Certainty rate welcomed by councils

Councils have welcomed the announcement of the Public Works Loans Board ‘certainty rate’.
In a letter sent to finance officers, the Treasury announced the rate – a 20 basis points discount on the usual PWLB rate – would be available to councils who chose to submit extra financial information to the Treasury. A form to be filled in by September 17 asks for details on three year plans for borrowing, capital spend, debt financing and commentary on capital investment plans.

“Given that local authorities’ borrowing impacts on public sector debt, their future borrowing plans form an important part of public expenditure planning,” the Treasury’s letter read. “In order for forecasts to be as robust as possible, additional information is sought in return for access to the certainty rate.” At the London Borough of Ealing executive director of corporate resources Ian O’Donnell agreed with the Treasury that the information requested was nothing councils would not already be in possession of. “Councils plan their capital spending carefully and I expect, like Ealing, nearly all will have a detailed three year medium term financial plan that reflects their capital needs,” he said. “They don’t need any extra incentive to do this. Completing the short questionnaire will be a five minute job for a junior officer – not a bad investment for 20 basis points.”

A Leicester City Council spokesman said that he didn’t consider the request for information unduly onerous as most of the information required is regularly updated as part of periodical capital monitoring. “It should be noted that the proforma only requests estimated information which would allow for the volatility that can be experienced in the timing of financing large capital projects and of the council’s level of cash balances,” he said. “The council obviously welcomes any opportunity to reduce its borrowing costs.” At Shropshire County Council a finance department spokesman who did not want to be named questioned the usefulness of such flexible information. “Our position could change significantly over a three year period due to influences beyond our control,” he said. “For example, changes in interest rates, economic changes effecting the saleability of capital assets or changes in process for providing government supported funding could all profoundly change the direction that we would currently predict for the borrowing requirement for our capital programme over the next three years. On this basis, the information provided is limited to being a snap shot at a point in time.”

Director of Arlingclose Treasury Services Mark Horsfield said that the data would be used by the Office of Budget Responsibility. Since there is, currently, no cap or quota arrangement in place on certainty rates the information provided by the local authority will not place any particular restriction on its needs, he explained. Furthermore: “If an authority had no plans to borrow over the next few financial years they could complete a zero return by 17 September 2012 and still have access to the certainty rate of borrowing if its own or wider external circumstances changed,” said Horsfield. “My view is that a prudent and reasonable approach is what is being requested and that will be what we will be advising and assisting clients with,” he added. “For a modest provision of information, the opportunity to borrow across the PWLB maturity spectrum at margins 20bps below where they are today seems a reasonably attractive trade-off from our perspective.”

However Ealing’s O’Donnell pointed out that the Government could have found other ways to make borrowing fairer. “Councils would of course prefer the government to lift the 1% it added onto the PWLB rates,” he said. “It seems unfair for councils – and thus council tax payers – to be paying more for borrowing than the rate the government itself can borrow at.” O’Donnell also thought that the removal of “swingeing penalties” for early redemption to allow councils to restructure their debt would better incentivise them to “bring forward capital spending if that is the objective”. Many councils are still locked into double figure rates, he noted.