• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

Bhupinder Chana: PWLB and the barriers to infrastructure investment

1
  • by Guest
  • in Treasury
  • — 5 Sep, 2016

PWLB rates have fallen. But not all the benefits have been passed on to local authorities, argues Bhupinder Chana.

Version 2Local Authorities recognise the importance of capital investment in their infrastructure to ensure that it is fit for purpose and meets its priorities.

This is even more important at a time when Brexit has created economic uncertainty not just in the UK and EU but also in the US, China and emerging markets.

Local authorities have responded to significant grant reductions and increasing pressures to deliver balanced budgets.

This has not been an easy journey and indeed we are now looking at further reductions, even if we want to accept the government’s offer of funding certainty over the next three years.

Whilst we do not know what the alternative offer is, and whether the autumn statement will provide some relief, we are looking at further reducing our net spending envelope despite mounting demography and service pressures.

Like many other authorities, plans to meet those challenges are being put in place for the start of the next financial year.

However, we also recognise the benefits of a strong economy that maintains and allows for business rate and council tax growth that is critical to supporting our financial strategy over the medium term. Central to this is capital investment in infrastructure. Our capital programme allows for investment of £1bn over the next four years of which circa £400m is borrowing.

Borrowing includes support for essential spend to ensure that the council’s infrastructure is fit for purpose, but it also includes schemes which generate revenue savings or increase income to the council that provides further budgetary resilience.

Benefits

It is true that local authorities have benefitted from the reduction in the cost of borrowing from the Public Works Loan Board (PWLB) as gilt yields have fallen.

However, the benefit has not been fully passed on to locals and in a time of a reduced spending envelope is providing a further squeeze on local finances and even a barrier to further capital investment. Before 2010 the margin above gilts was approximately one eighth of 1%, or approximately a 3% charge on top of the 50-year par gilt.

On 20th October, 2010 this was increased to 100bp over the gilt and this unheralded change increased the funding costs to local government across the full yield curve.

The impact on 50-year borrowing was to increase the PWLB margin from 3.1% to 24%.

Subsequently on 1 December, 2012 the certainty rate was introduced, so the mark-up over gilts flat fell from 100bp to 80bp.

On that date PWLB certainty was 4.03% and this represented a margin of 25%.

So, whilst the mark-up to gilts had reduced the proportion above gilts par had actually marginally increased to 25%.

Different picture

Fast forward to today  and we have a very different picture. Falling gilt levels means that the mark-up of 80bp to the 50-year gilt represents a margin of 77% on a current yield of 1.04%. This margin is in addition to the fees for arranging the initial loan.

So, for every £10m borrowed this is costing the authority £80k per annum out of a total cost of £184k.

The reality is that this is adding to the financing burden but is also acting as a barrier to further capital investment at a time when rates have never been as low.

If the margin above gilts was still one eighth of one percent, or 13bp, this would represent a saving of 67bp.

On £400m that would represent a saving of £2.68m per annum. This would be significant savings in the context of our medium term financial planning strategy.

The burden of the current mark-up on PWLB falls on the local tax payer, and allows for central government to distribute the profits of this mark-up that is collected across all locals for national objectives.

Fiscal devolution is high on the government’s agenda and this mark-up seems at odds with that approach.

Lowering the mark-up would result in lowering the costs of future debt for locals but would also allow the option for greater capital investment in local economies to the benefit of local government and ultimately still allow central government to benefit through for example jobs growth and the taxes that would then flow in.

Bhupinder Chana is head of finance at Leeds City Council.

Photo: Bob Peters, Flickr.

Get the Room151 Newsletter

Share

You may also like...

  • Has Wales banned money market funds? Has Wales banned money market funds? 12 Dec, 2013
  • James Bevan: First thoughts on the Trump Victory James Bevan: First thoughts on the Trump Victory 10 Nov, 2016
  • Arlingclose and Funding Circle launch peer-to-peer lending partnership Arlingclose and Funding Circle launch peer-to-peer lending partnership 28 Feb, 2013
  • Fitch downgrades UK banks as treasurers look to spread risk Fitch downgrades UK banks as treasurers look to spread risk 3 Apr, 2014

1 Comment

  1. dblake@arlingclose.com says:
    2016/09/05 at 12:11

    PWLB rates look increasingly expensive. Short-term “LA to LA” funds are frequently available at around bank rate or lower, so this source of funding will continue to grow in popularity. HM Treasury should benchmark rates across the curve – a tapered margin, much tighter to gilts at the shorter end, would make more sense. Many authorities still don’t need to borrow, but where funding is required it is often shorter term or amortising loans that make more sense (with a shorter average weighted life). These should all benefit from a graduated margin.

    Of course, any net investors might argue against this approach – a tapered margin would also pull down their medium term “LA to LA” investment rates! But alternative investments are available.

    David Blake, Arlingclose

    Log in to Reply

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 3 hours ago

    LGPS webinar: Governance the key to TCFD implementation: LGPS funds have been warned that governance is it at the here of Whitehall plans to impose a new climate reporting regime on pension funds. In January the Department for[...] dlvr.it/RtjwNq pic.twitter.com/YMiMdmRyzU

    Room151 3 hours ago

    LGPS webinar: Central bank management of bond purchasing could affect all asset classes: When the government debt caused by the pandemic is eventually tackled there may be a huge impact on assets of all classes, according to a leading investment expert… dlvr.it/RtjwJx pic.twitter.com/7v8K5vMYHo

    Room151 4 hours ago

    #LGPS readers...what to do about #bonds? room151.co.uk/blogs/lgps-web… @BrunelPP 's new CIO, David Vickers tackles a problematic area #centralbanks #assetallocation #fixedincome pic.twitter.com/yUJr0azbKv

    Room151 6 hours ago

    LGPS Challenges: Balancing Realpolitik and responsible investment: Elizabeth M. Carey warns of the perils of an ESG echo chamber as countries outside the West continue to invest in fossil fuels. Anyone working with the LGPS probably feels[...] dlvr.it/RtjMpq pic.twitter.com/MykIYxuYri

    Room151 4 days ago

    How can local government ‘build back better’?: Beverley Gower-Jones looks at the options for driving small business entrepreneurship in clean technologies. Innovation is essential for local authorities to save money and reduce emissions, it is the… dlvr.it/RtT3nS pic.twitter.com/bSMB6OG70t

    Room151 4 days ago

    Helen Randall: Spelthorne report places spotlight on ‘controls’: Fresh criticism of Spelthorne Council raises the question of what “good” controls look like when negotiating a property deal. Spelthorne Council’s continuing debacle over property… dlvr.it/RtSPhy pic.twitter.com/9uCOJgBcH6

    Room151 4 days ago

    Step-out strategies: Hitting the sweet spot between liquidity and ultra-short duration: Sponsored article: Jemma Clee describes how an ultra-short duration strategy can help local authorities enhance returns. Despite the expectation of a low, and… dlvr.it/RtSPZb pic.twitter.com/pdXPpv5lcN

    Room151 5 days ago

    What role will climate change have on the pricing of government bonds?: Sponsored article: Kerry Duffain finds that “vulnerability and resilience to climate change” have a significant impact on the cost of government borrowing. Ardea Investment… dlvr.it/RtNKv7 pic.twitter.com/wDjT31x4Yt

    Room151 6 days ago

    ESGenius: Slashing emissions will fuel green growth for decades: Sponsored article: Velislava Dimitrova argues that a big enough investment could mean transition to a low, or no, carbon economy can become a reality. The world needs to slash carbon[...] dlvr.it/RtKZJp pic.twitter.com/cd8S3ijERl

    Room151 6 days ago

    Prudential code: “Not perfect, but its heart is in the right place”: The new Prudential Code offers revised rules for borrowing. Nikki Bishop is sceptical it will work while Gary Fielding offers his support. Nikki Bishop I have been asked to give[...] dlvr.it/RtKZFh pic.twitter.com/OriN28lXcb

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story News round-up: Pay to Stay rethink, DMO unveils linker bond, West Midlands’ devolution cash
  • Next story Public Sector Deposit Fund reaches £300m

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.