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Essex councils to borrow £480m for housing and infrastructure

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  • by Colin Marrs
  • in 151 News · Development · Treasury
  • — 16 Feb, 2017

Photo: Essex CC, Flickr.

The unrelenting pace of councils creating arms-length housing and property companies continues, with one project announcing plans to borrow £480m from the Public Works Loan Board.

Four councils in Essex, including the county, have created a four company structure — including three local delivery vehicles (LDVs) — to provide up to 35,000 homes in three new garden settlements.

Meanwhile, London Borough of Haringey has rubber stamped the appointment of developer Lendlease as its partner for a development vehicle aimed at building 5,000 new homes and regenerating Wood Green town centre.

Land receipts

A report to Essex County Council on its proposals said: “The expectation is that the LDV will fund the provision of infrastructure at the time when it is needed by the community rather than waiting for development to be completed prior to infrastructure being delivered.

“In order to do this the LDV will need access to finance. This finance will be repaid from land receipts as the scheme develops.”

It said that the LDVs would be able to obtain finance from any source, but “in practice the cheapest way of borrowing is likely to be from local authorities, if they are prepared to lend money to the LDV”.

Each of the LDVs will be overseen by an overarching company in which Essex, Braintree District Council, Colchester Borough Council and Tendring District Council will hold equal shares.

The subsidiary delivery vehicles will be responsible for delivering each one of three new planned settlements. Figures released by the council show that at the peak, the three vehicles will hold debt of £480m.

In order to comply with state aid rules, any lending to the vehicles by the councils would be made on commercial terms.

“This margin would represent a gain to the council, in part offsetting the risk that it is taking in providing funding,” the report said.

However, it warned that the partner councils will need to be mindful of its exposure to capital gearing, so the option of attracting more expensive external funding will still be an option.

It said: “Should the LDVs do this it would reduce the amount sought from the councils, reducing the call on the councils’ finances.

“This would however reduce the scope for the councils to obtain a financial return from the project.”

Consulting firm PriceWaterhouse Coopers has been appointed to help develop the model, including work to examine tax and minimum revenue provision implications.

Lendlease

In Haringey, councillors this week approved the appointment of Lendlease as a partner in another overarching vehicle, which will develop council-owned sites using different mechanisms including development agreements and joint ventures.

The council rejected a new vehicle wholly-owned by itself because “it is highly unlikely that a wholly-owned company could deliver the scale of outputs required”, according to a cabinet report approved this week.

It said: “It remains unlikely that a wholly-owned vehicle would be able to address the skills and capacity issues more effectively than the council itself.

“Further, housing kept in a wholly-owned company would also create potential exposure to the right to buy, as it is understood that the government is closely monitoring the situation with these types of vehicles and may bring forward legislation in due course to enforce the right to buy and compulsory disposal.”

Warnings

Last year, ratings agency Moody’s warned of an “adverse impact” on the credit profile of local authorities that have increased borrowing to fund commercial projects using capital spending.

It said: “Borrowing to invest in commercial projects exposes local authorities to additional credit risk as the revenues that flow from these projects are inherently uncertain.”

And in November, the Public Accounts Committee said the Department for Communities and Local Government (DCLG) has inadequate information to understand the nature and extent of councils’ commercial activities.

It said: “…we are concerned that the department appears complacent about the risks to local authority finances, council tax payers and local service users arising from the increasing scale and changing character of commercial activities across the sector.”

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