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

Room 151

Impact Awards –>
  • 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

Lender of last resort: making sense of the PWLB rate rise

0
  • by Editor
  • in Blogs · David Green · Treasury
  • — 17 Oct, 2019

The government has finally lost its temper with ever increasing borrowing by local authorities and has added 1% to Public Works Loans Board interest rates.

Anecdotally, much of this recent splurge in borrowing has been to finance commercial property acquisitions for a combination of regeneration and investment purposes, although since government still doesn’t collect statistics on this, nobody can know for sure.

But with £1.6 billion borrowed in September following £2 billion in August, HM Treasury has called time.

SAVE THE DATE – LATIF NORTH
March 25th, 2020, Manchester
Council treasury investment & borrowing

On the plus side, this move confirms that the government is happy to manage demand for PWLB loans by changing the interest rate, rather than by restricting supply.

It even gave the PWLB permission to lend another £10 billion if authorities request it.

This policy of changing the price rather than rationing availability is similar to the rate increase made in October 2010.

Then, the new coalition government was starting to tighten its own belt to keep a lid on the national debt, and didn’t want local authorities taking advantage of falling interest rates to an extent that it impacted upon national policy.

Last week’s rate hike can be viewed in the same vein – we may be nearing the end of austerity but if Brexit and/or the global slowdown require a fiscal boost, central government doesn’t want councils using up its headroom to buy investment property.

The big negative of course is that PWLB loans are now much more expensive.

So what should local authorities do?

A few councils have panicked and borrowed from the board immediately after they raised rates, but for most authorities that will be the wrong response (hint: it’s usually better to borrow after rates have fallen not risen).

Many local authorities still hold large volumes of short-term investments earning around base rate, and the cheapest and lowest risk course of action for those is to reduce these balances before borrowing any loans.


Room 151 is seeking council finance officers’ views on the PWLB rate rise – click here to take part


Some people still see the capital financing requirement as the natural level of debt to hold, even 11 years after CIPFA refined its approach by introducing the liability benchmark as the key comparator.

Borrowing a fixed-rate loan only provides an illusory certainty of cost if you have a material investment balance exposed to fluctuations in short-term rates.

The next best source of cash is short-term borrowing, typically from other local authorities that have borrowed too much long-term and are looking for a safe home for it until it can be spent.

It is quite sensible to have a strategic allocation to short-term borrowing that exceeds the average balance of short-term investment.

This is partly because it’s cheap, but also now that local authorities are more exposed to the local economy through the localisation of business rates and council tax support, not to mention commercial property income, it is good risk management too.

If the economy weakens and other sources of income dry up, you’d prefer your interest costs to fall.

Conversely when the economy is strong and income is rising, you can afford to pay more on short-term borrowing.

There’s a limit to how far this is sensible, of course, and at some point long-term fixed rates will be the lower risk option.

But the PWLB shouldn’t be the first port of call. Private sector lenders that would previously have lent at 0.2% to 0.5% above PWLB rates will now lend at 0.8% to 0.5% below the new rates.

There will be more paperwork and a longer lead time, but if it saves you £1 million in interest over the long-term, you should be willing to invest a little time and money up-front.

For many local authorities it would be cost effective to employ an additional member of staff just to manage the process.

In the end, the PWLB rate is a political tool, and ministers can increase the rate when they want to restrict local authority borrowing and cut it when they want to encourage it.

It’s a reasonable bet that a change of government would lead to a downwards rate change.

And today’s ministers may well look to incentivise the eponymous public works with another round of the discounted local infrastructure rate. But for the time being, the PWLB has returned to its official role as the lender of last resort, rather than a bottomless well of cheap and easy money.

David Green is strategic director at Arlingclose Limited.


Take part in Room 151’s survey of council finance officers on the PWLB rate rise


The Room151 Weekly Newsletter covers local government treasury and pension investment, funding, development, resources and technical finance. Register here. 

The LGPS Quarterly Briefing focuses purely on pension fund investment. Register here.

Share

You may also like...

  • Stephen Fitzgerald: making a success of capital projects Stephen Fitzgerald: making a success of capital projects 8 Jun, 2016
  • Olwen Dutton: The governance of treasury investment strategy under the new guidance Olwen Dutton: The governance of treasury investment strategy under the new guidance 4 Jun, 2018
  • Bob Swarup: The only certainty for investments is uncertainty Bob Swarup: The only certainty for investments is uncertainty 17 Oct, 2017
  • Guy Ware: The business rates retention row of ducks Guy Ware: The business rates retention row of ducks 12 Mar, 2018

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 3 days ago

    Impact Awards: Liverpool’s cafe culture and Warrington’s investment in homes: The CCLA/Room151 Impact Awards showcase  finance teams with a direct impact on their local communities and the environment. This week we spotlight Liverpool City Council’s… dlvr.it/RxJsKb pic.twitter.com/dEYpaz6HP0

    Room151 3 days ago

    Doing something in #localgov #finance for housing or regeneration? Check out the 'Place Shaping' category room151.co.uk/impact-awards/… sponsored by @31tenConsulting in the CCLA/Room151 Impact Awards. #timetoenter !! pic.twitter.com/dU99vE6Wws

    Room151 4 days ago

    Doing something in #localgov #finance for Adult Social Care & Health? Check out the ASC&H category room151.co.uk/impact-awards/… sponsored by Fundamentum Social Housing REIT in the CCLA/Room151 Impact Awards. #timetoenter !!

    Room151 4 days ago

    Doing something in #localgov #finance for the environment? Check out the 'carbon management' category room151.co.uk/impact-awards/… sponsored by @ACSLLP in the CCLA/Room151 Impact Awards. #timetoenter !!

    Room151 4 days ago

    So what are the seven categories for the CCLA/Room151 Impact Awards? Here they are room151.co.uk/impact-awards/… #localgov #finance #outcomes

    Room151 4 days ago

    Why should LGPS be concerned about rising inflation?: The impact of the coronavirus pandemic, lockdown and wider economic uncertainty created  deflationary pressures which raise important considerations for the Local Government Pension Scheme writes… dlvr.it/RxF7Fs pic.twitter.com/JlcjROBIpz

    Room151 4 days ago

    JOB ALERT: LPFA Finance Director vacancy: London Pensions Fund Authority Finance Director and s151 Officer Competitive salary and benefits The largest Local Government Pension (LGPS) provider in London with around £6.5 billion of assets and 135[...] dlvr.it/RxBdJP

    Room151 5 days ago

    Richard Harbord: Further signs that local government finance is failing: The crisis in Liverpool and a fix for education budgets are further indication that local government finance is in need of a root and branch review. Even for those students[...] dlvr.it/Rx9PSV pic.twitter.com/sAanC2gEyu

    Room151 2 weeks ago

    Impact Awards: Finance helps launch school meals company and support business during lockdown: The CCLA/Room151 Impact Awards will showcase the way finance teams have a direct impact on their local communities and the environment. This week we spotlight… dlvr.it/RwnlF4 pic.twitter.com/AJhne1MVG4

    Room151 2 weeks ago

    "This work has made a vital, practical contribution to ensuring people have been supported through the pandemic." #impact #151awards #covid #s151 room151.co.uk/treasury/impac… #impactcasestudies #councilfinancemakesadifference

    Room151 2 weeks ago

    room151.co.uk/impact-awards/ #passiton #localgov #s151 #151awards pic.twitter.com/A0uO0dwBkM

    Room151 2 weeks ago

    Financial pressures loom for 2023 and beyond: Kate Ogden writes the government has addressed most of the short-term Covid-19 financial pressures facing English councils, but problems loom in 2022-23 and the years following. As we enter the[...] dlvr.it/RwfDsz pic.twitter.com/hpv2R09w75

    Room151 2 weeks ago

    Calling all #localgov finance officers and #s151s room151.co.uk/impact-awards/ It's the #151Awards Thanks to the @LGALocalism for helping us get the word out along with all the LA treasury societies. pic.twitter.com/Nkal9BrH1J

  • 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 Brady to step down from bond agency helm
  • Next story Take the Room 151 survey on the impact of the PWLB rate rise

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.