Local authority bonds: Do they hold the answer to housing?
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PWLB remains the go to source of funding for local authorities. Nick Haverly asks whether a move to bonds and the private sector would offer a better route to building homes.
They say that if you can remember the 1960s then you really weren’t there. However, I doubt many of us would recall that particular sunny day in July 1963 when the Local Government (Financing Provisions) Act obtained royal assent, and councils were finally rid of the shackles of the Publics Works Loans Board (PWLB), from which virtually all borrowing had to come, and instead were given permission to borrow by issuing bonds, or “munis”, of their own.
It was following this newfound financial freedom that the UK saw the largest investment in housing and regeneration that the country would ever see, with over 3.1 million new homes being delivered over the following decade, and councils delivering 1.2 million, or 40%, of those directly themselves.
It wasn’t until 1980 when things began to decline once more. The Local Government, Planning and Land Act gave central government control of capital spending again in the form of annual borrowing approval limits, and the Housing Act introduced the Right to Buy, and the two combined resulted in the slowing of Local Authority housing delivery across the Country.
This reduction in spend and the annual uncertainty over how much could be invested for capital projects, resulted in local authorities being unable to plan as effectively as they once had, and as a result, the sector moved away from issuing bonds and instead became more reliant on the PWLB once more, which was seen to be more responsive to demand.
It wasn’t until the white paper, Strong Local Leadership—Quality Public Services was published in December 2001, that a new capital finance system was suggested that would once again put an end to central government-controlled credit approvals and instead delegate control back to local authorities.
The Local Government Act 2003 formally put in place the legislative framework for the new prudential regime for borrowing, which was supplemented by the Prudential Code which was developed and published by CIPFA and secondary legislation. The Act and the Prudential Code, allowed councils the freedom to finance capital spending from self-financed borrowing without the need to have government approval as long as it is affordable and prudent to do so. This is the framework which remains to this day.
Reliance
However, despite the freedom that the prudential regime, many councils remain wedded to PWLB. As at 31st December 2020, outstanding PWLB borrowing by local authorities stood at £86bn, which equated to approximately 76% of all long-term debt in the sector, and of that over 90% was in the form of fixed rate maturity, or bullet, loans.
It is evident therefore, that most councils rely on the PWLB when delivering their housing and regeneration schemes, despite there being more attractive alternatives available in the market which would improve the viability and therefore deliverability of such schemes.
With only 148,630 new homes completed across England in 2020, of which only 1,270, or one percent, were delivered by local authorities, something clearly needs to be done to accelerate the numbers of policy compliant housing being delivered in order to achieve government’s target of 300,000 home per year, and councils should be at the forefront of this campaign, directly delivering, and not just enabling.
However, using PWLB might not be the best approach.
Limitations
While the ease of access to PWLB loans is clearly appealing, the Board offers a comparatively simple and narrow range of lending options. This lack of flexibility can mitigate against the optimum treasury management strategy and therefore increase costs at the margin. While over recent years, the PWLB has increased its flexibility, it still does not offer the full range of options that are available in the private sector.
Due to the ability of councils to negotiate with the private sector directly over the terms of a bond issue or private placement, tailor-made funding solutions can be secured that satisfy a council’s specific requirements and ultimately reduce the financial burden on the revenue account. And this at a time when most local authorities are looking to achieve savings, without adversely affecting front line services.
Such features can include deferred drawdowns, which allow a council to secure rates at today’s prices and have the ability to delay the drawn down until required, thus reducing the cost of carry.
Facilities can also include interest free and repayment grace periods, as well as flexible repayment profiles. This is useful for delivering enabling infrastructure or housing and regeneration projects, as there may be no requirement to repay interest or principal until projects are completed and generating revenue to cover the associated debt costs.
In addition, we currently find ourselves in an unusual financial climate, in that investors are currently paying a premium to councils to access their long-term covenant strength, resulting in local authorities receiving sums that actually exceed the bond principal at issuance.
Conditions
Close observers believe that despite the recent sell-off in gilts, the current market conditions are still more favourable to bond issuers than at any time in the last 50 years.
Others forecast that although PWLB rates are likely to remain relatively low for the next three years, the use of the bond and private placement markets is still expected to be a competitive alternative source of funding for councils going forward, especially where they can be forward starting and offer more flexible repayment terms.
So why then have only a very small handful of councils taken advantage of these alternative facilities?
With a minimum loan size of £20m, these opportunities aren’t limited to just the largest Local Authorities, however in the last 20 years only a small handful of local authorities’ have secured such funding.
Interestingly, a recent poll suggested that if the PWLB did offer loans that offered exactly the same terms and flexibilities as a private placement, most local authorities who responded would snap them up. Yet there seems to be a reluctance to take that exact same product from the private sector. Could such a facility be part of the solution?
The newly appointed chair of Homes England, Peter Freeman, actively endorses central government’s desire to protect HM Treasury resources and bring in private capital to support their wider housing and regeneration ambitions.
Councils were readily accessing these facilities during the 1960’s, and the flexibilities offered to them then enabled the delivery of the highest ever rate of new housing and estate regeneration ever seen, far exceeding government’s current targets.
The question is, has all this been forgotten? Are muni’s and private placements part of the solution to the public sector’s delivery of housing and regeneration projects?
I doubt many serving treasury managers or directors of finance experienced the swinging sixties in all their glory. However, if the mantra is true, perhaps for those who did, and for those who followed, the significant benefits of this funding approach have indeed been forgotten by all. Until now.
Nick Haverly is founder and director of Haverly Consulting.
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