Low PWLB rates prompt borrowing surge
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An 11% jump in borrowing by councils from the Public Works Loan Board (PWLB) during 2018/19 might have been fuelled by fears over a rise in interest rates, according to a leading industry figure.
The Ministry of Housing, Communities and Local Government (MHCLG) last week released its figures for borrowing and investment at the end of the financial year that ended in March.
Council borrowing from the PWLB increased by £7.8bn, year-on-year to 77.4bn, a rise of 11% – more than double any year-on-year increase at the end of recent years.
According to an industry expert, the fact that investments have also risen – from £27.9bn to £30.6bn – suggests that councils have held onto large quantities of the cash they have borrowed.
David Green, strategic director at Arlingclose, said: “It looks to me like people have seen the low interest rates and are worried they’re going to go up.
“PWLB is an easy source of long-term fixed-rate borrowing, though not necessarily the cheapest.
“You wouldn’t borrow money you don’t need yet for anything other than if [rates] might go up.”
In March, Room151 reported that councils were taking advantage of plummeting interest rates on offer from the PWLB to fix short-term borrowing over longer periods.
However, Green said the rush to borrow as investments rise is counterintuitive.
“We see the UK economy going down. Brexit is unlikely to be good for the economy in the short term. So, we’re a bit surprised people are so keen to lock-in when rates are likely to go down in future.”
However, he added: “People are managing their risk. At least if you borrow fixed you know what it’s going to cost you, even if it might not be the cheapest.”
Total long-term borrowing by local government for 2018-19 stood at £102.5bn, up from £95bn for the same period last year.
Borrowing from banks fell to £9.3bn, the first time it was below £10bn for six years.
Green believes the fall in bank borrowing is explained by the cancellation of Lender Option Borrower Option (LOBO) loans which have become highly controversial in recent years, gaining a reputation for being expensive and risky.
Banks deposits increased by around £700m to £11.09bn, while building society deposits shrunk by £330m to £1.06bn.
However, investment in public corporations (£1.2bn to £1.4bn) and treasury bills (£530m to £759m) grew, while money market funds were half a billion up on last year at £7.6bn.
Mike Jensen, director of investments with Lancashire County Council, warned that councils should be moving their cash away from unsecured deposits following the introduction of bail-in legislation, which came into effect at the beginning of 2016.
“Frankly that should have happened immediately and it should have happened with a greater degree of alacrity. It’s been very slow burn,” said Jensen.
He added that councils should also take care which securities they choose.
Treasury bills, he said, are liquid but he said there are better yields on offer elsewhere. He suggested councils look at sovereign and sub-sovereign floating rate notes and the REPO market where underlying government bonds act as security for the transactions.
He added that he hoped the future would see investments “moving away from unsecured deposits to some form of security…”
In recent times councils have ploughed money into commercial property investment, causing concern in some quarters.
In May it emerged the National Audit Office is examining local government borrowing to fund property investment.
Appearing before a hearing of the House of Commons local government select committee in May, Amyas Morse, the outgoing comptroller general of the NAO, said the review would look at MHCLG’s supervision of the issue.
A report is likely to be published at the end of the year.
Government figures do not currently filter for council investment in property.
