Manchester reveals £18.9m cost of PWLB rate rise
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The Public Works Loan Board rate rise (PWLB) will add £18.9m to the cost of servicing Manchester City Council’s planned borrowing for capital projects, reducing its future borrowing capacity, it says.
The council is one of the first to outline the impact of October’s shock hike in the PWLB rate by 100 basis points in a report to councillors.
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March 25th, 2020, Manchester
Council treasury investment & borrowing
It found that the Treasury’s move is set to add £0.5m to interest payments this year, with the cumulative total reaching £18.9bn by 2023/24.
The report said: “The policy change took PWLB rates back to where they were towards the end of 2018, and as such the existing capital programme was predominantly budgeted for at that time, meaning that the programme remains affordable.”
However, it said that some of the planned projects which involve loan finance to a third party or are based on a “spend-to-save” calculation, will need to be reviewed.
“Where projects may have been pursued on a spend to save basis,” the report said, the income from them will need to cover both minimum revenue provision and the higher interest cost the council faces, which may mean that they can no longer be self-funding.
“This could affect regeneration schemes where a return on investment was expected.
The report also said that the most significant impact on the council relates to its future borrowing capacity.
“The rate change means that the existing forecast borrowing becomes more expensive and therefore there will be less revenue budget available in future years to service further debt, alongside that future debt also now being more expensive,” the report said.
The council approved its capital budget in February, and at that point did not include any borrowing for housing revenue account projects.
However, a number of schemes using borrowing through the HRA are understood to have been in the process of being worked up when the rate rise was announced.
The report said that these “future schemes become unviable or will need redesign to value engineer costs out of the project due to the limited funding available within the business plan.”
Manchester is set to review its borrowing strategy once more clarity emerges about alternative sources of borrowing.
“There may be a case, for example, of looking to borrow for shorter duration and therefore at lower rates, if the council feels this will provide value for money and is willing to accept the refinancing risk that this would create,” the report said.
Officers said that the council has added its voice to those lobbying central government to consider introducing a new discount PWLB rate “which recognises borrowing to fund housing, regeneration and infrastructure schemes that are clearly in line with local authority strategic objectives, rather than for commercial investments
Last week a Room 151 survey found that almost nine in ten councils are planning to push ahead with planned capital projects despite the rate rise – with more than half set to seek funding from alternative sources.
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