PWLB: Alternative sources of borrowing are available
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The current consultation on borrowing from the Public Works Loan Board may limit local authority options but Mike Jensen argues there are attractive alternatives, among them the Municipal Bonds Agency.
The Treasury’s recent decision to cut the PWLB lending rate by 100bps for the Housing Revenue Account was a welcome move for local authorities looking to fund social housing projects, but it was less generous than it seemed.
The cut took the interest rate for social housing projects back to what it was in October 2019, before the Treasury declared a sudden, arbitrary hike in the PWLB rates. Understandably, that decision to increase rates was a blow to many local authorities with capital projects in the pipeline and there was real anxiety around whether some building programmes would come to a halt as council took stock of their finances and the impact of the rise.
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The Treasury is consulting on the future lending policies and practices of the PWLB, but there is no certainty regarding the outcome or the timing of any changes. Were the Treasury to reduce rates for General Fund projects, there is no guarantee that rates will be restored to previous levels.
Warning
You would be hard pushed to find a local authority—many of whom are dealing with financial pressures—that would argue against cheaper loans.
However, as someone who is responsible for managing the complex investments of a county council, my objection is to the arbitrary nature of these rate changes.
Local authorities continue to be captive to the Treasury’s decisions on debt pricing, not knowing when the next rate change will be and whether it will be an increase or not. I would like to believe that these Treasury measures are based on some substance, however there is no sense of a real evaluation of systemic risk or market value.
Without notice, changes to rates driven independently of market value, or inherent risk, essentially rules out sensible project evaluation and pricing. At a basic level, this makes it near impossible for local authorities to create meaningful financial plans, prepare budgets or manage debt.
A more serious consequence is the derailment, or unnecessary delay, of critical local infrastructure projects, such as urban regeneration or improved social housing.
Limitations
Created to finance infrastructure projects, the PWLB has over time evolved to become the lender of first and last resort for local authorities. Whilst it offers a small, but useful, suite of products that are easy to access, it does not offer financing fit for a range of capital schemes that require scheduled or structured finance.
In addition, the government consultation may lead to a further narrowing of the definition of capital projects for which local authorities are allowed to borrow through the PWLB. Projects can be complex and multi-layered making simple classification difficult. Furthermore, there is good reason to believe that changes will be made in the future.
The PLWB’s margins have been changed frequently and if the government is concerned about councils’ exposure to property prices and income, some councils have very significant regeneration and economic development schemes funded by PWLB loans, the real risk of which are indistinguishable from “pure property investment”.
Alternatives
By limiting the types of projects which qualify for funding from the PWLB, local authorities are being encouraged to consider alternative sources of funding, in particular those offered by the capital markets.
This opportunity to reduce reliance on a single source of funding, the PWLB, provides local authorities with the chance to take more control of their finances without fear of arbitrary rate changes handed down at no notice from the Treasury and to move further away from being dependent on central government.
Raising money through the capital markets offers local authorities the flexibility to shape debt products to meet their own needs. Funds raised can be deployed for a wide range of capital expense requirements, beyond infrastructure and housing projects.
In March 2020, in partnership with the UK Municipal Bonds Agency (UK MBA), we secured a five-year municipal bond deal on the capital markets, the first ever to be launched by the agency. The issue was an overwhelming success in difficult market conditions, significantly oversubscribed and, most importantly, raised £350m for the council.
The issue was fairly priced at 80bps above SONIA and the money raised will refinance borrowing that we have earmarked for infrastructure and other projects. Looking at the bigger picture, this maiden bond signals a major step change for the sector, providing councils with the flexibility to fund a wide range of important projects which will ultimately benefit the communities that they serve.
As director for investments, I enjoy the sense of security that comes with feeling in control of our debt management budgets and the reduced financial risk. Another benefit is that here is a deal that was crafted to meet our specific needs and requirements.
Critically, the UK MBA is owned and run by local government (via its board members and local authority shareholders) so it understands the severe financial pressures that local authorities are under. It empowers councils to stand on their own feet and become less reliant on central government.
The PWLB has become the default lender of choice for local authorities, partly due to familiarity, partly because it’s a quick and easy way to access much needed funds.
Those who may be worried about the process of exploring other options can rest assured that it is possible. For example, with the UK MBA, you will be subject to an initial credit check, but once approved you will have access to their funding options, from short-term individual loans to pooled bond issues.
There will always be a place for the PWLB, but there is plenty of space in the sector for other, alternative channels of funding that allow local authorities to diversify their debt and explore debt products to fulfil bespoke requirements.
With the current PWLB consultation likely to further stratify the criteria for borrowing, it is now more important than ever that we have a range of funding options available for local authorities to choose from.
Mike Jensen is director for investment at Lancashire County Council.
