Local Authority Debt for Yield: Is it over or are we at Last Chance Saloon?

Following the changes in the borrowing terms issued by the DMO at the end of 2020, Local Authorities are no longer permitted to use PWLB borrowing to invest in anything that doesn’t fit into the following five allowable categories:     

Service Spending - Activity that would be captured in the following areas in the MHCLG Capital Outturn Return (COR): education, highways & transport, social care, public health, culture & related services, environmental & regulatory services, police, and fire & rescue services

Housing - Activity normally captured in the HRA and General Fund housing sections of the COR, or housing delivered through a local authority housing company.         

Regeneration - Activity that addresses an economic or social market failure, improves or changes the use of an existing asset, generates additional jobs/economic value that would not happen without Local Authority intervention.             

Preventative - Activity that prevents a negative outcome, eg preventing disrepair of an asset of community value, or providing support to maintain economic activity, for which no other source of funding or support is available.  

Treasury Management - Covers refinancing or extending existing debt from any source, and the externalisation of internal borrowing.  It is worth noting that even if a Local Authority is investing outside of these five allowable categories, it will still be able to access PWLB for refinancing existing debt.

But does this mean that Local Authorities can no longer do something that doesn’t fit into these categories?

No, but there are consequences, if it does!

Whilst Local Authorities can, and always have, been able to source external financing to fund their capital projects, if a Local Authority wants to access PWLB terms for any of its programmed capital spend, the S151 must sign a declaration to say that there are no schemes in their capital programme that are outside of the above five allowable categories. 

It is worth noting here that CIPFA still states that PWLB should be the lender of last resort, and that PWLB should be just one source of a diversified debt portfolio.

With this in mind, rather than actually stopping all commercial or debt for yield activity, have we not instead arrived the Last Chance Saloon?  

Yes, I believe so. For example, a Local Authority could choose to continue to have commercial property or solar farm investment in its capital programme in the coming year still.  It is true that the LA would not be able to access PWLB to fund the rest of its capital programme for that year, but does that really outweigh the potential ongoing revenue benefits?  With interest and inflation rates at historic lows, and investment funds clambering to secure safe, long dated Local Authority covenants, this may actually be the perfect time to take advantage of extremely competitive alternative sources of finance and get the benefit of those ongoing revenue streams.  

The following year the S151, should they wish to do so, can then submit their capital programme which would once more be in-line with PWLB terms, and access Govt rates again.

This approach has been confirmed as allowable by HM Treasury.

I am aware of a number of Local Authorities whose knee jerk reaction to the DMO announcement last year was that all projects not meeting the five allowable criteria should be removed from their capital programmes.  Schemes that were initially included in the programme to ultimately provided much welcomed index linked revenue.

I wonder how many will rue the decision not to have stopped and taken advantage of one last swift one, before time was called for good.