Interest hike for council loans “could stop regeneration”
A surprise decision to increase the borrowing rate for a government-run loans body could stop vital regeneration projects, a senior official has told the Bureau.
On Wednesday the Treasury increased the interest rate for the Public Works Loan Board (PWLB) by one percentage point — meaning the typical rate for a loan is now 2.8% instead of 1.8% — in a move seemingly designed to discourage councils from borrowing to fund “risky” multimillion property investments, as reported by the Bureau.
These loans included £1 billion borrowed by Spelthorne borough council in Surrey to buy office blocks, as revealed by the Bureau last year.
The PWLB is the main source of finance for infrastructure programmes such as building schools and maintaining roads. While the interest rate hike affects new rather than existing loans, councils will have to assess the impact on projects that are in the pipeline.
Andrew Burns, associate director at the Chartered Institute of Public Finance and Accountancy (CIPFA), an organisation which helps set the rules for local government borrowing, told the Bureau the increase was a “clever” way of curtailing commercial property investments.
“The negative unintended consequence is potentially it might delay or stop regeneration schemes in parts of the country that really need them,” Burns added. “The government has thrown quite a lot of money at struggling towns and speaks positively about the devolution agenda. This appears to be cutting across that in the opposite direction.”
In a letter to council finance directors on Wednesday, the Treasury’s Local Government & Reform team said the decision to increase the interest rate was taken because “some local authorities have substantially increased their use of the PWLB in recent months, as the cost of borrowing has fallen to record lows”.
While the letter makes no specific reference to commercial investments, the practice of borrowing from the PWLB to play the property market has made headlines repeatedly in the past year.
In December the Bureau published research showing the number of local authorities investing in commercial property in the hope of replacing reduced government funding with increased rental income had doubled in the last two years. A senior civil servant later said the government was worried “two or three councils” had borrowed too much to fund the purchases.
The biggest investor is Spelthorne council, which bought up offices around the Thames Valley and Heathrow area. Following the Bureau’s story James Brokenshire, then the local government secretary, said he shared concerns about councils’s overexposure to commercial investments. He added that he would discuss potential intervention with the Treasury. Spelthorne council has indicated that it will halt its investment plans.
The Bureau investigated councils borrowing to invest in property last year
Mr Burns, a former finance director at Staffordshire county council, said it was pretty clear the increased interest rate was intended to curtail property speculation, although he was surprised by the scale of the rise. “The size of the rise was quite a shock but the rise itself was not,” he said.
“If you are sitting in the Treasury and you’re considering a disorderly Brexit and an economic hit as a consequence of that, you would be worried about a number of issues, including that there was too much debt in the economy.”
The decision will increase the cost of infrastructure projects. In Lambeth, the council is about to embark on a £300 million housing project funded by loans from the PWLB; the interest increase could cost it as much as £3 million. Lambeth council is assessing the impact of the decision on the project and has said it will consider alternative sources of funding. A spokesperson added: “There are other potential sources of loan funding including pension funds, other councils and banks which may now be cheaper than PWLB.”
Mr Burns said: “The intended consequence is to put a limit on the amount councils are borrowing for whatever reason, whether its commercial investments or refinancing debt portfolios. The unintended consequence is it makes infrastructure investment more difficult.
“I imagine the Treasury recognises that but has decided this is the least-worst option.”
A spokesperson for the Local Government Association said the increase “could cost councils an extra £70 million a year for borrowing to be undertaken in the next year”.
“It presents a real risk that capital schemes, including vital council house building projects, will cease to be affordable and may have to be cancelled as a result,” the spokesperson added.
A spokesperson for the Treasury said: “This 1 percentage point increase takes rates back to the levels that were available in 2018. Even with this change the PWLB rates offer very good value to local authorities.”
The Public Works Loan Board
The Public Works Loan Board is the main source of borrowing for local government. Its purpose is to allow councils to access relatively low interest finance to fund infrastructure projects such as schools and roads.
While there is an overall cap on the amount local government can borrow from (which was increased on Wednesday from £85 billion to £95 billion) the PWLB does not ask councils what the money will be used for and undertakes no checks as to whether the borrowing is prudent. Its loans can last for up to 50 years.
“All you need is a reference number, how much you want and when you are going to spend it, and they’ll give you the money,” said Andrew Burns of CIPFA. “You haven’t got to do a business case. There’s no due diligence. It’s not just about price with the PWLB, it’s the ease of getting [the money].”
As a result some councils have borrowed huge sums to invest in commercial property, with the PWLB’s low interest rates giving them an advantage over potential competitors in the private sector.
While the Prudential Code, which provides guidelines to local authorities, prohibits borrowing for the sole purpose of making profit, in practice it is up to councils to decide whether what they are doing is correct. Holding them to account is left to voters, most of whom are unlikely to be fully informed because authorities withhold key details under commercial confidentiality.
Header image: A construction site. Credit: Shutterstock
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