Cutting the cost of council borrowing

In last month’s first, the LGA warned that an unexpected increase in the cost to councils of borrowing from government could cost them an extra £70 million a year.

The Public Works Loan Board (PWLB), which lends money to local authorities and collects repayments, increased its interest rates by 1 per cent in October.

But there is an alternative and cheaper source of funding for councils wanting to finance housing, regeneration and other infrastructure projects – the UK Municipal Bonds Agency (UK MBA).

The agency was set up five years ago by local government, for local government, and the LGA is one of its shareholders.

Over the summer, the UK MBA has been undergoing a quiet evolution to reinvigorate its management, structure and product range. Fortuitously, this was completed as the PWLB raised its rates.

A number of councils were comfortable with the UK MBA’s original structure and included its framework agreement into their treasury management strategy. But some had concerns about the ‘joint and several guarantee’ element of the offer.

We have listened and are simplifying the UK MBA’s documentation, widening the product range and making a number of changes to the agency’s structure, particularly the guarantee it requires.

The probability of a council defaulting on any debt is immeasurably small; none has done so since the Corporation of London was established in 1067.

However, there was the worry that should the unthinkable happen and a council fails to repay its loans to the UK MBA, another council may find itself liable for significant sums owed by others.

The agency’s guarantee has now been restructured so that borrowers are liable for any default on a proportional basis. Gone is the risk that any council could be singled out disproportionately. Additionally, if a council has repaid its debts to the UK MBA, it is automatically ‘off’ the guarantee, with no prospect of being called upon in the future.

As an alternative to PWLB borrowing, the UK MBA is also offering short-term loans which provide low-cost finance, enabling councils to fund their immediate capital programme while the UK MBA prepares bond issues with a range of maturities.

The agency is also offering ‘forward rate’ loans, which guarantee the interest rate a council will pay on a loan taken out in the future, significantly reducing the risk of complex, multi-year capital projects.

With local government debt across the UK now more than £100 billion, every 1 percent increase costs local government £1 billion per year.

The UK MBA aims to be cheaper than other products available to most councils – and at lower risk – so the potential savings for the sector are significant. As well as being cheaper, our products and processes are also transparent and clearly understandable.

Now, more than ever, is the time for local government to make the UK MBA a success. With the positive changes made by the agency, local government can take greater control of its own future free from unplanned, disruptive and arbitrary changes to the capital finance that is critical to its long-term success.

The UK Municipal Bonds Agency has recently appointed PFM Financial Advisors as the managed service provider to the agency. PFM will manage all day-to-day operations of the agency, with the board remaining in overall control. The UK MBA remains owned by local government, for local government – see www.ukmba.org for more information

Previous

Addressing challenges in public health through research

Taking an independent line

Next