CIPFA Scottish Treasury Management Forum
Workshop
Local authority borrowing – an HMT perspective
23 February 2012
Andy Ralph
Local Authority Capital Expenditure, Statistics and
CLG Core Programmes, HM Treasury
UNCLASSIFIED
The historic picture
Historic capital outturn expenditure and receipts from asset sales have been:
Capital expenditure/£m
199900
200001
200102
200203
200304
200405
200506
200607
200708
200809
200910
201011
Scotland
816
803
930
972
1,033
1,264
1,572
1,952
2,184
2,554
3,293
N/A
England
6,998
8,288
10,028
11,672
12,326
14,404
16,797
16,472
20,395
20,233
21,362
23,385
Asset sales/£m
199900
200001
200102
200203
200304
200405
200506
200607
200708
200809
200910
201011
Scotland
304
150
165
207
217
355
366
451
514
230
229
N/A
England
3,651
3,512
3,579
5,040
5,322
4,661
3,777
3,671
3,992
1,353
1,427
1,498
Source: respective local government finance statistics for each year
Huge growth in capital expenditure in Scotland (404%) and in England (334%) over the period 1999-2011.
But the impact of fiscal tightening is clear in 2011-12 forecasts in England which suggest a reduction of over
10% in spend.
2
Spending Review 2010: Overview
The Government had to make tough choices in the Spending Review about how
taxpayers’ money is allocated and prioritised spending which supports long term
economic growth, such as capital funding for key infrastructure projects.
Overall reduction in local capital spending consistent with CDEL cuts. English LA
capital expenditure forecast to fall by c30% over the period 2011-12 to 2014-15,
including reductions in capital funding from Depts of c45% and forecast reduction of
self-financed capital (LASFE) of c17%.
Despite difficult decisions, no cap on local prudential borrowing. Recognised as a
priority flexibility and maintained to ensure high value local capital investment is
prioritised.
3
The Public Works Loan Board and the Spending Review
The Public Works Loan Board (PWLB) lends to GB LAs for capital investment purposes. The
PWLB accounts for c80% of all GB LA debt. Scottish LAs account for £7.95bn of total PWLB
outstanding debt of £53.1bn (2010-11 Annual Report). Operationally, the PWLB is part of the
Debt Management Office (DMO) an HMT agency.
The decision to increase the rates on PWLB loans to local authorities to an average 1% above
UK Gilts was effective from 20 October 2010. The rationale for increasing PWLB rates was
based on the following considerations:
• PWLB loans represent on-lending of central government borrowing. In tackling the fiscal
deficit, local authorities need to recognise their impact on the wider debt picture;
• Placing downward pressure on LA borrowing for capital investment is consistent with the
path of public sector capital spending over the Spending Review period; and
• Very cheap PWLB loans allow local authorities to make sub-optimal capital investment
choices and an increase in rates should make them more market facing and require
greater consideration of relative value for money and return on investment.
4
PWLB Rates since April 2010
5-5½
10-10½
20-20½
30-30½
In excess of 50
5.4
4.9
PWLB Maturity Rates (%)
PWLB interest rates
are lower today
across all maturities
than they were at
01 April 2010
(before the
increase to gilts
+100bps).
4.4
3.9
3.4
2.9
2.4
1.9
5
PWLB historic data
The historic net lending and balance of principal outstanding for Scottish LAs at the PWLB has been:
Net lending/£m
2006-07 2007-08 2008-09 2009-10 2010-11
GB
825
2,836
108
365
1,918
Scotland
-125
51
-84
205
694
Principal outstanding/£bn
2006-07 2007-08 2008-09 2009-10 2010-11
GB
47.9
50.7
50.9
51.2
53.1
Scotland
7.09
7.14
7.05
7.26
7.95
Scotland as % of PWLB
14.80
14.06
13.87
14.17
14.96
PWLB GB net lending data to end-January in 2011-12 has been £1,319m and has been subdued compared to
previous years however we have seen drawdown of local authority investments over this period to finance
capital expenditure.
6
PWLB gross/net lending 1999-2012
Gross Lending (GB)
Net lending (GB)
Gross Lending (Scotland) RHS
Net lending (Scotland) RHS
14,000
2,500
12,000
2,000
10,000
1,500
8,000
1,000
6,000
£m
500
4,000
0
2,000
-500
0
-2,000
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
(to end
Jan)
-1,000
-4,000
-1,500
-6,000
-2,000
7
Housing Revenue Account (HRA) reform
English LAs currently surrender any HRA surplus to the UK Government. Under HRA reform,
English LAs are effectively buying themselves out of the system in England by taking on up-front
debt instead of surrendering future surpluses. Implementing self-financing is a key plank of the
Government's Localism agenda. The objectives of this reform are:
• to give councils in England the resources, incentives and flexibility they need to manage
their own housing stock for the long-term and to drive up quality and efficiency; and
• to give tenants the information they need to hold their landlord to account, by replacing the
current opaque system with one which has a clear relationship between the rent a landlord
collects and the services they provide.
In effect, Government will require English local authorities to borrow £13.365bn to finance
payments to central Government which will then be used to reduce national public borrowing
by the same amount. This transaction will all take place on 28 March 2012.
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HRA reform: reduced PWLB rate
There was significant market interest in the HRA transaction. The rationale for the decision to reduce the
PWLB rate to gilts plus c20bps for the HRA transaction, announced by the Chief Secretary on 18 September
2011, was:
•
Borrowing to fund self-financing is a Machinery of Government change and is not a local decision;
•
HRA reform is a one-off transaction arising from this transfer of finance from central to local government;
•
It will not give rise to an increase in public debt;
•
Concerns there was insufficient capacity in the market to deliver the transaction;
•
Products designed to “beat the PWLB rate” not necessarily reflecting the best product for individual LAs;
plus
•
Arbitrary arrangements for pooling of LAs to achieve ‘optimum’ transaction size.
NOTE: existing housing debt is not subject to the reduced PWLB rate.
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Local authority bonds
The increase in the PWLB rate has led LAs to look at market led alternatives to finance capital expenditure.
LA bonds have been particularly widely discussed.
“Beating the PWLB rate” is more than just coming in at gilts +99bps – LAs need to consider associated costs,
questions of flexibility and how any such issuance sits with their wider treasury management portfolio. Some
of these questions seemed to get drowned out in the dialogue that took place prior to the reduction in PWLB
rates for HRA reform in England.
Current market conditions mean that it is unlikely that the markets can offer a product that is consistently
priced below the PWLB at a level that also takes account of the flexibility offered by PWLB. A fairly recent
local authority bond issuance shows the volatility in the markets comparable to the PWLB rate over time.
A recent LA bond issuance compared to PWLB equivalent
120
115
110
105
Bps over gilts
In this economic context,
LA bond issuance does not
look attractive. To avoid sending
mixed messages, it was decided
not to introduce legislation to
amend ‘withholding tax’ rules
at Budget 2012.
100
95
90
85
80
75
70
10
Bonds: Local Government collective Agency
LAs In response to the increase in PWLB rates and reflecting some of the restrictions around
existing market vehicles in terms of size, access, compliance etc, the local authority community
has worked up a business case for an agency using collective buying power to deliver lower cost
borrowing.
• Welcome sector led exploration of alternative lending models;
• as always the ‘devil is in the detail’;
• HMT will work closely with the LGA to look at issues both as part of the consultation and
arising from the consultation;
• This model may reconcile some of the price and scrutiny issues not currently addressed.
11
Derivatives and Investments
Derivatives
•
CIPFA guidance on derivatives issued in November 2011;
•
Some pressure within sector to legislate specifically on this; and
•
With introduction of GPC highly unlikely to see specific legislation.
Investments
•
In a period of significant financial uncertainty active management of investment portfolios is very
important;
•
Emphasis on security, liquidity and yield (in that order);
•
Evidence suggest LAs are being more proactive but no room for complacency;
•
The amount of cash held by LAs regularly raises questions – particularly against a backdrop of low returns
and higher investment risks; and
•
Service pressures and sensitivity around the level of taxes.
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