Thurrock Council faces a “significant risk” from fluctuating interest rates as the authority plans to borrow £836m of short-term funding from the Public Works Loan Board (PWLB) to repay its debt of over £1bn.
A report by Jonathan Wilson, interim director of finance, outlined that the authority has agreed with the government to borrow from the PWLB via 16 separate loans to meet its cashflow requirements. This includes £687.5m of funding to repay Thurrock’s existing loans from counterparties in the inter-authority market.
The report was discussed at a Corporate Overview and Scrutiny committee meeting on 6 October.
In the meeting, Wilson stated that interest rates on pre-existing loans from the inter-authority market were between 0.5% to 3.5%. This is much lower than the interest rates on the PWLB funding, which are “roughly 4.5% on average”.
However, Wilson warned that there is a further risk of interest rates rising on the PWLB loans due to the uncertainty of the market.
“So, we [Thurrock Council] have a significant risk.
“Interest rates are very volatile at the moment. So, we were in a very stable situation for a while and now that is not the case clearly,” Wilson added.
Following chancellor Kwasi Kwarteng’s mini budget on 23 September the cost of local authority borrowing from the PWLB for one-year loans increased to 5.31% and has since fluctuated. On 5 October, the fixed interest rate on a one-year loan was 4.76% and on a 10-year loan it was 5.07%.
Since 2010, Thurrock Council borrowed on a short-term basis through the inter-authority market to support its wider capital and investment strategies, including investment in multiple solar energy farms.
Wilson’s report detailed that in the current financial year the council needs to repay around £1bn, which represents its total value of capital debt and investments.
“By the end of the 2021/22 financial year, short-term funding made up £1.162bn of the total £1.452bn debt held by the council,” the report stated.
This arrangement is not paying off any debt – it is merely refinancing it and at, unfortunately, a much higher rate of interest. So, it will actually add to the overall amount of debt.
Consequences of intervention
In September, former levelling up secretary Greg Clark announced measures to intervene in Thurrock Council following concerns about the level of financial risk and debt incurred by the authority. Essex County Council was appointed as commissioner and best value inspector.
Wilson’s report stated that after the announcement of government intervention the “council’s access to the inter-authority market contracted significantly”.
He said in the report: “Consequently, the council has needed to work with commissioners to seek a solution to the issue and provide wider assurance to local authority partners over the security of the funds lent to the council.”
The report stated that this also “ensures the ongoing integrity of the inter-authority borrowing market” and further manages reputational risk in the sector.
Sara Muldowney, a Labour councillor, said at the meeting: “This arrangement is not paying off any debt – it is merely refinancing it and at, unfortunately, a much higher rate of interest. So, it will actually add to the overall amount of debt.”
Wilson stated at the meeting that as part of the intervention a Best Value (BV) inspection has started this week. A report by the BV inspection team, commissioned by Essex County Council, will be presented to levelling up secretary Simon Clarke on 3 January.
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