The Public Works Loan Board is tightening its lending criteria to ensure that loans will be repaid by local government borrowers. But, asks Peter Findlay, shouldn’t it have been doing that anyway?
In 2016, the treasurer of Spelthorne District Council – faced with cuts to Revenue Support Grant and the possibility of losing significant business rates contributions – contacted the Debt Management Office (DMO) and asked for £360m to help it buy BP out of its Sunbury campus, and then lease it back to them. A positive response came back in short order, the money was transferred, and the rest as they say is history.
It was arguably the easiest £360m loan ever arranged between two counterparties, and the world of local government finance has never quite been the same since.
Observers of the system are wont to crack wise about the ease with which authorities can obtain cheap lending from the office which now sits within HM Treasury. The joke goes something like this: there are essentially two steps to the process …Step 1, you ask for the money; Step 2, you receive the money.
It’s a nice arrangement, particularly if you want to forgo the workload that comes with tapping the markets for long-term debt and dealing with lenders who ask pesky questions like “how are you going to pay us back?”
It’s also a bit of a no-brainer if the cost of the loan undercuts all other sources. Let’s be honest, there literally isn’t a property investor in the City of London, or anywhere else for that matter, who wouldn’t have borrowed £360m from the PWLB in 2016 had the same terms been available to them. They might not have invested in the BP campus but that is by-the-by.
Let’s be honest, there literally isn’t a property investor in the City of London, or anywhere else for that matter, who wouldn’t have borrowed £360m from the PWLB in 2016 had the same terms been available to them.
Casino councils
In case you don’t know how the story panned out, Spelthorne, despite doing rather well from the deal (so far!), unwittingly became the poster child of the so-called “casino council” – a term coined with images in mind of reckless council members and officers, gorging on cheap money and hoovering up assets that nobody else wanted.
We must not forget Warrington Borough Council in all of this. Really the poster was for a double-bill, and if Spelthorne were to eventually wind down its commercial borrowing programme in the face of so much adverse publicity, Warrington ploughed on under the watchful eye of CIPFA and HMT.
The “casino council” was a simplistic and often wildly inaccurate characterisation – finance officers don’t get bonuses, there is literally nothing in it for them other than doing what they think is best for their residents (and arguably keeping on the right side of elected members who have votes to play for) – but it stuck, and the government started looking for ways to curb excessive borrowing.
To be fair to HMT, there were some councils that were, how shall we put it …”pushing the envelope”? So along came the Prudential Code revisions, which were intended to stop councils from borrowing vast swathes of cash to invest in things like banks, solar farms, commercial property, basket weaving, spoon bending and out-of-town chip shops. And, well, it looks like that isn’t working either.
The ‘casino council’ was a simplistic and often wildly inaccurate characterisation – finance officers don’t get bonuses, there is literally nothing in it for them other than doing what they think is best for their residents.
A mechanism for saying ‘no’
Fast forward to 2022 and just this week, the DMO has dropped this bombshell: PWLB Guidance for Applicants – May 2022.
The guidance says:
“HM Treasury has chosen to issue guidance setting out its lending policy because of the challenges of developing strict definitions that reliably give the intended categorisation.”
Or, in other words: We may have tied ourselves up in knots over terms like “borrowing-to-invest” and “primarily-for-yield”, so now we need other mechanisms for saying “no”.
Seems sensible. How are you going to say no, then?
“The PWLB will not typically advance new loans if there is a more than negligible risk that the newly advanced PWLB loan will not be repaid without future government support.”
Now, I’m no banker, but weighing up a borrower’s ability to pay back a loan strikes me as a fairly important consideration when lending money. So thumbs up for that.
We may have tied ourselves up in knots over terms like ‘borrowing-to-invest’ and ‘primarily-for-yield’, so now we need another mechanism for saying ‘no’.
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Credit analysis
But how is HMT going to enable this sophisticated new credit analysis of council balance sheets? A new proprietary credit desk facing local government counterparties? Outsourcing the work to professional credit analysts? It doesn’t look like it …
“HM Treasury will continue to work across government to ensure there is adequate monitoring of risk in the local government sector. HM Treasury works with departments across government to monitor financial risk in local authorities, and this ongoing monitoring will be considered alongside any other relevant factors when determining if a local authority is potentially at risk of non-repayment.”
Hmm. That sounds a little bit like we’re going to keep our ear to the ground and if you’re one of those councils making the headlines, then the answer might well be no.
Right. So after six years of recriminations, policy initiatives, lengthy and expensive consultations, public spats and more press than a French vineyard, councils are going to be refused loans on the basis that … wait for it … they might not be able to repay them.
The only question that remains is: wasn’t that always an option?
Peter Findlay is Room151’s founder and publisher.
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