West Berkshire Council has become the first local authority to innovate using a community municipal bond. Joseph Holmes describes the reason why and the work that lay behind the launch.
Like many other Councils, West Berkshire declared a climate emergency in the summer of 2019.
Only a couple of months before, the University of Leeds released a report Financing for Society setting out some of the options for the public sector in raising finance and, in particular, the concept of a community municipal bond (CMB).
We’d been progressing our work on an overarching environment strategy since last summer, and following a very successful climate conference in October 2019 where there was a strong theme of residents wanting to take action, we’ve been considering CMBs as an option to raise funds.
The scheme itself has been worked up through an internal group with representatives from across the council, including legal, procurement, finance and environment colleagues, which has been vital in getting us up and running on a really tight timeframe.
It is being provided in partnership with the online crowdfunding platform Abundance Investment, which is regulated by the Financial Conduct Authority.
Principles
We are focussing as a resources directorate on being collaborative, creative and communicative, and this fits exactly within this framework. We’ve had external advice on accounting and audit review as well as legal due diligence, for which we received £20k to support and undertake via Abundance and the EU Horizon 2020 funded SocialRes scheme. This will also enable a post implementation review provided externally by Trinity College, Dublin.
As fellow s151 officers know, the rates on offer from the PWLB are prone to change; it was only a few weeks before we took the first concept paper of a CMB to our executive last autumn that the government suddenly increased our borrowing rates by 100 base points. This only helped the business case for the CMB as a way of borrowing that aims to achieve three things:
- Beats PWLB rates;
- Enhances our engagement with residents;
- Gives much more control to the Council over borrowing rates.
The first principle is that the CMB must beat the prevailing PWLB rate (we currently borrow on an annuity basis and the CMB is likely to mirror this).
This is a fundamental principle—if we issue at a rate higher than PWLB on the day then we are in effect subsidising those investors in the scheme from local residents and that cannot occur.
As rates are inflated at the moment following HM Treasury’s decision in the autumn, this allows scope for a competitive rate for the low risk to investors, for a state backed bond over five years.
Clearly, if the PWLB rate shifts then the bond will need to take account of this. As part of its due diligence Abundance undertook some focus groups which highlighted that potential investors were very motivated by the ability to have a social impact rather than necessarily a financial return.
The second advantage of the CMB is the ability to build stronger engagement with our residents.
The council has completed a lot of work on its environment strategy and for residents to have a direct ability to invest in their local area is really positive. It enables much more of a two-way relationship between the council and investors so we can highlight the environmental value of the investment, as well as future schemes as potential areas to invest in.
Finally, and as the CFO, this point is very important, it provides more control over borrowing rates.
Advantages
The CMB rates will, of course, fluctuate and need to be at or below the PWLB prevailing rate; however, it provides much greater certainty than the PWLB over the risk of a sudden, unexpected change to the rate—for long term schemes that is particularly important.
Of course, if the PWLB rate suddenly goes down, there is an upside for the council by the CMB having to drop too. We can also just go straight to the PWLB, but the upside risk is much more controlled and less at risk of future government decisions on the borrowing rate.
The CMB also means that the council is less reliant on central government funds; from a localist point of view, this will enable us, if we continue beyond the pilot, to be much more focussed on raising funds ourselves rather than through central government.
With the advent of the Municipal Bonds Agency also launching successful bonds recently, it will also enable more diversity in the market which can only be a good thing for councils.
We’re really excited to be the first council to approve this scheme; we may have to wait a short while until the schemes are ready as part of the Covid-19 pandemic for us to launch the bond, but hope that this represents an innovative and new way of us financing core schemes.
The pilot, administered by Abundance, involves a number of other Councils and it will be really interesting to see the schemes they use, and the level of uptake.
For our residents, we expect this will mean an exciting opportunity to invest and savings on our cost of borrowing for the wider taxpayer.
Joseph Holmes is executive director (resources) at West Berkshire Council.
