Will the local infrastructure rate provide a great boost to local government finance? David Green argues there are other ways to make a difference.
I overheard a conversation in a local authority canteen after the chancellor’s Autumn Statement last month. The leader of the council was very happy: “I hear that the government is investing £7bn in local authority infrastructure,” he said. “Ah, no,” said the cabinet member for finance, who had been listening more carefully. “The £7bn is for housing. Its only £1bn they are dishing out for the infrastructure to support.”
The finance director was at the table too, and she had actually read some of the statement. “I’m afraid it’s not that good,” she said. “They aren’t giving any money out at all. But they are going to let us borrow a £1bn at reduced rates”. The treasury manager sitting to her side then dampened spirits even further. “It’s even worse than that. They are only going to let us bid for permission to borrow.”
At this point I leant over and completely dashed their hopes. “You’re all being too optimistic”, I said. “The government is only consulting on letting you bid to borrow money at a reduced rate.” And no-one else should get too excited either, because the new local infrastructure rate at 0.6% above the government’s own cost of borrowing won’t change much at all, if it even happens.
Over 400 authorities will be allowed to bid for a share of the £1bn. Even if district and borough councils, who have limited infrastructure responsibilities, don’t bid, that still leaves 200 upper tier authorities. And £5m each doesn’t build many roads – a single mile of country lane, rather less if you want a dual carriageway by-pass, and just 300 yards of motorway.
Then don’t forget the government isn’t giving you the money, just a 0.2% discount on the interest costs compared to the Certainty Rate. That works out at about £7,000 a year on a £5m 50 year annuity loan. I doubt many local infrastructure projects have stalled for the lack of £7,000 in the capital financing budget.
And, of course, local authorities still have £40bn cash to hand, almost all of it invested at rates below the proposed Local Infrastructure Rate. So, there is plenty of scope for authorities to either spend their own cash or to borrow more cheaply from a neighbour before resorting to the PWLB.
If the government is serious about reforming the PWLB to encourage local authority capital expenditure, there are other things it can do. The most obvious is to cut its profit margin, especially at shorter maturity dates – the current flat margin of 0.8% in all periods makes little sense. And to do this for all loans to all authorities, not just those partaking in a time-consuming, cash-limited bidding process.
More adventurous reform would include forward start dates or phased drawdowns, so that authorities can agree funding in advance of spending it; and flexible repayment structures tailored to income streams, so they can afford to repay the loans more easily. Then we might really get some infrastructure up and running!
The HM Treasury consultation on the Local Infrastructure Rate can be found here and closes on 27th January 2017.
David Green is Client Director at Arlingclose Limited.
