A leading local government finance figure says the government should have allowed councils to swap their Public Works Loan Board loans as an alternative to raising the interest rate.
Last month, the Treasury raised the borrowing rate on PWLB loans by a percentage point in order to dampen the high rates of lending being taken through the facility.
SAVE THE DATE – LATIF NORTH
March 25th, 2020, Manchester
Council treasury investment & borrowing
However, Luke Webster, chief investment officer at the Greater London Authority said that the government had other tools at its disposal to reduce the burden on the public purse.
He told delegates to the CIPFA Scottish Treasury Management Forum last week: “If your objective is really to freeze or even reduce the amount of money being taken through the PWLB then one of the things you can do is to let us repay our loans.
“That would probably get you £20bn back tomorrow.
“The other thing you could do is restore the inexplicably withdrawn facility for local government to novate PWLB loans between themselves.
“There are people who want to repay and there are people who want to borrow.
“If you can enable them to swap between themselves then it’s going to freeze the total level of borrowing.”
He said that for councils to on-lend equivalent amounts between themselves would mean the duplication of every interest payment within the sector.
“It would be transactionally absurd,” he said.
Richard Dunlop, director at treasury adviser Link Asset Services, called the Treasury’s move a “kneejerk reaction” and suggested the rate rise might be reversed.
He said: “They have got to wake up to the fact that the PWLB is not making them any money if they aren’t making any loans.
“There is quite a large spread of gilts so they are going to lose quite a lot of money.
“When they work out they are effectively outsourcing that lending to the private sector they might rethink about what they are doing.”
David Blake, strategic director at treasury adviser Arlingclose, said he suspected the Treasury might be open to creating lower rates for categories of investment such as infrastructure and housing.
The move was called for by the Society of District Council Treasurers in the immediate wake of the rate rise.
Webster agreed, saying: “It is probably quite likely that they will start doing different rates for different things.”
But he added that this would be a “real shame” and contrary to the prudential framework.
He said: “You look at capital financing and liabilities in aggregate and finance that.
“If you are tying particular loans to particular projects – which bear in mind the prudential code tells you not to do – you are losing a bit of that way of thinking. But frankly if we are paying less we will take what we can get.”
Webster also warned councils to be “very, very cautious” about looking to bond issuance as an alternative to PWLB borrowing, saying that the financial benefit were likely to be “quite marginal”.
He said: “Let’s say for the sake of argument that we managed to achieve a 1%, saving versus the PWLB. By historical standards a 1% movement in interest rates is not actually that big so the spreads can be second order to the timing.”
He also warned about the complexity of arranging debt outside of the PWLB.
He said: “One thing that is inevitable is much greater complexity. So, there is considered a very significant consumption of time and resources to do this stuff and it’s not to be underestimated.”
He warned of the risk of errors due to the large amount of paper work.
“There is a risk of error in unintentionally not understanding contracts,” he said.
“Particularly when you are looking at a public bond programme, you will have a stack of reading material that will be measured in 10s of inches, not centimetres.
“Ultimately you know you have lawyers and they will go through this stuff for you. but it is easy to get fatigued and things can go wrong.”
Webster said that the GLA is likely to look to note purchase agreements, which he described as “almost like a pre-documentation of loans, and from the agreed programme you can sell notes to whoever, so it is like the mechanics of bonds”.
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