Major investment in infrastructure is needed to achieve the local economic growth sought by UK government and councils will require a new range of measures to make this happen, says Tom Symons
Capital investment in business-supporting infrastructure will be a fundamental part of Britain’s economic revival. A key part of this will be the ability of local authorities to spur local growth and attract business through improvements to economic and social infrastructure networks.
In a time of flux, between centralism and localism, and between high public spending and austerity, there is an opportunity for the local government sector to look afresh at the capital finance landscape in which it operates. A new research project from New Local Government Network (NLGN) – Capital Futures – will map out a range of new measures councils will need to drive local growth, and the components of a localist capital finance toolkit.
The coalition’s economic strategy has placed sizeable emphasis on nurturing local growth, notably an increase in businesses and a rebalancing towards the private sector. Facilitating this inevitably entails improving the physical networks that underpin business processes. New transport links, high-speed broadband and the regeneration of low-growth areas will all be vital in attracting new businesses.
But this comes at one of the most challenging times for capital investment in decades. Many of the sources of capital finance – grant, PFI credits, asset sales and developer contributions – are drying up as a result of spending cuts and depressed economic growth.
In addition, the primary source of self-financed borrowing, the Public Works Loan Board (PWLB), has increased its rates, adding approximately 25% to the cost of capital investment financed through prudential borrowing. Capital finance needs to change in response to this.
The local government sector must therefore respond to three main challenges; coping with the shrinking of current sources of capital finance; developing new mechanisms for borrowing from alternative sources; and crafting a new capital finance toolkit that can help maintain investment even in times of central government austerity. In short, new revenue streams, new borrowing mechanisms and new investment techniques are needed.
The development of new borrowing mechanisms is a central part of NLGN’s new research project. There is the potential to devise a series of methods of accessing capital debt markets which are not only cost-competitive with the PWLB but are all less prone to the political whims of central government.
This would be both a solution to the short-term funding problem for local authorities, but also a cornerstone of a more localist capital finance framework in the long-term. Crucially, new borrowing mechanisms must take account of the diversity and variations of scale across local authorities.
The purpose of the borrowing is likely to make bond issues the preferable option for raising debt. However, more than one structure or mechanism will be needed. Issuing a municipal bond may be viable for Birmingham, but it might not be an option for a small district. Therefore we need a range of borrowing mechanisms, including Scandinavian-style bond clubs, to enable all authorities to access debt from capital markets.
In addition, obtaining the best deals when borrowing from alternative sources may necessitate the use of new financial instruments, such as derivatives, so that councils can effectively manage risk. This is relatively uncharted territory for local authorities, but the urgency of the situation means there is a short window for solutions to be developed.
The localism agenda has been framed as a newly permissive attitude from ministers in the centre. There has rarely been a better time for the local government sector to set out a bold and ambitious series of desired reforms. Our research project, which will be supported by a high-level taskforce of key figures from the local government sector, aims to capitalise on this opportunity to present a vision of a localist capital finance landscape.
Developing the detail of new debt raising structures, and articulating the legislative changes required to make it work, we aim to give councils a more autonomous route to self-financed investment, something that could be vital in efforts to revitalise the economy.
- The Capital Futures Taskforce is made up of representatives from Liverpool, Sheffield, Northamptonshire and Westminster councils, Local Partnerships, Morgan Stanley, Nabarro, CIPFA and Balfour Beatty and is chaired by Paul Woods, director of finance at Newcastle Council.