HM Treasury has recently updated the guidance for local authorities borrowing through the Public Works Loan Board ("PWLB"). This updated guidance aims to reduce the likelihood of local authorities not being able to pay back their loans. The new guidance fits into the wider UK Government focus on borrowing by local authorities. It follows from their policy paper released last year which set out their plan to address problem borrowing by local authorities.
Approved Categories of Borrowing
The guidance has introduced a new principle that local authorities will not be able to borrow if there is a "more than negligible risk" of the council failing to repay its debt without government support.
When a local authority wishes to borrow from the PWLB they will need to provide a high-level summary of their spending and financing plans for the following three years. This summary should include all sources of borrowing and not just of that from the PWLB.
The guidance further sets out the types of expenditure which PWLB loans should be used for. These are:
- This is expenditure which forms part of the local authority's public service delivery. This includes areas such as transport, education and social care.
- This includes expenditure on building new homes, maintaining existing homes and purchasing built homes to deliver housing services.
- This is expenditure used to invest into assets to create new social and economic benefits. For example, investing in assets which are of value to the public but which the private sector does not see as commercially valuable.
- This is expenditure that is used to provide support to companies or assets which without the additional funding would no longer be viable. This may be done to protect jobs or prevent economic and social decline in the area.
- This is expenditure used for refinancing, addressing cash flow issues or other related finance planning matters.
The guidance explicitly states that PWLB loans will not be available for investment assets bought primarily for yield. These are defined as assets which "serve no direct policy purpose but are held primarily to generate an income." For example, buying a piece of land as a speculative investment or purchasing an office building to be let out at market rate.
The Treasury and the wider UK Government are continuing to keep a close eye on the borrowing levels of local authorities. It is therefore crucial that local authorities ensure that they are following all guidance made available to them.
The full guidance document can be found here. Annex C of the guidance includes useful worked examples of how the above categories should be applied in practice.
At Brodies we assist many local authorities with their finance requirements as well as a large range of other matters. If you would like to discuss this, please contact Michael Stoneham.