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Scandinavian-type local bonds proposed to cut borrowing costs

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Councils should club together to issue up to £7bn of Scandinavian-style ‘local government bonds’ to cut borrowing costs and boost the sector’s financial autonomy, the Local Government Association has proposed.

LGA officials believe councils could slash borrowing costs for capital projects by nearly a half, saving up to £500m over 25 years, if they formed a collective funding body to issue bonds on their behalf.

Interest rates at the Public Works Loans Board (PWLB) - councils’ traditional source of borrowing for capital projects - are currently set at 1 percentage point above the gilts rate. A paper being discussed at the LGA executive said borrowing through sector-wide bonds could cut that to 60 basis points.

A handful of councils are already looking at issuing bonds but the LGA said a single sector-wide bond could attract more competitive interest rates and allow all councils to tap the international bond markets.

Programme director for finance at Local Government Improvement & Development Mark Luntley said if there was sufficient appetite from councils, a model could be operational by 2013, with issued bonds worth between £5bn and £7bn.

“Such a move would bring us in line with local government in places like Scandinavia, where they have autonomy over their borrowing,” he added.

In Finland, 328 municipalities own ‘MuniFin’, a co-operative agency that carries a AAA credit rating.

The LGA said such a bond could prove attractive in the wake of October’s increase in the PWLB borrowing rate.

The LGA paper said: “Councils should pay less in interest, save on rating agency fees and incur reduced dealing costs. Authorities across the sector, including smaller councils, would be able to raise funds at a time and in a quantity that suits them.”

The proposals have attracted interest from leading financial institutions. Lloyds and HSBC have held informal discussions with the LGA, while other banks are keeping a close watch on developments.

Legal issues surrounding such a move are complex and could require legislative changes to give councils additional powers to issue bonds on a collaborative basis. The LGA has begun a six-month consultation period to gauge councils’ appetite for the initiative.

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