The years since 2010 have seen a dramatic shift in the perception of councils’ core responsibilities, with driving economic growth and regeneration seen as an increasingly significant activity.
Councils need the capital to regenerate town centres, develop vital transport infrastructure or provide facilities such as business parks or office space to tempt employers to their areas.
However, the combination of the recession and austerity have limited the scope for major capital funding injections from central government. According to the National Audit Office, capital grants to councils increased by just 0.2% over 2010-11 to 2014-15.
Writing for LGC recently, Centre for Cities chief executive Andrew Carter said it was “plain that local leaders will have to look beyond Westminster in order to secure the investment needed to drive growth in their local economies”.
Councils can borrow to invest through the Public Works Loan Board at competitive rates. But councils must service the cost of capital borrowing from their shrinking revenue budgets, meaning capital costs now take up a larger proportion of revenue spending as a whole.
This means councils are increasingly looking for cheaper alternatives to raise funds to support capital spending.
Council capital expenditure sources england 2017617
Over 2016-17, the PWLB advanced 622 new loans, worth a total of £3.6bn to councils, up from £3bn in 2015-16 and £2.6bn in 2014-15. In 2016-17, the total English borrowing for capital expenditure, including from sources other than the PWLB, was £6.8bn.
By contrast, £8.3bn of capital expenditure in that year was financed by central government grants. EU structural funds accounted for £13m – a reduction on £114m in 2015-16 and £132m the year before.
English councils will no longer have access to European structural funding after Brexit. The Conservatives pledged in their party manifesto to introduce a UK shared prosperity fund to fill the gap, although the party did not confirm it would match the level of funding currently available from the EU fund.
Key Cities chair and Wakefield MBC leader Peter Box (Lab) told LGC in July that attracting investment was a bigger priority for the body’s members than pursuing the devolution currently on offer from the government.
Naomi Clayton, policy and research manager at Centre for Cities, says there are three broad methods by which councils can boost their capital budgets or attract investment from partners to drive economic development: use of land and assets; launching financial instruments; and using their convening power.
Land and assets
Ms Clayton says more councils are choosing to sweat their assets rather than sell them off.
Councils can partner with developers, retaining limited control over land on which they allow development and gaining a share of the income derived from the assets built there. This approach is common in transport authorities in Hong Kong, Ms Clayton says, while in the UK, Transport for London is working on analysis of how it could capture value from land or property it sells or signs over to developers to spend on developing transport infrastructure.
Alternatively, councils can create vehicles through which to invest in development, using assets they own as a contribution, to attract investment and development partners.
One high-profile example of this is Croydon LBC’s limited liability partnership with John Laing, the Croydon Council Urban Regeneration Vehicle. The two partners took a 50% stake each in the £450m regeneration of four council-owned sites, with the council contributing its land and the developer contributing cash. Each partner also receives 50% of the profits arising from the developments.
Andrew Burns, finance director at Staffordshire CC and president of the Chartered Institute of Public Finance & Accountancy, says: “If councils have a desire to do something and some land or some property to put into [a project], that provides security for the private sector to come in.”
Mr Burns says the PWLB is usually the first port of call for council borrowing.
“There’s no way to get cheaper and safer money than the PWLB; you tend to look for other sources if that’s not enough,” he says, adding use of other forms of debt must be “prudent and stable”.
But while the rate of interest is fixed and reliable, it is not always suitable for financing major developments or regeneration projects. As a result an increasing number of councils are looking to stock market bonds to raise the capital they require.
Swindon BC has issued two bonds to develop two solar farms. In 2013, the Greater London Authority issued a £200m inflation-linked bond to finance the extension of the Northern Line to Battersea while Warrington BC has issued a bond to fund the regeneration of its town centre.
Warrington’s director of corporate services Lynton Green says the council looked into a PWLB loan to fund the £100m regeneration, but this was not suitable.
“Traditionally a local authority would borrow from the PWLB, but if we borrowed it all at the front of the project, there was the risk of carrying debt in advance, and if we borrowed during the project, there was a risk of interest rate rise during the project,” he says.
He adds there was investor demand for a bond linked to inflation.
“We had a bond that [cost Warrington] 0.84% plus CPI, but the cap on the CPI was 3%, so we knew the highest interest rate was 3.84%,” Mr Green says.
Warrington commissioned independent analysis of the price sensitivity of the bond compared with a PWLB loan, which showed the council saved £12m on the first £50m of the issuance thanks to the low CPI rate.
Mr Green adds much of the income from the regeneration project is linked to rental income, which in turn is likely to be linked to inflation, “so it mitigates some of the risk”.
Ms Clayton says municipal bonds are best suited to funding specific projects with clear start and end dates, outcomes and financial returns, rather than to build up a general pot for economic development.
Councils have the soft powers and bird’s-eye view of an area that can help to attract and coordinate investment from other parties.
Ms Clayton says: “Bristol has been at the forefront of a lot of that.
“Marvin Rees (Lab), the mayor, has been working with partners to set up city funds to fund its inclusive growth strategy. It will include things like affordable housing and skills and employment programmes.”
She says these have attracted investment from building societies, local companies investing part of their corporate social responsibility budgets and the third sector.
Another example is Bracknell Forest BC’s coordination of Legal & General and Schroders’ investment into its town centre.
Bracknell Forest chief executive Tim Wheadon says the project rebuilt the half of the town centre that was originally built in the 1940s and 1950s.
the lexicon bracknell
In the 1990s, the two investment firms began buying assets in Bracknell, such as a shopping centre built in the 1970s. “They saw the potential,” says Mr Wheadon, but he adds: “L&G and Schroders had competing visions for the borough, and both produced planning applications. Those applications would have protected their own investments and significantly impacted on their competitor’s.”
The council produced a masterplan to develop the town centre in the early 2000s and encouraged L&G and Schroders to use the land and assets they had already purchased to work towards that vision.
“As a result of our encouragement, they formed a joint vehicle in 2003, and we worked with them on a planning application for the whole of the town centre,” says Mr Wheadon.
However, the financial crisis in 2008 threatened to scupper the plan. To get the project off the ground, the council broke down its plan into eight phases, reducing the overall risk to the investors. Bracknell Forest also invested around £25m itself in improvements to highways and the local environment, usually undertaken by developers through section 106 agreements, to make the project viable.
“Despite the fact they were both blue-chip investors, they are not social services; they will not invest £240m if there is not enough return,” Mr Wheadon says. He adds the redevelopment benefits residents and shoppers, as well as bringing the council direct income from its car parks and increased business rates.
While councils may not have the cash required major regeneration projects, it seems there are plenty of willing investors out there prepared to stump up the cash. Councils must consider carefully which kind of arrangement best suits their plans and bring the vision, commitment and leadership vital to making any project on this scale a success.