In November 2020, HM Treasury introduced a new guidance note to assist local authorities when making an application for funds from the Public Work Loans Board (PWLB). The guidance aims to stop local authorities from borrowing if the intention of the borrowing is primarily for the generation of yield. Note that the guidance note is just that, in that it does not contain strict definitions and is therefore open to interpretation. Here are the key issues you need to be aware of.
Process
Each local authority that wishes to borrow from the PWLB will in future have to submit a high-level description of their capital spending and financing plans for the following three years, including their expected use of the PWLB.
The section 151 officer (or equivalent) will have to provide an assurance that the local authority is not borrowing in advance of need and does not intend to buy investment assets primarily for yield.
When applying for a new loan, the local authority will be required to confirm that the plans they have most recently submitted remain current and that the assurance previously given that they do not intend to buy investment assets primarily for yield remains valid.
What borrowing is authorised?
The guidance sets out categories of borrowing that are authorised:
- Service spending
- Housing
- Regeneration
- Preventative
- Treasury Management
(explanations of each and examples are explored in detail in the note produced in November 2020 by HMT)
These characteristics are relatively broad and potentially leave room for flexibility in project scope for commercial initiatives.
The main point of the guidance is to encourage consideration of the main objective of the investment as many projects will straddle the boundaries of the categories. Therefore, this does not prevent local authorities from borrowing for projects that are primarily for other purposes, but which also happen to generate a financial yield.
For authorities that wish to continue to generate commercial income, the challenge will be finding projects (such as regeneration) that deliver much more than financial yield. Any yield in any such projects will have to be secondary to another prime purpose.
Regeneration
Regeneration is a key authorised activity; its characteristics are set out in point 17 of the guidance. Of particular interest is 17b which includes assets in which a significant investment is made beyond the purchase price, unfortunately there is no definition of what is regarded as significant.
17d is also worthy of note as it allows rental income to be reinvested in the asset or another related (undefined) regeneration project but critically it cannot be used to fund wider services.
Borrowing to build?
The guidance is framed around borrowing to buy and not borrowing to invest, there is an argument that there should be no restriction on borrowing to build new yield-bearing investments on existing local authority land.
Primarily for yield
Acquisitions which will not be permitted are defined as having one of the characteristics set out at point 23 of the guidance note.
23b whilst the definition on the face of it prevents buying an existing investment which is then continued there is however a helpful proviso which means such purchase could go forward if there was then additional investment or modification, there is no further definition of those words.
23c requires some focus on an exit strategy, without a meaningful trigger the acquisition will not be permitted as it will be regarded as an investment to be held indefinitely.
Conclusion
There will still be opportunities to use PWLB funds for acquisition of a high yielding asset but only where it is the secondary purpose and is not the main objective.
If you require any assistance when making an application for funds from the PWLB, we’re on hand to support. Please feel free to get in touch with me or a member of our Local Authorities Team to discuss.
