HM Treasury has published a consultation document on “Future Lending Terms” fpr the PWLB. The Foreword states (emphasis added):-
“Local authorities have long owned buildings that could serve a commercial purpose, and they often use commercial structures to advance their core role in delivering public services, housing, and regeneration to the benefit of citizens and taxpayers. The government is committed to continuing to support this valuable investment.
However, a recent report by the National Audit Office (NAO) highlights how a minority of local authorities have started using low-cost loans from the Public Works Loan Board (a public body that lends to local authorities for capital projects) to buy investment property primarily for rental income.
The case for this ‘debt-for-yield’ activity can be compelling for the individual local authority. But it introduces risks locally and nationally. At the local level, it exposes ratepayers to the risk that the income does not materialise, leaving the local authority with an inflexible commitment to keep up with the repayments on their loans. Within the wider public sector, it diverts money from core services such as schools, hospitals, and roads. And, because local authorities can often access debt more cheaply than the private sector, it becomes hard for businesses to compete. In the wider economy, it could crowd out public investment, and risks distorting property markets.
The government has launched this consultation to work with local authorities, sector representatives, and wider stakeholders to develop a targeted intervention to stop this activity while protecting the crucial work that local government does on service delivery, housing, and regeneration. The government’s overall aim in this is to secure the effective operation of the prudential system for local councils, taxpayers and for all of us that rely on local services.”
The Executive Summary states (emphasis added):-
“… local authority (LA) borrowing has grown substantially in recent years, led by a minority of LAs borrowing from the Public Works Loan Board (PWLB) to buy investment assets primarily for yield.
The government is therefore consulting on a limited intervention to address the specific issue (described in this document as ‘debt-for-yield’) so that the PWLB can continue to support LA investment in service delivery, regeneration, and housing, without impinging on the powers and freedoms that LAs use to deliver local services in innovative ways.
The government will work with the sector through this consultation and a series of regional workshops to develop a solution that resolves the debt-for-yield issue without impinging on the wider freedoms of the sector. As a starting point, the government proposes:
a. requiring LAs that wish to access the PWLB to confirm that they do not plan to buy investment assets primarily for yield
b. publishing guidance defining the activity that the PWLB will no longer support, with clear protections for service delivery, regeneration, housing, and the refinancing of existing debt
c. standardising the information currently gathered through the application process for the PWLB Certainty Rate and using this as the primary way to confirm with LAs that their plans conform with the guidance
LAs that wish to buy investment assets primarily for yield would remain free to do so but would not be able to take out new loans from the PWLB in the year in which they have bought the asset. Any loans taken out under the old system would not be affected by this change.
This change is only intended to apply to capital spending – treasury management strategies are not affected.
This change would only apply to larger authorities in England, Scotland, and Wales. The government does not propose any change to the PWLB lending arrangements for smaller LAs …”
The consultation will run for twelve weeks, ending on 4 June 2020.
Chapter 1 relates to “Background”, referring to local authority powers under LGA 1972 to acquire land and under LGA 2003 to borrow and to invest, and to GPOC under the Localism Act 2011, and also to MHCLG statutory guidance in 2018, and the respective roles of the PWLB and of HM Treasury.
Chapter 2 relates to “Recent developments”, referring to the “rise of commercial activity” by local authorities, and the implications of “debt-for-yield activity”.
Chapter 3 sets out the proposed new PWLB lending terms, including the proposal for “ending access to the PWLB for LAs that wish to buy commercial assets primarily for yield”, and a proposal for developing a definition of “debt-for-yield” activity.
Chapter 4 is entitled “The wider PWLB Offer”; and Chapter 5 contains “Other questions”. Annex “A” gives seven examples of recent projects; Annex “B” defines “Affected borrowers”; and Annex “C” relates to processing of personal data.