Out-Law / Your Daily Need-To-Know

Councils to re-assess infrastructure borrowing as interest rates increase

Out-Law News | 11 Oct 2019 | 1:54 pm | 1 min. read

UK local authorities are likely to seek alternative sources of finance for new infrastructure or housing following this week's increase to the cost of borrowing from the Public Works Loan Board (PWLB), an expert has said.

The UK Debt Management Office (DMO) has increased the margin charged on local authority PWLB borrowing by one percentage point for new loans from 9 October 2019.

The increase brings the cost of borrowing back to 2018 levels, and is likely to lead to a number of local authorities re-assessing their investment decisions, according to project finance expert Stephen Tobin of Pinsent Masons, the law firm behind Out-Law.

Tobin Stephen

Stephen Tobin

Partner, Head of Projects

There are plenty of examples of pension funds, insurers and investors willing to lend to public bodies.

"We know of several councils that have well-developed plans for investment relying on low-cost PWLB loans," he said. "With the doubling of the interest rate margins, councils across the country should re-assess if there is a more cost-effective alternative available to them, particularly for long-term infrastructure or real estate assets."

"There are plenty of examples of pension funds, insurers and investors willing to lend to public bodies. Taking advantage of that interest, combined with low gilt rates, has just got much more attractive and astute," he said.

The government, in a letter addressed to the chief finance officers of local authorities (1-page / 55KB PDF), said that some had "substantially increased their use of the PWLB in recent months", encouraged by the record low cost of borrowing. Because of this, it was increasing the margin to the "normal" lending rate.

"The government recognises that the freedoms for local authorities to borrow under the Prudential Framework are fundamental to supporting local capital strategies and authorities' organisational objectives, including regeneration, supporting local growth and service delivery," it said.

The government would "work with individual authorities on a case-by-case basis" if they had any concerns about their financial position, and would keep it rates policy under review, it said.