Other councils should learn from Aberdeen's £370m bond issue, says expert

The council recently raised £370 million for the proposed new Aberdeen Exhibition and Conference Centre, which will replace the existing facility at Bridge of Don. It also became the first Scottish local authority to obtain a credit rating, with Moody's awarding it an Aa2 - just one notch below the UK as a whole.

Other local authorities and devolved bodies can learn from this example and consider bond issues as a cost-effective, relatively safe route to funding larger products which will replace out-of-date infrastructure, or to bring forward new developments which add to and secure the long-term economic prosperity of their regions.

Traditionally, local authorities have borrowed from the Public Works Loan Board, a well-established and cost-effective method of financing projects. But bond issue offers a number of advantages when it comes to funding big-ticket projects, as well as offering public bodies the opportunity to further diversify their sources of funding in a challenging climate.

It's not stretching things too far to suggest that current market conditions present a once-in-a-generation opportunity, which offers forward-thinking public bodies the chance to raise money for capital projects at historically low levels of interest. There is undoubtedly a surplus of funds, both globally and locally, looking for a home but frustrated by a deficit of attractive investment opportunities.

Low interest rates are forcing fund managers to seek our vehicles for capital preservation, as opposed to capital growth, on behalf of their investor clients. Such is the high demand for bonds which satisfy this need that local authorities are able to borrow big sums very cheaply.

The fiscal case for such an approach is that local and national government can be confident that by spending money that benefits the consumer, as user of the planned infrastructure, the increase in economic activity in their respective region should comfortably outweigh the cost of the debt. A bond issue can also be structured so that the lending is not project-specific, allowing councils to lend that funding on to support capital projects that they are ambitious to deliver as part of a regional focus.

For investors, this type of index-linked bond is hedged against inflation and offers them the greater security that comes from dealing with a well-established public body, which is extremely unlikely to default. Indeed, the strength of Aberdeen's credit rating by Moody's took in to account that the risk was lowered due to the local authority's proximity to national government, viewed in some regards as a 'de facto' guarantor of debt issued.

It's little wonder, therefore, that with these attributes, alongside the lure of a long-term income stream which is RPI protected at a time when we are in a near-deflationary environment, the council's bond issue was over-subscribed. It will be able to use the additional funds to support other activities, which could include infrastructure projects, school and housing developments and roads construction.

Michael Watson is an infrastructure and energy finance expert at Pinsent Masons, the law firm behind Out-Law.com.