Local authorities call for more powers to raise funds through municipal bonds

The representative body has written to Chancellor George Osborne on behalf of the 350 councils in England and Wales asking the Government to "remove the barriers" it claims are preventing councils from unlocking "billions of pounds of investment" – including from private council pension schemes.

Municipal bonds are securities which can be issued by local authorities to finance their infrastructure needs. Council revenue funding has fallen by 28% compared to an average cut of 8% in central government departments over the Government's Spending Review period, according to LGA figures.

"English and Welsh councils have better credit ratings than many European governments and believe a revived triple-A municipal bond market would make an attractive proposition to investors seeking a secure home for their capital in the current turbulent markets," the LGA said. "Local authorities would use funding raised through the markets to commission major new infrastructure projects like bridges, roads and new buildings that would reap benefits for the local economy, while creating new jobs in the construction industry and other sectors."

In its letter the LGA asked the Government to "deliver on its promise" to devolve funding for transport and skills projects to local areas and for councils to be given greater autonomy over funding arrangements. Local authorities should be given more control over planning fees and be allowed to use tax incremental finance (TIF) to fund regeneration projects by borrowing money against the predicted increase in locally-collected business taxes from the new development.

It has also asked the Government to help it raise awareness of local authority investment opportunities among pension funds, and to remove tax regulations which it claims "discourage foreign investors" from taking up municipal bonds.

Infrastructure law expert Alan Aisbett of Pinsent Masons, the law firm behind Out-Law.com, said that although local authorities were already able to issue bonds, the LGA was asking for additional control over transport projects and innovative financing arrangements that would allow councils to repay those debts.

"As it is a form of borrowing local authorities currently have sufficient powers to issue bonds for infrastructure - indeed, the Greater London Authority recently issued bonds to fund Crossrail and several local authorities have looked at bonds as an option to fund their Council Housing Self Financing Settlement," he said. "It also fits with the current Government initiative to access institutional finance for infrastructure. However, it is one thing to have the power to borrow and another to have control over local infrastructure and the means of repaying the bonds."

However, he added that even if the Government was to extend local authority powers in this way local government bonds would continue to form "part of public sector borrowing totals".

LGA chairman Sir Merrick Cockell said that allowing local government to encourage private investment could "kickstart the vital infrastructure projects the economy needs", while also providing a secure means of investment for a proportion of the £140 billion currently held by UK pension schemes.

"Councils have it within their potential to instigate a virtuous circle of economic growth where private investment pays for new roads, bridges and buildings to bolster the economy, which in turn create the new jobs and skills we need to keep it growing in the long-term," he said. "This is a win-win deal for everyone from investors and businesses to jobseekers, pension scheme members and taxpayers."

The Government announced in November that it had signed a Memorandum of Understanding with two groups of UK pension funds to support additional investment in infrastructure, and further details are expected in the 2012 Budget later this month. Infrastructure law expert Alan Aisbett said that he was in the process of organising a 'round table' event for representatives from pension funds and the construction industry, to "discuss opportunities for institutional funding in infrastructure".