The Treasury will not advance new Public Works Loan Board loans to councils where there is a “more than negligible risk” the loan will not be repaid without future government support, according to updated guidance for councils.
The updated guidance follows publication of the Levelling Up and Regeneration Bill last week which proposed beefing up the secretary of state’s borrowing powers over councils by enabling him to issue “risk-mitigation directions” including issuing borrowing caps and forcing councils to sell their assets, if they are deemed to have breached certain risk thresholds.
The updated Treasury guidance limits new PWLB loans to those councils that can be shown to have the ability to pay the money back, explaining that “failure to repay lending undermines the ability of the PWLB to continue to provide accessible, low-cost lending for local authorities to undertake capital projects”.
It adds that the Treasury “considers it necessary to clarify this in response to the continued build-up of very high levels of debt and associated credit risk in some local authorities”.
However, only those councils contacted by the Treasury regarding “specific concerns” should expect any change in their ability to access PWLB loans. If the government’s monitoring of the sector flags particular concerns regarding any council, the Treasury will contact them for a “period of engagement during which there will be the opportunity to make representations regarding capital spending and debt”.
“HM Treasury will ensure that there is sufficient time for a full investigation, including local authority representations, before taking a view on whether the local authority poses a more than negligible risk of non-repayment and whether that local authority is not adequately taking action that could be reasonably expected to reduce that risk,” the guidance explains.
Furthermore, the Department for Levelling Up, Housing & Communities has published a policy paper outlining the proposed risk metrics which, if breached, would allow the secretary of state to issue “risk-mitigation directions”, including curtailing their borrowing.
The metrics are still being refined through work with the sector, but include:
- Proportionality of debt, measured as total level of debt compared to the local authority’s financial capacity.
- Proportion of capital assets which are investments taken in order to generate net financial return or profit.
- Estimates showing the authority is not meeting its statutory duty to make sufficient provision to repay debt.
- Proportion of debt held by the local authority where the counterparty is not local or central government, including credit arrangements and loans.
If breached, the government could place borrowing caps on these councils, undertake commissioned reviews or “take specific actions to reduce” level of risk.
DLUHC is approaching those councils “likely to be particularly vulnerable” to these risks, offering to work “supportively and cooperatively on how they can reduce their risk exposure”.
The intention is understood to be that the majority of councils will continue to borrow and invest in much the same way they are currently doing and DLUHC has sent an email to chief finance officers emphasising that the new powers will be used flexibly.
Rob Whiteman, the chief executive of the Chartered Institute of Public Finance and Accountancy (Cipfa) clarified to LGC that “the role for PWLB and the Prudential Code remain as now”.
“We have seen the government is now asking councils for more capital planning and also introducing metrics. Based on these metrics, a few local authorities may see their borrowing curtailed. Many councils already operate with assessing metrics and ratios and this won’t make any difference for those local authorities. The secretary of state is taking powers to curtail the borrowing of those few councils which have excessively borrowed.”