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The long-awaiting response to the Government's consultation on the future use of the Public Works Loan Board (PWLB) is finally here. As a consequence PWLB's new lending criteria also mean there will be no more one line email applications for PWLB loans. 

In viewing the PWLB lending guidance/criteria it's important to remember that HM Treasury writes and ultimately interprets these. If it declines to lend it will be difficult for a local authority to force it to give that council a PWLB loan.  

There are two headlines. First, the interest rates have been reduced by 1% bringing them back to what they were prior to the shock rise in October last year and bringing the interest rates for loans to finance social housing into line with the rates applicable where the proposed loan is for another purpose.

Second, access to PWLB will be generally closed to any authority who cannot certify that they have no intention in the following three years to buy investment assets primarily for yield. This restriction applies not only where there is an intent to borrow PWLB money for this purpose but also where the acquisition is to be funded by other means.  

The rate reduction means that alternative borrowing sources available to councils, such as bonds and private placements, have become less attractive overnight.  But the immediate implementation of this rate change underlines once again why any council's reliance on PWLB as a source of borrowing can be dangerous. You simply do not know from one day to the next what the interest rate will be. PWLB does not provide an option to lock in today an agreed rate for future borrowing. In planning to use PWLB, councils are at risk of sudden politically-driven rate changes, but also at the mercy of interest rate movements in the underlying money markets. The scope of any pre-conditions that may apply to accessing this borrowing may also be subject to change - which links to the second headline mentioned.

There have been a number of inaccurate stories in the press announcing that local authorities can no longer acquire commercial property. This isn't entirely the case for a number of reasons.  

First, the restriction will not apply if a council's primary motivation in buying commercial property is otherwise than for profit. So investment in a local shopping centre, as a number of councils have done in recent times, would probably not be affected if, as is likely, the relevant council is driven primarily by a wish to revive its local high street. Buying commercial property entirely outside of area looks less justifiable, but even in this case there may be motivations other than profit if the asset in question is important to council tax payers. An example might be a leisure facility located just outside of area but frequently used by citizens of the council in question.

Linked to this point, the revised PWLB guidance published alongside the consultation response makes clear that borrowing for the purposes of housing will continue to be a legitimate use of PWLB funds.  In so doing, the guidance refers to the fact that some housing projects will contain an element of cross-subsidy and may make use of innovative financing arrangements. Borrowing for the purposes of regeneration also continues to be allowed albeit there are more conditions applied than for housing. The PWLB guidance also requires any rental income from regeneration to be ring-fenced for related activity and not used to cross-subsidise general services. 

The guidance appears to imply that these exemptions may be permitted even if aspects of them might otherwise disqualify an authority from accessing PWLB funding. 

This is to be contrasted with investment assets bought primarily for yield, which the guidance states would usually have one or more of the following characteristics: 

  • buying land or existing buildings to let out at market rate 
  • buying land or buildings which were previously operated on a commercial basis which is then continued by the local authority without any additional investment or modification.

What about authorities who do have plans to invest primarily for yield? They could of course decide not to do so - but it may not be that simple. Councils may view a particular new acquisition as critical. If so they would still have to satisfy themselves that their transaction complied with MHCLG guidance on investments as well as CIPFA's on property investment. That may be difficult to achieve. 

What about simply not using PWLB in the future? 

Will we see a division emerging between those councils that continue to borrow from PWLB and those that turn their back on PWLB in order to retain greater flexibility.  Possibly - but there look to be dangers here too.  Private sector lenders to councils derive considerable comfort from knowing that PWLB will always be there as a lender of last resort to refinance a council's debt if the need arises.  Would they be so keen to lend if they knew that a council could have disqualified themselves from future access to PWLB?

At the moment it looks to be possible for a council to make an investment primarily for yield financed otherwise than from PWLB monies but still leave open the ability to access PWLB in future so long as they can give the necessary three year certification at the time.  

The consultation response contains some tensions on this point.  On the one hand it states:

"The government recognises the value of ready access to the PWLB as a way to refinance existing debt or externalise internal borrowing. Local authorities will therefore be able to access the PWLB to refinance debt or externalise internal borrowing, even if they are pursuing debt-for-yield projects that would otherwise make them ineligible for PWLB loans." 

"Local authorities must not pursue a deliberate strategy of using private borrowing or internal borrowing to support investment in an asset that the PWLB would not support and then refinancing or externalising this with PWLB loans."

A cautious interpretation is that PWLB may be prepared to provide funds for a council to refinance its general debt but it will be less willing to do this for debt associated with investment assets. 

So whilst the Government has not banned local authorities from investing in commercial property altogether, it looks to have significantly restricted their ability to do so, both now and in the future.

**originally published in SocialHousing**