Revenue streams must be made available to local authorities if they are to access development opportunities
Demand for investment in UK infrastructure remains strong, with the National Infrastructure Plan identifying a pipeline of more than 500 projects over the next decade, with an aggregate value of more than £250bn.
Delivering projects of scale is considered critical in driving economic growth, but without access to the right revenue streams local authorities risk losing out. Local government capital expenditure and infrastructure development is experiencing a shift away from heavy reliance on central government funding, and towards more financial autonomy and self-sufficiency.
However, it remains to be seen how far local government will grasp new financial freedoms such as tax incremental financing (TIF), and assemble innovative funding packages that better utilise council assets and share risks with the private sector.
TIF raises money upfront, usually in the form of borrowing, which is repaid from a proportion of the increased business rate revenues generated by the development. This can support the primary local infrastructure which is necessary to attract development. However, it will usually require the local authority's chief finance officer to approve borrowing against future revenue streams, which are inherently uncertain.
Elsewhere, local authorities are maximising the use of surplus land and buildings by turning them into care or respite homes to deal with demand for places.
With regard to private finance, the current landscape remains uncertain. Some of the ingredients for local government to be able to procure infrastructure projects are in place, or at least at an advanced stage of development.
The government has completed its review of the Private Finance Initiative, the main UK form of public private partnership, and launched PF2. This revised structure includes provision for the public sector to participate in the equity of projects, and is more suitable for institutional senior debt than the previous PFI scheme.
PFI used credits given from central to local government to provide a long-term funding stream for contractual obligations, and this was a significant part of central control over local financing activity. PF2 provides an updated mechanism, but without revenue streams to drive it may not have much impact.
HM Treasury has also launched the UK Guarantees scheme to provide credit support for up to 49% of the debt for nationally significant infrastructure projects. Halton borough council's £600m Mersey crossing is to benefit from this scheme, and up to £1bn of cover has been offered for the northern line extension project in London.
Although this helps address the reduced commercial bank capacity for long-term projects, it is focused mostly on the largest projects, as they must be considered nationally significant by the government to be eligible. Provided there is a suitable underlying revenue stream for the project, the UK guarantee may prove a useful instrument to ensure debt capacity is available, and potentially help access lower cost institutional debt finance.
Local authorities need to focus on finding catalytic roles to unblock potential transactions, make best use of surplus land and make the most of the limited financial contributions they are able to make.
The key need is to identify the small- and medium-sized projects that can be got under way in one to three years, while mega projects such as HS2, the Thames estuary airport, Crossrail 2 and the Severn Barrage are planned and debated.
Craig Jones is director of corporate finance advisory at Deloitte
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