The shift from reliance on central funding towards local financial autonomy and self-sufficiency should be capitalised on
The National Infrastructure Plan identifies a pipeline over the next decade of over 500 projects with an aggregate value of over £250bn – and local government is central to its development.
Many local authorities face challenges in the capacity and condition of their infrastructure and most are responding to significantly reduced revenue budgets, reductions in central government capital grants and the withdrawal of PFI credits. A new funding landscape is beginning to emerge, both here in the UK at national and local level, as well as overseas. There is a move from heavy reliance on central government funding towards more financial autonomy and self-sufficiency.
The extent to which local government will grasp new financial freedoms such as Tax Incremental Financing (TIF) and assemble innovative funding packages better utilising council assets and sharing risks with the private sector, remains to be seen. For the right projects, TIF has the potential to raise financing for local infrastructure to kick-start local economic development. 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 necessary to attract the development that will generate additional taxes. It will likely require the local authority's S151 officer to approve borrowing against future revenue streams, which are inherently uncertain.
Elsewhere, some local authorities are maximising the use of surplus land and buildings, perhaps in conjunction with other public agencies such as the NHS, to increase the provision of care home or respite home places.
The current landscape also remains uncertain with regard to private finance. The government has completed its review of the Private Finance Initiative, the main UK form of public private partnership, and launched PF2. New documentation is being developed and under consultation. This revised structure includes provision for the public sector to participate in the equity of PF2 projects and is more suitable for institutional senior debt than the previous PFI scheme. Pilot projects for PF2, in the health and education sectors, have been identified.
Revenue support will be essential. PFI was used with a system of PFI credits from central to local government to provide suitable long term funding stream for the contractual obligations. This was a significant part of central government's control over local government financing activity, linked to a detailed approvals process. PF2 provides an updated mechanism but without revenue streams to drive it may not have much impact on local authority investment in infrastructure.
HM Treasury has also launched the UK Guarantees scheme to provide credit support for up to 49% of the debt (which can be higher if required in special cases) for nationally significant infrastructure projects. The £600m Halton Crossing over the Mersey, being procured by Halton borough council, is to benefit from this scheme. Up to £1bn of cover under the scheme has been offered for the Northern Line Extension project in London, to be procured by Transport for London. This helps address the reduced commercial bank capacity for long-term projects and can provide a basis to attract institutional debt providers seeking higher credit quality projects. It is, however, focused mostly on the largest projects and these must be considered "nationally significant" by government to be eligible. Provided there is a suitable underlying revenue stream for the relevant project, the UK Guarantee may well prove a useful instrument to ensure debt capacity is available, and potentially help access lower cost institutional debt finance.
Internationally, the form and scale of borrowing by local and regional governments varies widely between countries. The UK is currently more centralised with only limited capital finance raised by local authorities and no regional layer of government which could undertake borrowings. This is in contrast to more federal states such as the US, Germany and Spain.
In the UK, the Prudential Borrowing regime provides quite a tightly controlled basis for borrowings by UK local authorities. This is complemented by the Public Works Loan Board borrowing window for local authorities, in effect, to access sovereign borrowings by HM Treasury. While a number of local authorities have obtained their own credit ratings and a limited number have made listed bond or private placement issues, this remains a niche activity rather than a major source.
UK government wants more investment to be channelled through the private sector and in particular not to contribute to public sector borrowing totals or the budget deficit. Local authorities need to focus on finding catalytic roles to unblock potential transactions, make best use of surplus land in transactions 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 which can advance in a one- to three-year timeframe, while mega projects such as HS2, the Thames Estuary Airport, Crossrail 2 and the Severn Barrage are planned and debated.
Nick Prior is head of government and infrastructure at business advisory firm Deloitte
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