Public loans are an important source of financing for a local authority given that they are usually characterised by interest rates below commercial/market rates or, in some cases, can even be interest-free
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Public loans are an important source of financing for a local authority given that they are usually characterised by low interest rates or, in some cases, can even be interest-free. In the UK, public loans are available from a number of sources, including the Public Works Loan Board (PWLB), UK Infrastructure Bank and Salix.
Apart from the interest rate, crucial aspects to consider when applying for a loan are the creditworthiness of the local authority, which will be checked as a pre-condition, and the repayment scheme (as specified in the Local Government Act 2003). Indeed, in some cases, repayments could start before the project will start generating revenues (or savings).
- Finance source: Central government
- Funded project phase: Design, build
- Typical project size: Up to £100 million
- Match funding: Depending on the project circumstances
- Security: None – a direct loan from central government to the local authority
- Speed of accessing finance: In line with the PWLB process
Local authorities wishing to fund projects will often opt to use funds borrowed directly from central government, using the same process as they would for any large capital project. In view of the clarification and update to the PWLB loan terms in November 2020 (see below), a local authority will need to satisfy itself that the purpose of the project, and therefore the borrowing, clearly aligns with the local authority’s obligations in terms of Net Zero and service delivery, and is not solely for commercial purposes.
Public loans that are available to local authorities.
Local authorities are required by regulation to have regard to the Prudential Code when carrying out their duties in England and Wales under Part 1 of the Local Government Act 2003, in Scotland under Part 7 of the Local Government in Scotland Act 2003, and in Northern Ireland under Part 1 of the Local Government Finance Act (Northern Ireland) 2011 (CIPFA, 2017).
The government has clarified that borrowing primarily for yield is an inappropriate use of the PWLB and in November 2020 revised its lending terms accordingly. Its stated aim was “to develop a proportionate and equitable way to prevent local authorities from using PWLB loans to buy commercial assets primarily for yield, without impeding their ability to pursue service delivery, housing, and regeneration under the prudential regime as they do now”. According to the new lending terms, finance directors must now confirm that “there is no intention to buy investment assets primarily for yield at any point in the next three years”. It is clear that the government still thinks commercial investment could be “appropriate and necessary when it is done well” (House of Commons, 2021).
Salix and PWLB
Two of the most available public loans for local authorities are the PWLB and Salix loans.
UK Infrastructure Bank
The new UK Infrastructure Bank was launched on 17 June 2021 https://www.gov.uk/government/news/uk-infrastructure-bank-opens-for-business. The bank has launched with a financial capacity of up to £22 billion, comprising up to £5 billion in equity, £7 billion in borrowing and a further £10 billion under the Treasury’s UK Guarantee Scheme. With this funding, it aims to kick-start up to £40 billion of private investment into green projects.
The bank is still developing detailed policies on its offering for different sections and therefore not much detail is available on how the loans will work.
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