Funding for local authorities

When it comes to funding for local authorities, are there more options out there? Imogen Fisher, Jonathan Grosvenor and Lowri Fernyhough assess the possibilities.

The Local Government Association has warned that stability is desperately needed for local authority finances. Council finances are stretched but so, too, are the public finances: central government finance is therefore likely to be only part of the funding picture as councils move forward to meet the demands of their residents and central government. But are there wider options available? In this article, we explore what are the sources of funding for local authorities and whether there are other, non-traditional options available to them; and how might that change over the course of this parliament.

1. Public Works Loan Board

The most obvious source of funding for local authorities is from the Public Works Loan Board (PWLB), which is now a lending facility administered by the Debt Management Office on behalf of HM Treasury. As at March 2023, PWLB held loan assets of over £96 billion. The traditional attraction of PWLB for local authorities has been that its interest rates, which are linked to the government bond rates, have generally been lower than interest rates offered elsewhere.

However, in the last few years, PWLB rates have been increasing in line with the increase in gilt rates, which has made PWLB less attractive than in the recent past. With this increase in the cost of borrowing from the PWLB there are alternative sources of funding which local authorities can consider.

2. Bonds

In its simplest form, a bond issuance is where investors buy a debt instrument – a "bond" – on the condition that the issuer of the bond, which in this case would be the local authority, pays back the value of the bond at a specified time and pays interest on the bond until repayment. Bonds are usually listed on a recognised stock exchange and can be traded by the investor. A private placement is an alternative method of raising finance which is like a public bond, but is a private transaction arranged with select investors.

When issuing bonds, local authorities will need to have a credit rating and, as with any financial liability they take on, carefully consider their powers and the legal and financial implications. Key advantages of bond issuances for local authorities are that they are a form of long-term funding, often with good interest rates, and do not necessarily need to be guaranteed. Credit risk can be further mitigated by participating in a bond aggregator, such as the Municipal Bonds Agency, where local authorities club together to issue via an issuer that then on-lends the proceeds to each individual council.

Before PWLB became the main source of lending for local authorities, bond issuances were a key way of raising funds for councils. There has been a slight resurgence in the use of bond finance over the last decade, with Warrington Council and Aberdeen City Council issuing bonds, and the UK Municipal Bonds Agency being formed in 2016. Whilst the last 18 months has been a difficult environment for debt capital market issuances and bonds currently represent a relatively small proportion of local authority funding, recent initiatives suggest a growing renaissance for local authority debt capital market transactions .

3. Banks

Historically, local authorities have not obtained loans from banks as the rates involved would be significantly higher than those of the PWLB. But with the rise in PWLB rates, borrowing from banks could be worth considering as an option.

Aside from traditional, private banks, local authorities can also borrow money from banks such as the UK Infrastructure Bank (UKIB). UKIB is a state-owned bank formed in 2021 which offers loans to local authorities delivering economic infrastructure projects in the UK with a focus on delivering building decarbonisation, heat networks, green transport and mixed infrastructure projects. In September 2023, the rates offered by the UKIB in relation to funding for infrastructure projects was lower than that offered by PWLB.

Banks may need to be guided through the nuances of lending to local authorities, but, if the terms of the loan are favourable, local authorities should consider this as an option.

4. Public bodies

Local authorities can also receive funding from other public bodies, such as Homes England and the Greater London Authority. Usually such funding is accessed by local authorities bidding for funding from that central public body from a specific programme for a specific purpose; for example, local authorities can bid for funds from the Affordable Homes Programme, for the purpose of funding the development of new-build affordable housing.  

Though government finances are tight, the new Labour government has indicated that there may be more grant funding available during this parliament, and so local authorities should definitely look out for developments in this space.

It should be noted that councils can also set up their own funding programmes to pass on funding to others for a specific purpose. Devolution, which is a key priority of the new Labour government, will likely afford greater opportunities for local authorities to set up such programmes. 

5. "Partnership" with the private sector

Labour has repeatedly said that it wants to work in "partnership" with the private sector. It is too early to know what form this partnership will take, both in relation to local authorities and more widely, but it does potentially open up broader source of funding for local authorities. Based on past experiences of partnerships between the public and private sectors, this form of funding is likely to relate to particular projects and will require local authorities to actively work with the private sector on an ongoing basis, rather than just receiving funding from them.

Conclusion

There are a range of sources of funding available to local authorities which are influenced by amongst other things the macro-economic climate and government policy. As Labour continue to engage with local authority and wider stakeholders, particularly in relation to retrofit and decarbonisation, funding sources for local authorities will continue to develop and evolve.

Imogen Fisher is a Partner, Jonathan Grosvenor is a Senior Associate and Lowri Fernyhough is an Associate at Trowers & Hamlins.