Back in May 2022 HM Treasury (HMT) published its latest guidance for applicants looking to borrow from the PWLB. This guidance was an update to the guidance published in November 2020 which followed changes to lending terms that came into effect on the 26th November 2020.
The PWLB has been in existence, in one way shape or form, since 1793 and over these last 230 years has helped fund many capital projects delivered by those bodies that are eligible to borrow from the Board. The PWLB is here to stay but the scrutiny it now places on applications for funding has increased.
The latest guidance clearly sets out what the PWLB is all about, offering local authorities low cost loans to support the key areas of service delivery, housing, economic regeneration, preventative action and finally treasury management. It also makes it clear that any borrowing needs to be undertaken with the principles of Prudential Code firmly in mind.
These changes have been implemented because some local authorities have been using the PWLB to fund the purchase of assets primarily for the purpose of generating a yield, this is firmly against the main ethos of the PWLB and now of course the Prudential Code.
The guidance defines capital or property assets that serve no direct policy purpose, and which are held primarily to generate an income as “Investment Assets bought primarily for yield”. If a local authority plans to undertake this type of activity in its capital plans, then it will not be able to access loans from the PWLB for any purpose whilst this activity remains in the minds of the local authority.
Borrowing from the PWLB used to be a fairly easy process, you rang them up, answered a few questions and got your money in the bank two working days later. In November 2012, the Certainty Rate was introduced which provided a discount of 0.20% to those local authorities that provided the PWLB with information on their plans for long-term borrowing and capital spending over the coming years via the submission of a Certainty Rate return each year. The Certainty Rate was therefore optional, if you didn’t want to share your plans you would still have had access to the PWLB but not the discount.
Now the Certainty Rate return is mandatory, if you do not submit it, including a high level description of your spending plans, you won’t have access to the PWLB, the Certainty Rate is therefore the default rate available to local authorities, although the rates quoted on the DMO website are still gross of the discount.
Applying for loans is no longer done by phone, instead an electronic template must be submitted specifying the amount of money that is required, the repayment structure and the duration of the loan. A declaration needs to be made confirming that the loan isn’t to be used for any yield generating asset purchases and if this assurance cannot be provided the loan will not be advanced.
The Certainty Rate form, along with a local authority’s capital plans, are submitted through the DLUHC’s DELTA platform. Plans are scrutinised to ensure the capital programme as submitted is compliant with the new lending criteria.
In addition to this the s151 Officer has to provide an undertaking that there is no intention to buy Investment Assets primarily for yield, irrespective of how they are funded/financed. This is an important point, it will not be possible to use existing capital receipts to fund the purchase of investment assets or to recycle receipts from the sale of existing assets into new investment assets, or by borrowing from other sources. If you are going to invest in yield generation then the PWLB doors will be firmly closed.
It is expected that if a local authority has committed to any significant new items of capital expenditure or removed any significant items of capital expenditure during the year, the return the DELTA return should be updated. The amounts for planned new long-term borrowing or planned capital expenditure that will be financed by borrowing should also be updated if they have changed by more than 10%. There will now be increased scrutiny of the returns, and it has become apparent that PWLB applications are being held up if there is a discrepancy between requests for funding and the original/amended submission. The DELTA returns should therefore be updated as a capital programme evolves over the financial year and not just seen as an annual box ticking exercise.
The PWLB make mention in the guidance of the fact that they expect auditors to take a closer look at local authority’s decision making processes around borrowing and whether capital spending plans are compliant with the new lending terms. Whilst auditors have no powers to overrule a s151 officers’ judgement over the capital plan auditors could raise any concerns with HMT bringing in another set of eyes into the scrutiny process.
So what sanctions are in place if a local authority doesn’t play ball?
It is therefore pretty clear that the microscope is all over local authorities’ capital spending plans and ensuring the plans fit within the rules set out by the PWLB will ensure continued access to this form of funding. Failure to comply will trigger a number of sanctions which are costly and best avoided.
If you are looking at your capital programme and want any advice on a projects applicability for PWLB funding, the impact of reduced access to the PWLB on your wider capital plans or any other advice on capital spending and financing then please contact Arlingclose who have extensive experience in this complex area.