Following the introduction of HM Treasury’s PWLB Guidance, incorporating restrictions on access and a revised process, borrowing from the PWLB may now be more complicated. Arlingclose provide an overview of some of the key considerations.
Compliance
Authorities that purchase investment assets primarily for yield (PIAPY) will be restricted from borrowing PWLB loans in the financial year the purchase takes place. Guidance is high level, rather than a set of strict definitions, due to the diversity and complexity of local government finance. It deliberately avoids providing precise answers, leaving the onus on section 151 officers, or equivalents, to categorise borrowing activity and certify the authority is not planning PIAPY over the next three years.
Contentious projects will include those that contain various elements of approved and restricted activity. While generating a yield to recycle within projects is permitted, there will be schemes that appear more commercial in nature than others. Establishing a process to review projects and identify the extent and nature of commercial elements will be important, with authorities expected to have robust systems in place to be scrutinised by external auditors. Authorities will need to consider the proportionality of commercial elements and rental yields relative to market benchmarks for investments with similar risk profiles, together with the overall service delivery aspects. The extent to which negative outcomes are avoided through asset purchases, particularly where there is evidence of market failure and a lack of alternatives to Council intervention, will be important in the context of regeneration and preventative action.
Risk Assessment
It will be important to examine compliance with PWLB rules and the risk of projects falling foul of the guidance, and how these can be modified or removed. Authorities with a limited overall funding requirement may consider restricted access to the PWLB to be no more than temporary inconvenience. Those with more extensive capital programmes will be more wary, as the presence of any PIAPY could be enough to restrict access to PWLB, potentially increasing costs across the authority’s entire funding requirement.
A provision to maintain the PWLB as lender of last resort for refinancing requirements, regardless of PIAPY, has been included in the guidance, however, the process for accessing this is far from clear. There is no defined procedure for authorities that incur capital expenditure on PIAPY whilst simultaneously requesting PWLB for refinancing and treasury management purposes; in practice this refinancing facility may only be available in emergencies.
The cost of not qualifying for PWLB loans, together with the change in risk profile across the whole treasury management strategy, should be quantified and assessed. Is the marginal yield on a potential PIAPY project worth the increase in cost and risk profile?
Alternative Funding
There will be some authorities that will feel they need to continue with PIAPY, either to finish partially compete projects or meet pre-set revenue targets. Here, a root and branch re-assessment of treasury strategy may be required. Restricted access to the PWLB could have implication for credit, quality and liquidity, with different techniques and strategies required to manage this change in risk profile.
Of course, alternative funding sources will also need to be considered, with the options including “local to local”, private placements, bonds, bank loans, income strips, leasing and alternative hedging arrangements.
Further Analysis
Authorities will need to establish processes to ensure compliance with the regulations and quantify the risk and potential cost where this may not be the case. For some authorities, the introduction of the new PWLB guidance will have far reaching implications for treasury management. While the PWLB will remain a relatively low cost, easy choice for most, there will still be authorities that choose to examine the alternatives, for a variety of strategic reasons.