PWLB loans will be refused to municipalities at risk of non-repayment
The Treasury will not advance new Public Works Loan Board loans to councils where there is a ‘more than negligible risk’ the loan will not be repaid without future government support, according to updated guidance for councils.
The updated guidance follows the release of the Leveling and Regeneration Bill last week which proposed to strengthen the Secretary of State’s borrowing powers over councils by allowing him to issue ‘directing risk mitigation”, including by issuing borrowing limits and requiring councils to sell their assets, if they are deemed to have exceeded certain risk thresholds.
The updated Treasury guidelines limit new PWLB loans to councils that can be shown to have the ability to repay the money, explaining that “non-repayment of loans jeopardizes the PWLB’s ability to continue to provide accessible and low-cost loans to local authorities competent to undertake capital projects”.
It adds that the Treasury “believes it necessary to clarify this in response to the continued accumulation of very high debt levels and associated credit risk in some local authorities”.
However, only councils contacted by the Treasury over ‘specific concerns’ should expect a change in their ability to access PWLB loans. If government oversight of the sector flags particular concerns about a board, the Treasury will contact them for a “period of engagement during which representations regarding capital spending and debt can be made”.
“HM Treasury will ensure that there is sufficient time for a full investigation, including representations from local authorities, before deciding whether the local authority poses a risk of non-reimbursement more than negligible and if that local authority fails to adequately take action which it could reasonably be expected to reduce that risk,” the guide explains.
In addition, the Department for Leveling Up, Housing & Communities has released a guidance document outlining proposed risk parameters which, if breached, would allow the Secretary of State to issue ‘Risk Mitigation Instructions’ , in particular by reducing their borrowing.
Measures are still being refined through work with the sector, but include:
- Proportionality of debt, measured as the total level of debt in relation to the financial capacity of the local authority.
- Proportion of fixed assets that are investments made with the intention of generating a net financial return or profit.
- Estimates showing that the authority is not meeting its legal obligation to make sufficient arrangements to repay the debt.
- Proportion of debt held by the local authority when the counterparty is not the local or central government, including credit agreements and loans.
If breached, the government could impose borrowing limits on these councils, undertake commissioned reviews or “take specific steps to reduce” the level of risk.
DLUHC approaches councils “likely to be particularly vulnerable” to these risks, offering to work “in a supportive and cooperative way on how they can reduce their risk exposure”.
It is understood that the majority of councils will continue to borrow and invest in much the same way as they currently do and DLUHC has emailed Finance Directors highlighting that the new powers will be used with flexibility.
Rob Whiteman, managing director of the Chartered Institute of Public Finance and Accountancy (Cipfa) told LGC that “the role of PWLB and the prudential code remains the same”.
“We have seen that the government is now asking councils for more capital planning and also introducing measures. Based on these measures, a few local authorities could see their borrowing reduced. Many councils are already operating with measures and ratios assessment and it will make no difference to those local communities. The Secretary of State is taking powers to reduce the borrowing of those few municipalities that have borrowed excessively.