To PWLB or not to PWLB - changes to PWLB borrowing conditions for local authorities

Posted: 18/02/2021

Local Authorities have a broad discretion over their capital spending and finance plans to achieve their local priorities. However, when borrowing or making investments they must remain within the statutory framework that applies to them.

While they have access to finance from more traditional and well-known sources, one option that is available to Local Authorities is to source financial support from the Government through the Public Work Loans Board (PWLB). This has often proved attractive as PWLB loans are generally available at a lower cost to Local Authorities than traditional funding from other sources. Following legislation passed in 2020 PWLB loans are now also legally issued by the HM Treasury (the Treasury).

However, in November 2020, following the Government’s response to the consultation paper ‘Public Works Loan Board; future lending terms’, launched in March 2020 (the Consultation Paper), the Treasury announced that the terms on which Local Authorities borrow from the PWLB will now change.

The Government has become increasingly concerned that there has been an upwards trend of PWLB loans being used by Local Authorities to buy investment properties, with the “primary aim” of generating yield, which is not considered an appropriate use of the loans. The changes seek to prevent this.

The new PWLB terms

To ensure that the PWLB loans are not being used “primarily for yield”, the Treasury has introduced the following changes to the terms on which a Local Authority may borrow a PWLB loan:

• Local Authorities must submit a high-level description of their capital spending and financing plans for the following three years, along with their expected use of the PWLB loan. None of these should include purchasing investments with the “primary objective” of generating yield;
• Local Authorities must provide information on how much they intend to spend each year on a set of categories that are thought to be productive uses for a Local Authority’s spending. These categories are set out below. A short description of the main projects in each of these categories is also required; and
• the Responsible Finance Officer of the Local Authority must provide assurances that it is not borrowing to fund investment assets “primarily for yield”.

The Guidance

For clarity, the Treasury has defined “investment assets bought primarily for yield” in the ‘PWLB Guidance for Applicants’ document (the Guidance) as an investment that has one or more of the following characteristics:

• buying land or existing buildings to let out at market rate;
• buying land or buildings that were previously operating on a commercial basis which is then continued by the Local Authority without any additional investment or modification; and/or
• buying land or buildings other than housing that generate income and are intended to be held indefinitely.

Given the complexity of the sector and the diverse nature of a Local Authority’s actions, the Guidance has avoided issuing strict rules and definitions and instead relies on guidance. As a result there are, inevitably, some questions over what PWLB funding may or may not be used for.

The Guidance does, however, make it clear that the PWLB will continue to support the following categories of spending:

• service spending;
• housing;
• economic regeneration;
• preventative action; and
• treasury management.

As you would expect, each of these categories has within it several limbs. The project for which spending is being sought must comply with some or all of these limbs (as specified in the Guidance). For example, where a Local Authority buys land or existing buildings that were previously operating on a commercial basis which is then continued by the Local Authority, PWLB funding can be utilised if the Local Authority makes some form of additional investment or modification to the land or building (assuming it does not fall within any other part of the limiting characteristics above).

Consequences

If the PWLB loan is misused, there are various remedies available including requesting the Local Authority to unwind the transaction, requesting repayment of the PWLB loan or blocking future access to PWLB loans. Although the Guidance does not include reference to further consequences on breaching these new terms, the response to the consultation indicates that there could be significant penalties which the Treasury may choose to impose in the event of such a breach. It remains to be seen how the Treasury will seek to police the final use of any PWLB loan though.

There are undoubtedly grey areas within the Guidance itself that have (understandably) caused some level of confusion over what may be classified as an investment asset bought “primarily for yield” and whether some regeneration plans may inadvertently fall foul of this. However, if the new rules and the Guidance are considered at the outset of a project, it is likely that the project can be designed in such a way that a PWLB loan is available or allocated so that some, if not all, of the project can be funded.

The main consequences for Local Authorities are that the enhanced reporting requirements will need to be carefully complied with and it will be for the Local Authority’s section 151 officer (or equivalent) to make the decision regarding whether a project complies with the new terms (unless concerns are raised by the Government at any time). Obviously, if you have questions or any uncertainties in this regard, we can look to help you.

Key Take Aways

The Guidance seems, on the face of it, to have achieved its stated objective of preventing the use of PWLB funds purely for investment purposes. However, clearly where there is a housing, regeneration or other local benefit angle, then such funds can still be accessed. Local Authorities will need to carefully consider, document and report the basis on which any such investment is justified.

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