I lead Arup’s transaction advice team for...
The European Parliament recently agreed to a pilot programme for Project Bonds as part of efforts to boost the growth agenda across the EU. Maybe project bonds are part of the answer, but only if they are connected to real and lasting change designed to empower local government.
In the UK, all major political parties agree that growth is pivotal to secure the country’s long-term economic future. One way of delivering that is Keynesian style investment in infrastructure. But in these straitened times, with banks hoarding cash and public spending constrained, the question remains: how can we most effectively secure resources for badly needed infrastructure?
With localism firmly back in political fashion, perhaps local government could play a bigger role in solving the problem. The other day, my brother handed me a 1974 flyer from a house clearance. In bold black type face it calls out:
“Invest in Hackney Bonds … Not only will you get a high rate of interest on your savings, but you will also have the satisfaction of knowing that your money is helping to provide essential services in the borough … All expenses borne by the council … The procedure is simple… Trustee Security … Your investment is safe and secure … Issued by the London Borough of Hackney.”
Bonds enjoy a number of advantages over other forms of infrastructure finance. They are tradable; they allow a portfolio of projects and risks to be ‘blended’ by investors and they avoid many of the fee structures that make other investment structures less attractive. Backed by local authority balance sheets they could offer another source of finance to get projects off the ground.
Local authorities in the UK generally have an enviable record of demonstrating financial competence and prudence. Whilst public sector net debt as a percentage of GDP ballooned from 26% in 1990/91 to around 53% in 2009/10 excluding bailing out the banks, local government debt halved from 8% to around 4%.
Authorities such as Cornwall and Birmingham City Council are rightly proud of their ‘triple A’ ratings, which is more than many sovereign governments enjoy these days. With greater financial freedom, local government bond payments could match the long-term liabilities that funds need to cover. Pension funds would be able to get a stable rate of return but with the sort of security that comes with UK Government bonds (gilts).
Making this work will require sustained effort, and not just by the Treasury. The UK is still regarded as one of the most centralised democracies in the world. The Scottish Government is at present remarkably unable to borrow a single bean, although change is promised as Westminster ponders what to offer to keep the union from breaking up. For the UK as a whole there is a real opportunity for the Government to create a new lasting framework for funding infrastructure with local government at its centre.
This framework would need to be stable and long-term to give funders certainty. It would require the Government to make bold changes to the balance of power between Whitehall and city halls. Local government would need to be allowed to keep more of its tax base that since the war has been nationalised by Whitehall. Vehicle excise duty plus payroll and sales taxes could also be partly localised.
Getting long term investment funds into Britain’s infrastructure will undoubtedly require technical reform. Recent progress on creating an investment ‘platform’ for pensions suggest this is possible. But Government should be more ambitious.
Whitehall has made some bold pledges to promote localism; not least allowing local authorities to keep a chunk of business rate revenue growth that comes with new developments. If it is serious about unlocking growth and economic development across the country, it should loosen the Whitehall shackles on local government finance even further.