Consultation outcome

Consultation on introducing the Local Infrastructure Rate

Updated 1 December 2017

0.1 Foreword

For too long, the UK has lagged behind other advanced economies on productivity. High-value investment in infrastructure is one way of addressing this problem. Roads and railways make it easier to travel and to transport goods across the country. Telecoms help us communicate with each other. Flood defences are vital for protecting homes, businesses and farmland. Investing in infrastructure that raises productivity could drive long-term improvements in wages and living standards. This is crucial if we are to build an economy that works for everyone.

It is for this reason that the government has put infrastructure at the heart of its economic strategy. We have committed to raise annual central government investment in economic infrastructure from £14 billion in 2016-17 to £22 billion in 2020-21. We recognise, however, that central government can only do so much. We want to collaborate with partners in local government to support further investments in infrastructure. In many places, local authorities are best placed to recognise the needs of local residents and to identify projects that will deliver the most benefits.

Local authorities have responsibilities for transport, housing and environmental infrastructure. In total, they spent £23 billion on capital investment last year, including £8 billion on transport and £1 billion on environmental services. The government wants to support local areas to meet their local infrastructure needs. We are therefore proposing to offer £1 billion of discounted lending to local authorities, available at a new Local Infrastructure Rate of gilts + 60 basis points to support local infrastructure projects that are high value for money. Qualifying authorities would be able to access the allocation from the Public Works Loan Board, and its successor, for a period of three years to support upfront investment.

This consultation seeks views on the proposed new rate, specifically on its potential impact for borrowers and lenders in the local government debt market. We welcome any responses to the questions outlined in this paper, which will help inform and finalise the government’s plans.

Simon Kirby MP, Economic Secretary to the Treasury

0.2 Executive summary

Infrastructure contributes directly to higher productivity, which in turn leads to long-term improvements in wages and living standards. As part of its plans to close the productivity gap, the government has pledged to increase annual central government investment in economic infrastructure from £14 billion in 2016-17 to £22 billion in 2020-21.

A key part of the government’s plan is to support local authorities to invest in local infrastructure. In many cases, local authorities may be best placed to understand local infrastructure needs. The government wants to support local areas to meet these needs, where projects are high value for money.

At Autumn Statement 2016, the government announced that it would consult on lending local authorities up to £1 billion at a new Local Infrastructure Rate of gilts + 60 basis points to support infrastructure projects that are high value for money. Loans at the new rate would be available for a period of three years, with a maximum term of 50 years.

This new lending rate would be accessed through the Public Works Loan Board (PWLB), a statutory body that lends to local authorities and other prescribed bodies from the National Loans Fund. The Treasury has not introduced a new PWLB interest rate since 2013 and the government would like further input from stakeholders before proceeding with this policy.

This consultation seeks views on the effect of the Local Infrastructure Rate on infrastructure investment, as well as the impacts on local authorities and lenders to local government.

1. Introduction

Infrastructure is crucial for building a more productive economy and improving people’s lives. Every day, businesses and families depend on roads, railways, telecoms, energy and flood defences. Investing in infrastructure will also help to address the UK’s long-standing weakness in productivity, leading to higher wages and better living standards for workers. It is for these reasons that the government has committed to raise annual central government investment in economic infrastructure from £14 billion in 2016-17 to £22 billion in 2020-21.

At Autumn Statement 2016, the government announced that it would consult on lending local authorities up to £1 billion at discounted rates to support infrastructure projects that are high value for money. Under the government’s proposal, local authorities would be able to borrow up to £1 billion at a new Local Infrastructure Rate which would be set at gilts + 60 basis points. Loans at the new rate would be available for a period of three years, with a maximum term of 50 years. The total allocation would be capped at £1 billion, and would only be awarded to infrastructure projects that demonstrate high value for money.

This consultation document sets out some more details on the proposed rate and seeks views on its potential impact. Views are invited from a range of respondents, including individuals, local authorities and representative bodies. The government will take all responses into account before deciding whether to introduce this rate.

1.1 How to respond to the consultation

Please send responses to the following address by 27 January 2017:

Local Infrastructure Rate Consultation
Local Government and Reform Team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

Responses can also be sent via email to localinfrastructurerate@hmtreasury.gsi.gov.uk. The closing date for email responses is 27 January 2017.

When responding, please state whether you are responding as an individual or as part of an organisation. If responding on behalf of a representative body please make it clear who the organisation represents and, where applicable, how the members’ views were assembled.

2. Local Infrastructure Rate

2.1 Public Works Loan Board

The Local Infrastructure Rate would be accessed through the Public Works Loan Board (PWLB) or its successor body. The PWLB is an independent statutory body that issues loans to local authorities, and other specified bodies, from the National Loans Fund. Nearly all borrowers from the PWLB are local authorities requiring loans for capital purposes.

Local authorities are able to borrow from any willing lender in the UK or abroad without requiring government consent, but only in sterling. Around 75% of local authority borrowing is via the PWLB, with the rest mainly coming from banks, building societies, the European Investment Bank and the issue of bonds^{[footnote 1]}.

The policy on rates and repayment terms for PWLB loans is the responsibility of the Treasury. Monies for PWLB loans are drawn from the National Loans Fund, which is the government’s main borrowing account and is administered by the Treasury.

The interest rates on loans provided by PWLB are directly linked to gilt yields. The PWLB currently offers three interest rates: standard rate (gilts + 100 basis points), certainty rate (gilts + 80 basis points) and project rate (gilts + 60 basis points). Where local areas have been given allocations of borrowing at the project rate, these have been confirmed with local areas. The government does not currently plan to allocate any further tranches of discounted lending at the project rate.

As set out in the consultation response published earlier this year, the government is planning to use its powers under the Public Bodies Act 2011 to abolish the PWLB and transfer its powers to the Treasury. This will only affect the PWLB’s governance arrangements and does not change any of the policy or operational aspects of lending to local authorities. The policy on rates and repayment terms will remain the responsibility of the Treasury.

2.2 Details on Local Infrastructure Rate

More details on the precise requirements for the Local Infrastructure Rate would be set out in due course. However, for the purpose of the consultation, it may be helpful for stakeholders to have some more detail on how the government would expect to implement this policy if it did go ahead.

Bids would be considered from principal authorities, the Greater London Authority and its functional bodies, Integrated Transport Authorities and combined authorities for projects in the transport, energy, flood defences, water, waste, and digital communications sectors.

As is currently the case, ultimate responsibility for projects, including financing, assessment and delivery, remains with council members, who are democratically accountable to their electorate.

In order to allocate amounts of discounted lending for projects, the government will need a clear and transparent process to assess bids. The government’s current proposal is that councils would be required to produce analysis and an estimate of Net Present Value for the project, signed off by the Section 151 Officer, in line with Green Book appraisal guidance. Full details would be set out in due course, but this could include an estimate of net present value, a high level business case, a borrowing profile and a risk assessment.

Councils would be required to submit their bids to the government, and the government would approve bids that provide evidence of high value for money. Successful bidding authorities would be given an allocation of borrowing at the Local Infrastructure Rate. This allocation would then be accessible via the PWLB until the body is abolished, after which loans would be made by its successor.

The Local Infrastructure Rate would only be available to finance the projects for which allocations were given. It would not be available for other non-approved projects, or to refinance existing debts. Advances at the new rate would be available for a period of three years, with a maximum term of 50 years. As is standard for all PWLB rates, the Treasury retains the right to make unscheduled intra-daily rate changes, or alter the formula methodology or formula for variable rates, as necessary.

2.3 Rationale for change

Local authorities are responsible for delivering a sizeable share of government infrastructure investment, including but not limited to local roads, public transport and flood defences. Last year, local authorities spent £8 billion on transport and £1 billion on environmental services.

The government believes it is important to support local authorities in delivering infrastructure investment. In many cases, local authorities may be best placed to understand local infrastructure needs, but high costs of borrowing could prevent them from delivering projects to meet these needs. The new rate would make it easier for authorities to finance infrastructure projects that offer high value for money.

At Autumn Statement 2016, the government announced a £2.3 billion Housing Infrastructure Fund to be allocated to local authorities on a competitive basis. This will provide infrastructure that unlocks new private house building in areas where housing need is greatest. The Local Infrastructure Rate would complement this, giving local authorities more financing options for infrastructure projects that support the delivery of housing.

Alongside the Housing Infrastructure Fund, the government has also committed £1.8 billion to local enterprise partnerships (LEPs) in England through a third round of Growth Deals. Given the increased availability of capital funding to local authorities, we want to understand local authorities’ appetite for discounted lending to support infrastructure investments.

The local government debt market is evolving, with new trends emerging and new lenders entering the market. It is important for the government to fully understand the impact of a new PWLB interest rate before we consider introducing it.

Question 1

How would the introduction of the Local Infrastructure Rate at gilts + 60 basis points affect local authorities’ infrastructure investment?

Question 2

How would the introduction of the Local Infrastructure Rate at gilts + 60 basis points impact lenders in the local government debt market?

3. Consultation process

The government welcomes views on the following questions:

Question 1

How would the introduction of the Local Infrastructure Rate at gilts + 60 basis points affect local authorities’ infrastructure investment?

Question 2

How would the introduction of the Local Infrastructure Rate at gilts + 60 basis points impact lenders in the local government debt market?

3.1 Submitting responses

Please send responses to the following address by 27 January 2017:

Local Infrastructure Rate Consultation
Local Government and Reform Team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

Responses can be sent by email to localinfrastructurerate@hmtreasury.gsi.gov.uk. The closing date for email responses is 27 January 2017.

When responding, please state whether you are responding as an individual or as part of an organisation. If responding on behalf of a representative body please make it clear who the organisation represents and, where applicable, how the members’ views were assembled.

3.2 Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regime. These are primarily the Freedom of Information Act (FOIA), the Data Protection Act (DPA) and the Environmental Information Regulations 2004.

If you would like the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory code of practice with which public authorities must comply and which deals, amongst other things, with obligations of confidence. In view of this, it would be helpful if you could explain to us why you regard the information you have provided as being confidential. If we receive a request for disclosure of information we will take full account of your explanation, but we cannot give an assurance that confidentiality will be maintained in all circumstances.

In the case of electronic responses, general confidentiality disclaimers that often appear at the bottom of emails will be disregarded for the purpose of publishing responses unless an explicit request for confidentiality is made in the body of the response.

Any FOIA queries should be sent by post to:

Correspondence and Enquiry Unit
Freedom of Information Section
HM Treasury
1 Horse Guards Road
SW1A 2HQ

3.3 Consultation principles

This consultation is being run in accordance with the government’s consultation principles.

4. Annex A: Impact assessment

Type of impact	Effect
Economic impact	The government expects local authorities to take up a significant proportion of the £1 billion allocation if the new rate is introduced. This would raise investment in infrastructure and increase the productive capacity of the UK economy[footnote 2].
Impact on business including civil society organisations	Increased infrastructure investment would make it easier and cheaper to do business. An increase in lending by central government, albeit limited to infrastructure only, may reduce demand for private sector finance.
Financial impact	This policy is likely to lead some local authorities to increase expenditure financed by borrowing, or reprioritise capital funding away from lower priority areas.
Impact on individuals, households and families	Additional infrastructure directly contributes to living standards. For example, investment in local roads would reduce travel times and ease congestion. The indirect effect of infrastructure investment is higher wages, which would benefit working families.
Operational impact	We do not expect the PWLB to incur any additional costs in administering the new rate.
Equalities impact	The government has carefully considered whether this measure impacts on people with protected characteristics and has not identified any equalities impacts.

1. Local authority borrowing and investments, UK 2014-15, Department for Communities and Local Government, September 2016. ↩

2. In July 2015, the government published its plan for productivity titled Fixing the foundations: creating a more prosperous nation. This document shows the relationship between productivity and wages in OECD member countries, and explains how long-term investment in infrastructure will contribute to raising productivity. ↩