Local authority borrowing is an often-analysed topic. That makes sense – as central government funding has fallen in the past decade, money has been sought from elsewhere and the strategies of different councils have been up for scrutiny.
The debate was sparked again in October, with the announcement of new projects by Southwark and Brent LBCs, which will see them explore private equity options to fund housing. Both councils cited recent increased interest rates on loans from the public works loan board (PWLB), the statutory body which provides councils with funding from central government, as reasons to seek private sector co-investment and funding. With those increases taking place nationwide, that suggests the move may soon be replicated by others.
The news was followed by analysis of Spelthorne BC’s investment strategy, which has been criticised by MPs and the Government for, in some cases, over-use of PWLB borrowing. Spelthorne’s approach has attracted much comment in the current market, demonstrating the level of scrutiny which accompanies the use of public funds, even when made available on a commercial basis.
So the question remains, what do councils stand to gain from private sector co-investment and funding? And what’s more, how do councils ensure that private sector funding arrangements present simple, safe, and good value opportunities which provide benefit to their communities?
The benefits of private finance
The recent focus on Spelthorne, and the scrutiny it is receiving (exacerbated by the current market conditions and considerable uncertainty), demonstrates the extent to which public borrowing has become difficult.
By taking the route into private investment, councils avoid the responsibility of handling public funds, but retain all the necessary control over the investments they make.
Housing, in particular, is an attractive asset for public-private collaboration. Every local authority in the country has a need for more housing, and it is something which brings tangible benefits to communities. That goes beyond the simple provision of homes; the residential sector can also reinvigorate ailing high streets, improve quality of life for vulnerable populations, and provide homes at discounted market values and rents.
On the other side of that coin, that versatility and the resilient desire for more housing makes it an attractive, ethical, investment grade, and (generally) inflation-linked proposition for private sector co-investors and funders.
Control is key. Local authorities naturally want to know that private sector partnerships do not mean making risky investments with their own funds and publicly held land.
Councils do typically keep all the relevant veto rights they need to demonstrate good governance, value for money, and reversion rights to safeguard their investment. They also have the option to retain the freehold ownership of any public land, and instead make it available for improved housing through long-term leasing structures.
However, local authorities do need to be prepared to relinquish day-to-day control, and to take a collaborative approach with private partners. Those which try to overly control public-private partnerships often see the process slow down, and become unnecessarily protracted with unclear management lines and responsibilities. Day-to-day local authority management of any housing investment also makes onerous procurement obligations more likely.
The key is to strike the right balance between day-to-day oversight, management control, reporting, and the need to safeguard council investments, without triggering those procurement responsibilities.
One size fits all
A key benefit of public-private partnerships is their simplicity. Granted, there are initial structural framework issues to grapple with, but once councils have established the first framework model it is more easily duplicated.
Once the structure has been established, it can be used again and again as a catalyst for additional collaborations and the development of more quality housing.
From a legal perspective, local authorities need only do the difficult work once. When the systems are in place, adding new housing sites is a straightforward and streamlined process saving the need to re-invent the wheel for each new development.
James Duncan is head of real estate investment at Winckworth Sherwood