In search of new revenue streams
More than a decade of austerity has forced councils to consider their commercial activities as they seek new ways to generate revenue streams to replace the reducing central government funding. One route explored increasingly by councils is using low-cost PWLB loans to build up a commercial investment portfolio bringing both new income and wider regeneration benefits to the local area. There has been much debate about whether councils should take on property market risk; and whether they have sufficient skills and expertise to make sound investment decisions.
In November 2020, PWLB announced a 1% cut in its underlying interest rates. But alongside this was a tightening on how PWLB loans could be used by local authorities. In particular, the requirement for the s151 officer to confirm that the Authority does not intend to buy investment assets primarily for yield. Authorities that don’t comply with this requirement risk being barred from borrowing and/or being required to repay their loans. So the message is clear: borrowing from PWLB solely to generate income is not allowed. This change, plus a number of high profile council investment failures (some exacerbated by COVID-19), has caused a ripple effect of councils abandoning their planned commercial investments.
When are commercial investments right?
But there remain legitimate reasons for Councils to make investments and those that create and safeguard jobs in the local area are very much allowed. This is crucial for those councils that want to lead or support the economic recovery of their areas in the aftermath of COVID-19 and/or continue to support growth. And the focus on these investments is shifting from merely job creation to that of social value: how do local authorities create value for the local community, reduce dependency on benefits and reduce the poverty premium? Local authorities are now establishing investment funds that provide a more community-focused, human approach to considering the viability of schemes and are therefore able to start to make an impact here.
31ten has been working with a number of Councils seeking to set up such investment funds to seed economic growth and regeneration and for local businesses to access much-needed flexible finance; those that might be turned down for, or need to supplement, a regular bank loan. These are generally:
These investment funds can be set up to cover the council costs as a minimum. They can then operate as an evergreen arrangement, with returns supporting ongoing investment opportunities.
We advocate Councils explore their borrowing powers (either through the PWLB, the Government’s new UK Infrastructure Bank or the wide range of private banking products); clarify their objectives, including target industries and businesses that will have the biggest economic impact on their area; and adopt a portfolio-based approach to their investments to manage the risk across a range of opportunities.
Want to find out more?
To find out whether an investment fund would be right for your organisation, book in a no-obligation introductory chat with Chris Shepherd, using the form below.