The council is to raise money to pay debt that it will inherit from central Government as part of a major shake up of council housing finances. It believes that this radical new way of raising finances is a first for a London borough – although other public sector bodies like Network Rail and Transport for London have used this mechanism to raise capital for major infrastructure projects.
Arranging finances in this way will ensure that the council pays lower interest rates on loans. This could save the town hall between £625,000 and £1m each and every year that the deal is in place.
Traditionally councils have raised finances by borrowing from the Government-backed Public Works Loan Board. However, following last year’s budget this agency’s interest rates will be higher than the best rates available from the markets.
The move to raise funds in this way follows a Government decision to abolish the current housing subsidy system. Under the existing arrangements some local authorities like Wandsworth are required to pay a proportion of council house rents and the majority of receipts from any sales of land or homes to Whitehall as negative subsidy.
The abolition of the system will be part of wider reforms in this autumn’s Decentralisation and Localism Bill that will allow councils to keep rents and receipts from housing sales.
Finance spokesman Guy Senior said:
“This is an innovative and radical approach to raising funds that will enable us to make sizeable long-term savings on the current subsidy arrangements. By issuing a bond we can raise capital from the markets instead of via the more traditional route of borrowing from the PWLB at a higher rate of interest.
“The intention is for us to issue a bond and repay it all within ten years. This is likely to save us something in the region of £6.4m to £10m over that period. This extra money will then be available to fund additional investment in our housing stock and improving local housing estates.
“The new rules mean the council will be free it keep all the rent it collects and all the money it generates from vacant house sales and the disposal of land. This will have very significant long term financial benefits for the borough and for local tax payers.”
In order to obtain the best possible rates of interest the council is to appoint leading credit rating agency Moodys to determine the council’s credit rating. As a result of the town hall’s careful stewardship of its finances over the years, it will be seeking a ‘Triple A’ rating.
Once the rating is obtained, the council will employ leading finance players HSBC bank and Morgan Stanley to market the bond.
Cllr Senior added:
“This is new territory for local government although other arms of the public sector have used this type of mechanism in the past. What we will be looking to achieve above all else is the best possible financial return for our residents.”
The bond will be worth £250m and the aim will be to raise this sum from the capital markets early next year.
If the arrangements prove successful and offer a good deal for taxpayers, there is a possibility that a similar mechanism could be used to help finance an extension of the Northern Line to Nine Elms.
July 4, 2011