How can local authorities fund new infrastructure?
Author: Alex Thomson, Localis, in the Information Daily - formerly eGov monitor |
Infrastructure, and ways to fund it, have been subject to much debate of late ? particularly since the Chancellor’s Autumn Statement prioritised greater investment in this area.
We at Localis have this week launched a report, in partnership with Lloyds Banking Group, on ways local authorities can fund future infrastructure. Our report, entitled Credit Where Credit’s Due, alights on borrowing options such as tax increment finance, bonds, and outlines the potential utility of a new 30bn National Infrastructure Bank. These future scoping sections apart, it also highlights ongoing best practice amongst local authorities.
The first is the recent model of Local Asset Backed Vehicles (LABVs). In a LABV, a local authority contributes land and a private firm the skill sets and finance to develop that asset. The key, our report contends, is to reach a series of agreed outcomes for the joint venture from the outset, and ones which ensure profit for both private and public partners. LABVs to date have avoided the lengthy procurement period and upfront costs of PFI, they strengthen local authorities’ business acumen (which will help arm them in future negotiations), and, whilst maintaining a significant (normally 50%) risk within the local authority, have the potential to deliver both infrastructure, and a profit.
LABVs are, it must be noted, heavily dependent on location ? in determining the amount of private sector demand there is to enter into a joint venture (and thus the terms an authority can extract), and local demand for varying types of infrastructure. If councils wish to truly place shape, however, combining a LABV with some of the other forms of investment delineated here can lead to significant regeneration. The report highlights the example of the Sheffield Housing Company – a collaboration between Sheffield City Council and a developer to build around 2,300 homes in areas across the city where regeneration is needed the most. Arguing that much of the brownfield land used for the development is unattractive in piecemeal form, and that there was a lack of demand for developing it even when the housing market was more buoyant, the council hopes by retaining a 50% share in the project it can capitalise in later years on any housing market recovery. Delivering 35% affordable homes, it is expected to create 330m worth of investment.
LABVs aside, the report also shows that authorities can trade effectively for a profit, and put those profits into much needed infrastructure. As our report illustrates, in August 2011 DCLG released a list detailing the more than 100bn annual running costs incurred on the 250bn worth of council assets. Councils own nearly 100 golf courses, 20 cinemas, and 30 sports stadiums. Selling off assets clearly has its limits (some assets, the Etihad Stadium in Manchester for example, are significant earners for the council and bring in large revenues in their current usage), but in order to address a 60% five year decline in capital receipt, there may be further room for manoeuvre here.
Councils’ ability to trade effectively has grown steadily since the wellbeing powers were introduced in 2000. From a 66m loss in 2001/2, to c.80m profit in the mid 2000s, in recent years councils have raised around 300m annually from their external trading services. Kent’s Commercial Services trading arm generates profits for the council sufficient to reduce council tax bills by over 1% a year, whilst Stockport’s Solutions SK ? a formerly internal traded service spun out into a wholly owned business ? achieved a 40m turnover within two years of its foundation. Such business acumen, our report argues, will help local authorities in future years ?arming them both in their dealings with the private sector, and with additional funds to be spent on infrastructure.
Using Local Asset Backed Vehicles and their trading capabilities effectively, we argue, is one way local authorities can help deliver new infrastructure in financially straitened times. These are however but a piece of the jigsaw, and for those seeking ideas as to the future role of LEPs, pension fund investment, and forms of taxation, amongst other issues, we invite to visit our website, www.localis.org.uk, and view our report.