Research Project

Capital Contingencies: Local capital finance in an era of high public debt
26 October, 2009

  • Warning that dramatic budget deficits could plunge Britain back into era of crumbling infrastructure.
  • Local authorities should plan now for a new environment of constrained capital allocations from the Treasury.
  • Councils must be better prepared to raise capital in novel ways in order to meet critical investment needs

With the credit crunch causing the “tsunami of a public sector recession” from next year onwards, the shockwaves hitting investment in road and rail, school buildings, housing, regeneration and other public facilities could be extremely severe, according to a new thinktank report. The New Local Government Network (NLGN) says that inadequate investment into public infrastructure could lead to a decline in growth and hamper the modernisation of public services.

The UK has huge demands for the new provision and refurbishment of infrastructure, and it is local authorities who are at the forefront of investment in housing, transport, regeneration, education and waste management.

In its new report “Capital Contingencies” NLGN sets out how local councils could raise alternative forms of infrastructure investment in a scenario where the Treasury begins to clamp down on orthodox capital expenditure. NLGN suggests that local authorities should consider going directly to capital markets through bond issuance, potentially explore alternative revenue raising powers including the workplace parking levy once the recession ends, and that councils should rapidly exploring the potential to apply their own financial reserves more intelligently.

With Treasury plans to halve capital expenditure from £44bn to £22bn by 2013/14 and with private capital now only available to the public sector in a more limited form and quantity, councils will need a stronger approach to partnerships and rethink regeneration and construction plans. In order to lessen the capital funding crisis NLGN is proposing a number of innovations:

  • Local authorities to generate new revenue stream opportunities through modest user charging including workplace parking levy implementation, when the recovery allows, and new trading opportunities as permissive powers of wellbeing and general competence become available;
  • A new lending approach which treats the Private Finance Initiative (PFI) on a level playing field with other local capital finance models, removing bias and allowing greater local choice;
    A new collective fund for council reserves which could aid infrastructure investment across the country.
  • NLGN Director, Chris Leslie, urged all political parties to think hard before making large scale cuts in capital grants and loans:

“Anxiety over the level of public sector debt is set to define the next decade of public service provision in the UK but such a mindset risks a scenario in which economic growth is fettered by inadequate investment in the nation’s infrastructure.”

“Local authorities are the principal agents in much of the nation’s infrastructure development and must be ready to rediscover the skills and techniques that can enable self-determined capital investment. The constitutional circumstances which have created a local government community almost totally reliant on Whitehall now risk leaving much of our public services and facilities bereft of investment. We urge preparedness within the sector for the looming political obsession with national debt which could see a Treasury cutting capital grant and loan availability severely.“

“Councils have the powers, albeit dormant, to relate to capital markets directly should they choose to do so, and also possess great assets and reserves of their own which hold enormous potential for domestic reinvestment. We see it as vital that making more these powers and assets forms the vanguard of future locally-driven investment.”

“To do this we must address on a fundamental level the relationship between central and local government. The parameters within which local authorities operate are too restrictive, and it is only by removing these that the potential for a wider suite of independent options – whether municipal bonds, mutualisation, trading, alternative revenue streams or other forms of partnership with the private sector – can be realised.”

Publication Date: 26 October 2009
ISBN: 978 1 903 447 84 0
Authored by: Tom Symons and Chris leslie