Research Project

Capital Momentum: financing options for locally driven capital investment
29 July, 2010

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With investment in public building projects decreasing by 50% over the next four years, a new report recommends using the Local Government Pension Fund (LGPF), municipal bonds and council reserves to plug the shortfall.

The New Local Government Network (NLGN) report, Capital Momentum: financing options for locally driven capital investment, argues that new funding strategies will be needed to save some of the £12billion of building projects under threat from Government spending reductions. With housing, transport and education likely to be worst hit councils should think now about how vital schemes could be funded through alternative sources. NLGN calls for local authorities to utilise the estimated £97bn in the Local Government Pension Fund to continue investment in infrastructure projects.

Whilst there remains a deficit in the LGPS, NLGN argues that devoting some of its funding towards building projects would offer a stable and long-term investment for the pension fund whilst also supporting local job creation and the wider local economy. Report author, Tom Symons, points towards the need for pension portfolios to have a diverse range of investments following nosedives in traditional forms of investment, such as the FTSE 100, over recent years.

Currently there is no mechanism for local government pension funds to invest directly in pooled infrastructure provided by English local authorities and related sub-regional and regional agencies. In March 2010, just 0.7 per cent of the UK’s total pension fund assets were invested in infrastructure, indicating the scale of untapped potential that exists.

The report also warns the Government not to curtail the ability of local authorities to raise money through the Public Works Loan Board, as has happened under previous economic downturns. The report argues that this form of ‘prudential borrowing’ is vital to ensuring that infrastructure projects are well resourced.

NLGN also argues that in the future it may be necessary to use US-style municipal bonds for projects with a defined revenue stream, such as leisure centers or transport projects. If restrictions were placed on council borrowing by central Government, off-balance sheet ‘revenue bonds’ could be one of the few remaining ways of financing such projects. However, the report also concludes that municipal bonds would not currently represent an economically sound form of borrowing for local authorities while there are no limits on borrowing from the PWLB.

On the reforms proposed, Tom Symons, Senior Researcher at NLGN said:

“There is a real risk that future economic growth will be undermined by infrastructure that is unable to meet the demands of a modern, globalised economy. This provides a key imperative to find or design mechanisms that can sustain investment throughout a period of national fiscal consolidation.”

“Pension funds present enormous potential to invest in infrastructure. Just 1 per cent of the Local Government Pension Scheme1 would produce close to £1bn of investment opportunity for local capital projects. To bring this funding in, we need to adopt new investment vehicles that can operate at a scale, size and geography that creates the delicate combination of risk, return and social benefit that is required to incentivise a pension fund to invest.”

Publication Date: 29 July 2010
Authored by: Tom Symons