The PWLB lending facility is operated by the UK Debt Management Office on behalf of HM Treasury to provide local authorities with low-cost loans, mainly for capital projects such as building, adding or improving capital assets.
Funding
One of the main sources of prudential borrowing is through the Public Works Loan Board (PWLB).
The PWLB lending facility is operated by the UK Debt Management Office on behalf of HM Treasury to provide low-cost loans for mainly capital projects, such as building, adding or improving capital assets. Under the prudential regime, local authorities are free to finance capital projects by borrowing, provided they can afford to service their debts out of their revenues. Local authorities are free to borrow so long as the finance director is satisfied that they are acting in line with statute and can afford to repay the loan (United Kingdom Debt Management Office, 2020).
Loan types
There are 2 types of loans:
- Fixed rate loans – interest fixed for the life of the loan and interest paid at half-yearly intervals. These can be paid back according to 3 different methods:
- Annuity or equal repayments – fixed half-yearly payments of interest and principal.
- Equal instalments of principal: equal half-yearly instalments of principal together with interest on the outstanding balance.
- Maturity (also known often as ‘bullet’ repayment): half-yearly payments of interest only with a single repayment of principal at the end of the term.
- Variable rate loans – rate of interest is variable at 1, 3 or 6-month intervals (choice of the borrower). These are repayable with 2 different methods:
- Equal instalments of principal: equal monthly, quarterly or half-yearly instalments of principal together with interest on the balance outstanding at the time.
- Maturity: monthly, quarterly or half-yearly payments of interest only with a single repayment of principal at the end of the term (‘bullet’ repayment).
Eligibility criteria
- PWLB loans are available to major local authorities (such as metropolitan, borough, county, city and combined authorities).
- PWLB is a non-discretionary lender: it does not ask the purpose of a loan, as this would duplicate the decision-making structures of the individual local authorities.
- In deciding how much debt is affordable, major local authorities are required by law to “have regard” to the Prudential Code, published by the Chartered Institute of Public Finance and Accountancy (CIPFA), but they do have discretion to decide how to fulfil this statutory requirement (CIPFA, 2017).
- The Prudential Code requires authorities to look at capital expenditure and investment plans in the light of overall organisational strategy and resources and ensure that decisions are being made with sufficient regard to the long run financing implications and potential risks to the authority.
- The local authority is required to have regard for several matters, including value for money, affordability and practicality.
The affordability of borrowing from the PWLB is subject to some of the same risks as other borrowing, for example changing interest rates. It is therefore very important that such risks be assessed and factored into the economic analysis of any project. The increase in interest rates by 1% in 2019 increased the revenue costs of borrowing which meant some projects were no longer viable (Local Government Association, 2020).