IN PRACTICE
TREASURY MANAGEMENT
the risk and whether they are being honest about the level of debt needed to meet the housing targets they are attempting to deliver.
What are the challenges of developing a business case for large-scale projects?
Q
CH: These schemes are inherently complex. You have got to try and forecast, for example, what is going to happen to the London property market over a period of 10 to 15 years. The complexity is dealt with through proper financial modelling and sensitivity analysis, but you can never be 100% certain you have got it right. Critically, it is important to engage early on with members over what would happen if things went wrong. For example, if you foresee interest rates rising, inflating the cost of debt and impacting house prices and rental yields, that would be problematic for any regeneration scheme. It is therefore important to work in phases, which gives you the ability to adjust the scheme throughout, including in the worst-case scenarios, such as reducing the percentage of affordable housing to make it viable.
What is your view on the blend between short-term and longer-term debt in funding regeneration schemes?
Q
CH: Ideally, you should be trying to avoid short-term debt to fund these projects. There may be a small amount that is sensible. For example, it would be reasonable to finance the initial development phase of a project using shortterm debt. However, what you should not do – which I know some authorities have gone into – is to finance long-term investments through short-term borrowing. This tends to generate short-term savings, but means the authority is carrying a very significant interest rate risk. Photography: Alamy
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Newham made headlines over its use of ‘lender option borrower option’ loans. What is the current situation on these?
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EXPERT Q&A
Capital gains A senior UK local authority director of resources explores some of the treasury management challenges in financing major regeneration schemes A lot of councils have subsidiary companies to help deliver regeneration projects. Are they still relevant, given recent high-profile failings?
Q
CH: There are a number of good reasons why local authorities use subsidiary companies for regeneration projects. Mainly, the wish is to be agile and to bring in different skill sets and employment practices, along with the strong emphasis placed on board responsibilities. Some of the issues at particular authority-run companies could be put down to mismanagement. Such problems sometimes stem from the fact that the parent council – either directly or as a shareholder – has enabled the company to take risky or unwise developments and investments. Councils should be asking whether they have good arrangements in place to manage
CH: When I joined Newham in 2019, we dealt with a bunch of LOBOs that we held with Royal Bank of Scotland and NatWest, agreeing deals to refinance those. That move will save us £100m£150m over 40 to 50 years. We have a large number of other LOBOs that were entered into by a previous administration. We actively consider our portfolio and how to deal with those, but the issue with these existing loans is that refinancing can be prohibitive. Our starting point is that any new debt we take on will not include products with complicated derivatives. Where the conditions are right and can be agreed, we will look to exit our remaining LOBOs.
Looking more widely, what is your view on the government’s threat to reintroduce debt caps for some authorities?
Q
CONRAD HALL is director of resources at the London Borough of Newham
CH: If you change the financing system, it is inevitable that there will be unintended negative consequences on capital projects that could have gone ahead, would have been affordable and would have generated important social returns. That is a certainty, and one that should be avoided. The government’s focus should be around governance, transparency, reporting and risk management, but to go further and limit access to credit could have very negative impacts. PUBLICFINANCE.CO.UK 59
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