Danny Mather is corporate finance manager at Warrington Borough Council. This article was originally published in Issue 4 of Room151 Quarterly magazine.
Warrington Borough Council has been providing loans to registered providers (RPs) for the provision of housing since 2009 following the banking crisis and to date have provided loans to the value of £162m. The largest loan to date was for £90m to housing association Helena Partnerships. The council has several other loans in the pipeline and has been contacted by a large number of authorities for details of how to implement such a scheme. The interest stems from the simplicity of the product, the value for money opportunities that it offers both parties and the need for registered providers to raise capital at a time when there is a lack of bank lending to the sector.
The legal powers the council is using to complete these deals are contained within Section 1 of the Local Government Finance Act 2003 which gives councils the power to borrow. Section 24 of the Local Government Finance Act 1988 permits councils to lend to registered providers. Councils also have a power to borrow and to make loans under the powers of general competence in Section 1 of the Localism Act 2011.
In making these loans, councils will need to fully comply with the Prudential Code, to ensure that the decision to enter into a loan is prudent and affordable. Prudential indicators and treasury management strategies will need amending accordingly.
The intent for these loans is a capital purpose and they are accounted for as capital expenditure and included within the capital financing requirement as a long-term debtor.
State aid is a critical factor that will need to be addressed for any council that is considering a loan to a registered provider. The loan will need to be on full commercial terms and most importantly have attached to it a competitive interest rate, arrangement fee and a charge over RP properties that are related to the degree of risk involved.
The council commissions an independent due diligence exercise on all RPs that it is considering for a loan. This is a crucial document in determining the risk profile of deals and influences the overall structure of the deal.
Effective corporate governance is a foundation stone for any council considering giving a loan to an RP. It is crucial that the decision making process is procedurally sound and that the final form of report to members is frank, as well as realistic about the proposal and business case as a whole.
Education is a key aspect of corporate governance enabling decision makers to understand fully the risks of their decisions. With the large size of these loans, members of all political parties need to fully understand them and most importantly the risk. Warrington Council approached this by holding a risk workshop for leading members of all political parties and senior officers of the council together with key partners, senior legal and banking representatives, external auditor and treasury advisers. At this session, the key risks of making loans to RPs were explored alongside the opportunities. The prudential code was explained and a greater understanding developed.
In order for members to make a reasonable decision on any loan the final report presented to members is comprehensive, containing a copy of the business case, a copy of the due diligence report and a full risk analysis.
A key question often asked by members, and other commentators, is about the government’s view of the scheme, and does it add to public sector debt? The housing minister endorsed the scheme on national TV when we announced the Helena deal and urged other authorities to follow Warrington’s lead. Based on our current knowledge, the deals do add to national debt, but is this such a bad thing when the loans are addressing a national shortage in housing, which is an issue for all councils? The option may also exist to exclude these loans from national borrowing figures, similar to the £200m the government is injecting into housing in London, which does not form part of the national borrowing requirement due to the fact it will be paid back in 15 years. Also, as previously mentioned, councils have the legal powers to make these loans. Warrington does not see the loans it offers to RPs as reinventing the wheel. Councils making loans to RPs was commonplace in the 1970s and 1980s. In the spirit of the ‘’Wednesbury’’ principle these loans would appear to be a reasonable proposition in today’s world.
