Who will meet local government’s investment needs now the PFI has gone?

Rob Hann and Stephen Pearson take a look at what worked in the past and what needs to happen now to prompt investment and economic development in local government.

The Private Finance Initiative (the ‘PFI’) programme, as it impacted on local government, always was and remains controversial. Even now, some eight years after the last deal was signed, PFI is in the headlines, with Shadow Chancellor John McDonnell promising to scrap all existing PFI contracts should Labour get into power, being, in his opinion, a ‘rip off’ and poor value for money.

But whatever the rights and wrongs of the PFI as a funding mechanism for investment, at least under the PFI, new schools, roads, tram systems and other public infrastructure were built and delivered. No-one these days is talking about investing in local government yet the need for investment hasn’t gone away. Investment is required across a whole range of areas such as housing, primary care, land development, schools, waste management, housing and transport. The Prime Minister Theresa May’s recent announcement that the government is scrapping the cap on how much councils can borrow to build new homes has been widely welcomed and might help remove some barriers to the building of new homes by councils. But even if housing targets are met over the next decade, the need for supporting facilities, such as new roads, transport, health centres and schools will also increase. Where will this investment come from?

There is not enough available capital funding available for local authorities to finance all the work which is required to be done without accessing third party funds. Innovative ways to leverage in external funding to help make projects go ahead is needed but who is now leading this discussion and how can new projects access such funding? We don’t have central government bodies such as the old Treasury Taskforce, 4ps or similar bodies that had the role of encouraging and developing funding for schemes, providing templates and facilitating access to the market. Even when we had such agencies it took a long time to create ‘deal flow’ in PFI and for assets to be built and delivered. Given the criticism of PFI it is unlikely we will see a resurgence of the sort of close collaboration between central and local government which existed pre-2010 to help fund major local government projects, whatever Government is in power

It isn’t all doom and gloom of course. Although reserves are at a low level, there are a number of joint ventures which have taken place at the local level between local authorities and the private sector to build housing and promote economic regeneration. A number of districts within the East Midlands have pooled land and accessed private sector resources to bring about some successful joint venture housing, with a mixture of market and social units, on land owned by local authorities that the councils themselves would not have the resources or, in some cases the managerial skills to develop.

However, currently there is no route map or path for other similarly minded authorities to follow. For example;

• no standard procurement approach or documentation is available;
• no agreed form contract documentation has been developed and
• there is no standard procurement or competition process to be followed.

This makes it very expensive for every individual authority to develop and progress their own proposals.

Potentially there are a number of regional or local bodies which could provide a focus or a conduit for private monies coming in and who could take the lead on developing templates and precedents for others to follow. Local Enterprise Partnerships are obvious candidates and they have had some success, although they clearly have less resource leverage/covenant than the old Regional Development Agencies.

Combined Authorities have also been established in some areas (but not in all regions) and a new generation of City /Metropolitan Mayors have economic development as one of their core objectives. The trouble is that their agenda has expanded into other areas such as health and social care, before they have delivered on the core mission (economic development and transport). In the early days of the local government PFI programme it took a long time for the private sector and funders to have the confidence to do business with local government on a long-term basis and to lend to them as a sector. It took primary legislation to fix the vires problems which existed at the start of the PFI programme in local government in the form of the Local Government (Contracts) Act 1997. This legislation remains helpful as it provides a ‘safe harbour’ for lenders provided the certification process is followed.

At least the question mark over Limited Liability Partnerships (‘LLPs’) as a corporate vehicle for PPP joint ventures and investment schemes seems to have been removed following the case of Peters v Haringey LBC and Lendlease Europe Holdings (2018) (EWHC 192 admin). ‘The Haringey case’, now provides much needed clarity to this difficult local authority vires (powers) issue and has been very useful in terms of confirming that local authorities can use LLPs as a corporate vehicle for economic development, provided it can be directly linked to benefit of their geographical areas and these bodies are not being used for speculative investment in other parts of the country.

If investment in local government is to happen on a more stream-line and efficient way in future, funders, once again are going to have to have the confidence to become involved in funding local government infrastructure. Part of the problem now is that no two areas are the same. Each local authority region/body will need to be thoroughly vetted and due diligence will need to be done each time to see whether the individual local authority will be able to deliver the project, scheme or programme and whether it will be able to service the financial obligation coming out of the project. New bodies such as Mayoral Combined Authorities, similarly will have go through a process of due diligence to convince investors that they are safe to lend to, what risks are involved, and whether they will need to secure guarantees or collateral warranties from individual LA members of a Combined Authority.

The fact that a few local authorities have well-publicised financial problems (e.g. Northamptonshire CC) does not help. To be positive, the more deals that are done, the better the environment will be and for now of course, there is the Public Works Loan Board (‘PWLB’).

The PWLB has long been the go-to option for councils looking to borrow to fund investment needs– as of 2015, it provided 75% of local authority borrowing, according HM Treasury but there are concerns (following a Times investigation) about potential misuse of PWLB for investing in commercial projects outside of a LA’s traditional boundaries and risk parameters. There is even some talk of dissolving the PWLB which, in the short term at least, could create another barrier to LA borrowing. Government guidance on LA borrowing issued in February means that council treasurers need to exercise some care before committing public money into large-scale schemes (see https://www.publicfinance.co.uk/news/2018/02/council-investment-guidance-demands-greater-transparency)

But then we come to the dreaded B word. What about the impact of Brexit? What Brexit creates is a great deal of further uncertainty. At the time of writing we still don’t really know what impact Brexit will have on the economy. However, as far as the procurement regime is concerned it is likely that the UK government will keep something very much like the current system in place for the foreseeable future. Similarly, it has been indicated (whether this is regarded as a good thing or not) that the State Aid rules are going to stay as they are, although compliance is going to be administered by the Competition and Markets Authority rather than the European Commission. There is of course a concern that some sources of funding such as ERDF and the European Investment Bank will no longer be on the scene in terms of funding projects within the UK, but there is no reason that the financial sector could not “take up the slack” if the will, confidence and demand is there.

So, in conclusion, there are undoubtedly lessons to be learned from how PFI contracts were funded, procured, operated and are managed. But there are also positives to take from what was the biggest single investment programme for local government to date. Every time I get on a tram in my home City of Nottingham I am reminded that PFI wasn’t all bad and that someone, whether nationally, regionally or locally really should be taking up the challenge to fund and actively promote local government infrastructure projects going forward in the most efficient and effective way, building on what worked in the past. A recent report from the Association of Consultancy and Engineering (‘ACE’) states that Councils are sitting on over £400m of income generated from the Community Infrastructure Levy. This appears to signify there are at least some funds available in some areas to pump prime much needed local investment projects but what appears to be missing is any stream-lined process whether nationally, regionally or locally and/or a local government investment ‘champion’ with the remit to develop templates and create the deal flow necessary.

Rob Hann is a local government solicitor and author of Local Authority Companies and Partnerships (‘LACAP’) and the Local Authority Charging and Trading Guide – contact - This email address is being protected from spambots. You need JavaScript enabled to view it. www.hannbooks.com

Stephen Pearson is Freeths LLP Public Sector Partner who can be contacted on email This email address is being protected from spambots. You need JavaScript enabled to view it.

The above article summarises the discussion between Rob and Stephen at the recent East Midlands Law Share Conference to explore how processes established under the national PFI investment Programme for local government might help new local government infrastructure projects take off.