Government Offers Councils Possibility Of Securitisation As An Alternative Funding Mean

Published on Friday, 14 October 2011 12:02
Posted by Scott Buckler

Proposed changes to the local authority capital finance system published by CLG on the 11th October suggests securitisation may be an possibility for local authorities to raise finance for housing and infrastructure projects

Housing expert and head of local government at international law firm Pinsent Masons Alan Aisbett said: “The new proposals seem to give a green light to local authorities using the securitisation of revenues as a means of raising finance so long as it is affordable and the funds are used for capital investment. This could give local authorities alternatives for housing and infrastructure investment in conjunction with council housing finance and business rate reform.”

There has always been some doubt around the ability of local authorities to securitise revenue streams to raise capital.  Securitisation in its simplest explanation is the disposal of the right to receive future revenues in return for a lump sum. Certainly leading up to the passing of the Local Government Act 2003, which introduced the local authority prudential borrowing regime, securitisation was not flavour of the month for the then Government as it was not seen as providing value for money as a consequence of the risks involved to the financial institution.

Aisbett adds: “Whilst the consultation paper emphasises the need for local authorities to ensure that it has sufficient powers for the particular securitisation contract it also seems to imply that the General Power of Competence contained in Clause 1 of the Localism Bill may be sufficient when it becomes law.  Otherwise why propose the change the capital finance rules to accommodate securitisations by putting them on equal footing with borrowing?”

The effect of the proposed changes will be to bring securitisations within the controls of the local authority prudential borrowing regime in relation to both borrowing limits (by treating them as credit arrangements) and by requiring the lump sum to be applied for capital expenditure (though making the lump sum a capital receipt).They will also come within the Council Housing Finance reform borrowing controls.

This change could allow local authorities increased flexibility in raising finance for capital projects.  Authorities will however, need to ensure that such arrangements are affordable (and good value for money) and the prohibition remains on charging any of their property as part of the transaction.
Aisbett says the proposed changes also tie into the Coalition Government's proposals for Localist Finance in particular those relating to the reform of the Council housing finance regime(allowing authorities to retain rents) and business rates (allowing local authorities to retain a proportion of their business rates and undertake tax increment financing).


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