Learning from Europe… Municipal bonds

Sweden and Finland are proof that access to finance becomes a lot easier when you have an agency which sells local government as a great investment opportunity. Austin Macauley assesses whether it’s what UK councils need to kick-start local projects

Bond is back. No, not that one. We’re talking about the kind of bond that helped build Britain’s infrastructure in the 19th century. Municipal bonds haven’t made quite the same the explosive entrance as 007, but they’re definitely back on the agenda.

In recent months the Local Government Association (LGA) and Welsh LGA have been building the case for a new collective local authority bonds agency to provide loans to councils at competitive rates – effectively offering an alternative and rival to the government’s Public Works Loan Board (PWLB). They also view it as a route for greater investment in local projects by council pension funds.

In setting out their case they have been quick to point out that the model is already tried and tested, operating successfully in countries including Sweden, Finland and New Zealand. Indeed, France is about to launch its own version and Germany is now considering it as an option.

The example most commonly cited is Kommuninvest in Sweden. Its lesson in how to capitalise on the creditworthiness of local government is a powerful one. What started out 26 years ago as an initiative designed to open up access to credit for one county council and ten municipalities by pooling their borrowing needs has grown to encompass almost every corner of local government. It is also the only organisation in Sweden to receive a double triple A rating from the credit rating institutions, Moody’s and Standard & Poor’s.

Kommuninvest Cooperative Society owns and runs the agency, including its ‘credit market company’ Kommuninvest of Sweden. This year it’s expected to lend around £17bn to councils across Sweden who are members of the society – out of the country’s 310 municipalities and county councils, more than 260 have joined.

Its role has become increasingly critical in recent years. As the company itself states, ‘during the financial crisis, Kommuninvest maintained the stability of the local government sector as one of the few players able to offer financing to municipalities and county councils’. But it also acts as an ambassador for local government, essentially promoting it as a sound investment in markets across the world as well as building its own reputation as an organisation to do business with. The net result has been substantial investment in public infrastructure, from road networks and seaports to renewable energy.

Municipality Finance, or MuniFin, is following a similar path in Finland. Launched in 1990 and owned by the government, councils and Keva – the body responsible for public sector pensions – its aim has always been to ‘ensure affordable financial services for the local government sector under all market conditions’. By last year its lending had grown to around £11bn, with clients also including not-for-profit housing organisations.

MuniFin says a ‘significant portion’ of its lending is used for ‘socially important investments’ – such as municipal building and development projects, schools and day care centres – ‘…aimed at increasing welfare services and improving the quality of life’. Housing represents a significant area of investment, 39% in all, reflecting the fact that MuniFin as it is today was formed from a merger with Municipal Housing Finance in 2001. The latter had been set up by local authorities eight years earlier to manage the financing of municipal house building.

Much like Kommuninvest, MuniFin has sought to build on the creditworthiness of local government by raising international awareness of the sector and how it operates and by developing suitable financial services.

Both are now well established, so perhaps it’s helpful that there is a newcomer to the market in the form of the New Zealand Local Government Funding Agency. Launched at the end of last year and owned by 18 councils, although it’s operating in a very different economic climate to the UK the LGFA nonetheless gives some indication of what’s possible. It has already been awarded an AA+ rating by Fitch and Standard & Poor’s, stronger than any of the banks operating in New Zealand and enabling it to borrow at a similar rate to the government.

A collective bonds agency has the potential to turn local government into a more defined investment opportunity.

In December last year Craig Stobo, chair of the LGFA, said the majority of councils had pledged to direct around 80% of their borrowing through the new agency. ‘Those commitments guarantee scale for us, which means we can achieve the objectives.  Without the commitments we can’t achieve scale and can’t drive down margins,’ he said at the time. By August of this year LGFA had settled its sixth bond tender, taking it past the 1bn New Zealand dollars mark (£500m) four months earlier than expected.

There seems to be little argument the PWLB remains the most competitive source of borrowing for local authorities in the UK at present. Combine that with uncertainty in bond markets and a lack of support from the government and you have a significant barrier to getting an agency off the ground.

But the Treasury’s decision to increase the PWLB’s rate by 1% in 2010 and constant tinkering with regulations, followed by yet another rate change effective from November, have encouraged local authorities to look elsewhere.

A collective bonds agency, offering broadly similar rates to the PWLB and with local government at its heart, could be what they’re searching for. Mark Luntley, the LGA’s programme director for finance, believes it has the potential to turn local government into a more defined investment opportunity. An agency ‘would create a structure which would then allow institutional investors to invest in local government’, he says. And in terms of council pension funds’ concerns over potential conflicts of interest and responsibilities around risk and returns ‘it solves all these problems in one stroke’.

When you have examples like Kommuninvest to draw inspiration from – and the likelihood that Europe’s two biggest economies, Germany and France, will set up agencies of their own – the case in favour of a collective local authority bonds agency is growing by the day.


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Wilfried Rimensberger
Wilfried Rimensberger
11 years ago

In 1992 I made Michael Heseltine aware of Swiss pension funds traditionally being allowed to invest in government bonds or finance affordable homes only. Over the past year or so a joint NTO group has developed a concept exploring pension fund investments in mutual and TMO run housing projects. So nothing new if one was able to read foreign publications but still exciting and probably starting healthy and much needed dynamics in the UK investment and housing sector.

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