Commercial expertise driving value and efficiency in local public services

Local authority collective agency

Mark Luntley

2

Today

• Why

• What we’ve done to date

• Headline conclusions

• Our planned next steps

3

Why

• PWLB

• International lessons

• Stimulate market/reduce costs

• More than money

• Self confident sector

• Small and large councils

4

Steps

• Specialist advisors

• Political oversight

• Technical reference

• City discussions

• Sector consultation

5

Approach

• 5 case model

• Different options considered

• Detailed evaluation

• Cross guarantees

• Capitalisation

6

Vision

• AAA/Aaa

• Values:

• Straightforward

• Transparent

• Collective

• Efficient

7

Drivers

• Stimulate market

• Educate bond investors

• Support principles of prudential borrowing

• Looking outwards to other nations

• An alternative to PWLB – but mixed economy

8

International models

KBN Kommunalbanken KommuneKredit

Kommuninvest I Sverige AB

Municipality Finance PLC

Municipal Finance Authority of British Columbia

Domicile Norway Denmark Sweden Finland Canada

Establishment 1926 1898 1986 1989/1993 1970

Rating (M/S/F) Aaa/AAA/NR Aaa/AAA/NR Aaa/AAA/NR Aaa/AAA/NR Aaa/AAA/AAA

Guarantee Structure

Letter of support from 100% owner Norwegian Govt

Joint and several guarantee from local and regional Govts

Joint and several guarantee from local and regional Govts

Municipalities on a joint basis through Municipal Guarantee Board

Joint and several guarantee from municipalities

Competition Limited Very Limited Limited Limited Some direct issuance

Default None None None None None

S&P Adjusted Equity / Assets

1.3% 2.8% 0.7% 0.9% n/a

9

Developing a model

• Capitalisation not cross guarantees

• Uplift on individual ratings

• Asset quality

• Liquidity

• Rules

• Diversity of councils

10

Headline conclusions

0

5

10

15

20

25

30

35

40

0 5 10 15 20 25

Undeliverable

High cost of borrowing

Model 1: Joint guarantees

Model 2: Risk capital

Model 3: Pass-through

Best

High cost and good delivery

Worst

Low cost and poor delivery

Low cost of borrowing

Deliverable

11

Headline conclusions

• 97% of sample councils interested “in principle”

• AAA/Aaa possible

• Lend at 0.7% to 0.8% above gilts

• @£2.5m/ < two years to establish

• Between £2m and £4m a year to operate (depending on complexity)

• 25% market share

12

LGCA structure

OperationalSupport

Bond Proceeds

Debt Service

Subordinated Debt Proceeds

Debt Service

100% Shareholder

100% Shareholder

Service fee

Loans

Shareholders (Participating Local Authorities and other key stakeholders)

LGCA Limited

LGCA Finance Plc LGCA Operations LimitedBond Investors

Subordinated Debt Providers

Local Authority Borrowers

DebtService

13

Bond prices

0

20

40

60

80

100

120

140

0 5 10 15 20 25 30

Sp

read

to in

terp

ola

ted

Gilt

(b

ps)

Maturity (years)

PWLB

Model 1 (AAA)

Model 2 (AAA)

Model 3 (AA)

Network Rail (Aaa/AAA)

Temasek (Aaa/AAA)

GLA (AA+)

TfL (Aa1/AA+)

KFW (Aaa/AAA)

THFC (A+)

NIB (Aaa/AAA)

Wellcome Trust (Aaa/AAA)

Johnson & Johnson (Aaa/AAA)

Procter & Gamble (Aa3/AA-)

Wal-Mart (Aa2/AA)

Pric

ing

in

dic

atio

nQ

uasi

-go

vern

.S

SA

sH

ighl

y ra

ted

co

rpo

rate

s

14

Risks – set-up

• Government policy changes

• City

• Lack of sector interest (or waiting for another to lead)

• Set-up costs

• Alternatives emerge

15

Risks - operational

• Changes in prudential code

• Reduced demand

• Prudential code changes

• PWLB changes

• Actions of individual council(s)

16

What now?

• LGA Exec agreed (Jan ‘12)

• Six months:

• Detailed consultation on proposals

• Determine sector/investor interest

• Liaison with Government

• OJEU procurement

• Detail of arrangements

17

Aim – August 2012

• Lead councils + funding in place

• Shadow board

• Agreement on shape of agency

• Clear steer from government

• Advisors identified

• Rating?

18

Questions?

Mark Luntley

07909 962193

0207 664 3336

mark.luntley@local.gov.uk