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Local authority collective agency. Mark Luntley. Today. Why What we’ve done to date Headline conclusions Our planned next steps. Why. PWLB International lessons Stimulate market/reduce costs More than money Self confident sector Small and large councils. Steps. Specialist advisors - PowerPoint PPT Presentation
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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?