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Local Authorities call for Infrastructure Bonds

Support for planned ‘Green Infrastructure Bonds’ has come from the Local Government Association, which represents more than 350 councils in England and Wales. The LGA has written to the Chancellor ahead of this month’s Budget, arguing that lifting red tape and allowing local authorities to seek more private investment could reduce the damage done by public sector cuts and help revive the economy.√جª¬ø

The combination of the LGA initiative with councils’ own plans makes the development of a genuine bond market seem probable.√جª¬ø

Plans have already been announced by Wandsworth and the City of Birmingham, to raise funding for major infrastructure projects from sovereign wealth funds, pension funds and other private sector investors. These have been dubbed ‘Brummie Bonds’ in the press, and follow the issue of £215m of bonds by Birmingham in 2004 to refinance the council’s stake in the NEC.

Another phrase that is now appearing in the press, are so called ‘Green Bonds’, which could be green retail bonds, green investment bank bonds, green corporate bonds, index – linked carbon bonds as well as the most likely ‘green infrastructure bonds’. These are used to refinance, build and operate infrastructure such as offshore wind turbines and grid connections.

Local authorities are being seen as likely underwriters of such bonds, as the massive scale of investment that is required for the ‘low carbon economy’ becomes apparent. Recent studies have shown that £200 billion is required for the UK between now and 2020, a figure that is clearly out of reach of the Treasury. Ernst Young have estimated that there is a funding gap of at least £120 billion.

Although there is a tradition in the UK of funding for infrastructure ( e.g. the Victorian Railways) by such methods, issues such as the lack of a track record for low carbon technologies and the inability of Local Authorities to underwrite such large placings need to be resolved.

The Government has paved the way for more imaginative ‘off balance sheet’ local funding solutions with the passing of the Localism Act, that encourages the use of devices known as Tax Increment Funding, based on the American TIF schemes [See blog article 6th Feb 2012].  

This week the Local Government Association said it was to appoint advisers to examine how it might set up a collective agency to issue aggregate council bonds.

“If we can pull this off it will be one of the biggest developments in how we pay for infrastructure in local government,” said Mark Luntley of the LGA.

Originally posted 2012-03-12 00:00:00.

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