Caroline Davis 11 November 2019

Revaluating financing options

Revaluating financing options image

Despite promises to increase public spending in the recent Government Spending Review, councils, local authorities and other public bodies are still under significant financial constraints. Indeed, in its March report, the National Audit Office found local authorities have had a 49.1% real-terms reduction in government funding from 2010/11 to 2017/18.

Councils have for years been able to borrow from the Public Works Loan Board (PWLB) at favourable rates, but this source of finance became instantly less attractive on 9th October 2019 when interest rates increased significantly. Overnight the 50-year new maturity loan rate increased from 1.81% to 2.82%.

With the declining appeal of this traditional financing method, local councils are looking towards finance institutions to help meet the growing resource and service demands of their communities. Private institutions can help local authorities to bridge this funding gap by financing key assets such as IT, vehicles, and grounds maintenance equipment by leasing on flexible and affordable terms.

Challenging circumstances

In short, as funding has been scarce, resource demand on our public bodies has not. Investment is required across a whole range of areas such as housing, schools, waste management and transport, to provide everything from refuse collection vehicles to equipment for schools. While promises to increase funding into public services have been announced as recently as this month, in real-terms, local authorities and public bodies still face a significant challenge in meeting the demands in their districts.

Leasing is re-emerging as an attractive source of finance

Against this backdrop, coupled with the declining appeal of the PWLB, the public sector is evaluating financing options that are allowing them to access much-needed resources and investment, more flexibly and on affordable terms.

Lending and leasing from private investment firms is re-emerging as an attractive source of finance; offering the opportunity for government departments, local authorities and other public bodies to access the resources and assets that they need to meet the needs of their communities.

Essentially, a private investment business (the lender) purchases the initial, high value asset, and then leases it back to the public sector organisation on flexible and affordable terms. The local authority benefits from no initial capital outlay, increased affordability and flexibility as well as the fact that the leasing cost comes out of the council’s revenue budget.

Public authorities also benefit from the expertise and experience of private investment managers, many of whom have extensive knowledge and experience of the tech cycles, essential assets, and user behaviours. Specialist public sector finance companies understand the nuances of working with councils, education facilities and the NHS.

For example, schools don’t want to be disrupted with changing assets during term time, the NHS needs all their assets and ambulances available and working intensely during the busy winter months; councils need their mowers ready in early Summer and their gritters on standby when bad weather is forecast.

Ultimately, understanding customer’s finance and asset requirements helps mitigate risk and ensure the best possible terms can be given to public bodies.

Unlocking the potential in communities

Private specialist investment has had a huge impact on local communities and is already helping provide UK public authorities with billions of pounds of funding, helping transform the delivery of services and facilities offered to society across the country.

For many years leasing has provided the NHS with investment enabling UK hospitals to acquire the latest cutting-edge technologies, including surgical robots, computerised pharmacy dispensing systems, large and small scale x-ray machines, incubators and foetal monitors, vital to providing the standard of care for which the NHS is globally renowned.

Leasing has helped strengthen communities through investment in schools. In times of austerity and budget cuts, educational facilities were often the first to be sidelined, but, by giving the education sector access to finance on more flexible and affordable terms, schools have been able to provide students with new tech, such as IT systems and iPads, and with new facilities including modular classrooms and synthetic sports pitches. Ultimately, this increases the opportunity and prospects for students across the UK.

Of course, treasurers and other figures working in the public sector must ensure they do their due diligence when negotiating and securing contracts. Local bodies should look for lenders that understand the needs and intricate requirements of the authority, have experience working with the public sector, as well as a long-term proven track record of investing in the assets themselves.

It’s clear that in the absence of surplus government budgets, private financing such as leasing has a pivotal role to play in helping local bodies deliver the facilities and resources they need. But it can go beyond this. If authorities can tap into this opportunity in the right way, it can add significant value to their communities, allowing them to provide the type of infrastructure and services that they truly need.

Caroline Davis is head of public sector in the leasing and lending team at Triple Point

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