A secure future?

Is securitisation as a means of raising finance now a possibility for local government? Alan Aisbett analyses the legal background.

There has always been some doubt around the ability of local authorities to securitise revenue streams to raise capital. Securitisation in its simplest explanation is the disposal of the right to receive future revenues in return for a lump sum (away from local authorities, rents and loan or mortgage repayments tend to be the most favoured source for securitisation). Certainly leading up to the passing of the Local Government Act 2003, which introduced the local authority prudential borrowing regime, securitisation was not flavour of the month for the then Government as it was not seen as providing value for money as a consequence of the risks involved to the financial institution.

Whilst the 2003 Act expressly permits local authorities to borrow there is no express power to raise credit in any other way. However it is implicit that local authorities can enter into contracts which amount to so called credit arrangements (arrangements for the provision of long term credit) provided the total of such and their borrowing does not exceed its self-imposed annual borrowing limit. Since the 2003 Act sets down a "code" for local authority borrowing there was always some doubt whether local authorities would enter into securitisation transactions which would be outside of this "code". Furthermore in the official notes accompanying Section 13(1) of the 2003 Act (which prohibits local authorities charging their property as security for their borrowings) it is stated "it will also remain unlawful to 'securitise' .... for immediate lump sums (this is implicit in Section 13(1))".

However, proposed changes to the local authority capital finance system published by Department for Communities and Local Government on 11 October suggests securitisation may be a possibility for local authorities. Whilst the consultation paper emphasises the need for local authorities to ensure that it has sufficient powers for the particular securitisation contract it also seems to imply that the General Power of Competence contained in Clause 1 of the Localism Bill may be sufficient when it becomes law. Otherwise why propose the change to the capital finance rules to accommodate securitisations by putting them on equal footing with borrowing?

The effect of the proposed changes will be to bring securitisations within the controls of the local authority prudential borrowing regime in relation to both borrowing limits (by treating them as credit arrangements) and by requiring the lump sum to be applied for capital expenditure (though making the lump sum a capital receipt).

This change could allow local authorities increased flexibility in raising finance for capital projects. Authorities will however, need to ensure that such arrangements are affordable (and good value for money) and the prohibition remains on charging any of their property as part of the transaction. The proposed changes also tie into the Coalition Government's proposals for Localist Finance in particular those relating to the reform of the Council housing finance regime(allowing authorities to retain rents) and business rates (allowing local authorities to retain a proportion of their business rates and undertake tax increment financing).

Alan Aisbett is a partner at Pinsent Masons. He can be contacted on 0121 626 5742 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..