Local Government Finance and its dangers

Local Government finance, including giving more freedom for local authorities to borrow, is in the news and will be so even more as ideas for the Local Government Resource Review are developed further.

I have already spoken about my concerns about Tax Incremental Financing (TIF), and my surprise that so many senior local government officers seem to support the idea without really understanding what it is about and how it works. Indeed, some even seem to not understand that money obtained via TIF has to be paid back!  TIF will be appropriate in some circumstances, but it is not the cure-all that some commentators seem to think.

An article The Guardian (7 September, by Kim Willsher) has prompted me to pass on the experience of some French towns. Kim reports that many French towns have taken on loans to fund infrastructure or other investment, but face vast increases in repayments because these loans have been linked to the exchange rate of the Swiss franc.

Saint-Tropez took out a 20 year, 6.7m Euro loan which for the first 5 years had an interest rate of 3.94%, but from next May this fixed rate becomes variable and is then pegged to the value of the Swiss Franc.  If the Swiss Franc remains overvalued the interest rate could become 30%.

The city of Saint-Etienne had a loan deal which was linked to a relationship between the Swiss France and the value of Sterling. When the Pound fell in 2009 it was feared that the interest rate would become 24% with a 17m Euro penalty to get out of the deal.  The town is now suing the bank, claiming that bad advice was given.  Quite why anyone took out a loan with repayments linked to a currency other than than the one in which they receive their income is beyond me.

These are not the only French towns to enter into such structured finance deals, and about 60 French local authorities are taking a united front to try to persuade banks and financial institutions to renegotiate the loans.

Are UK Local Authorities so well run, and so well advised, that there is no danger that such deals will not be entered into here? Are the French so much more ill-informed or ill advised than we are? Are our Banks any less likely to chase a deal with is beneficial to them but not the tax payers than the Banks which the French have used? I think not.

If some local authorities make bad deals will they look to central Government to rescue them, and what happens if central Government refuse to come to the rescue? If the residents of a UK town or city are left with a deal with a 50% interest rate, what happens if the fleet of foot move next door to the local authority which didn’t borrow, leaving the poorer residents who can’t move with the tab?

In short, I think the review into local authority finance will turn into a damb squib once the risks are fully considered, or it will be the next financial scandal waiting to happen. Unfortunately, these problems can take 10 or so years to come to fruition, but the problem will arise nevertheless and was always there in the design if people had the will to see it.

It is a pity that our Central Government, and its politicians, don’t owe a duty of care to its citizens and have a fidicuary duty. If they did, we might get better policy and decisions out of them.

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