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Retail Therapy: Local capital finance and the retail bond market
English councils are prepared to use retail bonds to pay for crucial improvements to schools and highways – but only if the price is right. New research from localism think tank NLGN, based on interviews with senior finance officials, shows that the flexibility of retail bonds and the fact that local residents can buy them are both significant attractions, provided those benefits do not cost more than wholesale debt.
Since the government raised the rate at the Public Works Loan Board, it has become cheaper in some circumstances for councils to borrow from the capital markets, and many local authorities have now secured strong credit ratings. The Greater London Authority raised £600m via an institutional bond issuance for example – saving 17 basis points compared to the PWLB rate.
Retail bonds are bonds issued in sufficiently small denominations to be accessed by private individuals as opposed to wholesale bonds which are issued in denominations only accessible by institutional investors such as pension and sovereign wealth funds.
The report also calls for the creation of Infrastructure ISAs to help channel savings into vital infrastructure investment.
A recent NLGN survey showed that 84% of the councils that responded faced a capital funding shortfall. This translates into dilapidated schools, potholed roads and less land released to spark economic growth.
Report author Joe Sturge said:
“The wholesale bond market is beyond the reach of all but the biggest councils, but retail bonds are issued in smaller denominations which mean that many more councils can take advantage.“Not only could retail bond issuance cut borrowing costs for councils, but it could allow them to develop a more localist approach to finance. By targeting their bonds at local residents, a stronger link between citizen, council and infrastructure investment would be developed. Local people would take an active role in shaping the future of their communities while gaining access to a new, safe and accessible investment option.”
