Local authority infrastructure financing

A complex system of local government has developed across the UK as a result of reorganisations and changes to funding regimes.

This section explores the various ways local authorities finance infrastructure projects, detailing the sources of funding available, as well as the difficulties and potential pitfalls of the system.

It begins with an overview of local government and infrastructure, before moving on to explore the different funding options available to local authorities. It then turns to the subject of credit risk and debt, before concluding with issues of localisation and devolution, and pension funds. 

This section is maintained by Robert Robinson of Bridgecourt and Company.

Key updates

Key updates include:

  • The COVID pandemic has had a significant impact on local authority finances.
  • Central government has increased its financial support for local authorities by around £9bn to help with COVID-related costs.
  • A Shared Prosperity Fund is being established to replace the loss of EU grants received by UK local authorities.
  • Borrowing by UK local authorities fell by over £2bn in 2019/20, but is expected to increase by nearly £4bn in 2021/22 as councils invest in post-COVID recovery spending programmes.
  • The UK government increased the cost of borrowing from the Public Works Loan Board (PWLB) to discourage borrowing for investment in more speculative assets. At the end of 2020, the government reduced borrowing PWLB rates for non-speculative investment.
  • It is expected that there will be more borrowing from commercial lenders by local authorities in the future.
  • Local authorities have started to respond to the greater flexibility given to them to invest in local housing development.
  • The funding model for local authorities has undergone significant change in recent years. The move to 75% business rate retention and changes to how funding is distributed between local authorities has been further delayed until 2022.
  • Some local authorities have seen their levels of reserves fall during the pandemic, which has increased the risk of financial failure and the issuing of section 114 notices.
  • There remains uncertainty around the financial sustainability of many local authorities. However, given the strong framework of support in which they operate, local authorities remain highly creditworthy and attractive borrowers for most lenders.