Professor Richard Kerley, Chair of the CSPP, was interviewed on BBC Radio Scotland Newsdrive recently regarding Aberdeen City Council’s raising of £370m via the issuing of long term bonds from capital markets. The capital borrowed will be used to fund infrastructure development, including schools, housing, road construction and the construction of a new Aberdeen Exhibition and Conference Centre.
An expert on public sector financing, Professor Kerley was asked about how such an initiative works, and what the benefits and risks of this approach are. The full interview can be listened to at the link below. A rough transcript is given here:
Interviewer: Could you run through what Aberdeen City Council are proposing?
PROFESSOR KERLEY: What [Aberdeen City Council] are doing is something that other local authorities have done in the past, but haven’t done recently for a whole variety of quite complex financial reasons. What I understand that they are proposing to do is to issue a bond which is in effect a long term loan that could extend for 10, 15, 20, 25 years. They [the Council] will pay annual interest on it and they will use the money raised to improve facilities and to build things in the city.
Is the initiative risky?
It's not at all risky, [the Council] has a high credit rating – all local authorities in the United Kingdom are ultimately backed by their respective governments and so none of them represent a real risk to bondholders, and they wouldn’t have any difficulty securing the bond or paying it back, or paying the interest on it as that arises.
Why aren’t all local authorities doing this?
This is because there are different financial arrangements that arise. [Issuing bonds] is for building big ticket, capital items, and the ways local authorities finance this include borrowing through the Public Works Loans Board, grants from the Scottish Government, grants – until a couple of years time – from the European Union, and from their own resources. So [issuing bonds] is like another weapon [for local authorities].
What are the benefits and pitfalls?
The benefits are that you borrow long term. Most bonds are issued for a considerable period of time, as is a lot of the borrowing from the Public Works Loans Board, and so the hope over time is that the capital value of [the bond] will diminish and you will have in real terms less and less to pay – although I notice [Aberdeen City Council] are proposing index-linking, which could be problematic if inflation takes off in a particularly spectacular way over the next few years.
Listen to the original interview on BBC Radio Scotland Newsdrive (47:20) [available to 25/11/2016].