In search of a little private income

Public-sector finance: Local authorities may have to show a bit more of the competitive spirit, says Paul Gosling

Local authority associations have slammed government proposals that could divert public money away from primary schools and direct it towards partnerships with the private sector.

The Department of the Environment will publish early next year a consultation paper suggesting that a proportion of the amount councils can borrow for capital works be allocated to a competitive "challenge fund". Only those authorities that attract private capital will be successful. The move follows years of reduction in borrowing approvals for capital expenditure.

The Association of County Councils and Association of Metropolitan Authorities are unhappy at the idea. Keith Beaumont, AMA finance deputy secretary, says: "Private capital might come in where the need isn't greatest."

Will Tuckley, finance secretary at the Association of London Government, also predicts public spending will be skewed in favour of activities that will generate future revenue. "It shows the Private Finance Initiative has not worked," he argues. "Authorities will compete because they always do, and they haven't much choice given what's been happening to their capital budgets, but it would be more helpful to talk about incentives than penalties."

John Perry, policy director at the Chartered Institute of Housing, feels it will have little impact on housing because capital allocations for homes, the Housing Investment Programme, are already geared towards drawing private capital. But Roger Taylor, director of Newchurch & Co, advisers to the public sector on the Private Finance Initiative, thinks it could have a dramatic influence on all local authority capital programmes, including housing. He says the scheme is based on a proposal he gave to the DoE a year ago, and deems the move necessary because of authorities' negative attitude to the PFI.

Mr Taylor says it is easy to predict where the money is likely to be spent. "It will help authorities to redevelop or build old people's accommodation, sports and leisure facilities, offices and car parks - and I don't know why councils ever wanted to run those anyway - to redevelop town centres, and do things at the periphery, like developing new wholesale markets, where European Commission public health regulations mean that some inner city authorities are going through hellish times redeveloping."

It is also likely to push schools towards partnerships with the private sector for sports facilities that can be used by the public in the evenings and at weekends. If a large proportion of borrowing approvals were covered by the challenge fund, it could also force authorities to sell their entire housing stocks by limiting their borrowing for improvements.

Still, Mr Taylor sees problems with the challenge fund approach to borrowing approvals. "My guess is some local authorities are getting competition fatigue." He also feels it is unlikely to contribute towards the estimated pounds 5bn needed for school repairs, for local roads or even in the building of nurseries, where the value of vouchers is too low to repay debts on private capital.

Banks are cautiously positive about the proposed changes, while recognising it would gear local authority capital spending more towards income generation. One bank said it was preferable for the local government capital finance regulations to be brought into line with those of government departments, to end the private finance element of design, build, finance and operate schemes being counted against an authority's own borrowing approval.

The DoE believes it is overcoming this problem through regulation changes announced in October, which take effect next April. It has, though, commissioned research by Coopers & Lybrand that should establish whether more needs to be done to bring significant private finance into local government.