The City of London Corporation, which runs the UK capital’s Square Mile, is to take on debt for the first time in almost three decades as it faces a cash crunch caused by a clutch of expensive construction projects.
The corporation could borrow more than £1bn during the next three years through its local government arm and endowment fund, the organisation’s latest budgets show, in a sharp departure from its usual practice of financing capital spending from income and reserves.
The City’s Cash, the corporation’s £2.6bn endowment fund, has insulated its local authority arm from the worst of the austerity-induced budget pressures suffered by many other councils.
The City Fund, the body responsible for the corporation’s local authority and police functions, has been debt-free since 1991, although the position of the City’s Cash is less clear.
But infrastructure projects by the corporation expected to cost £3.3bn — a concert hall, a courthouse, the relocation of the Museum of London and the consolidation of the area’s wholesale food markets — have forced the organisation to look for fresh sources of funding.
“These projects represent a substantial funding requirement of unprecedented scale in the context of the [corporation’s] more recent capital plans,” according to a recent draft strategy document by the organisation.
“They therefore present a significant challenge to the finances of the organisation, requiring a step change in the previously debt-free status of both City Fund and City’s Cash.”
Having previously relied on external debt to fund capital spending, the corporation scaled back its borrowing following Margaret Thatcher’s local government reforms.
But years of forecast deficits for the City Fund caused partly by policing costs and uncertain funding from central government mean that the corporation is embarking on a “fundamental review of its priorities and expenditure” in an attempt to put its finances on a more stable footing, according to a report by Jeremy Mayhew, head of the corporation’s finance committee.
The organisation is also bracing itself for lower receipts from business rates, and the outcome of chancellor Philip Hammond’s forthcoming spending review, which could put further pressure on local government funding.
The corporation said its programme of major infrastructure projects would help “create a legacy for London” and that it would “have to invest substantially for them to be successful, financing them through a number of means, including external borrowing”.
“The way in which we have prudently managed our finances in the past enables us to invest with confidence for the future,” it added.
The corporation declined to confirm whether it had already taken on external debt, or to provide details of the likely sources of the borrowing.
It has authorised £241m of borrowing by the City Fund for 2019-20, rising to £513m by 2021-22.
The City’s Cash meanwhile has a borrowing limit of £355m in 2019-20, which increases to £528m by 2021-22, according the corporation’s treasury management statement.
The City Fund is likely to borrow from the Treasury’s public works loan board, which lends to local authorities. But the City’s Cash could turn to banks and other private investors.
Documents prepared for a meeting of the corporation’s finance committee last month show provisions of £293,000 had already been made in the City’s Cash budget for fees relating to a short-term bank facility, bridging loan and private debt placement.
Sir Mark Boleat, who previously served as chair of the corporation’s policy and resources committee, defended its decision to take on external debt.
“The City is embarking on an unprecedented number of large capital projects,” he said. “How they should be funded is simply a matter of which method gives best value.”
City of London Corporation faces cash crunch due to new projects Square Mile: organisation to borrow for first time in decades to finance infrastructure by Cat Rutter Pooley, Financial Times, 13 May 2019. Read the original piece here: https://www.ft.com/content/b8518ad2-727c-11e9-bbfb-5c68069fbd15