Below is the text of Mr Major's written Parliamentary Answer on the Public Works Loan Board on 15th February 1990.
Mr. Robert B. Jones To ask the Chancellor of the Exchequer what will be the arrangements for lending to local authorities by the public works loan board in the forthcoming financial year.
Mr. Major Every year the PWLB Commissioners, after consultation with the Treasury, determine loan quotas for each authority. Borrowing within these quotas is at very fine rates set by the Treasury. Additional loans may be made in specific circumstances at higher ("non quota A" and "non quota B") rates.
In recent years the Commissioners have, however, as a matter of course, made advances additional to the normal quotas available at quota rates. This was done with the agreement of the Treasury in order to assist in the management of the money markets. At present, however, local authorities are, in total, investing very substantial sums of money with the banking sector, whilst at the same time borrowing large sums from the PWLB. The combined effect of this is to cause difficulties in the management of the money markets. The Government therefore believe that it is now desirable to curtail the availability of funds from the PWLB at quota rates.
The PWLB Commissioners have reviewed the quota arrangements for the financial year 1990–91 and have today issued a circular (number 89) indicating that the quota entitlement for each authority will be: 75 per cent. of its net reckonable capital payments made during 1990–91; plus 4 per cent. of its net reckonable debt incurred for capital purposes, being the total amount outstanding less the total sums held in financial investments on 31 March 1990. There will be no minimum quota entitlement. The normal arrangements by which loans may be made under the non quota A and non quota B facilities will, however, continue to operate. Local authorities' ability to borrow in the market will not be affected.
With effect from today the Commissioners will no longer be prepared, as a matter of course, to make loans available in addition to the quota and at quota rates.
In order to limit the level of borrowing in the remainder of this financial year, the Commissioners have also decided to restrict advances within quota from the date of the circular to 31 March 1990, to not more than one tenth of each authority's quota for the current financial year.
The Commissioners will be prepared to consider requests from local authorities for advances additional to normal quotas at quota rates where the changes listed above will cause an authority exceptional difficulties, for example where it faces unusually high levels of maturing debt. The decision will be for the Commissioners, but I understand that, in deciding whether to make an advance, they will take into consideration, along with other factors, the level of the authority's investments and that the Commissioners are unlikely to be prepared to agree to an advance if, and to the extent that, it appears to them that these investments could be used instead.
An authority wishing to borrow from the board in addition to quota may also apply for non quota B loans. The Commissioners will continue to be prepared to consider applications for such advances where it can be demonstrated that additional capital finance is needed in the relatively near future. The rate of interest on non quota B loans is currently I per cent. above non quota A loans. From 1 April 1990 I have decided that the rate of interest on non quota B loans will be 2 per cent. above the rate of interest on quota loans.
At present the interest rate on quota loans is set at the lowest possible level consistent with the constraints of the 1968 National Loans Act. I have decided that for the future this fine rate will no longer be appropriate. Quota rates will therefore be gradually increased so that they are closer to, but still below, market rates. This will be done by maintaining PWLB rates when general interest rates fall.