Local authority financing at risk, says panel

A senior City body, the Financial Law Review Panel, warned yesterday that future private financing of local authority projects was at risk because of serious legal uncertainties.

The panel urged ministers to set up a new tribunal to vet bank deals with local authorities in advance, which would remove the risk that the deals would later be declared illegal.

If the Government failed to do anything, an extension of the Treasury's private finance initiative to local authorities was unlikely to succeed, said the panel.

The PFI uses private money to fund what would otherwise count as public spending and it is a key part of the Chancellor's strategy to reduce his borrowing requirement. Other new types of financing for councils were also at risk, the panel said.

The problem arises from a series of legal cases going back to the Hammersmith and Fulham swaps deals a decade ago, which the courts found to be outside the council's powers.

But the panel, which has been pressing the Government to act for a year, believes court of appeals judgments this month involving Credit Suisse, have increased the urgency.

The judgments confirmed earlier decisions in the lower court that a much wider range of off-balance sheet financing by councils was potentially illegal. These include leasing deals for capital equipment and other direct expenditure, rather than the speculation involved in the swaps deals.

Estimates of the value of existing finance at risk are as high as pounds 3bn, though the panel's chief executive, Colin Bamford, said the highest figure he had heard was pounds 1bn.

But he made it clear the priority was to set up a system to allay City fears that any new deal a bank does with a local authority could similarly be declared ultra vires.

Mr Bamford said "It is pie in the sky to think the private finance initiative will attract banks when they are unable to get legal opinions saying the deal is not going to be void."

The proposed tribunal, would be run by the Audit Commission and would certify that specific deals would not be ultra vires.