Public Sector - Councils may win City access

These talks could eventually have far-reaching – and multibillion pound – implications for local authorities. Ministers are considering loosening the arrangements placed on councils that seek to invest surplus cash.

If so, they could, in an instant, yield to a long-standing local government demand and provide an opportunity for councils to make money on the markets.

Currently councils’ opportunities to invest are strictly regulated.

Following big losses by the London Borough of Hammersmith and Fulham and Western Isles council in the late 1980s and early 1990s, central government sought to prevent future losses.

Subsequently, councils were encouraged to place surplus funds only in approved investments, such as gilt-edged securities and short-term deposits with banks.

If they choose the unapproved route, the rewards are limited. Half of any money gained from being placed in an unapproved, and by definition riskier, investment such as equities has to be set aside to pay off debt.

As councils constantly complain of being cash-strapped, this acts as a big disincentive. However, some markets may soon be opened up to local authorities.

The long-term aim, at least of local government, is for a range of investment instruments to be opened to councils. In the short-term, investments such as money market funds are top of the list.

Akin to cash unit trusts, these are seen as high-yield, flexible and low-risk because money is invested only in triple-A rated instruments and is spread across a diverse range of portfolios.

City investment institutions are gladly eyeing a market that could be worth more than £15bn.

Councils also want greater financial freedom. ‘We are fairly optimistic there is going to be change,’ said Richard Harbord, managing director at the London Borough of the Hammersmith and Fulham, who is leading the local authority negotiations.

If so, it would prove a big step for a government reluctant to give councils any freedom. How quickly the changes can be made though are questionable.

The government is expected to publish a Local Government Finance White Paper, including investment changes, later this year soon after a general election.

That all depends however on the timing of an election, the date of which becomes more uncertain with each case of foot and mouth.

And once any bill gets through ministers will have to allay fears about public sector money being placed on the money markets.

Councils though remain confident that in just a few years a new world of investment opportunities will be opened to them.