Local authorities are responsible for a large part of public infrastructure investments in all European countries. These investments are supposed to have a long life, let’s say 30-40 years or more. When borrowing to finance these capital expenditure most European local authorities prefer loans with a duration that corresponds to the life of investment. However, limitations in the credit markets can sometimes make it difficult to borrow beyond 20 – 25 years.
In France, recent trends show that more and more local authorities ask for 20 years or more. The same preference for long with long duration can be seen in the UK. Aidan Brady, chief executive of UK Municipal Bond Agency, said the other week in an interview that “A lot of authorities like to borrow 40 to 50 years”.
In Sweden, the situation is very different; many municipalities tend to borrow short-term. Kommuinvest’s lending during the first half of 2015, “the average period for which capital… was tied up was 2.3 [years]” (Kommuninvest’s Interim Report 2015). The CEO of the Norwegian Kommunalbanken, Kristine Falkgård, recently wrote an article where she points out that municipal short-term borrowing increased during the last year to around NOK 70bn. It is easy to agree with Falkgård’s opinion that substantial refinancing risks could arise from financing long-term investments with short-term loans.
Today, the difference in interest rates between short-term and long-term is relatively modest, so it is not easy to see the rationale of choosing short-term solutions. Even if the interest rate differences were bigger, local authorities should evaluate and be more transparent with the risks they are taking in their borrowing operations, just as Falkgård writes in her article.