Jonathan Bunt on investment mandates, Elevate East London and property rationalisation

Jonathan Bunt is currently Divisional Director of Finance at the London Borough of Barking & Dagenham having joined there in October 2009. His role covers accountancy, pensions, treasury management, internal audit, insurance and risk management as well as client management of outsourced contracts for Revenues & Benefits, Procurement and Payroll and the commercial lead on new funding opportunities.  Prior to joining Barking & Dagenham, he was at the London Borough of Barnet for five years in various roles from Principal Accountant up to Assistant Director of Resources.

Room151: It’s been an interesting quarter for treasurers, what do you make of the latest twist in the PWLB rate story?

Jonathan Bunt: Any drop in the rates available is clearly welcome but if you wanted to be cynical, arguably the government’s got nervous about local authorities starting to explore large scale alternatives to the PWLB. Previously, we’d only really dipped our toes in the water in terms of loans – some LOBOs for example – and then suddenly when the HRA buy-out first came into play we realised we had to explore other options. We put some thought into whether or not we could issue a bond, individually or collectively, and as soon as it became apparent we (local authorities) were doing that, there was a big concession on the PWLB rate for the HRA buy-out. That was obviously welcome – we had to borrow £265m – and it made our business plans that much more affordable. But it does look like the Treasury didn’t want to miss out on billions of pounds worth of borrowing which could have otherwise gone to investment banks.

There are certain conditions attached to the new rate – and they will determine to what extent other sources of borrowing are now a moot point but the conditions don’t look too onerous on the surface of it. When we explored bonds with our consultants and various banks the costs looked like they were going to come in around 80 bps over gilts. If the PWLB rate is going to be 80bps over gilts why would we want the hassle of launching a bond?

Room151: How has HRA impacted treasury management?

JB: For a start, I’ve had to borrow more money than ever have before. There was such a long build-up to it, but then in the end the process of borrowing £265m was a relatively straightforward one. We spent a lot of time thinking about what are the best options, considering our debt profile, our cash flow and eventually we borrowed £265m from the PWLB and handed it over to the CLG two days later. It was actually quite surreal. We’ve taken a view in our business plan that we’re unlikely to repay the debt before the end of the 30 years. We put it out long-term and locked it in at the discounted rate available rather than gamble on refinancing somewhere down the line. The members are very ambitious about housing and very keen on estate renewal and HRA new-build so I don’t really see us having a great deal of surplus to repay debt for some time. Those plans easily take us through the first 15 years of the business plan and I’m sure we’ll have more new ambitious ideas and plans by that stage.

Room151: Was the budget a positive from your point of view?

JB: I’m not sure about positive but there are certainly some interesting developments for us. We have quite a high pensions population and we’re a relatively deprived area so there’s some nervousness about what the so-called granny tax might mean, on top of universal credit and changes to council tax benefit for a group that’s already quite deprived.

Room151: Now that the Eurozone crisis seems to have pulled back from the brink, has that fed through to your treasury investments? 

JB: Not really. We’ve taken a fairly prudent decision to only invest in the UK – certainly for the first six months of the year and review it after that. That’s really been our position for a couple of years and the Eurozone issue really just galvanized that view. So we’ve only gone with relatively highly rated UK banks and even then mostly with a maximum of three month deposits. We haven’t really explored money market funds yet although we’ve got both the scope and approval to do so but we have got money out with an external fund manager, Investec, who manage about a third of our cash which generates a decent return for us. They invest in what we might perceive to be slightly riskier, slightly different instruments, but they do so from a much more informed position than we can do on a day-to-day basis. The other thing we added into our strategy for this year is the scope to invest in high graded corporate bonds and I think once some of our deposits mature and we find the right sort of yielding instruments that we’re confident in, it’s a potentially good source of return for relatively low risk. We’ll take advice on the best way to do that but I think if we felt confident enough to do it in-house then we would.

Room151: Turning to efficiency and savings, do you think there’s place for employee ownership in local authorities and would you like a stake in your organisation?

JB: I think there is. I chose to work in the public sector because I wanted to work in an environment that was adding something to the community, albeit in a back-office function – where my skills are – rather than in front line services. So I think that the motivation is already there and public sector workers already see their work as something of a vocation. Adding employee ownership to that would perhaps create even greater motivation. My reservation though is about the ability to grow the business. If you put in a mutual to deliver services, how is it going to win business outside of the authority it already delivers those services to? You can end up with a group that is very good at delivering a service to their clients but the ability to go out and win business is an entirely different skill which they may not possess. The risk is you deliver a very good service as a mutual but are then left with nothing when the contract runs out because you didn’t have the business and sales people to grow it.

Room151: There are a number of London based shared services initiatives going on – the tri-borough for example. What stage are you at in exploring such initiatives and do you see real potential for savings in them?

JB: In terms of shared services we’ve actually implemented, we have a shared legal service with Thurrock which started out as a shared head of legal services and is evolving into shared senior managers and more shared lawyers. We also have a 50/50 jointly-owned venture with Agilisys called Elevate East London which gives us a vehicle to become a hub for other parties interested in shared services.  We’re able to go out an bid for other services either in partnership with other organisations or simply tendering for services, with the backing of Agilisys and the Council. Moving on from there we’re part of the One Oracle project within London – that’s six boroughs looking at a single implementation of Oracle. From there we’ll explore how that might become a genuine shared service – single hosting, single support function – so the whole project is being implemented as a vanilla Oracle solution with common processes and practices to enable us to work towards a joint service. In terms of savings, we’ve estimated that our own savings are around £2m, just on the implementation.

Room151: Finance officers are becoming integral to stewarding local authorities through austerity – every penny really counts – have you noticed a shift in the expectations of Section 151 officers?

JB: I think if you look back over the last eight or so years, there’s been a bit of a cycle where finance has dipped away from the top table and was maybe usurped to some extent by policy and performance and now we’re seeing finance re-emerge as a very strong corporate voice. There’s been a need to explore very different options and commercial opportunities like, in our case, setting up a JV, setting up a private equity deal to provide new social housing and these really aren’t the kind of things we’d have been doing five years ago.

Room151: You also manage the LBBD pension fund. How has your strategic asset allocation changed in recent years and what impact has that had on the your investments?

JB: Up until about a year or so ago we were a very traditional fund, heavily concentrated in equities and bonds. Around a year ago we persuaded our panel to start exploring different options and now we’ve got a small alternatives mandate out with M&G which has done quite well but it’s small so you don’t see that massively in the overall performance of the fund. We’ve got three other mandates out following a review of the investment strategy at the end of the last calendar year: we’ve got a passive equity mandate out for around £100m, an absolute return diversified growth mandate out for £75m and an infrastructure mandate out for £50m. Those investments will come out of the actively managed equities and bonds.

Room151: Do you think LGPS funds have a good opportunity coming up, given the current Government interest, to invest in infrastructure?

JB: I think we’ll have to wait and see. The Government’s very keen but it all has to stack up as an investment. Our objective is to obtain return without exposing ourselves to too much risk – so it depends on what the proposals are. The Government has talked about roads and it’s difficult to see instantly where some of that return is going to come from. They’re saying it won’t necessarily be toll roads and, it’s true, the funding could come from maintenance contracts and things like that but that’s not a traditional place for pensions funds to be. It’s got to be the right investment.

Room151: Of the risks to your pensions assets that you identify in your Statement of Investment Principle, which concerns you most?

JB: It’s probably liquidity. Not in a huge way immediately but it’s something we’re looking at on the horizon. We’ve been doing some projections around cash flow and we suspect benefits will outstrip contributions in a couple of years time. So we’re currently working out what that means and I think in the short-term it’s not a problem because we still have dividends coming in and we can pull those back instead of reinvesting them. But we’re thinking about what that might mean for the asset allocation – so if we wanted to move more into property or private equity in years to come, do we have to think about cash flow as well as return on investment?

Room151: Lastly, turning to LBBD’s property portfolio, what new measures are you undertaking to generate savings and revenues from your assets?

JB: On the corporate portfolio side we’ve done quite a lot of rationalisation, coming down over the last few years from, I think, 24 buildings to five. Some of those we’ve sold and some were leased buildings which either the leases have run out on or we’ve managed to sublet until the leases expire. That’s through a combination of better space utilisation, some mobile working and the cold, hard reality of the cuts hitting and us employing fewer staff. The difficulty we face having got down to that is how much do you have to condense further to make even more reductions? And that’s something I think we have to explore. These building are expensive assets to hold, if we get get out of them then not only would we generate revenue savings but we’d also generate capital receipts.