Andrew Lovegrove: Evolving and resourcing our treasury strategy
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Andrew Lovegrove
Call me old fashioned, but I like to know who we have lent taxpayers’ money to.
I guess that’s because I recall a number of conversations I had with the leader of Stratford District Council where I was the Section 151 officer during the banking crisis.
Once I had confirmed that the council did not have any money with Icelandic banks, the question that had me scratching my head was: “Well, what have the banks we have lent money to done with our money?”
DMO habit
At Warwickshire, in the years after the banking crisis, we took a very cautious view, with security being the main factor when deciding how to invest our spare cash. So, no surprise that we developed a serious DMO habit.
On one level we were waiting for the market to return to normal. However, we had to accept that this was the new normal. This led to the question, what to do to make sense of the brave new world?
We were clear we wanted to reduce our DMO habit, have a line of sight to what our money was being used for, improve returns and spread the risk. Not a problem, we could get this cracked by lunchtime.
We had a long, hard look at our treasury management strategy and how this translated into day-to-day investment decisions and concluded we were playing it safe.
And so we came to the realisation that we could invest very differently, but still live within our treasury management strategy; this was the new normal and we had to step up to the mark.
We decided that we needed to diversify our investments, so all our eggs were not in the same basket, and that ideally we would like to have a greater understanding of who we were lending taxpayers money to.
We had a low base point, given our DMO habit, so the business case wrote itself. But if we were going to diversify our portfolio, we would need to accept that we should expect to pay fees, in some shape or form, and we would need more staff resource.
This additional resource was hard to justify when belts were being tightened. However, the proposition was clear; we expected to deliver greater returns for the council, as well as diversifying our portfolio without taking on substantially greater risks (alright, the DMO doesn’t come with many risks). The anticipated increase in returns would more than fund all the additional costs.
Joint resource
We took advantage of increases in the number of employers in the pension fund and successfully argued for a joint, new resource to help with both tasks. We were up and running.
As part of this brave new world, we undertook to look at the council as a whole to see if we could squeeze more cash out of the business.
We have taken a holistic view of our balance sheet, looking to manage our cash position. We have taken steps to increase the performance of debt recovery; we are keen to separate the “don’t want to pay” from the “can’t pay” debtors, and persuade the “don’t want to pay” debtors to settle up.
We have joined the technological age. For some debtors, we use emails and text messages to communicate with them. This is very powerful. People seem to respond to a text message that has a link to directly call us about outstanding sums and we are happy to take a card payment over the phone. The debt recovery team have seen significant improvements in the levels of debt recovery and it all increases the cash we have to invest.
We have also looked at how we pay our suppliers. We use P-cards (purchasing cards) for lower value transactions and we also use an electronic ordering portal with our local purchasing consortium.
All of this reduces the volume of transactions going through the purchase ledger by 40%. We pay our suppliers in accordance with our standard payment terms. However, we do offer, via a third party, an early payment discount. If suppliers want to be paid earlier than our standard terms they can get their cash.
We have lived within the existing treasury management strategy and have needed only a couple of minor tweaks. For example, the strategy is clearer about investing in UK building societies.
The portfolio has changed significantly too. We have some commercial property exposure, we lend to the largest building societies as well as exposure to corporate bonds. And yes, we do still have small sums of money with DMO from time to time.
We are currently invested in the Columbia Threadneedle Social Bond fund. The fund invests in corporate bonds, so a different risk profile from lending money to banks, and we can clearly see the investments Columbia Threadneedle are holding. The added bonus is that Columbia Threadneedle has to convince the Big Issue Invest team of the merits of any bond they are interested in.
The CCLA commercial property product is also very useful in that it has been built for local authorities and every month we get a list of the assets held by the fund.
So, if I am ever asked again, who have we lent money to and what have they done with it, I am much better prepared.
Andrew Lovegrove, head of corporate financial services, Warwickshire County Council.
