Chris Buss: How do you solve a problem like £500m?
0Without realising it many of you will have seen the Town Hall at Wandsworth; it’s appeared in many TV programmes and films including Poirot, the 2012 remake of The Sweeney and has even been blown up, in part at least, twice in Spooks. Perhaps its most infamous incarnation was as the Gestapo headquarters in the 1970s TV BBC series Secret Army where, as a young member of staff, I arrived at the Town Hall to find the centre courtyard bedecked in swastikas and some rather realistic extras in jackboots outside the then Director of Finance’s office.
Wandsworth Town Hall
You may wonder what is the point of this trip down memory lane, apart from showing that raising cash by renting out council facilities for filming is not a new or uncommon event. The real reason is to focus on something which was there in the 1970s and is still there now, which is the safe in the Director of Finance’s office, and more to the point how much cash could theoretically be stored in it.
This train of thought has come about due to the possibility that at some time in the near future we might move into the Alice in Wonderland world of negative interest rates or paying someone else to look after the Council’s cash. When that cash pile is over £500 million, that’s a real issue. Over the past ten years, in common with many other councils, we have moved away from the pre-2008 supposed safe haven of (largely UK) banks towards a much wider array of instruments. The idea of using anything other than a bank – let alone a money market fund – in 2006 would not have been entertained and the council’s treasury policy was quite clear that cash balances (at that time just under £200 million) would be invested in high rated institutions both in the UK and overseas, for very short periods. Very simple and very straightforward and meeting the two objectives of security and liquidity.
However post-2008, it’s a different world and an increase in cash balances to over £500 million has meant it’s been much harder to place secure and prudent investments, leading to a move into money market funds, property related funds through CCLA and loans to other local authorities. Investments have been placed for longer periods as the promised or threatened increase in interest rates has moved further into the distance. But if, as a result of Brexit or other economic uncertainty or even deflation, interest rates go negative, where does one place one’s cash?
The first obvious thought is to redeem debt, however, if your only debt is a very low rate HRA debt with a high PWLB penalty, then that isn’t attractive unless you feel that negative rates are likely to hang around. The second thought, which may go against the cautious treasurer’s instinct, is to spend some of the cash on other investments which might give a real yield. This is currently being done by a number of authorities who are investing directly into property, to hopefully gain both certainty in income and increased value over time. The latter is not, of course, certain and such investments need careful due diligence on both the property and the strength of covenant of the tenant. Over the medium term this is probably not a bad bet –sorry, I mean a prudent investment – when considering the balance of risk and reward! However, this has a limited application if there is a need for liquidity.
The third option, which is a variant of the other two, is to use cash reserves to meet investment in estate regeneration avoiding the use of either private sector investment or prudential borrowing. This option is being used by Wandsworth at present to fund the re-provision of social housing on one of our estate regeneration schemes as part of a joint venture which is currently in procurement. This appears at present to have the advantage of reducing risk to the private sector partner, reducing costs and enabling the Council to receive a future return on its loan to the joint venture. Clearly there are limits to the amounts that can be invested in this way, but the current HRA business plan assumes £150 million of investment over the life of a ten year project. Not very liquid, but the Council’s cash flow assumes this sum will be spent and this option is clearly better than borrowing.
This still leaves, however, a large amount of cash at risk of a negative return, so it’s potentially back to looking at the storing it in the Council’s safe. Based on using brand new £50 notes, I reckon it can hold about £40 million. This may be liquid but probably isn’t particularly secure and it just might be that fiction becomes reality in that, in The Sweeney remake, the Town Hall was the scene of a bank robbery. With £40 million in the safe, they might be queuing up outside! Any better ideas of where to stash our cash, however, are gratefully received.
Chris Buss is finance director and deputy chief executive at Wandsworth Borough Council.
