Is it time to pool treasury resources?
1Will local authority treasury management be the next area to see consolidation, or what we might perhaps call its own pooling project?
The word “pooling” might be misplaced, but after other projects brought areas of local government management together, it’s not a big stretch to ask if treasury departments should do likewise.
After all, councils in aggregate have around £41.3bn invested (including inter-authority loans) and that’s an awful lot of buying power.
In fact, this is one of the arguments pursued by Luke Webster, chief investment officer of the Greater London Authority, as he spoke to delegates at a CIPFA treasury management conference this week.
His argument is not that all local authority assets should come under a single roof. However, he does believe that groups of councils could band together using their aggregated balance sheets as leverage. In short, they should pool their efforts and their assets.
Precedents
Other examples of consolidation are happening. Local government pension schemes are currently working their way through a huge project to pool their assets, consolidating 89 funds down to eight in a bid to reduce management costs and provide greater investment clout.
Elsewhere Webster has supervised his own treasury consolidation project when other London authorities outsourced their treasury management to the GLA.
The Municipal Bonds Agency is another project to attempt pooling treasury resources, though despite being under discussion, and then planning, since 2012, the agency has so far failed to issue a bond.
There are potential regulatory drivers for consolidation. The new MiFID rules may mean that some authorities would be too small to qualify as “professional” investors, meaning they could miss out on market opportunities. Perhaps collaboration with authorities who opt up to professional status could offer a means of accessing a broader suite of risk assets?
Other advantages of bringing treasury departments together stand out even more. At one level consolidation would create much bigger treasury teams, bringing together more expertise and resource than an individual authority could afford. It would also save officer time: a large transaction involving cash from a number of councils could be conducted in the same time as, say, a deal for just a single authority.
Portfolios
Pooled expertise could also provide access for local authorities to a more diversified portfolio. Though councils now lend a big chunk of their cash to other local authorities (15% of aggregate investment, according to the latest DCLG figures) portfolios remain remarkably concentrated. Indeed, around 41% remains on deposit with banks and building societies, which now carry more risk after the introduction of bail-in legislation.
Portfolio diversification is also limited by the sums individual authorities have to invest. As Webster points out, most wholesale counterparties are uninterested in smaller amounts but would jump at the chance of a deal involving big numbers, only possible if authorities come together to pool their cash.
If collaboration were to go ahead there would undoubtedly be work needed on how to identify and share the benefits, but the potential gains look worth the effort.
What’s interesting is that there isn’t already more attention on treasury pooling. With big potential savings to be made, it is remarkable that we are not hearing of more authorities joining forces. That said, collaboration (or pooling) would represent a significant change and change is threatening, especially when it comes to the protection of public money and the level of risk that authorities find acceptable.
So, perhaps culture is where the biggest change will be needed if treasury management is to find, and go through, its next stage of development.
My understanding is that under MiFID II counterparties will need to make their qualatative assessments against each Authority individually.
If that turns out to be the final position then shared (and maybe even true pooled) arrangements make less sense as potentially the Treasury Function has to wear two hats, constantly switching depending on whether they are acting for a professional or retail authority.