The North East’s treasury mission
0Paul Woods of the North East Combined Authority explores the possibility of pooling treasury resources to increase returns on local authority investments.
Given the growing financial challenge facing councils, opportunities to increase returns from investments and cash deposits with minimal additional risk in the next few years are important, particularly as interest rates could continue at a relatively low level in the short to medium term.
The scale of investments and debt is reported in the latest Government Statistics* and highlights the huge scale of the issues and opportunities. UK Local Authority investments at 31st March 2015 rose to over £33bn, an increase of £1.5bn (4.8%) on the year.
Investments have increased by over £8bn (32%) since 2011. The biggest increases being in Scotland and in Shire Districts. The figure for gross investments in England (including lending between councils – which is netted off in the headline statistics) is £34.7bn.
On closer examination of the statistics and a comparison with councils’ accounts in my region, I believe that the level of investments and cash deposits is even higher than this, due to some cash deposits not being reported as ‘Investments’.
There appears to be more opportunities to use investments in place of external borrowing, significantly reducing net financing costs in the next few years. Although, with borrowing rates at extremely low levels as well, there is a balance to be struck between securing low longer term fixed-interest borrowing and securing beneficial short-term rates.
Treasury and devolution opportunities
As the chief finance officer of the North East Combined Authority, I am exploring the opportunities offered by devolution to create a pooled treasury management facility within a strategic investment fund, aimed at financing increased investment in infrastructure, at lower costs, and generating significant additional interest returns for councils in the pool – at least in the short to medium term. I am keen to talk to others who have already achieved this or are thinking about it. The opportunities for councils appear to be considerable as the national figures indicate.
The level of UK Local Authority borrowing has also increased to £86.4bn, up £1.7bn (2%) on last year and up £15.8bn (22%) since 2011, although £12bn of that increase occurring in 2012 when the HRA system changed and introduced more debt for many councils.
The 2015/16 prudential capital returns for England shows the Authorized Borrowing limit is £120bn, the Capital Financing requirement at 1 April 2015 is £100bn.
The fact that external borrowing is only £75bn and other long term liabilities are £11bn, indicates a use of internal funds to finance capital expenditure of around £14bn already.
These statistics also showed a potential increase this year in the capital financing requirement for England of £6bn, an increase in external borrowing of £4.5bn and investments at 1 April 2015 of £32bn. Investments are estimated to reduce to £25bn by the year end, but having looked at the statistics in more detail, I consider a £6bn reduction unlikely to occur.
Crash implications
Since the financial crash, when interest rates on investments and cash deposits plummeted to their current historic low levels, councils have sought to optimize net financing costs in a climate of higher financial risk. Most councils have already chosen to use some of their internal funds to reduce the level of their external borrowing, reducing their net financing costs.
I am hoping to more that double the level of interest earned on short term investments in the pool to 2% or more, while also reducing the borrowing cost by 1% to 1.5% or more on Enterprise Zone and other infrastructure projects over the next four years. A net annual saving/increased income of c 2.5%. For each £1bn that could be pooled, that means an extra net annual interest saving of £25m.
The risks and uncertainty of interest rates rising in future years clearly needs to be taken into account in any decision as part of the trade off between cost and savings v certainty. I see this as an extra innovative option for councils to consider as part of a balanced approach to their Treasury Management.
Paul Woods is chief finance officer at the North East Combined Authority.
pvdw1958@yahoo.co.uk
Photo (cropped): John Lord, Flickr.
