Agenda item

Report of the City Treasurer

7.1     The Committee considered a mid-year review report on the Annual Treasury Strategy for 2016-17 in accordance with the Council’s Treasury Management practices. 

7.2     The Committee noted that there had been two breaches of compliance with the Treasury Management Strategy Statement – (i) two tranches of investments placed between May and July 2016 with the National Bank of Abu Dhabi (NBAD) and Qatar National Bank (QNB) totalling £59.8m and (ii) exceeding the counterparty limit on the Lloyds bank account since August 2016 because of overnight balances. 

7.3     Whilst the investments with NBAD and QNB met the Council’s required counterparty credit rating and are included on the list of approved counterparties issued by the Council’s treasury advisor, Capita, they were not included in the permitted country of domicile for banks.

7.4     The committee asked about the action that the Finance Service had taken to prevent re-occurrence of the breaches.  Pete Carpenter, Director of Treasury and Pensions, explained that since the matters had come to light Treasury management practices had been reviewed and improved.  Multiple signatories are now required for certain levels of investment to be placed while overnight limits with Lloyds will be managed by not reinvesting maturing funds with this bank.

7.5     The report included an update to the Annual Investment Strategy for 2016-17 that detailed ways in which the return from the Council’s short-term cash portfolio can be enhanced while maintaining security and liquidity.  The opportunities presented included; Green Energy Bonds, Building Societies, Local Government Association and Other Bonds.

7.6     Mr Carpenter was asked about the investment approach that the Council should consider in the current environment of low interest rates and returns.  He stated that the Council had close to £1 billion of potential cash investments made up of £400m held for NNDR Business Rates Appeals, £200m in general fund reserves and £200m of funding for affordable homes.  He explained that when considering how to invest the sums the Council would need to consider the grounds upon which it was holding the investment money, what it would ultimately be used for and when this would be needed.  It would also need to consider the Prudential indicators of risk, duration and return.  The Council had previously financially planned over the shorter term and it was considered that it should look at medium and long-term planning of around 10 to 15 years.

7.7     He advised that the London Borough of Newham had a strategy whereby they treated their cash balances in a similar manner to the cash investments in their pension fund.  The City Treasurer advised that subject to the Council approving proposals set out in the budget in March Westminster would use cash balances in the short term to invest in the Council’s capital programme rather than facilitate this through borrowing.

7.8     The Committee then discussed the new investment opportunities set out in the report.  Members asked about the level of risk involved in investing in Green Energy Bonds as there was a perception that solar and wind farms had varying levels of success.  The City Treasurer explained that before proceeding with any such investment, internal and external due diligence would be undertaken covering the financial, planning and legal aspects.

7.9     Some support was expressed for the Council lending money to the Local Government Association through borrowing from the Municipal Bond Agency on the grounds that the investment was deemed to be low-risk and included a guarantee.  However, a number of members expressed unease about the Council providing loans to organisations delivering services for the Council, where this will lead to the enhancement of services to Westminster stakeholders.  The report explained that the operator of Westminster’s leisure centres was seeking to borrow £1.25 million from the Council to finance a refurbishment of the leisure centres.  Members had concerns that lending to organisations which it had a contractual relationship with would blur the boundaries of such a relationship.  If there were a need to impose a financial penalty on the contractor for failing to meet agreed targets this could impact on their servicing of the loan.  Similarly concern was expressed about the potential risk if the organisation was unable to make relevant payments because anticipated revenue failed to materialise and the borrowing is unsecured.  The City Treasurer explained that before proceeding with any such investment, internal and external due diligence would be undertaken.

7.10   A number of Committee Members expressed the view that as the Council was investing taxpayers’ money it should focus on investments with a reasonable return based on reasonable risk.  Members considered that there was insufficient detail on the Treasury opportunities in the report to come to a conclusive view on their merits.  The City Treasurer advised that officers were presently working up full appraisals which he would present to committee once ready. 

7.11   Officers were asked about the possible impact of Brexit on the Council’s investment opportunities.  Mr Carpenter commented that one of the weaknesses faced by the Council, which had also been highlighted in the previous item, is that it is unable to take speedy decisions due to having to comply with protocols.  Officers were referred to the fact that interest rates were anticipated to rise in the near future which would improve the Council’s Treasury opportunities.  The City Treasurer reported that in 2008 the Council made £23 million due to higher interest rates compared to £4 million last year.  However, he highlighted that the counter to rising interest rates is rising inflation.  This would have a negative impact as it would lead to increased costs for the organisation.

7.12   ACTIONS: That a task group should be established to consider the previously specified Treasury opportunities. Other Treasury opportunities not covered in the TMSS should also be presented for consideration as well as a review of the policy on the countries in which deposits/investments can be invested.  (Action for: Tara Murphy, Scrutiny Officer)