Quarterly financial report - treasury management

Report: 9
Date: 22 January 2001
By: Treasurer

Summary

This report reviews treasury management performance for the quarter ended 31 December 2000

A. Supporting information

Introduction

1. On 20 July 2000 this committee adopted a Treasury Management Policy Statement and Treasury Management Strategy for 2000-01. This report has been prepared in accordance with the requirements of that strategy to submit regular reports on treasury and debt management operations throughout the financial year.

Investment operations

2. The value of the investment portfolio at the end of December 2000 was £192 million compared with £213 million at the end of September. The decrease in the value of the portfolio is influenced by the timing of large receipts and payments. The average daily size of the investment portfolio this quarter was £260 million compared to £259 million in the previous quarter.

3. The latest forecast for interest receivable in 2000-01 is £14.536 million (note 1). This remains unchanged from the forecast advised in the last report. To 31 December 2000 £11.022 million interest on investments has been received (note 2).

Notes
1)  This figure represents interest on investments. An additional £130,000 is forecast for interest received on balances held by the MPA bankers.
2) To 31st December 2000 £120,000 interest has been received on balances held by the MPA bankers.

Structure of the portfolio

4. The structure of the portfolio reflects the investment instruments selected for investment purposes as outlined by the Treasury Management Strategy (also refer to the section ‘Policy Amendments’ of this report). Figure 1 below shows the average value of investments within each of the market sectors.

5. Investment with Foreign Banks has taken place since August 2000. The increased activity in this sector has resulted in a decrease in the purchase of UK Treasury Bills. Although the average for the Treasury Bill sector remains high at 25% this quarter this reflects the investment activity in Treasury Bills during October (45%) and November (30%). Since 30th November the Treasury Bill sector has recorded a nil balance.

Figure 1: Average investment portfolio size by market sector – October to December 2000

6. The contract with the MPA bankers, NatWest Bank, includes provision for the depositing of fixed term funds in a Treasury Reserve Account. We have negotiated with NatWest more favourable rates which now approach those achievable in the market and are generally higher than Treasury Bill rates. This facility was used on a December grant receipt day negating the need to purchase a Treasury Bill.  

Performance measurement

7. Investment performance is benchmarked using the London Interbank Bid Rate (LIBID). The mean investment term during the quarter to 31 December 2000 was 32 days. The return achieved on this length of investment is best compared with the 1 month LIBID rate. During the quarter investment operations achieved a return of 5.87% compared with the 1 month LIBID of 5.86 per cent. This close tracking of LIBID can be regarded as a very satisfactory performance.

8. Investment performance is also benchmarked against the Treasury Bill Rate. This is the rate of return achievable had we chosen to purchase Treasury Bills to the same value and term as the investments actually made. The quarter’s investment operations return of 5.87 per cent compares favourably with the Treasury Bill rate of return of 5.71 per cent.

9. Following the meeting of this committee on 17 October 2000 the Treasurer will consult with suitable authorities early in 2001 to explore the feasibility of comparing performance information for treasury management activities.

Debt management operations

10. There have been no debt management operations undertaken during the October to December quarter.

Policy amendments

11. Since the last report the Treasurer, under delegated authority, has reviewed the lending list. Figure 1 illustrates a heavy reliance on placing funds in Treasury Bills which are generally purchased on grant days when sector limits have been reached. However, the return on Treasury Bills is less than that achievable by placing funds with financial institutions, as exemplified in section 8 above. Increases to sector limits will help avoid dependence on Treasury Bills and will improve the return on the investment portfolio, without significant increase in risk.  

12. The Treasurer agreed that certain Foreign Banks, registered in the UK and meeting a credit rating in excess of that set out in the MPA’s policy, could be added to the lending list. These financial institutions (mostly European but also Canadian and Australian Banks) will enhance the Foreign Bank sector giving increased opportunities for placing funds.

To avoid dependence on Treasury Bills and to accommodate the increased number of foreign banks the Treasurer agreed to raise the UK Bank and Foreign Bank sector limits to £150 million. Figure 2 illustrates the revised sector level limits.

Figure 2: Investment portfolio sector limits including the revised limit for UK and foreign banks

B. Recommendations

It is recommended that the report be noted.

C. Financial implications

The budgetary assumptions discussed in this report are consistent with those included in the MPA budget for 2000-01.

D. Review arrangements

Reports will be prepared and submitted on a regular basis in accordance with standing orders.

E. Background papers

The following is a statutory list of background papers (under the Local Government Act 1972 S.100 D) which disclose facts or matters on which the report is based and which have been relied on to a material extent in preparing this report. They are available on request to either the contact officer listed above or to the Clerk to the Police Authority at the address indicated on the agenda.

• Report 35 of the Finance, Planning and Best Value Committee (meeting on 17 October 2000)

F. Contact details

The author of this report is Stephen Skirten, MPS Finance Department.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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