Annual financial review - treasury management

Report: 18
Date: 19 June 2001
By: Treasurer

Summary

This report presents the Annual Review of Treasury Management for the 12-month period ended 31 March 2001 and reviews current developments in 2001-02.

A. Recommendation

It is recommended that the report and the budgetary implications be noted.

B. Supporting information

1. On 20 July 2000 this Committee adopted a Treasury Management Policy Statement. This Statement requires that the Treasurer presents an Annual Review and this report is submitted in line with that requirement. In order to present a complete cycle of operation the report covers the 12 month period to 31 March 2001.

2. The Policy Statement also requires that the Treasurer submit a regular report on treasury and debt management operations throughout the financial year. This report reviews current operations during 2001-02.

Investment operations

3. The value of the investment portfolio at the end of March 2001 was £155 million compared to £153 million at the end of March 2000. The year on year position shows little change but the average daily size of the portfolio during 2000-01 was £251 million. This compares to an average portfolio size of £220 million during 1999-00. The value of investments on 3 July 2000 was £213 million.

4. Accrued interest received on investments in 2000/01 was £14.671 million. This compares to the forecast of £14.536 advised to this Committee in January 2001. The level of receipts was consistently in excess of the budget profile which was based on the original budget of £10 million. This was partly as a result of a beneficial profile of grant and precept receipts as compared to previous years. A summary of forecast and actual income is shown in Figure 1.

5. Additionally £0.129 million was received on balances held by the MPA bankers. This compares to a forecast of £0.130 million. This income was generated on balances at the Bank of England. During the year new contractual arrangements with the MPA bankers National Westminster Bank plc have been introduced. This has provided greater flexibility in identifying and placing surplus funds reducing substantially overnight bank balances. In view of this there is no provision for this type of income generation in the 2001/02 budget.

Figure 1: Interest Receivable 2000-01 – actual and forecast

Structure of the portfolio

6. The structure of the portfolio reflects the investment instruments selected for investment purposes in accordance with Treasury Management Strategy approved by the Authority in July 2000. The requirements were amended in October 2000 by this Committee to include selected foreign banks and were further enhanced in January 2001 to include additional foreign banks and increased sector limits. Credit ratings are provided by Fitch IBCA and the selected minimum standards include 'Investment Grade AA' denoting a very low expectation of credit risk and very strong capacity for timely payment of financial commitments. Institutions also meet the highest short-term credit rating of 'F1+' indicating the strongest capacity for timely payment and 'Individual Rating B' indicating a strong bank characterised by high profitability and balance sheet integrity. The same strict credit rating criteria are applied to all institutions on the lending list including both UK and foreign banks.

7. These amendments to the lending list provided increased investment opportunities without a significant increase to risk and removed a heavy reliance on placing funds in less competitive Treasury Bills. The mean investment by market sector, for each quarter, is shown in Figure 2.

Figure 2: Average investment portfolio size by market sector – 2000/01

8. The introduction of foreign banks coupled with increased opportunities in the UK Bank sector resulted in decreased use of Treasury Bills in the 3rd Quarter with no such deposits in the 4th Quarter. The Building Society sector continues to decline reflecting the trend towards demutualisation and conversion to plc status. This has contributed to increased activity in the UK Bank sector.

Performance measurement

9. Investment performance monitored by sector provides a measure of relative performance across the portfolio. The return achieved for each sector, by quarter, is shown in Figure 3. The overall reduction in the rate of return across all sectors in the 4th Quarter reflects market conditions and the 25 basis point reduction in base rate announced by the MPC on 8th February 2001. In each quarter the local authority sector gives the lowest return. Reference back to Figure 2 shows this to be the smallest sector by size. Local authority investments are used for call money investments totalling £6m to £8m. These liquid investments attract lower rates of interest in comparison to fixed term investments.

Figure 3: Rate of return by market sector – 2000-01

10. Investment performance is benchmarked using the London Interbank Bid Rate (LIBID). The mean investment term during the year to 31 March 2001 was 27 days. The return achieved on this length of investment is best compared with the 1 month LIBID rate. During the year investment operations across all sectors achieved a return of 5.82 per cent which compares very closely to the 1 month LIBID of 5.83 per cent.

11. 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 year's investment operations return of 5.82 per cent compares favourably to the Treasury Bill rate of return of 5.71 per cent. The removal of Treasury Bills from the investment portfolio will further improve performance and results above the LIBID rate should be achieved.

12. The feasibility of comparing performance information for treasury management activities is being considered. Work within a benchmarking club is currently underway and suitable benchmarks are being developed to monitor 2001-02 performance.

Debt management operations

13. The October 2000 report advised that a £10 million loan had been taken out prior to 3 July 2000. No further borrowing has taken place during the year and £11 million of maturing loans has been repaid. Cash balances were sufficient in 2000-01 to discharge liabilities without the need to take up further borrowing.

14. The balance of debt outstanding at 31 March 2001 is £135.97 million compared to £136.97 million at 31 March 2000. Total debt at 3rd July 2000 was £146.97million. The average size of the portfolio during the period April 2000 to March 2001 was £145.711 million with an average rate of interest paid on the portfolio of 6.41 per cent. All debt is held in maturity loans with the PWLB.

15. The repayment in year of £11 million included one variable rate loan of £3 million. At 31 March 2001 all debt is fixed rate.

Current operations 2001-02

16. All investment operations have been undertaken in line with the Strategy for 2001/02 approved by Committee on 20 February 2001.

17. The 2001/02 budget for income on investments is £12 million. This compares with the outturn for 2000/01 of £14.8 million. The reduced income in the budget reflected a lower projection of the average amount available for investment, partly arising from the redemption of PWLB loans in 2000/01, together with some downward pressure on interest rates.

18. In practice there have been three base rate reductions in quick succession between February and May 2001 totalling 75 basis points. The impact of these on projected investment income is a reduction of approximately £1.7 million. Financial commentators suggest further rate reductions are likely this summer although the General Election in June could influence the timing and extent of these.

19. The GLA receives Revenue Support Grant, Non Domestic Rates and Local Authority Precept. The MPA share of these is passed on by way of grant under S102 of the GLA Act. The payment profile of Section 102 Grant for 2001/02 has resulted in a reduction in the volume of funds available for investment as compared to 2000/01. Government grant was paid earlier in 2000/2001 as part of the transitional arrangements in setting up the GLA and its functional bodies. This gave a cashflow benefit for that financial year. The 2001/02 profile reflects more closely the profile that applied in earlier years. This results in a reduction in interest receipts of approximately £1.7 million. Of this, £1.2 million results from the profile of receipts paid to the GLA in Government grant and Local Authority Precepts. The balance of £0.5 million arises from the channelling of grants and precept through the GLA.

20. In addition to these major items, there are a number of other factors that impact on the level of cash balances available for investment. These include the timing of capital receipts and the balance of amounts owing to creditors compared to the amount owed by debtors. Taking account of the combined implications of the later receipt grant income and a reduction in interest rates, the interest income for the year is currently forecast to be in the region of £10-£11 million as compared to the budget of £12 million.

21. A further report will be submitted in November to report on the position at the end of the second quarter.

C. Financial implications

The financial implications of this report are that investment income is likely to fall short of the budget by between £1 and £2 million in 2001/02. This will need to be taken into account in the overall budget monitoring.

D. Background papers

None.

E. Contact details

The author of this report is Mike Jennings, Acting Head of Exchequer Services.

For information contact:

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

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