Contents
Report 11 for the 08 Nov 10 meeting of the Finance, Planning and Best Value Committee and discusses the Half-Year Review of Treasury Management for the 6 month period ended 30 September 2001 and reviews current developments in 2001-02.
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Half year financial review - Treasury management
Report: 11
Date: 8 November 2001
By: Treasurer
Summary
This report presents the Half-Year Review of Treasury Management for the 6 month period ended 30 September 2001 and reviews current developments in 2001-02.
A. Recommendations
Members are asked to note the budgetary implications detailed in this report.
B. Supporting information
Background information
1. On 20 July 2000 the Finance, Planning and Best Value Committee adopted a Treasury Management Policy Statement. This Statement requires that the Treasurer submit a regular report on treasury and debt management operations throughout the financial year. This report reviews operations for the six month period to 30 September 2001.
Investment operations
2. The value of the investment portfolio at the end of September 2001 was £146 million compared to £155 million at the end of March 2001. The decrease in the value of the portfolio is influenced by the timing of large receipts and payments. The average daily size of the portfolio during the six month period was £202 million.
3. Accrued interest received on investments in the 6 month period to 30 September 2001 was £5.192 million. This compares to the revised annual forecast of between £10 million and £11 million (from a budget of £12 million) advised to this Committee in June 2001. Following a reduction in base rate to 5.25% in May 2001 the market expected stability in interest rates[1].
4. Compounded by the events in New York and Washington on 11 September 2001, UK base rate has fallen by 75 basis points to 4.50%[2]. Further reductions are possible with commentators not predicting upward movement in rates until next year. The revised annual forecast for interest receivable on investments is now £9.1 million assuming a further reduction of 50 basis points to 4.0%. The estimated impact of increased operational expenditure following the terrorist attacks has not been included. Figure 1 (overleaf) summarises the position.
Figure 1: Interest receivable 2001-02 – actual and forecast
| Original estimate 2001-02 £000 |
Actual interest to 30 September 2001 £000 |
Estimate 1 October to 31 March 2002 £000 |
Budget Surplus(+) / Deficiency(-) £000 |
|
|---|---|---|---|---|
| Interest on investments | 12,000 | 5,192 | 3,918 | (-)2,890 |
5. In order to discharge liabilities short-term borrowing of £22 million was undertaken during the first quarter. In varying amounts and with different maturity dates, but for no longer than 11 days, all loans were at a competitive 5% with total interest £20,826.
Structure of the portfolio
6. The structure of the portfolio has continued to reflect the investment instruments selected for investment purposes as defined by Treasury Management Strategy. Sector limits are in operation and have not been exceeded.
7. The mean investment by market sector and rate of return for the first two quarters is shown in Figure 2.
Figure 2: Average investment portfolio size and rate of return by market sector – 1st and 2nd quarter 2001-02
1st Quarter 2001-02
| Market Sector | Size % | Return % |
|---|---|---|
| UK Banks | 48 | 5.30 |
| Foreign Banks | 30 | 5.26 |
| Building Societies | 18 | 5.28 |
| Local Authorities | 2 | 5.20 |
| Call | 2 | 5.17 |
| Total | 100 |
2nd Quarter 2001-02
| Market Sector | Size % | Return % |
|---|---|---|
| UK Banks | 41 | 5.00 |
| Foreign Banks | 37 | 5.00 |
| Building Societies | 19 | 4.98 |
| Local Authorities | 1 | *5.06 |
| Call | 2 | 4.98 |
| Total | 100 |
* July 2001 only
6 Months to 30 September 2001
| Market Sector | Size % | Return % |
|---|---|---|
| UK Banks | 44 | 5.15 |
| Foreign Banks | 33 | 5.13 |
| Building Societies | 19 | 5.13 |
| Local Authorities | 2 | **5.17 |
| Call | 2 | 5.09 |
| Total | 100 |
** April to July 2001 only
8. The UK Bank and Foreign Bank sectors continue to make up the largest sectors of the portfolio. Opportunities with Local Authorities have diminished with little activity in the market, although the rate of return from this sector is generally less than for other sectors. Call money of £5 million is now held at a competitive rate with the Bank of Scotland. The size of the Building Society sector has stabilized with no new conversions to plc status.
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 2. The overall reduction in the rate of return across all sectors in the 2nd Quarter reflects market conditions and the four 25 basis point reductions in base rate announced by the MPC during the 6 month period.
10. Investment performance is compared to the London Interbank Bid Rate (LIBID). The mean investment term during the year to 31 March 2001 was 25 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 5.14% which compares favourably to the 1 month LIBID average of 5.01%.
11. Investment performance is also compared to the National Westminster Bank plc Treasury Reserve Rate. This is the rate of return achievable had we chosen to invest directly with our banker to the same value and term as investments actually placed. The period's investment operations return of 5.14% compares well to National Westminster Bank's Treasury Reserve rate of return of 4.76%.
12. The feasibility of comparing performance information for treasury management activities is underway within a benchmarking club operated by The Institute of Public Finance Ltd. (IPF). Suitable benchmarks are being developed and performance during this 6 month period will be compared with performance in other Local Authorities.
Debt management operations
13. The balance of debt outstanding at 30th September 2001 is £135.97 million, unchanged from the 31st March 2001 position. No long-term debt management operations have been undertaken during this period.
Operational issues
14. Investment operations have been undertaken in line with the Strategy for 2001-02 approved by Committee on 20 February 2001.
Review arrangements
15. A further report will be submitted in February 2002 to report on the position at the end of December 2001 and to set out the recommended Treasury Management Strategy and proposed Borrowing Limits for 2002/03.
C. Financial implications
This Committee was advised in June 2001 that investment income was likely to fall short of the budget by between £1 and £2 million in 2001/02. The financial implication of this report is that investment income is now likely to be £3 million short of the budget. This will need to be taken into account in the overall budget monitoring.
D. Background papers
Report to Finance, Planning and Best Value Committee meeting on 20 July 2000.
E. Contact details
Report author: 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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