Treasury management half year review 2003/04

Report: 08
Date: 20 November 2003
By: Treasurer

Summary

This report provides a review of treasury management for the 6-month period ended 30 September 2003 and reviews current developments in 2003-04.

A. Recommendation

1. That members note this report and the budgetary implications.

B. Supporting information

Introduction

1. On 21 March 2002 the Metropolitan Police Authority formally adopted the key recommendations of CIPFA’s Code of Practice for Treasury Management in the Public Services as set out in Section 4 of that Code.

2. In line with the Code the MPA have adopted a treasury management policy statement that requires that the Treasurer submit a regular report on treasury and debt management operations throughout the financial year. This report is submitted in accordance with that requirement.

3. The purpose of this report is to provide members with a review of treasury management operations for the 6-month period to 30 September 2003.

Investment Operations

Portfolio structure

4. The average size of the investment portfolio for this period was £359 million compared to an average portfolio size of £306 million during 2002/03. The increase in cash balances available for investment is attributed to the strengthening of balance sheet reserves and provisions, unapplied capital receipts and grant and the timing of large receipts and payments.

5. The structure of the portfolio continues to reflect the investment instruments selected for investment purposes as defined by Treasury Management strategy, reported to this committee 15 February 2003.

Table 1 – Portfolio by sector size

6. The revision of market sector and individual lending limits in February 2003 (advised in the 2002/03 annual report to this committee on 10 July 2003), increased opportunities in the building society and British bank sectors. This has given a more even distribution of funds across these three sectors, reducing the proportion of funds with foreign banks.

7. Call money represents instant access funds held with Halifax Bank of Scotland (HBOS), Abbey plc and Royal Bank of Scotland (RBS). The return of base rate on these accounts (10 points below for RBS) has been attractive so high balances have been maintained.

8. Money Market Funds, added as approved investments in November 2002, remain uncompetitive and have not been used. Similar liquidity with higher return is achieved from our call accounts.

Interest rates

9. The Bank of England Base Rate, maintained at 4% for 15 months, was reduced by 25 basis points in both February 2003 and July 2003. Rates out to one year have been very flat with little benefit from placing funds longer term. From August 2003 the market turned around with the next move in rates considered to be upwards. This is reflected in 1-year money, which has exceeded 4% since the end of September 2003.

Performance

10. The accrued interest on investments for the 6 month period was £6.48 million compared to an annual forecast of £8.9 million. The revised annual forecast for interest receivable on investments is now at least £11 million. Table 2 summarises this position.

Table 2 – Interest receivable 2003/2004 – actual & forecast

11. Performance is monitored against the British Bankers Association (BBA) LIBOR rate. The 6-month MPA return of 3.60% compares with BBA LIBOR (1 week) of 3.59% and BBA LIBOR (1 month) of 3.66%

12. The MPA is a member of the Institute of Public Finance’s Treasury Management Benchmarking Club. Data for this period has been submitted with analysis expected after this meeting. However, analysis from financial year 2002/03 (received after the annual financial report considered by Committee on 10 July 2003) can be reviewed. Table 3 compares the MPA return to the group average.

Table 3 – Comparison of MPA return to Benchmarking Club Average 2002/03

13. The favourable return on call money supports the policy of maintaining relatively high balances in these accounts, although the return is still below the average fixed term rate achieved by the group as a whole.

14. The below average return on fixed term investments is attributable to a number of factors. Available opportunities were restricted as the size of the portfolio increased without any change to counterparty limits. Investment limits and the lending list were assessed and revised in February 2003 to increase opportunities. Also the necessity of placing funds short-term for cash flow considerations has meant not taking the optimum market rate.

Debt management operations

15. The balance of debt outstanding at 30 September 2003 is £114.47 million, unchanged from 31 March 2003. The rate of interest paid on the debt portfolio was 6.35% and no long-term debt management operations were undertaken this period.

C. Equality and diversity implications

There are no equality and diversity implications arising from this report.

D. Financial implications

The financial implication of this report is that investment income in the current financial year is likely to be at least £2.0 million in excess of budget.

E. Background papers

None

F. Contact details

Report author: Stephen Skirten, Treasury & Control Manager, Finance Services, MPS.

For more information contact:

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

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