Treasury management half year review 2004/05

Report: 7
Date: 21 October 2004
By: Treasurer

Summary

This report provides a review of treasury management for the 6-month period ended 30 September 2004 and reviews current developments in 2004-05.

A. Recommendation

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 the Chartered Institute of Public Finance and Accountancy’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 during the financial year. This report is submitted in accordance with that requirement.

3. Additionally, under Part 1 of the Local Government Act 2003, the Authority is required to have regard to the Prudential Code for Capital Finance including the setting of Prudential Indicators. Relevant treasury management indicators were incorporated into the Treasury Management Strategy 2004-05 approved by this Committee on 19 February 2004.

4. This report sets out:

• a review of investment operations for the 6 months to 30 September 2004
• a summary of interest rate movement and investment performance for the 6 months to September 2004
• a comparison of MPA return to Benchmarking Club average return for 2003-04
• a review of debt management operations
• a review of the treasury management Prudential Code indicators

Investment operations for the 6 months to 30 September 2004

5. The average size of the investment portfolio for this period was £362 million compared to an average portfolio size of £366 million during 2003/04. These cash balances available for investment include balance sheet reserves and provisions, unapplied capital receipts and grant and cash arising from the timing of large receipts and payments.

6. The structure of the portfolio continues to reflect the investment instruments selected for investment purposes as defined by Treasury Management strategy. Table 1 provides an analysis of average investment balances for each counter-party sector.

Table 1 – Portfolio average sector size 6 months to 30 September 2004

7. The largest share of the portfolio at 44.3% remains with non UK banks (the non UK bank share of the portfolio during 2003-04 was 40%) reflecting the greater access these banks provide for the placement of short dated deposits. Opportunities with building societies are limited by the number of counter-parties within both the specified sector (with credit ratings) and the unspecified sector (no credit ratings).

8. The call money sector represents instant access funds held with Halifax Bank of Scotland (HBOS) and Royal Bank of Scotland (RBS). The return of base rate on these accounts has been attractive so high balances have been maintained and the liquidity used to cover short term cash flow requirements.

9. Although available as approved investments since November 2002 Money Market Funds remain uncompetitive and have not been used. Similar liquidity with a higher return is achieved from the call accounts.

Interest rate movement and investment performance for the 6 months to September 2004

10. Following nine successive reductions to base rate by the Monetary Policy Committee this trend was reversed in November 2003. This was the turning point of the interest rate cycle with four subsequent upward moves increasing base rate to 4.75%. During this period money market and base rate diverged but although the market still expects one further 25 basis point rise the yield curve out to 364 days has now become much flatter with one year money just below 5%.

11. Interest on investments for the 6 month period was £7.7 million compared to an annual forecast of £11.1 million. The revised annual forecast for interest receivable on investments is now £13.1 million and is summarised in Table 2.

Table 2 – Interest receivable 2004/2005 – actual & forecast

12. Performance is monitored against the British Bankers Association (BBA) LIBOR rate. The 6-month MPA return of 4.29% compares with BBA LIBOR (1 week) of 4.48% and BBA LIBOR (1 month) of 4.58%. The period LIBOR returns reflect the upward yield curve so are expected to be higher than the return on fixed term, fixed rate investments.

Comparison of MPA return to Benchmarking Club average return for 2003-04

13. The MPA is a member of the Institute of Public Finance’s Treasury Management Benchmarking Club. Interim data for the 6 month period to 30 September has been submitted to IPF with analysis expected after this meeting. However, analysis from financial year 2003/04 (received after the annual financial report considered by Committee on 24 May 2004) can be reviewed. Table 3 compares the MPA return to the group average.

Table 3 – Comparison of MPA return to Benchmarking Club Average 2003/04

14. The favourable return on call money supports the policy of maintaining high balances in these accounts, with balances frequently maintained at the maximum permitted by the counterparty limits.

15. The MPA return on fixed term investments (cash less than 364 days) remains slightly below the average return for the group but compares favourably to the 2002/03 margin of -0.18%. The improvement is largely attributable to the revision of investment and lending limits in February 2003 which increased investment opportunities. However the necessity of placing funds short-term for cash flow considerations has meant not always taking the optimum market rate.

16. The MPA combined investments return represents cash less than 364 days and call money only. The group average return includes all investments undertaken by group members, such as money market funds, and indicates a slightly above average return for the MPA.

Debt management operations

17. The balance of debt outstanding at 30 September 2004 is £104.47 million, unchanged from 31 March 2004. The rate of interest paid on the debt portfolio was 6.28% and no long-term debt management operations were undertaken this period.

Treasury management Prudential Code indicators

18. Prudential Code indicators specific to treasury management are designed to ensure that treasury management is carried out in accordance with good professional practice. Indicators for 2004-5, 2005-06 and 2006-07 were presented to this Committee as part of the 2004-05 treasury management strategy.

19. The 2004-05 indicators and actual figures for the 6 months to 30 September 2004 are set out at Appendix 1. Activity has been maintained within indicator limits with the exception of the upper limit on fixed interest rate exposure for gross outstanding investment. The limit of 90% was slightly exceeded (91.6%) for four days as variable rate call money was used to cover estate management expenditure. It is proposed that future estimates for this indicator are increased to 95% reflecting the operational use of call money.

C. Race and equality impact

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

D. Financial implications

The financial implications 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

For information contact:

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

Appendix 1: Treasury management Prudential indicators for the Metropolitan Police Authority

Treasury management indicators – comparison of 2004-05 estimate to actual position for the 6 months to 30 September 2004

Gross outstanding borrowing

Limits in interest rate exposure calculated with reference to net outstanding borrowing sums.

Gross outstanding investment

Limits in interest rate exposure calculated with reference to outstanding investment sums.

Maturity structure of borrowing – upper and lower limits

Amount of projected borrowing that is fixed rate maturing in each period as a percentage of total projected borrowing that is fixed rate.

Principal sums invested for periods longer than 364 days.

No sums have been invested for longer than 364 days.

The MPA has adopted the CIPFA Code of Practice for Treasury Management in Public Services.

External debt indicators

Authorised limit for external debt

This is the maximum amount that the authority allows itself to borrow in each year. They are based on the estimate of the most likely, prudent but not worst-case scenario, with in addition sufficient headroom over and above this to allow for operational management, for example unusual cash movements. Risk analysis and risk management strategies have been taken into account, as have plans for capital expenditure and estimates of cashflow requirements.

Operational boundary for external debt

The Operational Boundary for external debt is based on the same estimates as the Authorised Limit but reflects directly the estimate of the most likely, prudent, but not worst case scenario, without the additional headroom included within the Authorised Limit to allow for example for unusual cash movements and equates to the maximum of external debt projected by this estimate.

Actual external debt

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