Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1-19)

MR ROBERT STHEEMAN, MS JO WHELAN AND MR JIM JUFFS

10 JANUARY 2007

  Q1 Chairman: Mr Stheeman, can I welcome you back to the Treasury Sub-Committee. Could you formally introduce yourself and your colleagues, please.

  Mr Stheeman: Certainly. I am Robert Stheeman, the Chief Executive of the Debt Management Office. On my left is Jo Whelan, who is the Deputy Chief Executive, and on my right is Jim Juffs, who is the Chief Operating Officer.

  Q2 Chairman: Thank you very much. You will recall back in May 2000 this Committee found that none of your performance measures adequately tested whether the DMO was achieving its objectives and, in particular, whether it was minimising the cost of debt management over the longer term. In June 2003 we found rather little had changed since the 2000 report. Since we last met what have you done to address performance measurement?

  Mr Stheeman: I think one thing is clear—and this has not changed over time—and that is that measuring the performance of the Debt Management Office against the primary debt management objective, the cost minimisation objective, is something which is very difficult. It is not just difficult for us, it is something which other countries find difficult as well. It has been highlighted by the NAO as a difficulty. We do have various strategic objectives. We do have various targets by which we try and measure what it is we do and how we do it. Clearly they can tell you something about our operational capabilities in connection with the operational targets that we have, to what extent we might have met them. I fully acknowledge that they do seem at one level quite micro. They do not talk about the overall performance and how we contribute to the overall debt management objective because it is virtually impossible to split that out from the Government and the Treasury's overall meeting of that objective as a separate element. It is something which is extremely difficult to do. That does not mean that these operational objectives which we have are in any way superficial or not important, I think they are extremely important, in particular because as an entity we are an operational agency and we are there to deliver specific operational results. In as much as part of our role is also to provide advice, advice to the Treasury and ministers on how we can best meet that objective, it is very hard, I acknowledge that, to split out.

  Q3  Chairman: The National Audit Office recommended that the Treasury should publish a statement wider than the remit actually setting out what it requires from you, do you think that would be helpful? Do you think there is a need for greater clarity about the respective responsibilities here between the Treasury and the DMO?

  Mr Stheeman: I think that would be helpful. If you look at that specific recommendation it follows on quite logically from something that the Treasury itself has done as recently as at the time of the PBR, which was to set out specifically what it expects from us as the agent in terms of cash management. For us to have something like that in terms of debt management, in making clear that if we do not have a very specific benchmark for debt management there are however various criteria which they would like to see us fulfil, I think that would be helpful.

  Q4  Chairman: Have there been discussions about that recommendation already with the Treasury?

  Mr Stheeman: We have had internal discussions only. At this stage it has not developed into anything concrete. As I say, we have had PBR, we have now been able to publish specifically a set of not so much performance indicators, that will come, but criteria which the Treasury itself considers important in us fulfilling our cash management task. Those criteria, just to give you a sense, are not just in terms of measuring performance cash management against the benchmark but they are also in terms of saying how we should act and behave in the market, and what the Treasury is looking for in terms of that behaviour.

  Q5  Chairman: I just want to be clear what the status of the recommendation is. You say you have welcomed it. You say there is some internal work going on. That work is still in progress, is it?

  Mr Stheeman: It is still in progress.

  Q6  Chairman: Just some housekeeping issues. You produce rather a lot of documents for a single financial year, do you not, report and accounts, annual review, management account report and accounts, business plan, report of the Public Works Loan Board. Are all these required by legislation? Why are there so many documents?

  Mr Stheeman: Some are required, for instance the reports and accounts are required. At the moment we produce two separate sets of reports and accounts for the Debt Management Office as an agency and for the Debt Management Account. I agree that they can be amalgamated, especially those two, I think that will be very valuable. The Annual Review, that is something which we also produce, is a requirement of the code for fiscal stability but it is also more of a narrative and more informative about developments in the market and is used by market practitioners perhaps to a greater extent than our annual report and accounts are.

  Q7  Chairman: Given the importance of people outside the DMO trying to get a better understanding of what you do and how you do it, you would look at the case again for streamlining some of these documents?

  Mr Stheeman: Absolutely, and we would welcome that.

  Q8  Chairman: Last time you came you told us that following the merger with the Public Works Loan Board and the Commissioners for the Reduction of National Debt, which you said you were going to come to, that breakeven on the investment costs associated with the merger was expected by this autumn and that after about 10 years you would be saving a million a year. Are you on course for that?

  Mr Stheeman: I think we are is the straight answer to that. I believe that we also sent you, subsequent to the last hearing, a note outlining where we were going to make some very specific cost savings. At the time, if I remember correctly, we talked about a head count reduction potentially of up to five people. That head count reduction may not sound very big numbers but in the context of an office of 80-85 people in percentage terms it is not inconsiderable. We have increased the head count reduction by eight people within the CRND function. We have also achieved head count reductions within the PWLB function. As a result, if I remember correctly I think we talked about a figure of £90,000 in terms of cost reduction, actually we are probably closer per annum, purely as a result of streamlining business processes for reducing head count, to achieving cost savings of about £230,000.

  Q9  Chairman: But the overall net savings of a million pounds will be achieved, will they?

  Mr Stheeman: Yes. I should mention a million pounds is also a saving which we have contributed not just from the merger but also as part of the efficiency review. We had to contribute savings there and through other things, such as the dematerialisation of Treasury bills, reduced costs in association with the issuance of Treasury bills as a result of that, those sorts of things as well across the board.

  Q10  Chairman: When you last appeared before us you said you would like to see the DMO place greater emphasis on research, policy development and the advice that you provided to Government. Has that happened?

  Mr Stheeman: It has, it is ongoing, there is always room for more. One of the things in particular you may have seen, in our Annual Review we refer specifically to a piece of research work The Strategic Debt Analysis Work. That seems quite a technical article but it is extremely important to us and it is extremely important to the Treasury as well. That is specific advice in relation to debt management strategy. My main aspiration, because we are an operational entity of the Treasury operating in the wholesale financial markets, is for us to be ideally a centre of excellence in operating in the markets and advise the Treasury on developments in the market where we can add value and that remains very much the case. We do have on-going discussions on specific topics where we can try and provide that. We are in discussions at the moment with colleagues in the Treasury continually about how we can effectively provide Treasury management services potentially to government in a wider sense.

  Q11  Mr Gauke: The Treasury gives a number of operational targets and in 2005-06 you have succeeded in meeting all of those. What do you see as the most important of those targets and how does the Treasury assess you against those targets?

  Mr Stheeman: The most important one, we talk about compliance with the remit. Without doubt, and I think I said this last time as well, that was my number one priority then, that remains the number one priority. That might sound very much a statement of the obvious but, just to emphasise the importance of that, if we miss one or two operational targets, that can happen, we take that seriously. Were we in some way not to be compliant in terms of meeting the actual remits that would obviously have huge consequences. If you ask me which is the most important, it is literally meeting the remit in terms of delivering what it is that we have to raise in gilt sales but also on the cash management side specifically we have to—we have no choice in the matter—balance the Government's books every working day of the year. That must be the absolute overall priority for us.

  Q12  Mr Gauke: Do you think there are any other quantifiable targets that could be usefully added to illustrate specific aspects of what you do?

  Mr Stheeman: That is a very good question and I think it is fair to say that we have tweaked the operational targets as they currently exist over time but they have not changed significantly and that begs the question what else can we do which is new. One of the things, for instance, which I think we can potentially do, I mentioned earlier the statement at the time of the PBR regarding cash management, effectively I think it is fair to say that we have already discussed with the Treasury potentially some kind of performance indicators as to how we meet any of these criteria, and I think if we can feed those somehow into revamped operational targets it will make it hopefully a little bit more meaningful; it is progression, it is reporting just that little bit more. I do not want to suggest that some of these—I used the word earlier—micro targets that we have are nonetheless not important, they are important not least in terms of how the market perceives the DMO to operate. The fact that we need to be seen by the market to be absolutely reliable, that sort of thing is extremely valued by the market and it is important that we do that.

  Q13  Mr Gauke: Just looking at reporting for a moment, the National Audit Office made recommendations[1] to enhance your reporting arrangements and I understand you are taking those forward. What progress has been made and will be made and when will these be implemented?

  Mr Stheeman: I would like to think that we could, for instance on the streamlining that we talked about of reporting in terms of publications, do something potentially this year but also, if I think about the NAO's recommendation, reporting on developments in debt management on why we do certain things. To me part of the reporting that we do is another word for accountability because, as I fully acknowledge, there is this difficulty in trying to measure what it is that we do and how we specifically contribute. Another version of performance measurements is ultimately making us accountable and it is trying to provide a reason for why we are taking certain decisions, why we act in certain ways. I think we can improve still further on that. We have done quite a lot on that already. One of the reasons we have the Annual Review is to talk a little bit more about strategy. We also use the Debt and Reserves Management Report which the Treasury produces specifically to explain certain positions but I think a key part of performance or accountability measurement is explaining, quite often it has to be ex post rather than ex ante for market reasons but actually saying why we take certain decisions and act in a certain way. It boils down to the fundamental principle of transparency.

  Q14  Mr Gauke: One of the difficulties that the NAO acknowledges[2] is that it is not possible to have an operational benchmark in the same way that the private sector does for you and the NAO sets out various reasons why that is the case. Do you think it is practical/possible to identify a figure for your contribution to the primary debt management objective in any way or is that something which cannot be done?

  Mr Stheeman: To identify a figure in that way, I wish it was, I do not think so is the honest answer. What I would say is that the Strategic Debt Analysis project that we do will go a long way towards being able to illustrate in a quantitative or numerical fashion what the outcomes are in certain scenarios which we build into this model of decisions which we take based on certain specific assumptions. That is not quite the same thing, I admit that, but it is going in the right direction and it is all part of greater accountability and transparency.

  Q15  Mr Gauke: With all these issues, is it something very much led by the DMO? What is the role of the Treasury here? Do you take proposals to them and they run with them or do you produce these proposals together? How does it work?

  Mr Stheeman: That is a good question. I think it works genuinely in a collaborative fashion. Inevitably I think it is probably fair to say that the initiative for many of these proposals probably does come from us because that is our primary role, that is what we are there for. I would like to think that if we want to be this centre of expertise that I mentioned before, we come up with the good ideas but at the same time the Treasury does push and challenge us. For instance, SDA is something which has always been very close to the heart of the Treasury, and the Treasury has been very much involved and I have been on a steering group with colleagues in the Treasury actually monitoring this work so they are particularly interested in seeing what comes out of it. Arguably as a principal that is what they want to see from their agent.

  Q16  Peter Viggers: Cash management is a highly sophisticated operation and you are competing in seeking to recruit the appropriate people with banks recruiting some of the sharpest brains in the City. How do you recruit and retain people of an appropriate quality?

  Mr Stheeman: That is a very good question and it is one which is an issue. We are part of the Civil Service. We have the advantage—and this is absolutely crucial—that the DMO sets its own terms and conditions. Now that does not mean that we can effectively hire and spend what we like on staff. We cannot. Our administrative budget from which we pay salaries comes out of the Treasury's own parliamentary vote. It is set in a certain way and clearly in the City, especially in the current environment, there is no way that people will be joining us purely for the money if they can go elsewhere, and in some cases for significant multiples of what they earn at the DMO. What we can do is to offer people a certain flexibility perhaps compared with the rest of the Civil Service. We do not have grades, for instance, in the Office. We can offer them an environment in which they are effectively working at the centre of the financial market. That is interesting. If you are interested in financial markets the DMO is a great place to be. You see flows, you see volumes, the market comes to you to a certain extent and that has its own attraction. Having said that, retention is an issue and it is one that vexes us. We have turnover but I believe compared with the wider Civil Service our turnover is quite respectable. Quite a few key colleagues that we have have been with the DMO since its inception nine years ago. Both Jo and Jim have been there from day one, as have other colleagues. I think ultimately people choose quite often a career that is focused on very specialist financial markets but also from a specific angle which is the public sector.

  Q17  Peter Viggers: A very high proportion of turnover in the financial markets is speculative whereas I imagine that your turnover would be much more purpose-driven. You would not have the same level of turnover at all. How many trades do your dealers do compared with the average outside dealer?

  Mr Stheeman: That is a good question. You mentioned cash management, and I will try and stick to that. It is fair to say that on an average day, and I am just trying to think of how many trades we settled because I see the statistics regularly, it is probably close to 100 a day. I do not know if that sounds like a lot or a little, it is not very much actually compared with some financial organisations. It tends to be low volume, extremely high value. In other words, specifically in the cash management market or the money markets we transact approximately, in value terms, close to one trillion pounds per year. You are talking very big numbers. Now the actual size of the trades that we transact in the markets is probably quite normal for the money markets per se. You are absolutely right to say that the activity is non-speculative. We transact in order to effectively offset cash flows in as cost-effective a way as possible. We do not transact or do not try and inflate the Government's balance sheet. I should say this is one of the key points that was expressed by the Treasury in a statement that they put out at the time of the Pre-Budget Report. We do not transact in order to generate a profit where there is absolutely no underlying need other than pure profit generation, that is not what we are there for. We are there to minimise costs that arise out of the Government cash management function.

  Q18  Peter Viggers: Have you looked at the possibility of not having your own dealers but setting out broad guidelines of what you want achieved and using outside dealers to carry out the tasking for you?

  Mr Stheeman: I think the answer is no, we have not. I do not know, Jo, whether this was ever discussed in the past. I think it is probably fair to say that would be very hard to do because ultimately we are transacting and I am Accounting Officer for the Debt Management Account and the flows flow through the Debt Management Account. It is important to me as Accounting Officer to know that we have full control and full knowledge of, if necessary, every single trade that our dealers, who are employees of the DMO, are transacting. Outsourcing that particular function begs all sorts of questions: on what basis, how would you try and do that, how would you potentially remunerate someone in that way. I would prefer as Accounting Officer to retain an element of in-house control with a small specialised team doing that where they are accountable to me and I am accountable to the Treasury and to ministers.

  Q19  Peter Viggers: I suppose your Office's role is one of the more essential functions of Government. Can you say a word about contingency planning? What would happen if one day it was not possible for your Office to trade?

  Mr Stheeman: It is essential, you are absolutely right, and contingency planning is something which we work on. It is probably fair to say that we are constantly developing that. We spend a fair amount of money on that. I will just ask Jim to comment a little bit. It is absolutely key.

  Mr Juffs: This is continuity which we take very seriously and always have done since we were launched. The rest of the world obviously came to life once 9/11 happened but we were already hopefully well prepared to remain operational on a daily basis. Our main objective is to remain operational on a daily basis come what may and we also act in another capacity for Treasury where we act as the Treasury's eyes and ears in the market. Firstly we need to be operationally effective and resilient, which we are, and we also act as a conduit for information. We have been invoked in that respect too. The way we do that, we are only in a single office but we have a disaster recovery site which is dedicated to us and we have other accommodation that we can go to should our building not be accessible. At the sites there are duplicate systems. We have a dedicated dealing area which would allow us to carry out market transactions or even carry out auctions if necessary. We have built a fit-for-purpose capability. Going forward, obviously the world is moving ahead and, in fact, we can see ourselves only as a cog in the wider network. In fact we took part in the tri-partite tests very recently as a participant on the market wide-exercise which is a six week exercise which tested the pandemic flu scenario. We are part of a network and we invest in remaining part of that network.


1   http://www.nao.org.uk/publications/nao_reports/06-07/debt_management_office.pdf Back

2   ibid Back


 
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