Examination of Witnesses (Questions 40-59)|
10 JANUARY 2007
Q40 Mr Newmark: I still do not understand.
I am a person with a business background, so I spent my whole
time effectively figuring out what you have been trying to figure
out until I got here: how can I better manage my debt portfolio;
how can I better manage my cash? If I saw the debt market go where
it is today and I owned a series of companies, I would be issuing
as much debt as possible and taking advantage of these historic
rates, because it is unlikely we are going to see it lower. If
I did a risk-benefit analysis, I would say it is more likely to
go up than down, and so I do not understand why there has not
been more issuing of long-dated gilts given that that is the case.
Mr Stheeman: I think the answer
is that there has, and, as I said earlier, we have been issuing
record amounts, but the point is we cannot ignore and there are
other considerations which we have to take into account in terms
of risk. If we put everything into the long end, if in a record
year, with £63 billion announced at the time of the Budget,
we said we are going to do absolutely everything in longs and
Q41 Mr Newmark: You have got a lot
of demand for it still. It is still there.
Mr Stheeman: The demand certainly
seems there, but how do we know that the market will take it down
Q42 Mr Newmark: Because the market
will start moving and reacting, and then you will know when to
Mr Stheeman: But the trouble with
that is that we announce at the beginning of the year what we
are going to do for that year. That is part of being predictable,
and we do not change within year what we are going to do; and
I think that is quite an important point to make because otherwise
we would be accused of being opportunistic, which we are trying
not to do. We are trying to be pragmatic and, in terms of cost
minimisation, decisions are taken at the beginning of each financial
year for that year. The other point we have to manage and think
about is simply the redemption profile. Yes, we can put everything
into the long end, but I mentioned earlier that we already have
the longest average maturity of any debt manager and by quite
a long way. There comes a point where we have to talk about how
we have managed that redemption profile, we also have to think
how much we have redeemed in specific years. If, for instance,
all the bonds are maturing, what do we replace them with? All
those factors feature in that.
Q43 Chairman: Can we turn to the
cash management side. You say the two big outcomes from your 2004-05
review of the cash management function have been the development
here of a benchmark approach to performance measurement and the
implementation of risk limits. How have those changes practically
enhanced your public accountability?
Mr Stheeman: The answer is that
we have just been in the process of implementing it. They have
not yet, but they will, I think we can say fairly. I mentioned
the statement at the time of the Pre-Budget Report and we said
specifically at the time, the PBR said, that formal reporting
and publication of the performance related to cash management
against these KPIs will begin for the outturn in 2007-08, and
we are considering it, I can also say, for the outturn of 2006-07,
this financial year, and it will lead to better accountability.
We are developing, for instance, a benchmark which represents
either a default strategy as well for cash management; and it
is easier for us to do in cash management than it is in debt management,
because in the cash market we are not just the market ourselves,
we are only a participant; but this benchmark, as I say just,
is one specific aspect of what it is that the Treasury wants us
to deliver in terms of the cash management objective. We will
be reporting specifically on that, and I think that will go a
long way towards enhancing accountability.
Q44 Chairman: Our cash management
activity is driven by cash flow forecasts provided by the Treasury,
as I understand it. How accurate has that forecasting been? Do
you factor the accuracy into your cash management performance
Mr Stheeman: That is a very good
Q45 Chairman: Otherwise you do not
have control over it, do you?
Mr Stheeman: The DMO has no control
of the actual forecast itself. The result of government cash management
overall is clearly influenced by the quality of that forecast.
In other words, the numbers that we receive are the numbers which
we act on and which we trade on. We do not try and second-guess
the forecast which we receive from the Treasury and which the
Treasury puts together as a result of input which it gets from
departments across government. There can be, for instance, at
times, large swings which arise from late payments of tax receipts,
and early payments from another part of government. That is something
that the Treasury itself specifically at the moment is looking
at: how across government it can better manage the whole forecasting
process. We at the DMO are the recipients of that forecast and,
you are absolutely right, there is a key impact on us and, if
that forecast is not accurate, it can impact overall on the cost-effectiveness
of cash measurement. The one thing I would say is, in practice,
inaccuracies in the forecast tend to be ones of timing rather
than size. The timing tends to be very much the key. That is where
the inaccuracies arise. The size of the forecast per se
over time tends to be pretty well known in advance.
Q46 Chairman: What is the answer
to my question then? How do you factor into the performance measurement
the accuracy of the forecast?
Mr Stheeman: I do not think we
can split it out. That is the answer. In other words, the forecast
is one part of what goes into the overall performance of government
Q47 Chairman: So, in the end, we
are measuring your performance in this respect against some factors
of which you do not really have control.
Mr Stheeman: To a certain extent
that is true.
Ms Whelan: I think it is fair
to say that we are measuring government cash management as opposed
to DMO's part of cash management in looking at the benchmark that
Robert mentioned earlier. So integral to that is both the activity
of doing the forecasting and the activity of doing the transactions
to offset the forecast.
Chairman: Let us turn to the Commissioners.
Q48 Mr Todd: The Commissioners for
the Reduction of the National Debt is still enshrined in law as
the main governance body for much of your activities here but
have not met since Gladstone's day. Indeed, Gladstone may have
been at the last meeting in 1860 as Chancellor! Does this suggest
a need to modernise the legislative framework for your activities?
Mr Stheeman: Arguably, yes.
Q49 Mr Todd: Or is it a case of,
"It works okay", in the rather typically English informal,
"Anachronisms are no bother to us", way?
Mr Stheeman: You could say that.
Let me put it this way. The Commissioners are there by statute
and the positions are ex officio. As you quite correctly
pointed out, they have not met for a very long time. The only
function that they actually perform as commissioners is to appoint
what they call the Comptroller General, who is Jo in this case,
and they let us then, if you like, get on with it, and I would
not be surprised if some of the commissioners themselves were
from time to time surprised to find out that they are actually
commissioners. The same probably applies on a slightly different
scale (because they do actually perform a function) to the commissioners
for PWLB, for instance. Arguably, you would not create something
like that if you were to start from scratchclearly not.
The whole set-up and the structure does appear anachronistic.
Having said that, in terms of how we carry out the CRND investment
function, they play no role whatsoever as commissioners.
Q50 Mr Todd: They do not have to
report on their activities, since there are none, and in law they
are accountable for a very large amount of the UK's debt?
Ms Whelan: Yes. There is about
£45 billion under management, but all of the functions are
carried out at the official level by us, me and my colleagues.
Q51 Peter Viggers: I wanted to support
Mark Todd's line of questioning. The Chairman said at the beginning
of this session that you have quite a heavy duty in terms of annual
reports and yet the CRND related investment activities do not
appear to have a similar reporting requirement. I put it to you
there is no balance there?
Ms Whelan: I think it is fair
to say that most of the accounts and funds which are managed by
the CRND do have reports and accounts that are required under
statute, but they are prepared, in effect, by the sponsoring department
for the fund or the account. For example, the National Insurance
Fund is reported on in the National Insurance Fund Account Report
that goes before Parliament. We prepare numbers and figures, and
so on, that go into that process, we do not ourselves produce
a separate report on it, but there are still statutory requirements
for some of those accounts to have reports on them.
Q52 Peter Viggers: Can I be clear
how this actually works. Your investment at the moment on behalf
of the CRND is restricted to government and government guaranteed
securities. In essence, you are borrowing from other parts of
the Government. Is that right?
Ms Whelan: Yes, the investments
are either deposits into a pooled account of cash or they are
into gilts, but they are not marketable gilts. It is not that
we are going out into the market and grabbing gilts that we are
also issuing into the market.
Q53 Peter Viggers: This part of your
operation reduces the amount of borrowing that the DMO undertakes
through the conventional gilts market. Is that right?
Ms Whelan: It did a long time
ago, but once it is in existence and it is just continuing, there
is no new net effect year on year, but, yes.
Q54 Peter Viggers: Is this kind of
borrowing included in the overall borrowing figures?
Ms Whelan: The central government
net borrowing requirement is a net number, if that makes sense.
Q55 Peter Viggers: So is the answer
Ms Whelan: I think so, yes.
Q56 Peter Viggers: What would happen
if one of the investment funds actually wanted its money back?
Where would that come from?
Ms Whelan: That would then generate
some additional real world borrowing, for example through the
Q57 Peter Viggers: Real world?
Ms Whelan: Yes, meaning using
Mr Stheeman: Can I stress, that
is quite an important point. The vast majority of this is a very
small number. The vast majority of the CRND investments are in
non-marketable gilts, and so clearly it has no impact, therefore,
on what we are doing in terms of our current borrowing.
Q58 Chairman: But somewhere in your
annual review you said that you were looking at investigating
scope for providing a more active style of fund management through
the private sector. Why would that be more appropriate?
Ms Whelan: What we aim to provide
is a fairly passive, low-cost type of fund management service,
and we think that we can do that more cheaply than that being
outsourced; but if it were desirable from the perspective of the
client fund to have a much more active type of fund management
or, indeed, investing in instruments that we have no expertise
in, clearly that would need to be done through an outsourcing
solution and we were saying that we would be open to investigating
that if that looked like a sensible solution.
Q59 Chairman: Would it be proper
for that kind of investment to include investment in non-government
securities, in equities, for example?
Ms Whelan: Some of the funds are
required to stick within a very narrow range of conservative instruments
because their priority is capital protection, so for those funds,
no, that would not be the case, but it is always possible for
the sponsors of the fund to decide what they think the fund should
be invested in and for that to be something different to what
it is currently invested in.