Examination of Witnesses (Questions 60-72)
MR ROBERT
STHEEMAN, MS
JO WHELAN
AND MR
JIM JUFFS
10 JANUARY 2007
Q60 Chairman: What proportion of
the £45 million, or whatever, could be invested more liberally,
if you like?
Ms Whelan: I think a very small
proportion, a tiny fraction of that. The vast bulk of the £45
billion is, in fact, the National Insurance Fund that I mentioned,
that is by far the largest of the funds, and that, in effect,
is money that probably would be inappropriate to be invested in
something like equities or whatever.
Q61 Chairman: "Probably would
be inappropriate"—what does that mean? You are not
allowed to invest it on the stock market?
Ms Whelan: At the moment it is
not permitted to be invested in those anyway, but if one were
thinking outside the box I think one would conclude that that
would remain a valid conclusion.
Q62 Mr Todd: To those of us who have
served as councillors and are familiar with the Public Work Loans
Board the level of activity has increased substantially recently.
Is that mainly driven by the wish to refinance into longer term
loans?
Mr Stheeman: This is partly an
answer to the question, yes, but it is also simply an acknowledgement
that current rates are extremely low and to lock into current
rates now is very attractive, and that is clearly the main driver
for that.
Q63 Mr Todd: In your report you set
out that 23 January last year was a record day of activity. Had
you anticipated the level of demand that you were likely to be
facing?
Mr Stheeman: Not directly, because
obviously we did not know that on that particular day yields would
dip as low as they did . You may recall I said earlier that a
year ago we had a—
Q64 Mr Todd: But these demand patterns
are driven by local authority treasurers presumably?
Mr Stheeman: Yes, but they observe
what is going on in the gilts market, and what we tend to observe
is that they tend to come in and draw down loans just at the moment
that yields have gone very low but have begun to pick up. In other
words, they will usually come in a couple of days after the lows
and, you are absolutely right, 23 January last year was a key
date. If I am correct the headlines about ultra-long bond yields
hitting all time lows was on 17 or 18 January. Usually you can
notice a little uptake very shortly afterwards, but you are absolutely
right.
Q65 Mr Todd: So there is a sort of
lead time for local authority treasurers to absorb this information
and act on it and it is about four or five days?
Mr Stheeman: Yes, or because they
think that rates are rising they feel they had better get in there
quickly.
Q66 Mr Todd: The limit that is set
in law for the Board is £55 billion, and in your last account
you were £47 billion. Is there any intent to review the legislative
limit for the Board's activity?
Mr Stheeman: I think that you
are right, the limit is at £55 billion. I believe there is
a provision which would allow the limit to go up to a sum not
exceeding £70 billion in total, but clearly if this trend
continues—
Q67 Mr Todd: That needs Parliamentary
approval.
Mr Stheeman: Yes, and we would
clearly need to speak to the Treasury if we felt that we were
getting close to that specific amount.
Q68 Mr Todd: Does the current level
of activity suggest that you will need to consider that if it
continues at the rate you report?
Mr Stheeman: I think that is a
possibility. Arguably we are still several billion away from that,
but—
Q69 Mr Todd: There was significant
growth last year, was there not?
Mr Stheeman: Yes.
Chairman: A final question from Brooks
Newmark.
Q70 Mr Newmark: I wanted to pursue
the discussion at the end. Could you take your civil servant's
hat off for a moment and just answer a question directly. If in
the real world of business you see the debt market move, you can
be opportunistic and take advantage of that. Do you see any need
perhaps, or any desire, or any possibility that you could talk
to the Chancellor and say, "Actually we may want to consider
being a bit opportunistic with the market and maybe have some
small amount, or a reasonable amount of debt that one can be more
opportunistic with"? I understand the point that you made;
we should be predictable at the beginning of the year what the
debt issue should be, and so on, but clearly there is a financial
advantage to the Government, to the taxpayer, and so on, of being
slightly more opportunistic than clearly the Government has been
traditionally. Is that something you would ever recommend?
Mr Stheeman: I did not realise
I had such a civil servant's hat.
Q71 Mr Newmark: You are usually cautious
in your answers. That is what I mean.
Mr Stheeman: You are right. I
have a problem taking it off, especially on this point. Just to
be quite clear, the Government's policy for the last, effectively,
nearly 12 years now in terms of overall debt management has focused
very much on this predictability and transparency aspect. The
reason being that, yes, potentially there would be a short-term
gain were we to be opportunistic, but debt management is a repeat
game, we are a repeat borrower and at one point the market will
come in and it will charge us a premium, and that I say wearing
a market hat. "Opportunistic" sounds negative, but you
might even dress it up in a rather pragmatic or a more market-oriented
approach, but anything that is opportunistic, ultimately, I think,
market theory would suggest it will charge you a premium for,
and it was, I believe, the driver.
Mr Newmark: Your phrase was, "The
market taking advantage of what is going on in the market."
If the market is where the market is and you can borrow more cheaply,
anybody would do that. You are right, if you are being opportunistic,
taking advantage of that has a negative connotation, but that
is simply being practical. If the market is telling you, this
is the cost of capital today and you have an ability to take advantage
of that—
Q72 Chairman: We have got that. Let
us hear the rest of the answer.
Mr Stheeman: The one thing I would
say using the word pragmatic, which is something that we have
been, is that you may be aware that in the current year's remit,
for the first time effectively in 10 years, there was a small
limited element of flexibility built into our borrowing. So, whereas
before we are told exactly in advance how much we are doing in
shorts, mediums, longs and linkers, there was a small amount (£10
billion, relative to the overall £63 billion) which was deemed
flexible, and that was there not to take advantage of any specific
market but to enable us potentially to react, having discussed
with the Treasury if it was necessary, in a certain way if there
was a major shift in demand patterns away from what we would have
seen at the beginning of the year and anticipated at the beginning
of the year; but whether we continue that or not is not at all
clear.
Chairman: We must leave it there. On
behalf of the sub-committee, could I thank you and your colleagues
very much for appearing before us.
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