Examination of Witnesses (Questions 71-79)
MR MIKE
WEAVER, MR
PETER ANTILL
AND MR
ALAN CROSS
26 JANUARY 2009
Q71 Chair: I think it is now the time
when we were meant to start. Despite the absence of one of our
witnesses, I think we will start. I hope Mr Weaver has not gone
into the wrong Committee and is giving the wrong evidence to the
wrong set of MPs! It would be really interesting to know how far
into the investigation they get before they discover it! Can I
welcome the two witnesses who are here and start with a question
about the level of local councils' cash holdings? Is there a trend
for the level of those cash holdings in their totality to increase
over the last few years?
Mr Antill: I can
only speak from district councils' point of view and I think over
probably the last ten years or so you have seen the districts'
cash balances increase, particularly through stock transfers where
they have transferred their housing stocks to housing associations.
That has, I think, given districts a different position to what
you would have found perhaps 15 years ago. Significant sums for
small districts as well, I would suggest.
Mr Cross: Obviously there are
statistics available on that, but if the Committee has not seen
them I am sure it could be got to you. My understanding is that
the trend is somewhat upwards. That may be reversing in the current
climate a little bit. One of the reasons for that will be with
the inverse yield curve and the coming of the Prudential Code
and the acceptance that it is acceptable to borrow a little bit
in advance of need. Clearly, there will be occasions when people
have felt borrowing rates are right for the funding of their long-term
capital expenditure a year or two ahead, so that will therefore
leave the cash balance high in the short-term.
Q72 Chair: Your own council, which
is Reading, which is a unitary authority, has it increased its
cash holdings?
Mr Cross: Certainly our cash holdings
had increased. They are in the process of being reduced.
Q73 Chair: Can I press you more on
why they are now being reduced?
Mr Cross: Partly because the financial
plans are adjusting at the current time—which means that
we are not expecting quite as substantial a borrowing funded capital
programme as we were a little while ago because of the way the
current economic climate is affecting the council's budget strategy—and
partly because things that were in the capital programme are currently
being spent, so the money that we had borrowed is flowing out
the door to pay for it.[1]
Q74 Chair: Okay. Mr Weaver, just to repeat
the question, I was asking your colleagues whether there was a
trend for local authorities' cash holdings to be increasing or
not?
Mr Weaver: I think it is fair
to say I would see the cash holdings reducing. We are going through
a budget period where we see income declining. Income on deposits
is reducing as interest rates fall. We are also seeing across
local government for the services that we provide a downturn in
income from car parking, a range of fees and charges that councils
are able to levy. That is likely to put budgets under stress.
We are also likely to see a situation, I think, where councils
will be thinking very carefully about the balance between money
which should be placed on deposit when it is earning something
like 1 or 2% and its borrowing cost to support the capital programme,
where the average cost typically will be around 4½-5%. So
if I use Worcestershire as an example, we have repaid loans to
the Public Works Loan Board to avoid borrowing costs because I
think that makes sense when you look at the income that has been
lost on deposits because of the general fall in interest rates.
Q75 Chair: Do I take it from that
that at some point in the recent past it was more beneficial to
councils to have considerable cash deposits at the same time as
having quite large borrowings?
Mr Weaver: That is correct, Chair.
It clearly is not allowable. It is not legal for councils to borrow
to deposit or to on-lend. As colleagues have said, it is possible
to pre-fund the capital programme, but in all things be reasonable
and sensible. In managing the cash holdings you are looking at
the relationship between medium to long-term interest rates and
short-term interest rates and if the statutory power is there
to raise loans at a sensible level to fund the capital programme
and at the same time use one's cash holdings which are a combination
of reserves, general balances and the natural ebb and flow of
income and expenditure but exploit short-term interest rates,
that will benefit the council in terms of either supporting more
service delivery or keeping the council tax down. But that interest
rate relationship has changed.
Chair: Can we move on to the next set
of questions and can I just point out that we have got two more
sets of witnesses after you, so we will try and keep our questions
short and I would be grateful if you could keep the answers short
as well.
Q76 Anne Main: You do not all have
to answer this, but whoever is best placed to answer it: do you
think the CIPFA Codes of Practice are adequate in relation to
treasury management investments, and are there any weaknesses?
Mr Antill: From a district council's
treasurer's point of view, just to say that you will probably
know that local authorities have to approve an Annual Investment
Strategy in line with the Code of Practice. From my point of view,
I see nothing fundamentally wrong with the Code of Practice at
all. We look for security, liquidity and an optimum return, but
I think it is an onus on authorities to carry out their own risk
assessments when carrying out investments and I think that is
a fundamental point.
Q77 Chair: Does anyone dissent from
that?
Mr Cross: Clearly the risk issue
is the one which needs greater emphasis.
Mr Weaver: I think the CIPFA Code
does need to be viewed in the light of experience. It is not good
enough to say, "This Code is fit for purpose now." We
have to learn the lessons of the experience from last autumn and
the Icelandic experience. There is much about the Code that is
very good. I think the statutory framework has been well-designed
and CIPFA will be well positioned in the light of its own work,
the work of the Select Committee and the work of the Audit Commission
to revise, refine and emphasise key parts of the Code. So I do
think it will need looking at.
Q78 Anne Main: Can I ask about the
updating of the counterparty lists on behalf of the local authority?
Unfortunately, my own local authority is caught up in this, where
the list was not updated as quickly as it should be, therefore
decisions were made which unfortunately did not bring very good
results in terms of investments in the Icelandic banks. What are
your views on the updating of the local authority list? Do you
think that is a weakness there, that they may not be updated as
quickly as they ought to be?
Mr Antill: I, too, at Tewkesbury
have an experience with Icelandic banks, so I await the results
of their findings as well, but I think as a district council in
Tewkesbury we particularly rely on credit agencies, so it is absolutely
imperative that information is up-to-date, and also on the advice
of our advisers. In district councils we do not have an awful
lot of expertise. It is often relying on a very small team, so
external advice is fundamental, particularly that of the credit
agencies.
Chair: We are going to explore this.
Q79 Anne Main: Before we do that,
unless somebody else has got something different to add about
the counterparty list, could I then take that a little bit further
and ask what mechanisms do you believe are in place for treasury
management staff to inform councillors about changes to the investment
portfolio so that people can be reactive and quick on making alternative
decisions?
Mr Antill: Every year the council
has to present to members, councillors—
1 Note by witness: The overall position, almost
come what may, is Reading Borough Council will report its largest
capital outturn ever this year, but that is mainly because it
is rebuilding J11 of the M4 more or less entirely funded by a
£30m+ DoT grant. In addition to this it had been planning
to borrow substantially, but has reduced that by delaying some
schemes. Back
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