Examination of Witnesses (Questions 220-240)
COUNCILLOR RICHARD
KEMP AND
COUNCILLOR MERRICK
COCKELL
26 JANUARY 2009
Q220 Chair: It is slightly unfortunate
to choose Kent, which is actually exposed on my understanding,
despite their large treasury team.
Cllr Cockell: Yes, I realise they
have a £50 million exposure.
Q221 Mr Betts: Not much of a debt!
Cllr Cockell: Exactly, but they
have very large amounts—
Q222 Chair: I think this might be
a hold because the Kent taxpayers might think that £50 million
is a lot for Kent!
Cllr Cockell: Yes, but with the
size of deposits they have, I say they should have an experienced
treasury team. We can discuss how they were performing, that is
something different, but you would expect them to have an experienced
treasury team. We would not expect, I would say, some counties
to have the equivalent and that is where I think we should be
looking at pooling, not only pooling the advice but perhaps pooling
some of the funds in deposits. That is something in London we
have been looking at, partly because the market has changed and
where in the past financial institutions were willing to accept,
say, £3 million going on short-term deposit, our members
in London councils—and I think this would apply throughout
the country—simply many banks and others are not interested
in £3 million any more, or even £10 million. They say,
"The minimum we are interested in is £50 million."
Well, if we can have a safe bank, if there is such a thing, a
Government owned bank, a nationally owned bank, and we have to
pool that sort of money to get a decent return, then that would
be a sensible thing to consider as well.
Q223 Chair: Hang on, I do not like
to keep being beastly about Kent, but we have got written evidence
that Kent County Council does not directly employ specialist treasury
staff, it is actually provided through Butlers!
Cllr Kemp: Yes, and I have got
written evidence from Kent Council, who will be writing to you
to say that they were not satisfied with the evidence which was
given last week, that they do have a treasury function which is
robust and we will be circulating that information to you, Chairman.
Q224 Chair: It was provided to Kent
County Council and they did not object at the time.
Cllr Kemp: There will be a letter
from Kent interpreting that, which I will not go into because
I am not Kent Council.
Cllr Cockell: Oh dear, I should
have quoted another council! My own authority.
Q225 Mr Betts: I remember when the
Conservative Chairman of London Councils was supporting nationalised
banks, but we will move on!
Cllr Cockell: At this precise
moment, yes!
Q226 Mr Betts: Just to look at what
more could be done to help and whether you think there might be
a role for some government organisation, the PWLB or maybe even
a government department or some other body to actually offer an
alternative form of advice to local authorities in some way. Secondly,
in terms of the PWLB, one thing which was drawn to our attention
last time was that it was asked why local authorities have got
so much money which they are putting on deposit. Some of them
rather like to pay off their debts to the PWLB but find that if
they are paying them off early they get penalised. Is that something
you have got concerns about and would like to see changed as well?
Cllr Kemp: In terms of the short
point, yes, there should be increased flexibility. Most of us
are great believers in having as little debt as possible and we
want to pay off. That does not mean to say we want to get rid
of it all because we have reasons for dealing with it. In terms
of who could help us, I am sure that we need to consider in light
of what I have just heard who does advise us. I am not necessarily
convinced that a government department or quango would be the
best ones. We rely heavily, dare I say it, on the Audit Commission
and they are not exactly -
Q227 Mr Betts: The Audit Commission
was down here actually!
Cllr Kemp: Yes, which does of
course raise questions with me about how Members of Parliament
scrutinise the Audit Commission and other quangos. I think this
area of advice is an area we have all got to look at because it
is not only local authorities who keep reserves and balances,
it is a whole range of public sector bodies, so I think we have
got to look at this collectively. We would play a part in doing
that with pleasure.
Cllr Cockell: Can I just comment?
The last thing I want to sound is complacent, because no one is
complacent in local government, but actually if you look at the
overall amounts we have on deposits, which I think has surprised
everyone, just the quantum of it, if you actually look at the
amount which is at risk—that does not mean it is lost, it
is at risk—actually if you were looking at a commercial
entity, talking, I think, of 3, 4%, you would say that actually
that is a reasonable amount of risk. Of course, for individual
authorities it is very different and there are real difficulties
arising from it. So I would certainly be very worried about a
body being created to give advice because nobody predicted what
would have happened not just in Iceland but overall with the financial
position we are in. I think it is for local government actually
to look at other ways of doing it and rather than somebody doing
it to local authorities I think we should come up with options,
and there is work being done now on perhaps different models,
on maybe whether, because of the size of it, initially we could
be far more working together, making sure we have the best advice
and not just some of the advice we heard about earlier which quite
clearly was information rather than advice. By pooling some of
those reserves we can afford to do it properly and get confidence
in that, and that may be some sort of local government body or
body which is perhaps supervised by the Bank of England. These
are my personal views, not any approved by London councils, but
I think we have to look at a response to it from local government.
Q228 Chair: Can I just clarify something
you said earlier, Councillor Cockell? You were talking about the
London councils and saying they were considering maybe pooling
resources or working together. Are there any that actually are
already?
Cllr Cockell: No. It is quite
complicated, as you can imagine, but actually from within a week
of Iceland we had a meeting of the leaders of authorities in London
affected by Iceland. We are working with the Society of London
Treasurers and Chief Executives to explore the feasibility of
pooled investments.
Cllr Kemp: Just in another field,
I happen to be chair of a housing association and my housing association
manages the treasury functions for eight others, so the ability
to pool is there but we are private sector. We are not bound in
quite the same way as councils are, but the principles could be
dealt with.
Cllr Cockell: There are models
around the world. Indeed, I think one of the only two banks which
are AAA rated—the Bank of England is one—is Rabobank,
which is actually made up of a whole mass of farmers in Holland.
So there you have a pooling of lots of small cooperatives and
others who have the only other AAA rated Standard & Poor's
bank in the world.
Q229 Jim Dobbin: Following the Icelandic
situation, have you reviewed your opinion of the credit rating
agencies?
Cllr Cockell: I think the difficulty
is that we have to rely on credit rating agencies. That is what
they are created to do, to provide the sort of advice which non-experts,
and indeed experts, require, looking, we understand—I suppose
we have trusted—at the detail of financial institutions
and working out whether they are safe or less safe bets. Then
it is up to us in local authorities to decide our investment criteria
and what level of risk we are prepared to take. Only investing
in AA or AAA rated obviously is the sort of decision you can make,
but I think we all have to question, especially when credit rating
agencies are getting different views, as we heard earlier, of
individual institutions. The one thing that certainly should do
is put a question mark up against those institutions. If the credit
rating agencies are not in conformity, then I think you should
be asking questions and I suppose it is whether we are seeing
one credit rating agency—I know we heard that they use a
variety—to be absolutely sure that treasurers are actually
seeing the whole picture rather than just from one particular
credit rating agency, because if they are not then the ability
to take the right decision is even less.
Cllr Kemp: You will notice in
our formal submissions to you from the Local Government Association
we have asked for a review of the credit reference agencies. That,
frankly, is beyond our remit but we would be happy to encourage
other people to do it.
Q230 Andrew George: On the issue
of the private sector advisers we were talking about earlier and
you have heard evidence from because you were sitting in during
that session, clearly there is a debating point, it appears to
us, about whether what is conveyed to local authorities is information
or advice, or something in between. I just wonder to what extent
you are aware as councillors of the quality of what is conveyed
to local authorities, particularly during the difficult days of
September into October and whether there was any way in which,
let us say, we accept the information they provided to us that
what they are providing to local authorities is information and
not advice, whether there was any way in which that could be animated
to local authorities with a sense of urgency for the need to act?
Can you comment on that?
Cllr Kemp: I think we heard, as
I think your Chair suggested, some very careful legal words reiterated
to us today. My feeling is that most councils—I cannot talk
for everyone because everyone tenders separately—will have
assumed that what they were getting was informed advice, if I
want to add another layer of sophistry to what I have heard! I
do not see the point. I could set up a business doing press cuttings
from the Financial Times from what I heard today and I
could do it a lot cheaper than £13,000 or £20,000 a
year. I have no doubt that councils thought they were getting
advice and if we look at other places we get advice from, for
example our pension fund get information from PIRC and if they
have concerns about something they do not bung it on the bottom
of an email, they do a red top, "Here is a problem on governance.
Do something about it, members." At the very minimum people
should be pointing out major changes and problems.
Q231 Andrew George: So alarm bells
are rung in that sense?
Cllr Kemp: Absolutely, yes.
Cllr Cockell: I think that most
elected members certainly would believe or assume that these sorts
of advisers would flag up particular things to notice, because
if you look at the numbers—my authority has several hundred
million pounds on deposit at any one time, but the number of institutions
that we agree annually is not that large because we happen to
have very strict criteria, but it is not that we are going in
and out of institutions day in, day out, a whole different range
and everything like that. It is quite a restricted number which
have been very carefully thought through, and I imagine most authorities
will have a pretty restricted number. So it is not that there
is an enormous amount of work required to flag up either that
there are particular countries you should be aware of or that
particular institutions are less secure than you might have thought
they are.
Q232 Mr Betts: Could I ask whether
the LGA knows whether any councils actually outsourced treasury
management completely?
Cllr Kemp: I do not, but we can
get you that information.
Cllr Cockell: Of course, some
authorities perhaps in the past more often used to use external
fund managers who, clearly under set criteria, would pass funds,
particularly long-term money to and those external fund managers
would manage the funds. I think some will still do that, but I
think the number that do that is less and I think that is something
we will need to be looking at again, whether those external fund
managers are likely to actually be any better. That is a very
good question.
Q233 Chair: Finally, can I turn to
the issue of financial help from the Government? No, we are not
offering it because, of course, we are not the Government! Firstly,
do you think that the local authority investments in Icelandic
banks should be guaranteed by the Government in the way that private
individuals' deposits with Icelandic banks have been?
Cllr Kemp: First, the Government
has been incredibly helpful to us next year by taking off any
liability from the equivalent of our balance sheet, so that will
not affect things in the short-term. In the longer term, we believe
we have acted in good faith. We have followed what were then ODPM
guidelines. We have been audited by the District Audit Service.
We have a set of arrangements from CIPFA which have been approved.
We think we have invested to the best of our ability.
Q234 Chair: Are you talking for your
own council, Councillor Kemp, or for the totality?
Cllr Kemp: In the totality.
Q235 Chair: I am not expecting you
to put a finger on individual councils, but is it not a bit unwise
for the LGA to suggest that you know that all of your councils
have taken all of the measures that they could sensibly have done?
Cllr Kemp: I do not. I am saying
the sector as a whole has broadly performed. Have some people
made mistakes? Have Restormel made a mistake? It is an example
which was given to me earlier today, as it happens. I do not know.
Clearly some people have instituted inquiries, for example North
East Lincolnshire, which invested very late in this process, have
their own formal inquiry going. So clearly some local governments
have lessons to learn, but by and large, as Councillor Cockell
has said, there have been very small amounts invested overall.
It is 3 or 4%, which just shows how well we have diversified,
but by and large everything we have done has been to the best
possible advice from the public and private sectors, perhaps debatably
in the private sector, to rules and regulations which are outside,
largely, our control. So we do not believe we should necessarily
carry the can for that, or particularly our council tax payers
should not.
Q236 Chair: You are starting to get
as lengthy as some of the previous witnesses!
Cllr Kemp: I do apologise.
Q237 Chair: I think the answer was,
yes, you do think the Government should underwrite it in the same
way as they have with private investors, is that right?
Cllr Kemp: Give us the money!
Yes.
Q238 Chair: Just on that question,
do you agree with Councillor Kemp?
Cllr Cockell: I am not sure we
have not moved slightly beyond that now, but certainly I would
agree that at the time when we needed to give confidence to the
sector certainly then we were looking for Government to clearly
say that and they chose not to. I think they described us as being
"informed investors".
Q239 Chair: Can I then move you on
to a specific question for London Councils, because I believe
London councils have got significant deposits in Heritable Bank—which
is what, just as a matter of interest?
Cllr Cockell: Which is one of
the British institutions, yes.
Q240 Chair: Are you asking then the
Government to protect those local authority investments?
Cllr Cockell: I think we are saying
that the amounts, which I think in Heritable amount to 90% of
the liabilities, are now within the public sector, not just London,
nationally. But I think we are saying that as the vast majority
of it is now in public sector hands the Government should be looking
at whether actually it should be transferred perhaps to another
financial institution or handled in a different way. That is our
question about Heritable because of the particular circumstances.
Everything else has been stripped out of Heritable and that is
why the husk of what remains is mainly money owed to the public
sector.
Cllr Kemp: Could I just slightly
expand my answer? Having received advice from my colleagues, to
be absolutely clear the LGA is not saying, "You've got to
give us the billion pounds back." What we are actually asking
for is capitalisation to deal with that over a period of time.
If we can do that, that is a manageable sum. Taking a hit of a
billion pounds in one year would be very difficult for us, but
if we could capitalise it, perhaps over four or five years, then
we can cope with it, bearing in mind we do not yet know what it
is because some of that will come back. It is money at risk at
the moment, not money lost.
Cllr Cockell: Just to be clear,
John Healey said he would look at capitalisation on a case by
case basis and I think, as it become clearer exactly what has
been lost rather than what is at risk, we hope that Government
would say, "Actually, we will allow you to capitalise it
rather than tying it down case by case."
Chair: Thank you very much indeed.
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