Examination of Witnesses (Questions 340-350)
RT HON
JOHN HEALEY
MP, MR GRAHAM
DUNCAN AND
MR GRAHAM
FLETCHER
9 FEBRUARY 2009
Q340 Dr Pugh: Do you think the poor
debt repayment terms offered by the Public Works Loan Board contributed
to local authorities having more money to invest in 2008?
John Healey: Perhaps. The Public
Works Loan Board will operate its interest or its penalty policies
essentially because it is required not to make a loss. I think
myself that local government has more to invest in large part,
or at least in part, because central government every year since
1997 has given local government above inflation increases in grants.
You laugh, Dr Pugh, but if you look at the level of reserves they
have gone up each year and they are significantly higher than
four or five years ago—and the level of investments local
government may make. I want to encourage them to make the best
use of investments. Where they do that well and securely it helps
to fund some of the services that otherwise would either be cut
or fall to the council tax payer to fund.
Q341 Mr Betts: The point that was
made quite strongly to us was they could make better use of their
money writing off debt where they were paying a higher rate of
interest than the interest they were getting on investing that
money. The problem was that the redemption penalties from the
Public Works Loan Board were so high that it was not worth them
doing so.
John Healey: From the Board's
point of view, what they would find difficult to manage, particularly
given their duty not to make a loss, would be to have local authorities
using them and then as soon as they could get a better rate of
return pulling out without penalty the sort of deposits they may
have made with the Board or the borrowings they have taken with
the Board.
Q342 Mr Betts: In terms of the Public
Works Loan Board or any other debt management office, bearing
in mind there are a lot of small authorities around who probably
will never internally have the level of expertise—and they
would recognise they do not have it—to make some of the
financial decisions and run the whole treasury management operation,
do you think there is a case for the Debt Management Office, the
Public Works Loan Board or another part of the public sector,
being able to offer independent treasury management to small authorities
who cannot have that expertise in-house?
John Healey: There may be. I only
hesitate because it does not immediately strike me as a function
that would necessarily sit sensibly or comfortably with what the
Debt Management Office are there to do, particularly when CIPFA
has the status and the expertise as the professional accountancy
body and offers itself, if authorities do not want to go elsewhere,
much of the advice and support that could be valuable to authorities
no matter how big or small.
Q343 Mr Betts: Would there be no
conflict of interest then in CIPFA developing the Code of Practice
and then giving advice on how to follow it?
John Healey: They are there as
professional advisers. Is the type of advice you are talking about
specific investment advice? Is that what you are driving at rather
than how to take the decisions and to make those kinds of judgments
for themselves?
Q344 Mr Betts: Probably both.
John Healey: If it is a view the
Committee comes to that the Debt Management Office should play
a role then that would be something we would consider. I am not
immediately convinced or attracted to it.
Q345 Mr Hands: I have just a couple
of questions on the general approach. What is the argument for
local authorities making investments at all at the moment rather
than repaying debt?
John Healey: Because at any time,
and you as a former leader of a local authority and your colleague
Sir Paul will know, any local authority is likely to have some
cash that is surplus. It is likely to have liabilities that may
fall due at a particular point and it surely makes sense for them
to be able to make financially productive use of any such surpluses
for a period until the point at which that may be needed.
Q346 Mr Hands: That is absolutely
fair.
John Healey: Not doing so would
mean the opportunity costs would have to be picked up either by
the council tax payer or by central government and therefore the
taxpayer in some other form of financial support.
Q347 Mr Hands: There are various
local authorities which are rolling these investments forward
year by year. I think I am right in saying that. Should there
not be a case for the department suggesting that debt repayment
should come first? Secondly, if there are cases where local authorities
are borrowing to finance investments, or have been, and with the
change in the shape of the yield curve and having to pay PWLB
quite large rates on fixed rate borrowings which are now being
invested in short-term variable rate investments paying an extremely
low rate of interest, is there a problem out there in UK local
authorities that have been borrowing to invest?
John Healey: There may be. There
may be a question mark over the borrowing that local authorities
have undertaken well in advance of the need for the borrowing
in the first place. I think these are areas which are appropriate
for us to look at probably under the review that CIPFA is conducting
of the Treasury Management Code.
Q348 Mr Hands: Are there authorities
out there who have been borrowing long at fixed rates to invest
short-term those proceeds at a time of when yield curve was flat
or inverted who are now being hurt very, very hard because of
basically 0% interest rates on the deposits they are making?
John Healey: Because we do not
track the detailed investment decisions that individual local
authorities are making, I myself cannot answer that question are
there authorities out there in a position like that. I would anticipate
that some light might get shed on that by the Audit Commission's
current study. If that throws up the sort of situation and the
sort of practice you are suggesting may be a problem, then clearly
we will look at that and consider whether or not we need to change
the framework within which they operate whether that is the guidance
or the Treasury Management Code that CIPFA produce.
Q349 Chair: We have been focusing
on the situation within the UK. Presumably local authorities in
other European countries have large money flows that they invest
short, medium and long term? Is there any evidence from other
European Union countries of similar poor decisions having been
taken by councils in those countries? If not, are they getting
better advice or do they have a different mechanism within which
they operate?
John Healey: I am Minister for
English Local Government so I cannot answer that. If the Committee
is interested—I do not know if either of the Grahams might—we
may be able to point you in the direction of a man who can.
Mr Duncan: We do not have any
evidence that there is obviously a better system out there. There
are other European countries we know about where the local authorities
were in the same position on Icelandic banks. The Netherlands
and Germany are the ones we have particularly focused on and have
had some exchanges with but that has not thrown up best practice
elsewhere that we ought to be picking up ourselves.
Q350 Chair: Would be it possible
after the meeting to drop us a note on that aspect, the extent,
in so far as you know, of the scale of the problem in other countries
because that would be helpful. Thank you very much.
John Healey: We look forward to
the conclusions and recommendations in your report.
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