Supplementary written evidence submitted
by HM Treasury
FURTHER MATERIAL REQUESTED AT THE EVIDENCE
SESSION ON 8 DECEMBER 2009
Do large minority shareholders attend the quarterly
meetings with UKFI? (Q401-Q402)
The Committee asked about UKFI's relationships
with large minority shareholders.
Quarterly meetings are held between the UKFI
CEO and senior Treasury officials, to allow Treasury to assess
UKFI's performance. These meetings are weighted towards a forward-looking,
risk-based analysis of progress against the UKFI Business Plan
and Investment Mandate. Large minority shareholders in the relevant
banks do not attend these meetings.
UKFI recognises that rebuilding the confidence
of existing and potential shareholders will be essential if the
banks are to attain a full market valuation for their shares.
This is especially important given the Government's intention
not to be a permanent shareholder.
Since the publication of UKFI Strategy: Market
Investments and Annual Report and Accounts in July 2009, UKFI
has held over 130 meetings with UK-based and global institutional
shareholders, including current and potential shareholders in
RBS and Lloyds.
The aims of these meetings are:
— to canvas other investors' views on the
issues facing the banks, and what steps the banks should be taking
to address these. Given the relative size of the Government's
shareholdings in the two banks it is important that UKFI's views
are well-informed;
— to explain the arm's length nature of
UKFI's relationship with Government, and to explain the objective
of protecting and enhancing the value of Government's stakes with
a view to an exit from the shareholdings. This is intended to
address any misunderstandings or fears about possible non-shareholder-oriented
goals that UKFI, as a Government-related entity, might be perceived
to have; and
— to demonstrate the UKFI is a responsible
and responsive steward of the taxpayer's investment. UKFI aims
to promote the development of a broad group of investors who are
comfortable with the direction that the banks are taking, and
who would be willing to enter into transactions with the Government
over time.
UKFI continues to build relationships with other
investors, and is committed to continuing its policy of engagement
with them around major business issues and in deliberation on
matters brought to vote at the banks' Annual General Meetings
and all other meetings of shareholders.
What was the reasoning behind the targets that
were given to RBS and to Lloyds for additional lending? (Q403-Q406)
The lending commitments agreed with RBS and
Lloyds Banking Group are the result of careful, detailed negotiations
between the institutions concerned and HM Government.
The lending agreements were negotiated individually
with the banks, taking account of their specific circumstances,
expertise and capacity.
Could you share the work on risk management of
the Mapeley contract? (Q427)
HM Revenue & Customs (HMRC) has been very
conscious of the potential impact of the economic downturn and
it own vacation plans on Mapeley's financial position. To that
end, it has carried out a detailed analysis of Mapeley's financial
viability. Ongoing monitoring activity takes place, by intelligent
review of published information. Two-way dialogue at senior stakeholder
level in the partnership augments this analysis.
A financial model has been constructed which
shows the impact of a variety of factors on Mapeley's financial
viability; these include external economic factors (eg inflation,
borrowing interest rates) and contractual (particularly the extent
and timing of HMRC exiting buildings under the flexibility provisions).
Mapeley were fully consulted during the development of the model
and provided property specific data and management information
relating to their own cash flows. These inputs are fed in to the
model so that it can be used for robust decision-making, rather
than HMRC relying upon scenario assumptions when determining its
tactical and strategic estate plans. The model can be updated
and continues to be used to inform vacation plans as well as allowing
a number of economic scenarios to be run.
HMRC has discussed the results of the initial
modelling with Mapeley with a view to identifying the options
for maximizing HMRC's capacity to use the STEPS contract to generate
financial efficiencies, whilst ensuring the ongoing financial
viability of the partnership arrangement. HMRC has drawn on the
modelling work as vacation plans have become clearer and both
partners have discussed where it may be possible to amend plans
in order to reduce the financial pressure on Mapeley whilst enabling
the Department to vacate surplus space. We are in discussion with
Mapeley based on those planned vacations.
HMRC is refining this modelling to enable it
to undertake comparative analysis of the impacts of a range of
service and portfolio related contractual strategies and actions,
both on its own financial position and on Mapeley's financial
viability. The model, once fully constructed, will form a platform
to inform ongoing measurement of value for money from the STEPS
contract.
Whilst the Department has prioritised the discussions
and supporting modelling work intended to help Mapeley manage
its financial pressures, HMRC has also refreshed and enhanced
previous work done on business continuity planning in the event
of Mapeley default. Through this planning and the work on Mapeley's
financial viability, HMRC's Executive Committee is confident in
its ability to manage any risks to its estates management plans
effectively.
Why is outcome 2(a) "Supporting low inflation"
described as "met-ongoing"? (Q433-Q435)
The rationale behind the "met-ongoing"
assessment is that consumer price inflation (CPI) hasn't been
more than 1% above or below the 2% target since February, but
also that the monetary policy framework allows the Monetary Policy
Committee (MPC) to look through short-term fluctuations to keep
inflation at target over the medium term. As the latest MPC remit
states:
"The framework takes into account that
any economy at some point can suffer from external events or temporary
difficulties. The framework is based on the recognition that the
actual inflation rate will on occasions depart from its target
as a result of shocks and disturbances. Attempts to keep inflation
at the inflation target in these circumstances may cause undesirable
volatility in output."
If CPI does move more than 1% above or below
the 2% target, the remit states that the Governor of the Bank
of England must explain in an open letter the reasons for the
deviation from target, the action the MPC proposes to take, the
expected duration of the deviation and how the proposed action
meets the remit of the MPC.
Can you confirm the number of families that were
supposed to be helped by the Housing Benefit change? (Q458-Q459)
Our latest estimate is that around 200,000 working
families will gain about £1,000 a year following the
disregard of Child Benefit from the calculation of their Housing
Benefit and/or Council Tax Benefit award. These customers are
already in receipt of Housing Benefit and/or Council Tax Benefit
and so we can be confident they will gain.
In addition to those families who are already
in receipt of Housing Benefit and/or Council Tax Benefit, the
introduction of the disregard will also bring a further set of
families onto entitlement for these benefits. Because of uncertainty
about the extent to which this group will take up the benefits
they are entitled to, reference to them is not included in the
press notice issued by DWP in November when the change came into
effect.
Our current estimate is that around a further
200,000 working families who become newly entitled to Housing
Benefit and/or Council Tax Benefit because of the disregard will
need to make a claim. We have not included this group in our media
strategy because of the dependency upon them to make a claim.
The estimate for AME cost of the disregard announced
at Budget 2008 was £330 million per annum. This
estimate took a cautious approach for costing purposes (the potential
maximum cost to the exchequer) by including both existing customers
who will gain and assuming full take-up by those who become newly
entitled to Housing Benefit and/or Council Tax Benefit.
The disregard of Child Benefit from the calculation
of the Housing Benefit and/or Council Tax Benefit award applies
to all customers in the Social and Private Rented Sectors.
What discussions has Treasury had with the Crown
Estate regarding seabed leasing for renewable energy offshore?
(Q520)
The Crown Estate operates at arm's length from
the Treasury and enjoys a substantial degree of independence in
its commercial activity. The Treasury's main focus of interest
is in the commercial activity of the Estate as an integral corporate
entity. The Crown Estate has shown itself capable of delivering
successful financial results, while contributing to sustainable
development, over a number of years and in a variety of property
fields.
In the offshore energy field—both wave
power and wind power—the Crown Estate is working constructively
with the expert departments, notably DECC and the Scottish Government.
It meets relevant people both in formal committees and ad hoc
as issues arise.
How are you monitoring NS&I's performance
now that they have suspended the value-add indicator? (Q534-Q536)
NS&I's performance
NS&I's performance is measured against three
main financial targets: Value Added (measure of cost effectiveness
against comparable (ie similar maturity) alternative wholesale
sources of financing), Net Finance (the net flow of customer deposits),
and the cost of administering funds (which benchmarks NS&I's
efficiency against the industry). The minister sets annual targets
for these measures.
Last year, NS&I was affected by a series
of unexpected events, and was operating in a volatile environment.
It saw the flight to safety, followed by falling base rates, and
the dislocation between base rate and LIBOR.
NS&I did not benefit from the market instability.
It kept rates within the pricing corridor and stopped all discretionary
marketing, such as TV and press advertising for instance, and
adopted—as best as it could—a low profile. However,
in the interest of financial stability it remained open to new
customers and focused on maintaining its usual service standards,
in spite of the additional unsolicited inflows. At each stage
it was quick to point out the effect of the changing environment
on the dynamics of its business, presenting the options to stay
on track (to reduce net financing and keep value added on track).
It recommended and we agreed to an approach, which preserves the
brand and Net Financing, at the expense of short term Value Added.
Net Financing in 2008-09 was £12.5 billion against
a remit of £4.6 billion.
For 2009-10, HMT agreed a net financing target
of zero, with a range of -£2 billion to +£2 billion.
NS&I's focus in 2009-10 is on delivering its modernisation
programme for the benefit of customers, preserving net financing
for the government and supporting financial stability in terms
of maintaining an appropriate competitive position.
Value Added (VA)
The cost effectiveness of NS&I in the form
of VA is measured against the cost of the most directly comparable
form of alternative wholesale financing. For variable rate products
we compare the cost of funding to the Bank of England base rate,
and for fixed rate products, the comparator is the yield on fixed
rate gilts.
In the current unprecedented economic environment,
the comparators NS&I previously used to measure NS&I's
cost-effectiveness and set its interest rates are no longer as
meaningful. The base rate is now at a historically low level and
financial markets have been unusually volatile over the last year.
It is worth noting that the distorted Value Add comparators could
have resulted in NS&I's Value Add figures being artificially
depressed or flattered.
Under the circumstances and the actions agreed
on pricing, NS&I agreed with HMT that NS&I's Service Delivery
Measure target for value added would be temporarily suspended
from Quarter 4 2008-09 and no target set for 2009-10.
Alternative indicators
Over the last two years, NS&I has proved
itself to be a reliable, secure and trusted cornerstone of the
savings market. NS&I remain committed to delivering Value
Add over the longer term; however, there are other measures that
illustrate its effectiveness as a cost-effective way of raising
funding for the government: a good example is the efficiency ratio
[this compares NS&I's administrative costs to the average
funds invested by customers]. This currently stands at 20 basis
points, which compares extremely well to those of comparable financial
services providers and below the target agreed with HMT.
While Value Added is temporarily suspended due
to market conditions, NS&I has developed a proxy value indicator,
which has more validity in current circumstances. This is useful
for pricing and planning purposes. It is not designed to replace
Value Add but to give NS&I a tool to see whether it is delivering
cost effective financing while the Value Add comparators are distorted
and therefore misleading.
The alternative value indicator is still calculated
in the same way for the fixed book; however, for the variable
book it has looked at the average length of time people hold their
investment with NS&I. it has compared this average figure
to current gilt yields with equivalent maturity dates [ie, the
cost to the DMO of raising the money now]. It estimates that,
in the current financial year, this has so far delivered a figure
of circa £750 million.
What assessment have you made of the impact on
the Government's net debt figure of full compliance with IFRS?
(Q541)
None of the existing PFIs coming on balance
sheet under International Financial Reporting Standards (IFRS)
will be counted against net debt. Any new PFIs will be assessed
against both IFRS and National Accounting rules (ONS). If they
satisfy IFRS criteria, they will come on balance sheet for resource
accounts (and local authority accounts), and if they satisfy National
Accounts criteria, they would be counted against net debt. We
expect that very few PFIs will remain off balance sheet under
IFRS, but the existing off balance sheet schemes and new ones
are likely to be outside national accounts and thus outside net
debt. The actual position for the first year of IFRS will not
be known until the accounting for the 2009-10 financial year
has been completed and audited by the NAO.
What proportion of the assets covered by the Asset
Protection Scheme, which now and in the future will only apply
to RBS, represented assets outside the UK? (Q548)
HM Treasury does not intend to publish detailed
information about individual assets within the Scheme given the
commercial sensitivity of such information and the risk that releasing
such information would hinder the effective operation of the Scheme.
However, now that the accession agreement is signed and all details
are finalised, Treasury has published more detail on the asset
pool and the due diligence and loss estimation process. This has
been deposited in the libraries of both Houses of Parliament and
includes information on the location of the Obligor incorporation
(extract from Table 3.B, page 18 below). This can be accessed
via the following link: http://www.hm-treasury.gov.uk/d/rbs_aps_apa.pdf
If RBS had not been able to include foreign
assets and assets denominated in foreign currencies the scheme
would not deliver its objectives. The RBS balance sheet includes
assets denominated in foreign currencies and assets that were
issued or purchased by foreign subsidiaries of RBS. Where these
assets meet the criteria for entry, it is right that they are
included in the APS pool. Failing to do so would not solve RBS'
problems and allow it to increase its lending to customers. Some
international assets have been excluded from the scheme since
it was announced in January 2009. This is because the Government
has concluded that specific assets are incompatible with the scheme
rules.
Table 3.B
LOCATION OF OBLIGOR INCORPORATION
|
| Location of obligor incorporation |
Covered assets (£bn)
|
|
| United Kingdom | 114.5
|
| Other EU | 75.4
|
| United States of America | 43.6
|
| Other | 48.4
|
| Total | 281.9
|
|
How will HM Treasury report a change in value of the Government's
investments in financial institutions in its Resource Accounts?
(Q562)
In accordance with International Accounting Standard 39 (Financial
Instruments: Recognition and Measurement), where HM Treasury acquires
share capital in a financial institution, it is initially held
on the Department's balance sheet as an "Available For Sale
Financial Instrument", at the fair value of the consideration
paid. Subsequently, the fair value of the investment is reassessed
either—in the case of "ordinary shares" capital—by
reference to the publicly quoted share price, or—in the
case of "B shares" capital—with reference to a
valuation model. Any movement in this fair value assessment whilst
the investment is held is shown in the "Available For Sale
Reserve" in the bottom of the balance sheet.
Where HM Treasury sells any such Financial Instrument, the
fair value of the investment is removed from the balance sheet,
with the fair value of the consideration received recorded in
the balance sheet; any difference in these two values is then
recognised in the Operating Cost Statement, alongside the release
of any related "Available For Sale Reserve".
Under this accounting standard, where the fair value of the
investment suffers a significant or prolonged decrease in a given
financial year, this loss in value, is recognised in the Operating
Cost Statement in the period in question, and not deferred until
any future sale date; this treatment does not apply to any significant
or prolonged increase in value.
Financial instruments held by HM Treasury during 2008-09 are
reported in the Operating Cost Statement on page 176 of HM
Treasury Group's Annual Report and Accounts 2008-09 (HC 611),
and in the Balance Sheet on page 177, along with the associated
Notes 8 and 13a to those Accounts.
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