MD1634 Treasury Management Strategy Statement 2016-17

The Group Treasury Management function is responsible for the management of the GLA’s investments, borrowings and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; the pursuit of optimum performance consistent with those risks and the paramount issue of preserving capital.

Effective treasury management is central to the GLA’s financial standing, given the £multi-billion scale of operational cash flows, assets and liabilities.

The ongoing delivery of finance for major capital projects such as Crossrail, the Northern Line Extension (NLE), Olympicopolis and the lending programmes for Housing Zones and the London Housing Bank means that the cost of debt service is the GLA largest source of revenue expenditure and its greatest source of financial risk, alongside business rates volatility.

The GLA, through functional delegation arrangements, undertakes the treasury management functions of the London Fire and Emergency Planning Authority (LFEPA), London Legacy Development Corporation (LLDC), London Pensions Fund Authority (LPFA) and the Mayor’s Office for Policing and Crime (MOPAC) (i.e. All of the GLA Group, excluding TfL). Investments are largely managed collectively through the Group Investment Syndicate (GIS), an arrangement which has proved extremely successful for delivering greater liquidity and performance than would have been achievable by the participating organisations acting individually.

This report proposes that existing treasury management shared service be expanded to cover the London Boroughs of Haringey and Southwark in order to deliver further benefits and opportunities.

TMSS, GIS Investment Strategy and Prudential Indicators

These documents provide a strategic framework for the achievement of the following prudent objectives

Borrowing
• Proposed levels of borrowing are sustainably affordable
• The expected costs are well-matched to the relevant revenue streams to maximise budgetary certainty
• Financing is readily available when required for major capital expenditure
• The most economical sources of borrowing for a given situation are identified and made use of.

Investments
• Public funds are not lost
• Cash is available when required for essential expenditure
• Returns are maximised, so far as the above constraints allow, to offset the impact of inflation on the spending power of public funds held by the GLA.

Effective Balance Sheet Management
• A sustainable and prudent balance is struck between the use of cash balances in lieu of external borrowing and any potential risks of refinancing.
• Opportunities for intragroup borrowing/investment transactions are identified in order to reduce risks and/or costs.

The TMSS builds on previous years. The significant changes relate to investment strategy, introducing a new asset class (residential mortgage backed securities) as a diversification option and rationalising the credit policy to be consistent across deposits and bonds.

MRP Policy

Where capital expenditure is due to be funded by future revenues, this provides a means to match those costs to the period over which the relevant benefits are enjoyed in a way that is equitable to taxpayers, e.g. avoiding the risk of taxpayers at a particular time disproportionately bearing the cost of benefits enjoyed previously or subsequently.

From a cash flow perspective, the MRP policy also ensures that a prudent amount of cash is available for the repayment of borrowings.

Treasury Management Practices and Treasury Management Policy

These set out the high level objectives for the control and performance management of the function.

Shared Service Expansion

The GLA’s experience of the existing shared service arrangements has been extremely positive.

Through the effects of pooling, the GIS has provided the Group Treasury Team with both greater and more stable minimum balances over 3 - 12 month periods than would generally have been the case for each organisation individually. This has provided increased opportunity for longer term investments providing greater yields.

In tandem, the overall increase in balances has provided greater bargaining power in respect of instant access accounts with banks, allowing the GIS to maintain yields for the shortest dated investments. By investing in a mix of overnight and longer dated products, the GIS has maintained a weighted average maturity below 3 months, while maintaining excellent overnight liquidity.

Performance is shown in the chart below:

(see signed decision form)

In addition to the more stable balances and improved purchasing power, the pooled GIS balances have allowed larger individual deals to be struck. The benefits of this are twofold – one transaction is made rather than a series of individual ones (saving costs) and additionally greater opportunities for diversification arise, since a number of banks in particular operate minimum deal sizes, which would be inappropriate for the participating organisations individually.

By pooling staffing and other administrative resources, the participants have been able to maintain or reduce individual expenditure on treasury management while funding a function able to operate a more sophisticated strategy than would be feasible individually. A key example of this is the expansion of the strategy to cover corporate bonds, whereby Group Treasury have been able reduce credit risk by further diversification and in many cases obtain superior yields for identical risk.

Because of the factors above, the GIS has significantly outperformed its benchmark, ie the rate at which banks and other large organisations typically lent to each other for 3 months. As at 9 Feb, the GIS has outperformed by 0.36% on an annualised basis since inception.

The net cash flow managed by the Group Treasury team continues to be dominated by the GLA. The introduction of a range of new organisations with different cash flow profiles has had a positive impact on relevant stability of balances, which together with scale advantages has been positive for the risk and return outcomes for all concerned.

The LPFA’s balances have proved a helpful contribution. From the LPFA’s perspective, access to the resources of the GLA team and the strategy it is able to deliver has improved returns significantly, with economic benefits in excess of £0.5m.

The overall increase in Group Treasury resources provided by the shared service arrangements have continued to enable development of resilient, well-qualified team delivering sector-leading innovations in both investment and borrowing and with the capacity to undertake major projects. As an example, the GLA’s issue in May 2015 of the world’s first CPI-linked Sterling bond providing £200m for the Northern line extension, reducing inflation risks and estimated to save the taxpayer some £34m in today’s prices.

For the reasons above, the GLA will continue to pursue partnerships with additional public bodies in London in a gradual fashion. In particular, developing the shared service with London Boroughs will provide an opportunity for the GLA to provide practical support, where desired, to the financing of local regeneration and infrastructure projects. The opportunity to bring LB Haringey into the shared service arose in part from GLA involvement in determining a financing solution for regeneration in Tottenham. LB Southwark has also started discussions based on interest in the GLA’s capital financing experience and capabilities. It is proposed that the Executive Director of Resources approves the shared services arrangements between the GLA and both boroughs.

None directly arising from this report

Risk management is integral to the report and effective treasury management underpins the sustainability of the financing of all GLA activities.

The shared service proposal supports the corporate priority of increased budgetary efficiency and provides the opportunity to support the financing local infrastructure, housing and regeneration initiatives through the identification of financing opportunities.

There are no formal consultation requirements; however the GLA oversight committee has been apprised of the intention to expand the shared service to London Boroughs via Item 5 or the meeting of 10 March 2015. The committee indicated support for the direction of travel.

Financial implications are largely integral to the report.

The expansion of the shared service will involve additional staffing and administrative expenditure within Group Finance; however, these additional costs will be fully recovered from the participating Boroughs.

Additionally, the fixed costs of the treasury function (inter alia, systems, advisory fees and senior management) will be shared across participants in proportion to balances managed. The addition of new participants is likely to result in a reduction in net costs to existing participants including the GLA and/or provide opportunities to mitigate the impact of additional investment in systems and compliance.

Part 1of the Local Government Act 2003 introduced a new statutory regime to regulate the borrowing and capital expenditure of local authorities. Section 23(1)(d) and (e) provides that the Greater London Authority (GLA) and the functional bodies are local authorities for this purpose.

Section 3(1) of the 2003 Act provides that all local authorities are to determine and keep under review how much money they can borrow. Section 3(2) of the Act is more specific in relation to the Mayor and functional bodies by providing that the determination is to be made by the Mayor following consultation with the Assembly, in the case of the GLA, or the relevant functional body. As a result, borrowing limits could be changed in-year, as well as at the start of financial years. Under section 1 of that Act the GLA and the functional bodies may borrow money for any purpose relevant to their functions under any enactment or for the purposes of the prudent management of their financial affairs; they may also invest for the same purposes under section 12.

Under section 127 of the Greater London Authority Act 1999 the Authority has a duty to make arrangements for the proper administration of its affairs. Responsibility for the administration of those affairs lies with the Executive Director of Resources as the statutory chief finance officer of the Authority under section 127(2)(b) of the Act. The management of the Authority’s Treasury function and the development and monitoring of the Treasury strategy fall within this responsibility of the chief financial officer.

Section 401A(2) of the Greater London Authority Act 1999, as amended, permits a shared service arrangement, by providing that any ‘relevant London authority’ (as defined in the GLA Act 1999) may enter into arrangements for the provision of administrative, professional or technical services by any one or more of them to any one or more of them, whether for consideration or otherwise. This enables the GLA, the Functional Bodies and the LPFA to delegate the professional technical and administrative functions involved in treasury management to the GLA and for them all to jointly participate in the GIS under their common powers to borrow and invest for the prudential management of their financial affairs.

Although the LBs of Haringey and Southwark are not covered by section 401A, they and the GLA are local authorities for the purposes of the Local Authorities (Goods and Services) Act 1970. As a result the GLA may provide the same professional technical and administrative functions involved in treasury management to the two boroughs, who also share the same investment and borrowing powers.

The TMSS will be implemented with immediate effect from 1st April 2016.

Conclusion of scope and fees, followed implementation of the shared service proposals is expected before
end June 2016.

Appendices (see signed decision form)

Appendix 1 Treasury Management Strategy Statement for 2016-17
Appendix 2 Treasury Management Policy Statement
Appendix 3 Minimum Revenue Provision Policy Statement
Appendix 4 Prudential Code Indicators and Treasury Management Limits
Appendix 5 Group Investment Syndicate Investment Strategy
Appendix 6 Treasury Management Practices: Main Principles
Appendix 7 14/15 Outturn and 15/16 Mid Year positions

Supporting Papers
MD1490 - Treasury Management Strategy Statement 2015/16
Mayor’s Final Draft Consolidated Budget 2016-17
Capital Spending Plan 2016-17