MD1490 Treasury Management Strategy for 2015-16

1. Introduction and background

The Treasury Management function is responsible for the management of the GLA’s investments 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 a scale of operations, assets and liabilities (including borrowings) in £billions; the ongoing delivery of the Crossrail funding package; responsibility for the financing of the proposed Northern Line Extension (NLE) and support for the Olympicopolis scientific, educational and cultural vision for Stratford Waterfront and the south of the Queen Elizabeth Olympic Park.

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 conducted in accordance with the Group Investment Syndicate (GIS) Investment Strategy.

2.1 Borrowing Performance

To progress the following borrowing schemes:

• Crossrail – The GLA has completed the borrowing for Crossrail. In doing so, it has outperformed against the terms of the Crossrail Prospectus: An enhanced borrowing strategy has resulted in a saving in total borrowing of £192m, thereby resulting in the total borrowing for Crossrail being £3.308bn rather than the original budgeted figure of £3.5bn; In addition, the actual borrowing rates on this £3.308bn have been lower than the targeted 6% by some 2.4%, permitting lower financing costs, which it is estimated will save the business rate taxpayers around £65m over the life time of the Business Rate Supplement (BRS). Projecting into the future, further savings in financing costs could be delivered through early repayment of the debt, as it is possible that the £3.308bn borrowing could be fully repaid by 2032/33 rather than the 2035/36 repayment date forecast in the Crossrail Prospectus. This early repayment of the full debt may be made possible, not only because there is now less debt to repay, but also because the BRS amounts required to repay the debt could be collected quicker: it is possible that BRS receipts could be higher than forecast, as a result of upward five yearly revaluations commencing in 2017 and increased economic activity, thereby enabling the total funds required to repay the debt to be available sooner than expected. Less debt to repay and increased BRS would also improve interest receivables, by increasing cash balances available for investment in-between debt repayment and financing cost payment dates.

• Northern Line Extension – Total project borrowing is forecast to be £928m: It is expected that external financing will commence in 2015/6 with the raising of an estimated £200m in this year. However, this is subject to the ‘dual key’ being ‘turned’ between Battersea Power Station Development Company, TfL and the GLA. This is because, it is only when the ‘dual key’ documentation is signed, does there become an irrevocable commitment to build the NLE. It is anticipated that up to 50% of the total project borrowing will be from the European Investment Bank (EIB) with the remainder from private sources (including an index linked bond issue) and/or the PWLB. On the revenue side, the Enterprise Zone (EZ) regulations are now in place, allowing full retention of business rates growth for at least 25 years. These EZ revenues will be ring-fenced to fund the NLE financing costs and repayment of debt. Significant savings in financing costs during 2015-18 are likely, as a result of the decision to seek lenders other than the PWLB, as the interest rates secured from the EIB are likely to be lower than the PWLB project interest rate. Sourcing funds from the proposed index linked bond will also bring an inflation hedge to the project.

• Housing Financial Transactions – To boost housing supply in London, the Mayor will on-lend £200m from the London Housing Bank and £200m to Housing Zones (together with £200m of grant support to such Zones).

• Olympicopolis – The GLA will be supporting the London Legacy Development Corporation’s (LLDC) transformation of the Olympic Games site through loan funding. The monies for this loan funding will be met out of GLA core cash balances and in 2015-16 is expected to result in a net increase in LLDC’s borrowing of some £95m.

2.2 Investment Performance

The GIS has been fully operational since mid-2013 and currently manages GLA cash balances in excess of £1bn.The GLA is on target to outperform its investment benchmark by 54% during 2014-15.

2.3 Treasury Management Budget Performance

Forecast performance against budget as at 31st March 2015 is likely to be an extra £9.89m in revenue, as a result of Treasury activities, with £6.21m more interest earned on investments than expected, and financing costs lower than expected by £3.68m.

2.4 Compliance with the Treasury Management Strategy Statement (TMSS) 2015-16 and Treasury Management Practices (TMPs)

The GLA operates within the Treasury Limits and Prudential Indicators as set out in the TMSS and complies with the Authority’s Treasury Management Practices. These Indicators and Limits for 2015-18 are detailed in Appendix 4.

None directly arising from this report

4.1 Key Risks and Issues

The primary objective of the TMSS is to create a framework for the management of risks associated with borrowing, investment and cash flow management.

Wherever there is debt there is risk: risk of default and liquidity risk, as sufficient cash balances must be available to cover financing costs and debt repayments.

The GLA is very aware of these risks and has therefore put in place a robust debt management approach, underpinned by the principal of ‘supported funding’. Under ‘supported funding’, borrowing is only undertaken if there is a ring-fenced income stream to support it. The £3.308bn Crossrail borrowing is an excellent example of this approach, whereby the borrowing is supported by a ring-fenced Business Rates Supplement (BRS) income stream, which is forecast to fully repay the debt by 2032/33.

External gross debt is forecast to be £3.6bn as at the 31st March 2015, and is expected to fall in 2015-16 to £3.5bn as Crossrail and Olympic debt repayments commence. However, in 2016-17 and 2017-18, external debt is again forecast to rise with external debt forecast to be at £3.8bn by the end of 2017-18, as the borrowing for the NLE is undertaken. However, just as with Crossrail, the principal of ‘supported funding’ will be ‘in-situ’ for the NLE debt: instead of BRS receipts, Enterprise Zone revenues and Community Infrastructure Levy (CIL)/Section 106 contributions will be used as the ring-fenced income stream to support the NLE borrowing and repay it.

Additional pressure is also placed on liquidity through

• downward pressure on investment returns, as a result of a continuing low interest rates, as policymakers seek to support the re-emergence of economic growth.
• funding the LLDC for the Olympicopolis out of cashflow. In 2015/16, this is expected to draw down an additional £95m from the GLA’s cash balances.

However, with GLA cash balances of some £1bn and core cash being used for this funding, there is more than adequate liquidity to support these additional liquidity pressures.

Counterparty risk is also a concern. Under the GIS investment arrangements, the GLA manages short term investments and cash balances for all other functional bodies, except Transport for London (TfL). Cash balances under investment management are forecast to be in the region of £1.8bn (including GLA cash balances). The GLA seeks to minimise counterparty risk by only investing in high quality institutions and by keeping the majority of investments in highly liquid instruments. The recent tightening of the financial regulatory environment by governments, in so far as it has strengthened the balance sheets of financial institutions, has also helped to reduce counterparty risk.

4.2 Links to Mayoral strategies and priorities

This TMSS is intrinsic to supporting the GLA element of the Mayor’s Budget and Capital Spending Plan for 2015-16 including the long term affordability of the Crossrail project and future funding obligations in respect of the NLE and the Housing Financial Transactions. .

Effective and prudent cash management is essential to protect the GLA against loss of capital and ensure adequate liquidity to meet spending obligations and aspirations.

4.3 Impact assessments and consultations

None required.

Financial implications are integral to the report and further comment is not required.

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.

Appendices (all included with signed decision form)

Appendix 1 Treasury Management Strategy Statement for 2015-16
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