Agenda item

This report presents the draft Treasury Management Strategy for 2017/18 for consideration by the Committee. The final version of the Strategy, incorporating the views of the Committee, will be included in the budget report to be approved by the Council on 27 February 2017.

Conrad Hall (Chief Finance Officer) introduced the report which presented the draft Treasury Management strategy for 2017/18 whose final version, alongside with the views of the Committee, would be included in the budget report to be approved by the Council on 27 February 2017.

He stated that the successful identification, monitoring and control of risk was central to the Council’s Treasury Management Strategy, which defined how officers would protect investments and how they would look after the Council’s money. He emphasised that securing the return of capital was considerably more important than securing a return on that capital and paid special attention to the fact that interest rates were at extremely low levels. The consequence of this was that opportunities to improve portfolio performance at reasonable levels of risk were very limited and  that although rates could increase and this would change the strategy, this was unlikely to happen soon.

Conrad Hall drew Members’ attention to the fact that, on 30 November 2016, the Council had £416m of long-term debt and £201m of investments and asked Members of the Committee to look into Appendices A, B, C and D for further detail. He commented that Appendix D contained benchmarking information which showed that the Council had a low risk portfolio of borrowing. He outlined that the Council had £80.5m exposure to LOBO loans (Lender’s Option Borrower’s Option) of which £40.0m of these could be “called” within 2017/18, while £15m of these were transformed into regular fixed rate loans in 2016/17. He explained that the default position if the option was called would be the repayment of the LOBO without penalty i.e. the revised terms would be accepted. It was considered a significant possibility that some LOBOs could be called over the next few years due to the need to comply with Basle III Regulations for Banks in 2019.

The Chair noted that the Council’s external interest budget for 2016/17 of £23.3m, with budgeted investment income of £1.3m, was showing that invested money did not earn much in terms of interest, a feature of the interest date environment.

Members asked questions which related to eliminating debt and using interest payments to repay loans on the Council’s portfolio. In response, Conrad Hall explained that there were no legal restrictions on doing this. However, the high interest rate loans in the portfolio, which were taken out in the early 1990s when loans at c9% may have seemed attractive, would necessarily attract very high redemption penalties whilst current rates were so low. An early repayment strategy could be more practical if interest rates started to rise. With regard to repayment penalties, it was clarified that these could exceed 100% of the principal value of the loan. 

Members commented on paragraph 23 of the report, noting that balances in the Council’s accounts were earning less interest due to the low rates, and a discussion on the delivery of the Capital Programme followed, concluding that it required improvement despite the progress achieved. Officers pointed out that Brent 2020 gave a clearer idea of key developments the Council wanted to unfold and emphasised the need to ensure that these were sustainable. Members noted that more had to be done in terms of the delivery of the Capital Programme. This would be discussed as part of the work programme at the Committee meeting in March 2017.

The next topic of discussion was the £201m of investments mentioned in paragraph six of the report (see page 39 of the Agenda Pack). A member of the Committee enquired as to what was enabling authorities, shown on the second graph in Appendix D, to get so much in terms of total return on total investment portfolio and whether Brent could learn from them. Conrad Hall responded that the total return on total investment portfolio could be influenced by a higher risk strategy, better returns, deals made in the past, etc. He explained that the graph was sourced by the Treasury Advisor whom he met quarterly and stated that further details were not available at present.

A Member of the Committee asked if there were any restrictions on what the Council could do with money from Section 106 agreements. Conrad Hall responded that it could be spent as it had been agreed and outlined to the Committee that £201m of investments reflected a range of balances, among which Section 106 funds and the Council’s reserves, with approximately £10.3m being specific balances on Section 106. The discussion continued by clarifying that each year a report had been taken to Cabinet defining what areas Section 106 funds would be spent on and what the money would be used for while the Council had it.

Members enquired whether if Brent was to join with other local authorities, it would be able to generate higher interest on investments as a higher sum would be more attractive to investors. Conrad Hall stated that this would depend on whether the sums involved would be enough to excite the market and raise rates. He outlined that the answer to this question would not be straightforward and would require careful consideration.

The Independent Member commented that protecting the capital liquidity of the Council was a clear priority. He suggested that a user guide to accompany the Treasury Management Strategy be created, with clearly defined policies, executive summary and process of improving decisions. 

There were no further questions and it was RESOLVED that:

(i)            The contents of the Treasury Management Strategy 2017/18 report be noted; and

(ii)               A user guide to accompany the Treasury Management Strategy be created.