MD2274 Treasury Management Strategy Statement 2018/19

1.1 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.

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

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

1.4 The GLA, through shared services arrangements for professional technical and administrative activities, undertakes the treasury management functions of the London Fire Commissioner (LFC), London Legacy Development Corporation (LLDC), London Pensions Fund Authority (LPFA), Old Oak and Park Royal Development Corporation (OPDC) 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.

TMSS, GIS Investment Strategy and Prudential Indicators

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

Borrowing:

• Proposed levels of borrowing are sustainable and 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.

Minimum Revenue Provision (“MRP”) Policy

2.2 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.

2.3 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

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

Shared Service Expansion

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

2.6 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.

2.7 In tandem, the overall increase in balances has provided greater bargaining power in respect of instant access and notice 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 (WAM) below 3 months, while maintaining excellent overnight liquidity.

2.8 As previously agreed, the GLA intends to create a second GIS (GIS 2) for strategic reserves, in order to extend to others the benefits it has experienced with its own longer term balances invested in Residential Mortgage Backed Securities and other longer dated assets. This will operate under identical investment guidelines, except that the WAM limit will be extended to 3 years. In order to reduce administration costs and in keeping with the intention for GIS 2 to be a home for longer-term, core balances, there will be a single agreed dealing day per month for deposits and withdrawals. The simplicity of this arrangement may enable the participation in GIS 2 of additional London Boroughs without the same resource implications for the GLA of a full shared service or the daily transactions of the original GIS.

2.9 GIS performance since inception has good, significantly outperforming its benchmark as shown in the chart below: (see signed decision form)

2.10 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.

2.11 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.

2.12 Because of the factors above, the GIS has significantly outperformed its benchmark of 3-month LIBID, i.e. the rate at which banks and other large organisations typically lent to each other for 3 months. As at 29 January 2018, the GIS has outperformed by 0.32% on an annualised basis since inception.

2.13 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.

2.14 A review of the GLA’s Treasury Function has been undertaken by the its Treasurer Advisor, Link, and following its recommendations, structural, process and system changes are being implemented which include a greater segregation of duties and for a separate external compliance function which has no role in the management/operation of the treasury function, and an enhanced role for Internal Audit in compliance.

3.1 None directly arising from this report.

4.1 The primary objective of the TMSS is to create a framework for the management of risks associated

with borrowing investment and cash flow management; the discussion of risk is therefore integrated

with the document.

5.1 Financial implications are integral to the report.

6.1 Part 1 of 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.

6.2 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.

6.3 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.

6.4 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.

6.5 Although London Boroughs 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 boroughs, who also share the same investment and borrowing powers.

7.1 The TMSS will be implemented with immediate effect from 1st April 2018.

Appendices (see signed PDF attached)

Appendix 1 Treasury Management Strategy Statement for 2018-19

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 2016-17 Outturn and 2017-18 Mid-Year positions

Supporting Papers

Mayor’s Final Draft Consolidated Budget 2018-19

Capital Spending Plan 2018-19