MD2458 Treasury Management Strategy Statement 2019-20

Type of decision: 
Mayoral decision
Code: 
MD2458
Date signed: 
25 March 2019
Decision by: 
Sadiq Khan, Mayor of London

Executive summary

This report sets out the GLA’s Treasury Management Strategy (TMSS) for 2019-20 (including the Treasury Management Policy; Minimum Revenue Provision Policy; Investment Strategy; prudential indicators and Treasury Management Practices: Main Principles). It has been prepared in accordance with the Treasury Management in the Public Services Code of Practice (the Code), issued by the Chartered Institute of Public Finance and Accountancy (CIPFA), and relevant legislation.

Decision

That the Mayor approves the

1. Treasury Management Strategy Statement for 2019-20 (Appendix 1)
2. Treasury Management Policy Statement (Appendix 2)
3. Minimum Revenue Provision Policy Statement (Appendix 3)
4. Prudential Code Indicators and Treasury Management Limits including Group Borrowing Limits (Appendix 4)
5. Group Investment Syndicate (GIS) Investment Strategy (Appendix 5)
6. Treasury Management Practices: Main Principles (Appendix 6)

Part 1: Non-confidential facts and advice

Introduction and background

The Group Treasury Management function is responsible for the management of the GLA’s borrowings, 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 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), East Bank and the housing lending programmes means that the cost of debt service is the GLA’s largest single revenue expenditure and its greatest source of financial risk, alongside business rates volatility.

The GLA, through shared services arrangements for professional, technical and administrative activities, undertakes the treasury management functions of the London Fire Commission (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.

The GLA has also recently established a longer-term collective investment arrangement, the London Strategic Reserve (LSR).

Objectives and expected outcomes

TMSS, GIS /LSR Investment Strategy and Prudential Indicators

These documents provide a strategic framework to achieve 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; and
• 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; and
• 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; and
• Opportunities for intragroup borrowing/investment transactions are identified in order to reduce risks and/or costs.

Minimum Revenue Provision (“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 in a particular period 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 – London Treasury Limited

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 without significantly greater risk.

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 three months, while maintaining excellent overnight liquidity.

As set out in MD2445, the GLA has created a new pooled investment arrangement for longer term balances, the LSR. The intention is to extend to others, especially London Boroughs, the benefits the GLA has experienced with its own longer-term balances invested in Residential Mortgage Backed Securities and other longer dated assets. MD2445 sets out the interim investment strategy for the LSR, which is expected to evolve over 2019-20 as new participants join. In order to reduce administration costs and in keeping with the intention for LSR 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 will enable the participation of additional London Boroughs in LSR without the same resource implications for the GLA of a full shared service or the daily transactions of the existing GIS.

The GLA has created an investment subsidiary, London Treasury Limited (LTL), which is authorised and regulated by the Financial Conduct Authority (FCA). LTL will be able to perform those functions the GLA itself could not perform and hence share widely the resources of its successfully established Group Treasury function. LTL will operate LSR on behalf of the GLA and other participants.

GIS Performance since inception is shown on the PDF of this decision.

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 of 3-Month LIBID, i.e. the rate at which banks and other large organisations typically lent to each other for three months. As at 21 February 2019, the GIS has outperformed by 0.29% 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.

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

Equality comments

Under Section 149 of the Equality Act 2010, as a public authority, the Mayor of London must have ‘due regard’ of the need to eliminate unlawful discrimination, harassment and victimisation as well as to advance equality of opportunity and foster good relations between people who have a protected characteristic and those who do not.

There are no direct public sector equality duty implications arising directly from this report.

Other considerations

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.

Financial comments

Financial implications are integral to the report.

Planned delivery approach and next steps

The TMSS will be implemented with immediate effect from 1st April 2019.