Councils have a “moral duty” to seek returns on their investments that keep their spending power stable in relation to inflation, according to Luke Webster, group treasury & chief investment officer at the Greater London Authority.
Webster, speaking at Room151’s FD’s Summit last week, said councils are in a better position than many private investment funds when it comes to the amount of available cash they can employ.
He suggested that councils need to seek new ways of using that cash to increase their investment returns to help support services.
“Despite the very, very constrained fiscal environment we have been operating in for the past decade, cash balances have remained comparatively unchanged. By definition that cash is tax collected in advance of need.
“I am glad that necessity has brought this to the fore but I would say that it is our moral duty to at least try to preserve the spending power of that [cash].
“The opportunity costs of what we have done historically, which is invest it at sub-inflation rates, is really bad. There is an opportunity to address that but it involves taking some risk.”
Webster suggested that councils could also give themselves more scope for improving investment returns by pooling resources.
He said: “The more you pool the more you understand each other’s balance sheets. We are all familiar with the concept of internal borrowing on our own account but let’s look at this a bit more between ourselves as a sector.
“In London alone, if we reduce our cash balances by 50% and used it to finance capital expenditure within the city, we could probably release quarter of a billion [pounds] a year of revenue flexibility…That is before we think about anything more exotic.”
He said that pooling would enable councils to release more cash partly because cash flow issues would be smoothed across larger groups of authorities.
Also speaking at the session, Ian Williams, director of finance and resources at London Borough of Hackney, said: “Pooling resources is an idea that we as section 151s need to take forward.”
He added that such solutions reinforced the argument that finance directors should be at the top table in corporate decision-making within councils.
He said: “There are lots of discussions about where the CFO is placed in an organisation but particularly by utilising the flexibilities and innovation that is possible with capital finance, we can really add value to our organisations.”
In other comments, Sarah Pickup, deputy chief executive at the Local Government Association said that councils need increasingly good judgement on financial matters to cope with current funding pressures.
She said: “Councils have their backs against the wall in terms of managing their resources.
“Lots of criticisms are levelled [at local authorities] when they try to reduce costs or increase income and at the end of the day they have got to use their skill and judgement and take appropriate advice to decide how to invest and whether it is an income generating opportunity or whether it is about economic development only.”
