The new Prudential code targets long-term investments in pooled funds. But a Room151 webcast hears it does not require authorities to become “forced sellers” of those assets.
There has been much debate since the latest versions of the Prudential and Treasury codes were published. And much concern that they were about to make the treasury investment landscape unrecognisable. But this week, there is reassurance: They should not cause a “fire sale” of local authority assets.
Treasury officers were put at ease during a Room151 webcast convened to explore implications of the revised codes, attended by over 200 authorities. What emerged from the discussion may dispel fears among many in local government finance who read the new codes to mean they would have to disinvest from assets such as long-term bond, equity or property funds.
According to Luke Webster, a member of the CIPFA treasury and capital management panel and chief investment officer at the Greater London Authority: “It’s not about fire sales or completely prescriptive restrictions.
“The philosophical point is if there are genuine structural reasons why there will be surplus cash on your balance sheet for a long period of time, then by all means consider longer-term investments.” Webster went on to assure the online audience that the new codes had not persuaded him he would have to “sell down” any investments.
Primarily
Controversy has simmered since new versions of the prudential and treasury management codes were unveiled at the end of September following consultation that has run for most of the year.
An initial reading had many concerned that the codes appeared to propose councils would need to exit long-term investments in funds, or perhaps other investments that could be viewed as “primarily” for a return.
That worry came from paragraph 53 of the new Prudential Code, which says: “Authorities which have an expected need to borrow should review options for exiting their financial investments for commercial purposes in their annual treasury management or investment strategies.
“The options should include using the sale proceeds to repay debt or reduce new borrowing requirement. They should not take new borrowing if financial investments for commercial purposes can reasonably be realised instead, based on a financial appraisal which takes account of financial implications and risk reduction benefits.”
Despite the headline worry about borrowing to buy property—even locations outside the buyer’s own local authority boundaries—for commercial purposes or “primarily for financial return”, pooled funds are clearly targeted too. The context was set by CIPFA’s pensions and treasury advisor Richard Lloyd-Bithell, who said there is around £9bn in pooled funds. Of that £6bn is invested by local authorities that are net borrowers; £4.7bn has happened over the last four years; and £3.1bn, according CIPFA research, is funded by borrowing.
Historic
Backing out of historic fund investments has snags. What might be tricky, according to David Green of Arlingclose, is if some councils were forced to end long-term investments that are made to offset some of the cost of long-term borrowing from PWLB. Forcing councils into short-term investment, he said, would create its own set of problems.
“I’m not sure that’s going to be very helpful,” Green said. “There’ll be short-term investment risk when they [councils] could be making long-term investments to offset the long-term borrowing and neutralising the risk.”
Lloyd-Blithell conceded the point that “sensible asset allocation” could be made to long-term investments, but argued the “scale” within the sector was a problem. “It’s just not a good use of public money,” he said.
But, he added the codes do not intend for councils to disinvest from their problematic investments on “day one”. “It’s about encouraging people to have a real, critical look at their portfolios and say, ‘OK, have we got a sensible asset allocation? Have we got a sensible amount of risk in our balance sheet?’
“And it’s about considering those exit plans. And for property—the way markets are, the way things are going at the moment—the question will not be today, maybe in the future.” He said it was about “de-risking” portfolios “when it’s the right time.”
“We don’t want to hamper commerciality within the context of regeneration,” he added.
Further reassurance came from Martin Easton, author of the codes on behalf of CIPFA. If, he said, councils have over borrowed, “then yes, by all means, that long-term surplus should be invested on a long-term basis.” The code, he said, does not require authorities to sell investments. “The code does ask authorities who are expecting to borrow, and who have commercial type investments, to review those commercial investments before they go ahead and borrow.” He added councils would not be “forced sellers” of their commercial investments.
The reassurance shifts the focus from historic investments to the appropriateness of future investments. That may mean the code’s language needs addressing for clarity.
“There’s probably some of the wording in the daft code that could be improved slightly,” said David Green, “to emphasise that it’s more, ‘Don’t take new long-term borrowing with a view to making a new long-term investment’.”
Adjustment
There is much to digest in the revised codes and their accompanying documents. A consultation will run for eight weeks, though that appears open for discussion if the sector feels it is too little time. Treasurers and finance chiefs will have much to mull over, not least their attitudes to the risk involved in long-term investment. One viewer pointed out that events like the collapse of Northern Rock demonstrated that money in banks could be at more risk than in long-term funds. “I couldn’t agree more,” said David Green. “There is risk in everything and some risks are more apparent than others.”
But while the clear intent is to head off borrowing for commercial returns, the codes may be less disruptive than first thought. The public reassurance is that they are viewed as guidance rather than instruction. But while there is no immediate demand to sell fund investments, it’s clear the code intends an adjustment in portfolios over the longer term.
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