To receive a report.

The Chairman welcomed Sean Howsam, Interim Treasury Investment Manager, PSPS Limited to the meeting to present Members with the Mid Term Treasury Management Report 2022/23 on the Council’s Treasury Management Strategy Statement and Annual Investment Strategy for the period ending 30 September 2022, pages 31 to 36 of the Agenda refer.

 

The Interim Treasury Investment Manager detailed and highlighted pertinent information to Members from the Treasury Management Update at Appendix A, pages 37 to 56 of the Agenda refer.  Members were advised that the Council’s Investment Policy and Strategy was kept under constant review with the aim of balancing risk and reward.  Currently, the Council had a higher level of surplus funds available for investment following receipt of New Towns funding and in addition to this there were less counterparties currently available to the Council resulting in an increased difficulty to invest short-term funds for longer durations at higher rates. 

 

This would require approval from Council, therefore it requested that Committee noted the contents of the report and Members recommended to Council that the Sovereign Country Limit be increased from £5m to £10m (excluding the UK that had no limit), full details were set out at Paragraph 3.9 of the report, page 33 of the Agenda refers.

 

Members were invited to put their comments and questions forward.

 

• A Member highlighted the Icelandic banking crisis that occurred in 2008 and stated that it was the £5m sovereign limit that prevented the Council from losing a higher amount of money at that time and although a lot of the money was recuperated it tied the Council’s money up for a long period of time.  It was acknowledged that the Council was quite constrained on how to best invest for its residents, therefore an increase in the sovereign credit limit was required but it was not considered appropriate to increase the sovereign country limit to £10m, particularly due to the current volatility of the worldwide economic crisis and the war in Ukraine. 

 

• Concerns were further raised on the treasury strategy as it had no consideration of Environmental, Social, and Governance (ESG) criteria on the way the Council invested.  It was further highlighted that the Council had received negative publicity with regards to investment in Qatar and other middle eastern countries and considered that this was an insult to East Lindsey LGBT residents.  It was also considered that the way the Council determined its investment criteria and judged the countries to invest in was not divided by the size of those economies when it should be.  Following which, it was considered that the sovereign country limit be set at £8m for larger countries and £6m for smaller countries.

 

The Interim Treasury Investment Manager advised Members that following the situation in 2008, the majority of the funds invested in Icelandic banks had been received back.  With regards to investment criteria advice, this was taken from Link Asset Services and as a result of the Icelandic banking situation it had amended its counterparty criteria and how this was assessed.  This included maximum durations and now considered the cost of default in the markets where they could insure against defaults from banks, therefore in line with this criteria would recommend in accordance with the current market conditions.

 

The Interim Treasury Investment Manager advised Members that with regards to the comments made relating to ESG, this would be taken into consideration in the treasury strategy for future years and in other Council documents moving forward.  Discussions had taken place with the external treasury advisors who were currently sourcing this information from organisations that considered how banks and countries were doing in relation to ESG issues.  Following which, consideration would be given to how it would be possible to change the counterparty criteria to take that type of information into consideration.

 

With regards to comments made to Council investments in Qatar, Kuwait and Abu Dhabi, the Section 151 Officer had given consideration that the Council should not be investing in these countries at the current time due to ESG concerns.  It was confirmed that the Council currently had £5m invested with each of those countries or banks and these would not be renewed.  Currently, there was £5m that needed re-investing to maximise the returns for the Council whilst keeping security liquidity and yield in consideration and confirmed that the Council relied on credit rating agencies for their assessment of strengths of financial institutions.

 

• A Member queried the decision not to further invest in middle eastern countries and queried whether this was a decision that was arbitrarily made by the Section 151 Officer or from officers of the Council in general.  The Section 151 Officer advised Members that the propositions went to the Interim Treasury Investment Manager from the market in terms of what were the best rates on the day for the particular banks, whereby the yield would be considered along with the longer and shorter-term investments, when the investment was due to be redeemed and other factors in the mix at that time.  It was further highlighted that the views of Members were very important and Committee was giving a clear steer on their views in relation to this.  In addition, when making a choice from propositions coming forward ESG would be helpful in assisting on that particular point as well as other factors to be taken into consideration, for example climate change.

 

It was highlighted that currently the Council had a lot of cash that ideally needed investing to get the best return possible, whilst bearing in mind all factors that needed considering and was the reason to propose that the sovereign country limit be increased as the current limits were constraining the Council’s ability to place funds.  The Section 151 Officer advised Members that compared to a lot of other councils, ELDC was in a good position as it had cheap debt locked in and cash to invest.

 

• A Member referred to the proposed increase to the sovereign country limit from £5m to £10m however stated that the report referred to the bank group or individual limit remaining at £5m.  The Interim Treasury Investment Manager clarified that by raising the £5m limit to £10m would allow the Council to invest in individual banks if in the same country.

 

• A Member commented that the start dates on the table of investments were all in the current year and asked if this was correct, page 51 of the Agenda refers.  The Interim Treasury Investment Manager confirmed that this was correct and prior to the current financial year the Council was in a very low interest environment and little value to be obtained on a long-term investment basis so funds were being held on a relatively short-term basis.  However, now interest rates were rising there was considerable benefit to be obtained by maximising the investment period to obtain higher rates of interest achievable before those rates started to go down.  Furthermore, the Council was now trying to ladder the maturity dates to get a good spread over the year.  It was confirmed to Members that the term deposits were invested at a fixed rate, with the short-term cash accounts being at a variable rate.

 

• A Member referred to the Capital Programme 2022/23/Q2 Forecast Outturn, pages 56 to 57 of the Agenda refer.  It was highlighted that £7.231m had been spent out a total budget of £69.535m and it was queried how realistic it was whether the forecast of £43.397 for 2022.23 would be met.

 

• A Member queried that if there was a further £20m of proposals for lending at a rate circa 2% whether the Council should be borrowing rather than using its own sums as the Council was at a deficit in terms of what it would receive in returns.  The Section 151 Officer advised Members that the Council took the debt out a number of years ago to further invest and currently in terms of investments for ELDC and aspirations for the longer term, the debt referred was very good value debt although this needed to be balanced.  However, at some future point and after discussion with the auditors on how to use that to finance future potential capital expenditure there was a choice to be had around whether the Council kept the debt or let it go by seeking to redeem debt at a premium. 

 

With regards to the Capital Programme, Members were informed that this was a matter for the Executive Board in terms of its monitoring of the financial management of the authority and advised Members that the Q2 report would be circulated shortly that detailed some of those underspends which would mainly be slippage in relation to the Towns Funds through to the next financial year.  Members were advised that in terms of the amount of grant funding involved it was not unusual to have slippage and the end date should always be taken into consideration, which was 2024 for those funds and this would be the job of those areas of the Council to manage those funds.

 

A Member queried what oversight of governance and scrutiny there would be on the various departments delivering those projects and asked for clarification on the viability and delivery of these as he was concerned that the day to day business may overtake the work on the projects.   The Section 151 Officer assured Members that there was a huge amount of scrutiny ongoing internally, particularly in relation to the points made about inflationary impacts and funding available with a large amount of involvement from Members and officers.  Negotiations were underway with other parties and various issues were in the mix, furthermore those officers overseeing the work were project managers who were specifically focussed on the projects.  It was further highlighted that some of the projects were being developed by external parties, therefore the Council had to follow their pace on this.

 

It was highlighted that the report presented was a backwards look whereas the Q2 report took a forward look in terms of where the Council would be at year end.  Therefore, at Q3 it would be proposed to formally slip at that point and the capital programme would be adjusted to formally say that the funds would not be spent in that financial year.

 

A Member added that there had been massive inflationary costs, particularly in the construction sector and highlighted that if the projects were delayed the Council would be increasing its costs and considered that it was important to have the minimum amount of slip in the capital programme.  The Section 151 Officer responded that the teams involved were very cognizant of this, however some of the projects had a certain pace to them.

 

• A Member referred to cryptocurrency investments and the recent collapse of FTX, whereby losses could not be quantified as yet and was concerned that there were a number of investment houses that needed to be checked out in relation to crypto to ensure they were safe to place investments.  It was further considered that although investment in European banks was considerably safer, there needed to be a cautious and realistic approach to this as the German economy was likely to suffer a severe collapse in 2023.  It was therefore considered that the sovereign country limits proposed were sensible.

 

• A Member asked that the Interim Treasury and Investment Manager provide an update to Members on anything pertinent since the report was written, particularly since significant changes had occurred in central government.

 

The Interim Treasury and Investment Manager advised Members that from the Council’s perspective the key was getting inflation down to try and cause a stabilisation in the interest rates and then hopefully a reduction in interest rates so that inflation came down and costs were reduced.  It was highlighted that it was extremely difficult from the Council’s perspective to create a balanced budget with inflation running at double figures.

 

• With regards to the capital programme a Member highlighted the recent IT problems across the three councils of outages for approximately a week and queried whether the recent investment that increased from the original forecast of £794k to £1.187m would be sufficient to address such issues.

 

• A Member referred to the traveller site purchase and raised a concern that a recent assessment undertaken by external consultants concluded that there was no need for a traveller site and queried why there was £690k allocated in the budget for this.

 

• A Member highlighted the original land purchase for the Horncastle Hub and the original budget of £2.088m which was now £4.006m, page 55 of the Agenda refers and asked for clarification on the figures.

 

• A Member referred to the Towns Fund projects where there appeared to be considerable jumps from the original to the revised budget and queried whether this was due to the increase in construction costs, pages 55 to 56 of the Agenda refer.  A concern was raised that if the projects were considerably delayed, considering the current rate of inflation which was unlikely to decrease there was going to be a financial gap to plug.

 

The Section 151 Officer advised Members that in terms of the capital programme the reason for the revised budget was due to the slippage in 2021/22 and this had been referred by Executive Board as a result of the year-end report and was approved at Full Council and further clarified that the capital programme was fully funded.  Any further project that was not fully funded would have to go to Executive Board and then to Full Council for those funds to be approved and allocated.

 

• A Member highlighted that labour shortages were a significant challenge for many and referred to the 60+ age group that had now left the labour market.  With East Lindsey being noted as a retirement area, it was becoming more difficult to find people looking for work with vacancies across all sectors, but in particular it was important to get health workers back in the NHS.

 

The Section 151 Officer thanked Members for the questions, however highlighted that the Q2 report was due to be presented to Overview Committee for scrutinising and it would be more appropriate for some of the questions raised to go there.

 

• A Member referred to the investments and highlighted that it was not obvious which country the accounts were held in and requested that the table be annotated, following which it was agreed that the Interim Treasury and Investment Manager would add a column for the country and whether the rate was fixed or variable.

 

• A Member highlighted that the Council would see a significant wage settlement for public sector workers that would have an impact on the budget for 2023/24 and considered that as it would be likely that the Local Government settlement would be flat, looking at inflationary pressures it would result in a 10% cut in terms of its value.  Following which a query was raised on what ELDC was factoring in, in terms of wage inflation.  The Section 151 Officer responded that the budget process was still ongoing, but with regards to pay inflation this was around 4% across all staff although only 2% had been budgeted for as last year the Council was in a completely different financial era versus where it was now.  In terms of 2023/24, a figure of 4% was likely to be fed in as a pressure rather than having a significant adverse variant which would be seen in the 2022/23 Q2 report.  This was being offset against the improvement investment income in the first instance, however in 2023/24 another view would have to be taken.  It was highlighted that a lot of other pressures were coming through, for example there had been costs incurred by the pension fund review, and was looking at 300% type increases in fuel and power costs.  Further conversations had also been held with the Internal Drainage Boards (IDB).

 

A Member responded that the IDBs was a massive part of the Council’s budget and agreed with the Portfolio Holder that the levy should be separate and the government needed to address this, although this was not likely to happen in the short-term for the 2023/24 budget.  It was anticipated that the IDBs ask would be for a significant increase, however assuming the cap would be set at 5% it was likely that the Councils would have no option but to go to the ceiling with this.  A Member responded that due to the prudent management by officers and Members the Council was in a much better position than many other local authorities.

 

• It was further highlighted that Councillors in the three authorities across the Partnership had different allowance levels and queried whether the Independent Remuneration Panel would be looking to harmonise this.  It was considered important for this to be undertaken, particularly as the district elections were being held in 2023 and people wishing to stand needed to know what they were signing up for to take on the role.  The Section 151 Officer responded that she was aware that the Monitoring Officer was currently looking at this as he picked up the independent review process and the point had been made.  Members were advised that this would be added onto the list of officer questions as a point to be revisited.

 

• A Member commented that Committee had had a good discussion with regards to investment and by taking greater caution during volatile times as long as that process was followed it was considered that the limits set out within the officer recommendation for a single investment of £5m and £10m for investment in a single country should be accepted, subject to a greater level of due diligence than previously taken, particularly as the Council was looking to move away from investing in areas that posed a greater risk.  It was proposed that this should be moved, together with a note to Council to accept the recommendation stating that a greater deal of due diligence was undertaken before any decisions were made.

 

No further comments or questions were received.

 

Following a brief discussion, contrary to officer recommendation a Member proposed that the sovereign country limit be set to a maximum of £7.5m for investment into one country due to the volatility worldwide with the caveat that a greater level of due diligence be undertaken.

 

The proposal for the limit to be set to a maximum of £7.5m was seconded.

 

Upon being put to the vote, the amendment to the original recommendation was lost.

 

VOTE:

 

2 In favour    5 Against.

 

A Member asked it to be noted that this vote was not unanimous.

 

Upon being put to the vote, the proposal that the Sovereign Country Limit approved by Council on 2 March 2022 be increased from £5m to £10m was won.

VOTE:

5 In favour    2 Against.

Following which it was,

 

RESOLVED:

 

1.     That Members of the Audit and Governance Committee review and note the contents of the report attached at Appendix A.

 

2.     That Audit & Governance Committee recommend to Council that the Sovereign Country Limit approved by Council on 2 March 2022 be increased from £5m to £10m, subject to a greater level of due diligence to be undertaken.