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Treasury Management Strategy and Annual Investment Strategy for 2012/13
1.Treasury Management Policy Statement
1.1West Mercia Police Authority defines its treasury management activities as:
“The management of the organisation’s cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”
1.2The Authority’s strategy for treasury management is to obtain the best available return from its transactions consistent with cash flow requirements and with the security of cash being of paramount importance.
2.Strategy for 2012/13
2.1The Prudential Code for Capital Finance requires a number of prudential indicators to be set and the Treasury Management Strategy has been set in accordance with these.
2.2The capital programme requires substantial borrowings of longer term duration. The actual timing of the borrowing will be guided by an assessment of market rates of interest. As the Authority’s investment plans need to be supported by external borrowing then the strategy will be to generally match the term of the borrowing with the life of the assets, subject to taking advantage of the relative merits of shorter and longer term interest rates at the time.
2.3The base rate of interest is currently 0.5% and the current strategy is substantially to lend for relatively short-term periods. In view of the current disadvantageous margin between long term borrowing and short term investing, it is planned to delay longer term external borrowing. In 2012/13 the capital expenditure incurred in 2008/09, 2009/10, 2010/11 and 2011/12will be temporarily funded by the use of the Authority’s temporary cash balances. The aim will be to minimise the payment of interest on borrowings.
3.Annual Investment Strategy for 2012/13
3.1The Authority has a standing strategy to obtain the best available return consistent with cash flow requirements and with the security of cash being of paramount importance.
3.2The Annual Investment Strategy must take note of the definition of specified and non-specified investments.
3.3A specified investment is one which is for less than one year and is either invested with a government body or a local authority or is invested with a body with a high degree of security. The Authority must set its own standards of security. These investments offer high security and liquidity.
3.4A non-specified investment is any investment other than above.
3.5The Police Authority will only invest in specified investments as a routine practice. In exceptional economic circumstances the Treasurer may enter into non-specified investments when there is no risk to the capital invested and they are justified by the rate of return.
3.6In previous years the standard practice for investments has been to lend for not more than 364 days to:
-Other local authorities
-UK clearing banks and their wholly owned subsidiaries with strong short term credit ratings
-The larger building societies with strong short-term credit ratings
-Other banking institutions with strong short-term credit ratings
-The UK Government’s Debt Management Office.
3.7The Statement of Prudential Indicators has set a limit of £5million for investments for longer than 364 days, although no investments of this duration are currently made.
3.8In view of exceptional conditions in the credit markets in recent years, the current practice is to restrict lending to the UKDMO (Bank of England) and to other local authorities. This will continue until stability and confidence returns to the market.
3.9As a result of the current low rates of interest together with the policy of using cash balances to temporarily fund capital expenditure, the estimate for income from investments remains at £0.035m for 2012/13.
4.0Further details in relation to the policy of using cash balances to temporarily fund capital expenditure are as follows.
4.1In 2007/08 £10m was borrowed from PWLB for 40 years at 4.44% fixed interest to fund that year’s capital expenditure. This is the Authority’s only borrowing.
4.2In 2008/09, 2009/10 and 2010/11 the capital expenditure caused a borrowing requirement of £9.5m, £7.4m and £3.8m respectively. In 2011/12 it is estimated that there will be a further borrowing requirement of £10.3m. To date these borrowing requirements have been temporarily funded from cash balances.
4.3The estimated borrowing requirement for 2012/13 is currently £14.8m. The revenue budget includes provision to make interest payments when external borrowing becomes unavoidable. The budget includes an assumption that an average of £10.0m of cash balances will be available to offset external interest costs in 2012/13.
4.4For these reasons the expectation of income from cash invested externally is low.
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Q:\Finance\Departmental\Secretarial Support\Peter\REPORTS\2012\Appx D Treasury Management Strategy - Budget 2012-13 PA (14 Feb).doc
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