13 June 2003
Local authority finance experts this week demanded more investment autonomy from Whitehall, after a survey commissioned by Public Finance revealed widespread support for new freedoms.
Investment powers introduced last year have already proved so popular that a quarter of all authorities in England and Wales would welcome more, the report, undertaken by JP Morgan Fleming Asset Management, has found.
The survey, published to coincide with the annual CIPFA conference in Harrogate, also highlights widespread interest across Scottish councils, which will roll out the new services shortly.
In April 2002, the government granted councils in England and Wales two cash management facilities – commercially managed money market funds and the Treasury-run debt management account deposit facility.
The former operate like unit trusts and are managed by fund managers, while the latter is managed like an interest-bearing account by the Debt Management Office (DMO) of the Treasury.
Before the rules were relaxed, most councils placed surplus funds in standard bank accounts and used other simple interest-bearing products, such as bonds, for diversification.
This was viewed by some as restrictive, as councils often had substantial balances to invest. The survey shows that 52% of the 180 authorities in England and Wales polled have more than £25m to invest quarterly. A further 25% have between £10m and £25m.
Researchers found that council finance directors believe money market funds in particular are superior to bank deposits because they offer better interest payments and additional flexibility in terms of withdrawals as well as security.
Use of the deposit facility is also viewed positively because of the security involved – cash is placed in the government's bank accounts, which carry triple-A credit ratings.
The new freedoms have been so appealing that take-up of the funds has reached 31% after just one year, compared to 26% for the deposit facility, although the latter has been rolled out slowly after a series of pilot schemes.
A further 53% of councils say they intend to use money market funds in future. Andy Feek, senior treasury officer at Norfolk County Council, says: 'They offer diversification, which lowers financial risk, but they are also flexible because people can get to their cash quickly. The biggest plus point, however, has been the additional security.'
That's a view borne out by the survey, which found that 89% of those using money funds are satisfied, while the remaining 11% say it is too early to tell. Not one respondent appears unhappy.
Of those using the deposit facility, 90% express satisfaction, while 5% say they are dissatisfied.
Consequently, Feek would like the Office of the Deputy Prime Minister to introduce more freedoms in the next few years. He warns, however: 'It should be a case of "softly, softly", because finance officers want to be sure that the new services work effectively.'
Overall, almost a quarter (24%) of respondents would like the government to grant further cash management freedoms. But they may have to wait. The ODPM this week told PF that authorities must show that money market funds and the deposit facility are working well before ministers will consider granting more freedoms.
A spokesman added, however, that the government was 'hopeful' that the new facilities could precipitate future reforms.
Jim Juffs, head of operations at the DMO, appeared to echo the ODPM's gradualist approach: 'We're in consultation with the Treasury, and the big issue now is how we roll out the existing service to suit growing demand.'
That may be difficult in the short term. The deposit facility is now fully subscribed, although Juffs has made provisions for some Scottish authorities to join once the tools 'go live' north of the border.
According to experts at JP Morgan Fleming, however, councils should be given more information about the deposit facility before it is rolled out. The survey found that 34% of respondents were 'not very well informed' about the facility. Around 66% feel they are reasonably well informed.
This compares unfavourably with knowledge about money market funds, where 90% of councils express a good understanding and just 10% feel they are uninformed.
Researchers at JP Morgan Fleming conclude that the lack of understanding about the deposit facility 'may be limiting take-up'.
They urge: 'The government and fund management industry have more to do in educating local authorities. This must not be allowed to falter even when initial interest in the widening of the investment rules has died down.'
One thing is clear, however. Councils have taken a shine to their new investment freedoms and are likely to escalate their demands for more in future.
PFjun2003
