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FEATURES - RICH TEA AND FANTASY

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With one flash of centralist intervention, the DTLR dreamt up the perfect alternative to MMFs - but can its deposit...
With one flash of centralist intervention, the DTLR dreamt up the perfect alternative to MMFs - but can its deposit facility perform in the real world? Legendary local government money man Charles Dobson thinks not

It is ironic that just before sitting down to write this piece I read of the death of Sir Nigel Hawthorne who so beautifully portrayed Sir Humphrey Appleby in Yes, Minister and Yes, Prime Minister.

My subject - which culminated in the October 2001 circulation of the DTLR consultation note entitled Modernising the local government investment framework - would have made ideal material for one of those much-loved episodes. It has it all - those responsible for making the rules totally lack any practical knowledge about how the real world works, a sprinkling of empire building by civil servants, and the inevitable likelihood of nothing actually getting done in the end.

Top credit-rated Money Market Funds should be added to the approved list of investments for local authorities no later than March 2002. Councils overwhelmingly want the option, the industry is prepared, and primary legislation is not required for their inclusion. What is more, the October consultation note said: 'The government would be content for local authorities to invest in these funds.' So it should be - it has had two years to consider their value and suitability and knows they have satisfied all scrutiny.

Indeed those of us who have been openly promoting MMFs were given every indication they would be approved by this January. So why have they been side-swiped into the generality of the big changes proposed in the 2001 green paper, meaning they will effectively remain unavailable until 2004 at the earliest?

The answer is somebody has decided all the merits, practical advantages, benefits and flexibilities offered by MMFs can, at a stroke, be provided by a Public Works Loan Board-run deposit facility.

In the consultation note the DTLR devotes two paragraphs and one question to MMFs, and six paragraphs and five questions to its proposed utopian facility. No prizes for guessing where its priorities lie.

This is all the more surprising as, a few years ago the PWLB was asked to provide some sort of deposit facility for small amounts of short-term money and had to decline. It seems a touch of computerisation at the National Investment & Loans Office may have blended with retiring board secretary Ian Peattie's wish to go out with a bang. Not only has this made possible what was previously considered impossible, but has also spawned an alternative to the traditional short-term local authority money market. Just like that.

By tempting local government with such naively conceived and undeliverable carrots, the DTLR could be accused of time-wasting. Though only at consultation stage, this say-yes-to-everything-and-sort-it-out-later approach is irresponsible and unhelpful.

Clearly no real thought has gone into how this deposit facility will actually work. Will it be adequately staffed? Could it cope on a grant day when hundreds of councils have money to invest at the same time? In the unlikely event the answer to these most basic of questions is yes, a few more difficult ones remain.

As all investments in the facility will be 'guaranteed by the government', how can returns possibly match those achievable with triple A-rated, non-government counter-parties? What an interesting precedent this would set if indeed they did. Does the facility intend to pay what the consultation note calls 'wholesale market rates' or 'secured wholesale money market rates'? The latter is markedly lower than councils safely achieve on the market. Such vague indications of likely rates of return show no appreciation of how important every penny is to all town halls.

How will the drastically expanded staff at the deposit facility keep in touch with continual movements in short-term interest rates so they can match what the market automatically offers.

What does 'excellent liquidity' mean? Is it same day or not? What sort of deductions are likely to be needed to cover administration costs? Remember there is no charge for investing on the money market and only a nominal fee when money market funds are used.

The consultation note, after intimating all things are possible with their deposit facility, asks: 'Would your authority be likely to use the deposit facility?'. Put it this way, if it can really provide what the consultation note infers, councils should never invest their surpluses in any other way again. Government guarantee, competitive commercial market rates (after fees), bids for all periods up to 364 days fixed, same-day liquidity if required and a reliable, efficient service - lovely jubbly! Local authority Treasury team lending worries are ended in a flash of divine centralist intervention.

Back here on Earth I foresee the following. After appraising the response to the consultation note, the powers that be will deduce there is substantial interest (surprise, surprise) in their new brain child.

A number of committees (the more the merrier)

will emerge to progress matters, one of which will discover, due to practical, unforeseen problems

(see above) the facility cannot deliver quite what was envisaged.

Eventually by, say August 2002, a much watered-down central deposit-taking scheme will evolve. It will be added to the approved investment list and soon be viewed by most councils as only slightly more useful than the proverbial chocolate teapot.

Do not be side-tracked by the fools' gold promoted in this consultation note. In your responses ask why you, the practitioners, have to face further delay in the approval of MMFs which you know will enhance your short-term investment performance while they, the theorists, waste your valuable time trying to concoct something which evidence suggests bears no relation to reality.

Lest any reader should feel my chagrin stems from any pecuniary interest, I should clarify that I am now retired. 'About time,' I hear you cry. The way this business has been handled I could not agree with you more.

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