Select Committee on Treasury First Report


APPENDIX 5

Letter to the Chairman of the Treasury Sub-committee from Mr Anthony Loehnis, CMG, Chairman of the Public Works Loan Board Commissioners

  Thank you for your letter of 9 November in response to my letter dated 5 July to Giles Radice.

  There has not been time to clear this letter with my fellow Commissioners, but I think they would all agree that we have no quarrel with Mr Peattie's evidence or indeed with the descriptions of the role, operation and responsibilities of the PWLB set out in various written memoranda from HM Treasury.

  The point of my original letter to Mr Radice was twofold:

    (i)  to question the linking of the conclusion in paragraph 92 of the Report that "the rationale for the Commissioners is open to question" specifically to "the manner of the recent changes to the maximum period of PWLB loans";

    (ii)  to express surprise that six former Commissioners were invited to submit memoranda about the role and influence of the Commissioners, the modus operandi of the Board and its future role, but that no members of the present Board were so invited.

  In respect of (ii), you write that you would have welcomed at any time a written memorandum from us, but if so, it was hard for us to know in the absence of a direct communication.

  While I do not think it appropriate at this stage to submit a memorandum in the name of all the Commissioners, perhaps I may elaborate a little on my earlier letter in my personal capacity as Chairman.

THE RATIONALE FOR THE COMMISSIONERS

  As I said in my original letter, I have no problem with the recommendation that the Government review our role, which paragraph 92 suggests might involve "defining a more strategic role for the Commissioners". I also accept that the "watchdog" role of the Commissioners, which was perhaps the main justification adduced by a number of witnesses, both oral and written, for our existence and continuation in the future, could be achieved in other ways. In the Report, however, the main reason for questioning the rationale for the Commissioners is "the manner of the recent changes to the maximum period of PWLB loans". In reaching such a conclusion, I take it that your Sub-committee was particularly influenced by the exchanges between Mr Kidney, Mr Beard and Mr Peattie recorded in Questions 402-428 of the Minutes of Evidence taken on 8 March 2000. Mr Kidney suggested (Q404) that "the Commissioners had simply caved in to Treasury pressure by saying that the Commissioners took the view that there was no harm done", and (Q410) that "this letter on the behest of the Treasury during the year meant that they could have done something and they did not".

  In circumstances where:

    (a)  the statutory responsibility for setting rates lies with the Treasury, and Treasury Ministers had agreed that rates for lending at maturities of more than 25 years could not any longer be set, and

    (b)  there is a statutory duty on the Accounting Officer for the National Loans Fund that the Fund should make no loss on its lending operations, and

    (c)  he had determined that the risk of such loss was high on long-term lending, with no gilts in issue beyond 30 years maturity and yields on 30 years gilts being artifically depressed because the Government was not borrowing much and there was strong demand for long-term gilts,

  the option of refusing Sir Andrew's request was not realistic. I can imagine the arguments there might have been in Parliament and press for the Commissioners' abolition had we rejected it, quite apart from the impossibility of continuing lending at the longer maturities if the Treasury would not post interest rates for them.

  What we did do was to express regret that the change had to be made suddenly and without notice while a number of local authorities were in the throes of organising rescheduling of their debt portfolios to take advantage of favourable long-term rates, as well as to voice a number of other technical concerns.

GOVERNANCE ISSUES

  Paragraph 93 of the Report raises a number of governance issues, in particular:

    (i)  possible conflicts of interest because around half of the Commissioners are existing or retired local government officers;

    (ii)  the transparency of our proceedings;

    (iii)  the appointment of Commissioners by Royal Warrant.

  Paragraph 92 suggests that "there may be merit in defining a more strategic role for the Commissioners . . . perhaps in relation to the monitoring of local authority finances".

  As I have indicated, I have no problem with the recommendation that the Commissioners' role should be reviewed by Government. This would include the manner of their appointment ((iii) above) as well as their composition. On that I would simply observe that in my experience the risk that loan applications that come before the Board might be decided in favour of applicants and contrary to the principles laid down by the Board (which are annually reviewed and communicated to local authorities) because of bias on the part of the local Government Commissioners is nil. The 50/50 mix of local government practitioners and practitioners with direct or indirect experience of financial markets enables the Board to act as an effective "safety valve" or "watchdog", a role I believe is appreciated by local authorities.

  As regards transparency ((ii) above), I believe our clients, the local authorities, are well aware of the principles the Board follows in its lending decisions, which are affected both by Government policy on local authority lending, and, subject to that constraint, the Board's wish to be as responsive as possible to local authorities' reasonable demands for administrative simplicity and flexibility in loan administration. The reasons behind refusals of, or reductions in, loan requests are well explained to the applicants involved by PWLB staff. It is not clear to me that the publication of the minutes of Board meetings, which are rarely concerned with high policy matters, would make the Board's governance more transparent.

  The question of an enlarged role for the Board, possibly in relation to monitoring local authority finances, should certainly be the subject of Government review. My observations are as follows. As currently constituted, with 12 unpaid Commissioners meeting regularly 13 times a year, the Board may not be well suited for a more strategic role. Certainly we do not currently see it as our role to monitor local authority finances, for which other mechanisms exist. Inevitably there are occasions in connection with a loan application when the Board has doubts about the wisdom of financial policies being pursued, which may provoke further questions to the local authority involved, but the decision on a loan application is dependent solely on whether it meets our lending principles. It is also the case that the Board would alert relevant Government departments if it became aware of the widespread development of questionable financing practices, as pointed out in relation to the swaps issue in Mr Ross Russell's memorandum on page 239 of the Report. But to go beyond this to a wider responsibility for monitoring local authority finances would probably require a very radical change in the composition and method of recruitment of Commissioners, as well as a radical shift in the structure of relationships among those responsible for Local Authority finance.

27 November 2000


 
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