Administration and expenditure of the Chancellor's departments, 2007-08 - Treasury Contents

4  The work of the Debt Management Office


42.  The Debt Management Office (DMO) was established on 1 April 1998 to "carry out the Government's debt management policy of minimising financing costs over the longer term, taking into account risk, and to manage the aggregate cash needs of the Exchequer in the most cost effective way".[40] HM Treasury gives the DMO an annual remit which specifies the planned annual total of gilts to be auctioned by type of gilt. This remit also sets out the planned approach to Treasury bill issuance and the amount of Treasury bills the Government plans to hold in stock at the end of the financial year.[41]

43.  On 1 July 2002, the DMO integrated with the Public Works Loan Board (PWLB) and the Commissioners for the Reduction of the National Debt (CRND).[42] The PWLB issues loans, primarily to local authorities for capital works. The CRND manages the investment portfolios of public bodies such as the National Insurance Fund Investment Account, the National Lottery Distribution Fund Investment Account and the Court Funds Investment Account. The objectives of investment are primarily to maintain sufficient liquid funds to meet withdrawals by the client departments and to protect the capital value of the fund.[43]

Gilt issuance and the banking crisis

44.  The Treasury's 2007-08 remit authorised the DMO to issue gilts of £58.4bn in the year,[44] a remit which the DMO met in full.[45] In March 2008 the Treasury issued the 2008-9 remit which authorised £80bn of gilt sales, an increase of 36% on 2006-07 levels.[46] This increase in part reflected the Treasury's awareness of its need to refinance the loan made to Northern Rock upon its novation from the Bank of England to the Treasury in August 2008.[47]

45.  Following the announcement of the bank recapitalisation scheme in October 2008, the DMO's 2008-09 remit was increased from £80bn to £110bn.[48] This new remit was itself increased again, in November 2008 to £146.6bn following the measures announced in the Pre-Budget Report .[49] This new 2008-09 remit for gilt issuance constitutes 251% of the gilt issuance in 2006-07, a huge increase in business for an office with only 89 staff members.[50]

Communication with the market

46.  The Budget 2008 forecast of central government net cash requirement (CGNCR) in 2008-09 was, at £59.3bn,[51] some £21.7bn higher then the forecast of CGNCR included in the Pre-Budget Report of September 2007.[52] When the DMO's 2008-09 remit was formally announced as part of Budget 2008, it was reported that the market was surprised.[53] The DMO recognised that there were difficulties, as Mr Stheeman explained:

the market knows that there are normally … two fixed dates a year where the financing plans are communicated and we publish a gilt programme, which are the Budget and the PBR. That certainty is absolutely critical to the market. It is easy for me to say this in my position but I think that once Northern Rock was nationalised some commentators could potentially have put two and two together and worked out that there was going to be a not insignificant addition to the government cash-raising requirement. I am fully aware that not many did … you are right, the market was surprised.[54]

47.  The increase in planned gilt issuance for 2007-8, announced in Budget 2008 reportedly surprised the market. We recommend that the Debt Management Office reviews lessons learnt from this process in order to ensure the market is better prepared in future.

Coverage of gilt auctions

48.  The DMO issues gilts through an auction process. The volume of bids received relative to the total debt for sales is known as the subscription rate or coverage. In 2007-8 the DMO held a number of auctions which were covered only 1.1 times.[55] When invited to comment on the risk of an uncovered auction occurring, Mr Stheeman suggested that such a risk existed but that concerns would only arise if this happened repeatedly:

It is possible that we will see an uncovered auction and I made it clear to colleagues in the Treasury and to ministers that that is a distinct possibility. Personally an uncovered auction is not something I regard as anything more than a market event. An auction tells you how much demand there is for a specific piece of debt being offered at 10.30 in the morning on a very specific day. If there is an uncovered auction we have processes in place to deal with that ... I would not generally regard an uncovered auction as a very major issue. If there were a series of uncovered auctions, I would feel less comfortable.[56]

49.  We note that the forecast gilt issuance for 2008-09 has increased from £80bn to £146.6bn. These higher levels of gilt issuance, at a time when other governments will also need to raise cash, significantly increase the risk that supply of Government debt might outstrip demand and uncovered gilt auctions might result. We note the Debt Management Office's confidence in its ability to cope with the occasional uncovered auction but we seek assurances that the Government has put in place contingency plans capable of responding to repeated uncovered auctions.

DMO capacity

50.  The DMO's Chief Executive, Robert Stheeman noted the size of the office when discussing the increase in workload:

We are a small office; we are approximately 80 people, just less in terms of permanent staff. It is not my desire or my intention to suddenly increase staff numbers incredibly. What we want to do, if necessary—and we are going through that process right now—is to see where we need additional resources to manage operational risk, to make sure we can continue to deliver what we can ... on both sides there is a recognition that there is a primary need not just for us to deliver the remit that we have been given but to make sure that there are no mess-ups in that process.[57]

Pressed by the Committee, Mr Macpherson assured us that "the Debt Management Office will have the resources to do the job".[58]

51.  The unprecedented increase in gilt issuance levels in 2008-09 has created pressures for the Debt Management Office staff and such pressure increases the risk of mistakes being made. We recommend that the Government review the resources of the DMO in the light of its significantly increased workload.

Financial Performance and Reporting

52.  The net operating costs of the DMO in 2007-08 were £9.9m, an increase from £7.4m in 2006-07.[59] This increase in costs reflects marginal increases in costs and decreases in income.[60] Decreases in the charges levied by the CRND, together with lower levels of PWLB lending, contributed to reduced income in the year. Expenditure increased in line with the higher levels of gilt auctions.[61]

53.  The DMO Annual Report 2007-08 discloses that the DMO achieved or substantially achieved all ten of its performance targets.[62] One worrying failure reported concerned the inclusion of 12 factual errors in DMO publications during 2007-08.[63] There is a risk that factual errors published by the DMO may adversely affect the market. Mr Stheeman assured us that the errors in 2007-08 did not have any evident effect on the market:

No, they did not [affect the market], is the honest answer. There were some errors. The one which arguably could have had most of a result was in particular where we released the fourth quarter gilt auction calendar on 30 November six minutes early, but as far as we could see there was no discernible impact on the market. That was the one we felt also we should list here as being potentially one which could have moved the market.[64]

In its supplementary memorandum, the DMO reported that there had been six further errors in the period April 2008 to October 2008.[65]

54.  We note that 2008-09 will see a dramatic increase in the workload of the Debt Management Office and thus an increased risk of control failure. We recommend that the DMO revisit controls relating to publications in order to ensure that factual errors are minimised.

55.  One performance measure reported by the DMO is the timetable for issuing the results of gilt auctions. In 2007-08 the time taken for the results of gilt auctions to be issued ranged from 6 minutes to 22 minutes. The average time of 10 minutes compares with the figure of 20 minutes for 2006-07.[66] The DMO Report suggests that the significant reduction in the average time taken reflected the introduction of automated bid capture during the year.[67]

56.  The average of 10 minutes taken by the DMO to publish auction results is still longer then in other comparable countries: the NAO has reported that the United States, Germany and Ireland deliver auction results within 2 minutes.[68] Mr Stheeman's argued that the 10 minute delay was reasonable given the discretionary checks which the DMO performs regarding the concentration of bids and the value for money they offer the Exchequer which require "an element of time and assessment".[69] He told us that no external costs were incurred in establishing a system for electronic bidding and that the internally absorbed costs were around £50,000.[70] The system, in his view, now "mitigates risk" so that DMO staff "do not make mistakes".[71]

57.  We note that the DMO takes an average time of 10 minutes to publish the results of its gilt auctions compared to the 2 minute publication time achieved by other countries. While the discretionary checks performed by the DMO may account for some of this disparity, we recommend that the DMO sets a target for further reducing the delay.

Commissioners for the Reduction of the National Debt

58.  The Commissioners for the Reduction of the National Debt (CRND) have not actually met since 1860, but their duties are performed by the DMO.[72]

59.  The DMO reports that there was a technical breach within the CRND function during 2007-08 regarding 3.5% Conversion Loans. Mr Stheeman assured us that the DMO had received legal advice confirming that the chance of damaging consequences from the technical breach were "very minimal".[73] Furthermore as Jo Whelan, Comptroller General of the CRND, told us, other reforms were in place:

We have obviously referred very carefully to the prospectus, but we have also updated the procedures for the people who are operating this on the desk and the follow-through checks in the control area.[74]

60.  We note that a technical breach within the CRND function of the Debt Management Office occurred in 2007-08. Any technical breach is a serious matter. We note that in this instance the DMO has been advised that no adverse consequences resulted, and that a review of the procedures in place has been undertaken. We recommend that the DMO undertakes regular reviews of its control environment to ensure that emerging risks are mitigated where possible.

40   UK Debt Management Office and Debt Management Account, Annual Report and Accounts 2007-2008, HC 963, July 2008, p 5 Back

41   HM Treasury, Debt and Reserves Management Report 2008-09, March 2008, p 25 Back

42   UK Debt Management Office and Debt Management Account, Annual Report and Accounts 2007-2008, HC 963, July 2008, p 6 Back

43   Ibid. p 13 Back

44   HM Treasury, Debt and Reserves Management Report 2007-08, March 2007, p 21 Back

45   UK Debt Management Office and Debt Management Account, Annual Report and Accounts 2007-2008, HC 963, July 2008, p 3 Back

46   HM Treasury, Debt and Reserves Management Report 2008-09, March 2008, p 25 Back

47   Ibid., p 19 Back

48   HM Treasury, Written Ministerial Statement, Revisions to the 2008-09 debt management remit to finance bank recapitalisation, 14 October 2008 Back

49   Debt Management Office, Pre-Budget Report 2008 Revision to the DMO's Financing Remit Back

50   UK Debt Management Office and Debt Management Account, Annual Report and Accounts 2007-2008, HC 963, July 2008, p 45 Back

51   HM Treasury, Budget 2008, HC228, p 29 Back

52   HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, CM 7227, p 181 Back

53   Derivative News, Q1 2008, p 1 Back

54   Q 17 Back

55   "Result of sale by auction of £850m of 1 1.8% index-linked treasury gilt 2037", DMO Press release, 6 July 2008 Back

56   Q 14 Back

57   Q 29 Back

58   Q 229 Back

59   UK Debt Management Office and Debt Management Account, Annual Report and Accounts 2007-2008, HC 963, July 2008, p 19 Back

60   Ibid., p 19 Back

61   UK Debt Management Office and Debt Management Account, Annual Report and Accounts 2007-2008, HC 963, July 2008, p 19 Back

62   ibid., p 16-18 Back

63   Ibid., p 18 Back

64   Q 49 Back

65   , Ev 74 Back

66   UK Debt Management Office and Debt Management Account, Annual Report and Accounts 2007-2008, HC 963, July 2008, p 16 Back

67   Ibid., p 17 Back

68   National Audit Office, The UK DMO-borrowing on behalf of government, January 2007, para 2.23 Back

69   Q 28 Back

70   Q 26 Back

71   Q 26 Back

72   Oral Evidence taken before the Treasury Sub-Committee on 10 January 2007, HC 190-i, Q 49 Back

73   Q 43 Back

74   Q 44 Back

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Prepared 23 January 2009