Kent County Council and £10m in Dexia

There has been a bit of media interest this morning about the £10 million Kent County Council has on deposit with Dexia. Dexia is a major European bank, which, despite passing "stress tests" just a few weeks ago was falling into serious trouble due to exposure to Greek debt.

I'm no apologist for many Kent County Council decisions (!), but as the Liberal Democrat Finance Spokeman on Kent County Council, sit on the Treasury Advisory Committee, which takes advice and formulates investment strategy for the County Council for the Cabinet to agree (or not!). The Advisory Committee is cross-Party, and chaired by the CabinetMember for Finance - currently John Simmonds.

It's fair to say that when Kent County Council "lost" £50 million in Iceland (OK - some three years later, there is now a good chance we'll get around 90% of it back in total, but really) the way investment was being handled at Kent County Council was just not good enough. Key advice was either missing or failed to get to the right people, some key controls were not in place, and it seems unnecessary risks were taken. Sometimes you have to live by the rule that says "if a deal seems to be too good to be true, it probably is". The interest rates offered by Icelandic banks were out of scale of those offered by other banks, and instead of taking that as a warning, Kent invested and got it's fingers really badly burned.

However, and with credit to the Council, since then, lessons have been learned. I only became a Kent County Councillor after the Iceland debacle, and joined the Treasury Advisory Committee soon afterwards. All the processes of the investment arm of the Council have been looked at, and Councillors and Officers have worked to ensure they are tight and robust, new advisors put in place, and a "safety first" strategy of investment put in place.

There will always be arguments over what level of risk is acceptable for an investment strategy. The aim of the strategy is to get interest from the investments in order to help fund Council services - decreasing the cost to the taxpayer. The balance you have to put in place is that any investment has some risk - even if you store the money in a big box at County Hall, you risk the building burning down. Getting the balance between risk and reward right is the grail of any investment discussion.

The "safety first" investment strategy of the Council over the last 2 years has been to invest solely with major UK banks and building societies and the UK Government itself. There are limits on which banks and building societies should be used, and limits on how much can go into any individual bank, and for how long.

So of the "cash" Kent County Council currently has in balances, they are all, with the exception of £10million, currently with:

• Lloyds TSB
• Natwest
• Royal Bank of Scotland
• Nationwide Building Society
• Barclays
• HSBC
• Bank of Scotland

...and the UK Government Debt Management Office. You can see a full breakdown of the investment figures in the recent Treasury Management Report to Kent's Governance and Audit Committee.

As a brief summary, there was, in August 2011, £136m in UK banks, £10m in Dexia, £78m with the Government Debt Management Office and £39m as yet unreturned from Iceland.

So why is there £10m in Dexia, and why has nothing been done about it? Is it at risk? Should we panic?

The £10 million on deposit with Dexia was a long term deposit actually put in place before the Iceland banks went wrong. With almost perfect timing, its due to end at the end of October 2011 - and at that time, the cash would be withdrawn and put into one of the institutions listed above (in line with the new strategy).

However, when the new strategy of "safety first" was put in place, the deposit with Dexia was questioned, and whether we could get out of it. That was investigated, but like a household deposit, if you go for a fixed term deal, then to end it before the end of its term incurs penalty payments - and often quite heavy penalties. The deposit WAS renegotiated however, with the deposit now, in an extreme situation, guaranteed by the Governments of Belgium, France and Luxembourg. That's a pretty strong guarantee, and holds today. If the bank AND Governments of France, Belgium and Luxembourg all fail before the end of October, then the deposit will be in trouble. However, the world economy will also have just collapsed. It's possible, but really very unlikely.

The other interesting point is that, as with most Councils, not only do Kent have money on deposit, but also have borrowings. It's like many households - they have money in the bank, and a mortgage at the same time. As a part of their borrowings, Kent County Council currently have around £70 million in loans from Dexia. Now, as a negoitating position, having £70 million of Dexia's money while they hold £10 million of Kent's would seem to be quite a strong one...

Significant mistakes were made by Kent County Council on its investments in the past - but, even as an opposition member on the Council, I feel their current investment strategy is a reasonable balance. I've questioned, pushed, got some changes and hopefully helped improve that strategy. Safely investing taxpayers money should not be a political issue, but an entirely cross party one.

Where those systems fail, as they did over Iceland, then those responsible should be held to account - and I've done that in the past. The challenge will be to ensure that in future years, when investments opportunities improve, and they will, that Kent remembers its history, and keeps making as sure as possible that investments are safe.