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Looming Atlantic Split?

The future of the World Trade Organisation is in jeopardy; that much we know from President Trump's veto of new Appellant Judge appointments and his belligerent, "I'm the biggest beast in the jungle attitude". He judges that if the existing world trade order collapses then the USA will emerge stronger as others yield to the mighty dollar. But he would be wise, (some chance), to look at whats happening to the future of international financial transfer systems though because Germany has just about had enough of him.

Every time there is a foreign trade exchange the money passes through a system organised by the Society of Worldwide Interbank Financial Telecommunications. The whole world depends upon SWIFT and thousands of banks are members, the whole world over. And that gives the dollar and the US President enormous power. So, to pursue his ending of the Iran Nuclear deal he has given SWIFT until November 4th to stops trading with Iran. French oil giant Total has already pulled out as have other very large EU based companies who are putting their dollar business ahead of their Iran business.

Here's the split though; the EU countries, including the United Kingdom, want to keep the Iran deal in place. This means they are having to look at an alternative to SWIFT and it is the German Foreign Minister, Heiko Maas who is leading the charge. Frankly they are fed up with the USA threatening the rule based systems for trade.

In the next few weeks, unless attitudes change, we could see the breakdown of the WTO and the launch of a Euro-based replacement to SWIFT, probably building on the European Central Bank's TARGET2 Euro-payment system. At which point the UK will have to balance trade between a turbulent White House and a European future. The hard reality is that we will have to do both but we won't control either.

In that scenario, the hard Brexiters will also have to choose - those like Liam Fox who really want to be as close to America as possible and those like Rees Mogg who hanker after the old days of UK pure sovereignty. Under either outlook, a hard Brexit is dead and the country will have to face the reality of the referendum result and set out to sea alone or change its mind.

Ashmore Financial Limited is a partner of Wellington Street

Ian Rooth: Forward start loans, rate risk and planning for the future

While the Public Works Loan Board remains the first port of call for financing for many local authorities, there are alternatives that can lock-in future borrowing costs and help tackle interest rate risk.

As with many councils, the majority of Barnsley Metropolitan Borough Council’s (BMBC) borrowing is sourced from the Public Works Loan Board (PWLB).

While this source of funding is both simple and relatively cheap, we have found it to be quite limited. As such we are looking to diversify our approach — one of the more attractive options being the forward start loan, which the PWLB does not currently offer.

During 2017, BMBC worked with Ashmore Financial Limited in reviewing our treasury management strategy. Whilst our strategy defined our overall approach, it did not go into great detail in respect of:

  • The precise timing of our future borrowing requirements;
  • Our future interest rate risk exposure, based on such borrowing requirements (i.e. how much our financing costs could increase, or decrease, based on interest rate movements).
  • Ashmore’s analysis crystallised this risk and helped us to consider the financial impact of potential interest rate moves.

    Armed with this information we then started to look at how we could mitigate this risk. Given that our service budgets are being run so tightly, and that any unexpected increase in borrowing costs could have an adverse impact on these budgets, we wanted to know whether there was anything that we could do which would give us certainty of cost in respect of this future borrowing requirement?

    Along with Ashmore, we considered three alternative courses of action:

  • Do nothing: However, as rates appear to be on the rise (witnessed by the MPC vote on 2nd August), and in light of our considerable exposure to interest rate risk, we believe we need to be pro-active in the current environment;
  • Borrow immediately from PWLB: This provides the certainty we need however would involve a significant cost of carry;
  • ‘Lock-in’ some of our future financing costs through forward start loans, thereby reducing uncertainty for the council and minimising the risk of higher interest rates in future. This option still takes advantage of the current low interest rate environment in the interim.
  • Working with Ashmore we identified the potential to lock in the cost of future borrowing from Deutsche Pfandbriefbank at rates which were cost effective when compared against both PWLB and the forecasts that are being made by our treasury advisors and most economists.

    Whilst the process and documentation is more demanding than that of PWLB, we felt that it was worth proceeding down this route in order to protect our budgets and provide the certainty that the council was looking to achieve.

    Having fixed the first loan in late 2017, the process for the second loan which we secured in June (and which we will drawdown in 2019) was somewhat easier. We are now actively looking at similar opportunities with different lenders where Ashmore have established relationships.

    Whilst we completely understand that forward start loans may not work for every council, we have found the process and working with Ashmore and Deutsche Pfandbriefbank to be relatively straightforward. It has also given Barnsley much-needed certainty in our budgeting process.

    It is something that we will continue to consider and which we are more than happy to discuss with other councils who are concerned about the impact of a rise in interest rates.

    Ian Rooth is head of financial services at Barnsley Metropolitan Borough Council.


    Building More

    House building in the UK has been in a steady decline since the 1970s; from completions of around 370,000 a year in 1970, to just over 150,000 in 2017 (with the lowest levels during the financial crisis between 2008 and 2014), the Government estimates it needs to deliver one million new homes by 2020. 

    The Government’s 2017 White Paper ‘Fixing Our Broken Housing Market’ suggests the cause is not complicated: ‘for too long, we haven’t built enough homes.’ So far, so simple. And so, it would seem, is the answer – build more. But how can we reasonably expect an industry which has failed to deliver the required number of homes for the last fifty years to suddenly be capable of meeting the ambitions the Government has set out and build the homes we need?  

    Many people in the house building industry, even those involved in traditional methods of construction, agree this shortage is only going to be addressed by radical innovation in building practices – in other words, modular. As we know, the benefits of modular are plenty: off-site construction has the advantages of speed, predictability and safety, introduces economies of scale and can overcome the constraints of tight space requirements through quality, inspirational design. Modular also addresses the time-honoured issues of traditional house building methods such as shortages in both skills and materials, and – especially relevant in the United Kingdom – is not at the mercy of the weather to the same extent. And while modular building is certainly not a new concept – think back to the prefabs of the 1950s and 60s – and the Government itself has been committed to using Modern Methods of Construction since 2005, they have not yet really made the breakthrough into the mainstream. We in this room believe that is about to change.  

    Volumetric, pods, panels and sub-assemblies and components are among the MMC which, although considered by the large and medium sized housebuilders, are being brought to the market by smaller, more specialised firms. In addition, lenders are beginning to recognise modular constructed homes as suitable security for mortgage purposes, allowing them to become available to many more buyers than just the cash purchasers beloved of the non-traditional construction market.  

    The energy efficiency – both in construction and in situ – of modular builds is also becoming more important to buyers, domestic and commercial. As well as greater efficiencies in the construction of the homes themselves, modular homes are often much cheaper to heat, and are available with many water and energy saving apparatus – in a world where we are becoming increasingly conscious of our use of the planet’s resources, these things take on a greater sense of importance in and of themselves, rather than just for the impact on one’s pocket.  

    So: tackling the issue of housing supply in the shortest possible time and in cost and energy effective ways. What’s not to like? Why isn’t James Brokenshire beating a path to our door? Why isn’t he smiling for the camera in a high vis jacket, proffering a panel instead of a brick and basking in the glory of having solved a fifty year problem? We know modular could quickly, easily and crucially, much more cheaply, plug the gap left by traditional house building and allow the Government to meet its target of a million new dwellings by 2020.  

    But this is not the whole, or even the real story. The answer to the question is: because he can’t afford to build more.  

    Not literally, of course: we know modular can deliver a three bedroom house for around thirty five thousand pounds; that the Secretary of State has upwards of £2 billion in his Accelerated Construction Scheme which will speed up development on brownfield sites; and that changes to permitted development make it much easier for developers to navigate the quagmire of local planning rules. Rather the economy can’t afford for him to build more. Just as in any system which relies on supply and demand, a plentiful supply of new, affordable homes will supress house prices across the piece. And that’s what the Government – any Government – cannot afford.  

    All of this suggests that modular cannot after all then provide the sustainable, affordable and energy efficient answer we believed. But it can. It absolutely can. The real question is where, how and in what guise we build more.  

    In his October 2016 report ‘Modernise or Die’ Mark Farmer suggested a combination of the failure to replace retiring workers and low productivity means construction faces ‘inexorable decline’. The impact of Brexit and fewer immigrant workers means this labour force decline could be even steeper than the 25% Farmer predicted. Farmer contends that modular construction can tackle both these issues simultaneously: create the homes the country needs while the industry creates new, skilled jobs which are attractive to many who would be put off more traditional construction jobs. He also suggests a lack of cooperation within the industry has perhaps been one of the major stumbling blocks for lenders, who have often had a mixed experience with MMC.  

    In 1980 57% of the total properties built were provided by private developers, 35% by Local Authorities and 7% by housing associations. By 2015 77% were built by private developers, 21% by housing associations and just 2% by Local Authorities. We know it is in the affordable and social rented sectors that the gap has its greatest yaw, and therefore it is here the opportunity lies for modular to begin making the difference we believe it can. The Government has reiterated its commitment to modular in the 2017 White Paper through the Accelerated Construction programme and the Home Builders’ Fund, and is keen to work with local areas who are supportive of innovative manufacture to provide jobs and build local housing solutions more quickly.  

    Modular can square this circle. Diversity rather than saturation; quality as well as quantity; resilience and enhanced choice. We can build more. In the right way. In every sense.

    Paved With Good Intentions

    The demise of Carillion has thrown the issue of late invoice payments into sharp focus. To be fair to both Labour and Conservative Parties, they have tried to address the problem and, under existing legislation, Local Authorities face tough penalties if they miss the 30 day deadline. Many Councils will be surprised to learn that they face interest charges and fines this year for non-compliance. Ironic that they get punished but contractors don't. Labour's Jon Trickett MP, Shadow Cabinet Office Minister, has included prompt payment as one requirement of future out-sourcing contracts ( 

    What is infuriating is that whilst Councils and Government paid Carillion within the 30 day limit, the now-bust outsourcer held onto the cash for a further 90 days, contributing to a £1billion windfall - courtesy of the tax-payer. Readers may be interested to find out why. In October 2012 then Prime Minister David Cameron announced the Supply Chain Finance Initiative ( which followed a Labour Government commissioned report by the Bank of England and the Association of Corporate Treasurers. This was a well intended idea allowing access to bank finance to help suppliers receive their due money in term.  

    So what did Carillion do? They welcomed the initiative and cited support from apparently delighted suppliers: The problem was that due to the sheer size of Carillion and the payment terms extension, over three banks had to be involved. Banks which tended to only offer SCF to large suppliers due to the cost and complexity to on board KYC/AML etc. It is unclear if any SME supplier would have been brought into the Supply Chain Finance provision and, therefore, they now had to wait four months to be paid!

    The SCF initiative was well intentioned, but at best the charge against the Government is naivety; at worst, compliance. The danger now is that we throw the baby out with the bath water. The public sector often needs the expertise of the private sector to the benefit of the public but the Carllion experience has muddied the water for the entire sector. The lesson, as ever, is that the road to hell...