In the 1992-93 financial year, the 156 trusts then established had earned £42m from their investments. This followed instructions from the NHS Management Executive that trusts should look to maximise the use of their balances on the money market.
The PAC, instead of praising the extra income, questioned why more was not being earned. At the same time, MPs asked why figures had been collated on the benefits without calculating the costs.
"We know the aggregate results, so the PAC should also know the aggregate costs of achieving them," says Alan Milburn, MP, a member of the PAC. "The NHS Management Executive has deemed this a great success. I have asked how much it cost to raise that money in terms of staff and new resources and new procedures.
"It may well be that the NHS is a net loser from playing the money markets. It is pretty remiss of the NHS Management Executive to have no idea of the cost. There was evidence in the NAO [National Audit Office] report that some trusts were employing staff explicitly to administer this."
Trusts inspected by the NAO varied significantly in the interest rates they earned, the lowest achieving 4.2 per cent, the highest 5.6 per cent. Those obtaining higher rates were generally likely to deposit money in a wider range of investments. While this resulted in additional staff and administration costs, the NAO indicated that in the trusts examined, costs were more than recovered by extra income.
Wigan and Leigh trust, for example, earned £40,000 a year by adopting a wider investment approach, compared with using a single deposit account. The staff and administrative costs of this were £9,000 a year.
Peter Morley, director of Integer, which advises NHS trusts and local authorities on investments, says it is unlikely that trusts are losing money through their money market activities but agrees that many have not learnt to maximise their returns.
"They are more concerned at controlling risks than seeking a higher rate of return," he says. "We try to wean them off the idea that the best way to avoid risk is to keep their money in a clearing bank. They point out that they are not paying service charges, but they receive a low rate of interest.
"We alert them to the idea that many banks and building societies will bid to use their funds. We provide them with an investment list, with a wide range of banks, including some overseas."
Trusts are not permitted to hold balances in foreign currencies, but they are allowed to use overseas banks. Yet many resist doing this, Mr Morley says.
Integer recommends using brokers to maximise returns. It has also created an investment pool, containing funds from several trusts, enabling them to negotiate higher interest rates. "The major banks and building societies are not interested in bidding for small sums for short periods," Mr Morley says.
Similarly, an external investment manager only becomes viable if a large fund, £10m or more, is established, he says.
Most trust income comes in the middle of the month, and major expenses, such as salaries, are paid out at the end of the month. Trusts are allowed to place that short-term cash with banks, building societies or other public-sector bodies, including local authorities and nationalised industries.
"We have a very small number of trusts among our clients," says Mr Morley. "They don't readily take to the idea that they can improve their return, but they have been criticised for not earning more. Most think the best thing they can do is to keep the money in their clearing bank.
"This is at a very early stage for some of them. Most finance directors think of investment management as a job to be done between 9.30 and 10.30 on a Wednesday morning. People in the public sector see risk control as the most important factor, which is not surprising after the BCCI collapse. And the managers are not paid more if they obtain a higher rate of return.
Mr Morley says that trusts are likely to be able to gain an extra 1 or 2 per cent from better investment management, which would be worth several million pounds annually to the health service as a whole. While Integer, fairly naturally given its operations, advises trusts against employing their own treasury management staff, the NAO report suggests that this is cost-effective.
As well as short-term cash flow, many trusts also have some funds bequeathed to them. NatWest Investments advises several trusts, with portfolios worth from £250,000 to £2m.
Colin Coburn, chief investment manager at NatWest, says: "In most cases, they are governed by Acts of Parliament, and can only use authorised investments. That determines how much we can allocate between equities and non-equities. We can put no more than half into equities. We invest in a combination, in a range of government stocks, UK companies and investment trusts."
Some bequests are intended to benefit patients, others are for the welfare of staff. Advice on the investments varies according to the needs of the trust, when they need income and whether they want to receive the product of the capital or if they are intending to use up the capital itself.