The 36th Annual Report to Parliament - New South Wales Treasury Corporation
For the year ended 30 June 2018
Invested in the future of New South Wales
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2018 Year in Review
Delivered substantial benefits for the NSW Government family…
$ $ $ 6.8bn 35m 2.5bn
of investment returns of annual savings for in the TCorp Tailored Successfully through strong the State through the Deposit due to lengthened the performance across all successful exceptional liquidity maturity of the State’s client portfolios. implementation of the management, debt to guard against centralised funds supporting the State’s potential interest rate management policy. AAA credit rating. rises.
while building a stronger TCorp.
$ $ $ 94bn 65bn 6.6bn
$94bn of assets The largest custody $65bn of assets of longer-dated bonds managed on behalf of transition in Australia managed on TCorp’s issued to a diversified NSW entities. with the consolidation balance sheet. investor base. of $52bn of assets
with a single custodian, JP Morgan.
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TCorp provides best-in-class investment management, financial management, solutions and advice to the NSW Government family. We champion and protect the financial interests of the State and deliver sustainable returns and financial efficiencies that allow our clients to achieve their broader business objectives. We deliver this through our expert team, our ability to anticipate the future needs of the state and our deep understanding of the unique needs of the NSW Government family.
Our Objectives
TCorp’s Charter
We are the financial services provider for the New South Wales (NSW) public sector. The Treasury Corporation Act 1983 (NSW) (the’ Act’) states that our principal objective is “to provide financial services for or for the benefit of the Government, public authorities and other public bodies”.
Under the Act, activities in which we can engage include:
● Provision of finance for the Government and NSW public authorities. ● Management or advice on management of government and public authority assets and liabilities. ● Acceptance of funds for investment from the Government and public authorities. ● Investment of funds. ● Management of our own assets and liabilities.
Our powers to borrow, invest and undertake financial management transactions are regulated under the Public Authorities (Financial Arrangements) Act 1987 (NSW).
Our Mission
Provide best-in-class financial management, solutions and advice to the NSW Government family.
Corporate Objectives for 2017/18
● Be regarded as a best-in-class for financial management, solutions and advice. ● Be sought after by our clients for the capability and conduct of our people. ● Have a sustainable and aligned organisation always delivering whole-of-State outcomes.
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Achievements in 2017/2018
Financial Markets
● Continued to hold a strong balance sheet with total assets exceeding $65 billion at year end. ● AAA credit rating for NSW reaffirmed by all major ratings agencies following the release of the NSW budget. Our strategy of maintaining a strong liquidity position contributed positively to the assessment by ratings agencies. ● Successfully extended our maturity profile, and launched two new Benchmark Bond lines during the year maturing in 2029 and 2037. ● $2.5bn deposited in the TCorp Tailored Deposit due to improved cash management across the State. ● Council lending grew to $365 million across 33 councils, including new approved loan applications to 24 councils totalling $240 million. ● Actively participated in the NSW Government’s Asset & Liability Committee (ALCO) identifying opportunities to improve the financial position of the State. ● Significant added value for our clients by identifying and implementing solutions to meet their financial risk management challenges.
Investment Management
● Top 10 Australian investment manager with $94 billion of funds under management at year end, an increase of $9.4 billion. ● $6.8 billion of additional returns to the State with strong positive performance and all client portfolios posting returns above their investment objectives. ● Strong performance on cash and fixed income portfolios managed in-house for clients. ● The transition of $52 billion in assets under custody to one common custodian was successfully completed. This added to the external cost savings from the centralised funds management policy, with recurring savings reaching $35 million per annum for the State. In addition, this consolidation improved efficiencies through a reduction in operating risk and enhanced reporting. ● Collaboration with the NSW Government to set up the NSW Generations Fund, announced as part of the State Budget earlier in June. ● Engaged in a range of investment advisory assignments to design and deliver improved outcomes to meet clients’ needs.
Corporate Financial Summary
● Delivered a pre-tax operating profit of $89 million.
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Contents
Section One – About TCorp 6
Section Two – Corporate Performance 16
Section Three – Operations Overview 20
Section Four – Governance 37
Section Five – Financial Statements 53
Section Six – Appendices 102
Index – Annual Report Compliance Requirements 115
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Section One – About TCorp
A message from our Chairperson 7
A message from our Chief Executive 9
Our Board of Directors 11
Our Organisational Structure 14
What We Offer 15
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A message from our Chairperson
advantage of a low interest rate environment, and we’ve assisted the Government in recycling the proceeds of some of the assets sales and leases they’ve undertaken.
One of the pools of money that we’re managing on behalf of the State, the NSW Infrastructure Future Fund (NIFF), has had a very strong investment performance and generated millions of dollars for the State to fund future infrastructure projects.
This year we managed the largest custody transition in the Australian market, consolidating the TCorpIM Funds and icare assets under custody ($52 billion) with STC’s existing assets with JP Morgan. Savings to the State from this initiative and through lower external investment management fees are at $35 million per annum.
TCorp’s participation in the State’s Asset & Liability On behalf of the Board, I am pleased to present the Committee (ALCO) moves us away from providing 2018 TCorp Annual Report. The 2018 financial year solutions on an agency by agency basis, to was critically important for TCorp as we continued identifying new opportunities that will improve the to build on the foundations we have put in place position of the State overall. ALCO was established since we commenced our major transformation to bring together the best thinking from across the journey in 2015. Each year since, alongside our State Government about how to better manage existing financial markets business, we’ve taken financial assets, liabilities and risks generally. The major steps forward in building the integrated objective of the committee is to establish the investment management business that’s now really framework for fiscal responsibility and strategies to delivering performance for our clients, the State and protect and preserve the State’s AAA credit rating. the government agencies on behalf of whom we operate. Across our portfolio, we have identified savings and efficiencies well ahead of anything that we had Driving efficiencies for our State envisaged. Concrete savings are an impressive result, but the real upside is the bigger opportunity We work in conjunction with Treasury, agencies for the State in the better management of its and the State Government to identify opportunities money: better investment management to set up the State for future success. And that performance and better risk management. means careful and prudent investment, good management of the State’s debt profile, and Investment Stewardship supporting the agencies on their financial strategies. Our role – across a series of financial For TCorp, the importance of being effective transactions the State has undertaken – is to work stewards of the capital entrusted to us is towards deploying the proceeds in the most paramount, and we believe responsible and ethical effective way possible. governance will result in better financial outcomes for our clients. The Board – and all of our people – In our traditional financial markets business, for take our fiduciary responsibilities very seriously. We example, we’ve continued to lengthen the maturity are acutely conscious at every turn that this is not structure of the State’s debt, we’re taking
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our money we’re investing. All of the people in our My thanks to our Chief Executive, David Deverall. organisation carry this at the forefront of their Under David’s leadership, we’ve rebuilt the senior minds. This money belongs to the people of NSW, leadership team in a way that’s quite remarkable. In either directly through funds set aside by the State a period of great change, what I see is a team for future investment, or where they are the coming together to collaborate optimally and all due beneficiaries of the icare schemes, or the to the high capability and integrity of the individuals superannuation trustee fund. involved.
Implemented in 2016, our Investment Stewardship I also want to thank the heads and people of the Policy embeds stewardship principles in our various agencies we work directly with at Treasury, investment decision making and active STC and icare. As the principal agencies involved management of sustainability issues across our in the investment management amalgamation, we client portfolio. To support this, we have appointed would not have been able to achieve what we have a dedicated Investment Stewardship team, if we hadn’t had their direct support. developed Investment Stewardship beliefs that guide investment decision making, embedded good Our people should be very proud of what they are stewardship principles in the selection and building, being well along the journey to building a monitoring of our investment managers and trained best-in-class investment management organisation our people to embrace stewardship in their roles. alongside an already market leading financial markets capability. I’m thrilled with the progress All of our stakeholders in the government, the they have made to date, and it gives me massive agencies, and the people of NSW should have the confidence in their ability to continue. highest confidence that the Board and all TCorp staff are discharging their responsibilities in the And to our clients and peers in the NSW most careful way. Government family, we know our mission is about being here for you and the people of NSW. We are Our thanks for the year just gone earnest in this mission to provide the best financial services that we can to the State of NSW. I’d like to thank the Board, and each Director individually, for the contributions that they’ve made. This year the Board have engaged in some big decisions across a dynamic Board agenda, and so my thanks for their diligence and working collaboratively together to achieve our fantastic Philip Chronican results. Chairperson
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A message from our Chief Executive
Investment Management
Our Investment Management business is in the top 10 of Australian investment managers. FUM grew to $94 billion – an increase of $9.4 billion, $6.8 billion due to strong investment returns and $2.5 billion in net new funds – and all of our client portfolios posted returns above their primary investment objectives, adding significant flow- through benefits to the State.
Over the year we have continued to work closely with our key strategic clients, the State Super Defined Benefit Scheme (STC), with FUM of $35 billion, and Insurance and Care NSW (icare), with FUM of $32 billion. The icare portfolios include the Treasury Managed Fund which has returned 10.5% per annum over the last 5 years, enabling the fund to distribute over $1.6 billion in benefits to the State over that period. TCorp’s mandate from the NSW Government has never been bigger. Once the central financing FUM for the NSW Infrastructure Future Fund (NIFF) authority for the Government, over time we have totalled $19.4 billion at 30 June. The NIFF will fund substantially built out our investment management infrastructure over the next 10 years and it’s capabilities. In the next 12 months, we’re looking to pleasing that over the past 12 months the fund has evolve our business further to deliver best in class delivered $1 billion to the State budget’s bottom services in both our financial markets and line. investment management businesses in order to meet this larger mandate. The Social & Affordable Housing Fund commenced in August 2017 and has already generated The year in review additional earnings of $72 million for the State. We worked with Treasury to design and execute an FY18 has been one of our busiest years in recent investment strategy that helps deliver attractive memory. Our pre-tax operating profit was $89 investment returns, enabling the Government to million with funds under management (FUM) increase levels of social and affordable housing. totalling $94 billion and a balance sheet of $65 billion. Our clients in the TCorpIM Medium Term and Long Term Growth Funds, where we have seen net new We’ve delivered significant projects whilst driving funds flow, have also enjoyed strong positive beneficial outcomes for our clients. To name a few, returns, which has enabled them to deliver on their we have delivered the common custodian project; own business objectives. been actively involved in the ALCO; contributed to the formation of the Government’s Foreign Financial Markets Exchange (FX) risk policy; improved our own risk management frameworks; relocated to new As the central borrowing authority for the NSW premises; and refreshed the TCorp brand. Government family, we manage debt on behalf of our clients exceeding $65 billion as of 30 June. Our strong position is the outcome of attracting investors in the State’s bonds from local and
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international markets, managing risk on the TCorp management outcomes. We are also looking to balance sheet and managing liquidity assets. issue a Sustainability Bond whose proceeds will support green or social projects. Through ALCO we have focussed on improved cash management across the State, resulting in the Internally, we’re continuing to invest right across development of a new product, the TCorp Tailored our support functions including Risk Management, Deposit, which has attracted more than $2.5 billion the People & Workplace function with a particular from government agencies and contributes to more focus on building our leadership capabilities, and in flexibility in managing the State’s balance sheet. our Technology function where we’ll seek to use technology to enhance the efficiency of our During the year we collaborated with our clients in operations. the water sector to advocate for a significant change in their regulatory settings to allow for a In conclusion more prudent management approach to their debt maturity structure. Following the adoption of this I’d like to thank first and foremost our clients for new approach by the regulator, we have been their ongoing support of the work we do on their advising clients on the best way to transition their behalf and for the benefit of the State. I would also portfolios to this new structure by 2020. like to thank my senior leadership team during a very busy year of change and for your energy and We’ve also assisted a number of clients achieve drive in keeping the good ship of TCorp steered in savings of up to 15% on their overseas the right direction. procurement with the Government’s FX risk policy bringing much greater awareness to the opportunity Our Board, led by our Chair, Philip Chronican, has for expense savings. And we have helped those provided great guidance as our business has responsible for some of the State’s larger projects evolved. Their experience and wisdom has certainly better manage their financial risks, executing helped me and my team sail the right course. numerous interest rate and foreign exchange hedges on their behalf. My thanks to the TCorp team who continue to work extremely hard. Government is the biggest canvas Looking towards the year ahead there is and all our people are chosen not just for their undoubted expertise in financial services, but In Investment Management we’re working on a also the pride and passion they bring that really major new initiative, the seeding of the NSW resonates with our clients. For that alone I thank Generations Fund. This is a world-first sovereign them on top of all the other great work they do. wealth fund with the dual purpose of debt retirement and improving community facilities and To our stakeholders right across government, services across NSW. TCorp will manage this Fund Treasury and all other agencies, we will continue to with future cash flows from the State. During FY19, strive for better efficiencies for the State and better we’ll progress major investments into the investment returns for the State. All these flow investment management business in the form of through to delivering a financial position that systems development, focusing particularly on enables you to deliver on your promises for the strengthening our operating risk framework. people of NSW.
In Financial Markets, we’ll continue to work proactively with the Government in lengthening its debt portfolio, taking advantage of the relatively low interest rate environment. A disciplined approach to managing the liabilities side of the balance sheet David Deverall has continued to reaffirm NSW’s AAA credit rating. Chief Executive Work continues in deploying the Government’s FX risk policy, designed to improve financial risk
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Our Board of Directors
As at 30 June 2018
Director Term Qualifications and Experience
Philip Chronican Expires: SF Fin, BCom (Hons), MBA (Dist), GAICD 15 June 2020 Chairperson, Board of Directors Banking and finance industry for over 30 years. Non-executive director of National Australia Bank (NAB) and Bank of New Zealand. Non-executive director of Banking & Finance Oath and Juvenile Diabetes Research Foundation. Former Chief Executive Officer Australia, Australia and New Zealand Banking Group Ltd, Group Executive Westpac Institutional Bank, and Chief Financial Officer, Westpac Banking Corporation.
Michael Pratt AM Ex-officio SF Fin, GradDip (Org Beh), FAICD, FAIM, FAHRI, AMP Appointed: (Harvard) 1 August 2017 Deputy Chairperson, Board of Directors Secretary NSW Treasury and NSW Industrial Relations and is responsible for strategic management of the entirety of the State’s finances, budget, assets, liabilities and financial risk management framework and transformation. The Treasury Cluster incorporates Treasury, Treasury Corporation, NSW Industrial Relations, icare (Insurance & Care NSW) and SAS Trustee Corporation.
Former NSW Customer Service Commissioner; CEO Standard Chartered Bank, North East Asia; Group Executive of Westpac Business & Consumer Banking; CEO of National Australia Bank in Australia; CEO of Bank of New Zealand; and CEO of Bank of Melbourne. He is a former President of the Australian Institute of Banking & Finance and was the inaugural Joint President of Finsia.
Philip Gardner Ex-officio B.Ec/Llb Appointed: Board of Directors 1 September 2017 Deputy Secretary, Commercial at NSW Treasury. Chair of NSW Asset & Liability Committee (ALCO), and Board member, NSW Telco Authority. Phil spent 27 years in capital markets, funds management and superannuation. He worked for Macquarie bank for 8 years, followed by 17 years with Goldman Sachs Asset Management in London, Singapore and Sydney in senior portfolio management and regional management roles. Prior to joining Treasury, Phil was an independent member of the Sunsuper Investment Committee.
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Director Term Qualifications and Experience
Robert Whitfield Expires: BCom, Grad Dip Banking, Grad Dip Fin, AMP (Harvard), 26 July 2020 FAICD Ex-officio Board of Directors Appointed: Director of Commonwealth Bank of Australia. 13 July 2015 until 21 July 2017 Former Secretary, Treasury and Chief Executive Officer of Long Service Corporation. Former Board Member, Note: Subsequently Infrastructure NSW, Public Service Commission and the retired as deputy Greater Sydney Commission. Chairman on 21 July 2017 and re-appointed Former Chief Executive Officer of Westpac's Institutional as a Non-Executive Bank and Chairman of Westpac's Asia Advisory Board, in Director 27 July 2017. addition to other key Westpac roles over the course of a 30 year career in risk management, treasury, transactional
banking, structured finance and business development.
David Deverall Ex-officio BE (Hons), MBA Appointed: Board of Directors 8 February 2016 David joined TCorp as Chief Executive in February 2016. Before joining TCorp, David was CEO of Hunter Hall International. Prior to that, David was CEO of Perpetual Limited, where he was also Chairman of the peak wealth management industry body of The Financial Services Council. Before he joined Perpetual, David was Group Head of Funds Management and Head of Strategy at Macquarie Group.
Kerry Schott AO Expires: DPhil, MA, BA (Hons) 15 January 2019 Board of Directors Chair of Energy Security Board, Moorebank Intermodal Company Limited and Sydney Metro Board NSW. Director of NBN Co Limited and Member of Sydney Light Rail Advisory Board. Former Managing Director and Chief Executive of Sydney Water; Deputy Secretary of Treasury; Managing Director of Deutsche Bank Australia and Executive Vice President Bankers Trust Australia.
Peter Warne Expires: BA, FAICD 15 January 2020 Board of Directors Chairman of Macquarie Group Limited and Macquarie Bank Limited; Director of ASX Limited and related entities and Securities Exchanges Guarantee Corporation Ltd; Member of the Macquarie University Faculty of Business and Economics Industry Advisory Board and Chairman of St. Andrew's Cathedral School Foundation. Former head of Bankers Trust Australia Limited Financial Markets Group for 11 years.
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Director Term Qualifications and Experience
Susan Doyle Expires: BA 27 April 2019 Board of Directors
Director of Securities Exchanges Guarantee Corporation Retired: Ltd. Candidate Director of Commonwealth Bank of 28 October 2018 Australia De-merger Project. Former Chief General Manager of IAG Asset Management, Insurance Australia Group. Susan has served as a Member of the Future Fund Board of Guardians and a Director of South Australian Water Corporation, among others. Susan has also been Chairman of the Australian Government Employees Superannuation Trust and Commonwealth Superannuation Corporation.
Jenny Boddington Expires: MA (Hons, Oxon) FAICD 30 August 2020 Board of Directors Chairman of Latitude Insurance. Director of Supply Nation, ANZ Lenders Mortgage Insurance and Chief Executive Women. Former Global Head of Bancassurance at QBE; CEO of QBE Lenders’ Mortgage Insurance and Executive General Manager of Financial Institutions, QBE Australia; Director of DB Capital Partners; Director of Deutsche Bank Australia. Jenny has also been a Director of Indigenous Business Australia and the NSW Growth Centres Commission.
Subsequent to 30 June 2018 the following Director joined the TCorp Board.
Anne Brennan Expires: BCom (Hons), FCA, FAICD 31 August 2021 Board of Directors Non-Executive Director of Argo Investments Limited, Charter Hall Group Limited, Metcash Limited, Nufarm Limited, Rabobank Australia Limited, Rabobank New Zealand Limited and Rabo Australia Limited. Former Non-Executive Director roles with Myer Holdings Limited, Star Entertainment Group and Cuscal Limited. Former Executive Director Finance of Coates Group; Chief Financial Officer of CSR Limited and Partner at KPMG, Arthur Andersen and Ernst & Young.
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Our Organisational Structure
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What We Offer
Solutions TCorp advises clients on investments, risk management and execution. Our solutions include, but are not limited to: • Regulatory advice. We have the expertise to help our clients across the full spectrum of • Long-term financial plans for local financial services needs through our deep relationships in the financial • Investment advice. councils. markets. • Treasury management. • Policy and governance. • Risk management. • Trade execution. These solutions are delivered through our two business divisions, Financial Markets and Investment Management These solutions are delivered through our two business divisions, Financial Markets and Investment Management
Financial Markets Investment Management
TCorp is responsible for managing Clients can confidently outsource TCorp provides members of the Direct Investments – real asset the State’s annual funding their treasury management needs to NSW Government family with portfolios managed in-house, programme and lending to NSW TCorp as we provide financial risk investment advice and portfolios comprising infrastructure and public authorities and businesses. management solutions to our clients which meet their needs and property. Strong investor demand for NSW in the following areas: objectives. Bank Term Deposits - competitive AAA rated securities, combined with Customised investments – rates and simplified TCorp’s economies of scale, means • debt. tailored investment solutions for administration from a panel of we provide a lower cost of • interest rate. larger clients to meet their Australian banks through our borrowing to our clients. We offer: • foreign exchange. specific risk and return objectives. centralised Bank Term Deposit Service. • Debt portfolio management. • Commodities. TCorpIM Funds – a range of multi-manager funds for our • Tailored Deposits – on TCorp’s TCorp also provides best execution smaller clients. AAA balance sheet offering to our clients through preferential flexible terms. pricing due to our credit quality and Cash and Fixed Income – • Short-term cash management strong operational framework. income-generating portfolios facilities. managed in-house designed to meet specific needs.
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Section Two – Corporate Performance
Performance against Corporate Objectives 17
Performance Indicators – Five Year Summary 19
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Performance against Corporate Objectives
Objective 1
Be regarded as a best-in-class for financial management, solutions and advice.
Division Performance Measures Results for 2017/18
Financial Markets Performance of funding and Our overall profit met its budgeted outcome for balance sheet management the year. Prudent management of interest rate risk embedded in our balance sheet and funding activities contributed to this result.
Performance in relation to We continued our strategy of buying back short lengthening of the State’s term bonds and issuing longer dated bonds debt portfolio and evidence of when market pricing was conducive. This adding capacity (debt strategy reduced financing risk and increased headroom) and flexibility to the State’s debt headroom. We bought back the State’s balance sheet. $1.8 billion of shorter dated bonds over the year.
Investment Management Implementing a common The transition of $52 billion in assets under custodian for TCorp, SAS custody for the TCorpIM Funds and icare (from Trustee Corporation (STC) BNP Paribas and State Street respectively) to and Insurance and Care JP Morgan was successfully completed. This NSW (icare) added to the external cost savings from the centralised funds management policy, with recurring savings reaching $35 million per annum for the State.
Outperformance against Funds under management grew by $9.4 billion benchmarks for investment to $94 billion due to strong investment returns clients of $6.8 billion and approximately $2.5 billion in net new funds, mainly from the NSW Infrastructure Future Fund (NIFF).
Develop ‘Best in Class’ We continued to invest in our multi-year goal to Investment Management be a ‘best in class’ investment manager Model to maximise risk through the Investment Management adjusted investment returns Transformation (IMT) programme. for our clients We worked closely with Treasury, the Department of Premier and Cabinet and the Treasurer’s Office on the Government’s NSW Generations Fund initiative. We will manage this long term investment vehicle which is scheduled to be funded with an initial contribution of approximately $4 billion in late 2018.
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Objective 2
Be sought after by our clients for the capability and conduct of our people.
Performance Measures Results for 2017/18
Being regarded as a preferred Results from the 2017/18 client engagement survey have been strong supplier evidenced through reflecting our role as a trusted provider including partnering with our clients maintaining and improved to help them achieve their business objectives, while aiming to deliver client satisfaction as measured whole-of-state outcomes. by annual client surveys and We had positive funds inflow across our client base. growth in funds under management.
Objective 3
Have a sustainable and aligned organisation always delivering whole-of-State outcomes
Performance Measures Results for 2017/18
To be profitable and return a Pre-tax profit of $89 million. dividend to the State. This result allows us to return healthy dividends to the State over coming years.
Assessment of benefits We actively participated in the NSW Government’s Asset & Liability realised to the State of NSW. Committee (ALCO) identifying opportunities to improve the position of the State. The objective of ALCO is to establish the framework for fiscal responsibility and strategies to protect and preserve the State’s AAA credit rating. TCorp has delivered a number of benefits for NSW including: • Successfully managing the NSW Infrastructure Future Fund (NIFF). In this financial year we generated $1 billion in investment returns for NIFF. This is additional money that can be invested into the State’s infrastructure. • Successfully managing the Treasury Managed Fund which has returned 10.5% per annum over the last 5 years, enabling the fund to distribute over $1.6 billion in benefits to the State over that period. • Successfully managing the Social & Affordable Housing Fund, commenced in August 2017, which has already generated additional earnings of $72 million for the State. • Working with Treasury on the $1.1 billion refinancing of the Sydney International Convention Centre Public Private Partnership, replacing their existing debt arrangements with lower cost AAA-rated TCorp debt and delivering a material saving of $12 million.
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Performance Indicators – Five Year Summary
2018 2017 2016 2015 2014 $m $m $m $m $m
Profitability
Profit before income tax equivalent expense1 89 132 104 151 96
Balance Sheet
Loans to Public Sector 52,913 50,902 66,238 66,091 64,520
Other Assets 12,909 14,196 14,080 11,947 13,664
Total Assets 65,822 65,098 80,318 78,038 78,184
Domestic Benchmark Bonds 45,392 45,408 51,671 55,203 56,264
Global Exchangeable Bonds 67 70 483 581 1,268
Due to Government Clients 2,696 452 4,939 307 601
Other Borrowings and Liabilities 17,374 18,937 23,006 21,780 19,910
Total Liabilities 65,529 64,867 80,099 77,871 78,043
Difference Represented by Equity 293 231 219 167 141
Funds under Management for State Authorities
Investment Funds 47,753 35,907 14,826 13,811 13,304
Specific Fund Mandates 46,128 48,548 9,660 13,191 7,166
Funds Under Administration2 - - 41,483 43,769 -
Total 93,881 84,455 65,969 70,771 20,470
1 A significant portion of TCorp’s revenues are generated through the management of financial risks inherent in its Balance Sheet. As a result, TCorp’s profitability can fluctuate year on year as it is impacted by changes in interest rates and market conditions.
2 Funds under administration represented the amalgamation of the investment management activities of Insurance and Care NSW (icare) and SAS Trustee Corporation (STC). During 2017, TCorp commenced formal investment management services over these assets and therefore, these are included under “Funds under management” from 2017 onwards.
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Section Three – Operations Overview
Financial Markets 21
Investment Management 28
Economic Environment 36
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Financial Markets Funding and Balance Sheet
The first full year of the new Financial Markets “Delivering the State quality balance sheet strategy has seen great progress on our management outcomes, optimal funding mission to ‘seek out opportunities for financial solutions and a strong and diversified investor efficiency across the NSW government family. base.” TCorp is a centre of financial markets expertise, unique in the NSW government, Our annual borrowing programme is driven by whose capabilities can be used more broadly the current and future funding needs of NSW to deliver stronger financial outcomes for our public sector clients. We seek to meet these clients and the State. TCorp Financial Markets needs by providing funding at the lowest offers solutions which will help our clients possible cost through efficient issuance and either reduce expenses or reduce risk. Our maximising value from the State’s AAA credit new strategy has led to a much deeper rating. engagement with both our major stakeholder, Treasury, and key departments such as NSW We began the 2017/18 financial year with a Health and Transport for NSW, where some borrowing task of $6.4bn, which comprised of the biggest opportunities lie. We continued new client requirements of $1.9bn and to deliver value to our regulated utility clients maturities of $4.5bn. During the year we helping them to meet the challenges of successfully extended our maturity profile, managing debt portfolios under the complexity added new bonds to the nominal bond curve of Independent Pricing and Regulatory and bought back shorter dated bonds. Tribunal (IPART) and Australian Energy Benchmark Bond Issuance Regulator (AER) regulation and benchmarking. The Benchmark Bond programme continues to be the cornerstone of our funding strategy. The State runs the ALCO to improve balance The programme provides price transparency sheet management in the government sector. and liquidity to public sector borrowers and TCorp’s active involvement in ALCO, and its institutional investors in our bonds. ‘balance sheet working group’ has led to a number of joint initiatives with Treasury that This financial year, funding was achieved have benefited the State. One such initiative through a range of activities including new in relation to improved cash management for deals, syndicated taps, and Yieldbroker the whole-of-state resulted in the TCorp tenders. We also continued to engage with Tailored Deposit, a new product, which held a our 14 panel banks in order to facilitate balance of $2.5 billion from government liquidity. This activity also benefits the agencies as at 30 June, reducing our call on issuance programme through taps and buy- short-term debt markets. Another initiative backs of existing bonds. came from ALCO’s desire to lengthen the debt underpinning the balance sheet, and Early in the financial year, we tapped the resulted in both our clients and ourselves existing February 2030 bond by syndication, executing strategies to achieve the desired bringing the total outstanding in this line to outcome. The forthcoming Sustainability over $1.25bn at the time. We successfully Bond, announced by the Treasurer in the issued two new bonds, a 2029 benchmark 2018 State budget, is yet another solution that bond in October 2017 ($1.1bn) and a 2037 highlights the strong ESG principles bond (non-benchmark) in November 2017 underpinning much of the State’s activity, ($120m). Each of these bonds has increased allowing us to strengthen and broaden our in size through additional taps. investor relationships.
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AUD Nominal Benchmark Bonds Maturity Profile by calendar year as at June 2018
AUD Nominal Bonds
Maturity Profile as at June 2018
$bn 6
5
4
3
2
1
0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Offshore Issuance Short-term Issuance
Issuing in offshore markets and in different There was ongoing demand throughout the formats enables us to access a diverse year for TCorp short term paper through the investor base, target cost savings and provide Domestic Promissory Note programme and borrowing clients with specific funding needs the Euro Commercial Paper programme. that local markets cannot achieve. Composition of Term Borrowings 30 June 2018 While we currently have bonds on issue in (Market Value) foreign markets, there were no new longer dated bonds issued in other currencies in the 6% 1% 2% past year. Offshore markets did not prove to be as cost effective as domestic markets, 12% though we continue to monitor the markets for further opportunities, should they arise.
Sustainability Bonds 79% Issuing in other formats also aids investor diversification. Following the Treasurer’s announcement in June 2018, we intend to issue a Sustainability Bond in the coming financial year. The proceeds of this issuance Domestic Fixed Rate Bonds $45.5bn will support the allocation of capital to green Capital Indexed Bonds $7.2bn or social projects. Floating Rate Notes $3.4bn
Other $0.8bn
Offshore $1.0bn
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Funding Facilities
Coupon (%) Maturity Market Panel Members Value $m
Domestic Bond Programme
3.50 20-Mar-19 2,563
6.00 1-Apr-19 474
6.00 1-May-20 4,969 Australia and New Zealand Banking Group Ltd 6.00 1-Jun-20 90 BNP Paribas, Sydney Branch
4.00 8-Apr-21 3,940 Citigroup Global Markets Australia Pty Ltd Commonwealth Bank of Australia 6.00 1-Mar-22 6,313 Deutsche Bank AG, Sydney Branch 4.00 20-Apr-23 4,773 J.P. Morgan Australia Ltd 6.00 1-May-23 713 Merrill Lynch International (Australia) Ltd
5.00 20-Aug-24 6,508 National Australia Bank Ltd Nomura International plc 4.00 20-May-26 2,724 Royal Bank of Canada 3.00 20-May-27 3,167 The Hong Kong and Shanghai Banking Corporation Ltd 3.00 20-Mar-28 5,107 The Toronto-Dominion Bank, London Branch 3.00 20-Apr-29 1,683 UBS AG, Australia Branch
3.00 20-Feb-30 1,704 Westpac Banking Corporation
6.00 1-May-30 475
3.50 20-Nov-37 190
Global Exchangeable Bond Programme
6.00 1-Apr-19 67
Capital Indexed Bonds
3.75 20-Nov-20 1,160 Australia and New Zealand Banking Group Ltd
2.75 20-Nov-25 4,281 Citigroup Global Markets Australia Pty Ltd Commonwealth Bank of Australia 2.50 20-Nov-35 1,735 Deutsche Bank AG, Sydney Branch J.P. Morgan Australia Ltd Merrill Lynch International (Australia) Ltd Nomura International plc UBS AG, Australia Branch Westpac Banking Corporation
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Market Panel Members Value $m
Euro Medium Term Note Programme
Total outstanding 969 Australia and New Zealand Banking Group Ltd BNP Paribas Citigroup Global Markets Ltd Commonwealth Bank of Australia Daiwa Capital Markets Europe Ltd Deutsche Bank AG, London Branch J.P. Morgan Securities Ltd Merrill Lynch International Mitsubishi UFJ Securities International plc National Australia Bank Ltd Nomura International plc Royal Bank of Canada Europe Ltd The Toronto-Dominion Bank The Royal Bank of Scotland plc UBS Limited
Euro Commercial Paper Programme
Total outstanding 1,236 Bank of America Merrill Lynch International Ltd Barclays Bank plc Citibank International plc Commonwealth Bank of Australia The Hong Kong and Shanghai Banking Corporation Ltd National Australia Bank Ltd Nomura International plc RBC Europe Ltd The Royal Bank of Scotland plc UBS Limited Westpac Banking Corporation
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Market
Value $m
Domestic promissory notes 3,102
Domestic cash market raisings 2,832 (including client deposits)
Floating rate notes 3,441
Miscellaneous funding through non-programme bond issuance 837 structured financing and other term borrowings
Refer Notes 14, 15 and 16 of the audited financial statements
Total 65,053
Debt and Cash Management benchmark. The debt portfolio is then managed in line with the benchmark with the “Provide the NSW Government family with objective of minimising costs and ensuring best-in-class debt and cash management that funding needs are met on a timely basis. solutions.” At 30 June 2018, our managed clients’ debt We raised new borrowings during the year to portfolios totalled $33 billion. This included fund the infrastructure investment Crown Finance Entity which represents the programmes of the Government, its agencies NSW general government sector, our largest and Public Non-Financial Corporations. Most managed debt client. of the demand came from the water, electricity and transport sectors. The aggregate market We are also a debt advisor in the regulated value of loans to clients was $52.9 billion at utility sector. For these clients we provide 30 June 2018 ($50.9 billion at 30 June 2017). advice on liability management strategies, debt benchmarks and market execution During the year there was a focus on strategies. lengthening the debt maturities of client portfolios in order to take advantage of the Innovation in Debt Management historic low long term interest rates while de- risking those utilities who have a regulated We continue to develop debt products to benchmark for their debt allowance. assist NSW public sector borrowers to manage financial risks and enhance flexibility In February, the last of the debt remaining in uncertain market conditions. from the electricity asset lease transactions was either retired or transferred (total over two Over the year we restructured the loan years $18.2 billion) to other State borrowers portfolios of the State’s regulated utilities to as new debt requirements arose. improve their credit metrics. For the State owned utilities, the rate of return on capital TCorp is engaged by NSW government employed and the allowed revenue allowance entities to manage their debt portfolios. Under is determined by IPART. As part of this these arrangements, where applicable, we process, the regulator benchmarks the cost of work with each client to establish a debt debt by referencing market estimates for the
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risk free interest rate and credit spreads. We worked with water sector clients to align their debt costs with their revenues. These portfolio restructures improved clients’ credit metrics allowing their capital structures to become more efficient.
Debt Management Strategies and Outcomes
Over the year interest rates continued in a range well below long term averages, with the TCorp 10 year bond ranging between 2.89% and 3.31%. We were active in lengthening the debt maturity profiles of clients at opportune times, allowing them to lock-in the cost of new debt and refinancing at very attractive levels.
Lengthening the debt maturity profiles of our clients also delivers the benefit of minimising the State’s refinancing risk. This strategy has been noted as being very supportive of the State’s AAA credit rating.
Key Client Loans by Sector as at 30 June
$bn 75 Crown Electricity Water Transport Other General Govt
50
25
0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Financial Risk Solutions combined efforts of working closely with Treasury and clients. Examples of recent “Be sought after as the centre of financial projects include: markets expertise for the State” ● Co-authoring the formation of the We provide financial risk solutions to a range Government’s Foreign Exchange (FX) risk of public sector clients. This includes helping policy. our clients identify and quantify their ● Advising regulated utility clients and exposures as well as determining acceptable Treasury as they responded to public strategies for risk management and cost enquires undertaken by regulators into (1) reduction. Our team has a broad range of the debt benchmarks used within the skills and commercial experience within both Weighted Average Cost of Capital to the public and private sectors. The expertise assess the rate of return on capital in the team also includes highly developed employed and (2) the IPART financeability quantitative and financial modelling skills. test. ● Advising clients and Treasury on a broad Over the year the team has contributed range of issues relating to capital structure, significantly to the identification and analysis credit metrics and financial risk of the State’s risk profile through the management issues.
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● Providing strategies to restructure the client ● Approved an improvement plan showing debt portfolios of a range of State owned how the council plans to meet the financial enterprises to improve their standalone benchmarks. credit ratings. ● Providing advice to water sector clients on Our participation in the sector has continued the restructure of their debt portfolios to to generate competition in pricing for both improve credit metrics. loans and investments which has indirectly benefited all councils including the councils ● Providing financial risk hedging and that are not eligible to access our loans. commodities hedging advice to NSW government entities, such as Transport for Growth in capturing council investment funds NSW, Treasury, Department of Family and has also continued to be strong. Community Services. ● Support to Treasury’s Infrastructure Our achievements in 2017/18 include: Finance Unit on a variety of matters from existing infrastructure projects to new ● Approved loan applications to 24 councils initiatives, including the refinancing of totalling $239.7 million. By 30 June 2018 Reliance Rail and the International the total loans outstanding to 33 councils Convention Centre. amounted to $368 million. ● Advising Treasury and utility clients on the ● Investments in the TCorpIM Funds Government Guarantee Fee Policy to increased from $280m to $492m. There are ensure competitive neutrality. now 52 councils actively using the TCorpIM Funds (an increase of 13 councils). Local Government Services ● Met with nearly 80 councils, continuing to build upon our strong relationship with them “Improve the financial efficiency of the NSW broadening the demand for our services. Local Government Sector” ● More than 75% of all councils have signed This financial year has seen a continued up to access our client portal. increase in our activity with the Local ● Regularly attending and presenting to Government sector. councils, including at council finance summits to increase awareness of our Our lending remains available only to councils capabilities and educate audiences about that meet TCorp’s credit criteria and that the investment options. Government has: ● Providing advice to more than 20 councils on treasury and investment management ● Deemed ‘Fit’ under the ‘Fit for the Future’ policies. process; or ● Receiving approval from the Office of Local ● Assessed as meeting the financial Government to act as an adviser to councils benchmarks set by the NSW Government; in respect of their investments, a role or comparable to the role that we also perform for the NSW Government.
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Investment Management
Our mission is to provide best-in-class investment solutions and sustainable risk adjusted returns to the NSW Government family.
We are one of the larger investment managers in Australia with $94 billion of funds under management (FUM), providing the New South Wales Government family with investment opportunities across a range of asset classes. Our FUM has grown significantly over the last few years.
We manage investments for a significant ● Investment management advisory and number of New South Wales public sector administration services to government entities. As a public sector asset manager, we entities. adopt a prudent approach to investment ● “Manager-of-managers’ services through management in alignment with the risk the TCorp Investment Management preferences and tolerances of our investors. (TCorpIM) trust structures. We provide investment management services ● In-house management of cash and fixed through our TCorpIM investment funds, via income portfolios ($26 billion at 30 June) direct mandates and through customised and direct investments (10.6 billion at 30 client investment solutions including cash and June). fixed income mandates. We also offer attractive cash returns through our centralised We provide advice to our clients to ensure term deposit distribution service. their requirements are met with the most suitable investment strategy and solutions. Our funds management activities include: Where appropriate, we construct individually- tailored solutions to cater for specific investment objectives. A good example of this
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is the investment design of the NSW first dual purpose sovereign wealth fund Infrastructure Future Fund (NIFF). The NIFF designed to: is invested across a diverse range of cash defensive and growth assets, designed to ● Help maintain the State’s AAA credit by preserve capital and enhance investment supporting the State’s balance sheet and returns within risk parameters, which align providing funds for future debt retirement. with the Government’s infrastructure delivery ● Create capacity for funding to help improve timetable. It has generated over $1 billion in community facilities and services across profits which will be used to enable NSW. infrastructure projects via the Government’s Restart NSW and Rebuilding NSW initiatives. TCorp has been appointed the investment manager for this fund which will commence Funds under management grew by $9.4 later in the calendar year. The NGF will be a billion over the year to 30 June 2018 due to long term vehicle with an appropriately strong investment returns of $6.8 billion and diversified growth-oriented investment net new funds of approximately $2.5 billion. A portfolio. number of growth oriented client funds posted double digit investment returns driven by Portfolio Performance strongly rising listed equity and privately owned infrastructure/property prices, and Our clients’ portfolios performed well and all good manager selection. In addition, the exceeded their primary investment objectives, Government seeded the Social and Affordable driven by strong returns in our equity and Housing Fund (SAHF) in August 2017 with an unlisted portfolios. initial funding of $1 billion. The SAHF is an innovative Government programme which A number of growth orientated portfolios delivers social and affordable housing in NSW recorded returns in excess of 10% for the and offers coordinated access to support second year running. While encouraging, which is tailored to residents’ individual needs. these levels of returns should not be extrapolated as we believe that returns from Consistent with the Government’s policy, we growth assets will be lower in the future. continue to realise the scale benefits from the centralised funds management model through Other clients have material allocations to external cost savings, operational efficiencies bonds and cash which are used to provide and consolidated investment capabilities. defensive attributes or to act as a hedge for Annualised recurring savings of $35 million interest rate movements in line with clients’ have been achieved, with an important overall business objectives. While posting milestone being the transition to JP Morgan, strongly positive returns, the performance of our single custodian, in late 2017. these client portfolios was typically in the 5- 7% range, lagging the more equity orientated To help us achieve our best-in-class strategy growth portfolios. we have commenced a multi-year Investment Management Transformation programme. The unhedged MSCI World (ex-Australia ex- We seek to become an industry-respected tobacco) Index advanced by 16% in provider of long-horizon client aligned Australian dollar (AUD) terms. Currency- investment solutions. Achieving this will hedged investors underperformed unhedged ensure we continue to deliver significant investors by 3.9% as the AUD weakened benefits to the people of NSW. against the US dollar. The Australian share market also posted a robust return of 13.2% The NSW Treasurer announced the launch of (S&P ASX 300) in line with several major the NSW Generations Fund (NGF) in the global markets. The standout performer was 2018/2019 NSW Budget. The NGF is a world the technology heavy NASDAQ Index which
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surged 23.6% as stocks such as Apple, Facebook and Amazon reached new heights.
Investments in unlisted property and infrastructure typically delivered double digit returns as investors increasingly valued the steady income streams that these assets can provide.
Our cash funds performed very well against their benchmarks, albeit against a backdrop of record low interest rates as the RBA has kept rates on hold at 1.5% since August 2016. The TCorpIM Cash Fund and the TCorpIM Short Term Income Fund (formerly known as the Strategic Cash Fund) advanced by 1.99% and 2.15% respectively. Bonds performed modestly better with the Bloomberg Ausbond Composite ex Credit Index rising 3% with yields largely range bound during the year.
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TCorp Investment Performance
The table below shows the annualised investment performance of each of the TCorpIM portfolios since their respective inception dates.
Fund Funds under Total Return Excess to Management p.a Real Return $B Objective p.a
STC DB Growth Option CPI + 4.0% p.a. over 10 years 34.6 7.6% 0.3% Inception Date: 30-Apr-88
NSW Infrastructure Future Fund CPI + 2% p.a. over 10 years 19.5 6.5% 2.6%* Inception Date: 7-Dec-16
Workers Compensation Insurance Fund CPI + 3.0% p.a. over 20 years 16.8 6.4% 0.9% Inception Date: 30-Nov-05
Treasury Managed Fund CPI + 3.5% p.a. over 10 years 7.9 6.8% 1.7% Inception Date: 31-Mar-99
Lifetime Care and Support Authority Fund AWE + 2% p.a. over 20 years 5.8 8.0% 3.0%* Inception Date: 30-Jun-07
Long Service Corporation Investment Fund AWOTE + 3% p.a. over 7 years 1.3 8.5% 3.4%* Inception Date: 25-Nov-13
Dust Diseases Authority Fund 4.5% p.a. over rolling 5 year periods 1.2 5.6% 4.9% Inception Date: 30-Jun-07
TCorpIM Long Term Growth Fund CPI + 3.5% p.a. over 10 years 1.2 7.4% 1.8% Inception Date: 1-Jul-89
Social and Affordable Housing Fund CPI + 2.75% p.a. over rolling 5 year periods 1.1 9.0% 4.7%* Inception Date: 16-Aug-17
Parliamentary Contributory Superannuation Fund CPI + 4.0% over 10 years 0.3 11.7% 5.5%* Inception Date: 31-Aug-16
TCorpIM Medium Term Growth Fund CPI + 2.0% p.a. over 7 years 0.4 5.9% 2.2% Inception Date: 1-Dec-90
Insurers' Guarantee Fund AWE + 2% p.a. over 20 years 0.2 7.5% 2.9%* Inception Date: 1-Jul-11
* Excess return is calculated from inception as the fund performance history is less than the investment objective timeframe.
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Our Investment Beliefs
As part of our journey to be a best-in-class investment manager we have developed a set of investment beliefs that guide all our investment decisions. The high level beliefs set out below are supported by a detailed set of specific beliefs.
Portfolio Construction – we are flexible and long-term in our approach to portfolio construction, developing a deep understanding of each client’s investment goal and risk appetite, then ensuring tailored asset allocation, efficient implementation and quality client engagement.
Risk – we take appropriate, evaluated and communicated risk to deliver on our mission to help clients achieve their investment objectives.
Stewardship – we believe that embedding stewardship principles in our investment decision-making can result in better risk-adjusted financial outcomes for our clients.
Comparative Advantage – with government backing and scale, a true long-term investment horizon, and a tailored approach to constructing and managing portfolios, we have a robust framework to achieve our clients’ goals.
Governance – our governance model has clear accountability, clear process and consequences, and drives excellence across the organisation, to enable near real-time decisions for the benefit of our clients.
Investment Stewardship
It is incumbent on us as manager of NSW Government funds to be effective stewards of the assets entrusted to us. One of our core investment beliefs is that embedding stewardship principles in our investment decision making can result in better risk-adjusted financial outcomes for our clients. Investment stewardship encompasses both the management of Environmental, Social and Governance (ESG) factors and active ownership across portfolios. We developed our Investment Stewardship Policy in 2016 and we have progressed well in the implementation of activities to support this policy. Implementation highlights to date include:
● Establishing an Investment Stewardship model that is benchmarked to global best practice based on five key investment stewardship pillars.
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● Developing Investment Stewardship beliefs We deliver strong financial outcomes to to guide investment decision making. clients by leveraging our extensive experience ● Embedding good stewardship principles in cash and fixed income investment into the selection and monitoring of combined with our deep understanding of investment managers and into specific public sector cash flows. We take a investment manager agreements. conservative approach to managing cash and fixed income portfolios which is consistent ● Creating a dedicated Investment with our clients’ risk profiles. Our core Stewardship team. investment capabilities include forecasting ● Implementing NSW Government policy and monitoring of large daily client cash flows which requires tobacco investment to be and the management of their liquidity excluded from all portfolios and asset requirements. classes. ● Requiring all investment managers to Our investment process seeks to add value to exercise proxy voting rights (where client portfolios using duration and yield curve applicable) across portfolios. management, allocation among sovereign, ● Membership of, and a Board position on, semi-government and supranational sectors, the Australian Council of Superannuation with credit exposures limited to investment Investors (ACSI). ACSI engage with grade issuers. Over 2018 the ongoing companies and policymakers with the goal borrowing requirements of the of progressing material ESG issues on Commonwealth, the state governments and behalf of its members. the corporate sector has supported opportunities for our investment style and also ● Membership of the Investor Group on enhanced the risk and return profile of our Climate Change. This is a collaboration of internally managed fixed income portfolios. Australian and New Zealand investors focusing on the impact that climate change has on the financial value of investments. ● Undertaking climate resiliency portfolios analysis on behalf of clients. ● Focusing on governance and transparency across our direct real asset exposures. ● Tailored training for staff on the aspects of Investment Stewardship that are relevant to their particular role.
Cash and Fixed Income
We deliver improved financial outcomes for clients through domestic cash and fixed income portfolios which are managed internally. This includes managing the TCorpIM Liquidity Cash Fund, and a significant proportion of the TCorpIM Short Term Income and TCorpIM Australian Bond Fund.
Over the financial year investment returns were strong with the performance of all managed portfolios ahead of their respective benchmarks.
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TCorpIM Cash and Fixed Income performance
3 year Relative to 1 year Relative to Market Return Benchmark Return Benchmark value
(%pa) (%pa) (%) (%) ($bn)
Highly Liquid Funds 2.24 0.27 1.97 0.18 3.93
Floating Rate Funds 2.85 0.87 2.47 0.69 11.35
Bond Funds – Active 3.71 0.16 3.66 0.16 5.01
Inflation Linked Funds 2.92 0.17 4.65 0.26 3.29
Book Value Funds 4.36 - 3.97 - 1.44
Direct Investments The infrastructure portfolio is also diversified across sectors and geographies. The focus is The direct investments team manages a on acquiring minority stakes in assets where significant direct infrastructure and property there is stability of cash flows and some portfolio on behalf of our clients and continues growth opportunities. to invest in these asset class in a disciplined manner with the objective of exceeding client Key activities during the year included the investment objectives. acquisition of 7.2% of Bristol Airport, 15% of Birmingham Airport and an investment in an The managed portfolio comprises Australian logistics property platform. approximately $5.2 billion in infrastructure and $5.4 billion in property. This includes the Investment performance for infrastructure and TCorpIM Unlisted Infrastructure and Property property exceeded their respective Funds. benchmarks over 3 and 1 year time periods.
The property portfolio is diversified across All assets in the unlisted infrastructure and sectors and geographies. The focus for future property portfolio were independently valued commercial property investments will be as at 30 June 2018. quality assets or funds with a material proportion of the return expected to be generated by income.
TCorpIM Direct Investments Performance
3 year Relative to 1 year Relative to Market Return Benchmark Return Benchmark value
(% pa) (% pa) (%) (%) ($bn)
Infrastructure 12.41 3.74 10.40 1.79 5.2
Property 12.78 2.55 12.51 2.97 5.4
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Investment Managers
The table below shows the managers selected to manage each of the TCorp IM Funds.
TCorpIM Fund Managers
Liquidity Cash Fund TCorp Strategic Cash Fund TCorp Australian Bond Fund TCorp Australian Share Fund BlackRock Investment Management (Australia) Ltd Dimensional Fund Advisors Australia Ltd Northcape Capital Pty Ltd Indexed Australian Share Fund Colonial First State Global Asset Management International Share (Unhedged) Fund AQR Capital Management Dimensional Fund Advisors Australia Ltd Panagora Asset Management Schroder Investment Management Ltd Indexed International Share (Unhedged) Fund State Street Global Advisors (Aust) Ltd Emerging Market Share Fund Northcape Capital Global EM Schroder Investment Management Ltd Investec Asset Management Listed Property Fund Vanguard Investments Australia Ltd Unlisted Property Fund AMP Capital Investors Ltd Dexus Property Group Investa Unlisted Infrastructure Fund IFM Infrastructure Morrison & Co Limited Multi-Asset Class Fund PineBridge Investments Fulcrum Asset Management LLP Pyrford International Specialist Emerging Market Share Fund Robeco Asset Management Janus Henderson Investors Wasatch Advisors Direct Infrastructure Fund A Hermes GPE Direct Investment Fund B Whitehelm Capital Pty Ltd Direct Investment Fund C LOGOS Property Group Direct Investment Fund D Macquarie Infrastructure and Real Assets Direct Investment Fund E StepStone Group Real Assets LP International Share (Hedged) Fund TCorp Downside Protection International Share Fund Veritas Asset Management LLP C WorldWide Asset Management Downside Protection Australian Share Fund Alliance Bernstein Global Alphinity Investment Management Merlon Capital Management Global Credit Fund Alliance Bernstein Global High Yield Brigade Capital Nomura Asset Management Emerging Market Debt Investec Asset Management Lazard Asset Management Pacific Co. Bank Loans ICG KKR PineBridge Investments
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TCorpIM Fund Managers Cyclical Growth Australian Share Fund Ausbil Investment Management Limited Lazard Asset Management Pacific Co. Cyclical Growth International Share Fund Ardevora Asset Management Copper Rock Capital Partners Harris Associates L.P. Artisan Partners L.P. Small Cap Australian Share Fund Fidelity Investment Management Australia Realindex Investments Yarra Funds Management Alternative Risk Premia Fund BlackRock Investment Management (Australia) Ltd GAM International Management Absolute Return Multi-Asset Class Fund Invesco Australia JPMorgan Asset Management Other assets Sub-Manager Internally managed infrastructure assets StepStone Group Real Assets LP
Economic Environment population growth. The unemployment rate edged down from 5.6% to 5.4% over 2017/18 Overall global economies continued to grow at but, disappointingly, wages growth remain a healthy pace in 2017/18, although there subdued. were signs of a moderation in Europe and Asia, and some emerging markets began Australia’s inflation rate increased to 2.1% encountering difficulties later in the year. The over 2017/18, in part due to higher petrol United States was the clear stand-out prices. But given weak wages, combined with performer as large corporate tax cuts boosted no signs of economic overheating and falling company earnings at the same time as house prices, the Reserve Bank of Australia increased government spending on defence kept the stance of monetary policy unchanged and infrastructure delivered very strong over the last year. Most measures of house growth. prices suggest that values peaked in late 2017. This mainly reflects the tighter lending The acceleration of US growth ensured that standards that regulators have insisted the inflation slowly moved towards the US Federal banks introduce in recent years. Reserve’s inflation target. As a result, the Federal Reserve continued raising its policy The relative resilience of housing activity has rate towards a more neutral level. Tighter US been apparent in New South Wales, where financial conditions, however, also affected around 70,000 new dwellings were approved global financial markets, which partly explains for construction in 2017/18, which is down why some emerging markets encountered modestly from the 73,000 approved in the more difficult economic conditions. And previous year. That said, this is still around reflecting this increasingly disparate double the 35,000 buildings approved in performance of economies, the performance 2011/12. Healthy private-sector construction of financial markets also diverged, with the US activity, combined with the NSW equity markets performing strongly, but Government’s infrastructure plans have also emerging market equities struggling. supported the NSW labour market. NSW employment grew by a very strong 3.9% over The Australian economy grew at a near-trend 2017/18 and the unemployment rate fell to pace over 2017/18, supported by robust 4.7% at the end of the financial year - the public infrastructure spending and strong lowest in Australia.
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Section Four – Governance
Corporate Governance Framework 38
Risk Management and Compliance 41
Human Resources 46
Other Required Disclosures 51
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Corporate Governance Board members are appointed by the NSW Framework Treasurer.
This section reports on our governance The Board must comprise: framework. ● The Chief Executive. Role of the Board ● The Secretary of the Treasury (or an officer of the Treasury nominated for the time Our governing legislation defines the Board’s being by the Secretary of the Treasury to role as directing management to achieve our represent the Secretary). mission and fulfil the annual agreement ● Another officer of the Treasury (if any) between the Board and the NSW Treasurer. nominated for the time being by the This is set out in our Statement of Business Secretary of the Treasury to represent the Intent. Treasury. ● Not fewer than 3 and not more than 7 The Board is responsible for: persons appointed by the Treasurer.
● Providing strategic direction and approving Each Board member is appointed for a term of the corporate strategy. up to five years and is eligible to be ● Identifying the principal risks of our reappointed. business and, through rigorous inquiry, monitoring the risk management processes. The Chairperson of TCorp’s Board is Philip Chronican. The Secretary of Treasury, ● Determining an appropriate policy regime to Michael Pratt, has held the position of Deputy control those risks within a spectrum Chairperson since 1 August 2017. acceptable to the NSW Government. ● Regularly measuring financial performance Conduct of Board Business against the Board approved annual budget. ● Monitoring the conduct and the Our governing legislation and the Board performance of TCorp and its senior Charter define Board responsibilities, management. responsibilities of individual members and the ● Overseeing management’s succession Chief Executive. Our Board also incorporates plans. practices commonly required by entities regulated by the Corporations Act 2001 (Cth). Role of Management The Board Code of Conduct and Ethics sets The Board operates through delegation to the out the standards for appropriate ethical and Chief Executive and other executives who are professional conduct for members of TCorp’s charged with the day-to-day leadership and Board. It reflects the expectation that Board management of TCorp. The Board maintains members have the highest level of integrity a formal set of delegated authorities, which and ethical standards. clearly define the responsibilities that are Our Board meets regularly throughout the delegated to management and those that are year and will meet whenever necessary to retained by the Board. discharge its responsibilities.
Board Composition and Appointments The performance of the Board committees, Board and individual members is evaluated at Board members are chosen for their regular intervals. The Board and its experience, training and expertise in the committees undertake either self-evaluation or management of financial investments, as well use outside specialists. as their collective mix of complementary skills.
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Conflicts of Interest Board Investment Committee
For Board members, actual or potential The objective of the Board Investment conflicts of interest are managed in Committee is to support the Board in accordance with the requirements of our discharging its investment governance governing legislation and the Board Code of responsibilities in respect of managing funds Conduct. on behalf of the New South Wales Government and its agencies, departments As well as disclosing actual interests in and businesses. transactions, Board members must disclose All investment activities undertaken by TCorp matters that may give rise to an interest. in its capacity as Trustee, investment Board members with an interest in a matter manager, administrator, advisor and/or agent may not vote on it or participate in discussions on behalf of another Government entity are about it, unless the Chairperson or Board subject to oversight by the Board Investment determines otherwise. Committee. Committees People and Remuneration Committee The Board has established three standing The People and Remuneration Committee committees, being the Audit and Risk acts as an advisory body to the Board on Committee, Board Investment Committee and issues relating to TCorp's human resources the People and Remuneration Committee to policies. The role of the People and enhance its effectiveness in key areas, while Remuneration Committee is to assure the discharging its responsibilities. The objectives Board that effective plans are in place to of each Committee is determined by the underpin continuous improvement in the Board and codified in a charter. return on TCorp's investment in people. Audit and Risk Committee
The Audit and Risk Committee acts as an advisory body to the Board on issues relating to internal and external audit, financial reporting, enterprise risk management and other accountabilities.
Consistent with best practice, all members of the Audit and Risk Committee are non- executive Directors. Its primary responsibility is to provide independent assistance to the Board by overseeing, monitoring and reporting on:
● TCorp’s governance, risk and controls frameworks (including internal and external audit functions), and its external accountability requirements; and ● TCorp’s annual financial statements.
This committee meets a minimum of four times a year. TCorp’s internal and external auditors have standing invitations to attend these meetings.
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Attendance at Board and Board Committee Meetings
The following table sets out the number of scheduled Board and Committee meetings attended by each Board member.
People and Audit and Risk Remuneration Board Investment Board Member Board Committee Committee Committee13
Held Attended Held Attended Held Attended Held Attended
Philip Chronican1 8 8 - - 6 6 - -
Michael Pratt 3 7 5 ------
Caralee McLeish4 1 0 ------
Rob Whitfield2, 6 8 7 - - 5 5 - -
Philip Gardner12 6 6 - - 4 4 - -
Simone Constant10 2 2 - - 2 2 - -
Peter Warne5 8 7 5 5 - - 5 5
Kerry Schott5 8 8 5 4 - - - -
Jenny 6 6 3 3 - - - - Boddington11
David Deverall8 8 8 ------
Ilana Atlas6, 9 1 1 - - 1 1 - -
Susan Doyle7 8 8 - - - - 5 5
1 Chairperson of TCorp Board. 2 Treasury Secretary until 21 July 2017. Appointed as a non-Executive Director effective 27 July 2017. 3 Deputy Chairperson of TCorp Board. Appointed as Treasury Secretary and Director effective 1 August 2017. 4 Acting Treasury Secretary for period 24-31 July. 5 Chair of Audit and Risk Committee (K Scott until 28 February 2018 and remained as a member. P Warne effective 1 March 2018.) 6 Chair of People and Remuneration Committee (I Atlas until 28 July 2017. R Whitfield effective 29 July 2017). 7 Chair of Board Investment Committee. 8 Observer at Audit and Risk Committee, People and Remuneration Committee and Board Investment Committee meetings. 9 Director until 28 July 2017. 10 Director until 31 August 2017. 11 Appointed as Director 31 August 2017. 12 Appointed as Director 1 September 2017. 13 Independent members, Bernard Reilly and David Rickards, attend Board Investment Committee meetings.
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Risk Management and ERiCC, and quarterly to the Board and Audit Compliance and Risk Committee.
Responsibility for risk management, including In conjunction with the Risk and Compliance compliance, extends across the entire department, the individual business units organisation. identify risks specific to their areas and develop controls to reduce the identified risks Our risk management framework is set by the to acceptable levels. This decentralised Board and includes a variety of Board policies approach ensures comprehensive such as the Balance Sheet Liquidity Limits identification of risks and entrenches policy, Counterparty Credit Risk policy, management of them in the most appropriate Operational Risk policy and the Funding Rate areas. An example is Risk and Compliance Risk policy. These policies are also supported and Investment Operations jointly undertaking by a number of Board level Risk Management the day-to-day monitoring of client mandates. Framework documents such as the Risk Appetite Statement and Risk Philosophy. This This organisation-wide approach to risk framework includes the establishment and management fosters a culture of risk regular monitoring of limits for market, credit, awareness, with all levels of the business operational and other risks. contributing to the framework and the detailed systems and processes that identify, control, In respect of our broader risk management monitor and report on our risks. programme, the Audit and Risk Committee provide regular oversight of the programme Legal and Regulatory Compliance and reports to the Board as to the appropriateness of the enterprise risk We are regulated by several pieces of NSW management process and effectiveness of the legislation, including our own Act, the internal control framework. To assist with this Treasury Corporation Act 1983 (NSW), as process, the Audit and Risk Committee well as the Public Finance and Audit Act 1983 receives regular reports from internal audit, (NSW), the Annual Reports (Statutory Bodies) external audit and TCorp management. Act 1984 (NSW) and the Public Authorities (Financial Arrangements) Act 1987 (NSW) At a management level, governance over the (PAFA). We are ultimately accountable to the risk management programme is provided by NSW Parliament, through the NSW Treasurer. the Enterprise Risk and Compliance Committee (ERiCC) which is responsible for Although we are not directly regulated by ensuring that Board policies are adequately either the Australian Prudential Regulatory embedded in business practices and that Authority (APRA) or the Australian Securities appropriate levels of control, procedures, and Investments Commission (ASIC), we monitoring and training have been embedded actively utilise their guidance notes as the within the broader enterprise. Our risk basis for our risk management policies, both management objectives are further supported at the Board and management levels. We by a range of management committees and also voluntarily adopt relevant industry forums whose broader purpose is to oversee practices which help us to align with market specific issues such as market, credit and best practice. We continue to monitor operational risk exposures and activities. changes in the regulatory environment to determine if any changes to our business The Risk and Compliance department is a practices are required. centralised function responsible for monitoring of Board policies, management procedures Our activities are subject to review and and any other risk matters identified as monitoring by a number of external parties, potentially requiring attention. The department including: reports daily to management, monthly to
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● The NSW Treasurer, the NSW Government Market Risk shareholder representative. ● Treasury, which maintains a shareholder We use a value-at-risk model based on monitoring role through quarterly and historical simulation to assess capital annual reporting requirements common to requirements arising from market risk. The all NSW Government agencies and by model captures the potential for loss of representation on the Board. earnings or changes in the value of our assets and liabilities arising from movements in ● The NSW Auditor-General, who reports to interest rates and key credit spreads and from the NSW Parliament, provides an fluctuations in the prices of bonds or other independent audit of TCorp’s financial financial instruments. Market risk exposures reports and expresses an opinion on those are monitored daily against Board approved financial reports in line with the limits and reported on a quarterly basis. requirements of the Public Finance and Audit Act 1983 (NSW). Credit Risk Compliance is a key element of risk management and our compliance framework In conducting our business, we invest in high is structured to ensure adherence to grade financial assets issued by parties applicable laws, regulations, contracts, external to the NSW Government family. The industry standards and internal policies. returns achieved on these financial assets Consistent with our risk management must be sufficient to protect against a loss in approach, compliance measures are subject value caused by a decline in the to continuous monitoring and improvement. counterparty’s creditworthiness or ultimate Any material compliance issues are referred default. to the Chief Executive, ERiCC, the Audit and Risk Committee, the relevant investment Credit exposures are monitored daily against committee and/or the Board as appropriate. Board approved limits and reported on a quarterly basis. Use of Capital Operational Risk While we do not hold subscribed share capital in the conventional commercial sense, we do Operational risk can arise from a wide variety retain capital appropriate to the market, credit of events such as settlement errors, system and operational risks relevant to its business. failures, breakdowns in procedures and This retained capital, is determined with external factors. We review possible risks of reference to APRA’s standardised approach this nature, assesses the mitigating factors and in consultation with our owner, the NSW and controls to determine residual risks. We Government. use enterprise risk management software to aid the identification and measurement of risk Within these capital constraints which are and implementation of associated internal specific to TCorp, we manage the market, controls. High ongoing residual risks are credit and operational risks to which we are managed by a combination of improving exposed to ensure that the level of capital is procedures and process flows, ensuring sufficient to cover the financial and appropriate segregation of duties, insurance operational risks incurred in our daily cover and business continuity plans. business. Operational risk issues are reported to the Capital usage is calculated daily and Board on a quarterly basis and material monitored against Board approved limits. issues are escalated to the next scheduled Management reports are produced daily and Audit and Risk Committee. summary reports are presented quarterly to the Board.
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Auditor Independence Code of Conduct and Ethics
We are audited annually by the Audit Office of Our Code of Conduct and Ethics articulates NSW. The PAFA Act further promotes our expectations of staff in their business independence of the Audit Office by ensuring affairs and in dealings with clients and other that only the NSW Parliament, not the parties. The Code of Conduct demands high executive government, can remove the standards of personal integrity and honesty in Auditor-General, and by precluding the all dealings and a respect for the privacy of provision of non-audit services to all public clients and others. sector agencies. All staff sign the Code of Conduct upon Our outsourced internal audit programme is commencement to acknowledge that they currently provided by have understood it and at the time of writing PricewaterhouseCoopers who report directly agree to act according to its requirements. to the Audit and Risk Committee. Annual Staff subsequently re-attest this internal audit plans are approved by the Audit understanding on an annual basis. and Risk Committee and all internal audit review reports are reported directly and independently to the Audit and Risk Committee.
Insurance
During the 2017/18 financial year insurance for TCorp was maintained with the NSW Government self-insurance scheme called the Treasury Managed Fund (TMF), which covers the NSW Government’s insurable risks.
TMF provides cover for the following classes of risk: ● workers compensation. ● property (full replacement, new for old, including consequential loss). ● liability (including, but not limited to, professional indemnity and Directors’ and Officers’ liability). ● miscellaneous (e.g. personal accident).
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Internal Audit and Risk Management Attestation for the 2017-2018 Financial Year for NSW Treasury Corporation
The Directors are of the opinion that NSW Treasury Corporation has internal audit and risk management processes in operation that are compliant with the eight core requirements set out in the Internal Audit and Risk Management Policy for the NSW Public Sector, specifically:
Core Requirements Compliance
Risk Management Framework 1.1 The agency head is ultimately responsible and accountable for risk management in Compliant the agency. 1.2 A risk management framework that is appropriate to the agency has been Compliant established and maintained and the framework is consistent with AS/NZS ISO 31000:2009.
Internal Audit Function 2.1 An internal audit function has been established and maintained. Compliant 2.2 The operation of the internal audit function is consistent with the International Compliant Standards for the Professional Practice of Internal Auditing. 2.3 The agency has an Internal Audit Charter that is consistent with the content of the Compliant ‘model charter’.
Audit and Risk Committee 3.1 An independent and Audit and Risk Committee with appropriate expertise has been Compliant established.
3.2 The Audit and Risk Committee is an advisory committee providing assistance to the Compliant agency head on the agency’s governance processes, risk management and control frameworks, and its external accountability obligations. 3.3 The Audit and Risk Committee has a Charter that is consistent with the content of the Compliant ‘model charter’.
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Membership
The chair and members of the Audit and Risk Committee (ARC) are:
Member Status on ARC Appointment to ARC Retired
Mr Peter Warne Independent Chair March 2012 N/A
Dr Kerry Schott Independent member December 2015 N/A
Ms Jenny Boddington Independent member August 2017 N/A
David Deverall Chief Executive in accordance with a resolution of the Directors of NSW Treasury Corporation.
20 August 2018
Contact Officer Kevin Masling Chief Risk Officer [email protected]
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Human Resources General Manager, K McDonald, BA. LLB, People & Workplace MSc At TCorp, we are focused on ensuring a high level of engagement across our workforce. General Manager, P Verschuer, B.Sc, MIR We are building our people and leaders’ Financial Markets Intl.Rel., MA Intl.Comms. capability through our investment in training and learning, leadership development, top General Manager, M Daughton, BA (Hons), talent coaching, and focus on inclusion. Technology MSc
We are focused on attracting and retaining people who are driven by a sense of purpose, Key HR Priorities in 2017/18 and have the skills and client focus to deliver strong performance for our clients and the Flexible Working NSW Government family. In May/June 2018, we transitioned to fully flexible working arrangements. To support this Management and Structure cultural and behavioural change all staff participated in training. The training helped The Executive Committee was restructured staff to adapt to the new ways of working and late in 2017/18. The reporting line for the the new technologies which enable them to be Investment Operations function was more effective, both in and outside the office. redirected to the Corporate Services and Operations division under the Chief Operating Establishment of a Recruitment Centre Officer. A new General Manager, Technology of Expertise position was created, reporting to the Chief Executive. This role was filled internally in In January 2018, we established a September 2018. Recruitment Centre of Expertise as part of the People & Workplace division. Our As part of the Investment Management Recruitment Centre is focused on ensuring Transformation programme, a restructure of the best people are attracted to join our the Investment Management division business, and leaders and employees are commenced in late 2017/18. Additional provided with the development opportunities internal movements and key hires have been needed to build the capability required to made during the year to support business deliver on TCorp’s strategy. processes and enable our strategy. Talent and Development Senior Executives Our People & Workplace strategy identified Senior Officers specific priorities in the area of talent and development. All of these initiatives are aimed Chief Executive D Deverall, BE, MBA at further developing the capability of the organisation to deliver on TCorp’s best-in- Chief Investment S Brentnall, BSc Ec, class strategy, as well as to address issues Officer Dip.App.Fin. & Inv., CA, GAICD raised in the People Matter Engagement Survey. Highlights from the talent and General Manager, K Seymour, BSc (Hons), development programme include: Client Relationships MBA, GAICD ● The launch of the capability framework Chief Operating P Smith, B.Com, CA, which includes people and leadership Officer F.Fin capabilities supported by online training courses. Chief Risk Officer K Masling, B.Ec, M AppFin, MBA
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● The launch of the leadership excellence and development programme. ● Continuation of the top talent development programme.
Other notable activities included:
● Implementation of Success Factors, the new human resources management system. Success Factors holds employee profiles, supports recruiting activities and includes learning modules. ● Online cyber security training.
Numbers and Remuneration of Senior Executives
2018 2017
Number of Executive Officers 7 8
Number of Female Executive Officers 2 2
Band 2018 2017 Female Male Female Male
Bands 3 & 41 2 5 2 6
Band 2 0 0 0 0
Band 1 0 0 0 0
Band Range $ Average Remuneration Average Remuneration 2017/2018 2016/2017
Bands 3 & 41 $328,901 to $463,550+ $658,857 $571,8752
Band 2 $261,451 to $328,900 N/A N/A
Band 1 $183,300 to $261,450 N/A N/A
1. Bands 3 and 4 have been consolidated for disclosure purposes as only one senior executive’s remuneration fell within Band 3 ($328,901 - $463,550) in 2017/18.
2 The 2016/17 average remuneration calculation was impacted by the rebuilding of the senior executive team resulting in a portion of the remuneration package being calculated on a pro-rata basis.
● 12.9% of TCorp’s employee-related expenditure in 2017/18 was related to senior executives, who represented 4.3% of full time equivalent employees as at year end. ● 13.2% of TCorp’s employee related expenditure in 2016/17 was related to senior executives, who represented 4.8% of full time equivalent employees as at year end.
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Number of Employees 1
2018 2017 2016 2015
Chief Executive 1 1 1 1
General Managers 6 7 8 8
Professional Employees 131.70 132.6 113.7 101.1
Support Employees 21.30 26.0 23.3 22.6
Total 160.00 166.6 146.0 132.7
1. Headcount excludes casual and maximum term employees.
Exceptional Movements in Salaries During the year there was one workers compensation injury claim. It involved There were five exceptional salary increases minimal lost time so that the employee could of greater than 10% in FY17/18. These were attend medical and allied health required so that the relevant salaries complied appointments. The employee maintained all with TCorp’s remuneration policy and pre-injury work duties. practice. In addition to the more traditional areas of The overall movement in salaries was 1.88%. WHS legislative, compliance and injury management, preventative health and Industrial Relations Policies wellbeing is an increasingly important area of focus. During the year a number of There were no unfair dismissal claims during programmes and services addressed both the year and no time was lost as a result of physical and psychological wellbeing, through industrial disputes. the continuation of established programmes and the introduction of new initiatives. Code of Conduct We’ve continued our strong focus on WHS TCorp’s Code of Conduct and Ethics and particularly on correct ergonomic set up in represents the standards required by staff in conventional and non-conventional work carrying out their duties. It is a mandatory spaces. We conducted ergonomic requirement of employment that all staff assessments and briefings for all staff formally acknowledge that they have read and covering correct desk and chair operation and understood the Code as an annual set up, using dynamic postures throughout the undertaking. day and alternating between sitting and standing, taking rest breaks and regularly Work Health and Safety (WHS) changing from repetitive to non-repetitive activities. Our WHS Policy and WHS Risk Management Where employees require expert assistance, and Records Procedures are reviewed every we engage an expert to conduct an on-site two years, most recently in November 2017. ergonomic assessment. The review is aimed at ensuring our WHS system, policy and procedures support a safe We provide a number of health and wellbeing and healthy work environment for all workers benefits and programmes to employees. and meet legislative obligations. During the year 84 staff members participated in the annual on-site flu vaccination
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programme while 32 employees accessed the particular requirements so that relevant annual health check programme which is modifications or adjustments can be made. available to all permanent employees. Four We currently have one employee who has employees returning to work from parental declared a disability. This employee does not leave completed TCorp’s Return to Work require modifications to the workplace to Coaching Programme. perform their role.
As a requirement of their role, Facilities and Multicultural Policies and Services Front of House employees completed safe Programme manual handling and active assailant training. As we do not offer services to the general Other WHS initiatives implemented during public, our multicultural policies and activities 2017/18 included: are focussed internally.
● Resilience (identified as a key capability in We encourage and celebrate diversity in our the TCorp Capability Framework) and workforce and in the workplace. This ongoing emotional intelligence components were commitment is demonstrated through our included in leadership and other policies, values and through initiatives that development programmes offered to TCorp promote inclusion and diversity in the employees. workplace. We are currently developing a new ● A mindfulness programme ‘A Mindful Way diversity and inclusion strategy which will be to Work’ piloted in 2017/18. The programme launched in the first half of 2018/19. was well received and follow up or similar programmes will be offered again. We held our annual ‘A Taste of Harmony’ ● TCorp Board of Directors checklist, detailing event in celebration of Harmony Day in Directors’ legal obligations under WHS 2018. This event celebrates the diverse legislation and how TCorp assists Directors multicultural background of our workforce by in executing their obligations, was inviting staff to share a plate of food from their developed in conjunction with our external cultural background or a country they have legal counsel, and will be provided to all recently visited. Directors annually and on commencement of new Directors. Our Community Programmes continue to be popular with staff and enjoy high participation from across the business. The 2016/18 cycle Disability Inclusion Action Plans of TCorp’s Helping Hands Program concluded at the end of June, with almost $10,000 raised We have a Disability Inclusion Action Plan. over the two year period. The proceeds were Due to our relatively small workforce, the split between the charities ReachOut Australia focus of ongoing disability planning is directed and UNHCR Australia. Helping Hands seeks internally rather than being accessible by the to not only raise funds for our chosen charities wider public. but to educate staff on the issues and causes We ensure compliance with the relevant that they support through a program of legislation (disability and anti-discrimination) engaging events and communications. as it relates to all policies, procedures and The popular Giving Tree Programme was practices, including in areas of recruitment repeated in December 2017 with staff and selection, internal promotions and donating practical gifts to those seeking transfers, training and development. In shelter at the Elsie Refuge for Women and addition, our premises comply with Australian Children in Glebe, as well as those that are Building Codes and Standards. supported through the Elsie Outreach Upon commencement of their employment, Programme. new employees are asked to notify us of any
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Workforce Diversity
Table 1 - Trends in the Representation of Diversity Groups1 % of Total Staff 2
Benchmark 2016 2017 2018 or Target (%)
Women 50 36.5 40.2 40.6
Aboriginal people and Torres Strait Islanders 3.33 0.0 0.0 0.0
People whose first language was not English 23.2 25.8 28.0 30.2
People with a disability 5.64 0.0 0.5 0.5
People with a disability requiring work-related N/A 0.0 0.0 0.0 adjustment
Table 2 – Trends in the Distribution of Diversity Groups
Distribution Index 5
Benchmark 2016 2017 2018 or Target (%)
Women 100 88 91 93
Aboriginal people and Torres Strait Islanders 100 N/A N/A N/A
People whose first language was not English 100 97 92 92
People with a disability 100 N/A N/A N/A
People with a disability requiring work-related 100 N/A N/A N/A adjustment
1 Staff numbers are as at 30 June.
2 Excludes casual staff.
3 The NSW Public Sector Aboriginal Employment Strategy 2014 – 17 introduced an aspirational target of 1.8% by 2021 for each of the sector’s salary bands. If the aspirational target of 1.8% is achieved in salary bands not currently at or above 1.8%, the cumulative representation of Aboriginal employees in the sector is expected to reach 3.3%.
4 In December 2017 the NSW Government announced the target of doubling the representation of people with disability in the NSW public sector from an estimated 2.7% to 5.6% by 2027.
5 A Distribution Index score of 100 indicates that the distribution of members of the Workforce Diversity group across salary bands is equivalent to that of the rest of the workforce. A score less than 100 means that members of the Workforce Diversity group tend to be more concentrated at lower salary bands than is the case for other staff. The more pronounced this tendency is, the lower the score will be. In some cases, the index may be more than 100, indicating that members of the Workforce Diversity group tend to be more concentrated at higher salary bands than is the case for other staff.
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Other Required Disclosures involved contacting 37 clients across 30 organisations. The results of the survey Exemptions from the Reporting revealed that we are: Provisions ● A highly regarded partner by 70% of our We have been granted exemptions from clients. clauses 10 and 11 of the Annual Reports ● A trusted advisor to more than 50%. (Statutory Bodies) Regulation 2015 (NSW), ● Cited by 57% as a preferred supplier. relating to reporting on the performance of the liability portfolio, benchmark portfolio and Clients identified our strengths as the investments. following:
One of our core businesses is the raising of ● Technical capability and product expertise. debt in the private sector capital markets and ● Responsive client service. the on-lending to the NSW Government ● Government linkages and knowledge. sector. The profile of the borrowings from the private sector is substantially determined by ● Size and scale efficiencies of the the amounts and maturities required by the organisation. Government and public authorities. As such, There were no thematic weaknesses unlike other authorities that fall under the identified by the survey. Some clients noted regulation, we are not in a position to actively that there are opportunities for more proactive manage our liability portfolio in a manner that and targeted communications and increased is readily comparable with a benchmark education and support. portfolio as contemplated by such regulation. Any savings we make in connection with our debt are, however, reflected in the statutory Public Interest Disclosures Act 1994 accounts for the year. The Public Interest Disclosures Act 1994 In conducting this core business activity, we (NSW) (PID Act) gives public sector maintain, for appropriate prudential reasons, a employees a secure and confidential process pool of financial assets that provide a for disclosing serious wrongdoing in the necessary liquidity buffer. As such, unlike workplace, as well as protection from acts of other authorities that fall under the regulation, reprisal. It is part of the Government's with minor and immaterial exceptions, all of ongoing commitment to promoting ethical our assets, as well as our liabilities, are practices in the Government sector. financial. The assets are not considered Our PID Act policy meets its obligations under surplus funds in terms of the regulation, and the PID Act to institute and enhance the can be seen as directly related to our core internal reporting system. It allows for business, rather than an ancillary activity of an reporting disclosures of corrupt conduct, authority. maladministration or serious and substantial waste of public money by staff, and Production of the Annual Report government information contravention. It also takes steps to protect staff that make such The majority of the production of this report, was undertaken internally and less than disclosures from any detrimental action. $5,000 in costs were incurred. This report is available online at www.tcorp.nsw.gov.au in All new staff are advised during induction, and PDF format. existing staff are regularly reminded of their obligations under the PID Act and our PID Act Consumer Response policy.
Our independent annual client survey was conducted by telephone in May 2018. This
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We have an appointed public interest disclosure officer. No matters have been reported under the PID Act during the year.
Privacy Management
In accordance with the Privacy and Personal Information Protection Act 1998 (NSW) (PPIP Act), we have a Privacy Management Plan and a designated Privacy Officer. There have been no internal reviews conducted by, or on behalf of, TCorp under Part 5 of the PPIP Act during the year.
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Section Five – Financial Statements
Statement of Comprehensive Income 55
Balance Sheet 56
Statement of Changes in Equity 57
Statement of Cash Flows 58
Notes to the Financial Statements 59
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Financial Statements
TCorp
The audited financial statements for TCorp for the year ended 30 June 2018 commence on the next page and finish on page 101.
All financial information quoted before this section and after page 101 is unaudited.
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Statement of Comprehensive Income for the year ended 30 June 2018
2018 2017 Note $’000 $’000 Income from changes in fair value of financial assets and liabilities 3 2,613,656 4,960,674 Less: Expenses from changes in fair value of financial assets and liabilities 4 (2,511,359) (4,811,796) Net income from changes in fair value of financial assets and liabilities 102,297 148,878 Fee income 5 76,189 60,445 Total net income 178,486 209,323
Operating costs 6 (75,723) (65,702) Transaction costs 7 (13,952) (11,190) Total operating and transaction costs (89,675) (76,892) Profit before income tax equivalent expense 88,811 132,431 Income tax equivalent expense 1(c) (26,636) (39,753) Profit for the year 62,175 92,678
Other comprehensive income Items that will not be reclassified to profit or loss: Actuarial (loss)/gain on defined benefit plans (24) 79 Total comprehensive income for the year 62,151 92,757
The accompanying notes form part of these financial statements.
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Balance Sheet as at 30 June 2018
2018 2017 Note $’000 $’000 Assets Cash and liquid assets 8 764,804 1,343,989 Outstanding settlements receivable 1(e) - 288,211 Due from financial institutions 9 6,984,646 5,938,513 Securities held 10 4,599,959 6,072,995 Derivative financial instruments receivable 17 502,811 523,437 Loans to government clients 11 52,912,735 50,901,974 Other assets 12 49,821 27,813 Plant and equipment 13 7,274 1,136 Total assets 65,822,050 65,098,068
Liabilities Due to financial institutions 14 4,474,986 4,910,446 Outstanding settlements payable 1(e) 22 235,965 Due to government clients 15 2,695,665 451,624 Borrowings 16 57,882,426 58,675,203 Derivative financial instruments payable 17 439,661 486,004 Income tax equivalent payable 8,558 9,525 Other liabilities and provisions 18 27,317 98,037 Total liabilities 65,528,635 64,866,804
Net assets 293,415 231,264 Represented by: Equity Retained earnings 22 293,415 231,264 Total equity 293,415 231,264
The accompanying notes form part of these financial statements.
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Statement of Changes in Equity for the year ended 30 June 2018
Retained Total earnings equity Note $’000 $’000 Total equity at 30 June 2016 22 218,507 218,507 Profit for the year 92,678 92,678 Other comprehensive income 79 79 Total comprehensive income for the year 92,757 92,757 Transactions with owners in their capacity as owners: Dividend payable 18 (80,000) (80,000) Total equity at 30 June 2017 22 231,264 231,264 Profit for the year 62,175 62,175 Other comprehensive loss (24) (24) Total comprehensive income for the year 62,151 62,151 Transactions with owners in their capacity as owners: Dividend payable 18 - - Total equity at 30 June 2018 22 293,415 293,415
The accompanying notes form part of these financial statements.
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Statement of Cash Flows for the year ended 30 June 2018
2018 2017 Note $’000 $’000 Cash inflows/(outflows) from operating activities Interest and other costs of finance received 2,238,808 2,806,731 Interest and other costs of finance paid (2,180,171) (2,519,275) Fee income received 78,873 55,935 Payments of tax equivalents (27,603) (44,675) Payments of Goods and Services Tax (3,581) (2,032) Payments of operating and transaction costs (90,022) (74,528) Loans to government clients made (4,268,301) (4,664,613) Loans to government clients repaid 2,130,112 17,601,629 Net cash (used in)/provided by operating activities 32 (2,121,885) 13,159,172
Cash inflows/(outflows) from investing activities Purchases of plant and equipment and intangible assets (9,196) (632) Net cash from/(to) market securities held 319,424 (1,241,959) Net cash provided by/(used in) investing activities 310,228 (1,242,591)
Cash inflows/(outflows) from financing activities Proceeds from issuance of borrowings and short term securities 69,030,325 67,402,825 Repayment of borrowings and short term securities (67,364,327) (79,770,851) Net cash outflows from the purchase and repayment of other financial (352,526) (80,423) instruments Dividends paid (80,000) (21,000) Net cash provided by/(used in) financing activities 1,233,472 (12,469,449)
Net decrease in cash held (578,185) (552,868) Cash and cash equivalents at the beginning of 1,341,989 1,894,857 the year Cash and cash equivalents at the end of 31 763,804 1,341,989 the year
The accompanying notes form part of these financial statements.
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Notes to the Financial Statements for the year ended 30 June 2018
1. Summary of Significant Accounting Policies
(a) Basis of Preparation
The financial statements of New South Wales Treasury Corporation (‘the Corporation’) are general purpose financial statements and have been prepared in accordance with the provisions of the Public Finance and Audit Act 1983, the Public Finance and Audit Regulation 2015 and the New South Wales Treasurer’s Directions. They have also been prepared in accordance with Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board (AASB).
Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (IFRS) and Australian Accounting Interpretations. The financial statements which include the accompanying notes comply with IFRS.
The financial statements are prepared on the basis of a ‘for-profit’ entity.
The financial statements are prepared using the accrual basis of accounting. Financial assets and financial liabilities are stated on a fair value basis of measurement. Plant and equipment is stated at the fair value of the consideration given at the time of acquisition. Employee benefits are recognised on a present value basis, as detailed in Note 1(i). All other assets, liabilities and provisions are initially measured at historical cost and reported based on their recoverable or settlement amount.
All amounts are shown in Australian dollars and are rounded to the nearest thousand dollars unless otherwise stated. Assets and liabilities are presented on the balance sheet in order of liquidity.
Accounting policies and the presentation adopted in these financial statements are consistent with the previous year. Comparative information has been reclassified, where necessary, to be consistent with the current year.
Relevant Standards and Interpretations issued but not yet effective
At the date of authorisation of the financial statements, the Standards and Interpretations listed below were issued but not yet effective.
Standard/Interpretation Effective for annual Expected to be initially reporting periods applied in the financial beginning on or after year ending AASB 15 Revenue from Contracts with Customers, 1 January 2018 30 June 2019 AASB 2014-5 Amendments to Australian Accounting Standards arising from AASB 15, AASB 2015-8 Amendments to Australian Accounting Standards – Effective Date of AASB 15, AASB 2016-3 Amendments to Australian Accounting Standards – Clarifications to AASB 15.
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1. Summary of Significant Accounting Policies (continued) (a) Basis of Preparation (continued) Standard/Interpretation Effective for annual Expected to be initially reporting periods applied in the financial beginning on or after year ending AASB 9 Financial Instruments 1 January 2018 30 June 2019
AASB 16 Leases 1 January 2019 30 June 2020
The Corporation has not early adopted any new accounting standards, amendments and interpretations in compliance with Treasury Circular 18/01 “Mandates of options and major policy decisions under Australian Accounting Standards”.
AASB 9 Financial Instruments (and applicable amendments), (effective from 1 January 2018)
AASB 9 Financial Instruments and its associated amending standards specify new recognition and measurement requirements for financial assets and financial liabilities within the scope of AASB 139 Financial Instruments: Recognition and Measurement.
The amendments will have no material impact on the Corporation as it requires it to continue to measure financial assets and financial liabilities at fair value through profit or loss using current accounting principles.
AASB 15 Revenue from Contracts with Customers, (effective from 1 January 2018)
The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer.
The Corporation’s main source of income is interest and from movements in the fair value of financial instruments which is outside the scope of the new revenue standard. Further, the adoption of the new recognition rules are not expected to have an impact on the amounts recognised in the financial statements in relation to the Corporation’s fee income.
AASB 16 Leases, (effective from 1 January 2019)
The new standard for leases will result in almost all leases being recognised on the balance sheet, the only exceptions being short-term and low-value leases. The standard will require lessees of leases within the scope of AASB 16 to recognise a 'right-of-use asset' and related lease liability, being the present value of future lease payments.
The standard is not expected to have a material impact, however it will result in the Corporation’s operating lease in respect of its business premises (refer note 27) being recognised on the balance sheet for the first time. This will result in an immaterial increase in the recognised assets and liabilities on the balance sheet as well as an immaterial change in expense recognition, with interest and depreciation replacing operating lease expense.
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1. Summary of Significant Accounting Policies (continued)
(b) Critical accounting estimates and significant judgements
The preparation of the financial statements requires management to exercise a higher degree of judgement and estimation when determining the fair value of financial assets and liabilities as discussed in Note 1(d) and Note 20. Estimates and judgements are regularly evaluated and are based on historical experience and expectations of future events.
The Corporation believes the estimates used in preparing the financial statements are reasonable.
(c) Tax Equivalents
The Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 exempt the Corporation from liability for Commonwealth income tax. However, the Corporation is subject to tax equivalent payments to the New South Wales Government.
The Corporation’s liability was determined to be an amount equal to 30% of the profit for the year to 30 June 2018 (2017: 30%).
(d) Financial Assets and Financial Liabilities
The Corporation elected to designate all financial assets and financial liabilities as ‘fair value through profit or loss’, consistent with the provisions of accounting standard AASB 139 Financial Instruments: Recognition and Measurement. The eligibility criteria for this election is satisfied as the Corporation manages its balance sheet on a fair value basis. This is actively demonstrated through the measurement and reporting of risks, limits, valuations and performance, consistent with risk management policies approved by the Board. Derivative financial instruments are deemed to be ‘held for trading’ under AASB 139 and must be accounted as ‘fair value through profit or loss’. Therefore all financial assets, financial liabilities and derivative financial instruments are valued on a fair value basis as at balance date with resultant gains and losses from one valuation date to the next recognised in the statement of comprehensive income.
The Corporation measures financial assets and financial liabilities in accordance with AASB 13 Fair Value Measurement. Where an active market exists, fair values are determined by reference to the specific market quoted prices/yields at the year end. If no active market exists, judgement is used to select the valuation technique which best estimates fair value by discounting the expected future cash flows arising from the securities to their present value using market yields and margins appropriate to the securities. These margins take into account credit quality and liquidity of the securities. Market yields used for valuing loans to government clients are derived from yields for similar debt securities issued by the Corporation which are detailed in Note 23.
The Corporation manages market risk through its financial assets and financial liabilities on the basis of its net exposure, in accordance with its risk management strategy. As a result the Corporation utilises the exception permitted within AASB 13 Fair Value Measurement to measure a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net asset position or paid to transfer a net liability position for a particular risk exposure.
All financial assets, liabilities and derivatives are recognised on the balance sheet at trade date being the date the Corporation becomes party to the contractual provisions of the instrument.
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1. Summary of Significant Accounting Policies (continued)
(d) Financial Assets and Financial Liabilities (continued)
Financial assets are de-recognised when the Corporation’s contractual rights to cash flows from the financial assets expire. Financial liabilities are de-recognised when the Corporation’s contractual obligations are extinguished.
When entered into, securities sold under repurchase agreements are retained in the securities held classification on the balance sheet. The Corporation’s obligation to buy back the security is recognised as a liability and disclosed in due to financial institutions.
Securities purchased under agreements to resell, where the Corporation does not acquire the risks and rewards of ownership, are retained in the due from financial institutions classification on the balance sheet (Note 9). The securities provided are not included in the balance sheet as the Corporation is not substantially exposed to the risks and rewards of the securities.
Transactions offset or contingent on future events are disclosed in contingent liabilities and commitments (Note 29).
(e) Outstanding Settlements
Outstanding settlements receivable comprise the amounts due to the Corporation for transactions that have been recognised, but not yet settled at balance date. Outstanding settlements payable comprise amounts payable by the Corporation for transactions that have been recognised, but not yet settled at balance date.
(f) Other Assets and Liabilities
Other assets, including debtors, intangible assets, prepayments and deposits, and other liabilities, including creditors, expense accruals and provisions, are all reported based on their recoverable or settlement amount.
Computer software is classified as an intangible asset and amortised on a straight line basis over the estimated useful life of the asset. Estimated useful lives are generally up to five years from the date the computer software is commissioned. The assets’ useful lives are reviewed on a regular basis and adjusted if appropriate. Intangible assets are measured initially at cost. Intangible assets are subsequently measured at fair value only if there is an active market. As there is no active market for the Corporation’s intangible assets, the assets are carried at cost less any accumulated amortisation and impairment. Systems projects that are implemented in stages do not commence amortising until they are commissioned.
(g) Plant and Equipment
Plant and equipment comprising leasehold improvements, office furniture and equipment, computer hardware and motor vehicles are stated at cost less accumulated depreciation and impairment which approximates fair value. Cost includes expenditure that is directly attributable to the acquisition or construction of the item.
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1. Summary of Significant Accounting Policies (continued)
(g) Plant and Equipment (continued)
Depreciation is calculated on a straight-line basis, from the date the assets are commissioned, over their estimated useful lives as follows:
● Leasehold improvements (including the lease make good provision) over the term of the lease, which expires on 31 May 2025. ● Equipment and vehicles ● Computer hardware - three years ● Motor vehicles - five years ● Office furniture and equipment – over the term of the lease, which expires on 31 May 2025.
The assets’ residual values, useful lives and depreciation method are reviewed on a regular basis with the effects of any changes recognised on a prospective basis. Due to the nature and materiality of the assets an independent valuation is not required.
The gain or loss arising on disposal or retirement of an item of plant or equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income.
Expenditure on plant and equipment is capitalised where it relates to identifiable assets that result in a material enhancement to the asset base of the Corporation and it is probable that these assets will provide the Corporation with an on-going benefit.
(h) Impairment of Assets
Items of plant and equipment, intangible assets and receivables are assessed on a regular basis for any evidence of impairment. Where evidence of impairment is found, the carrying amount is reviewed and, if necessary, written down to the asset’s recoverable amount.
(i) Employee Benefits
Provision for annual leave is recognised on the basis of statutory and contractual requirements and is measured at nominal values using the remuneration rate expected to apply at the time of settlement. The provision for long service leave represents the present value of the estimated future cash outflows to employees in respect of services provided by employees up to the year end, with consideration being given to expected future salary levels, previous experience of employee departures and periods of service.
Provisions are recognised when the Corporation has a present obligation (legal or constructive) as a result of a past event, it is probable that the Corporation will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
Employee benefit provisions represent expected amounts payable in the future in respect of unused entitlements accumulated as at the reporting date and associated liabilities (such as payroll tax).
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1. Summary of Significant Accounting Policies (continued)
(j) Foreign Currency Transactions
Foreign currency transactions are initially translated into Australian dollars at the rate of exchange at the date of the transaction. At year end, foreign currency monetary items are translated to Australian dollars at the spot exchange rate current at that date. Resulting exchange differences are recognised in the statement of comprehensive income.
(k) Cash and Liquid Assets
Cash and liquid assets includes cash and liquid assets that are readily convertible to cash. For the purpose of the statement of cash flows, cash and cash equivalents includes cash and liquid assets net of outstanding short-term borrowings.
(l) Leased Assets
Operating lease payments are recognised as an expense as incurred over the lease term. Lease incentives received are recognised in the statement of comprehensive income as an integral part of the total lease expense (included in premises costs) and spread over the lease term.
(m) Fiduciary Activities and Funds Under Management
The Corporation acts as manager for various client asset and debt portfolios and as trustee and/or manager of the TCorpIM Funds (Note 28). The associated liabilities and assets are not recognised in the balance sheet of the Corporation. Fees earned by the Corporation in carrying out these activities are included in the statement of comprehensive income on an accruals basis.
(n) Offsetting
Income and expenses are only offset in the Statement of Comprehensive Income if permitted under the relevant accounting standard. Examples of offsetting include gains and losses from foreign exchange exposures and financial instruments held for trading.
The Corporation from time to time may facilitate certain structured financing arrangements for clients. In such arrangements where a legally recognised right to offset financial assets and financial liabilities exists, and the Corporation intends to settle on a net basis, the financial assets and financial liabilities arising are offset and the net amount is recognised in the balance sheet.
(o) Income Recognition
Income is recognised to the extent that it is probable that the economic benefits will flow to the Corporation and the income can be reliably measured. Specific types of income are recognised as follows:
● Interest Income ● Interest income includes accrued interest, discount and premium. ● Fee Income ● Fee income for services provided are recognised in the period in which the service is provided.
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1. Summary of Significant Accounting Policies (continued)
(p) Goods and Services Tax (GST)
Income, expenses and assets (other than receivables) are recognised net of GST. The amount of GST on expenses that is not recoverable from the taxation authority is recognised as a separate item of operating costs. The amount of GST on assets that is not recoverable is recognised as part of the cost of acquisition. Receivables and payables are recognised inclusive of GST. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the Australian Taxation Office is classified as operating cash flows.
(q) Dividends
Dividends payable by the Corporation are determined by the New South Wales Treasurer in accordance with the Public Finance and Audit Act 1983. Additionally, the basis for determination of the year’s dividend is recorded in a Board resolution prior to the end of the financial year.
2. Segment Information
The principal objective of the Corporation is to provide financial services for the New South Wales Government, public authorities and other public bodies of New South Wales. The Corporation has the following business segments:
1) Financial Markets
This division is responsible for lending to government clients and the associated funding through debt issuance and balance sheet risk management activities. This division also provides debt management, currency management and advisory services.
Revenues from Financial Markets comprise in its entirety the income and expenses from the changes in fair value of financial assets and liabilities as disclosed in Notes 3 and 4 and relevant fee income as disclosed in Note 5.
2) Investment Management
This division provides funds management activities including direct management of cash & fixed income portfolios, ‘Manager-of-managers’ services through the TCorpIM Funds and other tailored investment management services.
Revenues from Investment Management are in the form of fee income as disclosed in Note 5.
The majority of the Corporation’s revenues are derived from the New South Wales Government and its agencies, which are considered to be under common control. There were no intersegment sales during the year.
Given the nature of its core functions and the legislative intent, the Corporation operates within Australia, apart from a proportion of funding raised from offshore financial markets. As such, no geographic location segment reporting is presented within these financial statements.
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3. Income from Changes in Fair Value of Financial Assets and Liabilities
2018 2017 $’000 $’000 Interest income received or receivable – government clients 1,922,815 2,287,387 Interest income received or receivable – financial institutions 279,112 311,612 Net gains on derivative financial instruments by class - 112,930 Net foreign exchange gain 1,097 - Increase/(decrease) in fair value of financial assets/(liabilities)1 410,632 2,248,745
2,613,656 4,960,674 1 The fair value of financial liabilities classified as financing activities in the statement of cash flows decreased in fair value by $410.2 million (2017: $2,244.8 million).
4. Expenses from Changes in Fair Value of Financial Assets and Liabilities
2018 2017 $’000 $’000 Interest expense paid or payable – government clients 2,250 42,571 Interest expense paid or payable – financial institutions 2,172,185 2,371,928 Net losses on derivative financial instruments by class 41,631 47,330 Net foreign exchange loss - 927 Decrease/(increase) in fair value of financial assets/(liabilities) 295,293 2,349,040
2,511,359 4,811,796
Derivative financial instruments are used to manage interest rate risk and foreign exchange risk. Gains or losses on derivative financial instruments are largely offset by changes in the fair value of financial assets and liabilities.
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5. Fee Income
2018 2017 $’000 $’000
Investment Management Fees Asset client mandate fees1 47,091 40,367 TCorpIM Funds management fees1 24,459 16,137 Other fees from NSW Government entities1 287 195 Other fees from financial institutions 2,356 1,418
74,193 58,117 Financial Markets Debt portfolio management fees1 1,510 1,563 Other fees from NSW Government entities 486 765
1,996 2,328 76,189 60,445
1 Relates to fees earned on funds and portfolios under management as disclosed in Note 28.
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6. Operating Costs
2018 2017 $’000 $’000 Salaries, wages and entitlements 47,589 38,519 Information technology 10,439 9,416 Market information services 4,642 4,976 Depreciation and amortisation 1,340 2,911 Rent on operating leases 2,299 2,019 Other operating costs 9,414 7,861 75,723 65,702
The operating costs above include the following specific items: 2018 2017 $’000 $’000 Consultants’ fees 1,672 1,535 1,672 1,535
Auditor's remuneration to the Audit Office of NSW For audit of the financial report of the Corporation 320 312 Other services 84 92 404 404
Superannuation expense - Defined contribution plans 2,542 2,281 - Defined benefit plans 40 44 2,582 2,325
7. Transaction Costs
2018 2017 $’000 $’000 Bond issuance fees 2,475 2,250 Other transaction costs 11,477 8,940 13,952 11,190
Other transaction costs include costs associated with managing investment client portfolios and other financial market related costs including futures brokerage and clearance fees.
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8. Cash and Liquid Assets
2018 2017 $’000 $’000 Cash on hand and at bank 4,835 4,044 Overnight and short term placements (unsecured) 759,969 1,339,945 764,804 1,343,989
Overnight and short term placements for up to seven days are made to domestic financial institutions with principal repayable at maturity and interest payable at month end.
9. Due from Financial Institutions
2018 2017 Note $’000 $’000 Short term bank deposits 5,890,164 4,569,357 Securities purchased under agreements to resell 1,001,976 1,273,920 Cash collateral 24 92,506 95,236 6,984,646 5,938,513
Securities purchased under agreements to resell are collateralised by highly liquid debt securities and have a maturity of less than 30 days.
Cash collateral may be provided by the Corporation to support amounts payable to financial institutions in respect of certain derivative transactions (Note 24).
10. Securities Held
2018 2017 $’000 $’000 Floating rate notes 349,571 1,303,873 Certificates of deposit 1,663,287 2,306,882 Semi-government bonds 1,326,165 1,052,975 Supranational bonds 1,169,367 1,316,620 Other Commonwealth and NSW Government related securities 91,569 92,645 4,599,959 6,072,995
Securities held are used mainly to cover liquidity requirements. Of the above amounts, $2,569.8 million (2017: $2,372.6 million) is scheduled to mature more than twelve months from the balance date.
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11. Loans to Government Clients
2018 2017 $’000 $’000 New South Wales public sector clients: - Crown entity 30,582,806 31,079,563 • Water sector 10,820,790 9,621,539 • Electricity sector 5,764,671 5,687,546 • Transport sector 3,114,328 3,070,585 • Other sectors 2,262,302 1,230,594 - Local Government 367,838 212,147 52,912,735 50,901,974
Loans to government clients comprise financial accommodation on simple interest, fixed interest, floating rate or inflation indexed bases.
Capital indexed loans, coupons and face value are indexed quarterly in line with changes in inflation. The fair value of these loans at balance date totalled $7,348.0 million (2017: $7,566.1 million).
Year-on-year indexed loans comprise a constant face value and a variable coupon that includes the fixed real rate and latest adjusted Consumer Price Index. The fair value of these loans at balance date totalled $1,949.1 million (2017: $1,955.8 million).
Loans to New South Wales public sector clients are guaranteed by the New South Wales Government. Of the above amounts, $50,832.8 million (2017: $49,022.8 million) is scheduled to mature more than twelve months from the balance date.
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12. Other Assets
2018 2017 Note $’000 $’000 Debtors and fee accruals 29,133 18,697 Intangible assets 1,712 194 Security deposits 14,578 5,556 Prepaid superannuation 26 103 132 Other prepayments 4,295 3,234 49,821 27,813
Reconciliation of Intangible assets Opening carrying value 194 1,206 Additions 1,799 591 Amortisation (281) (1,603) Carrying value at year end 1,712 194
13. Plant and Equipment
Leasehold Equipment & Improvements Vehicles Total 2018 2017 2018 2017 2018 2017 $’000 $’000 $’000 $’000 $’000 $’000 Opening fair value 4,123 4,123 1,538 2,373 5,661 6,496 Opening accumulated depreciation (3,515) (2,803) (1,010) (1,304) (4,525) (4,107) Opening carrying amount 608 1,320 528 1,069 1,136 2,389
Changes during the year: Additions at fair value 4,927 - 2,333 82 7,260 82 Net disposals and write-offs1 - - (63) (27) (63) (27) Depreciation expense (665) (712) (394) (596) (1,059) (1,308) Closing carrying amount 4,870 608 2,404 528 7,274 1,136
Closing fair value 5,363 4,123 2,564 1,538 7,927 5,661 Closing accumulated depreciation (493) (3,515) (160) (1,010) (653) (4,525) Carrying amount at year end 4,870 608 2,404 528 7,274 1,136
1 2018 includes the disposal of fully depreciated assets totalling $4.8 million in relation to the Corporation’s previous business premises.
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14. Due to Financial Institutions
2018 2018 2017 2017 Face Value Fair Value Face Value Fair Value Note $’000 $’000 $’000 $’000 Promissory notes 4,348,278 4,338,382 4,764,828 4,757,202 Cash collateral 24 135,610 135,604 151,250 151,244 Short term borrowings 1,000 1,000 2,000 2,000 4,484,888 4,474,986 4,918,078 4,910,446
Promissory notes are short term securities issued by the Corporation, usually for terms ranging up to six months.
Cash collateral may be obtained by the Corporation to support amounts receivable from financial institutions in respect of certain derivative transactions (Note 24).
Short term borrowings include bank overdrafts and overnight deposits borrowed from domestic financial institutions. These overnight deposits are borrowed on an unsecured basis, with face value and interest repayable at maturity date.
15. Due to Government Clients
2018 2018 2017 2017 Face Value Fair Value Face Value Fair Value $’000 $’000 $’000 $’000 Client deposits: - Crown entity 2,306,825 2,307,283 260,945 260,963 - Other 388,060 388,382 190,669 190,661 2,694,885 2,695,665 451,614 451,624
Deposits are received from clients on an unsecured basis either at call or for fixed terms of one year or less, with interest payable at maturity.
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16. Borrowings
2018 2018 2017 2017 Face Value Fair Value Face Value Fair Value $’000 $’000 $’000 $’000 Benchmark bonds - domestic 42,168,260 45,391,719 41,193,020 45,408,365 - global exchangeable 63,960 66,907 63,960 69,611 Total benchmark bonds 42,232,220 45,458,626 41,256,980 45,477,976 Euro Medium Term Notes 789,744 969,039 804,971 975,240 Capital indexed bonds 6,254,921 7,176,221 6,518,848 7,480,635 Floating rate notes 3,435,500 3,441,141 3,710,500 3,721,666 Other borrowings 875,111 837,399 1,054,339 1,019,686 53,587,496 57,882,426 53,345,638 58,675,203
Domestic benchmark bonds and global exchangeable bonds pay semi-annual coupons with the face value repayable on maturity. Global exchangeable bonds are convertible to domestic benchmark bonds at the option of the holder.
Euro Medium Term Notes are issued via lead managers into both the Euro market and Japanese retail market. They are repayable at maturity with coupons payable either annually or semi-annually. All Euro Medium Term Notes are scheduled to mature more than twelve months from the balance date.
Capital indexed bonds are domestic bonds with quarterly coupons and face value indexed in line with inflation. All capital indexed bonds are scheduled to mature more than twelve months from the balance date.
Floating rate notes pay variable quarterly coupons with the face value repayable on maturity. In fair value terms, $2,631.0 million (2017: $3,671.5 million) of floating rate notes are scheduled to mature more than twelve months from the balance date.
Other borrowings include Waratah bonds and non-benchmark domestic bonds. The fair value of Waratah bonds at the balance date totalled $773.6 million (2017: $960.0 million). In fair value terms, $421.7 million (2017: $754.4 million) of other borrowings are scheduled to mature more than twelve months from the balance date.
All financial liabilities of the Corporation are guaranteed by the New South Wales Government (Note 19). The Corporation does not provide any further security in the form of asset and other pledges in relation to its borrowings and other amounts due to financial institutions.
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16. Borrowings (continued)
The benchmark bonds on issue, by maturity were:
2018 2018 2017 2017
Coupon Face Value Fair Value Face Value Fair Value Maturity % p.a. $’000 $’000 $’000 $’000 1 February 2018 6.00 - - 4,182,454 4,390,848 20 March 2019 3.50 2,510,226 2,563,300 3,234,487 3,354,944 1 April 20191 6.00 516,595 540,523 551,141 600,270 1 May 2020 6.00 4,598,924 4,969,518 5,371,859 6,004,479 1 June 20201 6.00 82,894 89,696 84,074 94,555 8 April 2021 4.00 3,722,946 3,939,646 3,707,846 3,979,986 1 March 2022 6.00 5,488,450 6,312,662 5,513,450 6,517,483 20 April 2023 4.00 4,427,094 4,773,255 4,319,494 4,711,082 1 May 20231 6.00 605,317 712,647 619,917 750,179 20 August 2024 5.00 5,636,690 6,507,926 5,957,690 6,985,470 20 May 2026 4.00 2,498,528 2,723,526 2,614,628 2,867,147 20 May 2027 3.00 3,134,450 3,166,738 1,340,000 1,349,698 20 March 2028 3.00 5,061,020 5,107,412 2,667,020 2,678,525 20 April 2029 3.00 1,685,000 1,683,276 - - 20 February 2030 3.00 1,711,333 1,703,712 726,167 715,193 1 May 2030 6.00 366,753 474,810 366,753 478,117 20 November 2037 3.50 186,000 189,979 - - 42,232,220 45,458,626 41,256,980 45,477,976 1 Commonwealth Government guaranteed borrowings at 30 June 2018 total $1,342.9 million, fair value (2017: $1,445.0 million, fair value). Refer to Other disclosures concerning financial liabilities (Note 19).
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17. Derivative Financial Instruments
A derivative financial instrument is a contract or agreement whose value depends on (or derives from) the value of (or changes in the value of) an underlying instrument, reference rate or index.
Derivative financial instruments include swaps, forward dated client loans, futures and forward foreign exchange contracts. Forward dated loans are priced on a consistent basis to other client loans. For all other derivative financial instruments the Corporation is not a price maker, but is a price taker in its use of derivatives.
Collateral may be obtained, or provided, by the Corporation when the market value of certain derivative transactions exceed thresholds agreed with the counterparty (Note 24).
Net Exposure
The fair value of the Corporation’s transactions in derivative financial instruments outstanding at year end is as follows:
2018 2017 $’000 $’000 Derivative financial instruments receivable Cross currency swaps 60,896 71,422 Interest rate swaps 392,069 451,148 Forward foreign exchange contracts 48,529 36 Forward dated loans 1,317 831 502,811 523,437
Derivative financial instruments payable Cross currency swaps (17,246) (32,091) Interest rate swaps (417,303) (448,866) Forward foreign exchange contracts (1,559) (4,879) Exchange traded futures (3,553) (168) (439,661) (486,004)
Net amount receivable under derivative financial instruments 63,150 37,433
The majority of derivative financial instruments (with the exception of forward foreign exchange contracts and exchange traded futures) are scheduled to be recovered or due to be settled more than twelve months from the balance date.
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18. Other Liabilities and Provisions
2018 2017 $’000 $’000 Provisions for employee benefits 13,915 10,119 Creditors, expense accruals and other provisions 8,537 7,544 Lease incentive 4,865 374 Dividend payable - 80,000 27,317 98,037
19. Other Disclosures Concerning Financial Liabilities
Guarantee of the State
All financial liabilities of the Corporation are guaranteed by the New South Wales Government under Sections 22A and 22B of the Public Authorities (Financial Arrangements) Act 1987.
Guarantee of the Commonwealth
Certain benchmark bonds issued by the Corporation, identified in Borrowings (Note 16) are guaranteed by the Commonwealth of Australia pursuant to the Australian Government Guarantee of State and Territory Borrowing Scheme dated 24 July 2009 (the “Scheme”). On 7 February 2010, the Commonwealth announced that the “Final Issuance Date” under the Scheme would be 31 December 2010. All Commonwealth Guaranteed benchmark bonds issued by the Corporation in existence as at the Final Issuance Date remain guaranteed by the Commonwealth, in accordance with the terms of the Scheme.
Financing Arrangements
The Corporation is able to readily access both domestic and offshore capital markets to ensure an adequate funding base. This ready market access is due to the Corporation having the highest level of credit ratings available to any Australian borrower, which derives from the guarantee of the New South Wales Government.
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19. Other Disclosures Concerning Financial Liabilities (continued)
In addition to the Corporation’s domestic benchmark, non-benchmark and promissory note issuances, the following offshore programmes are in place:
2018 2017 $bn $bn Global exchangeable bonds AUD 18 AUD 18 Multi-currency Euro medium term note USD 10 USD 10 Multi-currency Euro commercial paper USD 10 USD 10
2017 2017 ¥bn ¥bn Japanese shelf registration JPY 300 JPY 300
The programmes are not contractually binding on any provider of funds.
20. Fair Value Measurement
Financial assets and financial liabilities are designated as fair value through profit or loss.
The Corporation’s loans and borrowings are guaranteed by the New South Wales State Government, and certain benchmark borrowings are guaranteed by the Commonwealth Government (Note 16). As a result, credit risk is not a significant factor in the determination of the fair value. Changes in fair value are therefore mainly attributable to fluctuations in market yields and prices arising from changes in market conditions.
The Corporation uses a discounted cash flow valuation technique in determining the fair value of its financial assets and financial liabilities.
Fair value measurements are classified using a fair value hierarchy that reflects the subjectivity of inputs used in making the measurements. The fair value hierarchy has the following levels and inputs:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). This includes quoted or observable prices combined with margins derived from appropriate benchmarks.
Level 3: Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
TCorp’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period.
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20. Fair Value Measurement (continued)
The table below sets out the Corporation’s financial assets and liabilities (by class) measured at fair value according to the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.
Level 1 Level 2 Level 3 TOTAL 2018 $’000 $’000 $’000 $’000 Financial assets Due from financial institutions 92,506 6,892,140 - 6,984,646 Securities held 2,910,531 1,689,428 - 4,599,959 Derivative financial instruments receivable - 502,811 - 502,811 Loans to government clients - 52,912,735 52,912,735 Security deposits 14,578 - - 14,578 Financial assets 3,017,615 61,997,114 - 65,014,729
Financial liabilities Due to financial institutions (136,605) (4,338,381) - (4,474,986) Outstanding settlements payable (22) - - (22) Due to government clients (175,672) (2,519,993) - (2,695,665) Borrowings (55,534,271) (1,711,836) (636,319) (57,882,426) Derivative financial instruments payable (3,553) (436,108) - (439,661) Financial liabilities (55,850,123) (9,006,318) (636,319) (65,492,760)
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20. Fair Value Measurement (continued)
Level 1 Level 2 Level 3 TOTAL 2017 $’000 $’000 $’000 $’000 Financial assets Outstanding settlements receivable 288,211 - - 288,211 Due from financial institutions 95,236 5,843,277 - 5,938,513 Securities held 2,436,865 3,636,130 - 6,072,995 Derivative financial instruments receivable - 523,437 - 523,437 Loans to government clients - 50,901,974 - 50,901,974 Security deposits 5,556 - - 5,556 Financial assets 2,825,868 60,904,818 - 63,730,686
Financial liabilities Due to financial institutions (153,244) (4,757,202) - (4,910,446) Outstanding settlements payable (235,965) - - (235,965) Due to government clients (197,946) (253,678) - (451,624) Borrowings (56,132,549) (1,921,767) (620,887) (58,675,203) Derivative financial instruments payable (168) (485,836) - (486,004) Financial liabilities (56,719,872) (7,418,483) (620,887) (64,759,242)
Level 3 Financial Instruments – fair value determined from valuation techniques utilising significant unobservable inputs
The table below summarises Level 3 financial instruments.
2018 2017 Note $’000 $’000 Euro Medium Term Notes 16 (636,319) (620,887) Closing balance (636,319) (620,887)
The Level 3 Euro Medium Term Notes are foreign currency denominated fixed interest securities (borrowings) issued by the Corporation. The valuation of these securities is derived from quoted market prices of the underlying securities, and other observable inputs. The Corporation has applied a further risk adjustment to the quoted market prices in recognition of limited trading activity of the securities. The Corporation uses cross currency swaps to fully hedge the currency exposure associated with the cash flows on these securities, and these associated cross currency swaps are categorised as Level 2 under the fair value hierarchy.
There were no significant inter-relationships between unobservable inputs that materially affect fair value.
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20. Fair Value Measurement (continued)
Reconciliation of level 3 fair value movements
The table below summarises the reconciliation of change in exposure in the Balance Sheet to financial instruments categorised as Level 3 as at 30 June 2018.
2018 2017 $’000 $’000 Opening balance (620,887) (732,345) Unrealised (losses)/gains1,2 (28,108) 98,859 Coupons paid1 12,676 12,599 Closing balance (636,319) (620,887) 1 Included in net income from changes in fair value in the Statement of Comprehensive Income.
2 These gains and losses are largely offset by the gains and losses on the associated cross currency swaps, which are categorised as level 2 under the fair value hierarchy.
Level 3 financial instruments – sensitivity analysis
As at balance date, a 0.01% change in the market prices (interest rates) used to value the Level 3 Euro Medium Term Note securities would impact the fair value by approximately +/- $1.0 million (2017: +/- $1.1 million). This sensitivity analysis should be considered in context of the Corporation’s management of market risk as detailed in Note 23.
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21. Offsetting Financial Assets and Financial Liabilities
The following table identifies financial assets and liabilities which have been offset in the balance sheet and those which have not been offset in the balance sheet but are subject to enforceable master netting agreements with our counterparties.
Effects of offsetting on the Balance sheet Related amounts not offset
Net Gross amounts Amounts Financial amounts presented subject to instrument offset in in the master collateral and Gross the Balance Balance netting margins 2018 amounts sheet sheet arrangements (received)/paid Net amount Note $’000 $’000 $’000 $’000 $’000 $’000 Financial assets Derivative financial instruments 502,811 - 502,811 (307,013) (127,435) 68,363 (excluding futures) Total derivative financial 17 502,811 - 502,811 (307,013) (127,435) 68,363 instruments receivable
Securities purchased under 9 1,001,976 - 1,001,976 - (1,013,842) (11,866) agreements to resell Futures margins1 490 - 490 - (490) - Security deposits 12 14,578 - 14,578 - (3,063) 11,515 Financial assets 1,519,855 - 1,519,855 (307,013) (1,144,830) 68,012
Financial liabilities Derivative financial instruments (436,108) - (436,108) 307,013 90,456 (38,639) (excluding futures) Derivative financial instruments - (3,553) - (3,553) - 3,553 - futures Total derivative financial 17 (439,661) - (439,661) 307,013 94,009 (38,639) instruments payable
Financial liabilities (439,661) - (439,661) 307,013 94,009 (38,639) 1 Included in Note 12 debtors and fee accruals.
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21. Offsetting Financial Assets and Financial Liabilities (continued)
Effects of offsetting on the Balance sheet Related amounts not offset
Net Gross amounts Amounts Financial amounts presented subject to instrument offset in in the master collateral and Gross the Balance Balance netting margins 2017 amounts sheet sheet arrangements (received)/paid Net amount Note $’000 $’000 $’000 $’000 $’000 $’000 Financial assets Derivative financial instruments 523,437 - 523,437 (353,697) (138,588) 31,152 (excluding futures) Total derivative financial 17 523,437 - 523,437 (353,697) (138,588) 31,152 instruments receivable
Securities purchased under 9 1,273,920 - 1,273,920 - (1,260,277) 13,643 agreements to resell Futures margins1 168 - 168 - (168) - Security deposits 12 5,556 - 5,556 - - 5,556 Financial assets 1,803,081 - 1,803,081 (353,697) (1,399,033) 50,351
Financial liabilities Derivative financial instruments (485,836) - (485,836) 353,697 78,273 (53,866) (excluding futures) Derivative financial instruments - (168) - (168) - 168 - futures Total derivative financial 17 (486,004) - (486,004) 353,697 78,441 (53,866) instruments payable
Financial liabilities (486,004) - (486,004) 353,697 78,441 (53,866) 1 Included in Note 12 debtors and fee accruals.
Financial assets and liabilities are permitted to be offset and the net amount reported in the balance sheet where the Corporation currently has a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Corporation’s master netting agreements do not currently meet the criteria for offsetting in the balance sheet. This is because the Corporation does not currently have a legally enforceable right to offset recognised amounts, as the right to offset is enforceable only on the occurrence of future events. These amounts have therefore not been offset in the balance sheet, but have been presented separately in the table. The table also presents the gross amounts of financial assets and financial liabilities that are offset in the balance sheet. The column “Net amount” shows the impact on the Corporation’s balance sheet if all set-off rights were exercised.
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21. Offsetting Financial Assets and Financial Liabilities (continued)
Related amounts not offset on the balance sheet
Derivative assets and liabilities
The Corporation enters into derivative transactions governed by master netting arrangements set out in International Swaps and Derivatives Association (ISDA) agreements between the Corporation and market counterparties. In certain circumstances, such as a counterparty credit default, all outstanding transactions under the ISDA agreement may be terminated by the Corporation, the termination value is determined and only a single net amount is payable to/receivable from a counterparty in settlement of all transactions. Financial collateral refers to cash obtained to cover the net exposure between counterparties by enabling the collateral to be realised in an event of default.
Reverse repurchase agreements (Securities purchased under agreements to resell)
Reverse repurchase agreements are subject to offset under netting agreements, such as global master repurchase agreements. Under these netting agreements, all outstanding transactions with the same counterparty can be offset and close-out netting applied in an event of default. The financial collateral received comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default.
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22. Financial Risk
Objectives and Policies
The Corporation manages and monitors a variety of financial risks including market risk (interest rate risk and foreign exchange risk), credit risk and liquidity risk (refer Notes 23, 24 and 25 respectively).
The boundaries within which these risks are undertaken and managed are established under Board policies, management guidelines and client defined mandates. The Corporation monitors compliance with Board policies and management and client constraints. This monitoring is appropriately segregated from the operating divisions. Information is summarised, monitored and reviewed daily and reported regularly to the Board.
All aspects of the treasury process are segregated between dealing, settlement, accounting and compliance. In addition, position limits, liquidity limits and counterparty credit limits have been established. These limits are monitored independently of the dealing and settlement functions, with utilisation of these limits summarised and reported to management on a daily basis.
The nature of the Corporation’s lending and associated funding activities gives rise to maturity and repricing gaps within the Corporation’s balance sheet which alter from day to day. The Board of the Corporation has identified the risks that arise from these gaps and has established Board policies to prudently limit these risks. In managing the risks in accordance with the Board limits, the Corporation utilises derivative financial instruments.
Derivatives are used to manage interest rate risk and foreign exchange risk for certain assets and liabilities within the balance sheet.
Equity
The New South Wales Government is not required under legislation to contribute equity to the Corporation. Retained earnings are held in lieu of contributed equity and provide a capital base commensurate with the risks inherent in the Corporation’s business. Further, all financial liabilities of the Corporation are guaranteed by the New South Wales Government under Sections 22A and 22B of the Public Authorities (Financial Arrangements) Act 1987.
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23. Market Risk
Interest Rate Risk
Interest rates equal to, or derived from, the Corporation’s debt securities and used for valuation purposes were:
Market Rates Market Rates (Yield to Maturity) (Yield to Maturity) Coupon at 30/06/2018 at 30/06/2017 % pa % pa % pa Nominal Overnight - 1.500 1.500 90 days - 2.041 1.610 180 days - 2.132 1.750 1 February 2018 6.000 - 1.754 20 March 2019 3.500 1.968 1.891 1 April 20191 6.000 1.845 1.802 1 May 2020 6.000 2.071 2.072 1 June 20201 6.000 1.969 1.983 8 April 2021 4.000 2.169 2.217 1 March 2022 6.000 2.282 2.318 20 April 2023 4.000 2.442 2.462 1 May 20231 6.000 2.324 2.330 20 August 2024 5.000 2.583 2.616 20 May 2026 4.000 2.786 2.822 20 May 2027 3.000 2.912 2.955 20 March 2028 3.000 2.991 3.045 20 April 2029 3.000 3.076 - 20 February 2030 3.000 3.158 3.252 1 May 2030 6.000 3.107 3.194 20 December 2032 4.250 3.183 3.407 20 November 2037 3.500 3.377 - 20 November 2040 5.000 3.413 3.573 26 April 2041 6.000 3.413 3.573
Capital Indexed 20 November 2020 3.750 0.371 0.580 20 November 2025 2.750 0.829 0.968 20 November 2035 2.500 1.252 1.448
1 Securities covered by Commonwealth guarantee – refer Note 19.
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23. Market Risk (continued)
The Corporation measures its exposure to interest rate risk in terms of cash flows or notional cash flows generated by financial instruments. These cash flows are discounted to present values at appropriate market yields and margins as described in Note 1(d). Interest rate risk can be in the form of ‘fair value interest rate risk’, such as fixed interest rate instruments which change in value as interest rates move and ‘cash flow interest rate risk’, such as floating interest rate instruments that are reset as market rates change.
The Corporation uses a Value at Risk (VaR) model to measure the market risk exposures inherent in the balance sheet. VaR is measured on a rolling 2-year historical simulation basis using a 99% confidence interval and a 10-day holding period.
VaR is calculated daily and represents an estimate of the loss that can be expected over a 10-day period, with a 1% probability that this amount may be exceeded.
The historical database comprises observations relevant to the major market risk exposures faced by the Corporation including bank bills, bank bill futures, bond futures, Commonwealth and semi- government bonds, floating rate notes, capital indexed bonds and interest rate swaps. The simulation process captures movements in outright interest rate levels, yield curve tilts and changes in the basis spread between various groups of securities. All historical observations are equally weighted.
As an estimate of market risk, VaR has certain limitations including:
a. Calculating VaR on an historical simulation basis implicitly assumes that returns in the future will have the same distribution as they had in the past. If this is not the case, VaR may overestimate or underestimate the actual losses experienced. b. In rapidly changing markets, the model can be slow to react with the result that VaR at the confidence interval is exceeded more often than statistically expected. c. The model quantifies the expected loss at the confidence interval. It does not however indicate the potential size of losses on days VaR is exceeded.
Given the Corporation’s balance sheet positions at 30 June 2018, the maximum potential loss expected over a 10-day period is $6.0 million (2017: $9.3 million), with a 1% probability that this maximum may be exceeded. The average VaR over the year ended 30 June 2018 was $7.5 million (2017: $11.3 million).
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23. Market Risk (continued)
Foreign Exchange Risk
The Corporation has policies and procedures in place to ensure that it has no material exposure to changes in foreign exchange rates. Foreign exchange risk arising from borrowings undertaken in foreign currencies through Promissory Notes (Note 14) or Euro Medium Term Notes (Note 16), to fund Australian dollar assets is covered by entering into Australian dollar cross currency swaps and forward foreign exchange contracts.
Where the Corporation has entered into forward foreign exchange contracts with clients, these are covered by corresponding forward foreign exchange contracts with market counterparties. Foreign exchange risks within Investment Funds, where the Corporation acts as Trustee or manager, are borne by the investors in these Funds.
24. Credit Risk
For all classes of financial assets, with the exceptions noted below, the maximum credit risk exposure at balance date is equal to the fair value already disclosed.
As loans and receivables from government clients are guaranteed by the New South Wales Government, no credit risk is deemed to arise.
Certain securities held by the Corporation are guaranteed by the Commonwealth of Australia (refer to Note 19). These securities are separately identified.
Derivative financial instruments include swaps, forward dated loans, forward foreign exchange contracts, forward rate agreements and futures. The Corporation does not use credit derivatives, such as credit default swaps, to mitigate credit risks.
The market convention for the calculation of credit exposure for derivative financial instruments is to add to the market value an amount of potential exposure as determined by reference to the length of time to maturity and face value. The additional credit exposure is noted in the concentration of credit risk table below.
For financial instruments where face value is greater than market value, the difference between the face value and the market value is disclosed to reflect the maximum potential credit exposure. The additional credit exposure is noted in the concentration of credit risk table below.
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24. Credit Risk (continued)
The Corporation’s exposure to settlement risk is represented by the amount of outstanding settlements receivable shown on the balance sheet. These amounts were settled within seven days after the balance date and are excluded from the concentration of credit risk below.
Collateral
The Corporation may obtain, or provide, collateral to support amounts due under derivative transactions with certain counterparties. The collateral may include cash or eligible securities obtained, or provided, when agreed market value thresholds are exceeded. These arrangements are agreed between the Corporation and each counterparty and take the form of annexures to the standard industry agreement governing the underlying derivative transaction. In the event of default, the Corporation is immediately entitled to offset the cash collateral against the amounts owed by the defaulting counterparty. There was $135.6 million of collateral received under these arrangements at balance date (2017: $151.2 million). Refer below for the net impact of collateral received on credit risk.
2018 2017 $’000 $’000 Derivative financial instruments 145,871 149,411 Carrying amount of collateral received 14 (135,604) (151,244) Net credit risk 10,267 Nil
The Corporation had paid $92.5 million of collateral under these arrangements at balance date (Amount paid in 2017: $95.2 million). Refer Note 9.
Reverse repurchase agreements
At year end, the Corporation had purchased securities under agreements to resell of $1,002.0 million (2017: $1,273.9 million) (refer Note 9). These financial instruments are collateralised by highly liquid debt securities. The securities provided are not included in the balance sheet as the Corporation is not substantially exposed to the risks and rewards of the securities. The terms and conditions of the reverse repurchase agreements are governed by standard industry agreements. In the event of default, the Corporation is immediately entitled to offset the collateral against the amounts owed by the defaulting counterparty. The effect of these offsetting arrangements is disclosed in Note 21.
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24. Credit Risk (continued)
Concentration of Credit Risk
By credit rating – 20181 Other2 AAA AA+ AA AA- A+ A A- Ratings Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cash and liquid assets 13 - - 764,622 169 - - - 764,804 Due from financial - - - 6,394,522 585,024 - - 5,100 6,984,646 institutions Securities held6 1,730,512 977,919 202,100 - 550,061 646,578 - 492,789 4,599,959 Derivative financial 1,317 - - 254,831 176,473 13,084 - 57,106 502,811 instruments Security deposits ------14,578 14,578 1,731,842 977,919 202,100 7,413,975 1,311,727 659,662 - 569,573 12,866,798 - Additional potential - - - 127,453 70,996 3,020 - 5,722 207,191 exposure to derivatives Additional potential exposure to financial - 205 3,661 - 1,080 3,422 - 2,211 10,579 instruments 1,731,842 978,124 205,761 7,541,428 1,383,803 666,104 - 577,506 13,084,568
By credit rating – 20171 Other2 AAA AA+ AA AA- A+ A A- Ratings Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cash and liquid assets 9 - - 1,343,740 240 - - - 1,343,989 Due from financial - - - 5,910,754 19,609 - 8,150 - 5,938,513 institutions Securities held6 1,789,058 551,308 96,498 1,303,873 742,298 1,097,042 - 492,918 6,072,995 Derivative financial 867 - - 331,251 157,329 - 14,529 19,461 523,437 instruments Security deposits ------5,556 5,556 1,789,934 551,308 96,498 8,889,618 919,476 1,097,042 22,679 517,935 13,884,490
Additional potential - - - 152,143 69,626 1,500 2,488 2,300 228,057 exposure to derivatives
Additional potential exposure to financial - 2,341 3,502 - 3,078 2,958 - 2,082 13,961 instruments
1,789,934 553,649 100,000 9,041,761 992,180 1,101,500 25,167 522,317 14,126,508
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24. Credit Risk (continued)
By classification of counterparty – 2018
Governments3 Banks4 Other5 Total $’000 $’000 $’000 $’000 Cash and liquid assets 13 764,791 - 764,804 Due from financial institutions - 6,984,646 - 6,984,646 Securities held6 1,741,164 1,663,287 1,195,508 4,599,959 Derivative financial instruments 49,927 452,884 - 502,811 Security deposits - - 14,578 14,578 1,791,104 9,865,608 1,210,086 12,866,798
Additional potential exposure to derivatives 4,234 202,957 - 207,191 Additional potential exposure to financial 3,866 6,713 - 10,579 instruments 1,799,204 10,075,278 1,210,086 13,084,568
By classification of counterparty – 2017 Governments3 Banks4 Other5 Total $’000 $’000 $’000 $’000 Cash and liquid assets 9 1,343,980 - 1,343,989 Due from financial institutions - 5,938,513 - 5,938,513 Securities held6 1,120,245 3,610,755 1,341,995 6,072,995 Derivative financial instruments 20,328 503,109 - 523,437 Security deposits - - 5,556 5,556 1,140,582 11,396,357 1,347,551 13,884,490
Additional potential exposure to derivatives 2,300 225,757 - 228,057 Additional potential exposure to financial 5,843 8,118 - 13,961 instruments
1,148,725 11,630,232 1,347,551 14,126,508 1 Credit rating as per Standard & Poor’s or equivalent. In accordance with the Corporation's counterparty risk policy, counterparties on
"credit watch with negative implications" are reduced by one class.
2 Other Ratings includes long-term ratings of BBB+, or when the counterparty has no long-term rating, a short-term rating of A-2 or lower.
3 Governments – foreign, Commonwealth and other Australian states.
4 Banks - an entity licensed as a Bank under the relevant Australian Law, or equivalent in offshore jurisdiction.
5 Other counterparties include Supranational organisations.
6 AAA rated government securities held include amounts guaranteed by the Commonwealth of Australia totalling $65.4 million (2017: $67.3 million).
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25. Liquidity Risk
The Corporation maintains adequate levels of liquidity within minimum prudential and maximum ranges set by the Board. The minimum prudential level is defined as a percentage of total liabilities and is held to meet unanticipated calls and to cover temporary market disruptions. Additional levels of liquidity are maintained up to the maximum approved range to satisfy a range of circumstances, including client funding requirements, maturing commitments, and balance sheet management activities.
The following table summarises contractual (undiscounted) cash flows by time ranges. The amounts differ from the balance sheet which is based on fair value or discounted cash flows.
2018 1 to 3 3 to 12 1 to 2 2 to 5 Over 5 Up to 1 month months months years years years Total $'000 $'000 $'000 $'000 $'000 $'000 $'000 Financial assets Cash and liquid assets 764,835 - - - - - 764,835 Due from financial institutions 1,549,143 2,070,972 3,412,255 - - - 7,032,370 Securities held 111,685 1,473,403 549,399 1,110,601 1,116,398 433,106 4,794,592 Loans to government clients 571,228 472,344 2,567,536 5,552,113 19,561,659 33,303,162 62,028,042 Debtors and fee accruals 29,133 - - - - - 29,133 Security deposits 14,578 - - - - - 14,578 Financial assets 3,040,602 4,016,719 6,529,190 6,662,714 20,678,057 33,736,268 74,663,550
Financial liabilities Due to financial institutions (2,139,865) (2,080,022) (265,000) - - - (4,484,887) Outstanding settlements payable (22) - - - - - (22) Due to government clients (227,887) (1,071,389) (1,424,024) - - - (2,723,300) Borrowings (44,416) (1,413,930) (4,867,500) (6,753,890) (21,594,956) (32,272,772) (66,947,464) Creditors, expense accruals and (8,537) - - - - - (8,537) other provisions Financial liabilities (2,420,727) (4,565,341) (6,556,524) (6,753,890) (21,594,956) (32,272,772) (74,164,210)
Net financial assets/(liabilities) 619,875 (548,622) (27,334) (91,176) (916,899) 1,463,496 499,340
Derivatives Derivatives receivable 38,980 84,229 203,735 271,279 643,549 482,146 1,723,918 Derivatives payable (24,463) (57,605) (205,521) (251,763) (554,865) (757,384) (1,851,601) Net derivatives 14,517 26,624 (1,786) 19,516 88,684 (275,238) (127,683)
Net 634,392 (521,998) (29,120) (71,660) (828,215) 1,188,258 371,657
Cumulative 634,392 112,394 83,274 11,614 (816,601) 371,657 -
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25. Liquidity Risk (continued)
2017 1 to 3 3 to 12 1 to 2 2 to 5 Over 5 Up to 1 month months months years years years Total $'000 $'000 $'000 $'000 $'000 $'000 $'000 Financial assets Cash and liquid assets 1,344,044 - - - - 1,344,044 Outstanding settlements receivable 288,259 - - - - - 288,259 Due from financial institutions 1,369,437 1,517,993 3,086,462 - - - 5,973,892 Securities held 193,536 2,236,942 1,382,208 468,843 1,175,419 991,011 6,447,959 Loans to government clients 445,398 726,855 2,280,758 4,919,912 20,359,486 31,058,761 59,791,170 Debtors and fee accruals 18,697 - - - - - 18,697 Security deposits 5,556 - - - - - 5,556 Financial assets 3,664,927 4,481,790 6,749,428 5,388,755 21,534,905 32,049,772 73,869,577
Financial liabilities Due to financial institutions (2,666,349) (1,510,000) (741,729) - - - (4,918,078) Outstanding settlements payable (236,004) - - - - - (236,004) Due to government clients (450,217) (1,485) - - - - (451,702) Borrowings (14,988) (625,773) (6,079,031) (7,059,763) (22,707,409) (30,573,191) (67,060,155) Creditors, expense accruals and (7,544) - - - - - (7,544) other provisions Financial liabilities (3,375,102) (2,137,258) (6,820,760) (7,059,763) (22,707,409) (30,573,191) (72,673,483)
Net financial assets/(liabilities) 289,825 2,344,532 (71,332) (1,671,008) (1,172,504) 1,476,581 1,196,094
Derivatives Derivatives receivable 21,702 69,340 234,304 304,495 665,249 560,812 1,855,902 Derivatives payable (29,743) (75,668) (232,102) (297,885) (627,923) (880,479) (2,143,800) Net derivatives (8,041) (6,328) 2,202 6,610 37,326 (319,667) (287,898)
Net 281,784 2,338,204 (69,130) (1,664,398) (1,135,178) 1,156,914 908,196
Cumulative 281,784 2,619,988 2,550,858 886,460 (248,718) 908,196 -
Contractual commitments are disclosed in Note 27. Undertakings on behalf of certain New South Wales public sector clients and undrawn loan commitments are disclosed in Note 29.
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26. Superannuation
Amounts representing prepaid superannuation contributions arising from defined benefit schemes are recognised as an asset and included in other assets (Note 12). Actuarial gains and losses are recognised in the statement of comprehensive income in the year they occur.
The funds below hold in trust the investments of the closed New South Wales public sector superannuation schemes:
● State Authorities Superannuation Scheme (SASS) ● State Superannuation Scheme (SSS) ● State Authorities Non-contributory Superannuation Scheme (SANCS)
These funds are all defined benefit schemes, where at least a component of the employee’s final benefit is derived from a multiple of member salary and years of membership. All schemes are closed to new members. All fund assets are invested at arms-length1. Payments may be made to Mercer Administration Services to reduce the superannuation liability. These payments are held in investment reserve accounts by Mercer Administration Services. The weighted average duration of the defined benefit obligation is 8.4 years (2017: 9.9 years).
The actuarial assessment of SASS, SANCS and SSS was based on the requirements of Australian Accounting Standard AASB 119 Employee Benefits. This standard requires that a market determined risk-adjusted discount rate be applied as a valuation interest rate in the calculation of the value of accrued benefits. To satisfy the AASB 119 requirements, the following principal actuarial assumptions were applied at the report date.
2018 2017 % pa % pa Discount rate at 30th June2 3.7 2.6 Expected return on assets backing current pension liabilities 7.4 7.4 Expected salary increases - 2017 / 2018 - 2.5 - 2018 / 2019 2.7 2.5 - 2019 / 2020 to 2020 / 2021 3.2 3.5 - 2021 / 2022 to 2025 / 2026 3.2 3.0 - thereafter 3.2 3.5 Expected rate of CPI Increase - 2017 / 2018 - 2.0 - 2018 / 2019 2.3 2.3 - 2019 / 2020 2.3 2.5 - thereafter 2.5 2.5 1 The Corporation provides investment management services to SAS Trustee Corporation, the Trustee of the schemes. Fees earned by the Corporation in carrying out these activities are included in the statement of comprehensive income.
2 This reflects market yields of high-quality corporate bonds (2017: Commonwealth Government bonds).
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26. Superannuation (continued)
Reconciliation of the movement in (net) prepaid contribution
TOTALS SASS SANCS SSS 2018 2017 $’000 $’000 $’000 $’000 $’000 Net (asset)/liability at start of year (198) 15 51 (132) (62) Employer contributions (34) - - (34) (35) Net expense/(credit) recognised in the 142 (9) (70) 63 (35) Statement of comprehensive income Net (asset)/liability at end of year (90) 6 (19) (103) (132)
27. Contractual Commitments
2018 2017 $’000 $’000 Operating lease commitments Not later than one year 3,517 3,674 Later than one year but not later than five years 15,183 14,526 Later than five years 8,187 11,732 Total (including GST)1 26,887 29,932
Other expenditure commitments Not later than one year 338 2,154 1 Total (including GST) 338 2,154 1 Total commitments above include Goods and Services Tax (GST) of $2.5 million (2017: $2.9 million) of which a portion is expected to
be recoverable from the ATO.
Operating lease commitments primarily relate to obligations to Property NSW (“PNSW”) in respect of the occupation of business premises by the Corporation.
The Corporation has entered into an occupancy arrangement with PNSW. Under this arrangement:
● PNSW agrees to grant the right of occupancy of the Corporation’s premises for the period 1 June 2018 to 31 May 2025 with options to renew the lease for 2 further terms of 5 years; ● The Corporation is liable for rent, charges and expenses in respect of these premises; and ● The Corporation must pay PNSW a management fee of 2.1% (excluding GST) of gross rent, charges and expenses on the leased premises.
Other expenditure commitments include research and licence costs on significant Information Technology related contracts.
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28. Fiduciary Activities and Funds under Management
The Corporation acts both as Trustee and as manager of funds for the TCorpIM Funds and manages asset and debt portfolios on behalf of clients.
2018 2017 $’000 $’000
Funds under management1 93,880,756 84,454,514
These funds were managed by: - External fund managers 67,801,684 62,406,657 - The Corporation 26,079,072 22,047,857 Total funds under management 93,880,756 84,454,514
Debt portfolios under management 33,332,954 32,945,707 1 Funds within the TCorpIM Funds were $47,753.0 million (2017: $35,906.7 million).
29. Contingent Liabilities and Commitments a. During the year, the Corporation provided short term liquidity facilities to approved client authorities. These facilities are offered on a revolving basis. At the year end, the total facilities were $6,923.0 million (2017: $7,043.0 million) and undrawn commitments were $6,876.8 million (2017: $7,003.7 million). Drawn commitments are recognised as loans to government clients (Note 11) on the balance sheet. b. The Corporation has issued undertakings on behalf of other New South Wales public sector clients in respect of those clients’ performance under contracts with third parties. At balance date, the amounts of these undertakings totalled $84.0 million (2017: $103.7 million). These amounts are payable on demand. Amounts paid under these undertakings are recoverable from the New South Wales public sector agency participants. This financial accommodation is New South Wales Government guaranteed. c. The Corporation has a commitment totalling $650.0 million (2017: $650.0 million) to provide motor vehicle finance to the New South Wales Government. As at year end, the undrawn commitments under these commitments were $443.8 million (2017: $279.6 million). Drawn commitments are recognised on the balance sheet as loans to government clients (Note 11), included within Crown Entity.
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30. Related Parties
Key Management Personnel
Key management personnel include the directors and executives with the authority and responsibility for managing the Corporation. Compensation for key management personnel is disclosed below.
Compensation of Directors and Executives for the year
2018 2017 $’000 $’000 Short-term employee benefits 5,381 4,182 Post-employment benefits 212 181 Other long-term employee benefits 15 36 Termination benefits 419 1,060
6,027 5,459
The total compensation above is paid by the Corporation and includes $612,000 (2017: $587,000) for non-executive directors.
Where the Corporation’s key management personnel are also considered to be key management personnel of entities with whom the Corporation transacts, those transactions are conducted on an arms length basis, under the Corporation’s normal commercial terms and conditions.
Cabinet Ministers
Cabinet Ministers of the New South Wales Government, which includes the Corporation’s portfolio minister (the New South Wales Treasurer), are considered to be related parties of the Corporation and each State-controlled entity.
The New South Wales Treasurer, in his capacity as portfolio minister is responsible for authorising certain transactions undertaken by the Corporation, including the investment of public sector funds with the Corporation and lending activities to government clients.
Other Statutory Relationships
The Corporation is a statutory authority established under the Treasury Corporation Act 1983 of the New South Wales Parliament. It is domiciled in Australia and its principal office is at Level 7, Deutsche Bank Place, 126 Phillip Street, Sydney, NSW 2000.
Dividends payable by the Corporation are determined by the New South Wales Treasurer in accordance with the Public Finance and Audit Act 1983. The financial results of the Corporation are consolidated annually in the New South Wales Report on State Finances.
The Public Authorities (Financial Arrangements) Act 1987 requires New South Wales Government authorities to borrow only from the Corporation unless a specific exemption is granted by the New South Wales Treasurer.
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30. Related Parties (continued)
Other New South Wales Government Entities
Under the Treasury Corporation Act 1983 the Corporation’s principal objective is to provide financial services for, or for the benefit of, the New South Wales Government, public authorities and other public bodies. More specifically, the Corporation may engage in the following activities in relation to New South Wales Government and New South Wales public authorities:
● The provision of finance. ● The management, administration or advice on management of assets and liabilities. ● The acceptance of funds for investment.
All clients of the Corporation are New South Wales Government entities or other public bodies. The Corporation transacts with its clients under the Corporation’s normal terms and conditions.
31. Statement of Cash Flows – Reconciliation of Cash and Cash Equivalents
Cash and cash equivalents as at the end of the year as shown in the statement of cash flows is reconciled to the related items in the balance sheet.
2018 2017 Note $’000 $’000 Cash and liquid assets 8 764,804 1,343,989 Short term borrowings 14 (1,000) (2,000) Cash and cash equivalents 763,804 1,341,989
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32. Reconciliation of Cash Flow from Operating Activities to Profit for the Year
2018 2017 $’000 $’000 Net cash (used in)/provided by operating activities (2,121,885) 13,159,172 Add/(less) adjustments arising from: - net change in loans to clients 2,138,189 (12,937,016) - net change in coupons accrued at each year end on financial assets (37,940) (72,792) and liabilities - net change in other assets 20,298 (1,372) - net change in other liabilities and provisions, excluding dividends (8,313) 6,971 (9,651) 154,963 Add/(less) amounts contributing to net profit but not generating operating cash flows: - actuarial loss/(gain) on defined benefit plans 24 (79) - (loss)/gain on disposal of plant and equipment and intangible assets (8) 19 - gain on sale of financial instruments 129,476 708,950 - unrealised fair value loss on financial instruments (56,326) (768,264) - depreciation and amortisation (1,340) (2,911) Profit for the year 62,175 92,678
33. Subsequent Events
There have been no events subsequent to balance date which would have a material effect on the financial statements as at 30 June 2018.
34. Authorisation Date
This financial statements were authorised for issue in accordance with a resolution of the directors of New South Wales Treasury Corporation on 20 August 2018.
END OF AUDITED FINANCIAL STATEMENTS
The 36th Annual Report to Parliament of New South Wales Treasury Corporation 98 of 118
Statement by the Board of Directors
Certificate under Section 41C(1B) and 41C(1C) of the Public Finance and Audit Act 1983 and Clause 7 of the Public Finance and Audit Regulation 2015.
In the opinion of the directors of New South Wales Treasury Corporation:
(a) the financial statements have been prepared in accordance with the provisions of the Public Finance and Audit Act 1983, the Public Finance and Audit Regulation 2015 and the Treasurer’s Directions. They have also been prepared in accordance with Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. (b) the financial statements for the year ended 30 June 2018 exhibit a true and fair view of the position and transactions of New South Wales Treasury Corporation; and (c) the directors are not aware of any circumstances as at the date of this certificate which would render any particulars included in the financial report misleading or inaccurate.
Signed in accordance with a resolution of the Board of Directors:
P W Chronican D M Deverall Director Director
20 August 2018 SYDNEY
The 36th Annual Report to Parliament of New South Wales Treasury Corporation 99 of 118
INDEPENDENT AUDITOR’S REPORT
New South Wales Treasury Corporation
To Members of the New South Wales Parliament
Opinion
I have audited the accompanying financial statements of New South Wales Treasury Corporation (the Corporation), which comprise the Statement of Comprehensive Income for the year ended 30 June 2018, the Balance Sheet as at 30 June 2018, the Statement of Changes in Equity and the Statement of Cash Flows for the year then ended, notes comprising a Summary of Significant Accounting Policies and other explanatory information.
In my opinion, the financial statements:
● give a true and fair view of the financial position of the Corporation as at 30 June 2018, and of its financial performance and its cash flows for the year then ended in accordance with Australian Accounting Standards ● are in accordance with section 41B of the Public Finance and Audit Act 1983 (PF&A Act) and the Public Finance and Audit Regulation 2015.
My opinion should be read in conjunction with the rest of this report.
Basis for Opinion
I conducted my audit in accordance with Australian Auditing Standards. My responsibilities under the standards are described in the ‘Auditor’s Responsibilities for the Audit of the Financial Statements’ section of my report.
I am independent of the Corporation in accordance with the requirements of the:
● Australian Auditing Standards ● Accounting Professional and Ethical Standards Board's APES 110 ‘Code of Ethics for Professional Accountants’ (APES 110).
I have fulfilled my other ethical responsibilities in accordance with APES 110.
Parliament promotes independence by ensuring the Auditor-General and the Audit Office of New South Wales are not compromised in their roles by:
● providing that only Parliament, and not the executive government, can remove an Auditor- General ● mandating the Auditor-General as auditor of public sector agencies ● precluding the Auditor-General from providing non-audit services.
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I believe the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.
The Board’s Responsibilities for the Financial Statements
The members of the Board are responsible for the preparation and fair presentation of the financial statements in accordance with Australian Accounting Standards and the PF&A Act, and for such internal control as the members of the Board determine is necessary to enable the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the members of the Board are responsible for assessing the Corporation’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting except where the Corporation will be dissolved by an Act of Parliament or otherwise cease operations.
Auditor’s Responsibilities for the Audit of the Financial Statements
My objectives are to:
● obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error ● issue an Independent Auditor’s Report including my opinion.
Reasonable assurance is a high level of assurance, but does not guarantee an audit conducted in accordance with Australian Auditing Standards will always detect material misstatements. Misstatements can arise from fraud or error. Misstatements are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions users take based on the financial statements.
A description of my responsibilities for the audit of the financial statements is located at the Auditing and Assurance Standards Board website at: www.auasb.qov.au/auditors_responsibilities/ar4.pdf. The description forms part of my auditor’s report.
My opinion does not provide assurance:
● that the Corporation carried out its activities effectively, efficiently and economically ● about the security and controls over the electronic publication of the audited financial statements on any website where they may be presented ● about any other information which may have been hyperlinked to/from the financial statements.
Margaret Crawford Auditor-General of NSW
23 August 2018 SYDNEY
The 36th Annual Report to Parliament of New South Wales Treasury Corporation 101 of 118
Section Six – Appendices
GIPA Disclosures 103
Promotion 109
Consultants 110
Digital Information Attestation 111
Payment Performance Indicators 112
Budget 114
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Government Information (Public Access) Act 2009 (NSW) Annual Report for Agency New South Wales Treasury Corporation
Clause 7A: Details of the review carried out by the agency under section 7 (3) of the Act during the reporting year and the details of any information made publicly available by the agency as a result of the review.
Reviews carried out by the agency Information made publicly available by the agency
No No
Clause 7B: The total number of access applications received by the agency during the reporting year (including withdrawn applications but not including invalid applications).
Total number of applications received
0
Clause 7C: The total number of access applications received by the agency during the reporting year that the agency refused either wholly or partly, because the application was for the disclosure of information referred to in Schedule 1 to the Act (information for which there is conclusive presumption of overriding public interest against disclosure).
Number of Applications Refused Wholly Partly Total
0 0 0
% of Total 0% 0%
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Schedule 2 Statistical information about access applications to be included in annual report
Table A: Number of applications by type of applicant and outcome*
Access Access Access Information Information Refuse to Refuse to Application Total % of Total Granted in Granted in Refused in not Held Already Deal with Confirm/ Withdrawn Full Part Full Available Application Deny whether information is held
Media 0 0 0 0 0 0 0 0 0 0%
Members of 0 0 0 0 0 0 0 0 0 0% Parliament
Private sector 0 0 0 0 0 0 0 0 0 0% business
Not for profit 0 0 0 0 0 0 0 0 0 0% organisations or community groups
Members of the 0 0 0 0 0 0 0 0 0 0% public (by legal representative)
Members of the 0 0 0 0 0 0 0 0 0 0% public (other)
Total 0 0 0 0 0 0 0 0 0
% of Total 0% 0% 0% 0% 0% 0% 0% 0%
* More than one decision can be made in respect of a particular access application. If so, a recording must be made in relation to each such decision. This also applies to Table B.
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Table B: Number of applications by type of application and outcome*
Access Access Access Information Information Refuse to Refuse to Application Total % of Total Granted in Granted in Refused in not Held Already Deal with Confirm/ Withdrawn Full Part Full Available Application Deny whether information is held
Personal 0 0 0 0 0 0 0 0 0 0% information applications*
Access 0 0 0 0 0 0 0 0 0 0% applications (other than personal information applications)
Access 0 0 0 0 0 0 0 0 0 0% applications that are partly personal information applications and partly other
Total 0 0 0 0 0 0 0 0 0
% of Total 0% 0% 0% 0% 0% 0% 0% 0%
* A personal information application is an access application for personal information (as defined in clause 4 of Schedule 4 to the Act) about the applicant (the applicant being an individual).
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Table C: Invalid applications
Reason for invalidity No of % of Total applications
Application does not comply with formal requirements (section 41 of the 0 0% Act)
Application is for excluded information of the agency (section 43 of the Act) 0 0%
Application contravenes restraint order (section 110 of the Act) 0 0%
Total number of invalid applications received 0 0%
Invalid applications that subsequently became valid applications 0 0%
Table D: Conclusive presumption of overriding public interest against disclosure: matters listed in Schedule 1 of Act
Number of % of Total times consideration used*
Overriding secrecy laws 0 0%
Cabinet information 0 0%
Executive Council information 0 0%
Contempt 0 0%
Legal professional privilege 0 0%
Excluded information 0 0%
Documents affecting law enforcement and public safety 0 0%
Transport safety 0 0%
Adoption 0 0%
Care and protection of children 0 0%
Ministerial code of conduct 0 0%
Aboriginal and environmental heritage 0 0%
Total 0
* More than one public interest consideration may apply in relation to a particular access application and if so, each such consideration is to be recorded (but only once per application). This also applies in relation to Table E
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Table E: Other public interest considerations against disclosure: matters listed in table to section 14 of Act
Number of times consideration % of Total used*
Responsible and effective government 0 0%
Law enforcement and security 0 0%
Individual rights, judicial processes and natural justice 0 0%
Business interests of agencies and other persons 0 0%
Environment, culture, economy and general matters 0 0%
Secrecy provisions 0 0%
Exempt documents under interstate Freedom of Information legislation 0 0%
Total 0
Table F: Timeliness
Number of % of Total applications*
Decided within the statutory timeframe (20 days plus any extensions) 0 0%
Decided after 35 days (by agreement with applicant) 0 0%
Not decided within time (deemed refusal) 0 0%
Total 0
Table G: Number of applications reviewed under Part 5 of the Act (by type of review and outcome)
Decision Decision Total % of Total varied upheld
Internal review 0 0 0 0%
Review by Information Commissioner* 0 0 0 0%
Internal review following 0 0 0 0% recommendation under section 93 of Act
Review by NCAT 0 0 0 0%
Total 0 0 0
% fo Total 0% 0%
* The Information Commissioner does not have the authority to vary decisions, but can make recommendations to the original decision-maker. The data in this case indicates that a recommendation to vary or uphold the original decision has been made by the Information Commissioner.
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Table H: Applications for review under Part 5 of the Act (by type of applicant)
Number of % of Total applications for review
Applications by access applicants 0 0%
Applications by persons to whom information the subject of access 0 0% application relates (see section 54 of the Act)
Total 0
Table I: Applications transferred to other agencies
Number of % of Total applications transferred
Agency – Initiated Transfers 0 0%
Applicant – Initiated Transfers 0 0%
Total 0
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Promotion
The below table details overseas visits made by our employees during the 2017/18 financial year. As one of Australia’s largest Investment Manager’s and the State of NSW’s Central Financing Authority, our employees have significant interactions with global fund managers, banks and other investors. This necessitates the requirement for overseas travel in order to achieve our business objectives.
Officer Visit Undertaken Purpose
Fiona Trigona September 2017 Japan Roadshow (Tokyo)
Katherine September 2017 European Roadshow 2017 (London, Amsterdam, Munich, Palmer Frankfurt, Warsaw, Stockholm, Paris)
Paul Verschuer September 2017 European Roadshow 2017 (London, Amsterdam, Munich, Frankfurt)
Stewart Brentnall October 2017 Peer engagement (London, Amsterdam, New York, Montreal, Toronto, Vancouver, Victoria, Seattle)
Brian Redican October 2017 HSBC China field research trip (Beijing)
Kevin Masling October 2017 Enterprise risk management peers forum (Auckland)
Iain McAlister October 2017 Enterprise risk management peers forum (Auckland)
Jonathan Green December 2017 J.P Morgan site visit (Mumbai, Bangalore, Hong Kong, Manila)
Lianne Buck December 2017 GDI board meeting (Tokyo)
Sean Mullaney January 2018 Operational due diligence and peer engagement (Boston, New York, London, Luxembourg)
Jonathan Green January 2018 Operational due diligence and peer engagement (San Francisco, Newport Beach, Boston, New York, London, Luxembourg)
David Deverall January 2018 Host Treasurer/client meetings (New York, Montreal, Toronto)
Fiona Trigona March 2018 United States/Canada Roadshow (Boston, New York, Toronto)
Gavin Sinnott March 2018 United States/Canada Roadshow (Boston, New York, Toronto)
John Zavone March 2018 Research Trip on defensive strategies/peer engagement meetings (Singapore, London, Toronto, New York, Miami, Newport)
Lianne Buck March 2018 Investment fund manager meetings (Bristol, Birmingham, London, Leeds, Berlin, Copenhagen)
Stewart Brentnall March 2018 Investment fund manager meetings (Bristol, Birmingham, London, Leeds, Singapore)
Katherine April 2018 Asian Roadshow (Kuala Lumpur, Bangkok, Singapore) Palmer
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Officer Visit Undertaken Purpose
Brendan Hallett March 2018 Best of breed global research and investment programme for Institutional Investors (Boston, New York, Los Angeles, Newport Beach)
Ben Griffiths April 2018 Investment fund manager meetings (Amsterdam, Berlin, London, Edinburgh, Boston, New York, Milwaukee, Chicago, Salt Lake City)
Peter Laity April 2018 Investment fund manager meetings (Amsterdam, Berlin, London, Edinburgh, Boston, New York, Milwaukee, Chicago, Salt Lake City)
Omahlee May 2018 2018 Global technology and operations symposium (San Norburn Francisco)
Kenneth Wong May 2018 2018 Global technology and operations symposium (San Francisco)
Komal Jalan June 2018 Peer engagement meetings, International Corporate Governance Network (ICGN) conference and ICGN ESG integration programme (London, Amsterdam, Rome, Milan, Zeist)
Fiona Trigona June 2018 Asian fixed income forum (Hong Kong, Tokyo, Seoul)
David Deverall June 2018 Asian fixed income forum (Hong Kong, Tokyo, Seoul)
Consultants 2018 $ Cost (inclusive of GST)
Ernst & Young 246,005
BAE Systems Applied Intelligence 95,920
Towers Watson Australia 1,201,951
Shoreline Consulting 210,650
Consultancies equal to or more than $50,000 1,754,526
Consultancies less than $50,000 84,732
Consultancy costs in 2017/18 include costs associated with the implementation of a best in class investment management model, a comprehensive market scan of potential software solutions to support our investment management business as well as advice and design in relation to remuneration incentive schemes.
From time to time, we may also engage consultants on behalf of other Government agencies. To the extent that these costs are ultimately borne by those agencies, they are not reported here.
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Digital Information Security Policy Annual Attestation Statement for the 2017-2018 Financial Year for New South Wales Treasury Corporation
I, David Deverall, Chief Executive of New South Wales Treasury Corporation, am of the opinion that New South Wales Treasury Corporation had an Information Security Management System in place during the 2017-2018 financial year that is consistent with the Core Requirements set out in the NSW Government Digital Information Security Policy.
The controls in place to mitigate identified risks to the digital information and digital information systems of New South Wales Treasury Corporation are adequate.
There is no agency under the control of New South Wales Treasury Corporation which is required to develop an independent ISMS in accordance with the NSW Government Digital Information Security Policy.
D M Deverall
Chief Executive
The 36th Annual Report to Parliament of New South Wales Treasury Corporation 111 of 118
Payment Performance Indicators
Aged Analysis at End of Each Quarter
Quarter Current Less than Between 30 Between 61 More than 90 (within due 30 days and 60 days and 90 days days date) overdue overdue overdue overdue
$’000 $’000 $’000 $’000 $’000
All suppliers
September 67 0 0 0 0
December 1,308 17 0 0 0
March 216 0 0 0 0
June 240 7 0 0 0
Small business suppliers
September 0 0 0 0 0
December 209 0 0 0 0
March 60 0 0 0 0
June 67 0 0 0 0
Accounts Due or Paid Within Each Quarter
Measure Sep 2017 Dec 2017 Mar 2018 Jun 2018
All suppliers
Number of accounts due for payment 719 692 565 862
Number of accounts paid on time 695 684 543 848
Actual percentage of accounts paid on 96.7% 98.8% 96.1% 98.4% time (based on number of accounts)
Dollar amount of accounts due for 10,765,173 15,751,477 10,625,774 19,170,384 payment ($)
Dollar amount of accounts paid on time ($) 10,618,461 15,728,838 9,301,544 18,177,964
Actual percentage of accounts paid on 98.6% 99.9% 87.5%% 94.8% time (based on $)
Number of payments for interest on 0 0 0 0 overdue accounts
Interest paid on overdue accounts ($) 0 0 0 0
The 36th Annual Report to Parliament of New South Wales Treasury Corporation 112 of 118
Measure Sep 2017 Dec 2017 Mar 2018 Jun 2018
Small Business Suppliers
Number of accounts due for payment to small businesses 46 47 42 96
Number of accounts due to small business paid on time 45 47 42 96
Actual percentage of small business accounts paid on time (based on number of accounts) 97.8% 100% 100% 100%
Dollar amount of accounts due for payment to small business ($) 28,699 639,794 471,028 1,307,375
Dollar amount of accounts due to small business paid on time ($) 28,654 639,794 471,028 1,307,375
Actual percentage of small business accounts paid on time (based on $) 99.8% 100% 100% 100%
Number of payments to small business for interest on overdue accounts 0 0 0 0
Interest paid to small business on overdue accounts ($) 0 0 0 0
Late Payment Interest
No late payment interest was incurred or paid in the year ended 30 June 2018 (2017: $21).
The 36th Annual Report to Parliament of New South Wales Treasury Corporation 113 of 118
Budgets for the Years Ended 30 June 2018 and 30 June 2019
2018 2018 2019 Budget Actual Budget $’000 $’000 $’000
Investment Management revenue 60,339 63,983 68,387
Financial Markets revenue 99,416 100,947 95,791
Total income 159,755 164,930 164,178
Transaction costs 2,628 2,478 2,662
Operating costs
Staff costs 46,838 48,241 50,947
Finance services costs 4,300 3,760 4,565
Travel and corporate promotion 1,205 995 1,423
Computer costs 8,639 8,048 9,129
Premises and other operating costs 7,087 7,600 7,637
Subtotal – Operating expenses 68,069 68,644 73,701
Project costs 5,099 5,021 2,832
Total expenses 75,796 76,143 79,195
Operating profit before tax equivalent expense 83,959 88,787 84,983
Notes:
1 Due to reclassifications the 2018 Budget will be different to that published in last year’s Annual report.
2 The format presented in the table differs to TCorp’s Financial Statements.
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Index – Annual Report Compliance Requirements
Topic Reference Page
Access Schedule 1 ARSBR 118
Additional matters for inclusion in Clause 8 ARSBR 51 - 52 annual reports
Agreements with Multicultural NSW Schedule 1 ARSBR N/A
Aims and objectives Schedule 1 ARSBR 3
Application for extension of time Section 13(5) ARSBA N/A
Budgets Section 7(1)(a)(iii) ARSBA, Clause 7 ARSBR 114
Charter Schedule 1 ARSBR 3
Consultants PM 2002-07, Schedule 1 ARSBR 110
Consumer response Schedule 1 ARBSR 51
Digital information security policy DISP 2.0 111 attestation
Disability inclusion action plans Section 12 and Section 13 DIA, Schedule 1 ARSBR, 49 Clause 18 ARSBR, TC 15/18
Disclosure of controlled entities Schedule 1 ARSBR N/A
Disclosure of subsidiaries PM 06-02 N/A
Economic or other factors Schedule 1 ARSBR 36
Exemptions Clause 17(4) ARSBR, Clause 18 ARSBR 51
Financial statements Section 7(1)(a)(i)-(iia) ARSBA 54 -101
Funds granted to non-government PM 91-34, Schedule 1 ARSBR N/A community orgs
Government Information (Public Sections 125(4) and (6) GIPAA, Clause 7, Schedule 2, 103 Access) Act 2009 Clause 12, Schedule 3 GIPAR
Human resources Schedule 1 ARSBR 46 - 50
Identification of audited financial Clause 5 ARSBR 54 statements
Implementation of price Section 18(4) IPARTA N/A determination
The 36th Annual Report to Parliament of New South Wales Treasury Corporation 115 of 118
Topic Reference Page
Inclusion of unaudited financial Clause 6 ARSBR 54 statements
Investment performance Clause 10 ARSBR, TC 17-02 N/A
Internal audit and risk management TPP 15-03 44 policy attestation
Land disposal Schedule 1 ARSBR N/A
Legal change Section 9(1)(f) ARSBA, Schedule 1 ARSBR N/A
Liability management performance Clause 11 ARSBR, TC 17-02 N/A
Management and activities Schedule 1 ARSBR 7-10
Management and structure Schedule 1 ARSBR 11, 14 & 46
Multicultural policies and services Schedule 1 ARSBR, Clause 18 ARSBR, 49 programme TC 15/18
Privacy and personal information Clause 8 ARSBR 52 protection
Payment of accounts TC 11/21, Schedule 1 ARSBR 112
Numbers and remuneration of senior Clause 12 ARSBR, PSC Circular 2014-09, PSC 47 executives Circular 2016-05, PSC Circular 2017-04
Promotion Schedule 1 ARSBR 109
Public Interest Disclosures (PID) Section 31 PIDA, Clause 4 PIDR, PM 2013-13 51
Requirements arising from TC 15/07, Section 15(1) ARSBA N/A employment arrangements
Research and development Schedule 1 ARSBR N/A
Risk management and insurance Schedule 1 ARSBR 41- 43 activities
Summary review of operations Schedule 1 ARSBR 21- 30
Time for payment of accounts TC 11/21, Schedule 1 ARSBR 113
Workforce diversity Schedule 1 ARSBR, Clause 18 ARSBR, PSC Circular 50 2014-09, TC 15/18
Work health and safety Schedule 1 ARSBR, Clause 18 ARSBR, 48 TC 15/18
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* Key to Legislative Reference Codes
ARSBA Annual Reports (Statutory Bodies) Act 1984 (NSW)
ARSBR Annual Reports (Statutory Bodies) Regulation 2015 (NSW)
DIA Disability Inclusion Act 2014 (NSW)
DISP 2.0 NSW Government Digital Information Security Policy Version 2.0 - April 2015
GIPAA Government Information (Public Access) Act 2009 (NSW)
GIPAR Government Information (Public Access) Regulation 2018 (NSW)
IPARTA Independent Pricing and Regulatory Tribunal Act 1992 (NSW)
PIDA Public Interest Disclosures Act 1994 (NSW)
PIDR Public Interest Disclosures Regulation 2011 (NSW)
PC Premier’s Circular
PM Premier’s Memorandum
PSC Public Service Commission
TC Treasury Circular
TD Treasurer’s Direction
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Principal Office Level 7, Deutsche Bank Place 126 Phillip Street Sydney NSW 2000
Business Hours Monday to Friday 8:30am to 5:00pm
Postal Address Level 7, Deutsche Bank Place 126 Phillip Street Sydney NSW 2000
Email [email protected]
Website www.tcorp.nsw.gov.au
Telephone (02) 9325 9325 (General) (02) 9325 9267 (TCorpIM Fund Transactions)
Facsimile (02) 9325 9333
TCorp Dealing Desk Registry Offices
Bonds (02) 9325 9340 Link Market Services Limited Level 12, 680 George Street Money Market (02) 9325 9329 Sydney NSW 2000 Authority Deposits (02) 9325 9352 Telephone (02) 8280 7915 Borrowings/Other Transactions (02) 9325 9354 Email [email protected] Settlements
Telephone (02) 9325 9203 Facsimile (02) 9325 9355