THE TWENTY-EIGHTH ANNUAL REPORT TO PARLIAMENT OF NEW SOUTH WALES TREASURY CORPORATION FOR THE YEAR ENDED 30 JUNE 2010 New South Wales Treasury Corporation TABLE OF CONTENTS PAGE TCORP’S OBJECTIVES 1 REVIEW OF OPERATIONS 4 YEAR IN REVIEW 8 PERFORMANCE INDICATORS – FIVE YEAR SUMMARY 9 NATURE AND RANGE OF ACTIVITIES AND SIGNIFICANT OPERATIONS 10 LOANS OUTSTANDING TO AUTHORITIES 12 FUNDING FACILITIES 15 ADVISORY SERVICES 26 GUARANTEES 26 EXEMPTIONS FROM THE REPORTING PROVISIONS 47 PROMOTION 48 WASTE REDUCTION AND PURCHASING POLICY 50 PAYMENTS 51 BUDGETS FOR THE YEARS ENDED 30 JUNE 2010 AND 30 JUNE 2011 52 LEGAL CHANGE 52 CONTROLLED ENTITIES 52 ISSUES RAISED BY THE AUDITOR 53 POST BALANCE DATE EVENTS 53 FINANCIAL STATEMENTS 53 - i - New South Wales Treasury Corporation TCORP’S OBJECTIVES TCorp’s charter TCorp is the central financing authority for the New South Wales public sector. The Treasury Corporation Act 1983 states that TCorp’s principal objective is “to provide financial services for, or for the benefit of, the Government, public authorities and other public bodies”. In pursuing its objectives, TCorp has the same legal capacity, powers and authorities as a company under the Corporations Act 2001 (Cth). Activities in which TCorp 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; and . management of TCorp’s own assets and liabilities. TCorp’s powers to borrow, invest and undertake financial management transactions are regulated under the Public Authorities (Financial Arrangements) Act 1987. TCorp’s mission statement TCorp exists to deliver for New South Wales the best that the financial markets can offer. TCorp’s corporate objectives In line with the mission statement, the corporate objectives of TCorp are to: . achieve cost-effective funding; . effectively execute portfolio assignments; . effectively execute risk management and structured finance assignments; and . meet client and market needs through enhanced resource management and allocation. - 1 - New South Wales Treasury Corporation Objectives Performance measures Results for 2009/10 To achieve cost effective To ensure a cost effective To further diversify TCorp’s access to global finance for clients through funding mix through funding markets, a new US Shelf management of TCorp’s diversification of sources of Registration was established to facilitate funding programme and finance and professional issuance into the US capital markets. balance sheet activities. implementation of the annual funding programme. With limited opportunities to diversify funding into non-Australian dollar bond markets, new issuance held at $100m. Three new Benchmark Bonds were launched in the domestic bond programme as part of a strategy to re- establish this series under the NSW State guarantee. During 2009/10, the net outstandings on the benchmark programme increased by $4.5bn. The gross new issuance including the refinancing of the October 2009 maturity was $7.3bn. Activity continued in TCorp’s Capital Indexed Bond programme, with an issue of $2.1bn. A new November 2020 Capital Indexed Bond was established. To meet or exceed budgeted Managing the market risks inherent in revenue from managing TCorp’s balance sheet produced results in TCorp’s balance sheet risk excess of budget. activities. Contributing to the strong revenues were healthy margins on holdings of short term liquidity assets and on positions held for balance sheet risk management purposes. In addition, TCorp’s balance sheet was well positioned throughout the periods of market turmoil. To effectively execute To outperform neutral TCorp’s management of debt portfolios in portfolio assignments for benchmarks for managed debt line with client mandates resulted in clients through portfolios. performance being marginally behind management of debt and benchmark for the financial year. Longer asset management term bond yields were range-bound portfolios and Hour-Glass around fair value, reducing the Investment Facilities. opportunity to add value through strategic duration positioning. To achieve the debt interest The debt interest outcome was well within cost forecast for the General the agreed target range. Government sector. - 2 - New South Wales Treasury Corporation To generate strong returns for 2009/10 was marked as one of recovery for the Hour-Glass Investment global financial markets. The Hour-Glass Facilities and outperform Investment Facilities, on the back of this industry benchmarks. recovery, posted strong results in both absolute and relative terms. All four flagship Facilities – Cash, Strategic Cash, Medium Term Growth and Long Term Growth – outperformed their respective benchmarks. Importantly, prudent management of the Hour-Glass products meant that the funds navigated the global financial crisis without major incident. The funds remained liquid at all times; experienced no defaults and provided protection to investors during times of market volatility. To outperform neutral Discretely managed cash portfolios benchmarks for discretely performed significantly in excess of their managed fixed income asset individual benchmarks. The fixed income portfolios. asset portfolios also generated strong outperformance of benchmarks. Cash and fixed income portfolio performance outcomes were consistent with first quartile or above-median comparator rankings. To effectively execute risk To add economic value Advice is provided during various phases of management and through TCorp’s involvement procurement and ongoing management of structured finance in corporate advisory work for transactions. TCorp had an active year in assignments for clients. clients. terms of number of assignments, spread of clients, and type of work. Value add for the State was clearly demonstrated in several instances and client feedback was highly positive. To meet client and market To provide cost efficient Cost effective lending, investment, needs through enhanced services to TCorp’s client base. portfolio management, reporting and resource management advisory services were provided to some and allocation. 180 public sector clients, with business continuing to grow during the year. To maintain or improve client The 2009/10 survey showed excellent satisfaction as measured by an results, confirming TCorp’s strong annual survey. reputation and high service standards with clients throughout our business activities. - 3 - New South Wales Treasury Corporation REVIEW OF OPERATIONS Chairperson and Chief Executive’s Review Global financial markets continued to face fresh challenges and substantial uncertainty over the past year. The actions of governments, locally and globally, in responding to the financial crisis have been broadly effective. However, the legacy of growing sovereign debt is causing lingering concerns for many economies. Australia has performed exceptionally well in this context, although uncertainties and challenges remain. Pleasingly, TCorp has maintained its record of strong performance for its clients and shareholder throughout and beyond the financial crisis. We have kept a “clean sheet” with no credit losses incurred for clients, or on TCorp’s balance sheet. Profitability has held strong and significant value has been generated for clients across a broad range of portfolio assignments. The application, and subsequent removal, of the Commonwealth Government’s guarantee arrangements gave rise to a range of issues over the year. TCorp was able to anticipate and respond to these issues in a way which provided optimal outcomes for our borrowing clients and institutional investors. Environment The first signs of the global financial crisis emerged in mid-2007. The past three years have seen three distinct, but interrelated, periods of global economic and market performance. The first of these periods was the most dramatic and gave rise to the term “global financial crisis”. The period from mid-2007 to the end of 2008 saw severe and widespread losses among private sector financial institutions, with a significant knock-on effect to economic growth in the developed world. The second period, which ran from late 2008 to the end of 2009, was characterised by government rescue packages and significant fiscal and monetary stimuli. These measures were effective in turning around the performance of global equity and credit markets and providing a much-needed boost to ailing economies. The third period, which emerged early in 2010, is centred on the legacy issue of heavy sovereign deficits and debt ratios in a range of developed economies, most notably in Europe but also for the US. This legacy will affect a number of economies for many years. The healthy performance of the Australian economy in these circumstances is virtually unparalleled in the developed world. The combination of strong government balance sheets (both at Commonwealth and State levels), significant trade links with China, a flexible and well diversified economy, and a robust regulatory framework have all helped Australia through the past three years. With the Australian economy reverting to trend growth over the past year, the Reserve Bank of Australia (RBA) began the process of returning the official cash rate towards neutral settings. The RBA raised the cash rate six times during 2009/10, from 3.0 per cent to finish the year at 4.5 per cent, with