Section 6: Council Activities

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Management of Investments and Funding

Responsibility

Steve Taylor (General Manager Support Services)

Description of service

This activity covers the management of all Council-owned investments, sources of income not assignable to other activities and the management of the Council’s borrowing requirements.

Scale of service

This describes the size and scope of the Council-Controlled Organisations. These are:

Airport Joint Venture (50 per cent interest).
Production forestry on Council-owned land (251ha) and in joint venture with land owned by others (138ha).
Taranaki Investment Management Limited - management of the Council’s perpetual investment fund.
Tasman Farms Limited (part of the Perpetual Investment Fund but also a Council-Controlled Organisation by virtue of its 74.3 per cent shareholding by the Council) plus Tasman’s subsidiary (98.14 per cent shareholding) Van Diemen’s Land Company.

Rationale for activity

This activity has an internal financial focus on investments and borrowings but due to its significance is included as a significant activity in its own right. Management of Investments and Funding contributes to the economic well-being.

The rationales for the investments/borrowing are covered in the Investment Policy and Liability Management Policy (see summaries of both these documents in this document).

These items are key funding sources for present and future funding needs and this activity aims to provide a long term and financially sustainable contribution to those funding needs.

Contribution to Community Outcomes

Management of Investments and Funding primarily contributes to the Prosperous Community Outcome by financially supporting other significant activities. The level of income from investments is a significant portion of the Council’s overall sources of income, and hence its provision of services to the community.

Prosperous

A district that boasts a sustainable, resilient and innovative economy that prospers within the natural and social environment.

P6 People are confident and are happy to invest in the future.

Negative impacts on community well-being

This activity has no particular negative impacts.

Facing the challenges – assumptions and risks

Assumptions

The key assumptions underpinning this activity are:

Average return on the Council’s perpetual investment fund is 9.5 per cent per year over the forecast period.
Little or no return from the forestry joint ventures or airport joint venture.
Weighted average cost of borrowings is 5.0 to 6.5 per cent over the forecast period.
The Council will continue production forestry on its own land (including replanting following harvest) in the absence of any demand for alternate uses of the lands.
The Council will continue to meet its contractual joint venture forestry obligations through to harvest and subsequent termination of each of the respective joint ventures.

These assumptions are outlined in greater detail in the financial assumptions outlined within this document.

Risks

Changing market conditions can have an impact on the returns realised by the Council’s investments and consequently its ability to financially support the Council’s other significant activities.
Volatile markets can also have an impact on the Council’s ability to minimise its cost of borrowing.
Loss of forestry investment through tree disease, forest fire or other adverse incidents.
There is still some uncertainty regarding the Emissions Trading Scheme and its impact on the Council’s investments, particularly its production forestry ventures. Return to top

Managing risks

Management of the perpetual investment fund is contracted to Taranaki Investment Management Limited (TIML). TIML operates within general risk management parameters outlined in the investment policy and more specifically in terms of its operating policy. The fund is a diversified portfolio of income and growth investments and given the fund’s perpetual focus a long-term view is able to be taken on the mitigation of risks associated with such investments, while the level of annual release from 1 July 2009 is to be governed by a release rule [2] that aims to provide a higher degree of sustainability and certainty to the Council’s general revenue streams in the longer term.

Should the above measures be insufficient to prevent a decline in release, a range of other measures are available depending on the severity and sustainability of any reduction (short-term borrowing, deferral/reduction in more discretionary expenditures, increase other funding sources if sustainable, liquidation of the fund if extremely severe).

Mitigation of risks associated with the management of the Council’s debt is carried out internally (with external benchmarking and advice) in accordance with the liability management policy. This sets prudential limits within which the Council manages both the level and cost of debt. The Council is currently well within these limits and currently maintains a Standard and Poor’s credit rating of AAA as the key external benchmark reflecting its very strong financial position relative to its debt obligations.

The Council contracts the management of all its forests (including JV’s) to a professional forestry manager. The services of a registered forestry consultant are employed to provide independent advice about forest health, production and management strategies. The consultant maintains an annual forestry plan.

With the advent of an emissions trading scheme (currently under review by central government with implementation delayed) the Council is to engage a forestry consultant in early 2009 to provide an expert report on the financial implications (positive and negative) of the current emissions trading scheme when considered against the Council’s long-term forestry management strategy and related land use intentions.

[2] The release rule for the PIF is a formula that determines the annual release to be made from the PIF ahead of the year it will apply to. It has two components:

Eighty per cent of the previous year’s release, inflation adjusted for the year prior to that to be budgeted for; plus
Twenty per cent of a 5.6 per cent portion of the year-end audited capital value of the PIF, inflation adjusted for the year prior to that to be budgeted for.

The 5.6 per cent is a long-term release target that strikes a balance between the sustainability of the annual release and the real capital value of the PIF.

The release rule smoothes the potential annual fluctuations that would otherwise occur if a straight percentage of annual value was used. As such it provides greater certainty for the Council on annual release levels for budgeting purposes.