Risk Management in OFM - Policies and Practices

Management of OFM

Representation includes OFM, Internal Audit Bureau and Audit Office. Charter to identify and manage strategic and mainstream risks. An Annual program is determined to target high risk areas. Recent examples include the Snowy Mountains Corporatisation; the Electricity Tariff Equalisation Fund; the Financial Information System (FIS); the use of consultants and contractors.

Representation includes DPWS and stakeholders, including OFM. Charter to identify and manage risks associated with using the services of a central corporate services entity.

Representation includes DPWS and stakeholders, including OFM. Charter to identify and manage risks associated with using the centralised IT services.

4. Service and Resource Allocation Agreement :

Agreement between Treasury and the Treasurer on outcomes and outputs to be achieved during the year, including the major risks requiring monitoring.

Clearly delineated Treasury Procedures on various matters including use of consultants and contractors.

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Management of State’s Finances

Representation includes senior executives across all OFM directorates. Charter to manage the State Budget process and its associated risks, including resourcing, IT systems, printing, unforseen shocks (eg. HIH crisis). Operates from February to May each year.

Representation includes senior executives and staff across all OFM directorates. Charter to review and report on the previous year’s State Budget process in order to minimise risks in succeeding year’s Budget process, eg. through achieving early agreement on Government priorities. Operates from July to October.

Representation includes senior executives across all OFM directorates. Charter to achieve the General Government Debt Elimination Act targets. Reports and manages the risks around the fiscal targets.

Representation includes senior officers of the Department of Public Works and Services, Attorney General’s Department, Roads and Traffic Authority, Premier’s Department and the NSW Treasury. It manages risk through its charter to align asset management and office accommodation strategies with Government service delivery priorities.

Representation includes senior executives and staff from the Economic and Fiscal and Financial Management Directorates. Charter is to efficiently manage Crown assets and liabilities in accordance with the Government’s risk-return profile.

Representation includes senior executives and staff from the Roads and Traffic Authority, Treasury Corporation and OFM. Charter is to efficiently manage the debt portfolios in accordance with the risk parameters in the Memorandum of Understanding.

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Treasury Policies and Practices Related to Risk Management

A. Net financial liability management

Crown portfolio of debt liabilities is managed by Treasury Corporation under an annual Memorandum of Understanding (MoU) with Treasury. The MoU specifies the debt management objectives, quantifies the agreed risk parameters (duration, exposure to floating interest rates and debt servicing costs), establishes a performance benchmark for TCorp's management of the portfolio and defines reporting requirements. Treasury's debt management committee monitors performance.

2. Superannuation Liabilities and Assets Management

General government sector superannuation liabilities are subject to regular actuarial review. Treasury regularly reviews the parameters of the long term employer contribution funding plan and develops and implements specific liability reduction initiatives.

The Superannuation Administration Act 1996 delegates management of general government sector superannuation assets to SAS Trustee Corporation. Treasury has commenced a review of the Act. Treasury monitors the trustee's investment strategy and performance.

General government sector insurance risks are self-insured through the Treasury Managed Fund. Insurance liabilities are subject to regular actuarial review. Claims management is outsourced to GIO Australia. Treasury monitors performance and is developing service level agreements to allow individual agencies to monitor performance.

Insurance assets in the Treasury Managed Fund portfolio are managed by Treasury Corporation under an annual Memorandum of Understanding with Treasury, on behalf of the Insurance Ministerial Corporation. The MoU specifies the investment return objectives, quantifies the agreed risk parameters (strategic asset allocation, duration of bond portfolio, concentration and credit risk limits) establishes performance benchmarks for TCorp's management of the portfolio and defines reporting requirements. Treasury monitors TCorp's performance.

Treasury reviews applications by agencies for approvals to borrow and invest (including derivatives and joint ventures) and reviews agencies' policies and procedures for managing the financial risks associated with approved borrowings and investments. Treasury also reviews (and the Treasurer explicitly approves) projects in the private sector finances items of public infrastructure. Treasury has recently reviewed the Act.

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B. Commercial Policy Framework – covering Public Trading Enterprises, including State Owned Corporations

The principal objective of the Treasury Management Policy is to ensure that the risks associated with Treasury management functions are comprehensively managed. The coverage of the policy includes both budget-dependent and commercial agencies but in practical terms focuses on the activities of State Owned Corporations. These activities include borrowings, investments, derivative transactions, debt and investment management and structured dealings. The current Treasury Management Policy was introduced in July 1997. NSW Treasury is currently reviewing this policy.

The Statement of Financial Performance/Statement of Corporate Intent Guidelines (SFP/SCI Guidelines) detail Treasury’s minimum requirements upon agencies in preparing their annual SFP/SCIs. The Guidelines require agencies to prepare an Annual Risk Management Return as part of the supporting information to the SFP/SCI. The Risk Management Return is to include: a brief description of the business risks, a list of risk indicators for each risk identified, an assessment of the potential impact of changes in the risk indicators on the Corporation’s business and the SCI performance targets and the risk management actions proposed for each risk.

The Risk Management Guidelines form part of the NSW Government’s Total Asset Management Manual and apply to the management of risks associated with the planning, control and operation of physical assets of the NSW Public Sector. The Guidelines require agencies to prepare a Risk Management Plan, for designated project proposals. The Plan is to be included with other relevant documentation (including economic and financial appraisals) which are to be submitted to Treasury for assessment as part of the Budget Committee of Cabinet approval process. Designated proposals include:

• all Projects values in excess of $20 million;
• all proposals which involve private sector financing;
• proposals which are characterised as being significantly sensitive in economic, environmental or political terms; and
• complex or innovative projects where significant risks in terms of viability, procurement or Government commitment can be identified.

The Plan is required to contain schedules that identify and allocate the risks associated with a particular project and detail how each risk is to be managed. Categories of risk which are required to be considered include: Market Risk, Completion Risk (on time, on budget), Operating Risk, Financial Risk, Environmental and/or political risk and Private Sector Partner risks associated arising from the nature of the contractual obligations.

The Financial Appraisal Guidelines provide assistance to all agencies in the financial assessment of projects. Financial appraisals are required to be conducted for all capital infrastructure projects of Public Trading Enterprises and State Owned Corporations, as well as projects of Budget Sector Departments and non-Budget Sector Agencies which involve a financing decision (e.g. outsourcing projects and projects involving private sector participation in infrastructure provision).

In determining the financial viability of a project, agencies are required to determine and, where possible, quantify the risks associated with the proposed project. This involves sensitivity analysis of the key assumptions underlying the cashflow forecasts. Projects must be financially viable under reasonable changes to the key assumptions. Break-even points for critical assumptions at which the project begins to lose money are to be specified.

The Financial Appraisal Guidelines form part of the NSW Government’s Total Asset Management Manual.

The Economic Appraisal Guidelines enable agencies to examine the viability of a proposed project based on assessment of the overall costs and benefits of a proposed project. As a result, social costs and benefits are considered in an economic appraisal, in addition to the financial costs and benefits considered in a financial appraisal. Economic Appraisals are to be undertaken for all proposed projects of Budget Sector departments and non- Budget Sector agencies.

For proposed projects of Budget Sector agencies of over $5 million in total cost, economic appraisals are required to be forwarded to Treasury for review and submitted with the department’s capital funding bids to the Budget Committee of Cabinet.

As is the case for financial appraisals, economic appraisals are required to include an assessment and quantification of the likely financial and social risks of a project. This is mainly done by testing the sensitivity of the project’s net benefits to certain changes in the key assumptions. Where changes to the key assumptions are likely to imply increased social costs (e.g increased environmental costs), the cost of strategies to minimise these effects must be factored into the economic analysis. To ensure Treasury support, projects must demonstrate positive net benefits (social plus financial) under reasonable changes to the key assumptions.

The Economic Appraisal Guidelines form part of the NSW Government’s Total Asset Management Manual.

The Guidelines covering private sector participation require agencies to adopt a structured and systematic risk management process. Risk Management Plans are to be prepared for all such proposals, in accordance with the NSW Government’s Risk Management Guidelines.

In addition to the preparation of schedules that identify and allocate risks and outline how each risk is to be managed, Risk Management Plans for private sector participation proposals should include an assessment of the likely risks to be borne by the Government, including details of the impact on State Government borrowing requirements and recurrent outlays. The Plan should also detail the risk management strategies to be developed and implemented by the private sector operator. The Plans are to be updated at each stage of the project development and approval phase. An update plan which includes an evaluation of the risk of abandonment of the project by the private sector, both prior to and after commencement of the project, is to be undertaken at the detailed proposal and assessment stage. An estimate of the contingent liability of the project on the Consolidated Fund is made.

The Guidelines for Private Sector Participation in the Provision of Public Infrastructure form part of the NSW Government’s Total Asset Management Manual. The Guidelines are currently under review for their application to areas of social infrastructure.

Value Management is a powerful management tool for use in an overall strategic management framework including the development of all Asset Management Strategies of Government agencies. The Guidelines set out a process to achieve value-for-money outcomes and maximise the standards of quality or performance within the resource limits available.

All Value Management studies are required to address risk factors associated with the proposed project. This may include risks associated with project concept, feasibility, functional and design aspects as well as risks associated with procurement, delivery and contracting arrangements.

The Value Management Guidelines form part of the NSW Government’s Total Asset Management Manual.

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C. Financial Management Policy Framework – General Government Sector

This Statement expands the scope of internal control from the traditional one of focusing on financial controls and legal compliance, to one which incorporates an assurance that an Agency’s operations are being conducted efficiently and effectively to achieve the Agency’s objectives.

This paper provides examples of the functions, tasks, risks and mitigating controls that can be found in a typical agency. The Paper also contains sample checklists that may be completed by managers to provide assurance to the Board or CEO that the system of internal control has operated satisfactorily during the year.

The Risk Management Toolkit has been designed to assist agencies assess the risks they face and implement an efficient and effective risk management and internal control framework. Risk management issues covered in the Toolkit include any factors that could affect the achievement of an agency’s objectives. These include activities as diverse as ethics, executive leadership, the control environment and how risks are analysed. It involves strategies that address human resource mechanisms, leadership and business process supports.

The toolkit consists of:

• Risk management and internal control guidelines;
• Risk management and Internal control self-assessment matrix;
• Implementation strategies.

The Guidelines identify the benefits to be achieved by incorporating risk management and internal control in an agency and provide advice on how to use the toolkit.

The matrix consists of a series of questions covering the major elements of risk management and internal control. These assist in identifying where improvements can be made.

The implementation strategies provide practical suggestions on how to move towards best practice. They provide generic strategies for improvement that can be tailored to the specific needs of an agency.

Service and Resource Allocation Agreements (SRAAs) are negotiated between Treasury and General Government agencies and are signed by the Treasurer and the relevant Minister. The SRAA outlines the desired outcomes the agency is working towards achieving, details how the agencies intends to achieve those outcomes in terms of strategies and output delivery and lists targets to measure performance. The SRAA contains a 'risk management' section, which outlines risks which may prevent an agency from achieving its desired outcomes and how the agency proposes to manage these risks.