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Audit and Risk
Committee
14 February
2023
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Potential
Long-term Plan Amendment Consultation Document
- risk and control update
File No.: CP2023/00198
Te take mō te
pūrongo
Purpose of the report
1. To
support the committee in its role to review the effectiveness of governance
over risks, design and operation of internal controls over the preparation of a
proposal to amend our Long-term Plan (10-year Budget 2021-2031) included in
consultation material for the Annual Budget 2023/2024.
Whakarāpopototanga matua
Executive summary
2. This
report provides a status update on key controls employed and management of
significant risks related to the development of a potential amendment to our
10-year Budget 2021-2031 included in consultation material for the Annual
Budget 2023/2024 which relates to the amendment of Auckland Council’s
Auckland Airport Shareholding Policy to provide for the full or partial sell
down of council’s shareholding.
3. All
key control activities have now been completed. The following table summarises
the key control activities related to the preparation of the consultation
material.
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Area
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Key control activities
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Project oversight
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Annual budget project
control group
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Project planning
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Approved project execution
plan
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Financial information
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Financial
control review of accounting treatment and financials
Financial forecasts based
on audited information
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Legal issues
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Review and sign-off of
documentation by legal team
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Taxation implications
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Advice from tax team of
any implications
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4. All
process risks related to the amendment of our 10-year Budget 2021-2031 are
managed as part of the overall project management for the Annual Budget
2023/2024. All risks are recorded in a centralised risk register which is
updated regularly by project management and provided to the project control
group fortnightly as part of status reporting.
5. There
are no outstanding high or critical risks to this project on the central risk
register. However, the timeframes remain tight to achieve deadlines for public
consultation as part of the broader annual budget process.
6. The
specific costs and benefits associated with this proposal depend on future
events which are subject to a high degree of uncertainty. The approach taken to
address this in the consultation materials has been to make reasonable
assumptions, undertake sensitivity analysis and then fully disclose the
high-level of uncertainty and the impacts of this uncertainty.
7. The
key areas of uncertainty addressed in this way relate to:
· the amount of sale
proceeds received (after transaction costs)
· the timing of the
transaction
· future interest
rates
· future airport
dividends
8. At
the time of writing, the audit process is largely complete and no significant
outstanding audit issues have been raised with council staff. Final review,
updating and checking activities are continuing. Audit New Zealand’s
update on the audit process is the subject of another item on this agenda.
Ngā tūtohunga
Recommendation/s
That the Audit and Risk Committee:
a) whiwhi /
receive the report on the key controls and risks relating to Auckland
Council’s proposal to amend its long-term plan in relation to the
council’s shareholding in Auckland International Airport Limited
b) advise
the Governing Body that effective internal control and risk management
processes have been followed during the preparation of the consultation
material for the proposed amendment
c) advise
the Governing Body that there are no significant outstanding audit issues in
relation to the proposed amendment.
Horopaki
Context
9. Staff
presented to the Audit and Risk Committee’s meeting on 12 December 2022
on the background to this potential amendment to our 10-year Budget 2021-2031
and the respective roles of the Governing Body and the Audit and Risk Committee
in a long-term plan amendment.
10. At Governing
Body on 15 December, the decision was made to proceed with consulting on an
amendment to our 10-year Budget 2021-2031 as part of the draft Annual Budget
2023/2024.
11. The resolutions
made on 15 December 2022 that relate to the amendment were:
Resolution number
GB/2022/134
a) ii) consultation on a
proposed amendment to the Airport Shareholding Policy in the Long-term Plan
2021-2031 to provide for a full sell down of the council’s 18.09%
shareholding in Auckland International Airport Limited
g) note that the consultation
document for the Annual Budget 2023/2024 related to amending the Airport
Shareholding Policy to provide for the full sell down of the shareholding in
Auckland International Airport Limited, will include information on alternative
options including:
i)
partial sell down of approximately 8% and maintaining at least a 10%
‘blocking stake’ shareholding
ii)
retention of the current number of shares as per the current policy.
12. Staff have
prepared the required consultation materials including the proposal to amend
our 10-year Budget 2021-2031. Governing Body will be asked to adopt this
material on 15 February 2023.
Tātaritanga me ngā
tohutohu
Analysis and advice
13. The following
paragraphs detail the status of key controls identified to be critical to
ensure that:
a) long-term plan
amendment processes are robust
b) information contained
in the consultation material relating to the amendment is materially complete,
fit for purpose, and reliable
c) any risks associated
with the potential amendment to our 10-year Budget 2021-2031 are minimised
d) the potential amendment
meets the requirements of the Local Government Act 2002.
Project oversight
14. Oversight of
the project is undertaken by the Annual Budget 2023/2024 Project Control Group.
This group includes representation from across the organisation including
governance, risk, engagement, legal, local boards, finance, strategy and
planning and the mayor‘s office. The project sponsor is the Group Chief
Financial Officer, Peter Gudsell.
15. A project
execution plan has been prepared and approved by the General Manager Financial
Strategy and Planning as business owner and the Group Chief Financial Officer
as project sponsor.
16. The project
plan includes a detailed timeline and key milestones. Delivery against these
milestones is monitored and reported to the General Manager Financial Strategy
and Planning and to the Annual Budget 2023/2024 Project Control Group.
17. A communications
and engagement approach for the potential amendment to our 10-year Budget
2021-2031 is captured within the Annual Budget 2023/2024 communications and
engagement plan. This describes how the Auckland Council intends to engage and
communicate with Aucklanders on the draft budget including the proposal to
amend our 10-year Budget 2021-2031.
18. This plan
will include targeted engagement with mana whenua and mataawaka, and our harder
to reach communities across Tāmaki Makaurau.
Financial information
19. The proposal
includes two sets of financial information. The first is to support the
decision-making and is therefore based on latest information and assumptions.
The second is prepared to show the amendments to the financial statements
included in the 10-year Budget 2021-2031 and in part reflects assumptions made
in the preparation of that document back in May 2021.
20. The financial
assumptions and calculations prepared to support decision-making have been
reviewed by the council’s treasury staff.
21. The projected
amendments to the financial statements and funding impact statements have been
reviewed by the Financial Control team.
Legal issues
22. All
consultation materials have been reviewed, and signed off, by the
council’s internal public law team to confirm that they comply with the
requirements of the necessary legislation.
23. The
council’s commercial law team has also provided review of the
consultation material with a focus on the implementation of any resultant
transaction.
24. Final legal
sign-off of all consultation material was provided by Helen Wild, General
Counsel.
Taxation implications
25. The proposal
has been discussed with the council’s internal tax team and it has been
confirmed that there are no tax issues.
Quality assurance
26. A quality
assurance review of the draft consultation document was performed by staff
across the Auckland Council group including:
· Chief Executive
Officer
· Group Chief
Financial Officer
· CCO
Governance
· General Manager
Financial Strategy and Planning
· Group Financial
Controller
· Head of Financial
Strategy
· Public Law and
Commercial Law
· Nga
Mātārae
· Mayoral Office
Key assumptions
27. The specific
costs and benefits associated with this proposal depend on future events which
are subject to a high degree of uncertainty. The approach taken to address this
in the consultation materials has been to make reasonable assumptions,
undertake sensitivity analysis and then fully disclose the high-level of uncertainty
and the impacts of this uncertainty.
28. The following
table sets the key assumptions we have made, the risks and level of uncertainty
associated with these assumptions and the potential impacts.
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Assumption
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Risks and impact
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Sale proceeds
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The council
is projecting sale proceeds of $1.9 billion from the full sale of all the
shares it owns in AIAL.
This is based on the council’s
shareholding of 266,328,912 shares, the share price as at 9 Nov 2022 ($7.46
per share), and a provision for a 5% lower realisation value to allow for
the size of the transaction.
The
share price is subject to market movements.
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Risks –That the market share price at
the time of sale differs significantly from the assumption
That the
costs of the transaction differ from the provision made
Level of
uncertainty –
High
Impacts – If the share price is greater
than assumed and/or the transaction impact is less, the net proceeds will be
greater than $1.9billion. This will enable the council to reduce debt
further and make additional interest savings.
If the
share price is less than assumed and/or the transaction impact is greater,
the net proceeds will be less than $1.9billion. This will not enable the
council to reduce debt by as much and the resulting interest savings will be
lower.
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Transaction date
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For
purposes of modelling to support consultation, the council has assumed the
sale of shares and reduction of debt will occur on 1 July 2023.
The actual
date and method of sale will depend on the timing of decision-making and
market conditions.
Maximising
sale price will be weighed against the interest costs of delaying sale for
too long.
Professional
advice will guide that decision to maximise overall benefit to council.
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Risks – That the transaction date
differs from the modelling
Level of uncertainty – High
Impacts – If the transaction is executed
prior to 1 July 2023 then the council will be able to reduce debt earlier
and make interest savings in the current financial year. The estimated
impact of a one-month earlier transaction (assuming no movement in other
assumptions) would be around $7 million of additional interest cost savings.
If the
transaction is executed after 1 July 2023 the projected debt reduction will
be delayed and the full projected interest savings for 2023/2024 may not be
achieved. If the transaction was delayed by one month, then the interest
benefits would be reduced by around $7 million.
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Interest rates
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The
council’s interest rate projections are based on an assessment of
market rates and forecast borrowing requirements.
The council
manages its interest rate exposure to provide some certainty of its
borrowing costs over the short to medium term.
The council
interest rate projections assume it maintains its AA/Aa2 credit rating from
S&P Global and Moody’s.
For the
remaining eight years of the 10-year Budget 2021-2031 the forecast average
interest rates on council borrowing are:
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Risks – Prevailing interest rates
differ significantly from forecast
Level of uncertainty – High
Impacts - If actual interest rates are lower
the savings from the sale of shares will be lower.
If actual interest rates are higher the
savings from the sale of the shares will be higher.
Council’s average interest rate on
borrowing is highly dependent on several factors including market interest
rates, council’s credit rating, interest rate hedging level, as well
as wholesale capital market condition etc.
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FY24
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FY25
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FY26
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FY27
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FY28
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FY29
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FY30
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FY31
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Interest rate
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4.61%
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4.63%
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4.66%
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4.71%
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4.78%
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4.83%
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4.91%
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4.98%
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Dividends
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Projections
of potential future dividends are based on a broker consensus estimate for
the next four years published by Bloomberg.
Dividends
beyond this are projected to grow at the level of inflation (2%) in line
with our Financial Strategy targets.
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Risks – That the level of future
dividend differs significantly from that projected
Level of uncertainty – High
Impacts – If the level of dividend paid
by AIAL is higher than projected then the net level of saving for the
council from the sale of shares will be reduced.
If the level of dividend is lower the
savings from the sale will be greater than projected.
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29. The
sensitivity analysis undertaken shows that the financial benefits from reduced
interest costs associated with the proposal will be greater than the dividends
foregone over the remaining period of the 10-year Budget 2021-2031, except
under the most adverse combination of the key variables.
30. Once
a decision is made following public consultation, there will be financial risks
associated with how and when any transaction is executed. This will be managed
with the assistance of an independent expert advisor. The details of how and
when we would transact are not specified in the proposal, rather we would seek
to make those decisions based on market conditions at the time following the
advice of our expert advisor with a sole focus on achieving maximum value for
money.
Audit review
31. At
the time of writing this report, Audit New Zealand were mid-way through their
audit review of the proposal to amend our 10-year Budget 2021-2031 and
supporting information included in the consultation material for the Annual
Budget 2023/2024. At this stage, no significant outstanding audit issues
have been raised with council staff. Final review, updating and checking
activities are continuing.
32. Audit
New Zealand’s update on the audit process is the subject of another item
on this agenda. Any final updates relating to the outcome of
that audit will be provided to the committee during the meeting.
Tauākī whakaaweawe
āhuarangi
Climate impact statement
33. There are no
climate impacts associated with the recommendations of this report.
Ngā whakaaweawe me
ngā tirohanga a te rōpū Kaunihera
Council group impacts and views
34. The controls
set out in this report have been involved staff from the council finance, legal
and other teams.
35. There are no
impacts on Council Controlled Organisations associated with the recommendations
of this report.
Ngā whakaaweawe
ā-rohe me ngā tirohanga a te poari ā-rohe
Local impacts and local board views
36. Local boards
will continue to have the opportunity to provide input on the proposal as part
of the broader annual budget process.
37. There are no
impacts on local boards associated with the recommendations of this report.
Tauākī whakaaweawe
Māori
Māori impact statement
38. While the
potential long-term plan amendment will be of interest to Māori there is
no impact on Māori arising from the decision this committee is being asked
to make.
Ngā ritenga
ā-pūtea
Financial implications
39. While the
potential long-term plan amendment does have financial implications for the
Auckland Council, including in its implementation, this report does not require
the committee to make decisions with financial implications.
40. Any
associated costs related to the audit of consultation material will be included
as costs to the overall Annual Budget 2023/2024 project.
Ngā raru tūpono me
ngā whakamaurutanga
Risks and mitigations
41. All process
risks related to the amendment of our 10-year Budget 2021-2031 are managed as
part of the overall project management for the Annual Budget 2023/2024. All
risks are recorded in a centralised risk register which is updated regularly by
project management and provided to the project control group fortnightly as
part of status reporting.
42. There are no
outstanding high or critical risks to this project on the central risk
register. However, the timeframes remain tight to achieve deadlines for public
consultation as part of the broader annual budget process.
43. The approach
to addressing key areas of uncertainty in relation to future events is set out
in the body of this report.
44. While the
recent flooding at Auckland Airport significantly disrupted aeronautical
operations, this has not had an adverse impact of the value of the shares.
45. However, the
recent storm event will have financial implications for the Auckland Council
group. Finance staff have prepared a memo on these implications, and what this
will mean for the council’s Annual Budget 2023/2024 process. This memo
has been sent to councillors and to the independent members of this committee.
Finance staff will provide an update to the committee of the associated
financial risks and impacts at an appropriate time.
Ngā koringa ā-muri
Next steps
46. Following the
presentation of this report, the Office of the Auditor-General and Audit New
Zealand will present their status report on audit matters.
47. The council
will make a decision to adopt the consultation material on 15 February 2023,
ahead of consultation with Aucklanders taking place between 28 February and 28
March 2023.
48. Further
updates will be provided to the Audit and Risk Committee as we progress with
the budget.
Ngā tāpirihanga
Attachments
There are no attachments for
this report.
Ngā kaihaina
Signatories
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Authors
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Tamsyn Matchett - Programme Manager
Ross Tucker - General Manager, Financial Strategy and
Planning
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Authorisers
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Peter Gudsell - Group Chief Financial Officer
Phil Wilson - Director, Governance & CCO
Partnerships
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