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Audit and Risk
Committee
02 June 2023
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Potential
Long-term Plan Amendment - risk and control update
File No.: CP2023/06656
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, and design and operation of internal controls over the preparation
of a proposal to amend our Long-term Plan (10-year Budget 2021-2031) regarding Auckland Council’s Auckland Airport Shareholding
Policy.
Whakarāpopototanga matua
Executive summary
2. This
report provides the final 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 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
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.
4. There
are no outstanding high or critical risks to this project on the central risk
register.
5. Two
alternative options of either a full or partial sale of the council’s
airport shares were included in the consultation material and therefore staff
have prepared, and had audited, two different versions of the potential final
amendment. This will support the Governing Body in enabling either option to be
adopted.
6. At
the time of writing this report, Audit New Zealand were finalising their audit
review of the amendment to our 10-year Budget 2021-2031. At this stage, no
significant outstanding audit issues have been raised with council staff. Final
review, updating and checking activities are continuing.
7. 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.
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) whakaae
/ agree to advise the Governing Body that effective internal control and risk
management processes have been followed during the preparation of the proposed
amendment
c) whakaae
/ agree to advise the Governing Body that there are no significant outstanding
audit issues in relation to the proposed amendment.
Horopaki
Context
8. The
Governing Body agreed on 15 December 2022 to consult on a proposal to amend
Auckland Council’s Auckland Airport Shareholding Policy to enable either
a full or partial sale of its shares.
9. Staff
then presented to the Audit and Risk Committee’s meeting on 14 February
2023 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. The following
key controls were monitored throughout the development of the consultation
document and supporting information for the amendment to the 10-year Budget:
· Annual
Budget 2023/2024 Project Control Group providing oversight of key deliverables,
risks and issues
· Financial
Control department sign-off on Generally Accepted Accounting Principles (GAAP)
compliance for financial statements
· Legal
Services department sign-off of compliance with relevant legislation
· review
of taxation implications
· quality
assurance processes undertaken.
11. The chair of
this committee, with delegated authority, provided assurance to the Governing
Body that effective internal control and risk management processes had been
followed during the preparation of the consultation document and supporting
information and that there were no significant outstanding audit issues at the
date of adoption on the 15 February 2023.
12. At an
Emergency Committee meeting on 15 February 2023, the decision was made to
proceed with consulting on an amendment to our 10-year Budget 2021-2031 as part
of the Annual Budget 2023/2024 public consultation process.
13. Council
sought the community’s views on the proposal between 28 February and 28
March 2023 as part of consultation on the Annual Budget 2023/2024.
14. A special consultative procedure (SCP) was required under the Local
Government Act 2002 because of the proposed long-term plan amendment. The
approach to meeting those requirements was set out in the communications and
engagement plan that was agreed to by the Governing Body on 18 February 2023.
15. During consultation council received a total of 41,146 pieces of
feedback, including 4,488 pieces of feedback at in-person events. This
represents the largest budget consultation in Auckland Council’s history
to date.
16. A summary and full report on the feedback received, including the
breakdown of responses from Aucklanders on the proposal to amend the 10-year
budget has been published on our website here.
Tātaritanga me ngā
tohutohu
Analysis and advice
17. In December
2022 the Governing body decided to include two alternative options of a full or
partial sale of shares in Auckland International Airport Limited within the
Consultation Document for the Annual Budget 2023/2024. Council staff have
therefore prepared, and had audited, two versions of a potential amendment to
the long-term plan, one for a full sale and one for a partial sale.
18. The following
paragraphs detail the final status of key controls identified to be critical to
ensure that:
a) long-term plan
amendment processes are robust
b) information contained
in the proposed 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.
19. 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.
20. A project
execution plan was prepared and approved by the general manager financial
strategy and planning as business owner and the group chief financial officer
as project sponsor.
21. 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.
22. Following
consultation and the reporting of public feedback, staff provided updated
advice to the Governing Body on 26 April 2023 around the airport shareholding.
This has been released publicly on the council’s website.
23. This advice
included financial analysis using updated assumptions from 17 April 2023. These
were sourced from:
· share
price – the closing NZX market price on 17 April 2023
· interest
rates – an updated forecast of the council’s average cost of
capital based on market information on 17 April 2023
· dividends
– a broker consensus estimate for the next four years published by
Bloomberg. Dividends beyond this are projected to grow at the level of
inflation in line with our Financial Strategy
24. The financial
assumptions and calculations prepared to support decision-making have been
reviewed by the council’s treasury staff.
25. Further
third-party information was provided, confidentially, to members to review
alongside staff advice.
26. The financial
information included in the proposed amendments were calculated based on the
existing assumptions in the 10-year Budget 2021-2031 and an additional assumption
around sale proceeds based on the share price on 17 April 2023. This additional
assumption (shown below) will be disclosed in the amended plan, including the
associated risks and impacts of uncertainty.
Full Sale
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Assumption
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Risks and impact
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Airport share sale proceeds
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The council
is projecting sale proceeds of $2.2 billion from the full sale of all the
shares it owns in AIAL.
This is based on the share price as at 17 April 2023 ($8.66 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 proceeds from sale
differ significantly from the assumption.
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 $2.2 billion. 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 $2.2 billion. This will not enable the
council to reduce debt by as much and the resulting interest savings will be
lower.
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Airport share transaction date
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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 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 assumption.
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 $8 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 $8 million.
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Partial Sale
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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 $989 million from the partial sale of all the
shares it owns in AIAL.
This is based on the share price as at 17 April 2023 ($8.66 per
share), and a provision for a 3% 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 proceeds from sale
differ significantly from the assumption.
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 $989 million. 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 $989 million. This will not enable the
council to reduce debt by as much and the resulting interest savings will be
lower.
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Airport share transaction date
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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 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 assumption.
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 $4 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 $4 million.
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27. The projected
amendments to the financial statements and funding impact statements have been
reviewed by the Financial Control team.
28. Audit New
Zealand had raised some technical accounting questions about the correct
treatment under GAAP of some line items within the consultation materials. The
council’s Financial Control team provided our view about the correct
accounting treatment, but Audit New Zealand’s technical accounting team
were not able to complete their assessment of the issue at that stage. They
have subsequently confirmed in writing that they are now in full agreement with
the council’s proposed accounting treatment.
29. All proposed
policy amendments 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.
30. The
council’s commercial law team has also provided review of the proposed
policy amendments with a focus on the implementation of any resultant
transaction.
31. Final legal
sign-off of the policy and supporting financial information was provided by
Helen Wild, general counsel.
32. The proposal
has been discussed with the council’s internal tax team and it has been
confirmed that there are no tax issues.
33. A quality
assurance review of the proposed amendment was performed by staff across the
Auckland Council group including the:
· group chief
financial officer
· general manager
financial strategy and planning
· group financial
controller
· head of financial strategy
· Public Law and
Commercial Law teams.
34. At
the time of writing this report, Audit New Zealand were finalising their audit
review of the amendment to our 10-year Budget 2021-2031. At this stage,
no significant outstanding audit issues have been raised with council staff.
Final review, updating and checking activities are continuing.
35. 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
36. 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
37. The controls
set out in this report have been involved staff from the council finance, legal
and other teams.
38. 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
39. Local boards
will continue to have the opportunity to provide input on the proposal as part
of the broader annual budget process.
40. There are no
impacts on local boards associated with the recommendations of this report.
Tauākī whakaaweawe
Māori
Māori impact statement
41. 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
42. 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.
43. 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
44. 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.
45. There are no
outstanding high or critical risks to this project on the central risk
register.
46. The approach
to addressing key areas of uncertainty in relation to future events is set out
in the body of this report.
Ngā koringa ā-muri
Next steps
47. Following the
presentation of this report, the Office of the Auditor-General and Audit New
Zealand will present their status report on audit matters.
48. The Governing
Body will make decisions around any amendment to the 10-year Budget 2021-2031
on 8 June 2023.
Ngā tāpirihanga
Attachments
There are no attachments for
this report.
Ngā kaihaina
Signatories
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Authors
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Michael Burns - Manager Financial Strategy
Tamsyn Matchett - Programme Manager
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Authorisers
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Ross Tucker - General Manager, Financial Strategy and
Planning
Peter Gudsell - Group Chief Financial Officer
Phil Wilson - Director, Governance & CCO
Partnerships
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