Agenda of Audit and Risk Sub-committee Meeting

Audit and Risk Sub-committee Meeting Agenda

12 November 2020

8.1 Quarterly Treasury Compliance Report

Author: Anelise Horn, Manager Financial Accounting

Authoriser: Mark de Haast, Group Manager Corporate Services

Purpose of Report

1 This report provides confirmation to the Audit and Risk Subcommittee of the Council’s compliance with its Treasury Management Policy (Policy) for the three months ended 30 September 2020.

Delegation

2 The Audit and Risk Subcommittee has delegated authority to consider this report under the following delegation in the Governance Structure, Section C.1.

Ensuring that the Council has in place a current and comprehensive risk management framework and making recommendations to the Council on risk mitigation.

Background

3 The Policy sets out a framework for the Council to manage its borrowing and investment activities in accordance with the Council’s objectives and incorporates legislative requirements.

4 The Policy mandates regular treasury reporting to management and the Strategy and Operations Committee, as well as quarterly compliance reporting to the Audit and Risk Subcommittee.

5 In order to assess the effectiveness of the Council’s treasury management activities and compliance to the Policy, certain performance measures and parameters have been prescribed. These are:

· cash/debt position;

· liquidity/funding control limits;

· interest rate risk control limits;

· counterparty credit risk;

· specific borrowing limits; and

· risk management performance.

discussion

Cash/Debt Position

6 Table 1 below shows the Council’s net debt position as at 30 September 2020 against the 2020/21 full year budget and the prior year closing balance.

7 During the past three months, the Council has issued $10 million of new debt.

8 $10 million was issued to pre-fund $5 million of the May 2021 and $5 million of the October 2021 debt maturities. As part of the Council’s prefunding programme, all prefunding is placed on term deposit, at the most favourable market rates available at that time.

9 The table below shows (a) the movement in the Council’s external debt balance and (b) the movement in the Council’s pre-funding programme by debt maturity, for the three months ended 30 September 2020.

10 As at 30 September 2020 the Council had $67.2 million of cash, borrower notes and term deposits on hand. This is broken down as follows:

11 For the three months ended 30 September 2020, the Council has not breached its net debt upper limit, as shown in the chart below:

12 The Council is however targeting through its financial strategy, to keep net borrowings below 200% of total operating income. At 30 September 2020, the Council’s net borrowings are forecast to be 182.8% of total operating income at the 30 June 2021.

Liquidity/Funding control limits

13 Liquidity and funding management focuses on reducing the concentration of risk at any point so that the overall borrowings cost is not increased unnecessarily and/or the desired maturity profile is not compromised due to market conditions. This risk is managed by spreading and smoothing debt maturities and establishing maturity compliance buckets.

14 Since October 2015 the Council’s treasury strategy has included a debt pre-funding programme. The Policy allows pre-funding of the Council debt maturities up to 18 months in advance, including re-financing. Market conditions have been favourable for this approach, where the Council draws down debt early and is able to invest the funds on term deposit for a positive net return.

15 The strength of the Council’s debt pre-funding programme was again highlighted by the Council’s independent Credit Rating Agency, Standard & Poor’s (S&P), during their July 2020 review. This has resulted in the Council’s credit rating remaining at AA with a stable outlook for the following year. S&P noted that the Council’s liquidity coverage remains exceptional.

16 The following chart presents the Council’s debt maturity dates in relation to the financial year in which the debt was issued. This demonstrates that since 2016/17, the Council has actively reduced risk concentration by spreading debt maturity dates and debt maturity values.

17 Debt maturities must fall within maturity compliance buckets. These maturity buckets are as follows:

Maturity Period	Minimum	Maximum
0 to 3 years	10%	70%
3 to 5 years	10%	60%
5 to 10 years	10%	50%
10 years plus	0%	20%

18 For the three months ended 30 September 2020, the Council has been fully compliant with its debt maturity limits, as shown by the chart below. The upper limits, as shown by dashed lines, relate to the bars of the same colour. For example, the 0 to 3 year upper limit of 70% is in blue. Actual maturities in the 03 year bucket are represented by the blue bars. The Council has no long term debt maturing in ten years’ time or beyond.

Interest rate risk control limits

19 The Council issues all debt on a floating rate basis, as lower interest rates are realised this way, and uses fixed interest rate swaps (hedges) to minimise exposure at any one time to interest rate fluctuations. This ensures more certainty of interest rate costs when setting our Annual Plan and Long Term Plan budgets.

20 Without such hedging, the Council would have difficulty absorbing adverse interest rate movements. A 1% increase in interest rates on $220 million of external debt would equate to additional interest expense of $2.2 million per annum. Conversely, fixing interest rates does however reduce the Council’s ability to benefit from falling and/or more favourable interest rate movements.

21 The objectives of any treasury strategy are therefore to smooth out the effects of interest rate movements, while being aware of the direction of the market, and to be able to respond accordingly.

22 The Policy sets out the following interest rate limits:

Major control limit where the total notional amount of all interest rate risk management instruments (i.e. interest rate swaps) must not exceed the Council’s total actual debt, and;

Fixed/Floating Risk Control limit, that specifies that at least 55% of the Council’s borrowings must be fixed, up to a maximum of 100%.

23 The Council has been fully compliant for the three months ended 30 September 2020, as shown by the table below.

$000’s	Jul-20	Aug-20	Sep-20
External Debt (floating rate)	215,000	220,000	220,000
Swaps (fixed portion)	198,700	198,700	198,700
Fixed %	92.4%	90.3%	90.3%
Unfixed debt	16,300	21,300	21,300

24 Similar to debt maturities, hedging instrument maturities must also fall within maturity compliance buckets. These maturity compliance buckets are as follows:

Period	Minimum	Maximum
1 to 3 years	15%	60%
3 to 5 years	15%	60%
5 to 10 years	15%	60%
10 years plus	0%	20%

25 The Council has been fully compliant for the three months ended 30 June 2020, as shown by the following chart. Note that maturities falling within 1 year are not included.

Counterparty Credit Risk

26 The policy sets maximum limits on transactions with counterparties. The purpose of this is to ensure the Council does not concentrate its investments or risk management instruments with a single party.

27 The policy sets the gross counterparty limits as follows:

Counterparty/Issuer	Minimum Standard and Poor’s long term	Investments maximum per counterparty	Risk management instruments maximum per counterparty	Borrowing maximum per counterparty
NZ Government	N/A	Unlimited	None	Unlimited
LGFA	AA-/A-1	$20m	None	Unlimited
NZ Registered Bank	A+/A-1	60% of total investments or $25m; whichever is greater	50% of total instruments or $80m; whichever is greater	$50m

28 The Council was in full compliance with all counterparty credit limits for the three months ended 30 September 2020. The tables below show the Council’s investments and risk management instruments holdings per counterparty for this period.

Term deposits

*Policy Limit: 60% of total investments or $25 million; whichever is greater

Interest rate swaps

*Policy Limit: 50% of total instruments or $80 million; whichever is greater

Specific Borrowing Limits

29 In managing debt, the Council is required to adhere to the specific borrowing limits. The Net External debt/Total operating Income limit was updated during the Policy review in August 2020 to align with the new interim LGFA borrowing covenants in response to COVID-19.

30 Excluding economic stimulus initiatives driven by central government, the Council remains committed to complying with its financial strategy limit of not exceeding 200% of total operating income for 2020/21.

31 The Council fully complied with these limits for the 3 months ended 30 September 2020 (or a period as otherwise specified) and the results are shown below:

Borrowing limit	Policy limit	2020/21
Net interest expense/Total Operating Income	<20%	8.15%
Liquidity ((total debt + total committed facilities + cash on hand) total debt)	>110%	137.99%
Net External Debt/Total Forecast Operating Income	<300%	182.80%

Risk Management Performance

32 The following table shows the Council’s interest income and expense for the three months ended 30 September 2020 together with the weighted average cost of borrowing (WACB), compared to year to date budget and full year forecast.

33 The Council has been effective in its treasury management with its weighted average cost of funds being 0.88% lower than planned as at the 30 September 2020.

34 The following graph shows the cost of borrowing each month.

Considerations

Policy considerations

35 There are no policy considerations in addition to those already noted in this report.

Legal considerations

36 There are no legal considerations arising from this report.

Financial considerations

37 There are no financial considerations in addition to those already noted in this report.

Tāngata whenua considerations

38 There are no tāngata whenua considerations arising directly from this report.

Significance and Engagement

Significance policy

39 This matter has a low level of significance under the Council’s Significance and Engagement Policy.

Publicity

40 There are no publicity considerations arising from this report.

Recommendations

41 That the Audit and Risk Subcommittee notes the Council’s full compliance with its Treasury Management Policy for the three months ended 30 September 2020.

Appendices

Nil

Audit and Risk Sub-committee Meeting Agenda

12 November 2020

8.2 Risk Management - Business Assurance Update

Author: Sharon Foss, Business Improvement Manager

Authoriser: Mark de Haast, Group Manager Corporate Services

Purpose of Report

1 This report updates the Audit and Risk Subcommittee on the on-going implementation of the Enterprise Risk Management (ERM) framework.

Delegation

2 The Audit and Risk Subcommittee has delegated authority to consider this report under the following delegation in the Governance Structure, Section C.1.

Ensuring that Council has in place a current and comprehensive risk management framework and making recommendations to the Council on risk mitigation.

Background

3 The key elements of the Enterprise Risk Management Framework include:

· risk management;

· corporate business continuity management;

· procurement improvement programme; and

· business risk and assurance.

4 The key work streams within this area are:

· regularly discuss risks with staff and managers and embed the day-to-day management of risks in work streams such as: projects, activity delivery, and asset management;

· communicate and report risk up to Council/Committees;

· have a Business Continuity Management System for effective response to a range of potential business disruptions;

· provide fraud awareness training;

· provide business assurance oversight and complete business assurance work; and

· improve the understanding and tools to support good procurement practices.

5 Risk is defined as the effect of uncertainty on expected results and is managed on a continual basis. The intended outcomes from performing this risk management programme well will assure:

· stakeholders, external auditors, the Council and management that the real risks are being identified and managed effectively. Risks can be negative or positive:

o a negative risk is a threat and/or potential problem. It creates concern or uncertainty around our delivery of overall programmes, projects, strategies, or other expectations that can result in major health and safety, financial, fraud, operational and reputational impacts. Identifying negative risks before they occur means that we can take measures to mitigate or remove the threat, so that it does not materialise.

o a positive risk is an opportunity which has a positive impact on our objectives. When these are identified the appropriate action is to make use of the opportunity and leverage them to cause them to occur. For example, ensuring that everything is looked at and actions are put in place to make risks as small as possible might highlight the value of using new technology to increase quality assurance and improve service delivery.

· better decision making throughout the business through greater awareness of the real risks and how these are going to be addressed; and

· clarification and socialisation of the Council’s risk appetite and tolerance.

Enterprise Risk Management Progress Update

Corporate Risk Profile – Summary Update

6 The corporate risk profile is managed by a risk register and presented in the associated Corporate Risk Summary attached as Appendix 1 to this report. This Summary, lists the risk treatments (current controls and additional actions) planned to reach the target risk level. The risk action status is categorised as follows:

Risk Action Status

Major Concerns

Some Concerns

On Track

7 Engagement on the corporate risk profile is through quarterly conversations with managers. The focus is on identifying, managing and communicating the very highest strategic and operational risks that the Council faces. Our approach to how we assess risk is illustrated in the diagrams in Appendix 2 to this report. Important matters to note when reading the diagrams are that:

7.1 Likelihood is how likely the risk is to materialise and is rated as rare, unlikely, possible, likely and almost certain.

7.2 Consequence is the impact on Council - not just financial, but also health and safety, fraud, operational and reputational.

7.3 This assessment tool is subjective and is used as a prompt for a risk comparison and ranking mechanism.

8 The overall risk management culture and practice continues to improve and the risk conversations widen. The concept of risk acceptance is being further embedded across the organisation, i.e. certain moderate level risks may be tolerated by the business in the context of the costs or impracticalities to further mitigate the risk.

9 Matters for your particular attention in the Corporate Risk Summary attached at Appendix 1 to this report are:

Risk

Risk Action Status

Comment

Risk 9

Paraparaumu Wastewater Treatment Plant – difficulties with consent process

Some

concerns

Due to the lack of availability for Iwi to engage the original consent process we are now not able to progress the original consent process.

Instead an alternative consenting strategy has had to be developed. This will incur additional costs, over and above the original project estimates.

Risk 17

Open for business

On Track

Note that this risk and the associated impacts and actions to reach the target risk level will be changed for the next report to this Subcommittee.

The risk will be renamed Customer Framework while continuing to foster the associated values to guide staff attitudes to service quality and customer focus.

This change follows from the recommendations in the final report from the Independent Organisational Review by MartinJenkins.

Preparedness for moving between Covid-19 alert levels

10 Covid-19 has created a new form of business disruption. We are currently assessed as a moderate level risk (with a target risk level of low), in the Corporate Risk Summary, attached as Appendix 1 to this report.

Corporate Preparedness

11 Our Covid-19 Working Group led by key Activity Managers established during the Covid-19 Alert Level 4 lockdown continues to operate during Level 1. Their focus is to manage preparedness across the various Council work streams to ensure the best overall approach to working safely under each Covid-19 Alert Level. Critical to their success is their ability to consider and apply key information from approved sources such as All-of Government updates, legislation, and local government information from LGNZ and SOLGM.

12 Communication across the organisation is key to preparedness. The Chief Executive and his Senior Leadership Team are kept informed of the working group’s considerations and actions. Staff are also updated via internal communications either from the Chief Executive, their line manager and/or the Council intranet.

Kāpiti Emergency Operations Centre Preparedness

13 We have developed a resurgence plan that clearly articulates roles, responsibilities and primary focus areas should the country, region or in fact district see a second wave of Covid-19 cases. This plan builds on the debrief and learnings from our and regional experiences during Covid-19 first wave and in particular builds on the strength of relationships developed with our ‘not for profit’, welfare and volunteer sectors here in Kāpiti.

14 The resurgence plan makes assumptions of the role of a variety of central government agencies based on our experiences out of the first wave. It also considers feedback given to these national organisations about the ‘all of government response’ and the opportunities for improvement in collaboration with local government.

Recovery

15 While there is work underway for ensuring preparedness for the potential of Covid-19 resurgence, we are also getting on with delivering on recovery actions set out in the Recovery Plan.

16 In the event of resurgence, we will need to review and potentially pause some recovery actions until the impact of any resurgence is known. In the meantime, we are confident the current recovery actions are the right ones for us to be focussing on for where we are currently at.

Procurement Improvement Programme

17 Progress toward better procurement maturity is well in hand. The Council-wide Procurement Strategy has now been rolled out and work to uplift procurement capability and support has continued.

Risk and Assurance

18 The risk and assurance function (responsibilities, work programme and resourcing) is currently being developed.

Considerations

Policy considerations

19 There are no further policy implications arising from this report.

Legal considerations

20 There are no further legal considerations arising from this report.

Financial considerations

21 The work described above is planned to be funded from the 2020/21 Annual Plan budget by way of prioritised spending.

Tāngata whenua considerations

22 There has been no direct engagement with tāngata whenua regarding this report.

Strategic considerations

23 This enterprise risk management framework contributes to ensuring that the Council is continuing to improve its financial position against financial constraints.

Significance and Engagement

24 This matter has a low level of significance under the Council Policy.

Recommendations

25 That the Audit and Risk Subcommittee receives and notes this report, including Appendices 1 and 2 to this report.

Appendices

1. Corporate Risk Summary ⇩

2. Risk Comparison and Ranking Mechanism ⇩

Audit and Risk Sub-committee Meeting Agenda

12 November 2020

8.3 Health and Safety Quarterly Report: 1 July 2020 - 30 September 2020

Author: Dianne Andrew, Organisational Development Manager

Authoriser: Wayne Maxwell, Chief Executive

Purpose of Report

1 This report presents a Health and Safety report for the period 1 July 2020 – 30 September 2020.

Delegation

2 The Audit and Risk Sub Committee has delegated authority to consider this report under the following delegation in the Governance Structure, Section C.1:

· Ensuring that the Council has in place a current and comprehensive risk management framework and making recommendations to the Council on risk mitigation;

· Assisting elected members in the discharge of their responsibilities by ensuring compliance procedures are in place for all statutory requirements relating to their role;

· Governance role in regards to the Health and Safety Leadership Charter and Health and Safety Plan.

Background

3 The quarterly Health & Safety Performance Report is intended to provide the Council with insight into initiatives and activities, and their progress, as part of our organisations commitment to providing a safe and healthy place to work. The contents and any subsequent discussions arising from this report can support Council officers to meet their due diligence obligations under the Health & Safety at Work Act (HSWA) 2015.

4 Between July and September 2017 the Simpson Grierson Health and Safety team were engaged to review how the Council was progressing with changes and planned initiatives following the introduction of the Health and Safety at Work Act (HSWA) 2015. The findings were presented back to the Audit and Risk Committee in November 2017. This review identified areas for improvement, in particular where we can improve some current processes to further strengthen our ability to more effectively monitor and verify.

5 A draft Health and Safety Plan 2018 – 2020 was provided to the Committee at the meeting 13 September 2018 and has since been adopted by the Senior Leadership Team.

6 Progress on the 2018 – 2020 Health and Safety Plan has been incorporated into quarterly reports going forward.

Issues and Options

Issues

7 Progress on the Health and Safety 2018-2020 Plan initiatives is progressing however the alert level 4 and alert level 3 restrictions severely disrupted planned health and safety related initiatives and training. Several time lines may continue to be extended and this will be updated through the reporting cycle.

Considerations

Policy considerations

8 There are no Policy considerations.

Legal considerations

9 There are no legal considerations.

Financial considerations

10 Budget has been provided for implementation of the action plan initiatives as part of the 2018-38 Long Term Plan.

Tāngata whenua considerations

11 There are no Tāngata whenua considerations.

Significance and Engagement

Significance policy

12 This report does not trigger the Council’s Significance and Engagement Policy.

Publicity

13 There are no publicity considerations.

Recommendations

14 That the Audit and Risk Sub Committee notes the Health and Safety Quarterly Report for the period 1 July 2020 – 30 September 2020 attached as Appendix One to this Report.

Appendices

1. Health and Safety Quarterly Report 1 July 2020-30 September 2020 ⇩


AGENDA Audit and Risk Sub-committee Meeting
I hereby give notice that a Meeting of the Audit and Risk Subcommittee will be held on:
Date:	Thursday, 12 November 2020
Time:	1.30pm
Location:	Council Chamber Ground Floor, 175 Rimu Road Paraparaumu
Mark de Haast Group Manager Corporate Services

Mr Bryan Jackson	Chair
Cr Angela Buswell	Deputy
Mayor K Gurunathan	Member
Deputy Mayor Janet Holborow	Member
Cr Gwynn Compton	Member
Mr Gary Simpson	Independent