Australian Government, the Australian Office of Financial Management

Part 1

Overview

Role and functions

    The AOFM, a 'prescribed' agency under the Financial Management and Accountability Act 1997, was established within the Treasury portfolio to assume responsibility for the Commonwealth's debt management activities previously undertaken within the Treasury. The AOFM commenced operations on 1 July 1999.

    The AOFM is responsible for advising the Treasurer, the responsible Minister, on all aspects of Commonwealth debt management. In addition, the Treasurer has provided delegated authority to AOFM officials in relation to certain powers under the legislation governing Commonwealth debt management, to enable them to exercise those powers on his behalf.

    The principal objective of the AOFM is for Commonwealth debt to be raised, managed and retired at the lowest possible long-term cost, consistent with an acceptable degree of risk exposure.

    Debt management operations cover the issue of various borrowing instruments, the strategic formulation and undertaking of portfolio management, including through swap transactions, the administration of the redemption of debt represented by CGS, including that on issue for the States and Territories, and the assessment of the budgetary cost of the Commonwealth's net debt portfolio.

Figure 1: Organisational structure

Figure 1: Organisational structure

* Ted Evans stepped down from his position as Secretary to the Treasury on 26 April, 2001. Dr Ken Henry commenced his appointment as Secretary to the Treasury on 27 April, 2001.

Outcome and output information

    To enhance the Commonwealth's capacity to manage its net debt portfolio, offering the prospect of savings in debt servicing costs and an improvement in the net worth of the Commonwealth over time.

    The AOFM has one output - debt management. This was formerly reported under the program structure as subprogram 1.6 of the Treasury.

Figure 2: Outcome and output structure

Figure 2: Outcome and input structure

    In common with most entities with significant financial exposures in their balance sheet, the Commonwealth has been moving increasingly in recent years to conduct its debt management activities within an explicit risk management framework. In conducting its portfolio management and debt issuance activities, key risks managed by the Commonwealth include funding risk, market risk and credit risk. A description of the management of these risks is provided below in the context of the 2000-01 outcomes.

Table 1: Resources for AOFM outcomes

     

    Budget
    2000-01

    Actual
    2000-01

    Budget
    2001-02

     

    ($'000)

    ($'000)

    ($'000)

    ADMINISTERED

         

    Expenses against administered appropriations

         

      Annual appropriations

    4,429

    1,591

    4,082

      Special appropriations

    8,675,525

    10,561,198

    7,172,940

    Total administered expenses

    8,679,954

    10,562,789

    7,177,022

           

    Capital and other administered appropriations

         

      Annual appropriations

    3,400

    -

    3,400

      Special appropriations

    52,227,522

    23,115,740

    35,674,584

    Total capital and other administered
    appropriations

    52,230,922

    23,115,740

    35,677,984

           

    Total administered resourcing

    60,910,876

    33,678,529

    42,855,006

           

    AGENCY

         

      Output 1.1 - Debt management

    5,706

    5,706

    5,822

    Total revenue from government (appropriations)
    contributing to price of agency outputs

    5,706
    97.2%

    5,706
    97.8%

    5,822
    99.7%

      Revenue from other sources

      Output 1.1 - Debt management

    162

    126

    20

    Total revenue from other sources

    162

    126

    20

    Total price of agency outputs

    5,868

    5,832

    5,842

           

    Capital agency appropriations

         

      Loans

    749

    -

    -

    Total capital agency appropriations

    749

    -

    -

           

    Total agency resourcing

    6,617

    5,832

    5,842

           

    Total resourcing for outcome 1

    60,917,493

    33,684,361

    42,860,848

     

    Budget
    2000-01

    Actual
    2000-01

    Budget
    2001-02

    Average staffing level (number)

    42

    23

    40

Performance information

    Performance indicators for the outcome include:

    - achievement of the Commonwealth's financing task in a cost-effective manner;

    - efficient execution of the Commonwealth's borrowing activities. Partial positive indicators include the narrowness of the range of accepted bids and of the basis point spread between tender and secondary market yields;

    - efficient management of the Commonwealth's cash balances. Indicators include achievement of the Ministerially endorsed cumulative average cash balance target as at end-year; and

    - timely production of reports on debt management activities.

2000-01 outputs

    Cost-effective financing

    Despite the continuation of a surplus funding position in 2000-01, as in recent years the AOFM has undertaken modest issuance programs directed at maintaining net debt within agreed portfolio limits as well as seeking to maintain the liquidity and efficiency of CGS markets. In addition, maintenance of an efficient, liquid Commonwealth yield curve assists the continued growth and development of a range of domestic derivative and related markets and is consistent with the Government's commitment to the further development of Australia as a centre for global financial services.

    As noted above, the Commonwealth's debt management activities are conducted within an explicit risk management framework, with one of the key risks for management being funding risk - the risk that an issuer is unable to raise funds, as required, in an orderly and cost-effective manner. Cost-effective debt issuance requires appropriate stock selection, efficient execution of transactions, the maintenance of a diverse investor base, deep liquid markets, and an efficient yield curve for CGS.

    To this end, the practice of concentrating debt issuance into liquid benchmark stocks continued in 2000-01. Treasury Fixed Coupon Bond issuance in 2000-01 focussed on building up the volume on issue of the May 2013 stock. Extensive liaison with financial market participants was maintained over the year in order to assess market conditions and guide issuance decisions.

    Borrowing activities

    Treasury Fixed Coupon Bonds are the main debt instrument issued by the Commonwealth. An aggregate $2.3 billion (face value) of Treasury Fixed Coupon Bonds were issued in 2000-01, the program being conducted over five tenders. The average range of tender bids accepted was 1.6 basis points and the average margin between the weighted average yields achieved at tender and the prevailing secondary market mid-rate was around half of one basis point.

    Treasury Indexed Bonds were the other medium to long term debt instrument issued, with an aggregate $300 million (face value) being issued in four tenders. The average range of accepted bids was 4 basis points (narrower than in 1999-2000). The margin between yields accepted at tender and the prevailing secondary market mid-rate yields, while variable, averaged less than one basis point.

    Cash management

    The Commonwealth's short term debt instrument, Treasury Notes, are issued to finance the within-year timing mismatch between the payment of Commonwealth Government outlays and the receipt of Commonwealth Government revenues. Twenty-four Treasury Note tenders were conducted with issuance being around $14.4 billion (face value). The average range of accepted yields on the stock offered was 2.3 basis points. The Treasury Note tender program was managed such that, over the course of the full year, cumulative average cash balances were within the ministerially prescribed target.

    Portfolio management

    The reduction in Commonwealth debt as a result of ongoing fiscal consolidation has been managed by reference to an explicit policy framework governing acceptable market risk exposures at the portfolio level. Market exposures arise from the potential for changes in financial prices, such as interest and exchange rates, to affect the ongoing economic cost and market value of the Commonwealth portfolio.

    Market risk is managed by reference to a tightly defined portfolio benchmark that serves as a target for the composition and nature of market risks within the Commonwealth portfolio. The analytical framework underpinning the benchmark assesses the trade-off between the long-term expected cost and risk of different portfolio structures, and provides a basis for taking informed and consistent decisions about the nature of Commonwealth market exposures. The benchmark is not implemented in isolation but in conjunction with the sound management of other financial risks including funding, liquidity, credit and operational risks, and also has regard to the constraints imposed by broader public policy considerations.

    During 2000-01, the portfolio was maintained broadly within target ranges during the first quarter of the year but, thereafter, a number of other factors drove the portfolio parameters outside the benchmark ranges. In responding to these factors the AOFM had particular regard to the constraints imposed by public policy considerations, including the market impact of potential transactions, in deciding to allow the portfolio to remain outside the benchmark range. In particular, the on balance judgement was that the risk associated with departing from the benchmark range was acceptable when tested against the alternative of a sharp increase in the size of the announced swap program.

    The other key risk to be managed as part of portfolio management operations is credit risk, the risk that a counterparty of the Commonwealth may default on its obligations. In 2000-01, this risk continued to be managed by reference to a comprehensive Swap Counterparty Credit Policy endorsed by the Treasurer. The policy establishes minimum credit rating criteria for acceptable counterparties and differential market and potential exposure limits for various institutional counterparty types at different rating points.

    Legislative and administrative requirements

    Debt issue, repurchase and redemption programs, including those related to the redemption through the Debt Retirement Reserve Trust Account of Commonwealth Government security debt on issue for the States and Territories, were administered in accordance with the provisions of the Commonwealth Inscribed Stock Act 1911, the Loans Securities Act 1919, the Loans Redemption and Conversion Act 1921, the Financial Agreement Act 1994 and related legislation.

    Debt assistance payments to the States and Territories, in the form of Commonwealth sinking fund payments to the Debt Retirement Reserve Trust Account (to assist them in their redemption of Commonwealth Government securities on issue on their behalf) and untied grants (to compensate them for the costs related to the cessation of Commonwealth borrowing on their behalf), were made in accordance with the provisions of the Financial Agreement Act 1994. All relevant accountability requirements were met and enquiries from State and Territory Treasuries concerning debt redemption matters were handled promptly.

    Reporting on debt management

    The 1999-2000 AOFM Annual Report was tabled in the Parliament on 31 October 2000. The Report provided comprehensive information on CGS on issue and operations in 1999-2000 in relation to that debt.

    Financial performance - Agency items

    As at 30 June 2001, the AOFM is in a strong financial position, reporting positive net assets of $3.0 million, represented by $4.3 million of assets and $1.3 million of liabilities.

    In the context of the financial management reforms that have been implemented by the Commonwealth government, the AOFM is cognisant of the need to maintain cash reserves to fund the future settlement of employee liabilities, make asset replacements and for future contingent events. Major commitments, to date, in respect of $2.9 million cash holdings include:

    - $1.1 million for employee leave entitlements owing as at 30 June 2001; and

    - $0.6 million for asset replacements.

    The AOFM has had a capital intensive period over the last twelve months with expenditure on infrastructure, plant and equipment totalling approximately $1.4 million, including an accommodation fit-out of $1.1 million.

    The AOFM expects to undertake significant investment in new computer hardware and software assets commencing in the 2001-02 financial year. Capital appropriations have been made by Parliament for this purpose.

    A recruitment program has commenced to increase staffing levels to around 30 by end 2001, consistent with the AOFM's operational requirements. Going forward, the financial management challenge for the AOFM will be to manage its growth in a manner which guarantees the short-term financial strength of the AOFM, while at the same time maintaining and building upon reserves for future requirements.

    Further information

    The 2000-01 debt issuance and debt redemption programs and portfolio management are considered in more detail in Parts 2 and 3 of this Report. The Financial Statements for the AOFM are in Part 5.

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