To view or download this policy as a PDF click Finance and Administration Policies Documents

Purpose

The purpose of this policy is to establish the guidelines that Central Desert Regional Council adopts in investing funds not required to meet immediate liquidity needs.

Scope

All Council’s funds are to be invested in terms of this Policy document.

Definition and Terms

Authorised deposit taking institution (ADI): a body corporate in relation to which an authority under subsection 9 (3) of the Banking Act (No.6 of 1959 as amended) is in force.

Derivative: an arrangement or product (such as a future, option, or warrant) whose value derives from and is dependent on the value of an underlying asset, such as a commodity, currency, or security.

Financial Institution: any authorised deposit taking institution (see Glossary), or the manager of any authorised deposit taking institution, authorised under the Trustee Act to receive fixed deposits.

Investment: an arrangement that provides for, relates to, is directed towards or includes acquiring, consolidating, dealing with, disposing of, holding or issuing bonds, debentures, inscribed stock, shares, stock or other securities of a Commonwealth or State or a Financial Institution.

Legislation and Reference

Local Government Act, 2019
Local Government (General) Regulations 2021
Australian Accounting Standards

Policy Statement

To invest the Council’s surplus funds, with consideration of risk and at the most favourable rate of interest available at the time, for that investment type, while ensuring that Council’s liquidity requirements are being met. While exercising the power to invest, consideration is to be given to preservation of capital, liquidity, and the return of investment.

• Preservation of capital is the principal objective of the investment portfolio. Investments are to be made in a manner that seeks to ensure the security and safeguarding of the investment portfolio. This includes managing credit and interest rate risk within identified thresholds and parameters.
• The investment portfolio must ensure there is sufficient liquidity to meet all reasonably anticipated cash flow requirements, as and when they fall due, without incurring significant costs due to the unanticipated sale of an investment.
• The investment is expected to achieve a predetermined market average rate of return that takes into account the Council’s risk tolerance. Any additional return target set by Council must also consider the risk limitation and prudent investment principles.

Prudent Person Standard

The investment will be managed with the care, diligence and skill that a prudent person would exercise. Council’s staff are to manage the investment portfolios to safeguard the portfolios in accordance with the spirit of this Investment Policy, and not for speculative purposes.

Ethics and Conflicts of Interest

Elected Members and staff shall refrain from personal activities that would conflict with the proper execution and management of Council’s investment portfolio. Council’s policies require staff to disclose any conflict of interest to the CEO, the CEO to disclose to ….. and the elected members to …. (refer also to conflict of interest provisions in LG Act).

Approved Investments

Without approval by resolution of Council, investments are limited to:

• State/Commonwealth Government Bonds;
• Interest bearing deposits such as bank accounts and term deposits;
• Bank accepted/endorsed bank bills;
• Commercial paper (a loan of less than 270 days backed by assets such as loans or mortgages);
• Bank negotiable Certificate of Deposits; and
• Managed Funds with a minimum long term Standard & Poor (S&P) rating of “A” and short term rating of “A2”.

Prohibited Investments

This investment policy prohibits any investment carried out for speculative purposes including:

• Derivative based instruments;
• Principal only investments or securities that provide potentially nil or negative cash flow; and
• Stand-alone securities issued that have underlying futures, options, forwards contracts and swaps of any kind.

This policy also prohibits the use of leveraging (borrowing to invest) of an investment.

Risk Management

The risk of all assets included in the investment portfolio must be known, measurable, regularly monitored and acceptable to Council.

Risk Appetite

Risk Appetite is the amount and type of risk Council is prepared to pursue to take. It is based on Council’s objectives and describes the ‘comfort zone’ Council wants to operate in. Council’s Risk Appetite Statements for Investments activities:

Council has LITTLE or NO APPETITE for risks that foreseeably may:

• have a significant negative impact on Council’s long term financial sustainability or assets, or
• compromise the safety and welfare of staff, contractors and / or members of the community, or
• constitute major legal noncompliance, or result in significant successful litigation against Council, or
• significantly disrupt delivery of essential services, or
• cause significant and irreparable damage to the environment, or
• result in widespread and sustained damage to Council’s reputation.

Council has SOME APPETITE for risks that maintain and improve levels of service to the community, or that improve efficiency, reduce costs and/ or generate additional income sources, SO LONG AS the tangible benefits from treating the risks are higher than the most cost-effective treatment costs, AND there are no higher net benefit opportunities within Council’s risk capacity.

Risk Management Guidelines

Selected investments must comply with key criteria as indicated below relating to:

1. Portfolio Credit Framework: limit overall credit exposure of the portfolio
2. Counterparty Credit Framework: limit exposure to individual counterparties/institutions
3. Term to Maturity Framework: limits based upon maturity of securities.
4. Protection of Principal: investments entered into must be structured to minimise risk of loss of principal.
5. Grant Funding Conditions: conditions related to grant funding available to invest with which there must be complied.

Overall Portfolio Limits

To control the credit quality on the entire portfolio, the following credit framework limits the percentage of the portfolio exposed to any particular credit rating category:

Counterparty Credit Framework

Exposure to an individual counterparty/institution will be restricted by its credit rating so that single entity exposure is limited, as detailed in the table below:

If any of the Council’s approved investments are downgraded such that they no longer fall within approved credit rating category documented within the investment policy, they must be divested as soon as practicable. Investments fixed for greater than 12 months are to be approved by Council and reviewed on a regular term and invested for no longer than 5 years.

Term To Maturity Framework

The maturity profile of Council’s investment portfolio should enable Council to meet planned future cash flow requirements as reflected in the annual budget and the long term financial plan. The factors and/or information used by Council to determine maximum allocations to the shorter durations include:

• Council’s liquidity requirements to cover both regular payments as well as sufficient buffer to cover reasonable foreseeable contingencies;
• Medium term financial plans and major capital projects forecasts;
• Known grants, asset sales or similar one-off inflows; and
• Seasonal patterns to Council’s investment balances.

The investment portfolio is to be invested within the following maximum maturity constraints:

Investment Advisor

If Council appoints an investment advisor they must hold an Australian Financial Securities Licence issued by the Australian Securities and Investment Commission and their appointment as advisor must be approved by resolution of Council. The advisor approved by Council resolution must be an independent person who has no actual or potential conflict of interest in relation to investment products being recommended and is free to choose the most appropriate product within the terms and conditions of the investment policy.

Benchmarking

The benchmarks included in the following table are to be complied with for the relevant instruments.

Investment in Property

This investment refers to the acquisition of property or land where the maximisation of the income stream and capital appreciation is considered to be the primary objective. Property held for income generation will be developed to the highest and best use of the site.

When Council is making decisions to invest in Property or land related investments one or more of the following criteria needs to be satisfied:

• Council needs to consider its strategic plan objectives and how the investment in property fulfils or contributes to community outcomes.
• All property investment/development opportunities will be presented to Council for consideration. As part of this consideration, Council will review its annual budget and long-term plan before considering this investment. This includes exhausting all other options to bring forward other capital project spends.
• Council’s initial investment in property should not comprise of more than 15% of Council’s overall net cash position at 30 June in the year preceding investment to ensure liquidity is maintained.
• Council may invest in Commercial/Industrial Property in the Central Desert Region or Alice Springs, which gives continuous source of ongoing returns, and also have capital growth potential.
• Council investment in property must be capable of providing commercial rental returns;
• Council will appoint a property manager who will carefully consider and actively manage tenants.

Rentals will be set by reference to market levels, with regular reviews, depending on the circumstances. In general, subsidised rentals will not be considered for properties within this classification. Any debt waivers will go to Council for approval.

The performance of each property investment will be required to ensure a return greater than that of cash investments assessed over a period of no less than 10 years. Appreciation of capital will also be included in the assessment of the investment property.

Proceeds From Property Investments

All net returns from Commercial Rental property be used for day to day council activities (as Recurrent Income). This use may be changed from time to time by Council Resolution.

Reporting

All investments are to be appropriately recorded in Council’s financial records and reconciled at least on a monthly basis.

Certificates must be obtained from the financial institutions confirming the amounts of investments held on the Council’s behalf as at 30 June each year and reconciled to the Investment Register. The investment return for the portfolio is to be annually reviewed by an independent financial advisor by assessing the market value of the portfolio.

A monthly report will be provided to Council as part of the monthly financial report. The market value is to be assessed by Council at six monthly to coincide with mid-year budget review reporting.

An Annual review of the Property portfolio after annual report between December and April each year will be presented to Council, which will report against identified risks, required returns on investment and strategic outcomes as well as reporting on investment priorities and divestment activities.

Review History