Agenda of Risk and Audit Subcommittee Meeting

File Ref: 18/7

REPORT TO: Risk and Audit Subcommittee

MEETING DATE: Monday 12 February 2018

FROM: Manager Strategic Finance

Brent Chamberlain

SUBJECT: Treasury Activity and Funding

1.0 SUMMARY

1.1 The purpose of this report is to update the Subcommittee on treasury activity and funding issues.

1.2 The Council is required to give effect to the purpose of local government as prescribed by Section 10 of the Local Government Act 2002. That purpose is to meet the current and future needs of communities for good quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost effective to households and businesses. Good quality infrastructure means infrastructure, services and performance that are efficient and effective and appropriate to present and anticipated future requirements.

1.3 This report concludes by recommending that the report on treasury activity and funding is received.

2.0 BACKGROUND

2.1 The Hastings District Council has a Treasury Policy which forms part of the 2015-25 Long Term Plan and a Treasury Management Policy. Under these policy documents responsibility for monitoring treasury activity is delegated to the Risk and Audit Subcommittee.

2.2 Council is provided with independent treasury advice by Stuart Henderson of PricewaterhouseCoopers and receives weekly and monthly updates on market conditions.

2.3 Under the Treasury Policy, formal reporting to Council occurs quarterly and regular more in depth treasury reporting is provided for the Risk and Audit Subcommittee.

3.0 CURRENT SITUATION

3.1 Council’s debt portfolio is managed within the macro limits set out in the Treasury Policy. It is recognised that from time to time Council may fall out of policy due to timing issues as debt moves closer to maturity and shifts from one time band to another. The treasury policy allows for officers to take the necessary steps to move Council’s funding profile back within policy in the event that a timing issue causes a policy breach.

3.2 The following table sets out Council’s overall compliance with Treasury Management Policy as at 31 January 2018:

Measure	Compliance	Actual	Min	Max
Liquidity	ü	115%	110%	170%
Fixed debt	ü	84%	55%	95%
Funding profile: 0 – 3 years 3 – 5 years 5 years +	ü ü ü	46% 26% 27%	10% 20% 10%	50% 60% 60%
Net Debt as % Equity Net Debt as % Income Net Interest as % Income Net Interest as % Rates	ü ü ü ü	4% 47% 3% 5%	0% 0% 0% 0%	20% 150% 15% 20%

Council is currently compliant with Treasury Management Policy.

As requested at November’s Risk and Audit Subcommittee meeting, the above list of reported KPI’s has been expanded to include the Net Debt % and Net Interest % ratios.

3.3 The current total core net external debt is $65.7m as at 31 December 2017. This is supported by the Debt Status Report as at 31 December 2017 (Attachment 1). Core external debt has increased $5m from the November 2017 report.

3.4 The additional $5m was required to fund the current capital spend program being undertaken. It was borrowed from LGFA for a period of 110 days to align the maturity date with the second LGFA funding round of 2018, at an interest rate of 2.066% pa. By the maturity date our external credit rating will be confirmed allowing the debt to be refinanced with longer term debt at preferential interest rates.

3.5 The chart below shows the key drivers of the expected movement in borrowings over the next year. This is based on projects that have started already, or are highly likely to commence before 30 June 2018 and indicates a forecast debt position of $82.6m.

The chart identifies the major projects underway, however the smaller renewal projects have been aggregated into the “Other” heading.

3.6 The graph below shows the Council’s position for funding risk with $65.7 million of financing facilities as at 31 January 2018. The current liquidity ratio of 115% within the policy band of 110% - 170%. Council’s current debt profile is within policy, with good treasury management practices in place.

3.7 Council Officers and the Mayor met with two Analysts from Standard and Poor’s on the 19^th December as part of the Credit Rating assessment process. They wished to explore the key factors that affect the management, economic and financial risk profiles of Council and an agenda of what they wanted to cover had been previously circulated to help with preparations. Feedback was positive from the Analysts who will take the information presented and prepare a report for consideration to a ratings committee. The ratings committee’s results will be known in late February.

3.8 The following graph shows Council’s fixed debt is within the policy minimum and policy maximum set out in Council’s Treasury Management Policy. This graph also incorporates Council’s forecast debt over the long term (discounted to 80% of projections). The projected external debt requirement for the next 12 months is forecast to increase which will provide Council with the opportunity to take advantage of funding longer term debt at historically low levels of interest.

Officers are currently working with PWC on reviewing its interest rate strategy with the view of adding some more forward start swaps beginning from year 2 onwards. PWC are currently recommending a target level of 3.75% for retail swaps at the longer end of the yield curve (swaps of 5 to 10 years in length).

3.9 The graph below shows what wholesale 10 year swap rates over the past 12 months. In recent months interest rates have been drifting in a narrow range between 3.1% and 3.3% pa. While the Reserve Bank has indicated that it doesn’t plan to increase the OCR rate until 2019 at the earliest, economists are still picking an increase in interest rates of 0.5% pa over 2018.

3.10 Any new debt will be considered along with Council’s working capital requirements and liquidity ratios.

4.0 MARKET COMMENTARY

4.1 The Reserve Bank of New Zealand (RBNZ) last issued a Monetary Policy Statement on 9 November 2017 where the Official Cash Rate was held at 1.75% and the statement issued at that time was reported to the Subcommittee at its last meeting. The next RBNZ statement is due on 8 February 2018 and is therefore not released in time for any commentary to be included in this report, however below is ASB’s commentary following the weak Q4’s CPI figure’s announced on the 25^th January:

“The CPI rose by 0.1% qoq in Q4, taking the annual rate of inflation down to 1.6%, well below ASB’s, RBNZ’s and the market’s expectations. The weak result was largely driven by an unexpected fall in tradable inflation, despite a 6.1% lift in petrol prices over the quarter. Core measures of inflation reinforced that underlying inflation pressures are weak.

This release suggests that inflation has yet to stage a convincing comeback in NZ, outside of the housing sector. And, with this release raising numerous questions about the strength of inflation moving forward (especially when considering the stronger-than-thought economic backdrop of recent years) it reinforces that there is no need for the RBNZ to raise interest rates anytime soon. We will revisit our CPI forecasts in the wake of this release and what it means for our RBNZ call. But for now, it seems appropriate that the RBNZ to leave to OCR on hold over 2018.”

4.2 The graph below shows how the NZ interest rate curve has moved over the past 24 months.

The PWC Treasury Advisory Team believe that both short-term (although not till after mid 2018) and long-term interest rates could move higher due to additional inflation caused by increased government election spending promises, lower NZ dollar exchange rates causing more expensive imports, and a lower immigration policy combined with higher minimum wage rates leading to higher wages expectations. This may cause the Reserve Bank to raise the OCR earlier than originally thought.

5.0 FUNDING FACILITIES

5.1 Attachment 2 shows details of Council’s current debt facilities together with details of expiry dates and margins.

5.2 Council’s liquidity ratio of 115% at 31 January 2018 (based on net external debt of $65.7m and total debt facilities of $75.7m) is within policy (policy 110% - 170%). Officers are comfortable with this ratio because of continued uncertainty on debt forecasts and the ability to increase debt from the LGFA at relatively short notice.

6.0 Recommendations

That the report of the Manager Strategic Finance titled Treasury Activity and Funding dated 12/02/2018 be received.

Attachments:

1	Public Debt Status 31 December 2017	18/70
2	Funding and Interest Rate Risk 31 Jan 18	18/69

File Ref: 18/8

REPORT TO: Risk and Audit Subcommittee

MEETING DATE: Monday 12 February 2018

FROM: Chief Financial Officer

Bruce Allan

Strategy Manager

Lex Verhoeven

SUBJECT: 2018-28 Long Term Plan

1.0 SUMMARY

1.1 The purpose of this report is to update the Subcommittee about progress being made on the development of the 2018-2028 Long Term Plan, with particular focus on financial management and risk management considerations.

1.2 This issue arises from the legislative requirement to have in place a Long Term Plan by 30 June 2018.

1.3 The Council is required to give effect to the purpose of local government as prescribed by Section 10 of the Local Government Act 2002. That purpose is to meet the current and future needs of communities for good quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost–effective for households and businesses. Good quality means infrastructure, services and performance that are efficient and effective and appropriate to present and anticipated future circumstances.

1.4 This matter relates to the decision making, financial management and consultative requirements of the Local Government Act 2002.

1.5 This report concludes by recommending that the report be received and that feedback from the Subcommittee be incorporated into the Long Term Planning process as appropriate.

2.0 BACKGROUND

2.1 The Local Government Act 2002 sets out the requirement for a local authority to have a Long Term Plan in place for its community. Whilst it has a 10 year view, the Infrastructure Strategy (a requirement of the plan) looks out 30 years and beyond recognising the life of our infrastructural assets and the long-run maintenance, renewal and replacement needs of those assets. Each 3 years a new plan has to be produced recognising that the context within which a local authority operates can change.

2.2 During 2017 the Council considered the key aspects of the 2018 Long Term Plan with a final workshop held on 13 December finalising the key remaining components of the plan.

2.3 In summary, the plan builds on the key strategic directions previously set by the Council, with emphasis on:

§ Investment in drinking water infrastructure as our first priority to meet community expectation and new standards around safe drinking water;

§ Ensuring that a range of housing options are available to meet the needs of a changing community whilst protecting our valuable soils;

§ Ensuring industrial development opportunities are easily accessible in Omahu, Irongate, Whakatu and Tomoana to meet our target of increased jobs and investment;

§ Investment in the Hastings Central City to increase its vibrancy and to meet the challenges of changing retail patterns and the function and form of the central city;

§ Investment in our core infrastructure to look after our assets prudently and to meet new challenges in bridge strengthening, changing environmental standards and climate change;

§ Continuing to enhance our parks, recreational and cultural facilities to make the Hastings District a place where talent wants to live and people want to work, live and play;

§ Working together with communities and others to build civic pride, develop our youth and uplift people and communities.

2.4 The focus of this report is on the financial management and risk management implications of the work programme, along with some of the key assumptions which underpin the Long Term Plan.

3.0 CURRENT SITUATION

3.1 The Council will at its meeting of 22 February be considering some final remaining matters which will not have a consequential impact on the plan, before adopting the plan for community consultation on 22 March 2018.

3.2 The month of February is largely dedicated to the external audit process, conducted by Audit New Zealand. An audited Long Term Plan is a legal requirement. A further central audit is then also undertaken by the Office of the Auditor General to ensure a consistent standard is achieved across the country.

3.3 The Hastings District Council has consistently achieved a compliant Long Term Plan since the long term planning requirements become mandatory in 2004.

KEY INPUTS INTO THE PLAN

3.4 Asset Management Plans (AMPs) – These plans set out the long term approach to managing our various infrastructure assets. AMP’s are in place for the following activities:

§ Water Supply

§ Wastewater

§ Stormwater

§ Transportation

§ Park and Reserves

§ Council Owned Buildings

§ Solid Waste

3.4.1 Asset Management is forever evolving as we obtain better information on our assets and new challenges emerge, be they environmental, legislative or through level of service expectations of our community. Importantly the Council’s plans have evolved and been audited on numerous occasions. The Council has also engaged external expertise and peer review. The latest independent review of our asset management plans was undertaken during 2014 by Waugh Infrastructure Management, with continual follow-up on improvement items since that time. The Transportation AMP also has external review via our co-investor, the New Zealand Transport Agency.

3.4.2 The various audit processes described above have assessed our AMP’s as fit for purpose. A focus is on lifting the maturity of the Parks and Reserves AMP, which has included the transfer of asset data into the Council’s main data repository allowing for better management and decision making.

3.4.3 The AMP’s are currently being further refined with the improvement items identified from the 2014 Peer Review being the focus for the asset managers. It is envisaged that the audited AMP summaries will be presented to Risk and Audit at their May 2018 meeting where a more detailed update can be provided. Following Risk and Audit’s review, the AMPs will be presented to Council for adoption.

3.5 Infrastructure Strategy – the purpose of the Infrastructure Strategy is to identify the significant infrastructure issues for the Council and how they will be managed. The Councils approach to the renewal and replacement of assets, its response to growth or decline in demand for service, planned increases or decreases in levels of service, maintaining health and environmental outcomes and its approach to risk and resilience are all aspects of the strategy. The strategy is drawn from the various matters within the AMP’s, but means that the community gets a snapshot of key matters without having to read large and technical documents. A significant part of the audit process is focused on the underlying integrity of asset information and its connection with what’s presented in the Infrastructure Strategy.

3.6 Financial Strategy – the purpose of the financial strategy is to facilitate prudent financial management by providing a guide for the Council to consider proposals for funding and expenditure against, and to provide a context for consultation on the funding and expenditure proposals within the Long Term Plan. The Financial Strategy has a number of subcomponents which are not covered in detail here (as only minor change has been proposed) which include the following:

§ Revenue and Financing Policy

§ Liability Management Policy

§ Investment Policy

§ Development Contributions Policy

§ Various Rating Policies

3.6.1 Funding Depreciation – The Financial Strategy and Infrastructure Strategy are intertwined and another important focus of the audit process. Assurance that our assets are being looked after appropriately, being optimised and that adequate funding is in place to achieve these outcomes is a fundamental part of a good Long Term Plan. The Council plans its asset renewal programme around the detailed knowledge it has on the condition of its assets, to ensure it is optimising its investment. However, it is also useful to compare this approach with generally accepted accounting practice to the depreciation of assets and the investment requirements which are indicated via this methodology. As part of the development of this Long term Plan external expertise was commissioned to undertake a full review of our investment approach and to obtain assurance on that question “whether the level of investment is appropriate”. That review by and large affirmed that we are on track, but made two recommendations in respect of our stormwater activity and wastewater activities. Those recommendations have been actioned and additional funding allowance has been built into forward budget forecasts.

3.6.2 Balanced Budget – A key legislative financial benchmark within the Financial Strategy is the “Balanced Budget”. That benchmark assesses whether operating revenue has been set at a level to cover operating expenses in any one year as an indicator of the fiscal sustainability of the Long Term Plan. The draft budget meets this fiscal benchmark, however a point to note for the Subcommittee is that the budget is under stress to achieve this in the first three years of the plan. The reason for this is the comprehensive water investment programme, consisting of $47.8 million in capital expenditure and a new operating environment with an operating expense that is $2 million higher than 2017/18. To assist the community through funding this, a longer term view has been taken with the setting of the water targeted rate, which sees the rate increase by $250 (smoothed over the first 3 years) with smaller increases in the years after that. This approach does put the water account in deficit for several years before paying its way by the end of the 10 year period.

3.6.3 Rates – Limits on rate increases is another fundamental aspect of the Financial Strategy. The Council has worked within these limits in setting expenditure priorities within the plan. The key rates benchmark is to set rates in any one year within 4% plus the movement in the Local Government Cost index for that year – this is a limit and not a target. Further to this the Council set a LTP budget target of 3% or less for its forecast budget (with the exception of the water investment programme – which is required to deliver safe water to our community). The draft budget has been set within the financial limits in the Councils Financial Strategy, and includes an escalated debt repayment strategy in the latter years. The forecast budget is inflation adjusted as required by the Local Government Act 2002. Maintaining financial headroom is one of Council’s key resilience strategies.

3.6.4 Debt - Forecast debt does increase markedly over that forecast in the 2015 LTP. The water investment programme and bridge investment programmes being the key drivers. An aggressive debt repayment discipline will be important in decreasing debt levels over the next 10 years, as will assessing expenditure priorities and the value for money of competing priorities. The Council’s policy of using any surpluses to repay debt is part of that strategy as is a strategy of maintaining rate increases at 3% with additional funds used for debt repayment. The Financial Strategy acknowledges the need to reduce debt in order to provide Council with the capacity to respond to adverse events should the need arise.

3.6.5 Assumptions – Disclosure of the assumptions made in setting a Long Term Plan is another important aspect and focus for the audit process. The key assumptions are attached.

3.7 Risk and Resilience - Key risks and resilience issues have been addressed as follows:

3.7.1 Completion of programme – The Long Term Plan contains a significant programme of work in the first 3 years. Sufficient internal and external contractor capacity to deliver the programme is an important consideration. In the parks and public space area (where community level of service expectations continue to rise) an additional project manager has recently started which will alleviate some of the pressure being felt in this area. The programme of work is still reasonably aspirational but the programme of key works has been spread across the first 5 years to help manage this. The other key areas are in the delivery of the water investment programme and our roading programme.

3.7.2 It is evident that there are escalating capital work programmes across the local government sector and Hawkes Bay is no different with Napier City Council also likely to have a large capital programme throughout the term of this LTP. Officers have undertaken a review of what contactors are available to undertake the various types of work proposed in the plan and assigned projects to those contractors in an attempt to assess capacity in the market, and while this does demonstrate sufficient capacity, it does not fully understand what requirements will be placed on the market by other agencies like Napier City Council and the Hawkes Bay District Health Board.

3.7.3 Prices – With the increasing pressure on contractors to complete the projected capital programme, comes pressures on price and the risk for Council is that the capital programme cannot be delivered for the budget provided. While budgets are inflation adjusted beyond year one of the plan, Officers will be monitoring closely any cost escalations that are occurring and managing this risk where possible.

3.7.4 Asset Approach – In the asset management area the distinction between critical v non-critical assets is an important way of managing risk. Critical asset renewal strategies aim to ensure assets are replaced prior to asset failure and or loss of customer level of service. Critical assets have robust operation, maintenance and inspection programmes to ensure high levels of operational performance. Non critical assets are less critical to ensuring overall asset performance. Non critical asset renewal strategies aim to optimise asset life and investment. Condition assessment is less frequent and intensive than with critical assets. Review and assessment of faults trends is an important activity that helps predict declining asset performance and condition. Maintenance activities involves scheduled activities in areas with known issues and reactive maintenance in response to reported faults.

3.7.5 The subcommittee have already had reports detailing the corporate risks associated with water contamination and asset failure, these are not detailed further here.

3.7.6 Insurance – The Subcommittee will be familiar with the Councils approach to insurance and risk and that is not detailed further here.

3.7.7 Unknown/Unplanned Events – The one certainty with long term planning is that you cannot predict every future eventuality. Whilst the Council has provided for the build-up of funds in a number of reserve accounts (i.e. rural flood damage reserve for example) and contingency allowances in some parts of the budget to meet reasonably unforeseen circumstances, the reality is that a significant event impacting on our community (i.e. major earthquake) would be met by a combination of reprioritising non critical works and utilising the financial headroom the Council has to get the community through such an event. Retaining financial headroom therefore is a critical part of the Council’s financial strategy.

3.8 Long Term Plan Process – Key elements within the budget process are detailed below:

3.8.1 Budget Process – A Budget Review Board consisting of a range of senior officers has scrutinised budget bids and refined the plan over the last 5 months. In addition the Key Growth Projects Review Board has assessed the optimal growth development programme and made recommendations to Council. External market intelligence has assisted the Board to arrive at is conclusions.

3.8.2 Staff and Community input – The Long Term Plan and the priorities within it is based on many levels of intelligence. In addition to asset management planning community aspirations are captured via the community planning process which is continually being rolled out and via the Reserve Management Process. The non-asset areas of Council have also input into the process through the development of activity management plans which detail where the activity is heading and any implications for council.

3.8.3 Management and Governance Oversight – The LTP project sponsor is the Leadership Management team headed by the Chief Executive. This is considered a best practice approach and ensures that the necessary resources and strategic oversight are applied to this key planning process. Regular reporting through the team has occurred over the last 7 months. Elected members have also formed a critical part of the plan development process to ensure ownership of the plan and understanding of the priorities, trade-offs and risks. Four workshops have methodically taken elected members through the key matters and sought there guidance on these. The Rural Community Board and Maori Joint Committee have also had presentations and input into the plan.

3.8.4 Audit Update – The Subcommittee will be updated at the meeting on the progress of the LTP audit and any matters of consequence should there be any.

4.0 SIGNIFICANCE AND ENGAGEMENT

4.1 This matter is significant and the Council will be following the legislative provisions in respect of engagement with its community on the 2018-28 Long Term Plan.

5.0 RECOMMENDATIONS AND REASONS

A) That the report of the Chief Financial Officer titled “2018-28 Long Term Plan” dated 12/02/2018 be received.

B) That feedback from the Subcommittee be incorporated into the Long Term Planning process as appropriate.

Attachments:

There are no attachments for this report.

File Ref: 18/11

REPORT TO: Risk and Audit Subcommittee

MEETING DATE: Monday 12 February 2018

FROM: Risk and Corporate Services Manager

Regan Smith

District Customer Services Manager

Greg Brittin

SUBJECT: Enterprise Risk Management Update

1.0 SUMMARY

1.1 The purpose of this report is to update the Subcommittee on analysis of the strategic risks adopted by Council by presenting the initial Bow Tie analysis for; Water Supply Contamination, Adverse Environmental Change, and Procurement Failure, and present recommendations to change Investment Failure risk to Inadequate Available Funds, and to include an amended risk matrix for Water Safety Plans in the HDC Risk Management Policy and Framework.

1.2 This issue arises from adoption of the Strategic Risk Register by Council.

The Council is required to give effect to the purpose of local government as prescribed by Section 10 of the Local Government Act 2002. That purpose is to meet the current and future needs of communities for good quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost–effective for households and businesses. Good quality means infrastructure, services and performance that are efficient and effective and appropriate to present and anticipated future circumstances.

1.3 This report concludes by recommending that the report be received.

2.0 BACKGROUND

2.1 Council has used the Bow Tie risk assessment method to analyse the strategic risks listed on the Strategic Risk Register adopted by Council on 31 July 2017.

2.2 The Bow Tie risk assessment method was selected by Council as it is an effective tool to demonstrate causal relationships in complex systems. A Bowtie diagram does two things. First of all, it gives a visual summary of all plausible accident scenarios that could exist around a certain Hazard. Second, by identifying control measures the Bowtie displays what the organisation does to control those scenarios.

2.3 The Bow Tie analysis covering the key risk event and associated threats, consequences and control barriers have already been provided to the Subcommittee for the following risks:

· Civil Defence Emergency (Risk #2).

· Health & Safety Incident (Risk #3).

· Infrastructure Service Failure (Risk #4)

· Ineffective Regulatory Oversight (Risk #5)

· Demographic Change (Risk #7)

· Information Security Failure (Risk #8)

2.4 The 1-page summary for these risks have also been reported to Council on 1 February 2018.

3.0 CURRENT RISK ANLAYSIS

3.1 Initial Bow Tie risk analysis have been completed for the following additional strategic risks:

3.1.1 Water supply contamination (Risk #1): A first draft of the Bow Tie analysis has been completed, but requires further work before it is ready for submission to the Subcommittee. However, sufficient information has been gathered to present the risk summary at this time.

3.1.2 Water supply contamination risk focuses on Council’s responsibility to supply safe drinking water to the community. The risk covers all aspects of managing a water supply in compliance with statutory obligations and Council policy that might create potential for the water supply to carry source or network contamination to water users.

3.1.3 Risk assessment: Council manages the risk associated with water contamination through a focus on preventative activity designed to reduce the potential for contamination to enter the system. This includes catchment management and robust Asset Management Planning based on multi-barrier philosophy which is industry good practice, and utilising expert advice when necessary.

3.1.4 Adverse Environmental Change (Risk #6): Environmental change encompasses the disturbance of the environment resulting from human influences or natural ecological processes that have adverse impacts on the community’s ability to function effectively (e.g. changes in climate, human impacts, infestation of invasive species etc).

3.1.5 Risk assessment: While there is little that Council can do to control macro environmental change drivers such as global warming, Council does have a role to play in creating resilient communities that have a managed exposure to environmental change threats. These outcomes are achieved primarily through inter-agency collaboration, generation of pathway options, and Council land use and infrastructure planning. Acknowledging the policy role Council has to play and identifying potential funding options for possible interventions are key steps that need attention.

3.1.6 Procurement Failure (Risk #12): Procurement risk covers failures in the process of identifying business needs, engaging with the market to obtain good value for money, and poor management of contract implementation or tracking.

3.1.7 Risk assessment: The risk assessment workshop identified that Council has procurement policies and practices that follow government best practice documented in the Council Procurement Manual, which is supported by robust templates and overseen by Council's Procurement Manager and Procurement Steering Group. Existing practices are in place for tender publication, opening and approval to ensure adequate separation of duties and control over decision making.

3.2 Investment Failure (Risk #9)

3.3 In the strategic risk register Investment Failure (Risk number 9) is currently defined as a failure of Council investment resulting in loss of funds. However, when considering this definition for the risk assessment it became evident that the focus on failure of Council investments was possibly not the real risk.

3.4 The workshop team held the view that Council had few investments that were intended to put funds at risk to achieve a gain. Instead, the key risk for Council was the ability to access sufficient funds to meet immediate commitments.

3.5 Therefore, the workshop made the recommendation that consideration be given to changing strategic risk #9 from Investment Failure to Inadequate Available Funds, which could be defined as “loss of access to sufficient funds to meet Council commitments”.

4.0 AMENDMENT TO THE HDC RISK MANAGEMENT POLICY & FRAMEWORK

4.1 The Central North Island Drinking Water Assessment Unit (CNIDWAU) Report on adequacy of Drinking Water Supply’s Water Safety Plan for Whirinaki Esk Water Supply dated 22/12/2017 identified concerns with the use of the Council’s corporate risk matrix and associated consequence and likelihood scales in the Water Safety Plan (WSP).

4.2 Recommendation 1 from the report required Council to “Review the consequence scoring and likelihood definitions used to determine the overall estimate of risk table to ensure the overall risk ratings are accurate and appropriate for this water supply” (WHI007_WhirinakiHawkesBay_WSPadequacy_191217_v1, Page 4).

4.3 After discussion with CNIDWAU regarding the need for changing from Council’s corporate standard, an amended risk matrix has been submitted for approval. The revised risk matrix follows a similar patter to the HDC corporate matrix with the bands for Very High and High pushed further down the matrix with a resulting reduction in the area defined as Low risk (refer attachment). The Consequence and likelihood scales remain in-line with the definitions in the HDC risk framework.

4.4 Considering that the Drinking Water Assessors consider the revised risk matrix important for certification of the WSP, it is recommended that an amendment be made to the HDC Risk Management Policy and Framework to acknowledge the water supply risk matrix as an approved variation for this purpose only.

5.0 NEXT STEPS

5.1 To provide confidence that adequate controls exist for the remaining 11 strategic risks, further risk analysis will be undertaken to develop 1-page summaries. To progress this in a timely fashion an abbreviated risk analysis process will be used.

5.2 The purpose of the abbreviated risk assessment process is to enable time to be spent on confirming the integrity of critical controls identified for higher risk items.

6.0 RECOMMENDATIONS AND REASONS

A) That the report of the Risk and Corporate Services Manager titled “Enterprise Risk Management Update” dated 12/02/2018 be received.

B) Council be recommended that the strategic risk number 9 be changed from Investment Failure to Inadequate Available Funds, which is defined as a “loss of access to sufficient funds to meet Council commitments”.

C) Council be recommended that the HDC Risk Management Policy and Framework be amended to include the Whirinaki Water Safety Plan risk matrix as an approved variation for use only within Council Water Safety Plans.

With the reasons for this decision being that the objective of the decision will contribute to meeting the current and future needs of communities for good quality local infrastructure, local public services and performance of regulatory functions in a way that is most cost-effective for households and business by:

i) Validating risks in core business processes are effectively managed.

Attachments:

1	Governance Strategic Risk Summary Water Supply Contamination for Risk and Audit Subcommittee 12 February 2018	PMD-03-81-18-121
2	Governance Strategic Risk Summary Adverse Environmental Change	PMD-03-81-18-122
3	Strategic Risk Visualisation Adverse Environmental Change	PMD-03-81-18-123
4	Governance Strategic Risk Summary Procurement Failure	PMD-03-81-18-120
5	Governance Strategic Risk Bow Tie Procurement Failure Page 1	PMD-03-81-18-119
6	Governance Strategic Risk Bow Tie Procurement Failure Page 2	PMD-03-81-18-118
7	Revised Risk Matrix for Whirinaki Water Safety Plan	PMD-03-81-18-124

File Ref: 18/26

REPORT TO: Risk and Audit Subcommittee

MEETING DATE: Monday 12 February 2018

FROM: Manager Strategic Finance

Brent Chamberlain

Chief Financial Officer

Bruce Allan

SUBJECT: General Update Report and Status of Actions

1.0 SUMMARY

1.1 The purpose of this report is to update the Subcommittee on various matters including actions raised at previous meetings.

1.2 The Council is required to give effect to the purpose of local government as prescribed by Section 10 of the Local Government Act 2002. That purpose is to meet the current and future needs of communities for good quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost–effective for households and businesses. Good quality means infrastructure, services and performance that are efficient and effective and appropriate to present and anticipated future circumstances.

1.3 This report concludes by recommending that the report titled “General Update Report and Status of Actions” from the Manager Strategic Finance be received.

2.0 BACKGROUND

2.1 The Audit & Risk Subcommittee members requested that officer’s report back at each meeting with progress that has been made on actions that have arisen from the Audit & Risk Subcommittee meetings. Attached as Attachment 1 is the Audit & Risk Subcommittee Action Schedule as at 12 February 2018.

3.0 CURRENT SITUATION

3.1 Tech One Upgrade

3.1.1 Work undertaken by staff to review the scope and nature of the upgrade to the Technology One Finance Module has taken place and has resulted in a plan with stage 1 significantly “down-sized” which has minimised risk and cost while still achieving much of what was considered necessary when the project was first initiated.

3.1.2 Stage 1 will:

· Upgrade the TechOne Finance module to latest version

· Adjust the general ledger chart structure

· Automate opening balances

· Adjust how the Landfill is currently integrated within Council’s accounts

This will lead to overall efficiencies with reporting timelines, increased transparency through the in ledgers and position Council to take advantage of future enhancements.

3.1.3 Future stages will look to build on the improved stability of the general ledger and will include:

Stage 2 – Procure to Pay upgrades which will include the implementation of electronic purchase orders and will:

· create more robust internal controls around delegated financial authorities and approval processes

· shorten month-end process by a number of days, thereby shortening reporting process

· provide more automation of invoice and purchase order processes, less intervention meaning more accuracy

· allow further enhancements to be easily implemented e.g. supplier cataloguing

3.1.4 The need to move to electronic purchase orders is an improvement which has been identified in internal and external audit reviews and is a necessary improvement. Electronic purchase orders will improve control systems ensuring amongst other things that approvals are required prior to expenditure being committed rather than at the payment stage. Stage 2 will commence in October 2018 after all year-end and annual report workloads have eased.

3.1.5 Stage 3 – Contract Management System – the implementation of a contract management system is also an improvement that has been identified through the external audit. A contract management system is closely linked to the procure to pay improvements and can follow on from those improvements. In the meantime, Officers are developing a contract management spreadsheet where all current contracts are being collated.

3.2 Audit Action Plan

3.2.1 Attached as Attachment 2 is an updated Audit Action sheet providing the Subcommittee with a view of the status of recommendations made from previous internal and external audits. Good progress has been made on addressing recommendations and the new recommendations from the recent audit work have now been included.

4.0 SIGNIFICANCE AND ENGAGEMENT

4.1 This report does not trigger Council’s Significance and Engagement Policy and no consultation is required.

5.0 RECOMMENDATIONS AND REASONS

That the report of the Manager Strategic Finance titled “General Update Report and Status of Actions” dated 12/02/2018 be received.

Attachments:

1	Action Sheet 12 February 2018	CG-14-25-00026
	Audit Action Sheet - 12 February 2018	CG-14-25-00028

Hastings District Council

Lyndon Road East, Hastings