Annual Report 2014-15

22 September 2015

The Honourable Curtis Pitt MP
Treasurer, Minister for Employment and Industrial Relations, and
Minister for Aboriginal and Torres Strait Islander Partnerships
GPO Box 611
Brisbane QLD 4001

Dear Treasurer

I am pleased to present the Annual Report 2014–15 and financial statements for Queensland Treasury Corporation.

I certify that this Annual Report complies with:

• the prescribed requirements of the Financial Accountability Act 2009 and the Financial and Performance Management Standard 2009, and
• the detailed requirements set out in the Annual Report requirements for Queensland Government agencies.

A checklist outlining the annual reporting requirements can be found at page 56 of this annual report or accessed at www.qtc.com.au.

Sincerely

Gerard Bradley
Chairman

Vision

Securing Queensland’s financial success

Mission

To deliver optimal financial outcomes through sound funding and financial risk management

Values

Client focus: We build strong partnerships with our clients to deliver simple and well-designed solutions that achieve quality outcomes for Queensland.

Team spirit: We work as one team, taking joint responsibility for achieving our vision and collaborating to achieve outstanding performance.

Excellence: We aim for excellence using flexible and agile processes to continuously improve.

Respect: We show respect by recognising contributions, welcoming ideas, acting with honesty, being inclusive and embracing diversity.

Integrity: We inspire trust and confidence in our colleagues, clients, stakeholders and investors by upholding strong professional and ethical standards.

What is QTC?

Queensland Treasury Corporation has a statutory responsibility to advance the financial position of the State, and a mandate to manage and minimise financial risk in the public sector and provide value-adding financial solutions to its public sector clients. Established under the Queensland Treasury Corporation Act 1988, QTC is a corporation sole, reporting through the Under Treasurer to the Treasurer and Queensland Parliament.

2015-19 Strategic Plan

Strategic Goals

1. State and client value
2. Sustainable funding
3. Organisational excellence

Performance indicators

1. Value added
2. Investor/market support
3. Client satisfaction
4. Employee engagement

Role and responsibilities

As the Queensland Government’s central financing authority, Queensland Treasury Corporation (QTC) plays a pivotal role in securing the State’s financial success.

With a focus on whole-of-State outcomes, QTC provides a range of financial services to the State and its public sector entities, including local governments. These services include debt funding and management, cash management facilities, financial risk management advisory services, and specialist public finance education.

Debt funding and management

QTC borrows funds in the domestic and global markets in the most cost-effective manner and in a way that minimises liquidity risk and refinancing risk. QTC achieves significant economies of scale and scope by issuing, managing and administering the State’s debt funding.

QTC works closely with Queensland’s public sector entities, including local governments, to assist them to effectively manage their financial transactions, minimise their financial risk and achieve the best financial solutions for their organisation and the State.

Cash management facilities

QTC assists the State’s public sector entities to make the best use of their surplus cash balances within a conservative risk management framework. It offers overnight and fixed-term facilities and a managed short-term fund.

Financial risk management advisory services

QTC offers a range of financial risk management advisory services to clients, including:

• support to ensure financial risks are identified and effectively managed
• advice on financial and commercial considerations
• expertise in financial transactions and structures
• project management support to deliver key fiscal outcomes, and
• collaboration with the financial markets and private sector institutions.

Specialist public finance education

QTC offers a range of education and training courses that complements its products and advisory services and allows it to share its specialist financial, commercial, treasury management and risk management expertise with clients. Courses are developed and delivered by QTC’s experienced professionals and industry experts.

In 2014-15, Queensland Treasury Corporation successfully funded the State’s $7 billion term debt borrowing program, provided significant whole-of-State and client benefits, and achieved an operating profit from its capital markets operations of $41.3 million.

2014-15 funding requirements achieved

With strong investor demand for primary issuance, and despite some increasing volatility within the global financial markets, QTC successfully completed its $7 billion term debt borrowing program for 2014–15 in March—and by year end had raised an additional $2 billion towards the 2015–16 funding requirement. This proactive management of QTC’s borrowing program will underwrite the success of its funding activities for the coming year.

Issuance by quarter over the year included:

• In the September quarter, the launch of QTC’s $600 million November 2018 Floating Rate Note via syndication, issue of $1 billion of July 2023 benchmark bonds via syndicated tap, and issue of $300 million of July 2024 benchmark bonds via tender.
• In the December quarter, the issue of $1.3 billion of July 2024 benchmark bonds via syndicated tap.
• In the March quarter, the issue of $1.25 billion of November 2018 Floating Rate Notes, and $1.4 billion of July 2025 benchmark bonds via syndicated tap.
• In the June quarter, the issue of $750 million of July 2023 benchmark bonds, and $1 billion of July 2024 benchmark bonds via syndicated tap.

On 14 July 2015, the Queensland Government announced its 2015–16 State Budget, which was followed by QTC’s announcement of its 2015–16 borrowing program with a requirement for $6.5 billion in term debt (around $4 billion less than previously forecast).

QTC’s AUD benchmark bonds will remain its principal source of funding to meet the State’s borrowing requirements. While funding activity is subject to client requirements and market conditions, QTC will target term debt issuance to smooth its maturity profile and potentially launch new term debt maturities. Issuance in its benchmark curve will be complemented by floating rate notes and other instruments, and a minimum of approximately $5 billion in short-term debt outstandings will be maintained.

QTC’s long-standing and highly-respected global reputation with investors and market intermediaries is essential to its ongoing ability to fund the State. In 2015–16, as in previous years, QTC’s interactions within the global debt capital markets will be exemplified by its commitment to open and transparent communication.

Credit ratings affirmed

Queensland’s and QTC’s credit ratings were reaffirmed by both Standard & Poor’s and Moody’s Investors Service during the year.

On 10 October 2014, Standard & Poor’s affirmed Queensland’s and QTC’s credit rating at AA+/A-1+ with the outlook remaining stable, citing Australia’s strong institutional framework, Queensland’s strengthening economy, positive financial management and strong liquidity position.

On 3 December 2014, Moody’s Investors Service released its credit opinion for Queensland and QTC, with no change to the current Aa1/P1 credit rating and the negative outlook.

Whole-of-State contribution prioritised

QTC has a statutory responsibility to advance the financial position of the State, which it does through the management and minimisation of financial risk in the public sector and provision of value-adding financial solutions to its public sector clients. With its whole-of-State focus, and unique position as the Government’s independent financial advisor, QTC has a strong understanding of the financial opportunities and risks facing the State’s public sector entities.

In the year under review, QTC demonstrated its agility and breadth of capabilities as it responded to the priorities and requirements of the former and current governments, as well as the broader economic landscape, and strengthened its long-term business relationships and networks across all levels of government. These strong relationships continue to enhance QTC’s ability to provide valuable insights into the trends, issues and opportunities facing the State, and advice that helps deliver the Government’s key priorities.

Significant client assignments increased

QTC has worked closely with its clients to optimise their financial outcomes.

The number and scope of client advisory assignments has continued to increase, with the completion of 130 significant assignments and another 50 underway at year’s end. Assignments ranged from financial modelling to support decision-making, through to credit assessments and advice on procurement options. Highlights for the year included the provision of strategic advice to a number of clients on major debt and refinancing issues, each of which resulted in positive outcomes for the client and the State, and the development of a suite of financial tools and frameworks that support clients’ growing needs in project decision making, and financial forecasting and assessment.

Operating results

For the 2014–15 year, QTC recorded an operating profit after tax from its capital markets operations of $41.3 million (2013–14: $119.2 million), mainly attributable to earnings on capital, plus fair value accounting gains associated with the management of QTC’s funding task and balance sheet.

QTC borrows in advance of requirements to ensure public sector entities have ready access to funding when required, to reduce the risk associated with refinancing maturing loans, and for liquidity management purposes. As a consequence of market changes, realised and unrealised accounting gains or losses may be recorded during the year which, depending on whether these transactions are held to maturity, may be reversed in subsequent accounting periods.

Separate from QTC’s capital markets operations, QTC’s long-term assets, which comprises the investments set aside to fund the State’s defined benefit superannuation and other long-term employee liabilities, recorded a profit of $151.3 million (2013–14: $3.1 billion). Managed by QIC, these assets were transferred to QTC by the Queensland Government under an administrative arrangement in 2008; in return, QTC issued fixed-rate notes to the State that provide a fixed rate of return. While QTC bears the fluctuations in the value and returns on the asset portfolio, there is no cash flow effect for QTC. Any losses incurred by this segment have no impact on QTC’s capital markets activities or its ability to meet its obligations.

Operational enhancements on track

To ensure its capacity to meet the Government’s emerging financial needs, QTC has successfully continued its program of work to implement new technologies to enhance its financial and risk management systems and processes. This program of work is on track to deliver organisational efficiencies that will streamline processes and free-up expert resources for the front-line delivery of services.

Employee engagement increased

Solid results have been achieved through QTC’s well-rounded program of work to engage employees in its high performance culture. With the implementation of key initiatives to enhance leadership, learning and development, succession planning, recognition, remuneration, diversity and health and wellbeing, the significant improvement in QTC’s employee engagement survey results was particularly pleasing. In 2014–15, employee engagement increased by nine percentage points to 71 per cent, placing QTC within Aon Hewitt’s ‘Best Employer’ range and in the top quartile of surveyed financial institutions in Australia and New Zealand.

Board and management strengthened

Over the last year, two highly experienced directors have joined the QTC Board, bringing their considerable expertise and insight to benefit the organisation and the State; Jim Stening was appointed on 13 November 2014, and Karen Smith-Pomeroy was appointed on 9 July 2015.

Executive management has also been bolstered, with Richard Jackson moving into an executive-level role responsible for market relations, and Grant Bush accepting QTC’s offer to lead its Funding and Markets Division (see below).

Looking ahead

With a clear focus on its three key goals —to deliver value to the State and its clients; to ensure access to sustainable funding; and to achieve organisational excellence—and its highly talented leaders and staff, QTC is well-positioned to provide tangible financial value to the State in 2015-16, and the years to come.

G P Bradley
Chairman

P C Noble
Chief Executive
Grant Bush
After a global selection process, Grant Bush was appointed QTC’s Executive General Manager, Funding and Markets, effective 17 August 2015.

Grant has extensive experience in the fixed income markets having spent 23 years in the investment banking industry across a range of markets and disciplines. He spent the last 16 years at Deutsche Bank, most recently as their Managing Director, Co-Head of Corporate Coverage & Head of Capital Markets and Treasury Solutions. Grant has also worked with BZW (former investment banking arm of Barclays Bank PLC), and ABN AMRO.

He joins QTC with proven senior management experience in broad organisational decision making, and funding and markets strategy.

In 2014–15, QTC completed a broad range of financial advisory assignments that assisted its clients and the State to address financial risk management issues and deliver meaningful whole-of-State outcomes that contributed to the achievement of the Government’s fiscal priorities and objectives.

By year end, QTC had completed 130 major advisory assignments, and had another 50 underway, to assist its clients and the State to maximise the financial value, mitigate the financial risk, and minimise the financial costs in their projects. As client demand for its advisory services continued, QTC delivered services to address emerging challenges and opportunities, and assignments that ranged from financial modelling for decision making, through to credit assessments, procurement advice, business case development and project evaluation.

Refinancing advice prioritised

In the year under review, QTC completed a number of major assignments to address clients’ debt and refinancing issues, providing advice and developing and implementing strategies that resulted in positive financial outcomes and the mitigation of associated risk implications. For example, QTC partnered with two of its largest energy clients —Ergon and Energex—to develop and implement a new approach and strategies to refinance their $13 billion of debt, in line with regulatory requirements of the Australian Energy Market Commission. This new approach significantly decreased the current and future refinancing and regulatory mismatch risk for these clients and the State.

New suite of financial management tools delivered

The reach and accessibility of QTC’s financial risk management and advisory expertise was enhanced, through the development of a suite of new financial management tools for clients to use that further extended the application of some of QTC’s well-established financial frameworks and models. This included financial forecasting tools, standardised credit frameworks and project decision-making frameworks for clients from all areas of government. These best-practice financial models and tools are integral to the delivery of QTC’s advisory services across the State, providing additional support to clients in their financial and commercial decision-making.

Better outcomes for Queenslanders delivered

As QTC delivers its range of financial risk management advisory services across the full spectrum of the Queensland public sector, a number of its assignments in the past year have been completed for clients that have a significant role in providing better outcomes for Queenslanders.

For example, QTC continued its partnership with the Department of Housing and Public Works on its community housing reform program, including the financial and commercial assessments for the first two major social housing outsourcing projects, the Logan Renewal Initiative and the Gold Coast Management Transfer Initiative.

This work was complemented by subsequent assignments for contract management education, and the financial assessment of providers and training programs for the national regulation body.

Infrastructure project evaluation and procurement supported

QTC maintained its commitment to the Government’s Projects Queensland office, with employees leading and participating in the evaluation and procurement of some of the State’s most important infrastructure and service delivery initiatives to achieve value-for-money outcomes, deliver projects within tight time frames, and enable an appropriate transfer of risk to the private sector.

In 2014–15, QTC continued to provide clients with a lower cost of funds—through low-interest loans combined with a high level of interest rate risk protection. With responsibility for all of the State’s debt raising, QTC continues to capture significant economies of scale and scope in the issuance, management and administration of debt. Despite ongoing market volatility, QTC’s capital markets expertise ensures clients have access to borrowing products at comparatively low interest rates.

QTC offers cash management products that enable its clients to maximise the value of their surplus funds. In 2014–15, QTC’s Capital Guaranteed Cash Fund provided strong returns and outperformed its benchmark, the Bloomberg AusBond Bank Bill Index, by 0.80 percentage points.

As part of its commitment to ensuring it has strong and professional client relationships that deliver simple and well-designed solutions and achieve quality outcomes for Queensland, QTC constantly seeks client feedback to improve its services.

In 2014–15, QTC’s post-advisory survey results remained high, achieving a satisfaction score of 8.6 out of a possible 10. Similarly, in its annual client survey, QTC’s established goodwill with clients continued, as 74 per cent of clients who were asked to provide feedback completed the survey, providing results that indicated their sentiment score towards QTC remained strong and steady at 8.4 out of a possible 10. In addition, QTC’s client value score increased from 7.3 to 7.9 out of a possible 10.

QTC has prioritised the delivery of its public sector finance education this year, increasing the range and frequency of courses to provide additional, cost-effective opportunities for clients to improve their financial, risk and decision-making skills. Facilitated by QTC’s team of highly-skilled finance education experts, these courses foster an environment of continuous improvement and provide practical skills, tools and techniques to support public sector service delivery and the Government’s achievement of its fiscal objectives.

In 2014–15, through its high-quality execution of term debt issuance, QTC affirmed its reputation as a premium issuer with investors and the Fixed Income Distribution Group, particularly given its capacity to successfully launch and close large deals at attractive pricing levels. QTC’s activities to complete the annual borrowing program and support its bonds in the market included:

• the issuance of $2.8 billion of floating rate notes at yields below its equivalent fixed-rate curve, as well as creating a smoother maturity profile—this issuance was targeted at maturity dates that avoided large refinancing periods
• the issuance of $5.5 billion of syndicated fixed rate funding on average at QTC’s fair value curve, and
• the utilisation of QTC’s balance sheet to enhance liquidity in QTC bonds (turnover in QTC bonds held on balance sheet of $2.6 billion in 2014–15).

QTC continues to provide the market with diverse, liquid lines that have been issued using the strength of its AA+ credit rating.

QTC’s proactive management of the borrowing program, its client funding and balance sheet activities helped contain QTC’s spreads, and was supported by market confidence in QTC’s ability to manage its future funding programs, evident through strong investor demand for each of its public issuances.

In 2014–15, QTC capitalised on historically low interest rates by materially lengthening the duration of the Government Debt Pool in an efficient and prompt manner, thereby providing the State with significant stability of interest cost and protection against rising interest rates for the foreseeable future.

Funding, debt management, refinancing, client transaction and rebalancing activities for the State provided estimated savings of $66 million during 2014–15.

In 2014–15, QTC’s Fixed Income Distribution Group of 14 banks, traded $154 billion of QTC’s bonds in the secondary market—demonstrating the strength of QTC’s strong, liquid benchmark bond program.

QTC’s Fixed Income Distribution Group*

• ANZ Banking Group Limited
• Bank of America Merrill Lynch
• Barclays (withdrew 30 June 2014)
• BNP Paribas
• Citi
• Commonwealth Bank of Australia
• Deutsche Bank
• JP Morgan
• National Australia Bank Limited
• Nomura International plc
• RBC Capital Markets
• UBS Investment Bank
• Westpac Banking Corporation

*From 1 July 2015, TD Securities and HSBC were no longer part of QTC’s Fixed Income Distribution Group.

Funding principles

Conservative

Prudent

Transparent

Committed

2015-16 term debt indicative borrowing program

As at 30 June 2015

QTC manages its risks within an enterprise-wide risk management framework. The framework supports the achievement of QTC’s corporate strategies and objectives by providing assurance that QTC’s risks are being appropriately and effectively identified and managed, using a consistent and well-understood approach for evaluating and reporting risks. QTC’s Chief Risk Officer is responsible for embedding QTC’s risk management policy and program.

On 1 July 2014, EY (Ernst & Young) was appointed as QTC’s internal auditor. Internal audit results for the year were very positive; out of 14 audits completed, two audits were rated 5 out of 5, ten were rated 4 out of 5, and two rated 3 out of 5.

QTC has successfully implemented a framework that identifies key internal controls; control owners provide periodic assurance that the control is effective. In the year under review, all control assurances were positive. In addition, QTC’s internal auditors assessed that each control is operating effectively.

Throughout 2014–15, QTC managed its portfolio market risk exposures, including interest rate, foreign exchange and counterparty risk, within Board-approved risk parameters. It also managed its financial markets risks in line with industry best practice and Basel Committee recommendations. QTC continues to hold a portfolio of diverse, liquid financial securities to meet the State’s liquidity requirements, consistent with its internal and external policies.

In 2014–15, initiatives to improve the efficiency and effectiveness of operations remained a major priority for the organisation, with the implementation of the organisation’s longer-term strategy to ensure sustainability in its products, processes and systems.

The first systems within this program of work were successfully implemented during the year, and included straight-through processing to fully automate market transactions and optimise efficiencies, systems for enterprise content and print management, and improved secure remote-access functionality.

Through the provision of funding for clients, QTC efficiently and accurately completed more than 78,000 transactions, with a combined turnover of $1 trillion, and an error rate of only 0.036 per cent.

QTC was established by the Queensland Treasury Corporation Act 1988 (the QTC Act) as a corporation sole (ie, a corporation that consists solely of a nominated office holder). The Under Treasurer of Queensland is QTC’s nominated office holder. QTC has delegated its powers to its two boards:

• the Queensland Treasury Corporation Capital Markets Board (the Board), which was established in 1991 and manages all of QTC’s operations except those relating to certain superannuation and other long-term assets, and
• the Long Term Asset Advisory Board, which was established in July 2008 and advises in relation to certain superannuation and other long-term assets that were transferred to QTC from Queensland Treasury on 1 July 2008.

QTC and the Capital Markets Board have agreed the terms and administrative arrangements for the exercise of the powers that have been delegated to the Board by QTC (as the corporation sole).

The Board operates in accordance with its charter, which sets out its commitment to various corporate governance principles and standards, the roles and responsibilities of the Board and its members (based on its delegated powers), and the conduct of meetings. The charter provides that the role and functions of the Board include:

• overseeing QTC’s operations, including its control and accountability systems
• developing and monitoring QTC’s strategic and corporate plans, operational policy and yearly budget
• monitoring and measuring financial and operational performance
• monitoring and measuring organisational and staff performance
• monitoring key risks and risk management processes, and
• ensuring that QTC’s compliance is appropriate for an organisation of its type.

The Board typically holds monthly meetings (except in January) and may, whenever necessary, hold additional meetings.

Board appointments

The Board comprises directors who are appointed by the Governor-in-Council, pursuant to section 10(2) of the QTC Act, with consideration given to each Board member’s qualifications, experience, skills, strategic ability and commitment to contribute to QTC’s performance and achievement of its corporate objectives. QTC’s Board is entirely constituted of non-executive directors.

Conflict of interest

Board members are required to monitor and disclose any actual or potential conflicts of interest. Unless the Board determines otherwise, a conflicted Board member may not receive any Board papers, attend any meetings or take part in any decisions relating to declared interests.

Performance and remuneration

To ensure continuous improvement and to enhance overall effectiveness, the Board conducts an annual assessment of its performance as a whole. Board members’ remuneration is determined by the Governor in Council (details are disclosed in QTC’s financial statements).

Board committees

The Board has established three committees, each with its own terms of reference, to assist it in overseeing and governing various QTC activities.

Accounts and Audit Committee

The Accounts and Audit Committee has responsibility for the:

• adequacy and effectiveness of internal controls, including for the prevention of fraud
• integrity of financial statements
• adequacy and effectiveness of compliance monitoring, and
• audit effectiveness.

The Accounts and Audit Committee must have at least three members and meet at least four times a year.

During the year the Accounts and Audit Committee recommended the adoption of the half year and annual financial statements, reviewed external and internal audit reports and the progress in implementing the recommendations from those reports, and reviewed the Queensland Audit Office’s Client Service Plan and QTC’s Internal Audit Plan.

As required by the Audit Committee Guidelines: Improving Accountability and Performance issued by Queensland Treasury, QTC’s Accounts and Audit Committee has observed its terms of reference and has had due regard to the Audit Committee Guidelines.

Human Resources Committee

The Human Resources Committee has responsibility for:

• the appropriateness of any new or amended human resources policy
• the framework for, and review of, employee remuneration and performance, and
• employment terms and conditions.

The Human Resources Committee must have at least three members and meet at least four times a year. The Human Resources Committee has observed its terms of reference.

Funding and Markets Committee

The core responsibilities of the Funding and Markets Committee is to assist the Board by making recommendations about the policy to enhance the performance and management of risk in the areas of funding accessibility (including liquidity), and pool performance and to support QTC’s risk appetite with a focus on effectiveness and performance.

The Committee must have at least three members and meet at least four times a year. The Funding and Markets Committee has observed its terms of reference.

In accordance with the provisions of the Auditor-General Act 2009, the Queensland Audit Office is the external auditor for QTC. The Queensland Audit Office has the responsibility for providing Queensland’s Parliament with assurances as to the adequacy of QTC’s discharge of its financial and administrative obligations.

QTC has an independent internal audit function that was outsourced to Ernst and Young (EY) for the 2014–15 financial year. Internal audit reports to the Accounts and Audit Committee. Internal audit is conducted under an Internal Audit Charter that is consistent with the relevant audit and ethical standards. The role of internal audit is to support QTC’s corporate governance framework by providing the Board (through the Accounts and Audit Committee) with:

• assurance that QTC has effective, efficient and economical internal controls in place to support the achievement of its objectives, including the management of risk, and
• advice with respect to QTC’s internal controls and business processes.

Internal audit is responsible for:

• developing an annual audit plan, based on the assessment of financial and business risks (based on QTC’s approved significant risks and internal workshops) aligned with QTC’s strategic goals and objectives, and approved by the Accounts and Audit Committee
• providing regular audit reports and periodic program management reports to the management team and the Accounts and Audit Committee, and
• working constructively with QTC’s management team to challenge and improve established and proposed practices and to put forward ideas for process improvement.

In the year under review, EY completed its internal audits in accordance with the approved annual audit plan.

QTC has had due regard to Treasury’s Audit Committee guidelines, in establishing and supervising its outsourced internal audit function and, together with the Accounts and Audit Committee, in overseeing and monitoring the internal audit function.