Organisational Issues in Sovereign Debt Management

1. Organisational Issues in Sovereign Debt Management Peter McCrayDeputy Chief ExecutiveAustralian Office of Financial Management

2. Organisational Issues in Sovereign Debt Management • Australian Office of Financial Management established in 1999 as a specialist agency within the Treasury portfolio • charged with the full range of tasks associated with managing the Australian government’s net debt position • taken over the function from the former operation housed within the Department of the Treasury

3. Organisational Issues in Sovereign Debt Management • main driver of organisational reform • the need to bring institutional settings for Australian debt management into line with the requirements of a philosophical shift in recent years to a comprehensive risk-based approach to financial management • risk-based approach carries implications for resourcing, definition and clarity of objectives, rigour of accountability and control frameworks and clear differentiation of the respective roles of different policy agencies

4. Organisational Issues in Sovereign Debt Management • reform underpinned by a major review of existing debt management arrangements in 1996 and 1997 • review defined a four-tiered management framework as a basis for taking decisions on organisational reform • philosophical approach • operating framework • measurement and reporting framework • organisational and resource structure

5. Organisational Issues in Sovereign Debt Management • Philosophical approach • objectives of debt management • relevant cost and risk concepts • broad strategic principles governing the way in which the debt manager pursues those objectives • Operating framework • the policies and practices employed in implementing the management philosophy • degree of operational/funding flexibility, transactional capability, use of derivatives • framework of internal delegations and accountabilities, external governance

6. Organisational Issues in Sovereign Debt Management • Measurement framework • governs not only how risk is measured and monitored • but also how the debt manager’s performance is measured against those objectives • Organisational structure • establishes the resource, management and skills base appropriate to implementing the overall debt management strategy

7. Organisational Issues in Sovereign Debt Management • A philosophy that recognises and seeks to manage financial risk comprehensively requires that: • objectives and strategies are clearly defined • lines of delegation are short, clear and appropriate to an environment in which decisions need to be made and implemented quickly • accountabilities and responsibilities are clear • systems and resources are consistent with the high transactional burden implied • the organisational structure provides maximum flexibility to recruit and retain staff with the full range of requisite skills

8. Organisational Issues in Sovereign Debt Management • the review ultimately concluded that the existing debt management function within the Treasury was sound: • clear legislative backing for debt operations, well-established objectives and operational accountabilities, a control environment underpinned by a separate front, middle and back office framework • but the shift to a more comprehensive risk management philosophy had given rise to a number of inconsistencies, including: • limitations in operational flexibility and transactional capability • resourcing and governance arrangements inadequate in the face of emerging operational requirements

9. Organisational Issues in Sovereign Debt Management • the review established five design criteria for an institutional reform that would address these and related inconsistencies: • adequate resources (human and financial) and a sound basis for their allocation • a strong focus on financial markets and risk management • a strong perception of separation between debt management and economic policy advisory functions • mechanisms to ensure an institutional awareness of public policy sensitivities • a sound structure of governance and appropriate flexibility and accountability in decision making

10. Organisational Issues in Sovereign Debt Management • AOFM was established in 1999 as an independent agency within the Treasury portfolio, with scope for significantly enhanced resourcing and a brief to bring a specialist focus to the management of Australia’s net debt portfolio.

11. Organisational Issues in Sovereign Debt Management • important practical linkages with the parent department remain: • a reporting line to the Treasurer via the Secretary to the Treasury, the Head of the Department • an Advisory Board with both Treasury and private sector representation • a closer relationship with Treasury than some other sovereign debt operations • deliberate feature of the institutional reform

12. Organisational Issues in Sovereign Debt Management • AOFM now more clearly separated from institutions providing fiscal and monetary policy advice • provided with additional resourcing and increased day-to-day independence • own appropriations, financial accounts and annual report • capacity to recruit and retain requisite skills

13. Organisational Issues in Sovereign Debt Management • but continuing role for Treasury senior executive • strengthens the governance framework by bringing a range of public policy and technical financial management skills to the Board • provides additional surety regarding maintenance of institutional awareness of public policy issues, policy interdependencies and the govt’s risk preferences

14. Organisational Issues in Sovereign Debt Management • AOFM has no role to date in the management of state-owned enterprise debt, or of public sector contingent liabilities • current mandate is limited to net debt portfolio management • increasing focus on management of additional financial exposures on the gov’t balance sheet will likely see these considerations emerge as issues in the future