CENTRAL FINANCING UNIT
Objectives
The Central Financing Unit (CFU) manages the central finances of the Territory through the Territory Banking Account.  The CFU provides services to the Government including financial asset and liability management through the establishment of investment and borrowing policies and objectives, and the coordination and implementation of investment and borrowing activities.
The CFU manages the surplus cash balances of the Government and invests funds through external investment managers within known cash flow requirements and established investment policies.  The CFU is also responsible for the administration of the Government’s debt portfolio and the management of the Territory’s debt servicing liabilities.
The objective of the CFU is to effectively manage the capital markets functions through the maximisation of returns on investments within relevant risk tolerances, the achievement of competitive borrowing rates commensurate with the Territory’s credit rating and the development of effective financial risk management strategies.
The CFU, through the Territory Banking Account, recognises and manages the general government’s debt liability.  Revenues on behalf of the Territory are transferred to the Territory Banking Account and fortnightly appropriation disbursements are made to agencies from the Territory Banking Account.
2006‑07 Priorities
Strategic and operational issues to be pursued in 2006‑07 include:
•	managing the Government’s debt portfolio and associated risks; and
•	managing the general government sector’s investment portfolio and devising effective investment policies with the aim of maximising returns on the portfolio.
Business and Corporate Strategies
Assets are managed in accordance with guidelines set out in the Financial Management (Investment and Borrowing) Guidelines 2005.  These guidelines set investment and credit risk parameters for general government investments.  The investment performance of the institutional funds managers contracted to manage investments is also monitored and reviewed.  Monitoring of investment performance is done in conjunction with the Territory’s investment adviser and the Finance and Investment Advisory Board.
Debt is managed in accordance with a debt management policy that balances interest rate risk and budget volatility.  This involves ensuring that debt is managed within tolerances set out in the current policy.

Output Class
	Total Cost	Expenses on Behalf of the Territory	
	2005-06
Est. Outcome
$’000	2006-07
Budget
$’000	2005-06
Est. Outcome
$’000	2006-07
Budget
$’000	
EBT 1:
Central Financing Unit	2,496,119	2,776,307	12,486	11,943	
EBT 1: Central Financing Unit	2,496,119	2,776,307	12,486	11,943	
Description
This output includes the management of the investment and borrowing activities by the CFU.
The key outputs to be delivered in 2006‑07 include:
•	investment management – maximising the return on investments within acceptable risk tolerances;
•	borrowing management – achieving competitive borrowing rates commensurate with the ACT Government’s credit rating; and
•	risk management – developing and maintaining effective financial risk management strategies.

Strategic Indicators
Strategic Indicator 1

Investment returns meeting or exceeding benchmark
The CFU’s investment performance is measured against a standard market benchmark.  The conservative policy for general government investments is such that returns equal to or marginally in excess of the benchmark are expected.
Strategic Indicator 2
Borrowing portfolio in line with benchmark
General government borrowings are managed to minimise excess interest rate and market risk.  The strategy for managing the general government debt portfolio is to strike an appropriate balance between the risks associated with debt that has a floating (variable) interest rate and is therefore exposed to volatility in market interest rates and the costs associated with a fixed (and therefore more certain) rate of interest.
The two strategic indicators for the management of the debt portfolio are:
•	a maximum of 30 per cent of the general government debt portfolio be exposed to floating (variable) interest rates; and
•	the general government debt portfolio to have an average debt maturation timeframe (modified duration) of three years with a range tolerance of ±0.5 years.
Accountability Indicators     
	2005‑06
Targets	2005-06
Est. Outcome	2006-07
Targets	
1.1: Central Financing Unit	
a.	Ratio of investment earnings rate divided by the established benchmark	≥ 1	1.05	≥ 1	
b.	Exposure of debt portfolio to floating interest rates¹	n/a	17.9%	< 30%	
c.	Modified duration of debt portfolio¹	n/a	2.9 years	between 2.5 and 3.5 years	
Note:
1.	New measure.  The 2005‑06 estimated outcome is provided for comparative purposes only.

Changes to Appropriation

Changes to Appropriation - Territorial						
 	2005-06	2006-07	2007-08	2008-09	2009-10	
Payment for Expenses on Behalf of Territory	Est. Outc.	Budget	Estimate	Estimate	Estimate	
						
 	$'000	$'000	$'000	$'000	$'000	
						
2005-06 Budget	12,939	11,714	11,688	11,662	11,662	
						
2006-07 Budget Technical Adjustments						
Interest Rate Adjustment	-453	229	228	226	200	
						
2006-07 Budget	12,486	11,943	11,916	11,888	11,862	

Changes to Appropriation - Territorial						
 	2005-06	2006-07	2007-2008	2008-2009	2008-2009	
Capital Injections	Est. Outc.	Budget	Estimate	Estimate	Estimate	
						
 	$'000	$'000	$'000	$'000	$'000	
						
2005-06 Budget	214	214	214	214	214	
						
	 - 	 - 	 - 	 - 	 - 	
						
2006-07 Budget	214	214	214	214	214	

Central Financing Unit	
Statement of Income and Expenses on Behalf of the Territory	
  2005-06			  2005-06	   2006-07		  2007-08	  2008-09	  2009-10		
    Budget			Est.Outcome	   Budget	   Var	  Estimate	   Estimate	  Estimate		
    $'000			   $'000	   $'000	    %	   $'000	    $'000	   $'000		
		Income								
		Revenue								
12,939		Payment for Expenses on behalf of Territory	12,486	11,943	-4	11,916	11,888	11,862		
64,139		Interest	70,440	61,334	-13	53,847	58,362	68,942		
105,550		Other Revenue	101,034	167,789	66	159,624	152,044	142,677		
2,226,075		Transfer Revenue	2,250,141	2,347,478	4	2,464,362	2,609,095	2,737,789		
2,408,703		Total Revenue	2,434,101	2,588,544	6	2,689,749	2,831,389	2,961,270		
		Gains								
0		Total Gains	0	0	-	0	0	0		
2,408,703		Total Income	2,434,101	2,588,544	6	2,689,749	2,831,389	2,961,270		
		Expenses								
58,749		Borrowing Costs	60,787	56,130	-8	57,374	59,601	61,229		
4,209		Other Expenses	6,322	323	-95	224	261	391		
2,599,972		Transfer Expenses	2,429,010	2,719,854	12	2,675,797	2,641,131	2,707,028		
2,662,930		Total Ordinary Expenses	2,496,119	2,776,307	11	2,733,395	2,700,993	2,768,648		
-254,227		Operating Result	-62,018	-187,763	-203	-43,646	130,396	192,622		

Central Financing Unit	
Statement of Assets and Liabilities on Behalf of the Territory	
    Budget			Est.Outcome	   Planned		   Planned	   Planned	   Planned		
as at 30/6/06			as at 30/6/06	as at 30/6/07	   Var	as at 30/6/08	as at 30/6/09	as at 30/6/10		
   $'000			   $'000	    $'000	    %	    $'000	    $'000	    $'000		
		Current Assets								
6,079		Cash	4,316	3,143	-27	3,655	7,314	7,471		
109,305		Receivables	129,344	153,558	19	174,509	195,467	215,874		
298,749		Investments	493,212	284,669	-42	246,052	384,719	582,468		
12,875		Other	11,348	11,348	-	11,348	11,348	11,348		
427,008		Total Current Assets	638,220	452,718	-29	435,564	598,848	817,161		
		Non Current Assets								
354,334		Receivables	381,512	387,826	2	414,836	447,655	463,491		
236,355		Investments	230,934	179,616	-22	157,057	156,537	155,360		
28,244		Property, Plant and Equipment	25,781	11,461	-56	553	277	0		
618,933		Total Non Current Assets	638,227	578,903	-9	572,446	604,469	618,851		
1,045,941		TOTAL ASSETS	1,276,447	1,031,621	-19	1,008,010	1,203,317	1,436,012		
		Current Liabilities								
23,495		Payables	15,181	10,153	-33	10,581	11,016	11,458		
214,842		Interest Bearing Liabilities	255,731	182,092	-29	208,315	238,950	262,661		
11,517		Finance Leases	12,118	11,462	-5	554	278	1		
249,854		Total Current Liabilities	283,030	203,707	-28	219,450	250,244	274,120		
		Non Current Liabilities								
730,130		Interest Bearing Liabilities	749,595	749,243	..	751,422	783,669	798,299		
16,727		Finance Leases	13,664	0	-100	0	0	0		
746,857		Total Non Current Liabilities	763,259	749,243	-2	751,422	783,669	798,299		
996,711		TOTAL LIABILITIES	1,046,289	952,950	-9	970,872	1,033,913	1,072,419		
49,230		NET ASSETS	230,158	78,671	-66	37,138	169,404	363,593		
		REPRESENTED BY FUNDS EMPLOYED								
49,230		Accumulated Funds	230,158	78,671	-66	37,138	169,404	363,593		
49,230		TOTAL FUNDS EMPLOYED	230,158	78,671	-66	37,138	169,404	363,593		

Central Financing Unit	
Budgeted Statement of Cashflows on Behalf of the Territory	
  2005-06			  2005-06	   2006-07		  2007-08	  2008-09	  2009-10		
    Budget			Est.Outcome	   Budget	   Var	  Estimate	   Estimate	  Estimate		
    $'000			   $'000	   $'000	    %	   $'000	    $'000	   $'000		
		CASH FLOWS FROM OPERATING ACTIVITIES								
		Receipts								
12,939		Cash from Government for EBT	12,486	11,943	-4	11,916	11,888	11,862		
63,773		Interest Received	71,981	61,011	-15	53,622	58,101	68,552		
104,963		Other Revenue	100,688	172,808	72	164,038	158,745	142,107		
2,248,244		Territory Receipts transferred from Agencies	2,228,932	2,331,103	5	2,462,104	2,599,115	2,733,848		
2,429,919		Operating Receipts	2,414,087	2,576,865	7	2,691,680	2,827,849	2,956,369		
		Payments								
58,706		Borrowing Costs	61,564	56,109	-9	57,369	59,598	61,228		
34		Other	43	29	-33	20	25	36		
30,228		Payments to PTE Agencies for Outputs	29,951	31,828	6	32,265	32,706	33,201		
1,702,652		Payments to GGS Agencies for Outputs	1,694,390	1,808,714	7	1,798,857	1,844,413	1,901,441		
405,344		Payments to Agencies for EBT	372,465	404,308	9	468,980	507,812	541,730		
2,196,964		Operating Payments	2,158,413	2,300,988	7	2,357,491	2,444,554	2,537,636		
232,955		NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES	255,674	275,877	8	334,189	383,295	418,733		
		CASH FLOWS FROM INVESTING ACTIVITIES								
		Receipts								
0		Proceeds from Sale/Maturities of Investments	0	51,318	#	22,559	520	1,177		
10,599		Repayment of Advance	9,817	12,728	30	18,009	28,588	32,782		
5,000		Capital Distributions from Government Agencies	7,000	36,339	419	2,225	1,655	1,205		
15,599		Investing Receipts	16,817	100,385	497	42,793	30,763	35,164		
		Payments								
19,131		Purchase of Investments	11,408	0	-100	0	0	0		
0		Advances Issued to Government Agencies	25,000	25,600	2	55,600	65,600	50,600		
466,568		Capital Payments to Government Agencies	331,146	486,600	47	388,102	269,229	243,945		
485,699		Investing Payments	367,554	512,200	39	443,702	334,829	294,545		
-470,100		NET CASH INFLOW/(OUTFLOW) FROM INVESTING ACTIVITIES	-350,737	-411,815	-17	-400,909	-304,066	-259,381		
		CASH FLOWS FROM FINANCING ACTIVITIES								
		Receipts								
214		Capital Injection from Government	214	214	-	214	214	214		
0		Borrowings Received	45,690	0	-100	33,621	63,438	38,895		
214		Financing Receipts	45,904	214	-100	33,835	63,652	39,109		
		Payments								
10,641		Repayment of Borrowings	554	1,525	175	554	554	554		
36,297		Repayment of Investments to Agencies (CFU only)	54,327	72,465	33	4,669	0	0		
46,938		Financing Payments	54,881	73,990	35	5,223	554	554		
-46,724		NET CASH INFLOW/(OUTFLOW) FROM FINANCING ACTIVITIES	-8,977	-73,776	-722	28,612	63,098	38,555		
-283,869		NET INCREASE/(DECREASE) IN CASH HELD	-104,040	-209,714	-102	-38,108	142,327	197,907		
588,687		CASH AT BEGINNING OF REPORTING PERIOD	601,569	497,529	-17	287,815	249,707	392,034		
304,818		CASH AT THE END OF THE REPORTING PERIOD	497,529	287,815	-42	249,707	392,034	589,941		

Central Financing Unit	
Statement of Changes in Equity on Behalf of the Territory	
    Budget			Est.Outcome	   Planned		   Planned	   Planned	   Planned		
as at 30/6/06			as at 30/6/06	as at 30/6/07	   Var	as at 30/6/08	as at 30/6/09	as at 30/6/10		
   $'000			   $'000	    $'000	    %	    $'000	    $'000	    $'000		
298,243		Opening Balance	284,962	230,158	-19	78,671	37,138	169,404		
		Accumulated Funds								
-254,227		Operating Result for the Period	-62,018	-187,763	-203	-43,646	130,396	192,622		
		Reserves								
-254,227		Total Income And Expense For The Period	-62,018	-187,763	-203	-43,646	130,396	192,622		
		Transactions Involving Equity Holders Affecting Accumulated Funds								
214		Capital Injections	214	214	-	214	214	214		
5,000		Capital (Distributions)	7,000	36,062	415	1,899	1,656	1,353		
49,230		Closing Balance	230,158	78,671	-66	37,138	169,404	363,593		
Notes to the Budget Statements
Many of the variations within the CFU budget statements are driven by agency activity during and between financial years.  This will be disclosed within the relevant explanations below.
Significant variations are as follows:
Statement of Income and Expenses on Behalf of the Territory
•	payment for expenses on behalf of the Territory:  represents the appropriation paid to meet the debt servicing expenses incurred on general government borrowings.
–	the actual debt servicing interest costs are directly influenced by prevailing market interest rates.
–	variances reflect the difference between budgeted interest rates and actual interest rates.
•	interest:  represents investment interest returns received from banks and fund managers and interest paid by agencies for loans provided from the Territory Banking Bank (TBA).
–	the increase of $6.301 million in the 2005‑06 estimated outcome from the original budget is due mainly to higher balances of funds under investment; and
–	the decrease of $9.106 million in the 2006‑07 Budget from the 2005‑06 estimated outcome comprises a reduction in investment earnings due to a lower level of funds to be held on investment during the year ($10.482 million), offset by an increase in loan interest ($1.376 million).
•	other revenue:  represents notional CSS and PSS employer superannuation contributions from agencies.  Variances are driven by agency activities.  The increase of $66.755 million in the 2006‑07 Budget from 2005‑06 estimated outcome reflects a change of accounting policy whereby all contributions will be made to the Territory Banking Account as opposed to the current arrangement where contributions payable from non-budget funded agencies are paid to the Superannuation Provision Account.
•	transfer revenue:  represents the transfer from agencies of revenue received on behalf of the Territory and includes taxes, fees, fines and grants.  Variances are driven by agency activity.
•	borrowing costs:  represents interest payments made in respect of borrowings for the general government sector and ACTEW Corporation and investment interest payments to agencies.
–	the increase of $2.038 million in the 2005‑06 estimated outcome from the original budget mainly reflects higher payments of investment interest to agencies than originally anticipated due to higher balances of funds under investment; and
–	the decrease of $4.657 million in the 2006‑07 Budget from the 2005‑06 estimated outcome reflects lower anticipated payments of investment interest to agencies as a result of the introduction of cash management reforms whereby most cash will be maintained centrally.
•	other expenses:  includes investment related management fees for general government investments.
–	the increase of $2.133 million in the 2005-06 estimated outcome from the original budget is largely due to an unrealised loss in respect of the general government fixed interest investment portfolio ($2.016 million), which was not anticipated in the original budget.  The 2005-06 estimated outcome also includes the write-off of receivables associated with an internal loan ($3.842 million); and
–	the decrease of $5.999 million in the 2006-07 Budget from the 2005-06 estimate outcome is due to the absence of the above-mentioned one-off expenses for 2005-06. 
•	transfer expenses:  represents the transfer of appropriated funds to agencies for outputs, expenditure on behalf of the Territory and capital injections.  Variances are driven by agency activity.
Statement of Assets and Liabilities on Behalf of the Territory
•	current receivables:  
–	the increase of $20.039 million in the 2005‑06 estimated outcome from the original budget is mainly due to higher transfer revenue accrued; and.
–	the increase of $24.214 million in 2006‑07 Budget from the 2005‑06 estimated outcome is mainly due to loans provided to Rhodium Asset Solutions (Rhodium) to finance the ACT Government passenger and light commercial vehicle fleet from 1 July 2006.
•	non current receivables: 
–	the increase of $27.178 million in the 2005‑06 estimated outcome from the original budget is mainly due to an increase in loans provided to ACTEW; and
–	the increase of $6.314 million in the 2006-07 Budget from the 2005‑06 estimated outcome is due largely to new loans provided to Rhodium.
•	current and non current investments:  represents the total of all agency and the Territory Banking Account funds held on investment.  Variances are driven by agency activity.
•	property, plant and equipment:  represents the Territory’s motor vehicle assets leased through the ACT Fleet Financing Facility with Macquarie Bank.  From 1 July 2006 new ACT Fleet vehicles will be funded from loans provided to Rhodium, with the vehicles financed under the current facility reducing as leases expire and vehicles are sold.  This is reflected by the decrease in the estimated balance across the budget and forward years.
•	interest bearing liabilities (current and non current):  comprises agencies investment deposits with the CFU and external market borrowings.  External borrowings include commercial paper and indexed annuity bonds.  The 2005‑06 estimated outcome comprises $584.576 million external borrowings and $420.751 million agency investments.  The 2006‑07 Budget comprises $583.050 million external borrowings and $348.285 million agency investments.
•	finance leases:  represents the Territory’s motor vehicle financing facility with Macquarie Bank.  From 1 July 2006 new ACT Fleet vehicles will be funded from loans provided to Rhodium, with the vehicles financed under the current facility reducing as leases expire and vehicles are sold.  This is reflected by the decrease in the estimated balance across the budget and forward years.