Organisational Issues in Sovereign Debt Management

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Organisational Issues in Sovereign Debt Management. Peter McCray Deputy Chief Executive Australian Office of Financial Management. Organisational Issues in Sovereign Debt Management.
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Organisational Issues in Sovereign Debt ManagementPeter McCrayDeputy Chief ExecutiveAustralian Office of Financial ManagementOrganisational 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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.
  • 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
  • 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
  • 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
  • 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
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