Some of the recent engagements the Advisory Services team has been involved in includes:
- Analysis of the Proposed Noongar Boodja Trust Fund for the Department of the Premier and Cabinet
- Broome Port Authority, Valuation and Business Modelling
- Department of Housing asset transfer program
- Development of the WA Future Fund Management Framework
- Investment Services for Lotterywest
- Rates of Return for Western Australian Port Authorities
- Review of the Water Corporation’s debt management strategy
- Revolving Fund for the State Heritage Office
- Value Capture Analysis
Analysis of the Proposed Noongar Boodja Trust Fund for the Department of the Premier and Cabinet
At the request of the Department of the Premier and Cabinet (DPC), WATC assisted DPC by providing detailed performance simulations and financial analysis of the proposed Noongar Boodja Trust Fund (the “Trust Fund”). The proposed Trust Fund was intended to form part of an offer by the Government to finally settle all native title claims across Perth and the South West of Western Australia. The WATC financial analysis provided key insights into how the Trust Fund is expected to perform under a range of different State contribution structures, portfolio asset allocations and fund distribution policies.
The analysis required WATC to construct a detailed financial model to undertake the portfolio performance and scenario comparison. WATC sampled 18 years of historical asset return data in five-year blocks to construct the asset return paths over 10,000 iterations for different portfolios. These iterations were then used in combination with the specified contribution period scenarios and other DPC specified assumptions to derive simulated distributions of portfolio performance. Key metrics specifically measured included the simulated future value of the Trust Fund, as measured at the end of the contribution period and as measured at the end of the analysis period, and the simulated annual distributions which could be made while preserving the Trust Fund. WATC provided a final report to DPC summarising the key findings, and also presented key findings to representatives of DPC and the South West Aboriginal Land and Sea Council.
Subsequent to this analysis, the Government of Western Australia released a media statement in which the Premier announced an historic offer to settle native title claims across Perth and the South West of Western Australia.
Broome Port Authority, Valuation and Business Modelling
Broome Port Authority engaged WATC to develop a financial model to enable cashflow projections and valuations for some of its key business assets. In developing the financial model, WATC provided flexibility and functionality for the Broome Port Authority to financially model various business and strategic options.
As part of this engagement, WATC was also required to assist the Broome Port Authority to develop an appropriate discount rate. The discount rate considered comparable businesses’ asset betas, capital structures and other building blocks relevant to determining a weighted average cost of capital.
Throughout the engagement, WATC maintained involvement in broader strategic discussions, providing insight and assistance as and when required. This included being involved in conference calls and discussions with various project members in the Broome Port Authority.
Department of Housing asset transfer program
The Department of Housing invited Community Housing Organisations (CHOs) to tender for the ownership rights to housing assets developed under the Commonwealth Government Nation Building – Economic Stimulus Plan. The basis of the tender was for CHOs to propose the subsequent growth in social housing they could provide through leveraging off the value of the transferred properties and future expected operational surpluses derived from their management efficiencies. WATC:
- provided a comparator financial model to aid the department in assessing the growth potential of proposals
- provided risk identification for the program
- assisted in preparing tender documentation and evaluating proposals, in particular, interrogating the veracity of the financial models submitted and comparing growth expectations proposed by CHOs with the comparator model.
The outcome was the development of a comprehensive methodology for ranking the financial viability of proposals and identified key risks with proposals, providing guidance for the department’s subsequent negotiation with CHOs.
Development of the WA Future Fund Management Framework
WATC worked closely with the Department of Treasury to develop a framework for the management of the WA Future Fund.
The fund is being established with capital contributions in excess of $1 billion made in four tranches from 2012 until 2015/16. The fund will then receive 1% of the State’s mining royalties in subsequent years, growing to an estimated balance of $4.7 billion by 2032. From 2032 the fund’s capital will be retained in perpetuity with earnings available to fund infrastructure works, providing an intergenerational wealth transfer for future Western Australians.
WATC clarified and codified Treasury’s objectives for the fund, developing clear, unambiguous statements of investment principles, target return and risk appetite. WATC modelled and developed a portfolio structure from available asset classes, optimised to achieve the fund’s return objective and meet the identified risk constraints. WATC then developed operational limits around this strategic asset allocation to facilitate the fund manager taking active management decisions to further enhance performance. Finally, WATC developed performance measurement and reporting measures and associated governance mechanisms to ensure ongoing oversight and prudent management for the fund over its life.
Investment Services for Lotterywest
WATC is providing investment management services to Lotterywest.
Lotterywest was originally established in 1932 to offer state-authorised lottery products and raise money for hospitals and charity organisations. Lotterywest now sells Lotto games and instant lottery tickets through a statewide network of over 500 small businesses. Thousands of community, local government, charitable, sporting, arts and cultural organisations are supported each year from the funds generated by Lotterywest
WATC is providing a comprehensive investment management service to Lotterywest including transaction execution, settlement, performance and financial reporting. WATC worked collaboratively with Lotterywest to review and update its investment management policy, investment strategy and operational implementation. WATC’s Advisory Services team provided quantitative analysis support to optimise the composition of the Lotterywest Investment Portfolio and expected portfolio return and risk characteristics. The changes to investment management processes has provided enhanced governance, risk, investment decision-making and operational controls for Lotterywest.
Rates of Return for Western Australian Port Authorities
The Department of Transport is continually seeking to implement greater commercial rigour within Western Australian port authorities. WATC was engaged by the Department to develop a framework for calculating a commercial target return on assets for each port. Specifically, WATC had to calculate a risk-adjusted Weighted Average Cost of Capital (WACC) for each port.
WATC conducted interviews with representatives from each port to better understand their individual businesses and specific port issues. During this process, WATC developed a novel framework for differentiating the risks of each port, with the final model parameters locked down by the Department of Transport. This framework allows the Department to calculate a commercial WACC for each port, combining risk-adjusted required returns on equity and debt with an optimal capital structure.
Throughout the project there was ongoing consultation with port stakeholders and the Department of Transport. WATC made numerous presentations to key stakeholders, and delivered a written report and spreadsheet model to the Department. WATC continues to work with the Department as it further develops its policy.
Review of the Water Corporation’s debt management strategy
WATC worked closely with Water Corporation staff to carry out a major review of the Water Corporation debt management strategy. This was a significant exercise as it involved linking a purpose-built Water Corporation corporate financial model to WATC’s interest rate and inflation models. Rather than analyse the interest cost of differing debt structures in isolation, the objective was to model the joint impact of interest rates and inflation on the major drivers of both the expenses and revenues of Water Corporation and to gain a better understanding of how these factors ultimately affect the overall level and volatility of earnings.
Revolving Fund for the State Heritage Office
The State Heritage Office (SHO) sought advice from WATC regarding the establishment of a Revolving Fund (the “Fund”). The Fund was intended to be a vehicle for generating value from surplus or underutilised State-owned heritage buildings. The Fund aimed to be financially self-sustaining over a period of 4-5 years. SHO requested WATC to assist and advise on the establishment of the Fund. In order to successfully complete this engagement WATC was required to review forecast cash flows; review valuation data for Government-owned buildings on the State Register to determine the value-profile of properties that the Fund may potentially purchase; review the feasibility of running joint projects with other government agencies where the agency retains ownership of the property during the works phase and capital investment, risk and returns are shared; and build a cash flow model to determine if the appropriation of funds would be sufficient for the Fund’s operations, or if borrowing/working capital facilities would be required.
WATC developed a number of business models for SHO to manage restoration projects for heritage buildings. These business models included joint projects with other government agencies, outright property purchases and options to purchase properties. A benefits and risks analysis of the models was provided to SHO. WATC also provided a cash flow model for SHO to determine if the forecast appropriation of funds and the cash flows generated from projects would be sufficient to sustain the Fund’s operations. The model included a scenario manager that allowed the cash flows for various combinations of business models and projects to be forecast.
Value Capture Analysis
WATC worked with the Department of Transport to model the economic benefits of the planned Metro Area Express (MAX) Light Rail network.
The proposed MAX route was planned to run between Mirrabooka in the north and through the CBD before splitting into two branches – to Queen Elizabeth II (QEII) Medical Centre in the west and to Victoria Park Transfer Station, via the Causeway, in the east. The main route for Perth’s new light rail – Alexander Drive – is a north-south route which links major education, retail and leisure centres. It is one of Perth’s busiest public transport corridors but currently has no mass-capacity transport.
WATC developed a model to quantify the financial benefits expected to accrue to the community, business and government from the MAX development. In addition, the model facilitates estimation of the value which could be derived from mechanisms such as advertising and parking charges.