06 Jun 2019

Brisbane City Council investment arm a 'substantial risk' to ratepayer money, report says

The Brisbane City Council's investment arm is facing calls to be shut down, with Right to Information documents revealing "fundamental and systemic issues" with the fund and a "substantial risk" to ratepayer money.

City of Brisbane Investment Corporation (CBIC) was set up a decade ago by former Brisbane City Council (BCC) lord mayor Campbell Newman, with council injecting $130 million into the organisation.

It now manages around $260 million and aims to pay a $20-million yearly dividend back to BCC — its only shareholder.

The ABC has obtained an internal review of CBIC's operations in 2017, after appealing against the council's decision to keep the review secret from the Office of the Information Commissioner.

The document, by financial services firm PwC, warns the fund's board has limited property expertise and there is a risk ratepayer money might be lost.

"There appears to be a misalignment between the types of projects that the business plan is targeting and the running income profile these properties deliver in the context of the objective to deliver a dividend, the skillset within the team, and the resources available," the report states.

"We have identified significant gaps in the level of analyses provided in investment proposals and recommendations being submitted to the board by CBIC.

"Our concern is twofold — firstly that this points to a failure by management to consider all of [the] relevant issues when it evaluates new investment propositions (which, in turn, increases the risk of poor decisions being made by the board), and secondly the omission of material facts undermines the board's confidence in CBIC's executive team.

"This significantly increases the execution risk, and in turn, the potential for the shareholder to be exposed to financial losses and/or serious reputational damage.

"The financial modelling performed to analyse investment opportunities is lacking and presents a substantial risk to the business."

As of only three years ago, more than half of the funds under management by CBIC were in real estate, with more than 80 per cent of their property portfolio income in the form of rent paid by BCC.

Council Opposition have called for the fund to be shut down, with lord mayoral candidate Rod Harding critical of the board.

"Within the Brisbane business community, it's well known that if you get a spot on the board of this fund, then it's because you're a mate of the LNP," he said.

"I've always felt that this is a function that the council should do itself. They don't need a board. They don't need a special CEO. It's something that they used to do themselves and they still should do."

A CBIC spokesman said following the report, the fund had repositioned its portfolio.

"Subsequent to the report, CBIC has progressively implemented the recommendations provided by PwC," the spokesman said.

"Implementation of the recommendations, as well other improvements over the past 18 months, have now positioned CBIC to continue on its current trajectory of delivering quality council properties, above benchmark investment performance and best practice governance."

He also said their investment strategies and tactics would continue to change and evolve.

"A clear majority of the current board has no formal relationship with council and a new company secretary was recently appointed, external to the executive team and BCC City Legal," the spokesman said.

"CBIC is currently focused on minimising it investment risk by diversifying into different sectors and geographic regions."

Board remuneration 'excessive'

Council Opposition also criticised BCC for paying the board an "excessive" amount.

While the 2017 report found the almost $40,000 yearly board salary was in line with other large funds such as Queensland Investment Corporation and the Future Fund, CBIC's board were paid $1,415 per million dollars controlled, compared to a peer average of $21 — about 70 times more per million dollars under management.

It also found that compared to peer funds, CBIC board members with industry specific experience outside the government sector was far lower, at 11 per cent compared to 85 per cent.

There was also only one female board member compared to the eight male members, and the number of board members exceeds the number of staff employed by CBIC.

"Property is a specialist and complex investment class, and there should be somebody at board level who can evaluate transactions forensically, and ask relevant questions to ensure that appropriate checks and balances are in place," the report said.

The make up of the board has changed since 2017.

CBIC said board members had "varying degrees of real property experience" and "specific directors have experience across property funds management, law and financial control".

"We are also mindful of our responsibility to the shareholder and ultimately to the people of Brisbane and, as a result, have always taken a conservative approach to staff recruitment," a CBIC spokesman said.

'No plans to close CBIC'

Deputy Mayor Krista Adams told the ABC that last year CBIC delivered "another $20 million of dividends to ratepayers".

Councillor Adams said this was the equivalent of a 2 per cent rate increase and that the money had been reinvested into frontline council services.

"This record has been achieved by the current independent board of directors who have a range of experience and have, for more than a decade, delivered strong investment returns for the city and its residents," she said.

"If it were up to Labor, we would have no future fund and that has zero benefit for Brisbane residents and future generations.

"Council has no plans to close CBIC."

SOURCE ; https://www.abc.net.au/news/2019-05-29/brisbane-city-council-investment-arm-a-risk-to-ratepayer-money/11135208

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