Since the 2008 Cole Inquiry into faulty council investments a new financial conservatism has taken over local government. But the pressure is already on to find more high-returning investment opportunities, writes David Chaplin.

Chris Russell has a clear recollection of the day Grange Securities tanked in South Australia.

Facing down the crowd a few years ago at a South Australian Local Government Association (LGA) conference following a slick presentation spruiking the benefits of collateralised debt obligation (CDO) investments for councils, the Grange front-man was asked a simple question.

Russell, LGA communications director, says the organisation’s head of finance asked the Grange representative how CDOs were secured.

“[The Grange rep] gave a vague and fluffy answer,” he says.

According to Russell, with that reply any SA councils that might have been excited by the Grange spiel immediately crossed CDOs off their list of potential investments.

Theoretically, SA should have been one of the country’s most vulnerable to the PowerPoint-wielding salesmen from Grange, given that its 68 local councils are free to select any investments they deem appropriate.

Each of Australia’s six state governments manage council investments differently, ranging across a spectrum from highly-prescriptive centralised control to laissez-faire disinterest. South Australia, along with Western Australia and Tasmania, sits at the liberal end of the scale in this regard.

In practice, however, SA councils are among the most conservative local body investors in the country, and operate a de facto centralised investment scheme without the imprimatur of state government.

Almost 100 per cent of SA council investments are filtered through the Local Government Finance Authority of South Australia (LGFA), which bulks up council money to buy low-risk products at a cheaper rate and also purchases a guarantee from the State Treasury. Furthermore, the LGFA ‘nets out’ the debt management of SA local bodies, with loans flowing between councils as needed.

Russell says the system has developed for several reasons including the low level of funds available to SA councils relative to larger and wealthier states – making the pooling of assets a more efficient strategy than each local body investing on its own behalf.

According to the LGFA 2007/8 annual report, the organisation managed more than $370 million of SA local body deposits. Just one of Sydney’s richest suburban councils, Woollahra, by comparison, boasted a $40 million investment portfolio in a May 2008 financial report.

More importantly, Russell says, SA has built up a culture of risk-awareness among its councils that while “difficult to measure and articulate” is stronger than in other states.

Read the full story in the August issue of Government News magazine.