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Budget 2010 Home Page 2010 Investment Statement of the Government of New Zealand

Executive Summary

This Investment Statement of the Government of New Zealand provides an overview of the significant assets and liabilities on the Crown's balance sheet and how they are forecast to grow over time.

The main objective of this Government in introducing the Investment Statement is to facilitate better understanding of what the Crown owns and owes on behalf of the public. Taking a Crown-wide investment perspective will help to ensure that Government's capital management decisions promote stronger growth and higher living standards for New Zealanders while strengthening the Crown's financial position.

The Government has two main objectives for its capital management.

The first objective is to fund priority government services. This encompasses delivery of both social services and core operations of the Government. Many of these assets produce largely non-financial returns. They include, among others, schools, state housing, hospitals, state highways, defence assets and conservation land. A number of these sectors are also discussed in the National Infrastructure Plan.

The Government's asset management objectives for these assets are to ensure that they are used productively and efficiently. This means applying sound asset management principles, such as good performance information, whole-of-life investment appraisal and an ability to redirect capital where it is most needed and produces most value.

The second objective is prudent financial management. The Crown must remain solvent, and ensure that any liabilities it accrues do not unduly burden future taxpayers. What matters is the size and composition of the assets on the balance sheet relative to the liabilities the Government may need to take on, and how well they are matched over time. While there will be periods, as at present, when it is appropriate to allow liabilities to increase, in the long run the Government must at least maintain its net worth in order to avoid the need for future taxation increases.

The Public Finance Act 1989 makes the expected future track of taxes, expenditure and debt transparent. But it is not just the Government's tax and operational spending decisions that influence public finances - performance of Crown assets and liabilities also matters. The Crown has substantial financial and commercial assets, all of which produce financial returns. It also has liabilities such as future pension and insurance obligations. Increasingly it has assumed contingent liabilities, such as the Retail Deposit Guarantee Scheme. Financial prudence dictates that the totality of these exposures, including taxes, expenditure, assets, debt and other liabilities, is managed in a way that supports a sound financial framework, and does not place excessive risk on the Crown or the wider economy.

The Government's balance sheet is large and is significantly stronger than 15 years ago.

Measurement of the Crown balance sheet was first introduced in 1992. Since then it has expanded steadily. As at 30 June 2010 the Government owned $223.4 billion of assets. Net worth has increased from around zero in the mid-1990s to $95 billion in 2010. Social, commercial and financial portfolios haveall grown strongly. This has been funded from a variety of sources: investment of operating surpluses by the Crown; agency balance sheets; and retained earnings within State-Owned Enterprises (SOEs). Significant policy decisions have driven increases in some areas; for example, the establishment of the New Zealand Superannuation Fund (NZSF) and the decision to fully fund much of Accident Compensation Corporation (ACC) liabilities.

The Crown's capital is mostly allocated to social and financial assets. 

The Crown's assets consist primarily of social assets (for example, roads, schools and social housing) which make up 50% of total assets, and financial assets (27% of total assets). Commercial asset holdings are comparatively modest. The combined net value of the SOEs (excluding KiwiRail) plus the Crown's holding in Air New Zealand was $15 billion as at 30 June 2010. This is a small fraction of social and financial assets. It is about the size of Housing New Zealand Corporation (HNZC) assets, and substantially less than the value of state highways.

The large size of the portfolio means that effective management matters.

The Crown's balance sheet plays a number of important roles in the economy, including maintaining low overall costs of capital raising through protecting or improving New Zealand's sovereign credit rating and providing the Government with financial flexibility to support the economy in times of distress. This has been seen in the response to the recent recession and events such as the Canterbury earthquake.

The cost of holding these assets is significant. Using the public sector discount rate - which is the best measure of the Crown's cost of capital taking into account both the cost of debt and risks involved in the Crown's investments - of 8%, the opportunity cost is approximately $18 billion per year. This is equivalent to about 25% of General Government Spending (core Crown expenses) in 2010/11 and is larger than the annual government spending on health. This emphasises the need for the Government to use its capital effectively.

The Crown's assets are forecast to continue to increase significantly in the next five years.

Government's annual capital investment is substantial. Over the next five years, the forecasts show total accumulation of assets of over $70 billion. About half of this increase will be to acquire social assets, principally roads, schools and hospitals. The balance is mostly accumulation of financial assets.

The total investment in assets will be offset by $20.5 billion of expected depreciation, and $14.3 billion anticipated reductions in financial assets held by the Reserve Bank of New Zealand (RBNZ) and the New Zealand Debt Management Office (NZDMO). Including all these factors, total assets are forecast to increase by $32.9 billion over the next five years to $256.3 billion.

Despite this, the Crown's financial position is now deteriorating and will continue to worsen further before it gets better.

The impact of the economic recession can be seen in the recent deterioration of the Crown's financial position (rising debt and declining net worth). Forecast government deficits will see the Crown's net worth continue to decline as debt grows faster than assets. Liabilities are forecast to increase by $44.8 billion and net worth will decline by $11.9 billion to $83.1 billion by 2014/15, bringing net worth down to 33.6% of forecast GDP at the end of this period.

Various indicators suggest that the Crown's balance sheet can be better managed.

Asset management practices have not kept pace with the growth in the balance sheet.

While total social assets, for example, are more than twice the size they were in 1995, it is difficult to see similar levels of service improvements. Measures of the performance and efficiency of capital in most sectors is relatively weak, and whole-of-life planning and management of these assets is just emerging. In some areas there is a low level of contestability in service delivery and a history of weak procurement practices to drive better performance.

There has also been insufficient measurement and monitoring of the performance of the Government's financial and commercial portfolios. This deserves more attention, particularly given the size of the financial portfolio and the impact these portfolios have on the Crown's overall net worth. The available evidence suggests that performance of these portfolios has been mixed.

The release of this Investment Statement is a critical step for increasing transparency around balance sheet performance, and therefore for lifting that performance.

The Crown is by far New Zealand's largest owner of assets. Its very large portfolio of assets is the result of a number of individual decisions, rather than as part of a coordinated or disciplined strategy. There is scope, therefore, for better alignment of the Crown's capital investment with its objectives and priorities.

The Government's intentions for how the balance sheet will be shaped over time, and how the performance of the individual components will be improved, focus on:

  • rebuilding the Crown's balance sheet buffer against future adverse events
  • systematically working to reduce the Crown's risk exposures, including through strengthening the economy
  • sharpening incentives on State agencies to use existing Crown capital well
  • continuing to look at introducing private sector capital and disciplines where appropriate to help drive up the performance of State assets, and
  • more actively reprioritising Crown capital to its highest value use.

A major focus will be on ensuring that the management of the Crown's capital complements and is consistent with its efforts to raise New Zealand's potential growth rate and reduce macro-economic vulnerabilities by tilting the economy towards higher savings and exports and getting better control over government spending.

These priorities will guide the Government's future investment decisions. They will also guide the Government's continuing efforts to improve the performance of government agencies in managing the Crown's assets and liabilities to better meet the needs of current and future New Zealanders.

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