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

Shaping and managing the Crown's balance sheet

The Crown's balance sheet or financial position is influenced by the Government's operating balance (reflecting decisions about levels of government spending and tax), which flows through to debt and net worth, and decisions about where Crown capital is allocated and how much to invest. This includes policy decisions about what the Government should own and what liabilities it should take on. It is also impacted by how well managed the Government's assets and liabilities are, including the performance/returns from financial market and commercial exposures.

Under New Zealand's public sector management model, most day-to-day decisions about how to manage the Government's assets, liabilities and risks are made at arm's length from Ministers. This model is based on the principle that decentralised decision-making is efficient where agencies have better information and are subject to the appropriate incentives.

Key tools for creating the right incentives around the capital allocation process are summarised in the diagram below.

Figure 2 - Tools for creating the right incentives around the capital allocation process
Figure 2 - Tools for creating the right incentives around the capital allocation process.

Under this framework, the Government makes a number of choices that directly alter the size, composition and strength of the balance sheet, including setting the size of the new capital allowance each Budget.

The Government also indirectly influences what assets, liabilities and risks are on its balance sheet and how well those assets perform through:

  • its policy settings (which influence, for example, the value of student loans owed and written down, whether state houses are required to provide housing support and the existence of any deposit guarantees), and
  • financial and commercial investment and divestment decisions (for example, the establishment of Kiwibank), and its performance expectations as a shareholder (for example, the dividend policy for SOEs, and the investment parameters for NZSF).

Government also establishes the institutional arrangements that drive decision-making and performance in the public sector and which ultimately influence capital allocation. This includes the governance structures that apply (for example, the establishment of separate Crown Financial Institutions [CFIs]), the incentives and rules influencing the management and disposal of assets and, more generally, the degree of emphasis on contestability in the delivery of public services.

For the Crown's commercial portfolio, with SOEs expected to perform as successful businesses, performance also depends on how well commercial and corporate governance disciplines are replicated in the government sector. Standard corporate governance influences are summarised in the box below, with shading added to indicate those areas that may be weakened under government ownership.

Corporate governance influences
External Internal
Law/regulation Board of Directors - role, structure, incentives
Markets (1) - Capital markets, market for corporate control, labour/product markets Managerial incentives - ownership, compensation, employment agreement
Markets (2) - Capital market information/analysis Capital structure - debt/equity
Markets (3) - Accounting, financial and legal services Bylaw & charter provisions
Private sources of external oversight - eg, media Internal control systems

Source: Gillan, S.: ‘Recent Developments in Corporate Governance: An Overview', Journal of Corporate Finance 12 (2006), 381-402 - shading added

Ensuring that capital is allocated efficiently under the devolved public management system requires looking across all of the Crown's assets and liabilities to ensure that what the Crown owns and owes is appropriate and well managed. This means ensuring that the Government holds assets and liabilities only where it is best placed to do so, and getting the right tools and settings in place to ensure that these are managed in such a way as to secure the greatest benefits for New Zealanders. Over time, changes in the structure and management of the Crown's portfolios are expected to be necessary to optimise the size, strength and composition of the Crown's balance sheet.

It is clear that improvements can be made in a number of areas to support better asset management - and more efficient allocation and use of capital - across the public sector. The disposal of assets is an example (see the box below).

 Disposal of surplus assets

An efficient, flexible and responsive disposal process is an important element of any asset and liability management framework.  Holding surplus assets reduces the efficiency of the Crown's balance sheet and limits the amount of capital available for other areas.  It also leads to unnecessary operating costs for the Crown.

The value of surplus assets held by the Crown may be significant.  For example, the Ministry of Education's (MoE) surplus property portfolio as at 30 June 2010 comprises 244 closed schools, teacher houses, vacant sites and other types of assets with a total value of $95.8 million. 

The current process for disposing of surplus assets by a government agency can be complex and time-consuming.  Unlike privately-owned property, surplus Crown land or other assets frequently take more than three years to sell owing to requirements such as offer back to previous owners (or their willed successors) under the Public Works Act 1981 and the Maori Protection Mechanism process designed to address the Crown’s obligations under the Treaty of Waitangi.

For the 2009/10 financial year, for example, MoE surplus properties took on average 38 months to sellwhich is at the upper end of the expected range.  Contributing factors were delays in the disposal of former Maori land under the offer back process, and delays with Maori Protection Mechanism and Sites of Significance processes owing to the sensitive nature of claim negotiations and awaiting ministerial decisions.

Incentives on agencies to identify and dispose of surplus assets may also be weak where they do not face the full cost of capital and when access to capital funding has been relatively easy.  Finding ways to improve the use and performance of assets (and supply-side efficiency in general) can, in practice, be a lower priority than other objectives.  Capital charge regimes, and increasing transparency and focus on asset utilisation and capital asset management by the Government, are mechanisms for addressing these issues.

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