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Executive Summary

Managing the Crown's balance sheet well is part of prudent fiscal management

The Crown's assets and liabilities are held on behalf of all New Zealanders. Last year's Investment Statement emphasised the importance of better managing the balance sheet as part of overall prudent fiscal management. At 30 June 2010, assets totalled $223 billion, liabilities $128 billion and net worth was $95 billion.

Over the next four years the balance sheet will expand, but Crown net worth will fall slightly. Net assets are projected to increase by $34 billion, but liabilities rise by $45 billion, mostly through debt issuance. Managing asset and liability exposures matters because any loss of value, on either side of the balance sheet, is ultimately borne by taxpayers and compounds the deterioration in Crown finances. The Government's fiscal strategy is to achieve surplus and start to reduce debt by 2014/15.

Substantial Crown investment over the next five years is underway...

Between 2010 to 2015 the Crown will accumulate an additional $78 billion of gross assets. This includes substantial infrastructure investment already underway, including roads, rail, ultra-fast broadband, schools, hospitals and electricity transmission and generation. The projected increase in physical assets is $38 billion by 2015. The majority of the balance includes growth in Crown financial institutions' (CFIs) investments ($24 billion), and new student loans ($8 billion).

...and is funded by a variety of sources

A large portion of total new investment, $57 billion, is funded from sources outside the core Crown. For example, this includes investments by State-owned enterprises (SOEs) funded from debt and retained earnings, investment gains by CFIs and levies that fund transport, the Accident Compensation Corporation (ACC) and the Earthquake Commission (EQC).

The remaining $21 billion represents the funding requirement for the core Crown, financed from general revenue. Currently, the Crown is borrowing to fund capital investment. This emphasises the need for careful consideration of capital spending. The Crown balance sheet has more than doubled in size over the past decade. Yet only a minority of this investment is funded via new capital allowances; the balance receives much less scrutiny. In addition, the Crown's ability to redeploy capital as needs and priorities change, as any business would do, has been limited. The Government believes that there is considerable scope to reprioritise and use existing capital better, rather than simply increasing borrowing.

There is scope to redeploy capital invested in the Crown's commercial assets. The Government has decided to extend the Mixed Ownership Model to four SOEs and further reduce the shareholding in Air New Zealand Limited (Air NZ), while retaining majority stakes. This brings a number of additional benefits; sharper commercial disciplines on the companies, easier access to capital, wider investment opportunities for New Zealand savers and deeper capital markets.

Proceeds are expected to be in the order of $5 billion to $7 billion, starting in 2012. This reallocation of capital will therefore fund up to one-third of the Crown's investment in core social infrastructure over the next five years, and significantly reduce the need to borrow to fund this investment.

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