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2014 Investment Statement

Executive Summary - continued

The balance between devolution and coordination

A theme of this Statement is the balance between fostering accountability for agency performance through a devolved operating model, and the need for greater agency coordination and understanding of the impacts of discrete decisions in aggregate.

This Statement outlines a number of areas where balance sheet management could improve. There may be a need for greater central understanding of Crown assets, for more coordinated investment decision making, and for a more efficient and well understood financial risk management system. To improve outcomes the balance between devolution and coordination might need to be adjusted through greater use of central capabilities.

This would be consistent with recent developments. Parliament's decision to amend the Public Finance Act and the State Sector Act1988 was designed to facilitate greater coordination between agencies to work collaboratively towards achieving government outcomes.

Greater coordination is being introduced on an issue by issue basis, where it makes sense to support chief executives or to get the best outcome for New Zealanders. For instance, this greater coordination is being applied through the pursuit of the Better Public Services Key Results, and the use of functional leads in areas of procurement, property and ICT.

Decisions on the proposed steps towards coordination to improve balance sheet management should draw on lessons from other changes and an understanding of the impact on the whole operating model.

Area of focus:

  • Assess whether further system level capability can adjust the balance between accountability and coordination to achieve better outcomes.

Owning the right assets: performance challenges and opportunities 

This Statement represents a comprehensive assessment of the utilisation of Crown assets and their effectiveness in meeting public policy objectives. The focus of this analysis was Crown property, plant and equipment. This includes the bulk of the physical assets governments use to deliver social outcomes.

There is evidence that in many areas these assets are ageing, not well maintained, underutilised or no longer fit for modern purposes. For example, many schools, courts, and social houses are over 40 years old, which can have implications for ongoing operating costs or may soon require material replacement capital. In addition, there may be significant misalignment of capacity in large parts of the social sector. This may reflect the implications of demographic changes since these assets were built.

Measuring and monitoring the contributions of assets and new investment to outcomes must improve, and better performance measures need to be developed across the whole of government. Without that, there could continue to be asset underutilisation, misalignment with needs, and age-related functionality and cost problems.

Area of focus:

  • Further develop and utilise metrics for the measurement and monitoring of the performance of Crown assets in meeting government objectives.

Managing risk: understanding the financial implications of aggregate risk

Risk affects governments' ability to deliver on their objectives cost effectively. Effective financial risk management underpins living standards by increasing the Crown's resilience to shocks. This maximises the benefits and minimises the costs of publicly provided goods and services, and improves economic growth and social outcomes.

Beyond the financial risks it faces on its own balance sheet, the Crown plays a vital role in bearing risk on behalf of New Zealanders. These risks are some of the largest the Crown faces. Implicit and contingent financial liabilities require careful management to ensure they do not have unintended negative fiscal, economic or social consequences.

The Crown's current financial risk management framework generally involves holding agencies responsible for the risks that they individually face, subject to some central guidance, and with coordination for risks with broader national implications. Resilience is supported through low debt levels and a strong balance sheet.

This model works well although it may be less efficient and effective than it could be - more coordinated financial risk management may improve this. There is a need to have a better aggregate view of Crown financial risk to ensure that total risk is consistent with governments' risk appetites.

The financial risk implications of a larger balance sheet, more heavily weighted to financial assets, will need careful consideration in the future.

Areas of focus:

  • Build a fuller understanding of aggregate Crown financial risk.
  • Investigate whether efficiencies can be achieved within the current financial risk management framework.
  • Continue to develop policy to manage the Crown’s contingent and implicit liabilities to help ensure economic stability, fiscal resilience and social outcomes are maintained.

Fiscal sustainability: building buffers and liability management

The Crown needs to maintain an adequate fiscal buffer that can sustain government activities in the event of a major shock. The worth of this approach was clearly demonstrated by the global financial crisis and the Canterbury earthquakes. Repaying the core Crown debt raised to deal with these two events should have a high priority as surpluses eventuate.

Once prudent core Crown debt levels are reached the Crown could look to fund future obligations and contingencies through further saving. This would help the Crown cope with the fiscal implications of projected demographic pressures. Saving has social implications as costs are borne by the same generation that receive the benefits of interventions.

Many of the liquid assets owned by the Crown are not available in the event of a severe shock. There might be merit in having access to a general pool of assets to augment the Crown's fiscal buffers against a range of contingencies.

Areas of focus:

  • Investigate whether improvements could be made to the Crown’s current arrangements for contingency funds and reserves.
  • Continue the focus on strengthening the Crown’s balance sheet buffers in a timely way to further improve resilience.
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