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Annual Report of the Treasury for the Year Ended 30 June 2016

Explanatory Notes to Supplementary Statements and Schedules - Non-departmental

Explanatory notes provide details of significant Treasury Non-departmental expenditure and revenue variances between actual results in 2014/15 and 2015/16 and between 2015/16 actual results and 2015/16 Supplementary Estimates. All Non-departmental balances are included in the Financial Statements of the Government of New Zealand, with the exception of impairment of investments.

1  International Financial Institutions (IFIs)

Contributions of $198.9 million (2015: $34.1 million) were made to IMF in 2015/16 compared to forecast of $44 million owing to a timing variation in the draw-down of funding by IFIs and the finalisation of the 14th Quota increase in IMF. In December 2015, the agreement between the New Zealand Government and Asian Infrastructure Investment Bank (AIIB) came into effect, whereby the Government has agreed to subscribe to 4,615 shares in the authorised capital stock of AIIB with a value of US$461.50 million. AIIB is a Chinese-initiated multilateral investment bank aimed at addressing the significant gap in infrastructure investment across Asia. On subscription, 20% of this amount (US$92.3 million) is called but paid in five equal instalments over five years, with a present value of $135.814 million. Payments of the called portion are included in the fiscal forecast. The remaining 80% (US$369.2 million) is classified as callable capital stock and will only be called as and when required by AIIB to meet its liabilities.

Capital withdrawals of $445.546 million (2015: $52.288 million) were made by IMF, representing a repayment of advances by IMF, which support countries in financial difficulties, as well as a repayment to New Zealand as part of the promissory notes issuance for the 14th Quota increase in IMF. During the year, a loss of $17.895 million on revaluation of IFIs' investment was recorded as a result of New Zealand dollar foreign exchange rate movement (2015: $44.6 million gain).

2  Ōtākaro Limited and Greater Christchurch Anchor Projects

CERA was disestablished on 18 April 2016 as the Government transitioned from leading the recovery to establishing long-term, locally-led recovery and regeneration arrangements. Responsibilities for the continuation of the key Anchor Projects Programme and precincts in Christchurch, along with managing the Crown's property assets in the central city, are now carried out by Ōtākaro Limited, a Crown entity.

Funding to Ōtākaro Limited is made up of an operating grant and funding for the anchor projects. The funding was secured through the fiscally neutral transfer of funding from Vote Canterbury Earthquake Recovery. As a result, a new, Non-departmental, output expense appropriation, Management of Anchor Projects by Ōtākaro Limited and a Multi-category appropriation, Greater Christchurch Anchor Projects MCA were established during the year. For the current year, the Crown incurred $7.285 million and $50.250 million in respect of Non-departmental output expenses, Management of Anchor Projects by Ōtākaro Limited and Greater Christchurch Anchor Projects MCA respectively. The Crown also injected $6.1 million of initial working capital to Ōtākaro as part of its establishment.

In addition, a new, Non-departmental, multi-year, capital expenditure appropriation, Transfer of Assets to Ōtākaro Limited has been set up to enable the transfer of anchor projects assets from the Crown and into Ōtākaro Limited. The transfer of assets to Ōtākaro Limited amounted to $204.452 million, representing the fair value of anchor projects assets, funded via a non-cash equity injection by the Crown of $61.016 million and the issuance of a Vendor Finance Loan for the amount of $143.436 million. Interest is charged on a base risk-free rate plus interest margin, whereby the interest margin represents a concessionary component of the loan and will be funded via operating funding to Ōtākaro Limited, Management of Anchor Projects by Ōtākaro Limited appropriation.

Some of the land transferred to Ōtākaro for the anchor projects, rather than being built on, will become new public space for the people of greater Christchurch and visitors to enjoy. Under the cost-sharing agreement signed by the Crown and the Christchurch City Council (“the Council”), any land for anchor projects that forms part of the “public realm” will vest in and be maintained by the Council. The vesting date is yet to be determined. The creation of this space will be an asset for the people of Christchurch for generations to come.

The Crown has therefore recognised a provision of the “public realm” land that will be transferred to the Council at a future date.

3  New Zealand Debt Management Office

Detailed disclosures of borrowings and financial instruments are included in the Financial Statements of the Government.

(a) Debt servicing

During 2015/16, debt servicing expenses have decreased owing to lower average volumes of long-term debt (Government Bonds) combined with lower average interest rates and decreased inflation indexation expenses.

(b) Other income, fair value and Foreign Exchange gains - NZDMO

Other Income - NZDMO is lower in 2015/16 primarily owing to a decrease in interest revenue on loans to SOEs and Crown entities.

(c) Borrowings

For the year ended 30 June, borrowings have increased, with higher long-term (Government Bonds) borrowings, whereas the short-term (Treasury Bills) have decreased, reflecting short-term liquidity decisions. Previously classified short-term Government Bonds during 2014/15 have since matured in 2015/16. There are no short-term Government Bonds as at 30 June 2016.

4  Other Current Revenue

Significant balances included in Other Current Revenue are: Employers' Superannuation contributions, Reserve Bank Surplus, Earthquake Commission guarantee fee, recovery of Crown's costs from third parties in respect of Anchor Projects programme, rental income from New Zealand House and surpluses from investments in associates. Current year Other Current Revenue is higher by $520.722 million, owing to a significantly higher Reserve Bank Surplus of $510 million returned to the Crown during the current fiscal year.

5  Southern Response Earthquake Services Limited (SRESL)

The Crown's commitment of financial support to SRESL for the ongoing settlement of its Canterbury earthquake claims is embodied in a Crown Support Deed (CSD). The Support Deed provides two key capital instruments: $500 million of convertible preference shares (the Preference Shares); and the $500 million Uncalled Ordinary Share facility which has been extended by $250 million during the year to reflect the additional support necessary to enable the company to settle all its outstanding claims. For the year ended 30 June 2016, the Crown has paid the convertible Preference Share facility in full and paid $43 million on the Uncalled Ordinary Share facility.

The financial obligations to SRESL under the Uncalled Ordinary Share facility have been revalued to their net present value at 30 June 2016. This valuation is driven by SRESL's expected cash drawdown profile based on the underlying outstanding insurance claims valuation, and its discounting over the life of the CSD. The insurance claims valuation was completed by Finity Consulting Pty Limited.

Included in the Schedule of Liabilities - Other Provision is additional support of $222 million provided to SRESL during the year as part of the uncalled capital under the CSD. This capital injection is immediately written-off as it is not recoverable. Included in the Statement of Departmental and Non-departmental Expenses and Capital Expenditure against appropriations is interest unwind expense recognised on the outstanding liability for the year of $16.370 million (2015: $15.857 million). There has been a net re-measurement loss of the CSD of $5.145 million (2015: $21.076 net gain).

During the 2016/17 year, it is estimated the Crown is to pay $264 million to SRESL to assist in settling its outstanding claims. This amount was included in Other Current Liabilities in the Schedule of Assets and Liabilities (2015: $142 million).

6  Solid Energy New Zealand Limited

On 1 July 2015, the 1987 indemnity transferred to the Treasury from MBIE for continued monitoring and management.

In August 2015, the Board of Solid Energy New Zealand Limited placed the company and all associated companies into voluntary administration, a process which allowed the company to continue trading while creditors considered the best way forward. Creditors voted to support Solid Energy's plans for the company to continue operating under a Deed of Company Arrangement (DOCA), with a view for the company to undertake an orderly, managed sale of its assets prior to June 2018. As a result of the voluntary administration, during the year, a new, Non-departmental Other Expense Write-off of historical investment in Solid Energy New Zealand Limited appropriation was set up of $60.9 million.

Under the DOCA, the old Crown indemnities (1987 and 2014) have been cancelled and replaced with new Crown indemnities, the 2015 Indemnities, with there being a separate indemnity for each mine site. The Deeds of Indemnity create a liability provision for the Crown and an asset for Solid Energy. As at 30 June 2016, $124.161 million is included in the Schedule of Liabilities - Other Provision, representing the maximum amount of the Crown's liability to indemnify Solid Energy, or third parties should mines sell. As a result of the 2015 Indemnities, the old Crown indemnities have been re-measured for the amount of $54.364 million. For the year ended 30 June, there has been $1.851 million (2015: $4.731 million) of interest unwind incurred for the discounting of the liability.

7  Social Housing

The Government's Social Housing Reform Programme is focused on the development of a more diverse supply of social and affordable housing to meet the diversity of tenants' needs. An important aspect of the programme is the transfer of HNZC homes to community housing providers.

The first major milestone in the Social Housing Reform Programme relates to social housing in the Tāmaki region of Auckland. The Government transferred ownership and management of 2,873 properties in the Auckland suburbs of Glen Innes, Panmure and Point England to the Tamaki Regeneration Company (TRC) on 31 March 2016. A new, Non-departmental, capital expenditure appropriation was established to reflect the Crown withdrawing capital from HNZC and injecting equity into TRC for the amount of $1,631.161 million, representing the market value of the housing stock being transferred. The Crown advanced a loan to TRC for the amount of $8.5 million to enable the continuation of the Social Housing Reform Programme by enabling supply of both social and affordable housing in Auckland.

During the year, the Crown incurred $4.176 million (2015: Nil) of direct costs in respect of the Social Housing Reform Tauranga and Invercargill programme.

In order to align with the Social Housing Reform Programme and the Treasury's monitoring responsibility of HNZC and Housing New Zealand Limited (HNZL), the HNZC and HNZL debt refinancing appropriation has been transferred to Vote Finance. For the year ended 30 June 2016, there has been $142.362 million of debt refinanced.

8  Events After Balance Date

Crown Rehabilitation Indemnities

Subsequent to balance date and subject to execution of the Deed of Commitment by the Ministers, the Crown has agreed with relevant counterparties terms of a restructured rehabilitation indemnity relating specifically to acid drainage resulting from historical mining at the Stockton mine. The new arrangements will only come into effect on transfer of the Stockton mine to a new owner. This restructured rehabilitation indemnity is expected to account for the majority of the difference between the rehabilitation liability and the Crown's indemnity as at 30 June 2016.

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