Application of general principle of acting ultra vires

The principle of ultra vires refers to decisions or actions outside the lawful powers of a person or body.

Ministers’ powers arise from legislation and the common law (including the Royal prerogative[15]). Departments are not separate legal entities – therefore their powers come by way of delegation from Ministers or directly from statute. Statutes contain a number of delegation provisions. For example, the State Sector Act 1988 deals with the delegation by a Minister of all or any of the Minister’s functions and powers to a chief executive of a department (section 28). In addition, statutes can limit the powers of Ministers and departments. Actions or decisions that are ultra vires may be deemed invalid by the Courts.

Part 6 of the Act restricts departments and chief executives from exercising powers in regard to borrowing, investing and banking.

Therefore, while a decentralised approach to operational financial management is mandated elsewhere in the Act, the treasury functions of government are managed centrally. The New Zealand Debt Management Office (NZDMO), which is part of the Treasury, is responsible for managing the government’s debt, overall net cash flows, and some of its interest-bearing assets. It does this within an appropriate risk management framework consistent with international best practice so as to limit the financial risks faced by the Crown.

Borrowing powers and limits

Traditionally, in Westminster-based systems, the Crown may tax or spend only as authorised by Parliament. In New Zealand, the Constitution Act (section 22) expresses this principle of public finance. Part 6 of the Act continues this tradition by stipulating that the Minister of Finance is authorised to borrow debt only if it appears to the Minister to be necessary or expedient in the public interest to do so (section 47).

Departments are prohibited from borrowing – refer also Treasury Instructions. The Act states that the Crown must not borrow except under statute (section 46) and the Act provides this authority solely to the Minister of Finance (section 47 and 48). The Minister may not delegate this power in the same way that other powers are delegated under the State Sector Act (section 48).

As only the Minister of Finance has the power to borrow on behalf of the Crown, the Minister must approve all borrowing. That includes specific borrowings or programmes of borrowing. The Minister also approves the entering into of swaps or other financial arrangements on behalf of the Crown. The Minister, on behalf of the Crown, may appoint loan agents to raise loans and issue securities outside New Zealand. The prohibition on departmental borrowing extends to hire purchase agreements and finance leases – refer to the definition of “borrow money” in section 2(1). However, departments are permitted to purchase goods or services by way of a credit card, or on credit from a supplier, for a period of 90 days or less.

Issuing securities

The Act establishes requirements in relation to public securities including their issue, variation, terms and conditions and the making of payments in relation to securities. The issuing of securities by the Crown is tightly controlled – the Minister may issue securities for money borrowed by the Crown (sections 62 and 63).

Securities commonly issued by the New Zealand Government include:

• New Zealand Government Treasury Bills – These are denominated in New Zealand dollars and are sold at a discount to face value and carry no interest coupon. The Bills are redeemable at face value on maturity.
• New Zealand Government Bonds – Denominated in New Zealand dollars with a fixed coupon paid semi-annually in arrears. The Bonds are redeemable at face value on maturity.
• New Zealand Government Kiwi Bonds – Denominated in New Zealand dollars with a fixed interest rate paid quarterly in arrears. The Bonds are redeemable on maturity or at the option of the bondholder.

In order to give lenders assurance as to repayment, the Act provides permanent authority for the payment of principal under a public security and a permanent legislative authority for borrowing expenses, including interest, incurred under a public security (section 65D). Thus, repayment of debt is not subject to annual budget approval by Parliament.

Derivative transactions

Departments have no ability, in their own right, to enter into derivative transactions. However, pursuant to delegations from the Minister of Finance and the Secretary to the Treasury and subject to Treasury oversight via the Guidelines for the Management of Crown and Departmental Foreign Exchange Exposure, they are able to enter into derivatives in order to manage their foreign exchange risk. Refer also to Chapter 5.

The Act provides that the Crown must not enter into derivative transactions (section 65F) except as expressly authorised by any Act. However, the Minister, on behalf of the Crown may enter into a derivative transaction if it appears to the Minister to be necessary or expedient in the public interest to do so (section 65G). The Act also establishes a permanent legislative authority for money and expenses paid or incurred in relation to derivative transactions (section 65H).

The Minister of Finance has delegated to the NZDMO the operational aspects of managing the Crown’s borrowing, investing and derivative activities. The NZDMO is responsible for the efficient management of the Crown’s debt and associated assets within an appropriate risk management framework.

The use of derivatives by the Crown predominantly relates to the management of the Crown’s balance sheet. Derivatives are used as a tool to protect the Crown from primarily currency and interest rate risk associated with its borrowing and investment activities.

The approved derivative instruments used by the NZDMO in managing risks associated with the balance sheet in the financial statements of the Government include:

• forward foreign exchange contracts
• forward rate agreements
• currency swaps
• interest rate swaps, and
• interest rate futures.

Control and reporting

The derivatives used by the NZDMO are subject to administrative controls and reporting requirements. The financial statements of the Government are prepared in accordance with generally accepted accounting practice in New Zealand (GAAP) (refer Chapter 1 and the Glossary). GAAP requires all derivatives to be reported in the financial statements.

Audit oversight

The derivative activity of the Crown, departments and Crown entities is subject to independent audit oversight through the operation of the Public Audit Act 2001 and the Public Finance Act.