Strengthening management of the Crown's balance sheet; release of Solid Energy monitoring review

Improved monitoring programme#

The Treasury monitors 49 commercial enterprises, with assets of around $140 billion. A monitoring improvement programme was initiated last year, focused on three main areas:

• Structure and incentives – identifying how to enable closer engagement, and strategic alignment, between boards and Ministers
• Governance – ensuring processes for providing advice on governance are fit for purpose and contribute to improving entity performance, including director recruitment and performance evaluation processes
• Tools and procedures – assessing potential new monitoring approaches, including increasing the use of external experts to provide specialist advice in areas such as strategic reviews of some entities.

"This is a wide-ranging work programme and we plan to introduce changes progressively over time. We are looking closely at how we monitor governance and will be working with boards on what this should involve in future," says Gabriel Makhlouf, Secretary and Chief Executive to the Treasury.

Solid Energy monitoring review#

While the programme to improve monitoring is ongoing, the Treasury has today released an independent review of its monitoring of Solid Energy, which forms part of this work.

"There is clearly a strong public interest in Solid Energy and we're committed to being open about our work where we can," says Mr Makhlouf.

The Treasury identified a number of concerns with Solid Energy early on, and subsequently took a number of steps, including seeking an external review of the company's business strategy, rejecting its Statement of Corporate Intent (a key business planning tool), moving the company to intensive monitoring, and seeking the appointment of an Investigating Accountant.

The review of the Treasury's monitoring of Solid Energy concluded that the company's failure has not highlighted a material failure in the monitoring process. It noted that Solid Energy's failure did raise questions about how and when monitoring processes are applied, but that for the Treasury to have taken more “fundamental” action would have required it to express a lack of confidence in a Board with a sound track record at a time the company was performing well.

The review was conducted by Deloitte during March 2013, which reported its findings to the Treasury in April. The Treasury has accepted the findings of the report and will ensure its recommendations are factored into its monitoring work programme.

"While recognising the fundamental role of boards, the Treasury plays a key role in preserving the value taxpayers have invested in these companies. We welcome the report's conclusion that we acted appropriately, but we are committed to continually improving our processes where we can," says Mr Makhlouf.

The release of the report on the monitoring of Solid Energy follows previous information releases by the Treasury on 22 March and 21 May relating to the company, and can be downloaded from www.treasury.govt.nz/publications/informationreleases/solidenergy.

The Treasury's Balance Sheet Work Programme#

The New Zealand State sector manages just over $240 billion worth of assets across three portfolios: social assets (such as roads and schools); commercial assets; and financial assets and liabilities. These assets are forecast to grow by more than $30 billion over the next five years. The Government is committed to more active management of the Crown's ownership interest in order to enhance performance and better manage risk.

As outlined in the Treasury's Statement of Intent, the Treasury is developing advice on changes to the structure of the balance sheet and how elements of the balance sheet can be more effectively governed or managed to meet government objectives. Over time, we will provide advice on how to align the composition and shape of the Crown's assets and liabilities with the Government's value, performance and risk objectives (e.g. through advising on choices about the scale of new investment in social infrastructure assets versus reducing Crown debt). We will ensure there are incentives to use existing capital well, introduce private sector capital and commercial disciplines where this is appropriate and advise on the allocation of capital to its highest value use.

For more information see the Treasury's Statement of Intent:
www.treasury.govt.nz/publications/abouttreasury/soi.