Annual Report of the Treasury for the Year Ended 30 June 2012

Chief Executive's Introduction#

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I was appointed Chief Executive of the Treasury at the beginning of the 2011/12 year. It was yet another time of change in the development of our nation and the international outlook. The impact of the global financial crisis on Europe, a general election in New Zealand and the ongoing effects of the Canterbury earthquakes on the economy have all challenged the Treasury. As a new leader, I have tried to bring a fresh perspective to these and all the rich and diverse issues that the Treasury advises on.

Like many government departments, the Treasury is looking hard at the way we do things. We are recruiting a more diverse range of people, and we are reaching out to benefit from other public and private sector expertise. I'm proud of how the Treasury has responded to challenges. It is a privilege working with such committed and talented people.

New Zealand's overall growth performance has been weak for some time. An income gap of around 30% to 40% separates us from many advanced countries. We have lost competitiveness relative to our trading partners, and we have imbalances in our economy. The global economy is being re-shaped around us and it is vital in the next decade that we make good decisions, take the right actions and make the most of opportunities presented to us.

Our vision is to be a world-class Treasury working towards higher living standards for New Zealanders. We have a unique position of responsibility and influence in the New Zealand public sector. Under my leadership we will not be shy about entering public debate. We will use our credible analysis and well-researched evidence to present a more complete picture of complex issues. Achieving our vision requires us to provide sound advice that policy-makers and the public can be confident about.

The Changing Shape of the Treasury#

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Everyone working at the Treasury has a role in helping to achieve higher living standards for New Zealanders. To succeed in their work, my staff need to be bold in their thinking and behaviour, coming up with innovative ways to work with each other, with other State sector agencies and with the private sector. And they need to be passionate about making a difference, challenging themselves and others to remain focused on what really matters, supported by evidence and rigorous analysis.

We're re-shaping ourselves to ensure that we have the right capabilities to deliver on the Government's priorities and to achieve our vision, on a smaller budget. Much of our re-shaping is occurring through changes in our culture, capability and capacity. We've taken a far more outward looking approach to our work, compared with previous years. We are, for example, testing the quality of our work with external economists, academics and commentators and collaborating with a number of other agencies to help the Government develop its Business Growth Agenda. We have also engaged with high school students via a competition that helped broaden our understanding, and theirs, of long-term issues that affect their future.

We've organised ourselves to create a higher performing Treasury that drives to achieve improved economic performance, a stable and sustainable macroeconomic environment and a more efficient and effective State sector. These outcomes are directly intended to improve New Zealanders' living standards.

Shaping the Treasury to be the most effective organisation it can be is one of my most important roles as leader. My vision is that the Treasury is an exciting and energetic hothouse of ideas. I want us to be powered by intellectual curiosity and focused on work that has a real and positive impact. I want us to be one of the most influential and respected organisations in the country. By implementing our workforce strategy, we will become bolder, more outwardly focused and collaborative, more diverse in our thinking and adaptive in our behaviours.

Living Standards Framework#

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A highlight of the Treasury's year is the development of our Living Standards Framework. As we increased our understanding of the component parts of living standards, we saw the need for a robust and flexible tool to assess the contributions our day-to-day work makes towards our vision. The Living Standards Framework doesn't generate simple answers but it ensures that we acknowledge that there are both material and non-material factors that impact on living standards. It ensures that we recognise and articulate the choices we have to make in striving for a growing economy. Our Living Standards Framework is a clear demonstration that the Treasury's view of the world is far broader than many people realise. It provides a solid foundation for our advice to Ministers, giving them greater confidence when making their decisions.

Growing the Economy#

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In our Briefing to the Incoming Minister (BIM), we advised that the most immediate impact on people's incomes comes from helping businesses succeed. The Treasury's work aims to help keep economic activity close to full employment levels, keep economic variability to a minimum and avoid abrupt adjustments when hit by shocks. That's because macroeconomic stability provides households and firms with the predictability and certainty they need to make good decisions about employment, saving, investing, innovating and pursuing opportunities.

We advised in our BIM that reform is needed across government policies relating to education, welfare, tax, regulation, science and innovation, infrastructure and natural resources in order to achieve economic performance that matches New Zealanders' aspirations. Our policy advice includes consideration of the impact of government policies on the macroeconomic environment. Our advice, evidence and partnership have helped a number of agencies get work underway that will help support economic growth.

We have contributed to the development of coordinated education and welfare policies such as the Youth Guarantee and Youth Services that support youth achievement. We have also contributed to tertiary education policies encouraging the retention, achievement and progression of students to higher levels of study.

Working with the Ministry of Social Development (MSD), we developed a reform programme that significantly changes New Zealand's approach to welfare, to get people back into work and participating productively in society. We helped complete the policy changes necessary for legislation to be drafted for welfare reform, and the Treasury will now monitor Work and Income to ensure effective implementation of the investment approach.

We're seeking to lift New Zealand's youth achievement and our analysis and evidence supported development of the Government's policy agenda for schools. We engaged with teachers and the broader education sector and provided evidence and analysis that contributed to public debate about the quality of teaching.

Better Public Services#

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Another highlight of the 2011/12 year has been the evolution of the Better Public Services programme. I was a member of the Better Public Services Advisory Group that reported to Ministers after the 2011 general election. The Government accepted the recommendations of the advisory group and the Better Public Services work programme is now one of its priorities.

The Government is committed to changes in the public service in order to achieve its priorities, and the Treasury is part of the corporate centre that, along with the State Services Commission (SSC) and the Department of the Prime Minister and Cabinet (DPMC), will drive and support this change. We're providing assurance to Ministers that the results they want will be delivered, and improving the management of financial resources across all of government. We're getting alongside public service agencies to help them work better with each other and to help them find practical and innovative ways to use their taxpayer-funded and owned resources, organising themselves and their finances around results that make a difference. With our cross-agency view, we can get other agencies to view their work in a wider context and therefore get a greater understanding of what the Government needs them to deliver.

Thank you to all the Treasury staff who apply their skills and passion to the work they do. I'm proud to see their efforts driven by a desire to contribute to higher living standards for New Zealanders.

Gabriel Makhlouf
Secretary to the Treasury

28 September 2012

Statement from the Treasury Board#

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The Treasury Board is a governance body that supports the Chief Executive and Executive Leadership Team (ELT) in their work to make the Treasury's organisational strategy, capability and performance contribute to the achievement of the Treasury's goals. The Board steers and endorses organisational strategy, tests key strategic decisions and holds ELT to account for its performance.

We believe that the Treasury's vision - to be a world-class Treasury working toward higher living standards for New Zealanders - is very compelling. We have confidence in the leadership and management of the organisation to deliver on this objective.

The Treasury started the year with a new Chief Executive and a relatively new ELT. We are pleased to see that these leadership arrangements have bedded in well over the year. The team has performed well in making the Treasury's vision and values meaningful for the organisation, its staff and its stakeholders.

While still having a way to go, the Treasury has made significant progress on its external profile and engagement with the public, businesses and policy-makers. It has performed effectively in advising the Government on key economic and State sector policy issues, and implementing high-priority government policies.

We look forward to seeing further progress on delivering on the organisation's vision, and ensuring it is driven by its values.

Non-executive Board Members#

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The Treasury Board is currently made up of three non-executive members, the Chief Executive and Deputy Chief Executive. We are in the process of recruiting an additional two non-executive members. Current non-executive members of the Board are:

Paul Baines

Paul Baines has a significant background in financial and strategic management. He sits on the boards of the Institute of Economic Research, the ToddCorporation and the New Zealand School of Music. He is a former Chair of Barnardos and has served on the boards of the Reserve Bank and Telecom. He is a member of the Government's Regulatory Responsibility Bill Taskforce.

Susan Macken

Susan Macken is an experienced company director and consultant. She is a director of the Bank of New Zealand, Fertility Associates and Ultimate Care Group Ltd. She is Chair of Crown research institute Environmental Science and Research.

Joan Withers

Joan Withers is a full-time company director with significant senior executive and corporate governance experience. She is Chair of Mighty River Power Ltd, Deputy Chair of Television New Zealand and Chair of Auckland International Airport Ltd. She has temporarily stood aside from the Board in order to avoid any perceived or real conflicts of interest created by her role as Chair of Mighty River Power Ltd.

About Us#

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Our Vision - Higher Living Standards#

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The Treasury's overarching vision is to be a world-class Treasury working toward higher living standards for New Zealanders. We recognise that there are a number of factors underpinning living standards for every individual, and our Living Standards Framework identifies four essential factors that are essential to current and future living standards:

1. physical and financial resources such as infrastructure, housing and saved wealth
2. people's health, education and skills
3. social institutions and conventions that make our society work, and
4. natural resources such as a stable climate, quality water and biodiversity.

Assess the impact of policy across key living standards dimensions

The Treasury focuses on policies that increase the opportunities, capabilities and incentives for people to participate productively in economic life, and as the Government's lead economic and financial advisor we have a particular focus on the elements that improve the contribution of income to living standards. We also have an important role to play in supporting government agencies to build their capability to better deliver results now and in the future.

We've identified key outcomes that the Treasury and New Zealand need to achieve andorganised ourselves to create a higher performing Treasury that drives to achieve: improved economic performance; a stable and sustainable macroeconomic environment; and a more efficient and effective State sector.

Detailed information about progress on each of the outcomes is included on pages 18 to 33.

Our People and Our Values#

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Every person working at the Treasury has a role in helping to achieve higher living standards for New Zealanders. The Treasury's staff bring specialist skills and expertise to the varied and complex challenges of government. We bring policy expertise and operational smarts to the table. We have the ability to pick up complex projects. We understand the power of strong stakeholder relationships so we work hard to develop and maintain them. The way we think and work is driven by behavioural norms and expectations reflected in the organisational values we collectively hold dear. To be successful, the values that all Treasury employees strive to uphold are:

• Bold and innovative. We will never achieve what we want unless we generate, and act on, new ideas and challenge the status quo.
• Passionate and ambitious. We need to attract, retain and motivate the best people, challenge them, treat them exceptionally well and keep them focused on significant work.
• Collaborative and challenging. We must work with others to achieve our outcomes - maintaining the rigour and analytical excellence that is our traditional strength, coupled with a collaborative approach that gets things done in the real world.
• Adaptable and focused. We do a lot of complex and important work, so we need to focus on what really matters, look beyond our own boundaries and common ways of working and shift gears when we need to.

The Treasury's Functions#

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The Treasury has five different roles:

1 Economic

We are the Government's lead economic advisor, concentrating on policy areas that have a significant impact on the economy. This includes leading improvement of the quality of regulation, removing barriers to growth and barriers to increased productivity.

2 Financial

We are the Government's lead financial advisor. We manage the financial affairs of the Crown, concentrating on issues that have significant fiscal implications on public sector financial management and standards.

3 Central agency

We form part of the State sector's Corporate Centre, along with SSC and DPMC, actively working with State sector agencies to improve their performance by helping them to organise themselves, their finances and their work around results that make a difference. Together we assist the Government to develop its strategy for the State sector and manage significant issues.

4 Performance monitoring

We monitor the performance of State sector agencies, including State-Owned Enterprises (SOEs) and Crown Financial Institutions (CFIs), and work with them to improve performance.

5 Commercial policy and operations

We provide policy advice on commercial matters such as financial markets, insurance, or asset utilisation and provide financial operational services through the New Zealand Debt Management Office (NZDMO), the New Zealand Export Credit Office (NZECO) and the Commercial Transactions Group.

The Way We're Organised#

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* Reports to CE
** Reports to DCE

Note: Positions are as at date of publication. Brief biographical information about the Treasury's ELT is on pages 121 to 122.

The Work We Do#

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Highlights of the Year#

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More detail about progress on achieving our outcomes is included on pages 18 to 33 but the most significant highlights of the 2011/12 year are:

• Living Standards Framework.We extended our work on the Living Standards Framework, developing a tool to assess the trade-offs involved in our recommendations to the Government. This tool enables us to provide higher-quality advice.
• Better Public Services. As a Central Agency, the Treasury worked with SSC and DPMC to help the Government determine its priorities for better public services. Action to achieve better public services now forms a core plank in the Government's programme and the three Central Agencies are now working closer together as a "Corporate Centre" for the State sector, to drive and support the Better Public Services programme goals.
• Growth Agenda. Advice and evidence that we provided to the incoming Government after the 2011 general election, and our work with other agencies, led to development of the Government's Business Growth Agenda. A number of agencies now have action under way to help support growth.
• Welfare Reform. Working collaboratively with MSD, we developed a reform programme that significantly changes New Zealand's approach to welfare. The investment approach established for the future will help get people back into work and participating productively in society.
• Fiscal Discipline. We provided analysis, policy advice and implementation advice that enabled the Government to deliver on its fiscal strategy during difficult and uncertain economic times, including helping the Government deliver a second near-zero Budget as part of its strategy to return to fiscal surplus in 2014/15.
• Borrowing Programme. NZDMO issued $13.5 billion worth of government bonds. The government bond maturity in November 2011 was repaid in full ($8.7 billion).
• Education. Our analysis and evidence supported development of the Government's policy agenda for schools. We engaged with teachers and the broader education sector.  We provided evidence and analysis that contributed to public debate about improving the quality of teaching.
• Mixed Ownership Model. The Treasury's new Commercial Transactions Group made significant progress on preparing for the Mixed Ownership Model for the four energy SOEs and Air New Zealand. After the 2011 general election we provided advice to the incoming Government, assisted with the development of enabling legislation enacted by Parliament and helped Mighty River Power prepare itself for a public share offer.
• CASS. Working with SSC and DPMC, we created the Central Agencies Shared Services (CASS) agency in March. CASS provides back-office functions to all three Central Agencies, demonstrating our commitment to working together to deliver better public services, and our willingness to set the benchmark in terms of best practice shared services.
• Building the Treasury for the Future. In addition to CASS, we've put effort into shaping the Treasury for the future. Using learnings from external Peformance Improvement Framework (PIF) reviews, we are taking a longer-term view, developing and implementing a workforce and diversity strategy, four-year plans and have put in place a new financial information system that provides managers with information in a more timely manner to support effective decision-making.

Looking Ahead#

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The dynamic times that we live in present both challenges and opportunities for the Treasury, with some big issues facing us in the near future. These include:

• Making the most of uncertainty and change. The formation of new trade blocs and alliances, innovative ideas and the march of technology are changing the way that business is done. Ongoing volatility in Europe is causing investors to be wary of excessive government debt. Financial markets remain volatile. The dynamic environment creates opportunities for New Zealand too. The world's economic centre of gravity is shifting closer to us, demand for our commodities is likely to remain high, technology is reducing the tyranny of distance and New Zealanders are reducing their debt to levels they consider more prudent. The Treasury will continue to monitor international developments and local economic indicators so we can help the Government create appropriate policies to counter these challenges and benefit from the opportunities.
• The Growth Agenda. New Zealand needs sustainable growth in incomes in order to achieve higher living standards. We'll continue to recommend improvements in tax and regulatory settings, we'll seek greater integration and connections with the global economy's resources, knowledge and economies of scale, and we'll seek enhanced skills and labour productivity as part of the plan to grow the economy.
• Fiscal discipline. A stable fiscal environment is important for New Zealand's future. The Government has set ambitious fiscal targets. By working to improve the State sector's performance, providing advice on fiscal policy, publishing the Long-term Fiscal Statement and managing the Government's budget and the Crown's balance sheet, we'll help New Zealand return to a sustainable surplus. This will restore the buffer provided by low debt, improving the country's ability to cope with future adverse events and providing this and future governments with a greater range of options to deliver public services.
• Better Public Services. People expect better public services, delivered to them in more accessible, responsive and flexible ways. State sector agencies need to change the way they deliver their services. We'll continue to work collaboratively in the Corporate Centre to find innovative ways of driving value in the State sector. We'll help agencies find new ways to work, behave and interact with each other and with New Zealanders.
• A higher performing Treasury. We'll continue striving to be a world-class Treasury that will be among the most influential and respected organisations in the country, where the best people come to do ambitious and innovative work built on quality analysis and excellent implementation. We'll achieve this within the budgets necessary in the fiscally constrained public sector.

State of the Economy#

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International comparisons of income, productivity and the quality of institutions comprise a wide set of indicators and are produced by a number of organisations.

The Economic Development Indicators report produced by the Ministry of Business, Innovation and Employment (MBIE), the Treasury and Statistics New Zealand includes a large number of such indicators, benchmarking New Zealand against the Organisation for Economic Co-operation and Development (OECD) countries and more recently, Australian states. Reports have been published in 2003, 2005, 2007 and 2011. Organisations such as OECD and the International Monetary Fund (IMF) regularly comment on New Zealand's economic performance and, to varying degrees, on the quality of policies and institutions.

Given the wide range of existing reporting, we see the main features of the Treasury's annual reporting as comprising:

• an update of key indicators for income, productivity and quality of institutions, and
• external commentary on progress being made to improve the quality of institutions and raise productivity and income.

The most recent policy assessments from IMF and OECD are summarised in the tables below.

The decades-long decline in New Zealand's gross domestic product (GDP) per capita relative to the OECD average stabilised from the 1990s. Over the 1990s and 2000s, GDP per capita increased at around the same pace as the average OECD country.

GDP per capita as a proportion of OECD mean; 1970 to 2010

The gap in New Zealand's GDP per capita reflects a gap in the level of labour productivity (output per hour) with some offset created by slightly higher than average labour utilisation (hours worked per capita). Since the mid-1990s, the period over which comparable official productivity statistics for Australia and New Zealand are available, labour productivity growth in New Zealand has been below Australia's. While growth in New Zealand's multifactor productivity has been slightly ahead of Australia's, the capital-to-labour ratio in Australia has grown twice as fast.

Australia and New Zealand productivity growth  #

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Source: Statistics New Zealand

There are a number of indicators about the quality of New Zealand's institutions, including the International Institute for Management Development (IMD) World Competitiveness Yearbook; theHeritage Foundation Index of Economic Freedom; the World Bank Doing Business Database; and OECD cross-country product market regulation surveys. Many of these are included in the Economic Development Indicators report.

In terms of the quality of the regulatory framework for business, New Zealand has lost ground over the past decade, compared with other countries.

Product market regulation - selected countries; 1998 and 2008

While we might expect leading sources of indicators to produce similar results, there are often differences owing to the choices made by those preparing cross-country comparisons. In many cases there is no single "best" indicator. The Treasury is working on how to measure and report on international competitiveness, and the quality of regulatory policy and institutions. We are also working with Statistics New Zealand, MBIE and the Productivity Commission to improve our understanding of alternative economic performance data.

Some of the indicators reported here provide additional context to those set out in the Outcome Performance section of this Annual Report. These economic indicators, together with the broader assessment of New Zealand's institutions, are also relevant for the Living Standards Framework discussed previously. We expect the scope of annual reporting on economic performance and quality of institutions to expand somewhat over time as new information emerges and our understanding of the various indicators improves.

IMF 2012 Article IV Consultation: Summary of policy recommendations #

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Monetary policy

The current accommodative monetary stance is appropriate. If the recovery remains on track and downside risks dissipate, monetary policy will need to tighten gradually to contain inflationary pressures. However, if the global recovery stalls or international capital markets are disrupted, the Reserve Bank of New Zealand (RBNZ) has scope to cut the policy rate and provide liquidity support for banks.

Fiscal policy

The authorities' plan to return to budget surplus by 2014/15 should put New Zealand in a better position to deal with future shocks and the long-term costs of ageing. Moreover, it will relieve pressure on monetary policy and thereby the exchange rate, helping contain the current account deficit over the medium term. New Zealand's relatively modest public debt gives the authorities some scope to delay their planned deficit reduction path in the event of a sharp deterioration in the economic outlook.

External vulnerabilities and the exchange rate

Increasing national saving, including through the planned fiscal deficit reduction, would reduce external vulnerability.

Financial sector issues

While New Zealand's bank regulatory norms are more conservative than in many other countries, the authorities should assess on an ongoing basis the balance between banking sector vulnerability versus efficiency to minimise the risk that systemically important banks pose to the economy. Options to strengthen prudential norms if needed could include setting banks' capital requirements above the Basel III minimum or raising the core funding ratio more than the planned 75% to reduce short-term external debt further. RBNZ's continued work on the costs and benefits of macroprudential measures is welcome, as is the authorities' intention to implement key features of Basel III in early 2013.

Summarised from: IMF Executive Board Conclusion of 2012 Article IV Consultation with New Zealand, Public Information Notice (PIN) No.12/55

OECD Economic Survey of New Zealand 2011: Summary of policy recommendations#

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Reducing imbalances

• Return to fiscal surplus as soon as possible.
• Consider whether further changes are needed to strengthen the existing fiscal framework to reduce the risk of pro-cyclical fiscal policy in the next upswing (eg, expenditure ceiling or independent fiscal watch dog).
• Target a larger surplus in the medium term than the 2% of GDP signalled in the Half-year Economic and Fiscal Update (HYEFU).
• Align the top corporate, capital and labour income tax rates at lower levels, or adopt dual income tax approach.
• Reduce the tax on non-housing savings as long as New Zealand does not have a capital gains tax.
• Tax the real component of interest income instead of nominal interest income.
• Increase the retirement age, move to partial price indexation of NZ Superannuation and remove KiwiSaver subsidies.

Housing

• Introduce a capital gains tax, or at least reduce the ability to use tax losses on investment properties to reduce tax liabilities elsewhere (loss ring-fencing), or reduce taxation of alternative savings vehicles and introduce higher property taxes or land tax.
• Extend regular needs reassessments to all existing tenants, to enhance the capacity for social housing to match household requirements.

Regulatory governance

• Further strengthen regulatory governance (eg, greater use of periodic review and sunset clauses, requiring clearer net public benefit justifications for any regulatory restrictions on competition), and passing a "suitably refined Regulatory Responsibility Bill".
• Need more political will to further embed, and make more disciplined use of, the regulatory management system, to change the regulatory culture within government.

Competition

Government intervention in network sectors needs to be more transparent and predictable. New Zealand's competition policy framework needs updating, including:

• stronger accountability on regulators through periodic independent assessments
• giving the Commerce Commission a "wider range of interventions" (especially remedial orders, payment of damages, compensation and public warnings)
• having ex post evaluations of Commerce Commission decisions, to act as an audit of their performance, and
• harmonising anti-monopoly law with Australia or OECD best practice (s.36 and criminalising cartels).

Policy alignment and harmonisation

Increase policy harmonisation and mutual recognition of standards with Australia, and other counterparts where appropriate.

State-Owned Enterprises

If full privatisations are not feasible, partially float SOEs to improve commercial discipline and transparency.

Foreign direct investment

Amend the investment screening regime to provide greater clarity and certainty for foreign investors. In particular, ministerial veto powers should be removed.

Summarised from: OECD (2011), OECD Economic Surveys: New Zealand 2011, OECD Publishing. http://dx.doi.org/10.1787/eco_surveys-nzl-2011-en

The Treasury's Performance Framework#

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Our Outcome Performance#

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Improved Economic Performance#

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New Zealand's average GDP per capita growthfor the past six decades has been poorer than all other OECD countries. In order to maintain New Zealand's living standards we need to materially narrow the income gap between New Zealand and the most advanced economies. New Zealand's economic growth performance relative to other countries is improving, albeit slowly.

New Zealand real per capita GDP growth

For a country of New Zealand's size, much of this growth will need to be driven by strong export performance as reflected in tradable sector growth, which is also improving but still lags behind non-tradable sector real GDP growth.

To achieve improved economic performance requires policy changes with the potential to lift productivity across the economy and support a substantial lift in export performance. The Treasury provides policy advice that focuses on three intermediate outcomes that will contribute towards improved economic performance.

New Zealand real tradable and non-tradable GDP growth

Intermediate Outcome: Improved Business Environment#

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New Zealand's business environment needs to strongly outperform other countries to overcome the disadvantages of size and distance. Our business investment as a percentage of GDP remains below the OECD average (for the five years ending 2010 the New Zealand average was 10.4% compared to an OECD average of 11.2%), while our business expenditure on research and development (R&D) has been growing faster than the OECD mean but from a much lower base. It increased from 0.47% of GDP in 2006 to 0.54% in 2010 while the OECD average in 2008 was 1.63%.

The Government impacts on the business environment particularly through its policies relating to education, welfare, tax, savings incentives, regulation, science and innovation, infrastructure and the management of natural resources. The Treasury has provided policy advice in all of these areas, with a particular emphasis on tax, regulatory quality, savings and infrastructure; along with providing advice on priorities for medium-term economic growth strategy.

We have worked in a collaborativeway with a number of other government agencies to create a shared view across State sector economic agencies on economic strategy (the Internationally Focused Growth Strategy). This assisted the Government to develop its Business Growth Agenda and 120-action plan. We undertook research on taxation which improved the evidence base around the impact of potential changes to the taxation of savings and investment.

The National Infrastructure Plan was well received by the business sector, which saw it as a good assessment of the issues in the sector and demonstration of government focus on this area. We engaged with various sector groups to test its thinking and these groups have provided cooperation and advice about progress on the implementation plan. The National State of Infrastructure Report has now been linked to the Government's Business Growth Agenda Infrastructure Report, with both now scheduled for publication in September 2012 - we have been testing the content of both reports with business and local government representatives.

Through our role in assessing major Regulatory Impact Statements and by helping to build agency capability, we have seen the proportion of significant Regulatory Impact Statements meeting most or all of Cabinet's regulatory impact analysis requirements rise from 60% in 2009/10 to 75% in 2011/12.

We provided advice to ensure that policy settings maximise the value of New Zealand's significant natural resource endowment. We informed government decisions to maintain the transition settings for the Emissions Trading Scheme, which will reduce business costs by an estimated $255 million between 2013 and 2015. We have been instrumental in initiating a water reform programme to provide central government direction to regional councils in giving effect to the National Policy Statement on Freshwater Management 2011, which requires that regions establish and manage to freshwater objectives and freshwater quality limits.

For more detail on our policy outputs in this area, see pages 37 and 41.

Intermediate Outcome: Being More Integrated and Connected into the Global Economy#

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New Zealand needs to have an internationally competitive business environment and be well integrated and connected into the global economy. We need to ensure that we take an international lens to our policy settings so that they are best aligned to facilitate the flows of trade, people, capital and ideas.

The Treasury has adopted a far more collaborative approach to its work over the 2011/12 year. We've formed a joint venture with the Ministry of Foreign Affairs and Trade (MFAT) and MBIE to investigate the drivers and barriers to New Zealand's trade in services. The joint venture research will also touch on views about drivers and barriers to foreign direct investment. We have addressed gaps in the evidence base on the internationalisation of New Zealand firms.

We have sought to develop and maintain effective international relationships so that the Treasury and the Government can more widely influence policy-making by other countries and international institutions. Over the past year we have strengthened New Zealand's bilateral relationships with our key international partners, particularly with China, India and the US.

We have continued to manage New Zealand's ownership interests in IFIs and New Zealand's input into international Finance Ministers' forums, which has helped support New Zealand's international reputation. We have contributed policy advice to the negotiation of the Trans-Pacific Partnership negotiations and other free trade agreements. We also provided advice on improving the effectiveness and efficiency of New Zealand's offshore presence.

The Treasury also delivered NZECO products and services to increase exports that otherwise would not have occurred owing to constrained access to trade finance or appropriate risk mitigation techniques. For more information on NZECO outputs, see page 42.

Intermediate Outcome: Enhanced Human Capital and Labour Supply#

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Skills influence productivity and growth directly, through their impact on labour productivity and labour utilisation; and indirectly, through their effect on other drivers of growth, such as innovation and international connectedness.

Along with MSD, the Treasury continues to be the joint lead on the suite of reforms to the welfare system, with a particular focus on the accountability and funding arrangements. The purpose of welfare reforms is to reduce the number of people who remain on a benefit for more than 12 months thereby reducing the long-term liability of the benefit system, increasing labour force participation and ultimately economic performance. We have helped complete the policy changes necessary for the legislation to be drafted for the first phase of welfare reform (including Youth Services and changes to work expectations for sole parents); and began work on the second phase of welfare reform (including establishing an investment approach for the benefit system). From next year the Treasury will become the external monitor of Work and Income, to ensure effective implementation of the investment approach.

We have contributed to the development of coordinated education and welfare policies to support youth achievement, such as the Youth Guarantee and Youth Services. We have also contributed to tertiary education policies encouraging the retention, achievement and progression of students to higher levels of study, as well as the development of student support settings. Together these are seeking to lift our youth achievement as outlined in the box below. We decided to be bold in our public communications on education policy to help stimulate the public debate.

A Stable and Sustainable Macroeconomic Environment#

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A stable and sustainable macroeconomic environment is necessary for broad and enduring prosperity. Macroeconomic stability (as partly indicated through inflation, see graph below) provides households and firms with the predictability and certainty they need to make good decisions about employment, saving, investing, innovating and pursuing opportunities.

Inflation and inflation expectations

Global economic and financial conditions continue to have a major bearing on domestic economic and financial developments and overall macroeconomic stability.

Managing and ultimately reducing the risks associated with these vulnerabilities is central to macroeconomic stability. Macroeconomic stability is supported by having sound macroeconomic and microeconomic settings and environment in place to ensure that we can weather the external shocks that come our way, as well as ensuring that policy itself is not a source of domestic imbalances. A sustainable fiscal position contributes directly towards macroeconomic stability. The Treasury provides advice and services on both these elements.

Intermediate Outcome: A Stable Macroeconomic Environment#

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The Treasury's work aims to help keep economic activity close to full employment levels, keep economic variability to a minimum and avoid abrupt negative economic adjustments when hit by shocks. The May 2012 RBNZ Financial Stability Report showed decreased risk to the New Zealand financial system relative to earlier in 2011/12 (see graph below) and for the 10 years ended 2011 New Zealand's variability in real GDP was ranked 12th out of 34 OECD countries.

Financial stability cobweb

We provided advice on macroeconomic policy settings and frameworks; fiscal policy and strategy; and with RBNZ, advice on financial stability. This included advice to the Government on the impact of government policy on the macroeconomic environment. This advice enabled the Government to operate fiscal policy in a way that contributes to macroeconomic stability, balancing short- and medium-term requirements. We reviewed the Public Finance Act 1989 and provided advice to supplement the principles of responsible fiscal management. We helped strengthen the "rules of the game" in areas like fiscal and financial policy drawing on the experience of the past decade.

We participated in a trans-Tasman banking crisis exercise, working collaboratively with our trans-Tasman colleagues to help determine the scope for refinements to our cross-border financial crisis management arrangements. We continued to provide economic and fiscal monitoring, reporting and forecasting. The Treasury remains amongst the top two forecasters of the New Zealand economy; maintaining our reputation as a credible and trusted advisor.

Intermediate Outcome: Fiscal Position Returned to a Sustainable Footing#

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Reducing the fiscal deficit and reducing government net debt back to prudent levels will contribute to macroeconomic stability and increase fiscal sustainability. Reducing the fiscal deficit as the economy expands and spare capacity is used up will lean against upward pressure on interest rates and the exchange rate, thereby supporting a more growth friendly macroeconomic policy mix. It also helps offset some of the risk associated with New Zealand's large net external liability position. Returning to surplus on a sustained basis will restore the fiscal buffer provided by low debt, better positioning the economy to cope with future adverse economic shocks. Alongside this, maintaining a broad-base, low-rate tax system minimises economic distortions.

The Treasury, through our advice on fiscal policy and budget and balance sheet management, has worked to assist the Government to reduce future deficits with the aim of bringing the operating balance back to surplus by 2014/15. This included helping deliver a second consecutive near zero increase in operating spending in Budget 2012. IMF's 2012 Article IV report endorsed the current direction of fiscal policy and international rating agencies continue to note the relative strength of the fiscal position. They also highlight the high quality of New Zealand fiscal institutions, transparency of fiscal reporting and management of the Crown's finances.

The Treasury is required to produce a Long-term Fiscal Statement in 2012/13. The Treasury is taking an open approach to the development of the third of these statements by testing its assumptions and analysis with an independent panel of economists, academics and commentators and seeking alternative views from key experts through a conference in late 2012. This has helped create an environment for open debate and commentary about the policy options available to achieve long-term fiscal sustainability.

In addition, the Treasury continued to manage and administer financial operations on behalf of the Crown (for more information on these outputs, see pages 42 to 44) and continued to manage Crown debt and related financial assets (see pages 43 and 48 to 50). NZDMO issued $13.5 billion worth of government bonds, with the cost of new borrowing being 3.34%, compared with a benchmark of 6%.

A More Effective and Efficient State Sector#

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The quality of expenditure, regulation and other interventions by State sector agencies has a significant impact on the living standards of New Zealanders. It impacts both directly and indirectly on New Zealand's stocks of financial and physical capital, human capital, social capital and natural capital. Given the significant impact it has, the State sector needs to do the right things in the right ways at the right time - and they must be affordable.

The size of the State sector has grown dramatically over the past decade, both in terms of expenditure and the size of the balance sheet. The Fiscal Strategy Report (FSR) specifies the Government's long-term objective is to reduce core Crown expenses to below 30% of GDP. Current forecasts show an improvement in the reduction in core Crown expenses as a proportion of GDP compared with the Budget Economic and Fiscal Update (BEFU) in 2011.

Core Crown expenses

OECDindicators of product market regulation

* Aggregate Energy Transport and Communication Regulation Indicators (ETCR)

Note: The product market regulation survey is untaken every five years with the last available data being for 2007.

The results achieved have not always matched this growth nor have increases in spending always been targeted to those most in need. The limited indicators of the impact of State sector activity that have been available to date have moved only in quite narrow bands in recent years, although there has been improvement in the broad indicator of quality (Kiwis Count), as set out in the graph and box below.

Percentage of State sector employees as a proportion of the working-age population

Intermediate Outcome: State Institutions Deliver Sustained Performance in Results and Capability#

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The Treasury worked with SSC, DPMC and the Better Public Services Advisory Group to produce the Better Public Services report. The report's recommendations now form a core plank in the Government's programme to achieve its priorities. The three Central Agencies are now working more closely together as a "Corporate Centre" for the State sector. The three agencies are working collaboratively to drive and support the Better Public Services programme goals: strengthen leadership; deliver better results; and develop a culture and practice of innovation and continuous improvement in delivering better services and value-for-money. Legislative reform to the Public Finance Act 1989, Crown Entities Act 2004 and State Sector Act 1988 in support of this programme has been agreed by Cabinet.

Managing with a longer-term time horizon#

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The Treasury continued its efforts to shift the State sector management system onto a much longer-term focus, at a system level and in relation to specific areas of government activity. Four-year plans have been put at the heart of the fiscal management and budget process, providing a medium-term understanding of cost pressures and the strategies required to manage them over the next few years. In the welfare sector, we worked collaboratively with MSD to commission an actuarial calculation of the long-term liability of the working-age benefit system, to make the long-term costs to the Crown more transparent and become a key part of management in the welfare system.

Measuring performance#

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We continued our focus on developing or enhancing tools to understand performance in the State sector. We ran the second year of the Better Administrative and Support Services (BASS) benchmarking exercise[1]; we trialled a common indicator set for policy advice; and assisted SSC in the review and updating of PIF. We have made progress in tracking and improving agency performance in regulatory impact analysis; the proportion of significant Regulatory Impact Statements meeting most or all of Cabinet's regulatory impact analysis requirements has risen from 60% in 2009/10 to 75% in 2011/12.

These measurement tools, together with Gallup, audit results and other published data sources, now enable a much better understanding of State sector performance, at an agency, sector and system level. Alongside and supporting the Better Public Services focus on delivering results, this is creating a stronger focus on performance across the sector.

Assisting lifting performance#

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As well as measuring performance, the Treasury has worked to assist in enabling or delivering improved performance across the State sector. Innovations include our work with the Ministry of Education (MOE) and Department of Corrections on New Zealand's first PPPs; facilitating HR and Finance Improvement Programmes involving 19 agencies; working with a large number of agencies on business cases; and implementing new flexible financial arrangements to support collaboration in the justice sector.

Intermediate Outcome: The Crown Balance Sheet is Managed Efficiently and Effectively#

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The New Zealand State sector manages over $240 billion worth of assets - around half of which are physical assets - across three portfolios of social assets (such as roads and schools), commercial assets and financial assets and liabilities. Over time, we are seeking to align the composition and shape of the Crown's assets and liabilities with the Government's value, performance and risk objectives (eg, through advising on choices about the scale of new investment in social infrastructure assets versus reducing Crown debt).

The Treasury's roles with respect to these assets include ensuring there are incentives to use existing capital well, introducing private sector capital and commercial disciplines where this is appropriate and advising on the allocation of capital to its highest value use. These activities and interventions are designed to increase State sector productivity and the ability of the Crown to deliver more for less. We continued to roll out the Better Business Cases approach and undertook an inaugural round of asset management maturity assessments in capital-intensive agencies. We started to develop asset performance metrics with selected capital-intensive agencies. The Government's Investment Intentions are starting to be embedded into decisions around capital allocation. We supplemented the intentions with directions for investment in social, financial and commercial assets. For more information on these outputs, see pages 45 and 46.

We provided advice on the performance of SOEs and CFIs. We undertook a significant revision of the Owners' Expectations Manual. We analysed the extent to which the Crown's financial and commercial assets met their cost of capital and benchmark returns, publishing the results in the Treasury's Annual Portfolio Report (APR). As a consequence of Treasury engagement with companies on their dividend policies, some companies resumed dividend payments or established a timeframe for when they intend to do so. There is solid evidence that CFIs are well managed, with fee structures that are currently appropriate although it is worth keeping this under review. For more information on these outputs, see pages 54 to 55.

We provided the Government with advice on extending the Mixed Ownership Model and since the election have been working towards the implementation of this. For more information on these outputs, see pages 51 and 52.

A Higher Performing Treasury: Our Organisational Health and Capability#

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To be a world-class Treasury working towards higher living standards for New Zealanders requires an ongoing programme to develop the capability of our staff and systems.

We have three objectives that reinforce each other:

• We are an adaptable and productive workforce.
• Our leadership role models and drives our values in order to lift our performance.
• We are a well-managed public sector organisation focused on continuous improvement.

 

We are an Adaptable and Productive Workforce#

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In order to be a high-performing organisation, we need all our staff to know what we are seeking to achieve and how we are going to achieve this. Over the year, we have undertaken a number of initiatives in support of this, including improving the line of sight between our outcomes and individual work plans; improving the clarity of our Statement of Intent (SOI) (including our performance measures) and Output Plan; developing the four-year Budget Plan; improving our prioritisation process; and finalising a Workforce Strategy.

Our Briefing to the Incoming Government is an example of the progress we have made in bringing together coherent and forward-looking advice to Ministers on what matters for New Zealand's living standards.

We've developed and begun implementing a number of key strategies (including a Diversity Strategy and Workforce Strategy) that will enable and support a higher performing Treasury in the future.

We have put in place measures to lift the Treasury's capability to carry out our Ministry of Finance function. Our aim is to achieve a step change in our strategic finance analysis. We have also progressed work on how we are going to more effectively join up our functions with DPMC and SSC as part of an effective Corporate Centre.

The Treasury undertook its third Gallup Q12 survey over August and September 2011. The participation rate was 94%. Employee engagement at the organisational level has been steady year-on-year with the Treasury sitting on the 43rd percentile in Gallup's worldwide database (from the 44th percentile in 2010) and the 64th percentile in the Worldwide Public Administration database. The percentage of engaged employees increased from 34% to 37%. While this is positive movement, we aim to improve our engagement scores significantly.

Equal Employment Opportunities#

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The Treasury places importance on diversity to ensure our thinking and actions are informed by a diverse range of views. We need to understand different perspectives, constantly look for new insights and recalibrate our views in light of new evidence so an emphasis on diversity positively impacts the Treasury's reputation, credibility and performance. In line with the Workforce Strategy, the Treasury's Diversity Policy was reviewed in 2011/12 and enhanced to ensure diversity is considered and valued throughout the Treasury's work programmes and contribution to higher living standards for New Zealanders. As a result of the review the Treasury has developed a Diversity Strategy and implementation plan. The strategy was launched formally in February 2012 with a focus on three key areas: diversity of thinking including new approaches to problem-solving and creativity; ethnic diversity to better reflect the views of the broader society that we serve; and the proportion of women in senior leadership roles. Activities to date have focused on demonstrable senior management commitment, improved recruitment strategies and processes to attract a more diverse applicant base, improved data collection and reporting and development programmes focused on Maori engagement, implications for policy advice and language.

Our Leadership Role Models and Drives Our Values in Order to Lift Our Performance#

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We have continued to progress our Change Programme to lift the performance of the Treasury by changing the Treasury's culture. We have established a clear set of values that set out the type of organisation we want and need to be, and delivered a range of activities that help give effect to these values. Our leadership is taking an active role in leading the culture change and is committed to focusing more on setting the strategic direction of the organisation and to working collaboratively.

The Treasury takes improving the effectiveness of our leaders seriously and we have put in place a number of actions on this. In our 2011 Gallup survey the results to the statement "I have confidence in the leadership of the Treasury to successfully manage emerging challenges" increased from the 32nd percentile to the 43rd percentile.

In addition to our internal leadership, we have taken a more active external leadership role. We have been more visible in shaping the debate in a number of areas. In August 2011 we engaged an independent market research firm to survey external stakeholders' opinions about the Treasury. A series of 14 qualitative and 160 quantitative interviews were used to gauge external perceptions of the Treasury, enabling us to create a benchmark of our service delivery. Interviewees were asked about their perceptions of, experience with and satisfaction regarding the Treasury's service. Findings included that:

• Stakeholders respect the Treasury for its expertise and professionalism. There is a high level of confidence in staff, the standard of our thinking and analysis.
• Stakeholders are interested in the Treasury. They want more frequent and richer engagement, better information about who does what, more collaboration and partnership and for the organisation to engage with a wider range of interests.

We are a Well-managed Public Sector Organisation Focused on Continuous Improvement#

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In March 2012 CASS was established. This illustrates Central Agencies' commitment to working together to deliver better public services, and our willingness to set the benchmark in terms of best practice shared services.

In addition, the Treasury has been focusing on ensuring we have effective management information, planning and reporting systems in place to enable the Treasury to measure its impact and to support decisions about efficiency and effectiveness. In 2011/12, a new financial information system was introduced that provides managers with information in a more timely manner to better support effective decision-making.

The Treasury continues to be committed to improving measurement of its performance in order to demonstrate the value provided through the delivery of our goods and services (our cost effectiveness). Specific actions we have taken over the past year to improve our measurement include participation in the policy advice measurement pilot and development of an internal review process to assess the quality of the Treasury's policy briefings. In addition, we have continued to participate in the BASS programme.

Measuring our Continuous Improvement#

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• The Treasury is undertaking a midterm PIF to identify areas where the Treasury can invest to lift ratings to "strong".
• Costs of supplying administrative and support services as a proportion of the Treasury's running costs decreased from 17.13% to 16.95% (excluding rental costs) by end of 2010/11. With the introduction of CASS we anticipate seeing a further drop for 2012/13 but the fall is not evident at the end of 2011/12.
• Overall the Treasury's administrative and support services reduced in nominal terms by $338,000 or 2% between 2009/10 and 2010/11 but showed in a number of areas where the Treasury was well below the median in its peer group. The Treasury has participated in the 2011/12 benchmarking exercise and the results of this will be published towards the end of 2012.
• Some management practice indicator measures recorded in 2009/10 reduced slightly in 2010/11 from an average 62.86% to 61.43% owing to removing the requirement for formal time recording in 2010/11. It is expected that this position will improve by end of 2012 with the introduction of CASS and more formal servicing arrangements with each of the three agencies.
• The Treasury was rated 4.52 for 2011/12 out of a possible 5.00 for Departmental Internal Control Environment - a score which is excellent.

Risk Management#

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The Treasury's ability to manage in an uncertain and changeable operating environment and to achieve our outcomes is enhanced by the quality of our risk management[2].

Our enterprise risk management approach ensures there is systematic and regular assessment and monitoring of key strategic and operational risks facing the Treasury. Our senior leaders regularly identify and assess the Treasury's biggest strategic and emerging risks, and ensure that we take appropriate actions to manage them.

The Treasury also carries out regular operational risk assessments. We manage risks relating to our various change initiatives and projects to ensure that we anticipate and deal with uncertainty as effectively as we can.

The Treasury's risk management practices use an approach modelled on the Joint Australian/New Zealand International Risk Management Standard.

Our overall set of risks is overseen by a Risk and Audit Committee (a committee of the Treasury Board), which comprises two experienced external members to provide independent perspectives.

Our internal audit function provides assurance to the Board and senior management that key risks are being managed appropriately and that internal controls are operating effectively.

An example of an internal audit in 2011 was of our policy and practices relating to offers of gifts and hospitality received by Treasury employees. The audit reviewed our policy and practices against government requirements and best practice. As a result of the audit, we revised our policy so that it provides clear guidance to ensure everyone responds appropriately and consistently to offers of gifts and hospitality. Gifts and hospitality received are now recorded, approved and reviewed in a consistent way across the Treasury.

Statement of Responsibility#

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Pursuant to sections 45 and 45C of the Public Finance Act 1989, the Secretary to the Treasury is responsible for the preparation of the Department's financial statements and non-departmental supplementary schedules, and the judgements made in the process of producing these financial statements and supplementary schedules.

The Department's internal control procedures provide reasonable assurance as to the integrity and reliability of its financial reporting.

In the opinion of the Secretary to the Treasury:

• the Department's financial statements and statements of service performance fairly reflect its financial position and operations for the financial year ended 30 June 2012, and
• the supplementary schedules fairly reflect the assets, liabilities, contingencies and commitments managed by the Treasury on behalf of the Crown as at 30 June 2012 and revenues and expenses managed by the Treasury on behalf of the Crown for the year ended on that date.

Gabriel Makhlouf
Secretary to the Treasury

28 September 2012

 

Fergus Welsh
Chief Financial Officer (countersigned)

28 September 2012

Statement of Service Performance#

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Our Service Performance#

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This section describes the 12 groups of outputs that the Treasury was funded to deliver in 2011/12 and assesses our delivery against the performance measures set out in the Information Supporting the Estimates 2011.

Collectively these output expenses support the achievement of the outcomes set out on pages 18 to 33 of this Annual Report.

For each output expense, summary information has been provided on the nature of the work it covered, examples of significant work completed during the year and an assessment of how we have performed against the performance measures that were published in the Information Supporting the Estimates 2011. Where relevant, and where the information was available, performance information has also been provided against additional measures that have since been published in the Information Supporting the Estimates 2012.

The diagram on pages 16 and 17 of this report illustrates the relationship between our output expenses, our intended impacts (also known as intermediate outcomes) and our outcomes.

Policy - Finance#

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Scope of Appropriation#

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This appropriation is limited to the provision of advice (including second opinion advice and contributions to policy advice led by other agencies) to support decision-making by Ministers on government policy matters relating to finance.

Significant Work Completed During 2011/12#

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Outcome: Improved Economic Performance

The Treasury provided advice on:

• New Zealand's medium-term economic outlook and the key policy changes that in the Treasury's view would substantially increase both resilience and trend economic growth. This is best encapsulated in the Treasury's BIM
• a comprehensive range of policy options towards improving New Zealand's economic performance. This fed into the development of the Government's Business Growth Agenda which refreshed the Government's economic growth agenda. The Treasury has an ongoing role in coordinating agencies in delivering and refreshing the agenda
• the potential for changes to the taxation of savings and investment to improve our long-run economic growth performance, drawing on general equilibrium modelling of the effects of particular tax reform options
• the Regulatory Standards Bill which seeks to increase the disclosure of information to assist the scrutiny, and improve the quality, of government-initiated legislation
• the overall impact of medium-term design changes to the Emissions Trading Scheme, including transitional settings, and changes to increase the flexibility of the scheme including the provision for auctioning
• the potential economic benefits of re-orienting of the Hazardous Substances and New Organisms Act 1996 (HSNO) regime, which manages chemical and biological risks, towards encouraging innovation and economic development, including presentation of a paper to the Biological Risk Management Committee which helped catalyse the Royal Society's call for a review of HSNO
• the effective recovery of the Canterbury region. Specific issues addressed during the year included the Earthquake Commission (EQC) re-estimates of its liability and the implications of a High Court Judgement on EQC's liability across multiple events; land zoning and the cost of land remediation; and insurance market dynamics. We currently expect remaining non-EQC fiscal costs of the earthquake to remain within the amount ($5.500 billion) provided for in the Canterbury Earthquake Recovery Fund (CERF) in Budget 2011
• advancement of regional economic integration through the Trans Pacific Partnership (TPP) negotiations throughout the period (and this is ongoing), in particular, analysing proposals regarding SOEs and investment policy; and developing a framework for assessing the overall costs and benefits of the resulting TPP package
• welfare reform, including the subsequent legislative reform required to enable reform package changes to take effect in July 2012. The programme is expected to continue next year
• the proposal to integrate the Ministry of Economic Development (MED), Department of Labour (DOL), Department of Building and Housing (DBH) and the Ministry of Science and Innovation (MSI) into a single MBIE
• education funding, including the relative public/private contributions to tertiary education, drawing on Treasury-commissioned research from the New Zealand Institute of Economic Research (NZIER) and University of Auckland on the private returns to tertiary education, and
• the medium-term strategy for schooling, the Labour Market and Skills Strategy and the direction and scope of proposals to enhance the quality of teaching.

The Treasury also:

• updated the revenue strategy to reflect the Government's economic and fiscal priorities, and built this into the forward tax policy work programme
• engaged in the development of a Government White Paper on Vulnerable Children, with the Ministerial Committee on Poverty, and in development of new funding and data systems for early childhood education
• continued to run and build the regulatory quality management system, assessing Regulatory Impact Statements, developing an online database to record agencies' regulatory scanning results and running the annual regulatory plans process. We worked closely with key departments and some exemplary regulatory management practices are beginning to emerge
• finalised our first whole-of-government assessment of regulatory regimes and Cabinet agreed to the release of the Best Practice Regulation assessment
• supported the Minister's programme of visits in Washington DC at the IMF/World Bank annual meetings, represented New Zealand at the Asia-Pacific Economic Cooperation (APEC) Finance and Leaders' meetings, respectively and hosted senior delegations from IMF, World Bank and Asian Development Bank and delegations from China, the US and India
• participated in inter-agency climate change work to support Ministers on decisions regarding international and domestic policy settings, given changed international commitments, and
• advanced a number of tax policy items, including implementing Budget 2011 decisions on bank thin capitalisation; advice on the tax treatment of a range of events (such as earthquakes and the kiwifruit PSA virus); and advice leading to Budget 2012 announcements on tobacco excise, mixed use assets, outdated tax credits and the election of livestock valuations.

Outcome: A More Effective and Efficient State Sector

The Treasury provided advice on:

• the Better Public Services programme, which aims to deliver a package of practical State sector reform initiatives that are intended to deliver better public services at a lower cost. The Treasury advised on a suite of legislative reform, including changes to the Public Finance Act 1989, the State Sector Act 1988 and the Crown Entities Act 2004, supported by a stakeholder engagement programme
• the tradeoffs between ambitions and fiscal constraints involved in social housing reform (this was part of the Government's response to the Housing Shareholders' Advisory Group report)
• two bills concerning accident compensation; one to introduce competition in the Work Account with Accident Compensation Corporation (ACC) participation and another to expand the Accredited Employer Programme. Advice has been provided on a significant number of complex policy issues that will require resolution
• the direction of travel for the Inland Revenue Department's (IRD's) business transformation including technological change, and worked closely on the development of strategy through membership of IRD's transformation programme board
• New Zealand Defence Force funding and plans for achieving the planned savings targets by 2014/15
• the health system and its performance, including strategy discussions on the possible direction and design of reform, a case study with Nelson Marlborough District Health Board (DHB), increasing the contestability of supply in the system, co-payments for pharmaceuticals, budget strategy and savings advice and working with the Ministry of Health (MOH) on the Vote Health Four-Year Budget Plan, and a review of the DHB model. Also advice on capital issues in the sector, including possible PPPs, and
• increasing financial flexibility for agencies, allowing the transfer of funding between agencies and across years to enable sectors to better manage within their baselines to 2020. This advice was prepared jointly with the Ministry of Justice (MOJ).

The Treasury also:

• worked with SSC to complete six PIF assessments this year, and a further six are being finalised. The funding model and the work programme for the next three years were also agreed
• worked with the justice sector to ensure it can function within the flat nominal baselines set out in their plan. Achieving this will require some difficult decisions about some of the cost pressure issues affecting the sector such as out-dated remuneration agreements and infrastructure, reducing the in-flow to the justice pipeline and shifting the public debate to focus on results and the policy needed to deliver these
• began work on the economics of social housing, international evidence around reform in other countries and an evidence base for reform in New Zealand (in light of government objectives and the statements in the Housing Shareholders' Advisory Group report and the Productivity Commission report), and
• worked with the Office of Treaty Settlements to agree standardised comparative analysis on the "special factors" that have been increasing the cost of the Treaty settlements. Specific advice included a long-range scan of upcoming settlements and their likely costs, the medium-term trajectory of settlement costs, a framework for assessing the "special factors" that drive increased costs and options for tackling the legislative bottleneck and advice around the relativity mechanism.

Outcome: A Stable and Sustainable Macroeconomic Environment

The Treasury provided advice on:

• the fiscal outlook and risks for inclusion in the Budget Policy Statement (BPS) and the preliminary Budget forecasts, and regular reporting on earthquake recovery costs. The 2010/11 Financial Statements published in October 2011 were treated as the authoritative presentation of fiscal position. An unqualified audit opinion was issued on the 30 June 2011 Financial Statements of Government
• changing the trajectory of government operating and capital spending over the medium term to enable Ministers to reduce longer-term spending pressures, reallocate government spending and reprioritise the balance sheet, and
• strengthening the fiscal responsibility provisions of the Public Finance Act 1989, which led to the introduction of a bill in August 2012.

The Treasury also:

• participated in road shows to support the establishment of the new accounting standards by the External Reporting Board (XRB) with its sub-board New Zealand Accounting Standards Board (NZASB)
• produced tax and economic forecasts; these inform the Treasury's fiscal policy advice and inform the public about the basis of that advice, helping both government and business to make informed decisions about spending and investment
• launched the Government Economics Network (GEN) in September 2011 to strengthen economic capability across government and to improve the use of economics in public policy analysis
• began work on the next Long-term Fiscal Statement and public engagement process. This included preparing papers for the New Zealand Association of Economists (NZAE) conference, establishing an external panel of experts to test the Treasury's assumptions and analysis, commissioning independent research on key policy choices and organising a conference to discuss all of the key issues and options, and
• supported a Trans-Tasman banking crisis exercise to ensure that regulatory and crisis management settings were adequate to manage the risks presented by systemically important institutions. This work drew on a range of approaches being adopted offshore. We also worked with RBNZ on Open Bank Resolution (OBR) policy, in particular, on financial stability.

Expenditure is $5.111 million under the Supplementary Estimates budget. Approval has been granted to transfer up to $4.823 million of this under-spend to 2012/13 to complete a range of work programmes. The largest transfer of $3 million is for the development of ideas with the potential to deliver savings or significant improvements in efficiency or effectiveness across the State sector delivered through a range of agencies. While initially in Vote Finance, transfers will be made to the respective agencies that will deliver these projects.

The output expense structure under Vote Finance was rationalised in 2011/12 and therefore comparative figures are not available. Refer to Information Supporting the Estimates 2012/13 Part 1.4 of Vote Finance for the reconciliation of Changes in the Appropriation Structure.

Management and Administration of Financial Operations on Behalf of the Crown#

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Scope of Appropriation#

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This appropriation is limited to the implementation of the Government's Export Guarantees policy, the operation of NZECO and the provision of advice on, and management of, Crown Guarantee Schemes, Crown Lending, Crown Bank Accounts and Crown Investment.

Significant Work Completed During 2011/12#

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New Zealand Export Credit Office

• As at 30 June 2012 a total of 70 new policies were issued in 2011/12 - with total exposure of $104.130 million, supporting exports of $271.220 million. These results did not meet our forecasted targets, owing to exporters failing to secure new orders, delayed contract award or the successful negotiation of financial terms that have not required NZECO support. Positively, the number of new policies written and value of exports supported were both higher than NZECO achieved during 2010/11.
• Sound underwriting criteria and standards were maintained. Repayments were regularly monitored and any delays were actively managed.
• No claims were submitted or paid during the period. However, a $29.700 million provision was recorded. This will be actively managed during 2012/13 in order to minimise losses.
• NZECO continued to engage regularly with other export credit agencies to ensure it provides support to New Zealand exporters consistent with its overseas counterparts, including: attendance at a conference in Indonesia with other lead export credit agencies and international financiers; attendance at a Prague Club meeting in Oman in November 2011; and Kazakhstan in May 2012.
• As part of the Economic Growth Agenda, NZECO continued to work with cross-government officials to work on options for NZECO to generate greater export growth and strategically support New Zealand's Free Trade Agreements and the internationalisation of New Zealand firms. One specific outcome was Cabinet's approval in December 2011 to amend NZECO's delegation in order to add the Chinese Renminbi to NZECO's list of approved currencies that it can underwrite its trade guarantees in, and to substitute the requirement for a minimum 30% New Zealand content for a broader New Zealand economic benefit test.
• During the year, NZECO had 498 face-to-face engagements with exporters, banks and agencies to improve awareness of how to use NZECO guarantees to mitigate risk and to improve competitive advantage.
• Discussions are also underway with New Zealand Trade and Enterprise (NZTE) and MFAT on joint work to educate and improve information for exporters on trade finance options.

AMI Crown Support Agreement

• The Treasury continued to monitor AMI Insurance Limited (AMI) under the Crown Support Agreement. In April 2012, AMI sold its ongoing insurance business to IAG New Zealand Limited (IAG) for $380 million. At that time, the Crown assumed majority ownership of the residual business of AMI, appointed a new board and changed the name of the company to Southern Response Earthquake Services Limited (SRESL). SRESL manages settlement of the residual claims, primarily related to the 2010 and 2011 Canterbury earthquakes not included in the sale to IAG.

New Zealand Debt Management Office

NZDMO provides Treasury services, and administers loans, to other parts of the Crown according to government policy. These services provide net cost savings to the Crown. NZDMO is the lowest cost borrower in New Zealand. Central borrowing by NZDMO, with on-lending to the wider Crown, results in a lower debt servicing expense for the Crown than individual entities borrowing separately. Central treasury management saves on transaction costs and provides risk management benefits to the Crown. During the year, NZDMO:

• advanced $1,311.857 million distributed as follows: $652.400 million to DHBs; $179.457 million to Housing New Zealand; $170 million to the New Zealand Transport Agency (NZTA); $250 million to KiwiRail; and $60 million to Auckland Council. The advance to the Auckland Council was made up of three loans to enable it to develop the Auckland metro rail network through buying electric multiple units (EMUs) and building an EMU depot
• managed risk on $280.500 million of interest-rate swaps transacted for Housing New Zealand, and
• participated in the scoping of the possible tender of the Crown's transactional banking arrangements.

Expenditure is $1.329 million under the Supplementary Estimates budget. Approval has been granted to transfer up to $940,000 of this under-spend to 2012/13. This will cover the completion of negotiations associated with defaults under the Retail Deposit Guarantee Scheme and contracts for the US Contract Bond facility and short-term credit insurance to exporters.

The output expense structure under Vote Finance was rationalised in 2011/12 and therefore comparative figures are not available. Refer to Information Supporting the Estimates 2012/13 Part 1.4 of Vote Finance for the reconciliation of Changes in the Appropriation Structure.

Infrastructure Advice and Coordination#

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Scope of Appropriation#

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This appropriation is limited to the provision of advice to the Government and to government agencies on infrastructure, ensuring coordination and implementation of the Government's infrastructure activities, the formulation and implementation of the National Infrastructure Plan, monitoring of infrastructure investment and frameworks and operation of the National Infrastructure Advisory Board.

Significant Work Completed During 2011/12#

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• Continued to roll out Better Business Cases approach, in particular significant support and guidance to a range of agencies, including local government.
• Reported on inaugural round of asset management maturity assessments in capital-intensive agencies.
• Provided significant policy and second opinion advice in the Transport portfolio (including Auckland EMU train deal and NZTA Overdraft Facility) and on urban/infrastructure issues (in particular, the Auckland Spatial Plan and Christchurch CBD Recovery Plan). The Utilities Access Code was approved by the Minister for Infrastructure and took effect from 1 January 2012.
• Worked with other agencies and private sector stakeholders to develop an implementation plan for the National Infrastructure Plan. Implementation will continue through 2012/13, including reporting via the National State of Infrastructure Report and Business Growth Agenda reports, leading to another National Infrastructure Plan in 2014.
• Worked with MOE and the Department of Corrections agencies to bring PPPs to market for Hobsonville schools and Wiri prison and assisted with negotiation and closing of the Hobsonville schools contract. We also worked and continue to work with other agencies on prospective PPP opportunities and developed guidance.

Expenditure is $335,000 under the Supplementary Estimates budget. Approval has been granted to transfer up to $120,000 of this under-spend to 2012/13 for planned CAM and infrastructure plan projects.

Administration of Guarantees and Indemnities Given by the Crown Permanent Legislative Authority#

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Scope of Appropriation#

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• This appropriation is limited to expenses incurred in connection with administering of guarantees and indemnities given by the Crown, as authorised by section 65ZG of the Public Finance Act 1989.
• The Crown Retail Guarantee Scheme was wound down by 31 December 2011. There are no remaining guaranteed entities, and payouts under the Crown Retail Guarantee Scheme have been completed except in instances where claims have not been lodged. The budget for 2012/13 is for the remaining Wholesale Funding Guarantee Facility (WFGF). It is not expected that WFGF will be called on.

Significant Work Completed During 2011/12#

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• There have been no defaults in the wholesale scheme so no work required on this output over the year.
• All eligible depositors in Equitable Mortgages have now been repaid. The receivers for Equitable (acting on the instruction of the Trustee) have sought court direction in relation to the treatment of a small number of depositors in Equitable where their maturing guaranteed deposits were re-invested into unguaranteed securities and the determination may impact on the Crown's liability. The total amount affected by the court direction is $1.400 million in relation to 80 depositors.
• The Treasury proposed the consolidation of a majority of existing receiverships into a single management vehicle, which was approved by Ministers. The primary financial benefit was a 55% reduction in ongoing realisation costs. In addition, the proposed approach reduced workload involved in monitoring over the next two to three years (as the residual assets are realised) as well as offering scope to improve the level of recoveries.
• The Board-elect was approved in December 2011 and by 30 June 2012 the new entity (Crown Asset Management Limited [CAML]) was operating and the residual asset portfolio from the largest receivership (South Canterbury Finance [SCF]) had been transferred, with the remaining receiverships to follow.

Administration of Guarantees and Indemnities is $226,000 under the Supplementary Estimates budget. This relates to funding set aside for potential litigation and payments.

Permanent Legislative Authority Funding for New Zealand Debt Management Office#

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The Treasury's Debt and Related Financial Asset Management functions are funded through the three PLAs set out below.

Scope of PLA Appropriations#

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• Administration of Crown Borrowing PLA - This appropriation is limited to expenses incurred in connection with administering borrowing by the Crown, as authorised by section 61(1) of the Public Finance Act 1989.
• Administration of Derivative Transactions PLA - This appropriation is limited to expenses incurred in connection with administering derivative transactions of the Crown, as authorised by section 65H(2) of the Public Finance Act 1989.
• Administration of Investment of Public Money PLA - This appropriation is limited to expenses incurred in connection with administering the investment of public money, as authorised by section 65J(1) of the Public Finance Act 1989.

Significant Work Completed During 2011/12#

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Borrowing programme

• NZDMO issued $13.500 billion worth of government bonds, achieving its original programme of same value for 2011/12. A number of large bond tenders were completed through the year, including a record-equalling weekly tender in September 2011, which raised $1 billion. In response to variability in demand, the programme was revised to $15 billion at Budget 2012 to provide operational flexibility to issue additional bonds in the event of an increase in demand. As at 30 June 2012, the face value of bonds outstanding in the market was $55.307 billion.
• In November 2011, NZDMO repaid its largest ever bond maturity ($8.766 billion). NZDMO has risk and funding policies to ensure that all bond maturities are met in full.

Marketing efforts, interactions with international stakeholders and relationships with credit rating agencies

Throughout the year, NZDMO has been active in promoting bonds and New Zealand more generally. These efforts included: accompanying the Minister of Finance on overseas investor missions; developing and strengthening investor relations; and engaging with sovereign peers. This work included:

• Head of NZDMO, along with other Treasury staff, accompanied the Minister of Finance on a trip to the US to attend the IMF/World Bank Annual Meetings in Washington.
• Head of NZDMO and NZDMO staff have participated and presented at a number of investor and sovereign peers conferences and forums, including the Euromoney Australian and New Zealand Debt Capital Markets Forum, Fourth Annual Australasian Fixed Income Conference, the ANZ/Kanga News Capital Markets Forum and the Australian Central Financing Authorities Annual Conference.
• NZDMO has hosted a number of visiting delegations from developing debt management offices and investors, including sovereign wealth funds, Asian central banks and Japanese institutions, and briefed them on the economy and debt issuance strategy.

The Treasury and NZDMO maintained regular contact with the three rating agencies (Moody's, S&P and Fitch) during the year to assist them in their assessments of New Zealand's creditworthiness. This work included:

• briefing them on the developments in the New Zealand economy; and organising meetings with officials from relevant agencies including the Treasury, RBNZ, Minister of Finance, Opposition Finance Spokesperson and private sector economists and commentators, and
• on 30 September 2011, both Fitch and S&P announced that they had downgraded New Zealand's long-term foreign-currency rating from AA+ to AA and the domestic rating from AAA to AA+. Both agencies had had New Zealand on negative outlook. NZDMO had concluded several weeks earlier that a downgrade was a possible outcome of this year's rating reviews and had alerted the Minister to this. The Treasury provided the Minister's office material requested in order to prepare for the eventuality of a downgrade.

Derivatives programme

• Risk associated with the changing market value of NZDMO's debt and asset portfolios was successfully managed within NZDMO's average monthly Value at Risk (VaR) target.
• NZDMO has undertaken work to study the implications of the G20 mandate for over-the-counter derivatives to be centrally cleared, set to be implemented by the end of 2012.

Investment programme

• As at 30 June 2012, NZDMO managed marketable securities valued at $4.758 billion, deposits valued at $132 million and a cash balance of $8.477 billion. These assets are used to fund Crown operations, to provide short-term liquidity if required and to help repay debt maturities as they fall due.
• Assets are invested primarily in AAA- and AA-rated securities. The high quality of the asset portfolio, in conjunction with NZDMO's asset-liability matching policy, means that the portfolio value had very low volatility, as reflected in an average monthly VaR during 2011/12 of less than $1 million.

Administration of Crown Borrowing PLA is $628,000 under the Supplementary Estimates budget. This is owing to delayed implementation of inflation indexed bonds and project scoping work.

Note

Figures in the Investment Programme section are derived from NZDMO's management reporting, which is calculated on a different basis from external Crown financial statement reporting. For management reporting, NZDMO values its portfolios by the commonly-used methodology of calculating net present values from all future cash flows using zero-coupon discount curves which are generated at least daily from market data. NZDMO uses current spot foreign exchange (FX) rates to translate foreign-currency net present values to New Zealand dollars.

Extending and Implementing the Mixed Ownership Model#

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Scope of Mixed Ownership Model Appropriations#

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Extending the Mixed Ownership Model

• This appropriation is limited to policy, operational and transactional work in preparing to extend the Mixed Ownership Model.
• This appropriation covers work leading up to the approval by Cabinet of a multi-year appropriation to implement the model in December 2011.

Implementation of Mixed Ownership Model

• This appropriation is limited to policy, operational and transactional work to implement the Mixed Ownership Model.
• This multi-year appropriation commenced on 15 December 2011 and will expire on 30 June 2015.

Significant Work Completed During 2011/12#

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Extending the Mixed Ownership Model

• Appointed commercial advisors to advise on work required to extend the Mixed Ownership Model to four energy SOEs.
• Undertook scoping studies on the four SOEs identified for a Mixed Ownership Model and investigated each company's readiness for an Initial Public Offer (IPO) and any commercial impediments for a potential sale process. The Crown Advisor analysed the way in which a programme of IPOs might be undertaken and the Independent Advisor provided independent quality assurance on the work completed by the Crown Advisor.
• The Treasury prepared advice for Ministers on the design of a sales programme, drawing on the advice from its advisors and the views of the SOE companies and the relevant government departments.

Implementation of Mixed Ownership Model

• A substantial consultation process with Maori was designed and executed in the period December 2011 to March 2012 which involved 10 hui throughout the country, and the receipt and analysis of 213 submissions to the Treasury. The process resulted in ministerial decisions to bring certain elements of the current SOE legislation into the Mixed Ownership Model Bill.
• The Treasury provided support to Ministers and the Finance and Expenditure Committee through the legislative processes for the Mixed Ownership Model Bill: 1,486 submissions on the Bill were received, analysed and reported on to the Select Committee resulting in enabling legislation being passed on 26 June 2012.
• Appointments were made through public tender processes for various commercial roles associated with the Mixed Ownership Model programme.
• Commercial workstreams for the Mighty River Power IPO commenced in each of Due Diligence, Offer Structure, Corporate Finance, Retail Marketing and Logistics and Communications. In addition, the Treasury has led a Crown-wide due diligence process to discover Crown-held information which is material to the proposed IPO.
• The Treasury has worked closely with the Crown Law Office and external counsel to prepare and make submissions to the Waitangi Tribunal hearing of WAI 2358 - The National Freshwater and Geothermal Resources Inquiry.

Expenditure is $20.163 million under the Supplementary Estimates budget. This is a multi-year appropriation and the result against budget reflects the uncertain timing of the work programme. The full amount underspent is therefore transferred to 2012/13.

Main Estimates initial budget was appropriated under the Extending the Mixed Ownership Model and this was then transferred into the new appropriation for the Implementation of Mixed Ownership Model.

Provision of Financial Services to the New Zealand Local Government Funding Agency#

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Scope of Appropriation#

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This appropriation is limited to expenses incurred in connection with the provision of financial services on a commercial basis to the New Zealand LGFA. This is a Revenue-Dependent Appropriation (RDA).

Significant Work Completed During 2011/12#

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• Significant work on system development and legal work on contract documentation was completed in advance of LGFA going live.

LGFA commenced operations in February and since this time the Treasury has provided outsourced services to the level set out in the service level agreement. This included bond tendering, processing of on-lending to local councils, executing investment and derivative transactions as required and providing daily valuation and risk reports.

As this appropriation was established during the 2011/12 year, no performance measures were formally agreed for the year in review.

In December 2011, Cabinet agreed that NZDMO would provide a standby liquidity facility and outsourced service to the New Zealand Local Government Authority. An RDA was established and an annual fee negotiated between the two parties to recover the cost of providing the service.

Crown Company Monitoring Advice to the Minister for State-Owned Enterprises and Other Responsible Ministers#

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Scope of Appropriation#

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This appropriation is limited to the provision of ownership, performance monitoring and governance advice to the Minister for State-Owned Enterprises and other responsible Ministers in respect of the Ministers' shareholding responsibilities or as responsible Ministers for the New Zealand Lotteries Commission and Public Trust.

Significant Work Completed During 2011/12#

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• Engaged with monitored agencies and provided advice on strategy and planning documentation including Statements of Corporate Intent of SOEs.
• Prepared Quarterly Reports for Cabinet on Crown Company performance, covering SOEs and other entities being monitored. This year, the Treasury took on the secondary monitoring responsibility for Dispute Resolution Services Ltd, Health Benefits Ltd and LGFA.
• Analysed Post Investment Reviews of SOEs' major capital projects and business acquisitions and reported the results of these back to shareholding Ministers. The reviews showed that the majority of SOE investments have been successful.
• Published the 2011 APR, including an Economic Profit Analysis over 10 years for all SOEs, Air New Zealand, Public Trust and Television New Zealand (TVNZ). It also included Independent Commercial Valuations for all SOEs (also see below).
• Undertook work on the long-term strategy for Kiwibank, and in respect of two acquisitions by NZ Post/Kiwibank.
• Provided advice on institutional arrangements for SOEs. This included:
  • reviewing and revising the Owners' Expectations Manual for SOEs and other Treasury-monitored entitites, which has now been published, and
  • providing advice regarding KiwiRail's turnaround progress and a proposed Balance Sheet Restructuring, planned for implementation in 2013, which should assist in the reporting and monitoring of its commercial progress.
• Engaged with agencies on their dividend policies as part of the annual round of business planning and Statements of Corporate Intent, because these impact on capital structures, and as a consequence some companies resumed dividend payments or established a timeframe for when they intend to do so.
• Undertook work on understanding the senior management performance incentive structures at SOEs.
• Assisted Ministers with 101 appointments and reappointments of board members, and the appointments to establish boards for SRESL and CAML.

Expenditure is $419,000 under the Supplementary Estimates budget. Approval has been granted to transfer up to $400,000 of this under-spend to 2012/13 to continue to develop training for board directors and complete work programmes associated with Kiwibank and NZ Post.

From 2011/12 the appropriation previously attributable to Vote State-Owned Enterprises was transferred to Vote Finance.

Crown Company Monitoring Advice to the Minister of Science and Innovation and the Minister for Economic Development#

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Scope of Appropriation#

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This appropriation is limited to the provision of ownership, performance monitoring and governance advice to the Minister of Science and Innovation and other responsible Ministers in respect of the Ministers' shareholding responsibilities.

Significant Work Completed During 2011/12#

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• Maintained an oversight of the eight Crown research institutes (CRIs) and reported on them in the Treasury's 2011 APR.
• Provided second opinion advice and guidance to MSI on its monitoring of CRIs and Research and Education Advanced Network New Zealand (REANNZ).
• Provided advice on New Zealand Venture Investment Fund Ltd (NZVIF) business planning and risks and opportunities.
• Completed 25 board appointments for CRIs and other entities.

From 2011/12 the appropriation previously attributable to Vote Crown Research Institutes was transferred to Vote Finance.

Shared Support Services#

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Scope of Appropriation#

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This appropriation is limited to provision of support services to other agencies.

Significant Work Completed During 2011/12#

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Establishing CASS

• CASS was established on 7 March 2012 to deliver finance, human resources, information management and technology services to the Treasury, SSC and DPMC.
• By year-end CASS had completed its establishment phase, during which it continued to provide operational support to the three agencies.
• During this period, significant achievements were:
  • appointments made for all manager and team leader roles and most other permanent roles
  • establishment of the foundational governance mechanisms, in particular, the MOU between the three agencies, the CASS Partnership Board which provides cross-agency governance detailed in its charter and the CASS Service Catalogue which defines and describes the services delivered by CASS
  • implementation of several quick-win initiatives, including the rollout of new telephony and printer services, and
  • completion of detailed planning for 2012/13, including establishing a Service Catalogue agreement between the three agencies, which provides the framework for CASS performance metrics and targets for 2012/13.

As this appropriation was established during the 2011/12 year, no performance measures were formally agreed for the year in review.

Expenditure is $690,000 under the Supplementary Estimates budget and this is also reflected in the lower departmental revenue charged for these services. The first budget for this new activity represented an upper limit of expected costs and was subject to the completion of the detailed Service Catalogue.

Ministerial Servicing Performance 2011/12#

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The Treasury drafts responses to Parliamentary Questions for Written Answer (PQs), Ministerial Correspondence (MC) and Official Information Act requests (OIAs) for consultation with, or approval by, the responsible Minister.

The Treasury provides these services to the Minister of Finance, Associate Ministers of Finance and/or other Ministers on referral from the Minister of Finance or an Associate Minister of Finance; the Minister of Science and Innovation; and the Minister for State-Owned Enterprises.

There are two categories of OIA requests: OIA requests made to Ministers (MOIAs) and OIA requests made to the Treasury (TOIAs). The number of PQs listed below relates to written PQs only. Estimated and actual volumes for PQ, MC and OIA requests referred to the Treasury for 2011/12 are presented below.

During the year, the Treasury introduced new processes for handling MC, incorporating the recommendations of the Lean Six Sigma analysis undertaken earlier in 2011. The changes resulted in a sustained improvement in MC results since December which has lifted overall performance figures for the year compared with the previous year.

The measurement of drafts accepted the first time focuses explicitly on errors made by the Treasury. Agreed measures for ministerial servicing are set out on page 124.

The Quality of the Treasury's Policy Advice#

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The Treasury has a quality standard for policy advice that is applied to all appropriations. The Quality Standards for Policy Advice are published in full on page 123 of this Annual Report.

Review of the Quality of the Treasury's Policy Advice 2012

This year we established an internal panel to review a sample of the Treasury's policy advice for the 2011/12 year. This follows two previous external reviews conducted by Howard Fancy in 2009 and 2011.

The intent of the review was to:

• assess the quality of a sample of advice against the Treasury's Quality Standards for Policy Advice
• identify examples of best practice, and
• identify areas for potential improvement.

The panel was led by experienced leaders within the Treasury and looked at a representative sample of advice selected using a randomised methodology. The process was designed in line with the findings of the policy advice measurement pilot currently underway, which is being led by the Treasury.

The review found that:

• the average grade for assessed reports was 7.2 out of 10, and
• 80% of assessed reports were graded 7 out of 10 or higher.

These results should provide confidence that, overall, the Treasury achieves and maintains satisfactory levels of quality. The results are also broadly consistent with Howard Fancy's findings last year, with the reviewers identifying many of the same strengths as he identified.

Some of the weaknesses identified in the Fancy review, such as an emphasis on fiscal implications rather than a broader value-for-money perspective, did not come through as strongly. We would expect that, as the internal review process continues, a broad range of types of advice would be picked up through the random selection process and enable us to see whether the issues persist.

The Treasury is still working through the findings of the review and identifying what lessons can be learned to lift the quality of our policy advice.

Our intention is to continue the internal review process with regular assessments during the year so that staff receive more timely feedback to support continuous improvement. The Treasury will be giving consideration to how to complement the internal review process with periodic external reviews.

Financial Statements- Departmental#

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for the year ended 30 June 2012

• Statement of Comprehensive Income
• Statement of Changes in Equity
• Statement of Financial Position
• Statement of Cash Flows
• Statement of Departmental Expenses and Capital Expenditure Against Appropriations
• Statement of Commitments
• Statement of Contingent Liabilities and Contingent Assets
• Notes to the Financial Statements

Statement of Comprehensive Income#

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for the year ended 30 June 2012

The Statement of Comprehensive Income details the revenue and expenses relating to all outputs (goods and services) produced by the Treasury during the financial year ended 30 June 2012. Total expenses equals total departmental output classes expenditure and appropriations in the Statement of Departmental Expenses and Capital Expenditure Against Appropriations on page 64 and 65.

Explanations of significant variances against budget are detailed in note 19.

Statement of Changes in Equity#

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for the year ended 30 June 2012

The Statement of Changes in Equity combines information about the net surplus with other aspects of the financial performance of the Treasury to give a measure of comprehensive income.

The accompanying accounting policies and notes form part of these financial statements.

Statement of Financial Position#

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as at 30 June 2012

The Statement of Financial Position reports the total assets and liabilities of the Treasury as at 30 June 2012. Taxpayers' funds are represented by the difference between the assets and liabilities.

The accompanying accounting policies and notes form part of these financial statements.

Statement of Cash Flows#

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for the year ended 30 June 2012

The Statement of Cash Flows summarises the cash movements in and out of the Treasury during the financial year. It takes no account of money owed to the Treasury or owing by the Treasury and therefore differs from the Statement of Comprehensive Income on page 61.

The accompanying accounting policies and notes form part of these financial statements.

Statement of Departmental Expenses and Capital Expenditure Against Appropriations#

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for the year ended 30 June 2012

The Statement of Departmental Expenses and Capital Expenditure Against Appropriations details expenditure against appropriations. Total Departmental Output Classes Expenditure and Appropriations equals total expenses in the Statement of Comprehensive Income on page 61.

From 2011/12 the appropriations previously attributable to Vote Crown Research Institutes and Vote State-Owned Enterprises were transferred to Vote Finance. In addition, under Vote Finance the output class structure was rationalised.

There was no unappropriated expenditure incurred during 2011/12 (2010/11: nil).

The accompanying accounting policies and notes form part of these financial statements.

Statement of Commitments#

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Capital commitments#

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There are no capital commitments for this year.

Non-cancellable operating lease commitments#

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The Treasury has non-cancellable leases on its principal premises at No 1 The Terrace, Wellington until 2017. These operating lease commitments have been recorded at their gross values in the Statement of Commitments.

Other non-cancellable commitments#

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The Treasury has entered into non-cancellable contracts for computer maintenance, cleaning services, consulting and other contracts for services.

Statement of Contingent Liabilities and Contingent Assets#

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Unquantifiable contingent liabilities#

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The Treasury has the following unquantifiable contingent liabilities:

• Car park licence (Pastoral House) - In relation to the one car park leased by the Treasury at Pastoral House, the Crown indemnified AMP NZ Office Pastoral Ltd against certain damages or loss caused by our use of that car park.
• Car park licence (No 3 The Terrace) - In relation to the eight car parks leased by the Treasury at No 3 The Terrace, the Crown indemnified AMP NZ Office 1 The Terrace Ltd against certain damages or loss caused by our use of those car parks.
• Deed of Lease (No 1 The Terrace) - In relation to the lease by the Treasury of levels 5-14, the basement and the sub-basement of the building at No 1 The Terrace, the Crown indemnified AMP NZ Office 1 The Terrace Ltd against certain damages or loss in relation to our lease of the premises.
• Research in Motion Limited - In accordance with a delegation from the Minister of Finance dated 23 May 2005, the Treasury has granted an indemnity to Research in Motion Limited under a licence agreement for software used in conjunction with Blackberry mobile email devices, covering breach of the licence agreement, intellectual property rights, claims arising from incorrect use of the software, defamation-type actions and breach of export restrictions.
• Reuters Services Contract - The Treasury has indemnified Reuters Group PLC and its subsidiaries against any losses arising from the Treasury's use of certain Reuters services or arising from a breach of the Services Contract relating to the provision of financial information services. Further, the Treasury indemnified Lipper (a Reuters company) in respect of third party copyright and intellectual property rights.

Quantifiable contingent liabilities and assets#

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As at 30 June 2012, the Treasury had no quantifiable departmental contingent assets and liabilities (30 June 2011: nil).

Notes to the Financial Statements#

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for the year ended 30 June 2012

1  Statement of Accounting Policies#

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The Treasury is a government department as defined by section 2 of the Public Finance Act 1989.

In addition, the Treasury has reported on Crown activities and Trust monies which it administers.

The primary objective of the Treasury is to provide services to the public rather than making a financial return. Accordingly, the Treasury has designated itself as a public benefit entity for the purposes of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS).

The Financial Statements of the Treasury are for the year ended 30 June 2012. The Financial Statements were authorised for issue by the Secretary to the Treasury on 28 September 2012.

Statement of compliance

The Financial Statements of the Treasury have been prepared in accordance with the requirements of the Public Finance Act 1989, which includes the requirement to comply with New Zealand Generally Accepted Accounting Practices (NZ GAAP), and Treasury Instructions.

These Financial Statements have been prepared in accordance with NZ GAAP as appropriate for public benefit entities and they comply with NZ IFRS.

Basis of preparation

Measurement base

The Financial Statements have been prepared on an historical cost basis, modified by the revaluation of derivative financial instruments to fair value.

Functional and presentation currency

The Financial Statements are presented in New Zealand dollars and all values are rounded to the nearest thousand dollars ($000). The functional currency of the Treasury is New Zealand dollars.

Comparatives

When presentation or classification of items in the Financial Statements are amended or accounting policies are changed voluntarily, comparative figures are restated to ensure consistency with the current period unless it is impracticable to do so.

Changes in accounting policies

There have been no changes in accounting policies during the financial year.

The Treasury has adopted the following revisions to accounting standards during the financial year, which have had only a presentational or disclosure effect:

• Amendments to NZ IAS 1 Presentation of Financial Statements. The amendments introduce a requirement to present, either in the Statement of Changes in Equity or the notes, for each component of equity, an analysis of other comprehensive income by item. The Treasury has no other comprehensive income.
• Amendments to NZ IFRS 7 Financial Instruments: Disclosures. The amendment reduces the disclosure requirements relating to credit risk. Note 16 has been updated for the amendments.

Standards, amendments and interpretations issued that are not yet effective and have not been early adopted

Standards, amendments and interpretations issued but not yet effective that have not been early adopted, and which are relevant to the Treasury, are:

• NZ IFRS 9 Financial Instruments will eventually replace NZ IAS 39 Financial Instruments: Recognition and Measurement. NZ IAS 39 is being replaced through the following three main phases: Phase 1 Classification and Measurement; Phase 2 Impairment Methodology; and Phase 3 Hedge Accounting. Phase 1 has been completed and has been published in the new financial instrument standard NZ IFRS 9. NZ IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in NZ IAS 39. The approach in NZ IFRS 9 is based on how an entity manages its financial assets (its business model) and the contractual cash flow characteristics of the financial assets. The financial liability requirements are the same as those of NZ IAS 39, except for when an entity elects to designate a financial liability at fair value through the surplus or deficit. The new standard is required to be adopted for the year ended 30 June 2016. However, as a new Accounting Standards Framework will apply before this date, there is no certainty when an equivalent standard to NZ IFRS 9 will be applied by public benefit entities.

The Minister of Commerce has approved a new Accounting Standards Framework (incorporating a Tier Strategy) developed by XRB. Under this Accounting Standards Framework, the Treasury is classified as a Tier 1 reporting entity and it will be required to apply full Public Benefit Entity Accounting Standards (PAS). These standards are being developed by XRB based on current International Public Sector Accounting Standards. The effective date for the new standards for public sector entities is expected to be for reporting periods beginning on or after 1 July 2014. This means the Treasury expects to transition to the new standards in preparing its 30 June 2015 Financial Statements. As the PAS are still under development, the Treasury is unable to assess the implications of the new Accounting Standards Framework at this time.

Owing to the change in the Accounting Standards Framework for public benefit entities, it is expected that all new NZ IFRS and amendments to existing NZ IFRS will not be applicable to public benefit entities. Therefore, XRB has effectively frozen the financial reporting requirements for public benefit entities up until the new Accounting Standard Framework is effective. Accordingly, no disclosure has been made about new or amended NZ IFRS that exclude public benefit entities from their scope.

Significant accounting policies

Revenue

Revenue is measured at the fair value of consideration received or receivable.

Revenue Crown

Revenue earned from the supply of outputs to the Crown is recognised as revenue when earned.

Revenue other

State Sector Retirement Superannuation and KiwiSaver Schemes revenue

This revenue included reimbursements by SSC for contributions made by the Treasury to the State Sector Retirement Superannuation Scheme and the KiwiSaver Scheme, and the tax credits for contributions to KiwiSaver received from IRD.

Sale of publications

The sale of publications is recognised when the product is sold to the customer. The recorded revenue is the gross amount of the sale.

Recovery of costs

Recovery of costs is recognised as the costs are incurred. The recorded revenue is the value of expenses being recovered.

Capital charge

The capital charge is recognised as an expense in the period to which the charge relates.

Operating leases

The Treasury leased office premises during the year ended 30 June 2012. Substantially all the risks and benefits of ownership were retained by the lessor, and therefore these leases were classified as operating leases. Operating lease costs are recognised as an expense in the Statement of Comprehensive Income on a straight-line basis over the period of the lease.

Financial instruments

Financial assets and liabilities are initially measured at fair value plus transaction costs, unless they are carried at fair value through surplus or deficit, in which case the transaction costs are recognised in the surplus or deficit.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and bank accounts.

Debtors and other receivables

Short-term debtors and other receivables are recorded at their fair value, less any provision for impairment.

Impairment of a receivable is established when there is objective evidence that the Treasury will not be able to collect amounts due according to the original terms of the receivable.

Non-current assets held for sale

Non-current assets held for sale are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than continuing use. Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell.

Any impairment losses for write-downs of non-current assets held for sale are recognised in the surplus or deficit.

Any increases in fair value (less costs to sell) are recognised up to the level of any impairment losses that have previously been recognised.

Non-current assets held for sale (including those that are part of a disposal group) are not depreciated or amortised while they are classified as held for sale.

Property, plant and equipment

Property, plant and equipment comprise leasehold improvements, computer hardware, furniture and fittings and office equipment.

Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses.

Individual assets, or groups of assets, are capitalised if their cost is greater than $5,000. Computer equipment with a cost greater than $1,000 is capitalised. The value of individual assets that is less than $5,000 and is part of a group of similar assets is capitalised.

Additions

The cost of an item of property, plant and equipment is recognised as an asset if it is probable that future economic benefits or service potential associated with the item will flow to the department and if the cost of the item can be measured reliably.

Disposals

Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount of the asset. Gains and losses on disposal are included in the surplus or deficit.

Subsequent costs

Costs incurred subsequent to initial acquisition are capitalised only when it is probable that future economic benefits or service potential associated with the item will flow to the department and the cost of the item can be measured reliably.

Depreciation

Depreciation of property, plant and equipment is provided on a straight-line basis at rates calculated to allocate the cost of an asset, less any estimated residual value, over its estimated useful life. The useful life and associated depreciation rates are as follows:

Leasehold improvements are depreciated over the unexpired period of the lease or the estimated remaining useful lives of the improvements, whichever is the shorter.

Intangible assets

Software acquisition and development

Acquired computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software.

Costs that are directly associated with the development of software for internal use by the Treasury are recognised as an intangible asset. Direct costs include the software development, employee costs and an appropriate portion of the relevant overheads.

Staff training costs are recognised as an expense when incurred.

Costs associated with maintaining computer software are recognised as an expense when incurred.

Amortisation

The carrying value of an intangible asset with a finite life is amortised on a straight-line basis over its useful life. Amortisation begins when an asset is available for use and ceases at the date that an asset is de-recognised. The amortisation charge for each period is recognised in the surplus or deficit.

The useful lives and associated amortisation rates of major classes of intangible assets have been estimated as follows:

Impairment of property, plant and equipment and intangible assets

Intangible assets that have an indefinite useful life, or are not yet available for use, are tested for impairment annually.

Property, plant and equipment and intangible assets that have a finite useful life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use.

Value in use is depreciated replacement cost for an asset where the future economic benefits or service potential of the asset are not primarily dependent on the asset's ability to generate net cash inflows and where the Treasury would, if deprived of the asset, replace its remaining future economic benefits or service potential.

If an asset's carrying amount exceeds its recoverable amount, the asset is impaired and the carrying amount is written down to the recoverable amount.

For assets not carried at a re-valued amount, the reversal of an impairment loss is recognised in the surplus or deficit.

Creditors and other payables

Creditors and other payables are measured at cost.

Employee entitlements

Short-term employee entitlements

Short-term employee entitlements expected to be settled within 12 months of balance date are measured at nominal values based on accrued entitlements at current rates of pay.

These include salaries and wages accrued up to balance date, annual leave earned but not yet taken at balance date, vested retiring and long service leave and entitlements expected to be settled in the next 12 months, and sick leave.

A liability for sick leave is recognised to the extent the absences in the coming year are expected to be greater than the sick leave entitlements earned in the coming year. The amount is calculated based on the unused sick leave entitlement that can be carried forward at balance date, to the extent that the Treasury anticipates it will be used by staff to cover those future absences.

The Treasury recognises a liability and an expense for performance pay where contractually obligated to pay them or where there is a past practice that has created a constructive obligation.

Long-term employee entitlements

Entitlements that are due to be settled beyond 12 months after the end of the reporting period in which the employee renders the related service, such as long service leave and retiring leave, are calculated on an actuarial basis.

The calculations are based on:

• likely future entitlements based on years of service, years to entitlement, the likelihood that staff will reach the point of entitlement and contractual-entitlements information, and
• the present value of the estimated future cash flows.

Expected future payments are discounted using market yields on government bonds at balance date with terms to maturity that match, as closely as possible, the estimated future cash outflows for entitlements. The inflation factor is based on the expected long-term increase in remuneration for employees.

Presentation of employee entitlements

Sick leave, annual leave, vested long service leave and non-vested long service leave and retirement gratuities expected to be settled within 12 months of balance date are classified as a current liability. All other employee entitlements are classified as a non-current liability.

Superannuation schemes

Defined-contribution schemes

Obligations for contributions to the State Sector Retirement Savings Scheme, KiwiSaver, Government Superannuation and individual retirement funds are accounted for as defined-contribution schemes and are recognised as expenses in the surplus or deficit as incurred.

Provisions

The Department recognises a provision for future expenditure of uncertain amounts or timing when there is a present obligation (either legal or constructive) as a result of a past event, when it is probable that an outflow of future economic benefits will be required to settle the obligation, and when a reliable estimate can be made of the amount of the obligation. Provisions are not recognised for future operating losses.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision owing to the passage of time is recognised as a finance cost.

Equity

Equity is the Crown's investment in the Treasury and is measured as the difference between total assets and total liabilities.

Commitments

Expenses yet to be incurred on non-cancellable contracts that were entered into on or before balance date are disclosed as commitments to the extent that they are equally unperformed obligations.

Cancellable commitments that have penalty or exit costs explicit in the agreement, on exercising that option to cancel are included in the Statement of Commitments at the lower of the remaining contractual commitment and the value of that penalty or exit cost.

Goods and services tax (GST)

All items in the Financial Statements, including the Appropriation Statements, are GST exclusive - except for receivables and payables, which are on a GST-inclusive basis.

The net amount of GST recoverable from or payable to IRD is included as part of receivables or payables in the Statement of Financial Position.

The net GST paid to or received from IRD, including the GST relating to investing and financing activities, is classified as an operating cash flow in the Statement of Cash Flows.

Commitment and contingencies are disclosed exclusive of GST.

Income tax

Government departments are exempt from income tax as public authorities. Accordingly, no charge for income tax has been provided for.

Budget figures

The budget figures are those included in the Department's Budget Estimates for the year ended 30 June 2012, which are consistent with the financial information in the Main Estimates. In addition, the Financial Statements also present the updated budget information from the 2011/12 Supplementary Estimates.

Statement of cost allocation policies

The Department has determined the cost of outputs using the following cost allocation system:

• Direct costs are expenses incurred from activities in producing outputs. These costs are charged directly to the related output classes.
• Indirect costs are expenses incurred by CASS (from March 2012), Corporate Services and Office of the Chief Executive that can't be identified with a specific output. Indirect costs are allocated to each output class based on cost drivers, related activity and usage information.

There have been no changes in the Treasury's general cost accounting policies since the date of the last audited Financial Statements.

Since March 2012, the Treasury has hosted a shared services model incorporating the Treasury, SSC and DPMC for the delivery of finance, human resources, information management and information technology functions.

Critical accounting estimates and assumptions

In preparing these Financial Statements, estimates and assumptions have been made concerning the future. These estimates and assumptions may differ from the subsequent actual results. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are referred to below.

Retirement and long service leave

An analysis of the exposure in relation to estimates and uncertainties surrounding retirement and long service leave liabilities is disclosed in note 13.

2 Revenue - Crown#

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This is revenue earned for the supply of outputs to the Crown and is recognised as revenue when earned.

3 Other Revenue#

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4 Personnel Costs#

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5 Capital Charge#

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The Treasury pays a capital charge to the Crown based on taxpayers' funds as at 30 June and 31 December each year. The capital charge rate for the 2011/12 year was 8% (2010/11: 7.5%).

6 Operating Expenses#

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7 Debtors and Other Receivables#

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The ageing profile of receivables at year end is detailed below:

The carrying value of debtors and other receivables approximates their fair value.

8 Property, Plant and Equipment#

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The following categories of property, plant and equipment were used by the Treasury:

Additions for 2011/12 include $1.251 million transferred from SSC and DPMC with the set up of CASS.

9 Intangible Assets#

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The following categories of intangible assets were used by the Treasury:

There are no restrictions over the title of the Treasury's intangible assets. No intangible assets are pledged as security for liabilities. Additions for 2011/12 include $910,000 transferred from SSC and DPMC with the set up of CASS.

10 Capital Management#

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The Treasury's capital is its equity (or taxpayers' funds). Equity is represented by net assets. The Treasury manages its expenses, revenues, assets, liabilities and general financial dealings prudently. The Treasury's equity is largely managed as a by-product of managing income, expenses, assets, liabilities and compliance with the government budget processes, Treasury Instructions and the Public Finance Act 1989.

The objective of managing the Treasury's equity is to ensure the Treasury effectively achieves its goals and objectives for which it has been established, whilst remaining a going concern.

11 Capital Expenditure#

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Additions for 2011/12 include $1.251 million of computer hardware and $910,000 software transferred from SSC and DPMC with the set up of CASS.

12 Provision for Employee Entitlements#

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The present value of the retirement and long service leave obligations depends on a number of factors. Two key assumptions used in calculating this liability include the discount rate and the salary-inflation factor. Any changes in these assumptions will impact on the carrying amount of the liability.

In determining the appropriate discount rate, the Department adopts the central table of risk-free discount rates and Consumer Price Index (CPI) assumptions provided by the Treasury to all Departments.

If the discount rate were to differ by 1% from the department's estimates, with all other factors held constant, the carrying amount of the liability would be an estimated $80,000 higher/lower.

If the salary inflation factor were to differ by 1% from the department's estimates, with all other factors held constant, the carrying amount of the liability would be an estimated $68,000 higher/lower.

13 Creditors and Other Payables#

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Creditors and other payables are normally settled on 30-day terms, therefore the carrying value of creditors and other payables approximates fair value.

14 Return of Operating Surplus to the Crown#

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The return of operating surplus to the Crown is required to be paid by 31 October each year. The Treasury has no surplus to return to the Crown for the period ending 30 June 2012 (2010/11: nil).

15 Reconciliation of the Net Surplus to the Net Cash Flows from Operating Activities#

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This reconciliation discloses the non-cash adjustments applied to the net surplus reported in the Statement of Comprehensive Income on page 61 to arrive at the net cash flows from operating activities disclosed in the Statement of Cash Flows on page 63.

 

16 Related Party Information#

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All related party transactions have been entered into on an arm's length basis.

The Treasury is a wholly-owned entity of the Crown. The Government significantly influences the roles of the Treasury as well as being its major source of revenue.

The Treasury has received funding from the Crown of $72.319 million to provide services to the public for the year ended 30 June 2012 (2010/11: $63.921 million).

In conducting its activities, the Treasury is required to pay various taxes and levies (such as GST, FBT, PAYE and ACC) to the Crown and entities related to the Crown. The payment of these taxes and levies, other than income tax, is based on the standard terms and conditions that apply to all tax and levy payers. The Treasury is exempt from income tax.

The Treasury also purchased and sold goods and services from entities controlled, significantly influenced or jointly controlled by the Crown. Purchases from these government-related entities for the year ended 30 June 2012 totalled $925,000 (2010/11: $898,000). These purchases included air travel from Air New Zealand and postal services from NZ Post but excluded capital charge.

Key management personnel of the Treasury at 30 June 2012 included the ELT (Chief Executive, one Deputy Chief Executive, nine Deputy Secretaries and the Director CASS) and the Treasury Board. 2011 included the Chief Executive, two DCEs and the Treasury Board.

The key management personnel compensation excludes the remuneration and other benefits the Ministers of Finance, State-Owned Enterprises, Infrastructure and Science and Innovation receive. The Ministers' remuneration and other benefits are not received only for their role as a member of key management personnel of the Treasury. The Ministers' remuneration and other benefits are set by the Remuneration Authority under the Civil List Act 1979 and are paid under PLA, and not paid by the Treasury.

Related party transactions involving key management personnel or their close family members#

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There was one transaction involving a Deputy Secretary whose relative is a partner in a law firm that the Treasury uses for consultancy (2010/11: nil). The Deputy Secretary was not involved in the decision-making process to use that firm.

17 Financial Instruments#

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The Treasury's activities expose it to a variety of financial instrument risks, including market risk, credit risk and liquidity risk. The Treasury has a series of policies to manage the risks associated with financial instruments and seeks to minimise exposure from financial instruments. These policies do not allow any transactions that are speculative in nature to be entered into.

Fair value#

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The fair value of financial instruments is equivalent to the carrying amount disclosed in the Statement of Financial Position.

The carrying amounts of financial assets and financial liabilities in each of the NZ IAS 39 categories are as follows:

Credit risk#

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Credit risk is the risk that a third party will default on its obligation to the Treasury, causing the Treasury to incur loss.

In the normal course of its business, credit risk arises from debtors and deposits with banks.

The Treasury is only permitted to deposit funds with Westpac, a registered bank, and enter into foreign exchange forward contracts with NZDMO. These entities have high credit ratings. For its other financial instruments, the Treasury does not have significant concentrations of credit risk.

The Treasury's maximum credit exposure for each class of financial instrument is represented by the total carrying amount of cash and cash equivalents and net debtors (note 7). There is no collateral held as security against these financial instruments, including those instruments that are overdue or impaired.

Currency risk#

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Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Treasury has no material exposure to currency risk.

Interest rate risk#

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Interest rate risk is the risk that the fair value of a financial instrument will fluctuate, or the cash flows from a financial instrument will fluctuate, owing to changes in market interest rates.

The Treasury has no exposure to interest rate risk because it has no interest bearing financial instruments.

Liquidity risk#

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Liquidity risk is the risk that the Treasury will encounter difficulty raising liquid funds to meet commitments as they fall due.

In meeting its liquidity requirements, the Treasury closely monitors its forecast cash requirements with expected cash draw downs from NZDMO. The Treasury maintains a target level of available cash to meet liquidity requirements.

All of the Treasury's financial liabilities (creditors and payables) will be settled in less than six months from the balance date.

18 Events Subsequent to Balance Date#

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There were no events subsequent to balance date that required adjustment to the Financial Statements or disclosure (2010/11: nil).

19 Explanation of Major Variances#

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Statement of Comprehensive Income#

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The following major variations occurred in the Statement of Comprehensive Income between the 2011/12 Actuals and 2010/11 Actuals:

• The establishment of the Mixed Ownership Model in December 2011 has increased operational costs significantly in 2011/12 ($10.137 million).
• The provision of shared support services to Central Agencies began in March 2012. This resulted in increased revenue and expenses in 2011/12 ($2.310 million).

The following major budget variations occurred between the 2011/12 Actuals and the 2011/12 Supplementary Estimates budgets:

• The majority of the current year variance in expenditure and revenue relates to the multi-year funding provided for the Mixed Ownership Model ($20.163 million). The uncertain timing of this work programme means that this funding will be transferred to future periods.
• In addition, approval has been given to transfer up to $7.236 million of operational funding into 2012/13. These approvals are detailed under each output in the Statement of Objectives and Service Performance section of this report.

Statement of Financial Position#

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The following major variations occurred in the Statement of Financial Position between the 2011/12 Actuals and 2010/11 Actuals:

• The increase in debtors and receivables reflects the charges between agencies for new shared services provided through the Treasury from March 2012.
• Shared services assets were transferred to the Treasury in 2012 increasing the non-current assets balance.

The following major budget variations occurred between the 2011/12 Actuals and the 2011/12 Supplementary Estimates budgets:

• Supplementary Estimates capital expenditure on IT assets was expected to be higher following the integration of CASS. More of this work will now be completed in 2012/13.
• Increased operational activity has increased payables year on year and against the Supplementary Estimates budget.

Supplementary Financial Schedules - Non-departmental#

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for the year ended 30 June 2012

• Schedule of Expenses
• Schedule of Expenditure and Appropriations
• Schedule of Revenue
• Schedule of Capital Receipts
• Schedule of Assets
• Schedule of Liabilities
• Schedule of Commitments
• Schedule of Contingent Liabilities
• Statement of Trust Monies
• Statement of Accounting Policies
• Explanatory Notes to Supplementary Statements and Schedules - Non-departmental

Schedule of Expenses#

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for the year ended 30 June 2012

The Schedule of Expenses summarises expenses that the Department administers on behalf of the Crown. Details of non-departmental expenditure and appropriations are provided in the Explanatory Notes to Supplementary Statements and Schedules - Non-departmental on pages 95 to 102.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2012.

Schedule of Expenditure and Appropriations#

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for the year ended 30 June 2012

The Schedule of Expenditure and Appropriations details expenditure and capital payments incurred against appropriations. The Department administers these appropriations on behalf of the Crown.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2012.

Schedule of Revenue#

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for the year ended 30 June 2012

Comparatives have been restated to reflect the change in accounting policy and to report the current year's gain or loss in the correct statement.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2012.

Schedule of Capital Receipts#

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for the year ended 30 June 2012

The Schedule of Capital Receipts details non-departmental capital receipts that the Department administers on behalf of the Crown.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2012.

Schedule of Assets#

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as at 30 June 2012

The Schedule of Assets summarises the assets that the Department administers on behalf of the Crown.

In addition, the Treasury monitors 14 SOEs and 16 Crown entities. The investment in these entities is consolidated in the Crown Financial Statementsonaline-by-line basis.The investment in these entities is not included in this schedule.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2012.

Schedule of Liabilities#

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as at 30 June 2012

The Schedule of Liabilities summarises the liabilities that the Department administers on behalf of the Crown.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2012.

Schedule of Commitments#

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as at 30 June 2012

This schedule sets out the level of commitment made against out-year appropriations and funding baselines for non-departmental expenditure. The Department, on behalf of the Crown, has entered into non-cancellable contracts in relation to New Zealand House in London.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2012.

Schedule of Contingent Liabilities#

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as at 30 June 2012

Contingent liabilities are costs that the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, uncalled capital, legal disputes and claims. The contingent liabilities managed by the Treasury on behalf of the Crown are a mixture of operating and balance sheet risks and they vary greatly in magnitude and likelihood of realisation. In general, if a contingent liability were realised it would have a negative impact on the operating balance, net Crown debt and net worth. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to net Crown debt.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount included is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the possible amount of any award against the Crown.

The majority of the quantified contingent liabilities shown above arise from the uncalled capital element of the Crown's investments in the Asian Development Bank and the World Bank, and promissory notes issued in favour of IMF.

The significant increase in contingent liabilities is owing to exchange rate fluctuations.

The Crown's exposure to DGS and WFGF is detailed in the Explanatory Notes to Supplementary Statements and Schedules - Non-departmental.

Unquantifiable Contingent Liabilities#

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The Treasury also administers a number of contingent liabilities that cannot be quantified. These arise primarily from institutional guarantees and indemnities. Readers are referred to the Financial Statements of the Government for further details.

Contingent Assets#

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The Department, on behalf of the Crown, has no contingent assets (2011: nil).

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2012.

Statement of Trust Monies#

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as at 30 June 2012

The Trust Account is established pursuant to section 67 of the Public Finance Act 1989, for the purposes of depositing money paid to the Crown under section 77 of the Trustee Act 1956.

The source of funds is principally estates of deceased persons where the beneficiaries cannot be traced. Funds are retained in the Trust Account for six years, and are then transferred to the Crown as unclaimed money.

Details of funds held in the Trust Account are gazetted annually.

The Statement of Accounting Policies is an integral part of these supplementary financial schedules.

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2012.

Statement of Accounting Policies#

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for the year ended 30 June 2012

Reporting Entity#

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These non-departmental schedules present financial information on public funds managed by the Treasury on behalf of the Crown.

These non-departmental balances are consolidated into the Financial Statements of the Government for the year ended 30 June 2012. For a full understanding of the Crown's financial position, results of operations and cash flows for the year, refer to the Financial Statements of the Government.

Basis of Preparation#

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The non-departmental schedules have been prepared in accordance with the accounting policies of the Financial Statements of the Government, Treasury Instructions and Treasury Circulars.

Measurement and recognition rules applied in the preparation of these non-departmental supplementary financial schedules are consistent with NZ GAAP and Crown accounting policies and are detailed in the Financial Statements of the Government.

The financial information reported in these schedules is consolidated into the Financial Statements of the Government, and therefore readers of these schedules should also refer to the Financial Statements of the Government for the year ended 30 June 2012.

Significant Accounting Policies#

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Foreign exchange (FX)

FX transactions are translated into New Zealand dollars using the exchange rates prevailing at the dates of the transactions. FX gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the schedule of non-departmental income or expenses.

Goods and services tax

All items in the financial statements, including appropriation schedules, are stated exclusive of GST. In accordance with Treasury Instructions, GST is returned on revenue received on behalf of the Crown, where applicable. However, an input tax deduction is not claimed on non-departmental expenditure. Instead, the amount of GST applicable to non-departmental expenditure is recognised as a separate expense and eliminated against GST revenue on consolidation of the Financial Statements of the Government.

Commitments

Future expenses and liabilities to be incurred on non-cancellable contracts that have been entered into at balance date are disclosed as commitments to the extent that they are equally unperformed obligations.

Explanatory Notes to Supplementary Statements and Schedules - Non-departmental#

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Explanatory notes provide details of significant expenditure and revenue variances between actual results in 2010/11 and 2011/12 and between 2011/12 actual results and 2011/12 Supplementary Estimates.

1 Vote Crown Research Institutes#

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Vote Crown Research Institutes was disestablished from 2011/12 and all revenue and expenditure are now accounted for under Vote Finance.

2 AMI Insurance Limited (AMI)/Southern Response Earthquake Services Limited#

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On 7 April 2011 the Government provided a financial support package for AMI to give policyholders certainty and to ensure an orderly rebuild of Christchurch. The financial support to AMI was provided via a Crown Support Deed (CSD) under which the Crown subscribed for $500 million of convertible preference shares which were called but unpaid. On 5 April 2012 IAG purchased the ongoing insurance business of AMI. Immediately after completion of the sale, the Crown paid $100 million of the unpaid balance on the preference shares and took control of AMI's residual earthquake business. The earthquake business was renamed Southern Response Earthquake Services Limited (Southern Response).

AMI was consolidated into the Financial Statements of the Government from the time of entering into the original agreement. The fair value of AMI on acquisition was $159 million. The investment in AMI (now Southern Response) remains at the acquisition cost in accordance with IAS 27.

The terms of the CSD were revised at the time of the sale when Southern Response came into being. The deed now allows for Southern Response to request payment of the remaining $400 million unpaid balance on the preference shares when needed to settle claims. Southern Response must exhaust its reinsurance and reserves prior to requesting payment under the CSD. The remaining unpaid balance is payable on the 10-year anniversary of the original deed in April 2021. The end date of the CSD was extended from five years to ten years in recognition of increased awareness of potential complexities of the rebuild. The amount payable to Southern Response is recorded at its estimated present value which was $364 million as at 30 June 2012. A new appropriation was required to reflect the associated interest costs that will be recognised as the discounting of the CSD is unwound over its life.

3 Crown Guarantee Schemes: Crown Deposit Guarantee Scheme and Crown Wholesale Guarantee Facility#

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The Government provided two guarantee schemes in relation to financial institution deposits: DGS and WFGF. Information on the Government's exposure as a result of these schemes, the management of these exposures and the impact of these schemes is detailed below.

3 (a)  Crown Deposit Guarantee Scheme#

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The Government operated an opt-in Retail Deposit Guarantee Scheme for financial institution deposits from October 2008 to December 2011. The original scheme expired on 12 October 2010; the extended scheme expired on 31 December 2011.

Nine entities guaranteed under the scheme were placed into receivership. The Crown has met its obligations to depositors under the schemes with the exception of a small number of depositors whose deposits remain unclaimed. The rights of recovery from the receivers are recognised as assets.

As a consequence of payments made to depositors of failed finance companies under DGS, the Crown has inherited the beneficial interest in the proceeds that can be recovered from the sale of the secured assets of the receiverships. The reported receivables represent the receivers' best estimates of likely recoveries from the receiverships. However, the eventual return to the Crown is dependent upon the value that can be realised from these entities' assets and the timing of receipts. A range of outcomes for eventual recoveries is possible. The Crown monitors the receiverships to obtain assurance that optimal proceeds are realised as soon as possible.

In prior year, to reduce the fiscal cost under DGS, an appropriation was approved during 2010/11 in relation to the default of SCF. A secured loan was made to the receivers to remove prior charge holders. This has been subsequently repaid in full and appears in the Schedule of Capital Receipts (see page 88).

3 (b) Crown Asset Management Limited#

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A new capital appropriation was set up during the year to facilitate the transfer of the remaining assets of six of the finance companies placed in receivership while they had Crown guarantees to CAML. CAML was established to manage the recoveries from these assets. As at 30 June 2012, only the assets of SCF had been transferred to CAML.

3 (c) Crown Wholesale Funding Guarantee Facility#

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In addition to DGS, the Government operated an opt-in WFGF from November 2008 to April 2010. As at 30 June 2012, 15 guarantee certificates remained in place, and the remaining value of wholesale securities guaranteed was $3.700 billion. No provision is made for losses under this scheme as the probability of loss is considered remote.

 

4 Dividends#

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Total SOE dividends received this year have decreased by $413 million from 2010/11. Particular items to note are that Meridian paid a large special dividend as a result of the sale of Tekapo A and B to Genesis as required by the Electricity Industry Act 2010 reforms. As a result, prior year dividend was $543 million higher compared to current year.

Air New Zealand dividends decreased by $20 million; this is mainly owing to the company being severely affected by Christchurch and Japanese earthquakes, the ash cloud and the cost of jet fuel.

Lower dividends were offset by Transpower dividend of $110 million (2011: nil) and Mighty River Power dividend higher by $26 million compared to prior year.

Dividends from Crown entities (TVNZ) increased by $9 million in 2011/12, owing to increased profits for the 2010/11 financial year.

Other dividends received from the Crown's share in Airports is $2 million higher than those received in 2010/11 mainly owing to the Christchurch earthquake affecting prior year dividends.

5 Earthquake Commission#

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5 (a) Land remediation#

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Approval was given for $141.100 million for remediation to residential land affected by the September 2010 earthquake over and above the standard required by EQC. EQC negotiated MOUs with both Waimakariri District Council (WDC) and Christchurch City Council. As Christchurch sustained substantial land damage in the 22 February 2011 event, it was determined that Christchurch land remediation should be de-coupled from this process to allow further time to understand the impacts on Christchurch. The MOU signed by WDC was estimated to cost $37.200 million and this was accrued in the previous financial year. There has been a subsequent revoking of the MOU in the current year and the accrual was reversed, resulting in reduction of overall costs. This amount was recorded in other current revenue.

5 (b) Land insurance payments#

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Land insurance payments to owners of damaged land in the Canterbury region where the cost of the land remediation is greater than the insured value of the land were estimated to be $5 million. Full settlement has been made to the six worst affected properties for $2.368 million and this amount has been accrued.

In the current year there has been no new land insurance and land remediation payments required.

6 New Zealand Export Credit Office#

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The purpose of NZECO is to assist New Zealand companies to increase exports by providing government-guaranteed export credit insurance and financial guarantee products, which complement private sector provision. This support may help exporters mitigate buyer repayment risks, secure increased export sales and access additional credit facilities from their bank.

In June 2012, NZECO recorded a provision of $29.705 million on a transaction that it has underwritten. The provision was offset with unamortised premiums of $7 million recorded in current year revenue, which NZECO is not required to pay back.

Revenue has increased by $8 million in 2011/12 as a result of new export dealsguaranteed during the year and unamortised premium on an export credit policy.

7 Goodwill#

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Goodwill in relation to Air New Zealand of $258 million (2011: $258 million) has been tested for impairment at June 2012 based on a value in use discounted cash flow valuation. Cash flow forecasts were prepared for five years using the Air New Zealand Board-reviewed business plans. Key assumptions include exchange rates, jet fuel costs, passenger load factors and route yields. These assumptions have been based on historical data and current market information. The cash flow forecasts are particularly sensitive to fluctuations in fuel prices and exchange rates and are extrapolated using an average nominal growth rate of approximately 1.5%. The cash flow projections are discounted using post-tax discount rate scenarios of 10% to 10.5%. The 2012 valuation confirmed that there was no impairment required to the goodwill asset.

8 Government Superannuation Fund Unfunded Liabilities#

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The Government operates a defined benefit superannuation plan for qualifying employees who are members of GSF. The members' entitlements are defined in the Government Superannuation Fund Act 1956. Members make regular payments to GSF and in return, on retirement, receive a defined level of income. GSF is closed to employees who were not members at 1 July 1992.

The GSF obligation has been calculated by the Government Actuary as at 30 June 2012. A Projected Unit Credit Method, based on balance-date membership data, is used for the valuation. This method requires the benefits payable from GSF in respect of past service to be estimated and then discounted back to the valuation date.

GSF unfunded liability as at 30 June 2012 was $13,541 million, an increase of $3,389 million compared with 30 June 2011.

This is primarily attributed to an actuarial loss recognised in the year of $3,896 million owing to movements in the economic assumptions used in calculating the liability, particularly owing to the reduction in discount rates over the year and the increased allowance for mortality improvement. This has been owing to:

• the current service costs and interest expenses (appropriated under Other Expenses Incurred by the Crown - GSF Unfunded Liability) of $192 million, and offset by
• contributions made by the Crown against the liability (including taxation) during 2011/12 of $699 million.

The Government expects to make a contribution of $705 million to GSF in the year ended 30 June 2013.

In addition to its obligations to past and present employees, because GSF is liable to income tax under section HJ 1 of the Income Tax Act 2004, the Crown will be required to make additional contributions equivalent to the tax on future investment income. Additional detailed note disclosures required under New Zealand GAAP for this liability are included in the Financial Statements of the Government.

9 Government Superannuation Fund Authority - Crown's Share of Expenses#

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These are expenses of the Government Superannuation Fund Authority relating to the management and administration of GSF. The Crown's share for 2011/12 was $23 million, $3 million lower than that in 2010/11 and $2 million lower than forecast. The investment manager expenses are dependent upon the portfolio valuations. For some active investment managers, their performance, and accordingly their fees, exceeded the forecast. The fund portfolio grew during the year much more slowly than originally forecasted.

10 Government Superannuation Fund - Employers' Contribution#

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The employers' contribution to GSF has decreased from $54 million in 2010/11 to $47 million in 2011/12. The fund lost 967 members including 76 Armed Forces (34.39%) and 29 Police (7.1%). The Armed Forces and Police schemes paid the highest rates of employer contributions (Armed Forces 25.1%, Police 19.1% of members' salaries).

11 International Financial Institutions#

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Contributions of $157 million were made to the IMF lending programme in 2011/12 compared to forecast of $175 million. Payments have been made to several countries during 2011/12 reflecting the response by IMF to the current international financial crisis. During the year, a $6.767 million loss on revaluation of IFIs' investment was recorded as a result of New Zealand dollar FX rate movement.

In prior year, $65.125 million was called and paid to the Asian Development Bank as authorised by the Asian Development Bank Agreement and section 3 of the International Finance Agreements Amendment Act 1966.

On 19 June 2012, New Zealand joined other countries in extending its financial commitments to IMF and in turn entered into a new loan facility to support IMF in making bilateral loans if required.

12 Landcorp Protected Land Agreement#

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The capital expenditure in relation to the Landcorp Protected Land Agreement for 2011/12 was $1.700 million against a Supplementary Estimate budget of $11.700 million. Current year provision of $7.700 million (2011: $6 million) includes amounts for the accumulated capital costs and losses which will be owing to Landcorp when one property held under the Protected Land Agreement is transferred. Timing of transfers on other properties is difficult to ascertain and this budget will be carried forward to meet commitments when they arise.

13 National Provident Fund Defined Benefit Plan (DBP) (Annuitants) Scheme Provision#

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The Government has guaranteed superannuation schemes managed by National Provident Fund (NPF). As at 30 June 2012, NPF's DBP Scheme was in a net deficit position of $1,076 million (2011: $981 million), represented by a gross estimated pension obligation of $1,114 million (2011: $1,020 million) with net investment assets valued at $39 million (2011: $39 million). No additional provision was required in the year for other pension schemes managed by NPF under the Government's guarantee under section 60 of the National Provident Fund Restructuring Act 1990.

The increase of $93 million in the Crown's liability for the NPF DBP(A) Scheme under Crown guarantee as at 30 June 2012 was primarily owing to:

• payments made against the liability by the Crown during the year of $74 million, and
• reversal of prior year accrual of $1.500 million section 72 Crown-funded reimbursement, which was not required (2011: $3.700 million).

Offset by:

• the actuarial loss recognised for the year of $139 million resulting from movements in the economic assumptions used in calculating the provision, and
• the unwinding of the interest expense (appropriated under Other Expenses Incurred by the Crown - NPF Schemes - Liability under Crown Guarantee) of $29 million.

Additional detailed note disclosures required under NZ GAAP are included in the Financial Statements of the Government for this liability.

14 National Provident Fund - Crown Liability for Scheme Deficiency#

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The Crown is liable for the deficiency in the accounts of NPF schemes established pursuant to section 38A(6) of the National Provident Fund Act 1950, authorised by section 72 of the National Provident Fund Restructuring Act 1990. There was a call against this appropriation for 2010/11 of $94,000 to 31 March 2012 and a nil provision for the three months to 30 June 2012. The scheme deficiency paid for the year to 31 March 2011 was $16,000. Provision of $1.500 million from prior year (2011: $3.700 million) was not required in the current year and recorded in the current year as Other Current Revenue. Prior year's reversal of s72 of National Provident Fund Restructuring Act 1990 was re-classed to Other Current Revenue for consistency of treatment with the current year (see note 20, page 102).

15 New Zealand House - London#

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Operational costs associated with New Zealand House (including depreciation) are included in Other Expenses Incurred by the Crown - Crown Overseas Properties.

16 New Zealand Productivity Commission#

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The New Zealand Productivity Commission was established on 1 April 2011 with an equity injection of $500,000 provided by the Crown in the previous year. The operational expenses funded for the first year of its operations were $4.700 million.

17 New Zealand Superannuation Fund#

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No contributions were made to the New Zealand Superannuation Fund in 2011/12 as a result of the Government's decision in May 2009 to suspend contributions until there are budget surpluses sufficient to fund contributions. A one-off contribution of $250 million was last made on 1 July 2009.

18 New Zealand Debt Management Office#

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18 (a) Interest from investments and other income#

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NZDMO's interest from investments increased by $5 million primarily owing to changes in investment activity levels of New Zealand dollar and United States dollar market bonds.

NZDMO's other income increased by $6 million primarily owing toincreased interest income on lending to Crown Financing Agency and NZTA.

18 (b) Other expenses- NZDMO#

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Other expenses - NZDMO largely comprises net interest on NZDMO derivatives (excluding fair value and FX gains/losses). Current year decrease of $80 million is attributable to both interest rate changes and transactional activity.

18 (c) Borrowing costs#

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Borrowing costs have increased by $401 million primarily owing to increased volumes of New Zealand government stock issued to third parties.

19 Capital Charge#

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Capital charge revenue increased by $134.600 million from 2010/11 year predominantly owing to higher public sector discount rate of 8% (2011: 7.5%). Also, the Treasury has undertaken a comprehensive review of the capital charge regime with the aim of making it more consistent, transparent and effective. As a result of this review, new capital charge rules commenced on 1 July 2011 where departmental memorandum account deficits are now being included in the capital charge payable. New rules have been applied on entities' December 2011 net assets balances.

20 Other Current Revenue#

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Other current revenue has increased by $439 million in 2011/12. This primarily relates to an increase in the recovery of government guarantee payments during 2011/12, where funds received from receivers of defaulted entities were $467 million. During the current year, the Crown received a Crown Assistance Fee of $108 million from New Zealand Rugby. Prior year's Rugby World Cup provision of $6.437 million was no longer required and as such recorded as revenue in the current year.

21 Other Fees#

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Other fees have decreased by $13 million predominantly because of a one-off commitment fee of $15 million paid last year by AMI to the Crown in relation to the Crown's purchase of equity in AMI.

22 Reserve Bank Surplus#

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Dividends received by the Crown from RBNZ decreased from $290 million in 2010/11 to $210 million in 2011/12 owing to reduction in RBNZ's surplus. The principal reason for the reduction is mainly owing to lower net interest income earned, FX losses and changes in the market value of financial instruments.

23 Rugby New Zealand 2011 Limited#

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The Crown's obligation of 67% of the Rugby World Cup loss has been provided for in prior financial years. Some of this provision was no longer required in the current year owing to the change in the share of loss since the original Shareholders Agreement was signed; this provision was reversed in the current financial year and is being returned to the Crown. The release of prior year provision of $6.437 million was recorded in the operating statement as other current revenue. In the current year, the Crown received a Crown Assistance Fee of $108 million from New Zealand Rugby. Under the Shareholders Agreement between New Zealand Rugby Union (NZRU) and the Crown, the Crown had a payment obligation of GBP37.1 million to NZRU for its share of the Rugby World Cup Limited expenses. This was payable as a derivative transaction and was entered into under section 65 of the Public Finance Act 1989.

24 Taitokerau Forests Limited#

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Loans to Taitokerau Forests Limited of $750,000 were advanced as per the Loan Agreement during 2011/12. For the current year, impairment in Taitokerau loans was necessary as the valuation of the Taitokerau Forests Limited assets was lower than the valuation of the loan liability to the Crown as at 30 June 2012. An impairment of $379,000 in Taitokerau loans was recorded in the current year.In the current year the Crown received $947,000 (2011: $1.205 million) repayment of the Taitokerau Forests Advance.

25 GST Compensation for GSF and NPF#

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Prior year, an appropriation was approved and applied to compensation for recipients of GSF and NPF owing to an increase in the GST rate in October 2010.

New Zealand Debt Management Office#

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• Schedule of Assets and Liabilities
• Schedule of Revenues and Expenses
• Risk Management
• Funding Risk
• Liquidity Risk
• Credit Risk
• Operational Risk
• Market Risk

NZDMO is part of the New Zealand Treasury and is responsible for the efficient management of the Crown's debt and associated assets within an appropriate risk management framework. NZDMO's strategic objective is to maximise the long-term economic return on the Crown's financial assets and debt in the context of the Government's fiscal strategy, particularly its aversion to risk.

NZDMO's major responsibilities involve:

• financing the Crown's borrowing requirement and managing a portfolio of assets and liabilities
• disbursing cash to departments
• advancing funds to government entities in accordance with government policy, and
• providing capital markets services and derivative transactions for departments and Crown entities.

NZDMO managed $26.062 billion of assets, $83.120 billion of liabilities, $500 million of revenue and $3.158 billion of expenses on behalf of the Crown for the year ended 30 June 2012. Further information on NZDMO's performance in managing the Crown's sovereign-issued debt and related financial assets is provided on pages 43 and 48 to 50.

To facilitate a greater level of transparency regarding NZDMO operations, the following supplementary financial schedules report the activity of NZDMO as though it were a stand-alone entity. Cross-holdings or other financial positions between NZDMO and other government entities are not eliminated. The financial information reported in these schedules is consolidated into the Crown Financial Statements.

Schedule of Assets and Liabilities#

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as at 30 June 2012

Schedule of Revenues and Expenses#

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for the year ended 30 June 2012

Classes and Categories of Financial Instruments#

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NZDMO designates its financial assets and liabilities under the following NZ IFRS categories:

Derivatives#

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As at 30 June 2012, the value of derivatives was as follows: