Annual Report of the Treasury for the Year Ended 30 June 2008

The Treasury

Chief Executive's Introduction

The 2007/08 year has been one in which the Treasury has extended itself on many levels.

In the provision of economic and financial advice to the Government, we have sought to increase our impact in several fundamental areas of our work, while also expanding our involvement into what, for the Treasury, are some relatively new areas.

In our Central Agency role, we have strengthened our collaboration with the State Services Commission (SSC) and the Department of the Prime Minister and Cabinet (DPMC) and intensified our focus on ways we can collectively improve State sector performance.

Across the Treasury, we have focused on building our relationships with stakeholders in the public, private and community sectors, using these connections to help us be a more informed, influential and effective organisation.

Highlights

The Treasury's advice and services over the past year covered our wide-ranging contribution to the Government's long-term economic and fiscal goals, as well as some more immediate responses to topical issues as they arose. While we have sought to ensure that our contribution was of high quality overall, a number of achievements stand out.

A particular highlight for the Treasury was our input into the Personal Tax Package in Budget 2008. The advice we provided was instrumental in helping the Minister determine the final size, shape and timing of the personal tax changes announced in the Budget. Our role in the delivery of the tax package was characterised not just by the hard work of staff in the months and weeks leading up to the Budget, but also by our longer-term advice and discussion of fiscal issues over recent years.

Another highlight has been our intensive analysis of New Zealand's productivity performance. The imperative for a much stronger trend of productivity going forward is the biggest economic challenge facing policy-makers and both the public and private sectors in New Zealand. During the year the Treasury took a long-term view about what matters for productivity and what New Zealanders can do to improve it. Through our analysis we identified five interlinked drivers of productivity – enterprise, innovation, skills, investment and natural resources – and published our work to help broaden public discussion on this important topic. Productivity remains a key area of focus for us.

With the pace and scale of Treaty of Waitangi settlements building over the past year, the Treasury has become more deeply involved in settlement processes. Working closely alongside the Office of Treaty Settlements and with other government agencies, the Treasury had a lead role from an early stage in the negotiations on the recent Central North Island forests collective settlement - the biggest Treaty settlement to date. We were brought in specifically to assist in working through the complex issues involved, and this has continued post the Central North Island forests collective settlement.

During 2007/08 we reached decisive conclusions about where our work over the next three to five years can have the most impact on achieving higher living standards for New Zealanders. Our four strategic results areas - international connections, long-term fiscal sustainability, natural resource management and skills - are areas where we aim to deliver a step-change in our performance as a strategic advisor to Government. I have been encouraged by the initial progress we have made on these strategic result areas to date, and will be expecting the Treasury to exemplify quality policy advice and thought leadership on these issues in the coming months and years.

The Treasury has also been considering how collectively the Central Agencies can have the most impact on the overall performance of the State sector. The Central Agencies have made a good start on several fronts. We have been working together to set clearer expectations of capability and performance for State sector leaders. There is greater cohesion in the way we engage with individual agencies, so that they receive more consistent and complementary input from us. We are jointly driving the six Development Goals for the State Services, which includes a goal focused on value for money. And we have used our collective strengths to address major cross-cutting issues such as housing affordability: during the year the Central Agencies worked with housing agencies to deliver a report to Ministers regarding the drivers of house prices to give the Government further hard evidence on which to make policy decisions. Over 2008/09 the Central Agencies will continue to focus on policy development, agency performance and public management systems.

An Outward-looking Treasury - Changing the Way we do Business

One of the transformations we seek to achieve is to be a much more outward-looking Treasury. Engaging and communicating widely with all sectors of New Zealand's economy is an important means for ensuring that the Treasury is a relevant and connected economic and financial policy advisor for the Government. It keeps us in touch with what is happening “on the ground” as well as in the data. While there is still some way to go until the Treasury is as outward-looking as we want to be at all levels of the organisation, we took considerable strides during 2007/08 and have started to see the benefits.

In particular, we have taken a stronger approach to communicating with stakeholders about the Treasury's position on matters of major significance. My own involvement over the past year has included speeches expressing the Treasury's views on topics ranging from climate change and fiscal policy choices to State sector performance, productivity performance and savings performance. Other Treasury staff are sharing the Treasury's thinking more widely by publishing papers, presenting at conferences and meeting people as part of their day-to-day work.

It is important for us to engage not just to deliver our thinking, but also to hear other people's ideas, and to develop and test our thinking. We have been engaging more across the public and private sectors to help us get a better understanding of what is wanted and needed in these areas. During the past year we have been meeting with leaders and influencers in business, academia and communities to get their feedback on the Treasury's work and to hear their views on the big issues affecting New Zealand.

The Year Ahead

We go into 2008/09 as an organisation well prepared to meet the challenges of the coming year and eager to make the most of opportunities to make a difference where it counts.

I would like to thank Treasury staff for their professionalism and commitment throughout the past 12 months and I look forward to the year ahead.

John Whitehead

Secretary to the Treasury

What We Do

The Treasury's overall vision is to be a world-class Treasury working for higher living standards for New Zealanders. We aim to raise the country's capacity to deliver on people's aspirations for a better quality of life, through making an impact on the issues that are important to New Zealand's economic performance and State sector management.

Guiding the Treasury's work is our focus on achieving three main outcomes, all of which are necessary to attaining higher living standards for New Zealanders:

• Improved economic performance
• Improved State sector performance
• A stable and sustainable macroeconomic environment.

The Treasury also has three core roles that underpin what we do:

• Economic role - concentrates on issues with regulatory or policy implications that may have a significant and therefore pervasive impact on the performance of the economy as a whole.
• Financial role - concentrates on issues with a significant fiscal focus - expensive policies and long-term trends, and financial management and standards (including financial probity issues).
• Central Agency role - places more emphasis on helping the Government develop its overall strategy and manage significant issues that emerge.

As these roles suggest, the Treasury is uniquely placed to provide the Government with advice that integrates economic and financial perspectives including interests in institutions, macroeconomic performance and structural policy issues. We bring it together in a way that helps the Government focus on what really matters to raise living standards. We operate in partnership with other agencies that have more specific responsibilities, as well as our fellow Central Agencies to ensure that the public service overall is well placed to fulfil the Government's priorities.

The Treasury also engages with stakeholders across the public and private sectors to strengthen our analysis and to identify where our efforts to raise living standards can best be targeted. Our engagement and analysis have helped us prioritise four strategic result areas where our advice over the next three to five years can have the most impact:

• Skills - to achieve a substantive increase in the economic contribution of New Zealand's collective skills base.
• Internationalconnections - to achieve a sustained increase in the contribution of international connections to New Zealand's Gross Domestic Product (GDP).
• Naturalresourcemanagement - to ensure the New Zealand economy uses natural resources sustainably and productively.
• Long-term fiscal sustainability - to ensure decision-makers take action to meet long-term fiscal challenges.

Crown Company Monitoring Advisory Unit

The Crown Company Monitoring Advisory Unit (CCMAU) is a stand-alone unit within the Treasury responsible for maintaining and enhancing the Crown's ownership interest in a range of Crown research institutes, State-owned enterprises, Crown companies and other entities. The Executive Director of the Unit is directly accountable to the Secretary to the Treasury for the Crown's investment in CCMAU, and for CCMAU's performance.

Our Outcome Performance 2007/08

This section reports on progress we made in our three outcome areas: Improved Overall Economic Performance, Stable and Sustainable Macroeconomic Environment and Improved State Sector Performance. These three outcomes reflect those areas where we feel we can have most influence towards achieving the Government's goals.

The Treasury's main output, or service, is policy advice. This policy advice, as well as the other services we provide, is captured in our six output classes. As the diagram below illustrates, these individual output classes may contribute to one or more of the three outcomes.

The six output classes contribute directly to results we want to achieve. These result areas are selected because they represent the areas where we can have the greatest impact, and our aim in focusing on them is to maximise the impact that we have. The focus on results is also intended to enhance our effectiveness as a department.

Success in achieving our portfolio of results involves engaging effectively internally, and with our key external customers, providing good-quality policy advice and operations, and being flexible in our approach so that we can respond to changes in our operating environment.

Outcome: Improved Overall Economic Performance

The Treasury brings an overall perspective, including interests in institutions, macroeconomics and microeconomics, to advise Ministers on what really matters for New Zealand's economic performance. New Zealand's primary economic challenge is to improve long-term productivity performance.

Overall, the New Zealand economy has performed well over the past decade, including in 2007/08, averaging 3.3% per annum growth in GDP since 2000. Compared to other benchmark economies, growth in real GDP per capita is still somewhat above average, although still not sufficient to have made appreciable inroads on our relatively low level of per-capita GDP, which remains around 14% below the OECD average.

Most of our growth (2.2% per annum) has come from increases in labour utilisation, with unemployment in 2007/08 dropping to its lowest level since the 1980s (3.6%). This “good news” masks a growing concern, however. Relatively little of New Zealand's economic growth has come from improvements in labour productivity (1.1% per annum since 2000). While our productivity growth was roughly on a par with Australia's over the 1990s, it has weakened since - partly due to the dampening effect of high employment growth.

New Zealand is a poor productivity performer by international standards. Given the limits to improving our labour utilisation further, New Zealand's future economic prosperity will increasingly depend on improving our productivity performance.

Improving long-term productivity performance will require sustained effort on multiple fronts. Recent Treasury work has highlighted policy challenges for New Zealand centring around five drivers of productivity: innovation, skills, enterprise, investment and natural resources. For a small open economy, international connections provide a key opportunity to improve performance across all of these drivers.

Increases in productivity come from investing in new capital, increasing skill levels, encouraging entrepreneurial activity and better natural resource management, and from using international connections to further each of those areas. Our strategic result areas were chosen to target these key drivers of productivity.

Monitoring Economic Performance

The key tool we use to monitor economic performance is the Economic Development Indicators report. The latest edition of this report was jointly published this year by the Treasury, Ministry of Economic Development and Statistics New Zealand (available at www.med.govt.nz/indicators). The Economic Development Indicators report provides a snapshot of New Zealand's overall economic performance relative to other OECD countries.[1] Key conclusions include:

• overall, relatively low per-capita GDP but improving at a faster rate than the OECD average
• relatively low labour productivity, improving at about the same rate as the OECD average
• strong investment performance but relatively weak savings performance
• high levels of innovation that are not fully reflected in productivity performance
• relatively strong skills, but with apparent weaknesses in specific areas such as the “long tail” of low achievers.

This suggests a pattern of significant strengths in the New Zealand economy pocketed with areas in which we need to improve if we are to close the gap to other countries against which we benchmark ourselves.

Overview of Progress in 2007/08

Some of areas in which we have had a significant impact through our work this year include:

• Developing a framework for public discussion and policy development on productivity issues.
• In the internationalisation area, we contributed to the development of a Free Trade Agreement with China, the first such agreement that China has entered into, with significant economic benefits for New Zealand.
• In the area of taxation policy, we provided high-quality comparative analysis of the merits of different options to assist the Government in formulating its personal tax package.
• In the climate change area, we developed a conceptual framework to assist decision-making on international climate change issues, and led the development of the Emissions Trading Scheme.
• In the innovation area, we contributed to the establishment of Fast Forward, a $700 million fund leveraging equal industry support and aimed at increasing innovation and investment in the food and pastoral industries.

 

 

 

New Zealand Export Credit Office (NZECO)

Government approval of a wider range of products for NZECO has meant 2007/08 has been a year of expansion. The broader product range includes an expansion of the US surety bond guarantee, a contract bond guarantee and a working capital guarantee. Details of these products can be found on ECO's website www.nzeco.govt.nz

The expansion of the US surety bond guarantee has been implemented, and the other guarantees will be implemented early in 2008/09. ECO's staff also increased over to 2007/08 to administer these new products. ECO's deal activity in 2007/08 was far higher than in earlier years, due to the wider product range, higher staffing and investment in earlier years building up business relationships and informing potential clients about ECO's products.

Over 2007/08, the Treasury commissioned independent consultants to conduct a review of the organisational form of ECO. The consultants reported back to the Treasury in June 2008 and the Treasury will be advising Ministers on the future organisational form of NZECO early in 2008/09.

Outcome: Stable and Sustainable MacroeconomicEnvironment

The Treasury provides advice on macroeconomic conditions and fiscal policy. We also provide economic and fiscal forecasts and produce the Crown Accounts.

A stable and sustainable macroeconomic environment contributes to higher economic growth by allowing individuals, businesses and the Government to plan more effectively for the longer term. This improves the quality and quantity of investment in physical and human capital and helps to raise productivity, and ultimately contributes to higher economic growth and higher living standards for New Zealanders.

Our focus throughout this year has been on areas where our work is likely to have the most impact on the performance of the macroeconomy, and in particular, the institutional frameworks that promote macrostability, and the sound operation of fiscal policy.

Overview of Progress in 2007/08

Macroeconomic conditions were particularly challenging in 2007/08. This was primarily due to volatile international economic and financial market conditions, stemming initially from a meltdown of the US sub-prime mortgage market, and a sharp rise in international oil, food and other commodity prices that led to a marked rise in global inflation. These forces led to a heightened degree of uncertainty about New Zealand's macroeconomic prospects and required additional effort to be applied to monitoring, forecasting and advising on economic developments.

In the event, economic activity slowed sharply in the first half of 2008. The current account deficit reduced broadly in line with expectations. However, inflation pressures have turned out to be higher and as a result monetary policy has continued to be restrictive. This environment formed the backdrop for the Treasury's advice on fiscal policy for Budget 2008. The Treasury provided macro and fiscal policy advice that took account of the extra uncertainty, and advice on decisions that would be consistent with the Government's long-term fiscal objectives, while also supporting macrostability. During the year, the IMF endorsed the past operation of fiscal policy and emphasised New Zealand is in a very strong position to let automatic stabilisers work in the event of a slowdown or to use fiscal policy more actively if a more severe slowdown were to occur.

A combination of a continuing high exchange rate and tight monetary conditions has seen continued questioning of some of the macroeconomic “rules of the game”, as well as the manner in which macroeconomic policy is operated, including the interaction of monetary and fiscal policy. The Treasury has played a key role in supporting and providing advice to the FEC inquiry set up to investigate the monetary policy framework.

In making fiscal policy decisions and setting a fiscal strategy the Government should consider how a sustainable fiscal position can be attained in the long term. Financial assets have continued to build in the New Zealand Superannuation Fund that helps prefund some of the fiscal pressures that will emerge as New Zealand's population starts to age. It is desirable that governments look to moderate spending growth across various areas of government to address long-term fiscal challenges. In this regard, the Treasury has been working with the Ministry of Health (MOH) and relevant Ministers to identify how health spending can be put on a more sustainable track without compromising the standard of health services. Looking forward the Treasury will assess the scope for addressing other areas of government spending and taxes in order to meet long-term fiscal challenges.

Measuring progress on our results

The Treasury monitors the stability and sustainability of the macroeconomic environment through the Economic and Fiscal Updates and the Financial Statements of the Government of New Zealand, which include both fiscal and macroeconomic indicators of economic performance. As mentioned above, economic growth slowed markedly in the first half of 2008. This should be seen in the context of an economy that has had the longest period of economic growth since World War II. Inflation has remained above the Reserve Bank's target range of 1% to 3%, largely as a result of rising oil and food prices.

Despite the more difficult economic conditions, the Treasury's forecast performance improved over the year. Forecast variances for GDP and the Consumer Price Index (CPI) are smaller for the 2007/08 March year than historically. For tax revenue, the errors in Half Year Economic and Fiscal Update (HYEFU) 2007 and Budget Economic and Fiscal Update (BEFU) 2008 forecasts were lower than over the historic 1994 to 2007 period.

The fiscal position has remained strong and the Government looks on track to meet its long-term fiscal objective of maintaining debt at around 20% of GDP while continuing to make contributions to the New Zealand Superannuation Fund to help prepare for longer-term fiscal challenges.

Measuring Progress - Crown Debt and Related Financial Asset Management

New Zealand Debt Management Office's (NZDMO) objective is to manage Crown debt and related financial assets in order to maximise the long-term net return on the Crown's financial asset and debt portfolios, within an appropriate risk management framework. Our priority for 2007/08 was to continue managing the shift from predominantly debt management to a mix of debt and asset management, with foreign-currency hedging playing an increasingly important role in our business.

Reflecting the importance of NZDMO's growing asset portfolio, in 2007/08 we focused on improving our risk management practices and portfolio composition. See pages 38 and 39 for NZDMO's significant results for 2007/08.

The Treasury measures the performance of NZDMO in managing the Crown's debt, associated financial assets and overall net cash flows. Performance measures have been developed to assess the amount of return (value added) and risk incurred by these portfolios, as well as the cost per cash flow transaction settled. The value-added figure is derived from NZDMO's management reporting, which is calculated on a different basis from the financial statement reporting. The goal is to maximise net return while reducing risk as much as possible. These activities should also be managed as cost-effectively as possible.

Our performance against these measures is discussed below. The measures are not intended to be interpreted with reference to any particular benchmark, but are rather to be seen as highlighting trends in performance in key results areas over time. The trends demonstrate that while value added has increased, largely as a result of the strong fiscal position and improvements in the Crown's borrowing costs, risk has been maintained at a low level. The Treasury will continue to measure itself in these areas.

Cost-effectiveness

Value added generated for the Crown

Annual value-added result

The value-added result generated for the Crown has increased significantly over recent years owing to a combination of factors:

• the Government's strong fiscal position providing opportunities to undertake increased cash management (or investment activity) and a decrease in the Government's cost of funds (as measured by widening swap spreads)
• substantially increased foreign exchange risk management activity stemming from a greater number of Crown clients and the execution of flows arising from these relationships.

Market risk

Monthly VaR

NZDMO measures market risk (interest rate and foreign exchange rate risk) using a statistical model, Value at Risk (VaR).  VaR measures the worst expected loss over a given time interval under recent market movements at a given confidence level.  The monthly VaR limit at the 95% confidence level is set at $14 million.  As indicated by the movement of VaR over the past four years, the market risk that NZDMO has taken on is well below this limit and has been decreasing over time.  Even though market conditions in the past year have been more volatile than the preceding year, the estimated VaR figures have continued to decrease.  This can be attributed to changes in NZDMO portfolio composition and improved risk reduction practices.

Input cost per transaction

Annual cost per cash flow settled

Changes to the overhead cost allocation and reporting format of the Treasury Budget information mean it is no longer possible to continue calculating NZDMO's cost per transaction on a basis consistent with previous years.  A new methodology will be developed in 2008/09.  As an interim measure, we have measured cost per transaction on an input basis for 2007/08, and have provided equivalent figures for 2006/07 for comparative purposes.  Cost per transaction continues to decline, primarily as a result of systems improvements, the closure of some borrowing facilities and changes in the composition of staff.

Outcome: State Sector Performance

The Treasury provides advice to ensure the work of the State sector represents value for money in achieving the Government's aims and objectives. This includes advice on policy and regulatory settings, the public management system and the management of, and return on, the Crown's assets and liabilities.

Our focus over the longer term is on ensuring we have a sustainable public sector that represents value for money in meeting the Government's priorities and generates the maximum possible benefit for taxpayers for a given level of expenditure.

We have chosen to focus initially on performance in the fiscally significant areas - eg, health, education and the benefit system - as a matter of priority. In these areas we are developing measures of performance, and options to improve performance and manage longer-run fiscal pressures over time.

The State sector is a significant part of the economy in its own right. Because of its size, improvements in performance, for example through increases in labour and capital productivity or through delivering services in a more cost-effective way, will have an impact on economic growth. Improved performance will also place less stress on fiscal policy, assisting in finding fiscal headroom to progress priority areas, and contributing to the Treasury's stable and sustainable macroeconomic environment outcome.

Overview of Progress in 2007/08

To achieve our longer-term aim of having a sustainable public sector that represents value for money means that, in the short to medium term, our focus is on improving our ability to measure performance and advising Ministers on how they can get better results.

We prioritised our efforts on those areas of performance that are most critical to the Government's objectives and where we were likely to get the greatest returns for improved performance.

We identified the following as priorities for 2007/08:

• In-depth analysis on areas that are fiscally or financially significant (eg, health and education) and on government agencies that made a key contribution to the growth outcome (eg, working with MfE).
• Developing the Treasury's internal capability and frameworks to deliver space for our priority areas by streamlining our analysis in other areas of our work.
• Agreeing a common framework for improving capital and asset management in the State sector and applying that framework to capital-intensive areas (eg, defence).
• Developing a shared framework with Central Agencies for providing advice to Ministers on State sector remuneration.

We have made good progress in developing baseline performance information on key areas and agencies and have been able to use that information both in terms of shorter-term decision-making (eg, influential advice to Ministers on Budget initiatives in the context of a tight fiscal situation) and in a longer-term context (eg, helping create a debate with the health sector over long-term fiscal challenges). The in-depth performance analyses in the justice, health and education sectors and the benefit system were completed and the findings were reported to Ministers. We are now better placed to understand the drivers of performance - in priority areas, and more broadly - and what we need to do to influence them. We have a broader set of indicators of success in most areas although measuring our impact remains a challenge.

We have in place good systems and processes to manage policy and Vote analysis in areas that are not in our priority areas. We effectively managed our input into the Budget process across all our Vote responsibilities to the satisfaction of Ministers.

Cabinet agreed a new capital management approach and this is being implemented progressively across the public sector, starting with capital-intensive agencies. Over time, this should ensure better value from the capital asset base, in particular new capital investments. There should be fewer fiscal and operational “surprises”, more reliable fiscal projections, a more sustainable asset base and, over time, improved service delivery.

The budget parameters for major industrial relations and remuneration risks are informed and moderated by the Government's fiscal strategy, other spending priorities and labour market conditions. The Treasury, together with other Central Agencies, are providing Ministers with appropriate over-arching messaging and risk mitigation strategies for managing industrial relations and remuneration risks.

We have been responsive to changing priorities through the year and have reallocated resources to meet ministerial objectives. This was most noticeable in the Treaty area, and we have contributed to a number of Central Agency processes and initiatives. We have also made significant contributions to projects that have links to outcomes broader than that of State sector performance, including:

• The Treasury has contributed to the Government's Treaty-related work, in particular leading work on the deed of settlement with the Central North Island iwi collective.
• The Treasury has actively contributed to cross-agency advice to Ministers on a package of proposals to progress the Government's Schools Plus agenda.
• The Treasury played a significant role in a multi-agency team drawn together to analyse housing market issues, in particular around affordability, and possible policy implications.

In the Statement of Intent 2007-2010 we highlighted how our effectiveness at creating opportunities to provide advice to Ministers that reflects the wider long-term fiscal challenges was an important measure of our success. During the 2007/08 year, our in-depth performance analyses of the justice, health and education sectors, and also regarding the benefit system, provided such opportunities. In particular, with these fiscally significant sectors, ensuring that Ministers understand the long-term implications of their decisions, and the trade-offs associated with their choices, makes an important contribution to the outcomes we can achieve. Similarly, the new capital asset management approach which was agreed during the course of the year, supports and encourages a longer-term perspective to investment and portfolio management decisions.

 

Central Agency Leadership

Central Agencies (Department of the Prime Minister and Cabinet (DPMC); the Treasury; and State Services Commission (SSC)) share a mutual interest in a high-performing, trusted and accessible State sector. Central Agencies have a key leadership role to play in aligning the activities of the State services with Government's priorities and ensuring Ministers receive the best possible advice before making decisions.

An independent in-depth review of the Central Agencies was completed in 2006. While the review pointed to successes, Ministers agreed they needed more from Central Agencies, both jointly and separately, if Central Agencies were going to lift State sector performance.

To improve State sector performance, Central Agencies must:

• provide effective leadership
• focus on the things that matter
• work together more effectively.

In 2007/08 the Central Agencies worked together in a number of areas including:

• Cross-government policy issues - Central Agencies provided leadership and support to progress complex issues where the Government expected significant shifts in outcomes. These issues often cross agency and sector boundaries. For example:
  • Schools Plus - Collectively working in support of the MOE to align government agencies around delivering the Government's Schools Plus programme.
  • Effective Interventions - Continuing to work with and in support of the justice sector agencies to prepare improved outcomes from the criminal justice sector.
• State services systems improvement - Central Agencies worked together to improve systems that would significantly assist the Government to deliver on priorities. For example:
  • Implementation of the Crown Entity Work Programme. This was a joint initiative to assist monitoring departments to improve their advice to Ministers through networking, identifying best practice and introducing a new Crown entities report for Ministers.
  • Collaborative development and implementation of “Election-year guidance for State servants”.
  • Shared Central Agency leadership of the State Services Development Goals. The Development Goals are a transformation agenda for the State service.
• Central Agency organisational improvements - Each Central Agency is better aligned in their internal processes to more effectively carry out the shared Central Agency role. For example:
  • SSC and DPMC providing advice to the Treasury to inform their advice to the Minister of Finance on Budget initiatives.
  • The Treasury and DPMC working with SSC on advice to the Commissioner about the specific organisational requirements prior to appointment of new chief executives.
  • The Treasury and SSC working with DPMC to ensure the effort of government agencies is well aligned around the Government's policy priorities.

• All three agencies inducting new staff together, opening up information systems, sharing staff and developing more integrated systems.

Feedback

Independent feedback was sought from stakeholders, in June-August 2008, to assess progress on the Central Agencies' joint leadership role. Interviews were held with Central Agency Ministers and 10 State sector chief executives and/or deputies.

Ministers

Ministers reported a satisfactory level of engagement, in line with and appropriate to their roles. Ministers noted that there had been some good attempts at developing a shared view of priority issues for improving State sector performance and examples of coordination and cooperation. However, Ministers thought there was still room for improvement.

State Sector Leaders

State sector leaders believed Central Agency leadership had improved over the last year. Historically, the Central Agencies did not have a shared view of performance, which meant other agencies received mixed messages. Respondents agreed that a lot of work had been done in this area and improvements have been made. This has led to an appetite for more collective alignment between the Central Agencies. Activities receiving positive comments include the State Services Development Goals, Lominger competency framework, public surveys, Value for Money and developing a shared view of performance. Most respondents (chief executives) felt that the Central Agencies support their agency to achieve the Government's objectives. They also felt the Central Agency link to senior Ministers is useful.

Respondents also felt there was still room for improvement. While there is some coordination, it doesn't always translate into a shared view, particularly around things like Statements of Intent and the Budget. State sector agencies are asking Central Agencies for more clarity on how the Central Agencies, collectively, will continue to add value to the wider State sector.

Organisational Development and Capability

The Stepping Up change programme was first launched in November 2006. It was a fundamental look at our strategic direction, and how we organise ourselves, how we operate and the systems and processes we needed to deliver on that strategic direction. Initial changes under this programme involved aligning the organisational structure and reporting lines with our short- and medium-term objectives. In tandem, “soft” changes were made to foster “stepped-up” performance, including lifting the strategic focus of the strategic leadership team, recasting our outputs and outcomes with a focus on results and impacts and taking a more proactive approach to engaging with stakeholders and customers.

During 2007/08 we continued implementing changes under Stepping Up, focusing particularly on building buy-in across the Treasury, and establishing and embedding the new systems and information flows that are necessary to support enhanced organisational performance. In particular, we targeted change in four key areas: external engagement, quality, management and leadership and strategic policy leadership. Having a champion to build and maintain the momentum of change was important, and a member of the senior leadership team role was assigned to each focus area.

The collective buy-in of staff and management is an integral part of the success of the Stepping Up programme. To establish wider support, senior leaders increased their visibility through a variety of fora to ensure effective two-way communication about the new strategic direction. Among other things, this included regular staff briefings, newsletters and informal brown bag lunches. Underpinning this we also invested in developing the management and leadership skills that are necessary to support a step-change in our management and leadership over the next year.

In 2007/08 we focused on improving our ability to align capability and resources with business requirements and strategic priorities. This focus relies on effective flows of relevant and timely information and effective and timely decision-making to ensure that any skill gaps, or any misalignment between resource levels and priorities, can be promptly identified and resolved.

We have continued our focus on being an employer of choice by ensuring our work environment, culture, policies and procedures are fair and equitable. This year the Treasury completed its Pay and Employment Equity Review, resulting in a small number of areas for improvement. Work to address these is underway and will continue over the coming year.

We commenced a review of the structure, form and function of our organisational performance group and, based on the findings of that review, changes will be implemented in 2008/09.

Leadership and Management Development

The Treasury invested significant effort to create developmental strategies designed to lift management and leadership capability. A number of programmes were created to support managers to develop in specific skills, such as improving staff engagement. Six managers participated in a generic management development programme (the Diploma in Frontline Management with NZIM). A number of other developmental strategies, not limited to just training workshops, will be developed in 2008/09 to augment the programmes that were created this year.

During 2007/08 we began rolling out the Lominger competency framework, starting with the development of role profiles for deputy secretaries and assistant secretaries. These role profiles will be used as a basis for assessing our performance over time. Senior managers received 360° feedback based on their performance relative to these competencies as a mechanism for establishing individual development plans. The 360° feedback process is being further cascaded to managers in 2008/09.

Embedding a Results Focus

We maintained our focus on results throughout the year with regular updates to senior management on key successes, challenges and the implications these had for our financial management and resource capability. A six-month review provided the opportunity to ensure that budgets and people were well-aligned to achieve our results. The results focus, and the behaviours and competencies we want to encourage as part of Stepping Up, were also integrated into the Treasury's performance management system.

In anticipation of the 2008/09 financial year, we refreshed our result plans. Reviewing and defining our results for each year is essential if we are to be clear on how we can add the most value and how we should prioritise our efforts to achieve the greatest effect. This year the process resulted in a much sharper focus on a smaller number of strategically important results; from over 20 priority results in 2007/08 to four strategic result areas for the next three to five years. These strategic result areas are: international connections, skills, natural resource management and long-term fiscal sustainability. These represent a subset of areas where the Treasury can and must have a bigger impact.

A Stronger Focus on the Needs of our Customers and Managing Stakeholders Relationships

The Treasury maintains a close relationship with the Minister of Finance (and Associate Ministers); meeting regularly and seeking feedback, formally and informally, throughout the year to ensure we meet their needs. Regular meetings are also held with ministerial office staff.

Maintaining effective relationships with other government and private sector stakeholders is essential given the Treasury's role. Our external engagement programme this year included attendance at a range of business and public sector events, informal discussions with business and voluntary sector stakeholders, and speaking at events on important issues such as climate change and savings. In addition, as noted in the secretary's introduction, John Whitehead has delivered speeches on key issues such as the long-term fiscal strategy, public sector performance and productivity.

This year we also engaged with a number of public and private sector stakeholders as we developed the strategic result areas. Seeking an external perspective on major issues facing the economy was a key part of the development and testing of our strategic result areas. The secretary, deputy secretaries and assistant secretaries met with a range of business people, public leaders and other prominent thinkers to gain a better understanding of the issues they see as most important for New Zealand, and their expectations of the Treasury’s focus in that context. This directly supports our objective of improving our external engagement and enhancing the Treasury’s relationship with key stakeholders in the public and private sectors. More broadly, engaging with external stakeholders in this way is an important part of our Stepping Up changes: to ensure an external perspective is brought to bear on all our major work.

This same proactive engagement with stakeholders takes place at many levels in the organisation. Staff continued to engage with relevant stakeholders as part of ongoing work to deliver on results.

Delivering the Best Products, Services and Advice we can

The Treasury Quality Standards for Policy Advice were revised during the year and the new standard was rolled out across the Treasury, through a programme of briefings, in-depth discussions and supporting material. The new Quality Standard has been incorporated into our policy development training course and included in performance workplans for policy staff. We are working with the Development Centre to further support policy managers and analysts in applying the Quality Standard and ensure they have the tools, resources and expertise they need to develop and deliver the best advice to Ministers that we can.

The revised Quality Standards were published in the Statement of Intent 2008-2013. We have agreed an approach to assessing our performance against the standards and anticipate using a mix of self-review and external assessment tools to gauge the quality of our policy advice.

During the year we have also conducted a comprehensive review of the way we manage Official Information Requests, following an error where inappropriate material was inadvertently released. This review has resulted in clearer and more robust systems and protocols for ensuring appropriate handling of requests made under the Official Information Act 1982.

Our People

The Treasury employed 324 fixed-term employees (FTEs) at the end of June 2008. This included 14.5 staff on secondment to other government agencies and Ministers' offices and three staff on secondment to international institutions.

We employed fewer part-time staff than over the last five years (35 in 2007/08 representing 10.5% of total staff) and there has been an increase in fixed-term employees (20 in 2007/08). The increase in fixed-term employees reflects the difficulty in recruiting permanent skilled staff; this was particularly the case in support roles.

Compared with 2006/07 there is an increase in the proportion of analysts, as compared to more senior positions. This reflects a deliberate recruitment strategy to attract more junior level staff.

Turnover reached 24.3% in 2007/08, compared with 18.9% and 15.4% for the two preceding years. This has resulted in a heavier demand for recruitment to fill vacant positions; however, few positions have remained vacant for any lengthy period.

Actual turnover varied across the organisation, being highest in the Organisational Performance Group (33.5%) and Group Support (32.4%).

The use of sick leave and annual leave are indicators of staff wellbeing and engagement, and these remained stable in 2007/08. The Treasury conducts an in-depth biennial staff climate survey, and this is scheduled for 2008/09.

Staff training and experience

As a knowledge-based organisation, our success in contributing to our outcomes depends on maintaining and developing a talented workforce and making full use of its experience and expertise.

Given the tight labour market, the Development Centre also reviewed its technical programmes to ensure that if the Treasury cannot recruit the talent it needs, we can grow it effectively. This resulted in a broader programme of development for junior analysts, and a review of “core” skills training. In 2008/09, this will enable us to springboard off this more robust platform and create a more clearly defined “end-to-end” development pathway for economists and Vote analysts.

It is a reflection on the quality of the programmes being provided that a number of other departments are requesting that we either run our programmes with them or allow participants to attend courses we are running in-house.

Vote Finance Output Class Performance

Statement of Objectives and Service Performance Section 45A of the Public Finance Act 1989

This section provides information about the outputs (services and activities) that the Treasury provided during the 2007/08 financial year.

Descriptions of the Treasury's six output classes follow, along with some significant highlights of the 2007/08 year.

Through introducing results specification to all areas of our work we are endeavouring to develop better measures of performance. Detailed service performance standards for all output classes can be found on page 43.

Policy Advice: State Sector Performance

This class of outputs involves the provision of policy advice related to ensuring the work of the State sector represents value for money in achieving the Government's aims and objectives. This includes advice on:

• fiscal and financial management of all government agencies
• specific agency or entity performance (including Crown entities, Crown companies, Crown financial institutions and SOEs)
• in-depth performance analysis of priority agencies or sectors
• the overall performance of the public management system including thematic and cross-cutting analysis, eg, CAM.

The Treasury is seeking to differentiate the level of advice and service routinely provided on, or to, different government agencies and sectors. Those agencies and sectors judged priorities will be a focus for the Treasury's advice and services. Priority agencies and sectors will be significant for State sector performance, fiscal management or economic performance.

For all departments and votes, the Treasury's advice and services will include:

• management of core government Budget processes
• efficient support of good financial management and probity within agencies
• maintaining an informed overview to foresee significant emerging financial or performance risks.

For priority sectors and agencies, the Treasury's advice will extend to in-depth performance analysis, including a focus on the most efficient and effective policies, regulation, administration and delivery to achieve the Government's aims and objectives.

Empirical and analytical research will also be undertaken as required to inform the above policy advice.

Significant Work Completed During 2007/08

• Developed capability to understand the drivers of State sector performance and how to influence them.
• Introduced a new CAM approach which is being progressively implemented, starting with the capital-intensive agencies, and which will deliver better value and performance over time.
• Led the work on the deed of settlement signed with the Central North Island iwi collective.
• Contributed to cross-agency advice to Ministers to progress the Government's Schools Plus agenda: helping to ensure that all young people are in education, skills development or structured learning, relevant to their needs and abilities, until the age of 18.
• As part of a multi-agency team, analysed housing market issues and possible policy implications, in particular around affordability.
• Together with other Central Agencies, provided Ministers with appropriate over-arching messaging and risk-mitigation strategies for managing industrial relations and remuneration risks.
• Effectively managed our input into the Budget process across all our Vote responsibilities to the satisfaction of Ministers.

* General service performance standards are detailed on page 43.

Actual 2007/08 output class expenditure was $714,000 or 5% under Supplementary Estimates budgets. This output class belongs to a multi-output class appropriation.

The appropriation for this output class was decreased by $4,384,000 in the Supplementary Estimates. This decrease was largely due to changes in forecast assumptions, as a result of the 2007/08 Main Estimates being prepared prior to implementation of the Treasury's Stepping Up change programme.

 

Policy Advice: Economic Performance

This class of outputs involves the provision of policy advice and services relating to helping the Government to improve New Zealand's economic performance. This includes helping Ministers, the Government and State agencies understand policies that are important for economic growth and the connections between overall economic performance and other desired outcomes when developing strategies and evaluating intervention options.

The advice the Treasury will provide includes:

• analysis and advice to Ministers on broad economic strategies to promote economic growth and their impact on living standards
• analysing the drivers of productivity growth and advising Ministers on the policies, regulations and institutional arrangements that best achieve improved overall economic performance
• advice on trade-offs between these and other government outcomes.

The Treasury's advice will concentrate on those policy areas that are most significant and pervasive for New Zealand's economic performance. These are:

• financial markets, investment and savings
• competition and regulatory frameworks
• sustainable environment, particularly climate change
• skills acquisition and schooling outcomes
• taxation
• international connections
• infrastructure: energy, telecommunications, transport
• innovation
• Auckland
• labour market performance
• social mobility.

In addition, the Treasury will:

• continue to measure and monitor New Zealand's economic performance
• undertake empirical and analytical research to inform policy advice.

Significant Work Completed During 2007/08

• Published seven Policy Perspectives papers on productivity issues.
• Provided key advice on the development of the 2008 Personal Tax Package.
• Contributed to the development of a National Policy Statement on Freshwater Management with particular emphasis on providing more certainty in respect of competing demands on New Zealand's freshwater resources and facilitating opportunities to increase benefits from the use of freshwater resources, within constraints on availability and effects of discharges.
• Developed our thinking on sustainability issues, culminating in the establishment of the Natural Resource Management strategic result area as a departmental priority from 2008/09.

• Hosted the Emissions Trading Group which developed emission trading policy and legislation.
• Provided advice on the design of the Broadband Investment Fund including the introduction of criteria to ensure that the possible benefits of competition are maximised.
• Contributed to the development and implementation of the Land Transport Management Amendment Act 2008.
• Provided advice on progressing the Waterview project as a private public partnership.
• Developed our thinking on international connections, culminating in the establishment of the International Connections strategic result area as a departmental priority from 2008/09.
• Developed our understanding of New Zealand's key regulatory framework and where to make improvements to the regulatory quality management system.
• Contributed to the development and implementation of KiwiSaver.

* General service performance standards are detailed on page 43.

Actual 2007/08 output class expenditure was $555,000 or 4% over Supplementary Estimates budgets. This output class belongs to a multi-output class appropriation.

The appropriation for this output class was increased by $2,127,000 in the Supplementary Estimates due to an increase in demand for outputs such as carbon emissions trading and the Waterview Public Private Partnership. This increase is also a result of changes in forecast assumptions, as the 2007/08 Main Estimates were prepared prior to implementation of the Treasury's Stepping Up change programme.

Policy Advice and Management: Macroeconomic

This class of outputs involves the provision of policy advice and services related to helping the Government maintain a stable and sustainable macroeconomic environment. This includes advice on:

• budget management, including management and delivery of the Budget process
• forecasting, including macroeconomic, tax and fiscal forecasting
• fiscal policy and strategy
• long-term fiscal sustainability
• macroeconomic stabilisation
• fiscal reporting, including the application and development of current Generally Accepted Accounting Principles (GAAP), as it applies to the Crown.

Empirical and analytical research will also be undertaken to inform advice in the above areas.

Significant Work Completed During 2007/08

• Provided support to the FEC inquiry into monetary policy.
• Organised and hosted the IMF Article IV visit to New Zealand, and oversaw finalisation and publication of the IMF's Article IV report on New Zealand.
• Provided macro and fiscal input into the annual visits of Moody's and Standard & Poor's rating agencies which saw New Zealand's sovereign ratings remain unchanged.
• Managed the Budget process for 2008.
• Provided advice to the Minister of Finance and Cabinet on the Budget strategy, including theme packages, the capital package, the overall Budget and the fiscal and economic backdrop for the Budget and the options for managing Budget pressures.
• Completed the development and automation of the revised accountability documents, resulting from the formal RoADs. This included reshaping the Estimates documentation to provide better information to Ministers on actual vs forecast performance.
• Prepared Financial Statements of the Government in line with statutory requirements.
• Published the 2008 Fiscal Strategy Report and Budget Speech.
• Provided Monthly Economic Indicator and Weekly Economic Update reports to Ministers.
• Economic and Fiscal Forecasts prepared for the HYEFU 2007 and BEFU 2008 updates.

* General service performance standards are detailed on page 43.

Actual 2007/08 output class expenditure was $28,000 or 0.2% under Supplementary Estimates budgets.

The appropriation for this output class was increased by $1,175,000 in the Supplementary Estimates largely due to changes in forecast assumptions, as a result of the 2007/08 Main Estimates being prepared prior to implementation of the Treasury's Stepping Up change programme.

Debt and Related Financial Asset Management

Management of Crown debt and related financial assets contributes to the Treasury's macroeconomic performance outcome by maximising the long-term net return on the Crown's financial asset and debt portfolios, within an appropriate risk management framework. Specific activities include:

• developing and maintaining an appropriate framework for efficiently managing the portfolio and the risks associated with it
• issuing domestic-currency debt to meet the Government's funding requirements
• disbursing cash to departments and facilitating departmental cash management
• advancing funds to government entities in accordance with government policy
• providing capital market services and derivative transactions for departments and government entities
• funding the Reserve Bank's foreign-exchange reserves
• managing foreign-currency assets required to meet net foreign-currency interest and principal payments
• maintaining hedges of foreign-currency debt that cannot be bought back from investors.

Significant Work Completed During 2007/08

• Reflecting the importance of NZDMO's growing asset portfolio, in 2007/08 we focused on improving our risk management practices and portfolio composition. The results set out below demonstrate the success of a conservative approach in adding value to the portfolio even in challenging market conditions.
• Issued $1.9 billion of government bonds for the year, including $245 million of infrastructure bonds.
• Value-added result of $68 million for the tactical portfolio was a new record, set in volatile financial market conditions that required an increasingly flexible approach to debt issuance and asset management. The value-added figure is derived from NZDMO's management reporting, which is calculated on a different basis from the financial statement reporting.
• In spite of the most difficult credit conditions for decades, NZDMO's conservative approach to risk management resulted in another year where no credit-related losses were realised.
• Only five settlement errors were made during the year (compared with a target limit of eight), at minimal cost to NZDMO (just $45 in total).
• No breaches of policy limits reflected improvements in NZDMO's risk management practices over the year.
• Value at Risk continues to decline, even as the markets have experienced a significant increase in volatility, indicating improvements in portfolio composition and risk reduction practices.
• Provided advice on 2008/09 domestic borrowing programme in conjunction with the 2008 Budget, and led successful engagement with ratings agencies.
• Government security tender administration was successfully taken over from the Reserve Bank in April. Subsequent tenders have operated smoothly, with positive feedback from market participants.
• Completed policy development and systems changes required to add NZD investments to NZDMO's cash management options, ready for implementation in 2008/09.
• A range of measures was implemented to improve bond market liquidity, including moving to fortnightly tenders, and increasing the size of the bond lines (up to $4.5 billion). Plans were announced to introduce tap and reverse tap tenders during 2008/09.

* General service performance standards are detailed on page 43.

Actual 2007/08 output class expenditure was $534,000 or 6% under Supplementary Estimates budgets due to vacancies and cost savings.

The appropriation for this output class was increased by $1,359,000 in the Supplementary Estimates largely due to changes in forecast assumptions, as a result of 2007/08 Main Estimates being prepared prior to implementation of the Treasury's Stepping Up change programme.

Management of Liabilities, Claims Against the Crown and Crown Properties

This class of outputs involves managing a range of commercial, contractual, legal and Treaty of Waitangi-related claims against the Crown. Outputs contribute to minimising Crown financial risk within the bounds of government objectives. Specific outputs include:

• management of commercial and contractual risks associated with the 1973 Maui Gas Contract, including the operation of the gas notification system with downstream gas users
• management of contractual and commercial issues arising from completed asset sales and wind-up of the Crown's previous ownership interests in SOEs, Crown companies and other entities
• advice on the management of historical claims under the Treaty of Waitangi and assistance with the Crown's negotiation of specific settlements
• provision of legal title to land sold to SOEs and other Crown companies as a part of their sale and purchase agreements with the Crown
• management of litigation against the former Building Industry Authority relating to weather-tight homes
• management of New Zealand House, London.

Specific outputs often depend on the actions of third parties.

Significant Work Completed During 2007/08

• Provided advice on various aspects of Rugby New Zealand 2011 Limited (RNZ 2011), including advice on Eden Park funding issues, variations to the Shareholders Agreement, the tournament budget for the 2011 Rugby World Cup and on Board appointments.
• Undertook ongoing management of day-to-day contractual obligations regarding the 1973 Maui Gas Contract. Specific work this year included resolution of allocation disputes.
• Provided ongoing advice on debt restructuring options for Taitokerau Forests Limited.
• Provided advice on the options for resolving claims from the Atihau Incorporation relating to resumption of leasehold properties.
• Provided fiscal advice on claims and issues related to Treaty settlement policy, the Port Nicholson Block (PNBCT), Waikato River, Kurahaupo and the Central North Island claims.

Actual 2007/08 output class expenditure was $503,000 or 21% over Supplementary Estimates budgets largely owing to increased demand for fiscal advice on claims and issues related to Treaty settlement policy. This output class belongs to a multi-output class appropriation.

The appropriation for this output class was decreased by $3,267,000 in the Supplementary Estimates. This was largely due to $3 million for the management of litigation against the former Building Industry Authority relating to weather-tightness of homes not being required in 2007/08 and was transferred to 2008/09.

* General service performance standards are detailed on page 43.

New Zealand Export Credit Office

This class of outputs involves the provision of export credit insurance and managing and operating the NZECO in accordance with the delegated authority from the Minister of Finance. Outputs contribute to greater export activity within the bounds of the Government's financial risk parameters set out in the delegation agreement. Specific outputs include:

• provision of medium- to long-term export credit insurance via the NZECO in accordance with the delegation agreement with the Minister of Finance
• management of the ongoing operation of the NZECO in accordance with the delegation agreement with the Minister of Finance
• advice to the secretary via the NZECO Advisory Board on proposed transactions
• review of the NZECO during 2007/08 to evaluate the NZECO's statutory form, and in particular to assess the merits of establishing NZECO as a separate Crown entity and also to reconsider the NZECO's product suite.

Significant Work Completed During 2007/08

• Ministers approved new products for NZECO, which were implemented during 2007/08. These included an expansion of the US surety bond guarantee, a contract bond guarantee and a working capital guarantee.
• Achieved revised 2007/08 operational targets as agreed with the Minister.
• Over 2007/08, the Treasury commissioned independent consultants to conduct a review of the organisational form of NZECO. The consultants reported back to the Treasury in June 2008 and the Treasury will be advising Ministers on the future organisational form of NZECO early in 2008/09.

Actual 2007/08 output class expenditure was $365,000 or 23% under Supplementary Estimates budgets largely owing to three US bond guarantees not being completed by year end. This output class belongs to a multi-output class appropriation.

The appropriation for this output class was increased by $309,000 in the Supplementary Estimates as new funding was required by the NZECO to increase the range of services to exporters.

* General service performance standards are detailed on page 43.

Service Performance Objectives: All Vote Finance Output Classes

* The Treasury has not measured this aspect of performance during 2007/08. This measure has not provided meaningful information on our performance and has been discontinued.

Ministerial Servicing Performance 2007/08

The Treasury undertook significant restructuring during 2007 which included a review of how the Ministerial Servicing Result was organised and managed. It was decided to defer appointments to the staff vacancies contributing to the Ministerial Servicing Result until after the review was completed. During this time the volume of correspondence greatly exceeded expected volumes which caused difficulties in meeting performance expectations. Following the successful implementation of review decisions, subsequent organisational improvements and increases in staff, performance relating to the Ministerial Servicing Result has been greatly improved in the latter part of the year.

Crown Company Monitoring Advisory Unit (CCMAU)

Executive Summary

During 2007/08, CCMAU has continued to take a leadership role in the ownership monitoring of the wide range of SOEs, Crown companies and entities in its portfolio. The performance of these companies and entities contributes to the Government's economic transformation priority theme.

These companies and entities have faced a number of challenges and issues in the last year, and CCMAU has been at the forefront of assessing and advising shareholding Ministers on many of them.

CCMAU assisted Ministers in implementing a corporate social responsibility framework for SOEs. We also assisted Ministers to reinforce their ownership expectations for SOEs and CRIs, with the issue of revised Owner's Expectations Manuals for both SOEs and CRIs in October 2007. These are available publicly on CCMAU's website www.ccmau.govt.nz

We also implemented a set of non-financial performance indicators to enable the Government to measure the contribution CRIs make to the wider economy. Our Appointments and Governance team continued to identify skilled directors for Ministers to appoint to the boards of the companies and entities we monitor. Furthermore, we have cemented our relationship with Massey University's Graduate School of Business to provide our governance training programme.

It is a testament to the skill and standing of our staff that, when they leave CCMAU, they often move into responsible positions elsewhere. Whilst we have lost some experienced staff to the private sector this year, we were able to recruit a number of new staff with relevant skills and experience to ensure Ministers' expectations continued to be met.

The opportunity continues to exist for CCMAU to enhance its ownership monitoring role, building on current expertise to more effectively address the Government's wider ownership objectives.

What we do

Our mission

CCMAU aims to be the New Zealand Government's ownership advisor of choice in the provision of commercial and wider ownership advice.

Our purpose

CCMAU provides services in the following areas:

• Monitoring - reporting on business plans, company reports, performance against targets and sectoral trends.
• Ownership advice - advising on strategic issues, investment and diversification opportunities, restructuring issues and the impact of policy decisions.
• Ministerial servicing - managing issues and drafting replies to correspondence, parliamentary questions and Official Information Act requests.
• Governance - identifying and screening potential directors, managing appointment processes and promoting best-practice corporate governance of Crown companies and entities.

Relationship with the Treasury

The Executive Director of CCMAU is directly accountable to the Secretary to the Treasury for the Crown's investment in CCMAU, and for CCMAU's performance in providing the output classes Ministers seek.

The Year in Review

CCMAU has contributed to a wide range of activities and initiatives this year. The key achievements in each sector were:

Maintaining and Developing Capability

CCMAU's reputation and ability to meet the expectations of Ministers and key stakeholders is very dependent on the skill and experience of its staff and their ability to manage relationships with a wide range of contacts. During the year we continued to pay attention to making CCMAU a desirable place to work and to provide staff with the training and resources necessary to do their jobs well.

Over the past four years, measures of staff statistics and satisfaction have been as follows:

Murray Wright

Executive Director

 

CCMAU Output Class Performance

Statement of Objectives and Service Performance
Section 45A of the Public Finance Act 1989

Vote Crown Research Institutes

Crown company monitoring advice to the Minister for Crown Research Institutes (CRIs), Minister for Economic Development and Minister of Research, Science and Technology.

This output involves the provision of policy and ownership monitoring advice on nine CRIs, NZVIF and Research & Education Advanced Network New Zealand Ltd (REANNZ) and the provision of advice on the performance of the CRI Capability Fund, and includes:

• advising the Minister for CRIs, the Minister for Economic Development and the Minister of Research, Science and Technology on the strategic direction of CRIs, NZVIF and REANNZ, respectively and the commercial and fiscal risks associated with Crown ownership
• providing advice which assists the Minister for CRIs, the Minister for Economic Development and the Minister of Research, Science and Technology to set ownership objectives and targets for CRIs, NZVIF and REANNZ
• monitoring and advising the Minister for CRIs, the Minister for Economic Development and the Minister of Research, Science and Technology of CRIs', NZVIF's and REANNZ's performance against these objectives and targets
• providing policy advice on, and managing issues arising out of the ownership of, CRIs, NZVIF and REANNZ, including residual implementation issues
• managing, on behalf of the responsible Ministers, the appointment of CRI, NZVIF and REANNZ directors and monitoring the performance of those directors and boards
• assisting the responsible Ministers in the formulation of shareholders' expectations in relation to the governance practices and structures companies adopt.

Maintaining and enhancing the Crown's ownership interest in these companies to contribute to the efficient management of the Crown's assets and liabilities.

The CRIs, NZVIF and REANNZ have an important role to play in the New Zealand innovation system, thereby contributing to improving New Zealand's overall economic performance.

Significant Work Completed During 2007/08

• Completed the 2007/08 strategic planning round which included analysing and reporting on each company's draft Statement of Corporate Intent/Statement of Intent and strategic plan so that shareholding Ministers were able to provide informed advice to boards.
• Completed quarterly performance reports for the June, September, December and March quarters, which were presented to Cabinet.
• Contributed to the 2008 Operating Framework for CRIs.
• Provided a briefing to the incoming Minister of Research, Science and Technology.
• Completed and issued the revised Owner's Expectations Manual for CRIs.
• Managed various company issues, and provided advice to Ministers on such issues.
• Continued to take a “lead agency” role in the International Network of Government Ownership Agencies (INGOA), including organising and Chairing the inaugural INGOA conference in London, England. INGOA is an international best-practice sharing network of organisations with a similar role to that of CCMAU.
• Hosted three core training programmes for recently appointed or aspiring directors.
• Hosted four professional director updates for existing Crown directors (a series of three workshops on conflicts of interest; and a one-day study tour on corporate social responsibility).
• Hosted two workshops on the roles and powers of Select Committees (for both Crown company and entity directors).
• Hosted a one‐day induction seminar for new CRI directors.
• Managed expressions of interest from candidates wishing to be considered for Crown governance roles.
• Continued to provide assistance to other agencies regarding nominations.
• Provided advice to Ministers on a number of appointments and governance issues, including:
  • the 2007/08 CRI appointment round
  • a review of the directors' fees methodology for the Crown companies; and the implementation of associated changes in January 2008.

* General service performance standards are detailed on page 53.

Actual 2007/08 output class expenditure was $11,000 or 1% under Supplementary Estimates budgets.

 

Vote State-Owned Enterprises

Crown company monitoring advice to the Minister for State-Owned Enterprises and other responsible Ministers.

This output involves the provision of policy and ownership monitoring advice on SOEs, Crown entity companies and Crown entities covered by Vote SOEs (collectively referred to below as “SOEs”). This includes:

• advising the Minister for SOEs and other responsible Ministers on the strategic direction of SOEs; the commercial and fiscal risks associated with Crown ownership; proposals to establish and restructure SOEs; and the processes and outcomes of significant SOE divestments and acquisitions
• providing advice which assists Ministers to set ownership objectives and targets for SOEs
• monitoring and advising Ministers for SOEs' performance against these objectives and targets
• providing policy advice on, and managing issues arising out of, the ownership of SOEs, including residual implementation issues
• managing, on behalf of responsible Ministers, the appointment of SOE directors and monitoring the performance of those directors and boards
• assisting responsible Ministers in the formulation of shareholders' expectations in relation to the governance practices and structures companies adopt.

Maintaining and enhancing the Crown's ownership interest in these entities contributes to the efficient management of the Crown's assets and liabilities.

Significant Work Completed During 2007/08

• Completed the 2007/08 SOE business planning round, which involves analysing and reporting on each company's draft Statement of Corporate Intent and business plan so that shareholding Ministers are able to provide informed feedback to boards. The 2008/09 SOE business planning round was also substantially completed by 30 June 2008.
• Completed quarterly performance reports for the June, September, December and March quarters, which were presented to Cabinet.
• Completed and issued the revised Owner's Expectations Manual for SOEs.
• Completed long-term hold owner's reviews for Kordia and Genesis.
• Managed various company issues and provided advice to Ministers on such issues.
• Published on CCMAU's website, the results of private sector equity analysts' assessment of the value and projected performance of Genesis, Meridian and Mighty River Power.
• Following a review of the corporate social responsibility (CSR) obligations of SOEs, implemented a CSR framework as agreed by Cabinet in October 2007.
• Completed the amalgamation of Asure with AgriQuality, to create AsureQuality Ltd (on 1 October 2007).
• Continued to take a “lead agency” role in the International Network of Government Ownership Agencies (INGOA), including organising and Chairing the inaugural INGOA conference in London, England. INGOA is an international best-practice sharing network of organisations with a similar role to that of CCMAU.
• Hosted three core training programmes for recently appointed or aspiring directors.
• Hosted four professional director updates for existing Crown directors (a series of three workshops on conflicts of interest; and a one-day study tour on corporate social responsibility).
• Hosted two workshops on the roles and powers of Select Committees (for both Crown company and entity directors).
• Hosted a one‐day induction seminar for new SOE directors.
• Managed expressions of interest from candidates wishing to be considered for Crown governance roles.
• Continued to provide assistance to other agencies regarding nominations.
• Provided advice to Ministers on a number of appointments and governance issues, including:
  • the 2007/08 appointment rounds
  • a review of the directors' fees methodology for the Crown companies; and the implementation of associated changes in January 2008.

* General service performance standards are detailed on page 53.

Actual 2007/08 output class expenditure was $29,000 or 1% under Supplementary Estimates budgets.

The appropriation for this output class was increased by $202,000 in the Supplementary Estimates. A transfer of this amount was made from Vote Finance to Vote SOE to enable CCMAU to deliver its agreed outputs following unavoidable cost increases.

Service Performance Standards: All CCMAU Output Classes

Financial Statements

Statement of Responsibility

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 2008.
• The supplementary schedules fairly reflect the assets, liabilities, contingencies and commitments managed by the Treasury on behalf of the Crown as at 30 June 2008 and revenues and expenses managed by the Treasury on behalf of the Crown for the year ended on that date.

Financial Statements - Departmental

for the year ended 30 June 2008

Overview of Departmental Financial Results

Statement of Financial Performance

Statement of Movements in Taxpayers' Funds

Statement of Financial Position

Statement of Cash Flows

Statement of Commitments

Statement of Contingent Liabilities and Contingent Assets

Departmental Capital Expenditure

Statement of Departmental Expenses and Capital Expenditure Against Appropriations

Notes to the Financial Statements

Overview of Departmental Financial Results

for the year ended 30 June 2008

The following significant movements in actual results between 2008 and 2007, and 2008 actual results against the 2008 Supplementary Estimates budget, are explained below:

Significant Movements Between 2007 and 2008

Revenue Crown for departmental outputs increased by $2.9 million, mainly due to increased funding for the Export Credit Office in 2007/08 of $0.8 million and an underspend of $2.0 million recorded for 2006/07.

Personnel expenses increased by $3.0 million in 2007/08 mainly due to increased success in filling vacancies and market movements in salaries.

Accounts receivable have increased by $1.2 million in 2007/08 due to the inclusion of the expenditure recovery for the Central North Island project.

Property, plant and equipment decreased by $0.3 million in 2007/08 mainly due to delays in replacing computer hardware during 2007/08.

Creditors and other payables have increased by $1.6 million in 2007/08 mainly due to the inclusion of accruals in relation to the Central North Island project.

General taxpayers' funds decreased by $0.6 million due to a capital repayment to the Crown during 2007/08. The Treasury is repaying capital provided for the 2005 office accommodation refit.

Significant Variances Between Actuals and Supplementary Estimates Budget

Consultants expense is $0.7 million below budget largely due to planned Export Credit Office US bond guarantees not being completed in 2007/08 ($0.3 million) and the Supplementary Estimates consultancy budget including some expenditure that was subsequently classified as process management services.

Accounts receivable were $1.2 million over budget due to expenditure recovery for the Central North Island Project which was not forecast in the 2007/08 budget.

Property, plant and equipment is $0.5 million below budget due to delays in planned computer hardware replacements in 2007/08.

Intangible assets are $0.2 million below budget primarily due to planned software purchases being delayed during 2007/08.

Statement of Financial Performance

for the year ended 30 June 2008

The Statement of Financial Performance details the revenue and expenses relating to all outputs (goods and services) produced by the Department, including CCMAU, during the financial year ended 30 June 2008. Total Expenses equals Total Departmental Output Classes Expenditure and Appropriations in the Statement of Expenditure and Appropriations on page 64.

Explanations of significant variances against budget are detailed in the Overview of Departmental Financial Results on page 56.

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

Statement of Movements in Taxpayers' Funds

for the year ended 30 June 2008

The Statement of Movements in Taxpayers' Funds combines information about the net surplus with other aspects of the financial performance of the Department, including CCMAU, to give a measure of comprehensive income.

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

Statement of Financial Position

as at 30 June 2008

The Statement of Financial Position reports the total assets and liabilities of the Department, including CCMAU, as at 30 June 2008. 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

for the year ended 30 June 2008

The Statement of Cash Flows summarises the cash movements in and out of the Department during the financial year. It takes no account of money owed to the Department or owing by the Department and therefore differs from the Statement of Financial Performance on page 57.

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

Statement of Commitments

as at 30 June 2008

Capital Commitments

The Department is replacing personal computers with mobile computers (tablets). A commitment has been entered into for the purchase of these over the coming year.

Non-Cancellable Operating Lease Commitments

The Department has non-cancellable leases on its principal premises at No 1 The Terrace, Wellington (the Treasury) and Floor 2 No 3 The Terrace (CCMAU) until 2017. These operating lease commitments have been recorded at their gross values in the Statement of Commitments. The Department also had a non-cancellable lease over office space in Boulcott Street, Wellington which expired in March 2008.

Other Non-Cancellable Commitments

The Department has other operating commitments consisting of computer maintenance contracts, building services contracts and contracts for service.

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

Statement of Contingent Liabilities and Contingent Assets

as at 30 June 2008

Unquantifiable Contingent Liabilities

The Department has the following unquantifiable contingent liabilities:

• Carpark licence (Pastoral House) - In relation to the one carpark 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 carpark.
• Carpark licence (No 3 The Terrace) - In relation to the eight carparks 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 carparks.
• 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.

Quantifiable Contingent Liabilities

As at 30 June 2008, the Department had no quantifiable departmental contingent assets and liabilities (30 June 2007:nil).

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

Departmental Capital Expenditure

for the year ended 30 June 2008

Departmental capital expenditure incurred in accordance with section 24 of the Public Finance Act 1989

Statement of Departmental Expenses and Capital Expenditure Against Appropriations

for the year ended 30 June 2008

The Statement of Expenditure and Appropriations details expenditure against appropriations. Total Departmental Output Classes Expenditure and Appropriations equals Total Expenses in the Statement of Financial Performance on page 57.

A new output class structure was formulated for Vote Finance in 2007/08. The 2006/07 actual comparatives have been restated to reflect the new structure.

There was no unappropriated expenditure incurred during 2007/08 (2006/07: nil).

Notes to the Financial Statements

for the year ended 30 June 2008

1 - Statement of Accounting Policies

Reporting entity

The Treasury is a government department (the Department) as defined by section 2 of the Public Finance Act 1989 and is domiciled in New Zealand.

In addition, the Department has reported on Crown activities and trust monies which it administers.

The primary objective of the Department is to provide services to the public rather than making a financial return. Accordingly, the Department 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 Department are for the year ended 30 June 2008. The financial statements were authorised for issue by the Chief Executive of the Department on 15 September 2008.

Basis of preparation

These financial statements have been prepared in accordance with, and comply with, NZ IFRS and other Financial Reporting Standards, as appropriate for public benefit entities.

This is the first set of financial statements prepared using NZ IFRS. The comparatives for the year ended 30 June 2007 have been restated to NZ IFRS accordingly. Reconciliations of equity for the year ended 30 June 2007 under NZ IFRS to the balances reported in the 30 June 2007 financial statements are detailed in Note 19.

The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in preparing an opening NZ IFRS Statement of Financial Position as at 1 July 2006 for the purposes of the transition to NZ IFRS.

The financial statements have been prepared on a historical cost basis.

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 Department is New Zealand dollars.

Standards, amendments and interpretations 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 Department are:

• NZ IAS 1 Presentation of Financial Statements (revised 2007) replaces NZ IAS 1 Presentation of Financial Statements (issued 2004) and is effective for reporting periods beginning on or after 1 January 2009. The revised standard requires information in financial statements to be aggregated on the basis of shared characteristics and to introduce a statement of comprehensive income. The Department expects it will apply the revised standard for the first time for the year ended 30 June 2010.
• NZ IAS 23 Borrowing Costs (revised 2007) replaces NZ IAS 23 Borrowing Costs (issued 2004) and is effective for reporting periods commencing on or after 1 January 2009. The revised standard requires all borrowing costs to be capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. The Department intends to adopt this standard for the year ending 30 June 2010.

Revenue

Revenue is measured at the fair value of consideration received.

Revenue Crown

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

SSRSS revenue

The State Services Commission reimburses the Department for its contributions to the State Sector Retirement Superannuation Scheme.

Rental income

Lease receipts under an operating sub-lease are recognised as income on a straight line basis over the lease term.

Sale of publications

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

Capital charge

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

Leases

Operating lease

The Department leases office premises. Substantially all the risks and benefits of ownership are retained by the lessor, and therefore these leases are classified as operating leases.

Finance lease

The CCMAU leases computer equipment. Substantially all the risks and benefits of ownership belong to the leasee and therefore this lease is classified as a finance lease. The obligation under this lease is capitalised at present value of the minimum lease payments. The capitalised values are amortised over the period in which CCMAU expects to receive benefits from their use.

Financial instruments

Financial assets and financial liabilities are initially measured at fair value plus transaction costs unless they are carried at fair value through profit and loss in which case the transaction costs are recognised in the Statement of Financial Performance.

Financial instruments primarily comprise cash and bank balances, accounts receivable and payables. All financial instruments are recognised in the Statement of Financial Position at cost. Revenues and expenses in relation to all financial instruments are recognised in the Statement of Financial Performance.

Cash and cash equivalent

Cash includes cash on hand and funds on deposit with banks.

Debtors and other receivables

Debtors and other receivables are initially measured at fair value and subsequently measured at amortised cost using the effective interest rate, less impairment changes.

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

Property, plant and equipment

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

Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. All computer equipment assets and all other assets costing more than $5,000 are capitalised.

Additions

The cost of an item of property, plant and equipment is recognised as an asset if, and only if, 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.

Disposals

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount of the asset. Gains and losses are recorded in the Statement of Financial Performance.

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.

for the year ended 30 June 2008

Depreciation

Depreciation of property, plant and equipment is provided on a straight line basis so as to allocate the cost of property, plant and equipment, less their estimated residual values, over their estimated useful lives. The useful lives and associated depreciation rates of major classes of assets have been estimated 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.

The residual value and useful life of an asset is reviewed, and adjusted if applicable, at each financial year end.

Intangible assets

Software acquisition and development

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

Costs associated with maintaining computer software are recognised as an expense when incurred. Costs that are directly associated with the development of software for internal use by the Department are recognised as an intangible asset. Direct costs include the software development and employee costs.

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 the asset is available for use and ceases at the date that the asset is derecognised. The amortisation charge for each period is recognised in the Statement of Financial Performance.

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

Creditors and other payables

Creditors and other payables are measured at fair value.

Employee entitlements

Short-term employee entitlements

Employee entitlements that the Department expects 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, retiring and long service leave entitlements expected to be settled within 12 months and sick leave.

The Department recognises a liability for sick leave to the extent that 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 Department anticipates it will be used by staff to cover those future absences.

The Department recognises a liability and an expense for bonuses where it is contractually obliged to pay them, or where there is a past practice that has created a constructive obligation.

Long-term employee entitlements

Entitlements that are payable beyond 12 months, such as long service leave and retiring leave, have been 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. A weighted average discount rate of 6.45% and a salary inflation factor of 2.75% were used. The discount rate is based on the weighted average of government bonds with terms to maturity similar to those of the relevant liabilities. The inflation factor is based on the expected long-term increase in remuneration for employees.

Superannuation schemes

Defined contribution schemes

Obligations for contributions to the State Sector Retirement Savings Scheme, KiwiSaver and the Government Superannuation Fund are accounted for as defined contribution schemes and are recognised as an expense in the Statement of Financial Performance as incurred.

Provisions

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

Taxpayers' funds

Taxpayers' funds is the Crown's investment in the Department and is measured as the difference between total assets and total liabilities.

Commitments

Expenses yet to be incurred on non-cancellable contracts that have been entered into on or before balance date are disclosed as commitments to the extent that there 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 value of that penalty or exit cost.

Goods and services tax (GST)

All items in the financial statements, including appropriation statements, are stated exclusive of GST, except for receivables and payables, which are stated on a GST inclusive basis. Where GST is not recoverable as input tax, then it is recognised as part of the related asset or expense.

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

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

Commitments and contingencies are disclosed exclusive of GST.

Income tax

Good practice 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 Statement of Intent for the year ended 30 June 2008, which are consistent with the financial information in the Main Estimates. In addition, the financial statements also present the updated budget information from the Supplementary Estimates.

Statement of cost allocation policies

The Department has derived the cost of outputs/results using a cost allocation system. From 1 July 2007, the Treasury adopted a standard cost allocation method which is outlined below.

Direct costs are costs that can be identified with a single output/result. Where possible, costs are assigned directly to outputs/results.

Indirect costs are costs that cannot be identified with an output in an economically feasible manner. They are incurred for the common benefit of more than one output. Indirect costs are pooled as overhead costs and allocated to outputs/results based on the actual hours worked at a predetermined standard cost rate.

A time recording system is used to collect the information of actual hours worked on each output/result.

The predetermined standard cost per hour is set at the beginning of the year and is derived from dividing expected indirect costs for the year, including salaries and overheads, across expected hours to be worked for the year.

As the standard cost per hour is set at the beginning of the year, differences in costs and hours worked result in either an under or over recovery of costs during the year. This difference is allocated to outputs/results based on the hours worked on each output/result at the end of each month.

Change in cost accounting policies

On 1 July 2007, the Treasury's cost allocation policy changed from an actual cost allocation policy to a standard costing methodology. This change was made to more adequately reflect the new Stepping Up/Results-based performance measurement and reporting model. This does not materially affect the costs of the individual outputs/results.

Critical accounting estimates and assumptions

In preparing these financial statements the Department has made estimates and assumptions concerning the future. These estimates and judgements may differ from the subsequent actual results. Estimates and judgements 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. These estimates and judgements do not have a material impact on the carrying amounts of assets and liabilities.

2 - Revenue - Crown

This is revenue earned for the supply of outputs to the Crown.

3 - Other revenue

4 - Personnel costs

5 - Operating expenses

6 - Capital charge

The Treasury pays a capital charge to the Crown on its average taxpayers' funds for the six months ended 30 June and 31 December.

The capital charge rate for the financial year ended 30 June 2008 was 7.5% (30 June 2007: 7.5%).

7 - Property, plant and equipment

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

The 30 June 2008 actual cost balance includes $23,638 of work in progress (30 June 2007: nil) for leasehold improvements which have not been depreciated.

8 - Intangible assets

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

The 30 June 2008 actual cost balance includes $45,752 of work in progress (30 June 2007: $359,494) for computer software - internally generated which has not been depreciated.

9 - Creditors and other payables

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

10 - Provision for employee entitlements

11 - Provision for onerous contracts

The Department had a non-cancellable lease at Level 14, 47 Boulcott Street in Wellington until March 2008. Owing to the change in its activities, the Department no longer occupied Level 14 at the Boulcott Street premises. These premises were sub-leased. Owing to market conditions, the rental income was lower than the rental expense being incurred. The net obligation under the lease agreement was provided for as an onerous lease and this liability was incurred prior to March 2008.

12 - Finance leases

The effective interest rate for the life of the finance lease is 6.5%. The finance lease is secured over the assets to which it relates. The ownership of these assets passes to the Department at the conclusion of the lease term. The Minister of Finance, pursuant to section 47 of the Public Finance Act 1989, has approved this finance lease.

13 - Reconciliation of the net surplus to the net cash flows from operating activities

This reconciliation discloses the non-cash adjustments applied to the net surplus reported in the Statement of Financial Performance on page 57 to arrive at the net cash flows from operating activities disclosed in the Statement of Cash Flows on page 60.

14 - Financial instruments

The Department is party to financial instrument arrangements as part of its everyday operations. These financial instruments include cash and bank balances, advances, accounts receivable, debtor - Crown and payables and accrued expenses.

Credit risk

In the normal course of its business the Department is subject to credit risk from debtors other than the Crown.

The Department does not require any collateral or security to support financial instruments with financial institutions with which the Department deals, as these entities have high credit ratings. For its other financial instruments the Department does not have significant concentrations of credit risk.

Fair value

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

Currency and interest rate risk

The Department has no significant exposure to currency exchange loss risk and its financial instruments are not interest rate sensitive.

Liquidity risk

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

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

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

15 - Related party information

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

The Department enters into transactions with other government departments, Crown entities and SOEs on an arm's length basis. Those transactions that occur within a normal supplier or client relationship on terms and conditions no more or less favourable than those which it is reasonable to expect the Department would have adopted if dealing with the entity at arm's length in the same circumstances are not disclosed.

16 - Events subsequent to balance date

There were no events subsequent to balance date that required adjustment to the financial statements or disclosure (2007: none).

17 - Capital management

The Department's capital is its equity (or taxpayers' funds). Equity is represented by net assets. The Department manages it expenses, revenues, assets, liabilities and general financial dealings prudently. The Department's equity is

largely managed as a by-product of managing income, expenses, assets, liabilities and compliance with the Government Budget processes and with Treasury Instructions.

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

18 - Explanation of major variances against budget - see department overview

19 - Explanation of transition to NZ IFRS

Transition to NZ IFRS

The Department's financial statements for the year ended 30 June 2008 are the first financial statements that comply with NZ IFRS. The Department has applied NZ IFRS 1 First-time Adoption of NZ IFRS (NZ IFRS 1) in preparing these financial statements. The Department's transition date is 1 July 2006. The Department prepared its opening NZ IFRS balance sheet at that date. The reporting date of these financial statements is 30 June 2008. The Department's NZ IFRS adoption date is 1 July 2007.

Reconciliation of equity

a  Property, plant and equipment and intangible assets

Computer software was classified as property, plant and equipment under previous NZ GAAP. Computer software has been reclassified as an intangible asset on transition to NZ IFRS.

b  Provision for employee entitlements - sick leave

Sick leave was not recognised as a liability under previous NZ GAAP. NZ IAS 19 requires the Department to recognise employees' unused sick leave entitlement that can be carried forward at balance date, to the extent that the Department anticipates it will be used by staff to cover future absences.

Reconcilation of surplus

The following table shows the changes in the Ministry's surplus, resulting from the transactions from previous NZ GAAP to NZ IFRS for the year ended 30 June 2007.

a  Depreciation and amortisation

Computer software was depreciated as part of property, plant and equipment under previous NZ GAAP. Under NZ IFRS computer software is classified as an intangible asset and amortised.

Supplementary Financial Schedules - Non-Departmental

for the year ended 30 June 2008

Overview

Statement of Accounting Policies

Subsequent Events Schedule of Expenses

Statement of Expenditure and Appropriations

Statement of Unappropriated Expenditure

Schedule of Revenue

Schedule of Capital Receipts

Schedule of Assets

Schedule of Liabilities

Schedule of Commitments

Schedule of Contingent Liabilities

Statement of Trust Monies

The following supplementary financial schedules record the expenses, revenue and capital receipts, assets and liabilities that the Department manages on behalf of the Crown. These supplementary financial schedules include NZDMO balances reported on pages 96 and 97.

The Department administered $4,616 million of expenses, $3,653 million of revenue, $56 million of capital receipts, $27,547 million of assets and $46,151 million of liabilities on behalf of the Crown for the year ended 30 June 2008.

The financial information reported in these schedules is consolidated into the Crown financial statements, and therefore readers of these schedules should also refer to the Crown financial statements for the year ended 30 June 2008.

Overview

These are the first schedules prepared using the New Zealand equivalents to NZ IFRS. The comparatives for the year ended 30 June 2007 have been restated to NZ IFRS except for the comparative figures in the Statement of Expenditure and Appropriations. Adjustments to revenue and expenditure due to remeasurement under NZ IFRS are detailed in the Schedule of Expenses.

Amortisation of Air New Zealand Goodwill

The amortisation of Air New Zealand Goodwill is not permitted under NZ IFRS. Therefore no appropriation was incurred in 2007/08. In addition, the expense incurred from 1 July 2006 (being the date of transition by the Crown) is reversed under NZ IFRS and the increase is reflected in the value of Intangibles and goodwill (page 90).

Atihau-Whanganui Incorporation Ex-Gratia Payment

In June 2007/08, the Crown agreed to an ex-gratia payment of $23 million to Atihau-Whanganui Incorporation. This payment was for settlement of all its claims in respect of the Vested Lands and the Mäori Vested Lands Administration Act 1954. As negotiations were concluded earlier than anticipated, no appropriation had been included in the 2007/08 Supplementary Estimates. This is a one-off transaction. (Refer Statement of Unappropriated Expenditure.)

Borrowing Costs and Other Expenses - NZDMO

Borrowing costs currently shown under old GAAP for the 2006/07 year would be restated to $2,082 million if disclosed under NZ IFRS, ie, a reduction of $348 million. This NZ IFRS adjustment is due to the exclusion of losses on derivatives. All fair value adjustments on derivatives are now disclosed as remeasurements within Other expenses - NZDMO. Other expenses - NZDMO has decreased by $365 million from the 2006/07 year primarily due to the impact of interest rate movements on the fair value of derivatives and non-derivatives.

Dividends

SOE dividends decreased by $81 million from 2006/07 (page 88), primarily due to a reduction in dividends from Meridian Energy and Air New Zealand from those paid in previous years. These dividend reductions were due to changes in economic conditions. Crown entity dividends decreased by $15 million, as Television New Zealand incurred a financial loss for the year ended 2006/07 and did not declare a final dividend (payable 2007/08).

Foreign-Exchange (Losses)/Gains

Foreign-exchange gains were $7 million in 2007/08, compared with losses of $36 million in 2006/07, as a result of movements in exchange rates affecting the value of New Zealand's shareholding in the Asian Development Bank and the World Bank (page 88). The increase in value of these investments is also reflected in Other share investments (page 90). In contrast, NZDMO incurred foreign-exchange losses of $15 million in 2007/08, compared with gains of $17 million in 2006/07 due to movements in foreign exchange rates.

Government Superannuation Fund (GSF) Unfunded Liabilities

Under NZ IFRS, the subsidy paid to GSF schemes is no longer appropriated under GSFA - Subsidies to GSF schemes. Increases in the GSF liability due to additional current service costs and interest expenses are appropriated under Other expenses to be incurred by the Crown - GSF unfunded liability (page 85) while actuarial gains and losses are disclosed as a remeasurement (page 84) GSF unfunded liability - actuarial (gains)/losses. The GSF unfunded liability as at 30 June 2008 was $8,257 million (page 91), an increase of $1,096 million compared with 30 June 2007. The primary reason for the increase was actuarial losses due to movements in the economic assumptions used in calculating the liability.

International Financial Institutions

There were no capital contributions to or returns of capital from the International Monetary Fund (IMF) in 2007/08 (page 89) compared with returns of $100 million in the 2006/07 year. This reflects the cyclical nature of the IMF lending programme.

Maui Gas Contract

The Crown's revenues from Maui Gas Contracts have decreased by $14 million as the gas drawn reduces as the contract nears expiry. In addition, the revaluation of the Crown's margin and reduction in sales of prepaid gas has decreased both Other current revenue and Sales of goods and services by $6 million (page 88). The decrease in revenues is offset by a reduction in Other expenses incurred by the Crown for Maui Gas Contracts of $15 million (page 85).

National Provident Fund (NPF) Defined Benefit Plan (Annuitants) Scheme Provision

The Crown's liability for the NPF DBP(A) Scheme under Crown guarantee as at 30 June 2008 is $907 million (page 91), an increase of $136 million compared with 30 June 2007. The primary reason for the increase was movements in the economic assumptions used in calculating the provision and a reduction in fund assets due to payments of benefits. Increases in the NPF liability due to unwinding of the interest expense are appropriated under Other expenses to be incurred by the Crown - National Provident Fund schemes - Liability under Crown guarantee (page 85) while other changes due to economic assumptions are disclosed as a remeasurement, refer change in NPF DBP(A) Scheme provision under Crown guarantee (page 84).

New Zealand Debt Management Office (NZDMO) Interest from Investments and Other Income

NZDMO's interest from investments increased by $222 million due to higher average holdings in cash and investment securities than during the 2006/07 year. NZDMO's other income increased by $157 million primarily due to increased interest income from greater lending to Housing New Zealand Corporation and the Crown Financing Agency (CFA) and positive fair value revaluations on Crown lending to the Reserve Bank of New Zealand and the Crown Financing Agency.

Reserve Bank Surplus

The Reserve Bank's “notional surplus income” payable to the Crown decreased from $410 million to $193 million. The notional surplus income is calculated under section 158 of the Reserve Bank Act 1989. This calculation excludes unrealised gains and losses. As foreign-currency loans do not mature on a regular basis, the amount of notional surplus income will vary from year to year, often quite substantially (page 88).

Rugby World Cup

The Crown agreed to underwrite the 2011 Rugby World Cup in 2005/06. The estimated net present value of this cost has decreased by $17 million due to the reforecast of costs ($20 million), offset by changes in discount rate and the time value of money (page 88). This change was primarily due to the decision to fund the upgrade of Eden Park via the MED.

Rail Issues

During the year, the Crown planned to purchase Toll NZ Ltd's rail business and associated costs for up to $690 million. However, this purchase occurred in the 2008/09 year. The Crown also provided ONTRACK equity injections of $34 million for the purchase of rail land and the Wellington Railway Station. This sale is reflected in the decrease in Property, plant and equipment on page 90.

Statement of Accounting Policies

for the year ended 30 June 2008

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

The financial information reported in these schedules is consolidated into the Crown financial statements, and therefore readers of these schedules should also refer to the Crown financial statements for the year ended 30 June 2008.

Subsequent Events

On 1 July 2008, negotiations were completed and an agreement was signed for the purchase of 100% of the shares in Toll (New Zealand) Limited. Prior to the acquisition, assets and operations not integral to the rail operation were separated out of Toll (New Zealand) Limited. On acquisition by the Government, the company was renamed KiwiRail Limited.

Ownership of the rail business is intended to place the Government in a better position to integrate rail planning and funding with its wider transport policy, and to ensure capital investment for improving the rolling stock.

The cost of acquisition of the company was $690 million, settled in cash on 1 July. The assets acquired and liabilities assumed as a result of this purchase will be consolidated into the Financial Statements of Government from 1 July 2008, and the process to identify and value these individual items in accordance with NZ IFRS 3 has begun. Until this task is completed, an estimation of the full financial effect of this acquisition is not available.

Schedule of Expenses

for the year ended 30 June 2008

The Schedule of Expenses summarises expenses that the Department administers on behalf of the Crown. Details of non-departmental expenditure and appropriations are provided on pages 85 and 86.

The Crown's accounting policies are an integral part of these supplementary financial schedules.

Statement of Expenditure and Appropriations

for the year ended 30 June 2008

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

The Crown's accounting policies are an integral part of these supplementary financial schedules.

for the year ended 30 June 2008

The Crown's accounting policies are an integral part of these supplementary financial schedules.

Statement of Unappropriated Expenditure

for the year ended 30 June 2008

Vote Finance, Other Expenses Incurred by the Crown

Atihau-Whanganui Incorporation ex-gratia payment: $23 million in 2007/08 only

An ex-gratia payment to Atihau-Whanganui Incorporation in settlement of all its claims in respect of the Vested Lands and the Mäori Vested Lands Administration Act 1954.

Negotiations were successfully completed in June 2008, which was earlier than anticipated. Consequently, this ex-gratia payment to Atihau-Whanganui Incorporation was unappropriated expenditure because there was no existing appropriation for it.

Write-off of Capital Charge Receivable: $3.180 million in 2007/08 only

This unappropriated expense results from a government decision in June 2008, after the 2007/08 Supplementary Estimates had been finalised, to write off the capital charge incurred to 30 June 2008 on the government funding invested in the Government Shared Network.

This capital charge was recorded as a long-term receivable in Vote Finance. Upon write off an expense was incurred, which was unappropriated.

Vote Finance, Non-Departmental Capital Expenditure

Landcorp Protected Land Agreement: $64.2 million in 2007/08 only

Purchase (including by reinvesting cash dividends) of redeemable preference shares in Landcorp under the Protected Land Agreement.

Early in 2007/08 the Government agreed to compensate Landcorp in relation to protected land through a combination of equity and reduced dividends, and approved the use of imprest supply to provide $52.2 million in equity. The terms of the Protected Land Agreement that was entered into provided for the Crown compensation to Landcorp to be by way of a combination of a capital injection and diverting dividends, with Landcorp issuing redeemable preference shares to the Crown in return for both.

The Treasury subsequently received advice that under NZ GAAP because the redeemable preference shares become repayable in certain circumstances, they are debt rather than equity. Therefore, the $52.2 million payment that had been made to Landcorp was outside the scope of the approval to use imprest supply and requires validation in the Appropriation (2007/08 Financial Review) Bill.

Diverting dividends differs from reducing dividends in that it involves the Crown reinvesting dividends that have been declared by Landcorp and in return receiving redeemable preference shares. No approval under imprest supply was in place for the reinvestment of a $12 million dividend Landcorp declared to the Crown in October 2007, so this also requires validation in the Appropriation (2007/08 Financial Review) Bill.

Subsequent to the expenditure for which validation is being sought, an appropriation was included in the 2007/08 Supplementary Estimates and the 2008/09 Estimates authorising future Crown dividend reinvestments in redeemable preference shares in Landcorp.

The Crown's accounting policies are an integral part of these supplementary financial schedules.

Schedule of Revenue

for the year ended 30 June 2008

The Crown's accounting policies are an integral part of these supplementary financial schedules.

Schedule of Capital Receipts

for the year ended 30 June 2008

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

The Crown's accounting policies are an integral part of these supplementary financial schedules.

 

Schedule of Assets

as at 30 June 2008

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

The Crown's accounting policies are an integral part of these supplementary financial schedules.

 

Schedule of Liabilities

as at 30 June 2008

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

The Crown's accounting policies are an integral part of these supplementary financial schedules.

 

Schedule of Commitments

as at 30 June 2008

The Crown's accounting policies are an integral part of these supplementary financial schedules.

Schedule of Contingent Liabilities

as at 30 June 2008

Contingent liabilities are costs which 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 Department 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 the IMF.

Unquantifiable Contingent Liabilities

The Treasury also administers a number of contingent liabilities which cannot be quantified. These arise primarily from institutional guarantees and indemnities. Readers are referred to the Crown financial statements for further details.

The Crown's accounting policies are an integral part of these supplementary financial schedules.

Statement of Trust Monies

as at 30 June 2008

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. During the financial year ended 30 June 2008, no claims were made and interest of $77,585 was earned from trust money on term deposit.

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

The Crown's accounting policies are an integral part of these supplementary financial schedules.

New Zealand Debt Management Office (NZDMO)

Schedule of Assets and Liabilities

Schedule of Revenues and Expenses

Risk Management

Funding Risk

Liquidity Risk

Credit Risk

Operational Risk

Market Risk

NZDMO, established in 1988, 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
• providing capital markets services and derivative transactions for departments and Crown entities.

NZDMO managed $20.5 billion of assets, $36.9 billion of liabilities, $1.0 billion of revenue and $1.7 billion of expenses on behalf of the Crown for the year ended 30 June 2008. Further information on NZDMO's performance in managing the Crown's Sovereign‐issued debt and related financial assets is provided in the Output Performance - Vote Finance section of this report on pages 38 and 39.

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

as at 30 June 2008

Schedule of Revenues and Expenses

for the year ended 30 June 2008

Classes and categories of financial instruments

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

Derivatives

As at 30 June 2008, the value of derivatives was as follows:

Risk Management

NZDMO operates within a risk management framework that is approved by the Minister of Finance.

The framework specifies NZDMO's policies for managing market risk, credit risk, liquidity risk, funding risk and operational risk.

The risk management framework has been in place since NZDMO was established, and has been subject to continuous improvement as information technology and analytical techniques have advanced. NZDMO's risk management framework and practices are subject to regular audit review, and are also reviewed periodically by the NZDMO Advisory Board, by the Controller and Auditor-General and by external experts commissioned by NZDMO.

The risk management framework sets out the governance framework for NZDMO's operations, including the legislative provisions governing NZDMO's borrowing and investment activities. Internal operations are governed by an established risk culture, body of policies, ethical guidelines and codes of conduct, defined responsibilities and accountabilities, formal delegations, segregated duties and reporting and performance management requirements.

Funding Risk

Funding risk refers to the risk that maturing debt is refinanced at an unacceptable yield.

To manage the refinancing risk associated with New Zealand‐dollar borrowing, NZDMO establishes a relatively even maturity profile for debt across the yield curve. To manage interest‐rate risk and lower the cost of the New Zealand-dollar portfolio, NZDMO maintains a mix of fixed‐rate and floating‐rate debt and uses interest rate swaps. Inflation‐indexed debt makes up a component of the portfolio and is issued when it is cost‐effective to do so.

Bonds are issued into benchmark lines to improve liquidity in the market and, consequently, reduce the Crown's cost of borrowing. A range of measures was implemented in 2007/08 to improve bond market liquidity, including moving from monthly to fortnightly bond tenders and increasing the size of bond lines. Plans were announced to introduce tap tenders and reverse tap tenders during 2008/09.

Liquidity Risk

Liquidity risk refers to the risk of having insufficient cash available to meet NZDMO's obligations as they fall due. To manage liquidity risk in its foreign currency portfolios, NZDMO monitors all obligations falling due over rolling six‐week and 12‐week horizons, and holds readily liquefiable assets against these obligations. For New Zealand- dollar liquidity risk, NZDMO has established cash management arrangements with the Reserve Bank of New Zealand to support effective management of overall Crown cash flows.

Liquidity Management

Credit Risk

Credit risk refers to the risk of a counterparty to a financial transaction failing to discharge an obligation.

Credit losses arise when the issuer of a financial obligation that NZDMO holds as an asset is downgraded or defaults. Credit losses may also arise, for example, when NZDMO is required to find a transaction counterparty to replace one that is no longer of acceptable credit quality. In finding a suitable replacement, NZDMO would incur transaction costs and potentially suffer a loss in the market value of the original transaction.

Financial instruments that subject NZDMO to credit risk include bank balances, advances, investments, interest rate swaps, currency swaps and foreign exchange forward contracts.

NZDMO manages credit risk through the credit screening of counterparties, use of credit exposure limits and counterparty collateral obligations. Credit exposures are maintained only with highly rated institutions for which the probability of default is low. To diversify credit exposure, NZDMO limits its exposure to any one institution. The creditworthiness of counterparties is continuously monitored. Credit risk is further controlled by incorporating credit support annexes into master swap agreements with swap and foreign exchange counterparties.

NZDMO lending to government entities, and to entities to which NZDMO is exposed as a matter of government policy, is not managed under the credit policy.

Concentration of Credit Exposure as at 30 June 2008

Concentration of Credit Exposure as at 30 June 2007

Operational Risk

Operational risk refers to the risk of loss due to an event that could impact on NZDMO's ability to produce its outputs to the quality, quantity and cost specified. Risk events include resource failures or constraints, control and security breaches or failures, transaction errors, compliance breaches, poor strategic decisions, the breakdown of key relationships and disasters.

Operational risks are managed in a number of ways. Operational risk policies span, for instance, transaction processing, legal and regulatory issues, ethical standards, physical and systems security and business continuity. Independent experts provide additional support in managing operational risk.

Market Risk

Market risk refers to the risk of loss due to adverse movements in interest rates or foreign exchange rates.

NZDMO has implemented an asset and liability matching (ALM) policy to manage risk within its portfolios. The intent of this policy is to minimise the currency and interest rate risks to the NZDMO's revenues and balance sheet, by matching the characteristics of its assets to those of its liabilities, where practicable. The range of instruments used to minimise exposure to market risk includes debt instruments, financial assets, foreign exchange contracts, currency swaps, interest rate swaps and futures contracts.

NZDMO is exposed to market risk when assets and liabilities are imperfectly matched. It is managed through the use of Value at Risk (VaR) limits and stop-loss limits.

The VaR limit is expressed over daily, monthly and annual time horizons at 95% confidence level and reflects the risk tolerance of the Government in respect of NZDMO's activities. NZDMO uses back‐testing to evaluate the performance of the VaR model, and stress‐testing is carried out to understand how extreme or unusual events would impact on the portfolio. Monthly, quarterly and annual stop‐loss limits are in place to protect NZDMO from further losses once actual losses reach a certain point.

Because NZDMO's liabilities exceed its assets, it also incurs market risk associated with the net volume of outstanding government debt. Fluctuations in the net market value of New Zealand-dollar debt as a result of interest rate movements are not actively managed, and unmatched debt is accounted for on a modified historic cost basis.

Foreign Currency Risk Management

NZDMO's net foreign currency debt position is kept close to zero, as indicated in the schedules below.

Audit Report

To the readers of the Treasury's Financial Statements and Statement of Service Performance for the year ended 30 June 2008

The Auditor-General is the auditor of the Treasury (the Department). The Auditor-General has appointed me, Andrew Dinsdale, using the staff and resources of KPMG, to carry out the audit on his behalf. The audit covers the financial statements, statement of service performance and schedules of non-departmental activities included in the annual report of the Department for the year ended 30 June 2008.

Unqualified Opinion

In our opinion:

• The financial statements of the Department on pages 55 to 79:
  • comply with generally accepted accounting practice in New Zealand; and
  • fairly reflect:
  • the Department's financial position as at 30 June 2008; and
  • the results of its operations and cash flows for the year ended on that date.
• The statement of service performance of the Department on pages 31 to 45 and 49 to 53:
  • complies with generally accepted accounting practice in New Zealand; and
  • fairly reflects for each class of outputs:
  • its standards of delivery performance achieved, as compared with the forecast standards outlined in the statement of forecast service performance adopted at the start of the financial year; and
  • its actual revenue earned and output expenses incurred, as compared with the forecast revenues and output expenses outlined in the statement of forecast service performance adopted at the start of the financial year.
• The schedules of non-departmental activities on pages 80 to 105 fairly reflect the assets, liabilities, revenues, expenses, contingencies, commitments and trust monies managed by the Department on behalf of the Crown for the year ended 30 June 2008.

The audit was completed on 15 September 2008, and is the date at which our opinion is expressed.

The basis of our opinion is explained below. In addition, we outline the responsibilities of the Secretary to the Treasury and the Auditor, and explain our independence.

Basis of Opinion

We carried out the audit in accordance with the Auditor-General's Auditing Standards, which incorporate the New Zealand Auditing Standards.

We planned and performed the audit to obtain all the information and explanations we considered necessary in order to obtain reasonable assurance that the financial statements and statement of service performance did not have material misstatements, whether caused by fraud or error.

Material misstatements are differences or omissions of amounts and disclosures that would affect a reader's overall understanding of the financial statements and statement of service performance. If we had found material misstatements that were not corrected, we would have referred to them in our opinion.

The audit involved performing procedures to test the information presented in the financial statements and statement of service performance. We assessed the results of those procedures in forming our opinion.

Audit procedures generally include:

• determining whether significant financial and management controls are working and can be relied on to produce complete and accurate data;
• verifying samples of transactions and account balances;
• performing analyses to identify anomalies in the reported data;
• reviewing significant estimates and judgements made by the Secretary to the Treasury;
• confirming year-end balances;
• determining whether accounting policies are appropriate and consistently applied; and
• determining whether all financial statement and statement of service performance disclosures are adequate.

We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements and statement of service performance.

We evaluated the overall adequacy of the presentation of information in the financial statements and statement of service performance. We obtained all the information and explanations we required to support our opinion above.

Responsibilities of the Secretary to the Treasury and the Auditor

The Secretary to the Treasury is responsible for preparing the financial statements and statement of service performance in accordance with generally accepted accounting practice in New Zealand. The financial statements must fairly reflect the financial position of the Department as at 30 June 2008 and the results of its operations and cash flows for the year ended on that date. The statement of service performance must fairly reflect, for each class of outputs, the Department's standards of delivery performance achieved and revenue earned and expenses incurred, as compared with the forecast standards, revenue and expenses adopted at the start of the financial year. In addition, the schedules of non-departmental activities must fairly reflect the assets, liabilities, revenues, expenses, contingencies, commitments and trust monies managed by the Department on behalf of the Crown for the year ended 30 June 2008. The Secretary to the Treasury's responsibilities arise from sections 45A, 45B and 45(1)(f) of the Public Finance Act 1989.

We are responsible for expressing an independent opinion on the financial statements and statement of service performance and reporting that opinion to you. This responsibility arises from section 15 of the Public Audit Act 2001 and section 45D(2) of the Public Finance Act 1989.

Independence

When carrying out the audit we followed the independence requirements of the Auditor-General, which incorporate the independence requirements of the Institute of Chartered Accountants of New Zealand.

In addition to the audit we have carried out assignments in the areas of general accounting and advisory, which are compatible with independence requirements. Other than the audit and these assignments, we have no relationship with or interests in the Department.

Andrew Dinsdale

KPMG On behalf of the Auditor-General

Wellington, New Zealand