Annual Report of the Treasury for the Year Ended 30 June 2010

Chief Executive's Introduction#

In 2009/10, the Treasury was focused on assisting the Government to manage New Zealand's recovery out of recession and to building the foundations necessary for a stronger, more balanced economy in the future.

Meeting these challenges required a step-up in performance from across the economic, financial and regulatory teams and organisational changes within the Treasury designed to strengthen the way that we conduct our work and deliver value to the Ministers whom we serve.

Recovery is under way, but at a slower pace than in previous upturns.

Supporting a Stable and Sustainable Macroeconomic Environment#

The Government is committed to rebalancing the economy towards more sustainable growth and the Treasury assisted the achievement of this goal by providing timely fiscal and macroeconomic advice and by maintaining best practice debt management and Crown financial reporting standards.

Highlights of the year included the work that went into ensuring the successful launch of the Government's fiscal strategy to set the annual operating allowance within a lower maximum cap of $1.1 billion starting in Budget 2010 and thereafter.

This involved ongoing engagement with departments and ministries to ensure the public sector was assisting the Government to achieve its priorities within a significantly more constrained fiscal operating environment. It also involved working across the public sector to ensure the smooth introduction of the Baseline Alignment Proposal (BAP) process. Our cross-agency work also assisted the Government to redirect $1.8 billion over four years to frontline services. Reducing the costs of providing public services helps to limit the amount the Government needs to borrow.

Improving New Zealand's Overall Economic Performance#

The Government is committed to narrowing the income gap between New Zealand and other rich developed economies and the Treasury provided policy advice on how to raise New Zealand's productivity performance.

This involved advancing policy options designed to strengthen the drivers of higher per capita economic growth.

Highlights of the work in this area included the analytical work provided to the Government and to the Tax Working Group ahead of the decisions that were announced in Budget 2010. The most significant tax reform package in over a generation, Budget 2010's changes to the tax system aim to improve incentives to work, invest and save, reduce tax biases in favour of property investment and strengthen the coherence and integrity of the taxation system.

The National Infrastructure Unit (NIU) was responsible during the year for driving improvements in New Zealand's infrastructure planning and investment and for leading a strengthening in the public sector's management of its infrastructure assets. The work of the Unit forms a critical part of efforts to assist New Zealand to gain bigger economic dividends from its capital investments in the years ahead. The Unit published the first National Infrastructure Plan in March 2010[1].

During the year, the Government closed the Crown Wholesale Guarantee Facility while the Crown Deposit Guarantee Scheme was extended on tighter terms and conditions until 31 December 2011. The original scheme (which will close on 12 October 2010) was amended with regard to controls from 1 January 2010.

Improving State Sector Performance#

The Government is committed to delivering better, smarter frontline public services funded primarily from within public agencies' existing operating baselines.

The Treasury assisted the achievement of this goal by working across the public sector to achieve greater efficiencies and improved financial performance, including from State-Owned Enterprises (SOEs) and Crown Financial Institutions (CFIs).

The Treasury, working closely with the Department of Prime Minister and Cabinet (DPMC) and the State Services Commission (SSC), made progress on implementing the Performance Improvement Framework (PIF), setting the context for State sector pay negotiations consistent with the Government's fiscal and economic strategy and supporting the creation of much stronger financial and operational performance information.

Enhancing Organisational Efficiency#

A new leadership structure, with implementation beginning in November, included the establishment of a smaller, tighter Executive Leadership Team (ELT) with the appointment of two new Deputy Chief Executives – one primarily responsible for the quality and coherence of our policy advice and one primarily responsible for the quality and coherence of our operational functions, but both with a collective cross-Treasury mandate as well. The new structure included the creation of the new positions of Chief Economist and Chief Accountant to drive the strengthening in the quality of our analytical work and our external leadership, and the appointment of Result Leaders.

The purpose of the leadership changes is to ensure that our organisation is positioned effectively to meet the fiscal and economic challenges in which the public sector operates and the rising performance expectations that Ministers have of us. The aim is also to ensure that we have the flexible mechanisms in place to encourage strategic thinking across the Treasury’s outcome and result priority areas.

We have a responsibility to ensure that Ministers receive joined-up, forward-looking and solutions-focused advice at all times.

In September 2010, three non-executive directors were appointed to join the three ELT members on an expanded Board. The Board's role is to provide additional scrutiny, challenge and discipline to strategic choices - where our organisation should be heading and how it is going to get there. Having non-executive members on the Board will bring an external perspective and create a stronger performance discipline on senior management. The Chief Executive remains fully accountable for all Board decisions and retains his role and responsibilities under the State Sector and Public Finance Acts. The Treasury was careful to consult with the SSC in establishing the Board to ensure consistency with public sector legislative requirements. The Board will meet the Minister of Finance periodically with a focus on understanding the Minister's priorities and ensuring the Treasury's priorities are aligned with them.

Another significant structural change was that the former Crown Company Monitoring Advisory Unit (CCMAU) ceased to be a semi-autonomous body. All Treasury and CCMAU ownership monitoring, appointments and governance functions were brought together into a consolidated, separately branded, unit of the Treasury called the Crown Ownership Monitoring Unit (COMU).

This change will raise the bar in the monitoring of all Crown-owned entities, both through direct monitoring of some entities and via indirect levers for other entities, and it has also allowed us to better incorporate commercial expertise and capability within other parts of our business. These moves will strengthen the quality of advice to Ministers while also providing savings in the way the new group is supported.

During the year, the Treasury led and participated in the benchmarking work under the Better Administration and Support Services (BASS) programme and the all-of-government procurement reform. Assessments arising out of these processes have assisted, and will continue to assist, us to measure ourselves against best practices.

The Treasury's Budget 2010 BAP reprioritised expenditure within its core programmes as a continuation of changes commenced in Budget 2009 to ensure we are well placed to advise Ministers on medium-term and longer-term challenges and priorities.

Work also began on developing a People Capability Strategy and a Medium-term Financial Strategy for the Treasury. Steps completed include agreement to move towards a new remuneration framework and the implementation of detailed out-year budgets, identification of key future costs pressures and identification of options on rationalisation. A number of other management initiatives are also underway and the Treasury is looking forward to participating in the second tranche of assessments under the PIF. I anticipate this will provide further information to help us raise our performance as we build on the contributions that the Treasury's talented and committed staff are making.

John Whitehead
Secretary to the Treasury

What the Treasury Does#

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:

• a stable and sustainable macroeconomic environment
• improved economic performance, and
• improved State sector performance.

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

• Economic role – concentrates on issues with policy implications that may have a significant and therefore pervasive impact on the performance of the economy as a whole, including the NIU.
• Financial role – concentrates on issues that have significant fiscal implications both now and in the longer term, and financial management and standards (including financial probity issues).
• Regulatory role – concentrates on improving the quality of government regulation with a particular focus on removing the barriers to growth and improving productivity.
• Central Agency role – concentrates on helping the Government develop its overall strategy and manage significant issues that emerge.
• Operational role – concentrates oncore operational functions such as those carried out by the New Zealand Debt Management Office (NZDMO), the New Zealand Export Credit Office (NZECO) and the Guarantee Scheme.
• Performance monitoring– concentrates on ownership monitoring, appointments and governance functions relating to SOEs and Crown Research Institutes (CRIs).

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's Performance Framework#

This section reports on progress we made in our three outcome areas: a stable and sustainable macroeconomic environment; improved overall economic performance; and improved State sector performance. These 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 delivered through 19 appropriations. These appropriations contribute directly to results we want to achieve. Our 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 and to enhance our effectiveness as a department. In turn, each of these results contributes to our progress with one or more of the three outcomes.

Success in achieving our portfolio of results involves engaging effectively, both 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.

The Treasury's Performance Framework

The Treasury's Outcomes
Improving New Zealand's economic performance			A stable and sustainable macroeconomic environment			Improving State sector performance
The Treasury's Results
Medium-term economic strategy	Improving State sector performance	Macro and fiscal advice to achieve a stable macroeconomic environment		Management of Crown risks and balance sheet	Infrastructure		Effective and efficient management of financial operations
Enabling and supporting a high-performing Treasury
The Treasury's Appropriations
Policy Advice – Economic Performance	Policy Advice – State Sector Performance	Economic and Tax Forecasting Fiscal Management Fiscal Reporting Management of Crown Lending and Crown Bank Accounts Policy Advice – Fiscal and Macroeconomic		Management of Liabilities, Claims Against the Crown and Crown Properties Crown Company Monitoring Advice to the Minister of Research, Science and Technology and the Minister for Economic Development Crown Company Monitoring Advice to the Minister for State-Owned Enterprises and other Responsible Ministers	Infrastructure Advice and Coordination		Administration of Crown Borrowing PLA Administration of Derivative Transactions PLA Administration of Investment of Public Money PLA New Zealand Export Credit Office Crown Guarantee Schemes Crown Deposit Guarantee Scheme Crown Wholesale Guarantee Facility Administration of Guarantees and Indemnities Given by the Crown PLA
We will maximise our impact in these areas through a focus on results - this will ensure we are more explicit about the areas we think will make the greatest contribution to achieving our outcomes, the impact we are seeking in these areas and what we are going to do to achieve this.

Our Outcome Performance for 2009/10#

The Treasury focuses its efforts on progressing three outcomes: a stable and sustainable macroeconomic environment; improved overall economic performance; and improved State sector performance. These outcomes are aligned with the Government's priorities.

Outcome: A Stable and Sustainable Macroeconomic Environment#

The Government is committed to rebalancing the economy towards more sustainable growth than has been recorded in recent years.

The Treasury assists the achievement of this goal by providing accurate and timely fiscal and macroeconomic advice and by maintaining best international practice debt management and Crown financial reporting standards.

Stable and sustainable macroeconomic settings are critical for individuals' and businesses' investment, spending and savings planning and are vital, therefore, to efforts to deliver higher per capita economic growth and higher living standards for New Zealanders.

At the beginning of the 2009/10 financial year, as the world was tentatively emerging from the global financial crisis and New Zealand had just commenced its recovery, the Crown's operating balance was projected to remain in deficit for about a decade. Priority outputs for the Treasury covered under this outcome, therefore, were focused on finding ways to strengthen the Crown's fiscal position and to thereby diminish the extent to which the Crown was adding to national dissaving.

To achieve this result, work progressed in fourbroad areas:

1.  Fiscal and Macroeconomic Policy Advice

The global financial crisis, combined with increased baseline spending and tax cuts over the previous few years, meant that in Budget 2009 the Crown's operating balance was projected to be in deficit for about the next 10 years. The Treasury provided advice on how to advance the return to surplus and why that would help to reduce New Zealand's economic and financial vulnerabilities while supporting stronger economic growth in the future.

Other related outputs included:

• Long-term Fiscal Statement

In October 2009, the Treasury published a report entitled Challenges and Choices. This was the second Long-term Fiscal Statement to be prepared since the Public Finance Act 1989 was amended to require the Treasury to report to Parliament at least once every four years with 40-year projections of key fiscal indicators including revenue, expenses, the operating balance and debt. The report outlined several options for keeping the Crown's finances stable and sustainable over the long term.

• Changing the long-term fiscal objective in the Fiscal Strategy Report (FSR)

The Minister of Finance released his 2010 FSR in May 2010, along with the 2010 Budget. The 2010 FSR amended the Government's long-term net debt target by bringing forward the time when net debt would be brought back to below 20% of Gross Domestic Product (GDP) to the early 2020s. The Treasury assisted the Minister to produce the FSR by providing analytical advice and the 2010 FSR projects net core Crown debt to commence a downward trend in about five years' time and to stand below 15% of GDP by 2025.

• The “Fiscal Anchor”

The Treasury provided advice on the benefits of setting numerical objectives for fiscal measures other than net debt, such as net worth. While net debt has been maintained as the primary fiscal anchor, Ministers also consider movements in other fiscal measures (eg, net worth, operating balance) when weighing-up policy options.

• Best practice approaches to managing Crown spending

The Minister of Finance asked the Treasury to advise on the potential benefits of adopting a cap on total spending and whether or not such a cap would help the Government to meet its fiscal objectives by complementing its annual net new operating allowance. The Treasury devised a potential spending cap proposal and advised the Minister on its costs and benefits within the context of a critical assessment of the evolution and performance of New Zealand's fiscal framework. This work is informing the Treasury's ongoing advice to the Government on best practice approaches to managing Crown spending.

2.  Fiscal Management

The Treasury assists the Government by managing the annual budget process and advising on expenditure and revenue decisions that contribute to the Government's fiscal objectives, its economic and other priorities (including its commitment to achieving value for money from expenditure) while raising public sector productivity levels.

For Budget 2010, the Government's fiscal strategy committed it to deliver from within operating and capital allowances of up to a maximum of $1.1 billion and $1.45 billion respectively. These allowances were considerably smaller than the budget allowances during much of the past decade.

The process was modified to enable the Government to deliver its budget from within the stated allowances while advancing its policy priorities. The main changes were:

• at an early stage of the budget process, allocating almost all of the available operating allowance to the Government’s priorities, and
• inviting Vote Ministers to better utilise baseline funding to provide resources to higher-priority applications.

This helped the Government to meet its fiscal objectives with the beneficial economic side-effect of providing efficiency gains, reducing the number of budget initiatives from over 700 in Budget 2008 and Budget 2007 to around 30.

The reduction in the number of budget bids is evidence that departments are looking for savings within their baselines. The Treasury assists the Government to raise the value for money from expenditure by assisting departments to focus on their baseline spending. With budget allowances set to tighten further, this work will take on still greater significance as departments will need to find further savings from within their baselines.

3.  Economic Forecasting, Tax Forecasting and Fiscal Reporting

The Treasury produced forecasts for the economic and fiscal outlook in December 2009 and in May 2010. Budget Ministers used these forecasts as key inputs to their decision-making, especially for Budget 2010. The Treasury also provided Ministers with alternative economic and fiscal scenarios around various economic and policy options to assist them to make evidence-based decisions.

The variance from forecast for the one-year-ahead 2009 Budget tax revenue forecast was -1.4%, which was within the target variance of less than ±3%. Forecast variances for the major economic aggregates forecast by the Treasury (eg, real and nominal GDP growth, Consumer Price Index (CPI) inflation), were generally smaller than the rolling, five-year averages (as at March 2010).

The Treasury published the Financial Statements of the Government of New Zealand for the year ended June 2009, the Financial Statements for the three months ended September 2009 and then published monthly statements every month from September 2009 onwards, as planned. Publishing accounts informs the Government on how it is progressing towards its fiscal objectives, provides a base for its forecasts and informs the public on the Crown's income and spending.

The Treasury sent weekly and monthly commentaries on local and international economic developments to Budget Ministers, and provided Ministers with one-off evaluations of major international economic developments.

4.  Debt Management

The operations of NZDMO aim to work towards a stable and sustainable macroeconomic environment by minimising the cost of borrowing, and by managing financial assets to maximise long-term returns, within an appropriate risk management framework.

The annual cost of new borrowing in 2009/10 was 4.15%, lower than the long-run average cost of just over 6%. This reflects continued strong demand for New Zealand government securities and relatively low domestic interest rates during the period.

In 2009/10, NZDMO continued its policy of prefunding, revising the target for its 2009/10 bond programme up twice from NZ$8.5 billion to NZ$12.5 billion. Prefunding is expected to save money for New Zealand taxpayers, as sovereign borrowing costs are expected to increase in the future as a result of the significant volume of global sovereign debt needing to be raised. There is also likely to be further pressure on borrowing costs arising from the current focus on some European governments' credit risk.

Throughout 2009/10, NZDMO introduced further measures aimed at increasing demand, and thus reducing the cost of the Crown's borrowing, including:

• the bond tranche size was increased from $6 billion to $8 billion
• reintroducing the one-year treasury bill, providing investors with an additional short-term government security and increasing the range of funding options available to NZDMO, and
• announcing two initiatives under active consideration: reintroduction of inflation-indexed debt, and participation by NZDMO in the secondary market for New Zealand government securities.

Further information on NZDMO's operations can be found on pages 115 to 126 of this report.

Outcome: Improved Overall Economic Performance#

The Government is committed to narrowing the income gap between New Zealand and other rich developed economies, such as Australia.

The Treasury assists the achievement of this goal by providing policy advice on how to raise New Zealand's productivity performance relative to other rich economies so that we can lift our potential growth rate and our living standards in the years ahead.

An economy's productivity performance is a measure of the degree of efficiency with which its firms and organisations, including those in the public sector, turn inputs (labour and capital) into outputs (goods and services). New Zealand's productivity performance has lagged that of other developed nations over a timeframe of several decades.

In the year under review, the Treasury provided advice on the future direction of the Government's Economic Growth Agenda to support the goal of closing the income gap with Australia. This involved coordinating advice across the public sector, leading the development of progress reports to Cabinet, as well as advancing a number of work streams that will increase our understanding of the challenges facing the New Zealand economy, and therefore the future directions for policy. This included work on cross-cutting issues affecting our economic performance, such as the determinants of New Zealand's interest rate premium relative to the rest of the world, the drivers of New Zealand's exchange rate cycle and the implications of economic geography for policy advice. The Treasury also served as the secretariat for the 2025 Taskforce, providing analytical support for the Taskforce's first report in November 2009 and ahead of its next report (due in November 2010).

While the Treasury helped the Government manage the recovery out of the 2008/09 international economic and financial crisis we also worked to ensure that short-term measures adopted to support New Zealanders were consistent with the need to lift the productivity performance of the New Zealand economy in the years ahead.

The Government's economic strategy is based around six drivers of economic growth:

• investment in productive infrastructure
• removing red tape and improving regulation
• supporting business innovation and trade
• improving education and lifting skills
• lifting productivity and improving services in the public sector, and
• strengthening the tax system.

As the Government developed its economic strategy, the Treasury shifted away from the strategic result areas identified in its 2009-2012 Statement of Intent to focus more on the six drivers of economic growth. In 2009/10 we contributed directlyto four of the drivers:

• Investment in productive infrastructure

The NIU drove improvements in the Government's approach to infrastructure policy through the development of the first National Infrastructure Plan, published in March 2010. The Plan set out the Government's strategy, priorities and planned infrastructure investments, heralding a new transparency which will facilitate more informed public and private sector investment planning and decision-making in the years ahead.

• Removing red tape and improving regulation

We improved both the stock and the flow of regulation by helping the Government reform the institutional arrangements for the development of regulation and by contributing to a set of major regulatory reviews.

• Lifting productivity and improving services in the public sector

We helped the Government redirect $1.8 billion over four years to frontline services. (See the Improved State Sector Performance outcome on pages 12 to 17 for further details.)

• Strengthening the tax system

The Treasury and the Inland Revenue Department (IRD) advised the Government ahead of the decisions announced in Budget 2010 which heralded the most significant package of tax reform in over a generation. The tax package will improve the incentives to work, invest and save, as well as reduce tax biases in favour of property investment.

We also worked with other agencies to support business innovation and trade, improve education and lift skills.

Some of the work programmes we undertook to assist the Government to improve economic performance included:

Infrastructure#

The NIU assisted the improvement of the public sector's management of infrastructure assets by leading cross-government work on the use of better capital asset management techniques, systems to improve rigor in decision-making and public private partnerships (PPPs) to introduce contestability in procurement decisions. The NIU has published guidance on PPPs, and two PPP projects have now been approved by Cabinet.

Regulatory Quality#

The Treasury advised the Government on options for reform to the institutional arrangements around the development of regulation, including the strengthening of the Regulatory Impact Assessment regime and requiring government agencies to scrutinise the existing stock of regulation. We have supported the taskforce that is taking forward the Regulatory Responsibility Bill, and led policy development on the establishment of a New Zealand Productivity Commission, which will provide the Government with independent advice on how to lift productivity. Policy teams around the Treasury contributed to the major regulatory reviews launched by the Government covering legislation such as the Resource Management Act 1991, Securities Act 1978 and Building Act 2004. Our advice on these reviews is intended to help the Government develop good-quality regulation and sound, durable institutions that foster trust and confidence among stakeholders.

Tax Strategy#

The Treasury assisted the Tax Working Group's independent assessment of the New Zealand tax system through the provision of technical papers, presentations and secretariat services. Our major output was the delivery of the Budget 2010 Tax Package in conjunction with IRD. The Tax Package constituted the largest tax reform in 25 years and included a change in the tax mix from income tax to GST, various efficiency-enhancing base broadening measures, compensation measures for vulnerable groups in society and measures designed to increase the integrity of the tax system. The Treasury provided policy, technical, costing and distributional analysis for Ministers. The Tax Package announced by the Government was widely accepted by stakeholders as a growth-positive step change which was also fair and equitable.

Natural Resource Management#

The Treasury was closely involved in the work to develop New Zealand's climate change targets for the United Nations Climate Change Conference at Copenhagen in December 2009, and is now working with other government agencies to prepare for the next Climate Change Conference at Cancun. We have also been involved in finalising policy for the domestic Emissions Trading Scheme (ETS), which was amended in November 2009 and came into force for the stationary energy, industrial processes and liquid fossil fuels sectors on 1 July 2010. We have contributed to the Government's resource management reforms, with a particular focus on freshwater management and the review of the Resource Management Act 1991. We focused our efforts on the development of policy that will encourage the productive use of New Zealand's natural resources.

Skills#

The Treasury worked with Ministers and the Ministry of Education (MOE) to ensure a broad focus on lifting the achievement of all school leavers, as reflected in decisions on the initial implementation of the Youth Guarantee and Trades Academies initiatives. We also worked with Ministers and agencies to identify the system changes needed to give effect to the Government's Tertiary Education Strategy, issued in December 2009, which places an emphasis on young people and on getting more people through the system at higher levels. These changes, including recent decisions to publish performance information from providers, introduce performance-linked funding and link eligibility for student loans to passing courses, are intended to lift the performance of both students and providers. Our work has also contributed to the rationalisation of a number of special funds that were poorly linked to educational or research outcomes, freeing up resources for extra places and cost pressures. We anticipate that these decisions will collectively result in higher student achievement over time - with more young people achieving better school-level qualifications and completing higher-level tertiary qualifications - and that these higher skills should help drive higher labour productivity and living standards in the future.

International Connections#

The Treasury contributed to improving the cross-border flow of people, capital, ideas and trade through our work on reviewing the Overseas Investment Act 2005 to remove unnecessary impediments to overseas investment in New Zealand, agreeing arrangements with Australia to allow the portability of retirement savings and advancing negotiations with Australia on an investment protocol to make it easier for residents in one country to invest in the other. We also participated in the Trans-Pacific Partnership free trade negotiations and the review of New Zealand's offshore network, began identifying the next steps for the future development of the Single Economic Market with Australia and undertook research on factors influencing trade and performance in the services sector.

Enterprise and Innovation#

The Treasury advised the Government on how to support a competitive business environment that rewards business investment, innovation and enterprise. This included joint advice with the Ministry of Research, Science and Technology (MoRST) and the Ministry of Economic Development (MED) on initiatives to increase firms' expenditure on research and development and policies to support the transfer of knowledge between our public research organisations and firms. We advised on the governance and structures of public sector agencies involved in innovation policy and delivery and on how to maximise the contribution of CRIs to New Zealand's economic performance through our participation in the Crown Research Institute Taskforce. We also provided advice on the value for money of government expenditure on innovation and enterprise.

Crown Balance Sheet Risk Management#

In 2009/10, we undertook development work on measuring and understanding Crown risk. In particular, we: developed a new Crown risk model; provided advice on how to think about Crown risk overall, culminating in a set of reports to Ministers covering both aggregate and commercial portfolio risk; included more discussion of risk and the balance sheet in Budget 2010 documents including the 2010 FSR.

New Zealand Export Credit Office#

As part of the response to the global financial crisis, the Government decided to expand the range of NZECO's products in two key areas: NZECO entered the short-term trade credit insurance market to complement private sector provision and the Crown provided NZECO with additional capacity of $200 million to meet increased demand. NZECO has supported $172 million of exports through bond guarantees and $382 million of exports through short-term trade credit guarantees. In addition to transactions underwritten with the private sector, NZECO issued a total of 122 short-term trade credit guarantees covering transactions in 43 countries across a range of industries. Overall, in supporting export growth, NZECO also continued to generate premium in excess of its costs, including the cost of paying its first claim, with net income from insurance operations totalling $0.639 million.

Guarantee Schemes#

During the recent global economic and financial crisis and its aftermath, we advised the Government on the appropriate macroeconomic policy settings in response to the evolving macroeconomic context, including the implications for New Zealand of the European sovereign debt crisis. With the domestic and global economies recovering, our attention in 2009/10 shifted from crisis management to the appropriate pace of unwinding fiscal policy stimulus. During the year under review, we alsomade a number of adjustments to the policies introduced as temporary crisis measures in 2008. The original Crown Deposit Guarantee Scheme was extended on tighter terms and conditions until 31 December 2011. The original scheme (which will close on 12 October 2010) was amended with regard to controls from 1 January 2010. The Government closed the Crown Wholesale Guarantee Facility on 30 April 2010 as the institutions using the facility were again able to access wholesale funding markets without a Crown guarantee.

Outcome: Improved State Sector Performance#

The Government is committed to delivering better, smarter frontline public services funded primarily from within public agencies' existing operating baselines as part of its commitment to rebalance and strengthen the economy.

The Treasury assists the achievement of this goal by seeking the following changes in the State sector:

• greater effectiveness (by better achieving the outcomes that the Government has prioritised)
• increased efficiencies (by achieving better or equivalent results at lower cost), and
• improved financial performance from the Crown’s portfolio of companies, including SOEs and CFIs.

In the year under review, the Treasury focused its efforts to make progress in five broad areas.

Improving the Effectiveness of the State Sector Model#

This model enables Ministers to specify their performance requirements and requires chief executives to deliver and report on these requirements. The model includes an annual cycle of direction setting; allocating and prioritising resources; agreeing price, quantity and qualitative standards; and monitoring the performance of agencies. This cycle has given the Treasury opportunities during the past year to help Ministers achieve the results they are seeking within a focus on driving efficiency, effectiveness, within affordable budgets.

The 2009/10 year was a period of investment work intended to assist Ministers to deliver on the Government's fiscal strategy and to get more traction on overall management of the State sector. To date, our impact has been in giving Ministers a better sense of how current initiatives are working, both individually and as a set, which has led to some changes, such as removing the need for separate reporting on Performance Improvement Actions and increasing our efforts in looking at baseline relativities. In particular, the “toolkit” approach to supporting conversations between Ministers and chief executives to engender better performance information is delivering greater transparency. Advice on ensuring that the model is understood, and that opportunities are taken to give effect to Government's desired objectives, such as increasing contestability in public services, has been well received.

The Treasury expects that the investment work will pay off, in particular through the better aligning of expenditure and priorities work. There is a risk that the focus becomes overly short term, at the expense of continuing to invest time in thinking about the longer-term direction. Keeping the right balance between short-term deliverables and analysis of more fundamental questions about the scope, scale and configuration of public service provision (which is increasingly the focus of policy attention overseas) will be important.

Over the year, the Treasury advanced measures to improve State sector input management, such as through the BASS and MED procurement initiatives. While measurable productivity gains can be achieved through the reconfiguration of back office services, most of the value from State sector reform will lie in the redesign of front line services, reduction in the size of the State sector and the removal of low-value programmes. It will be critical to the success of these efforts to remain clear on the respective roles and responsibilities of chief executives, the three Central Agencies and of Ministers.

On 6 April 2010, the Treasury established a Cross Agency Programme Management Office (CAPMO) to assist Ministers on all-of-government and cross-agency initiatives and to facilitate and encourage all-of-government activity where it provides a greater return on investment than individual action. The CAPMO assisted MED in establishing the funding mechanism for the ongoing operation of the Procurement Reform Programme and released draft guidance on the Cross Agency Initiatives Process, a mechanism to encourage and facilitate greater collaboration across the State sector. The CAPMO also assisted SSC in establishing the Chief Executives' Group to oversee Government Business Reform (CEG GBR) in July 2010. This group, which is chaired by the Chief Executive of the SSC, Iain Rennie, will be key in driving the reform agenda across government.

The purpose of the group is to provide alignment, coherence and strategic leadership for all-of-government and significant sector business reform initiatives. It has a mandate to oversee the full range of business reform initiatives, ensure communication is coherent and consistent, advise on the alignment of new initiatives and provide direction on specific all-of-government initiatives where needed.

Providing Advice on Priority Issues and Sectors#

The Treasury initially identified tertiary education and schooling, the justice sector, health funding and defence as key sectors. During the year, Accident Compensation Corporation (ACC), the benefit system, Treaty of Waitangi settlements and housing also emerged as significant areas of focus to improve State sector performance.

Tertiary education

The Treasury assisted Ministers to make decisions about the reprioritisation of expenditure in the tertiary education sector to deal with enrolment and cost pressures, including the growing cost of the student loan scheme and to remove low-value expenditure. It provided Ministers with advice on the financial performance of the polytechnic sector, given the challenges some institutions in the sector have faced with financial viability. The Treasury also worked with MOE, IRD and the Ministry of Social Development (MSD) to develop options for improving the governance of the student loan scheme which involves significant roles for each agency. The Treasury also contributed to the introduction of performance-linked funding and streamlining of the provision of Levels 1-3 courses.

Schooling

The Treasury worked with Ministers and the MOE to make system and policy changes to deliver improved education outcomes within a sustainable fiscal track. Changes to the budget treatment of Vote Education (including forecast changes) mean that the Ministry is managing cost pressures within a clearer funding envelope. This has driven an explicit process of reprioritisation to better reflect government priorities and policy decisions to address key cost drivers - Cabinet's Expenditure Control Committee and the Ministry's Performance Improvement Actions - and in particular to align funding with the Government's target for 80% qualified teachers in early childhood education.

The Treasury and the NIU continued to work with Ministers and the Ministry on a PPP for a new school which offers significant opportunities to improve value for money (eg, through improvements to the procurement model) and also education outcomes.

Health sector

During the year, the Treasury influenced health sector performance in four related ways:

• The Treasury led initial advice on how the Government should respond to the Ministerial Review Group’s July 2009 recommendations, and worked with the Ministry of Health (MOH) on more detailed implementation issues. Through this work, the Treasury assisted Ministers to redesign the system of leadership for the health sector. The changes included establishing the National Health Board and other new advisory bodies to oversee health sector capital planning, workforce, information technology and quality and safety; and restructuring within the MOH, including the creation of a National Health Board business unit.
• The Treasury’s advice assisted Ministers to implement a budget package that delivered on the Government’s health priorities while constraining new spending at significantly lower levels than in previous years and reprioritising within baselines to manage within fiscal constraints.
• The Treasury’s October 2009 Long-term Fiscal Statement included an analysis of health sector challenges and choices including the need to lift productivity and adopt more cost-effective models of care. The impact of this on front-line health services will take time to assess. However, initial sector response to budget signals and the longer-term analysis has included an increased focus by District Health Boards (DHBs) on achieving sustainable financial performance, and greater collaboration between DHBs and other health providers in planning and delivering health services.
• The Treasury also helped the MOH to establish a new health capital process that will include higher-quality analysis of capital expenditure proposals and a more consistent whole-of-government approach to capital asset management.

Justice sector

Initiatives to explore and design a new approach to justice sector performance management undertaken in 2009/10 have the potential todrive significant change across the sector. Maintaining the momentum of this effort will require clear focus in coming years.

The Treasury also supported the general direction of the Policing Excellence work. This work has the capacity to generate enduring performance improvements, provided that the planned changes are implemented at an adequate pace and scale.

The Treasury continued towork with the Department of Corrections on a PPP for a new prison at Wiri, which offers significant opportunities to improve value for money and also prison outcomes.

Defence

The Treasury worked with the Ministry of Defence and other Central Agencies on the Defence assessment, reflecting the strong commitment from agencies to expedite the completion of the Defence White Paper process. This process is likely to generate key choices and decisions for Ministers over the next three to four months, particularly once the Defence value-for-money review is completed. The work in 2009/10 means that the Treasury is well placed to advise Ministers in this area.

Accident Compensation

The Treasury was involved in the stock-take of ACC accounts established by the Government, which included consideration of the introduction of competition into aspects of the scheme, a value-for-money project run by the Corporation, advice on levy setting, budget proposals and analytical work into better understanding what has driven increases in the size of the ACC liability in recent years.

Benefit system

The Treasury worked closely with Ministers and the MSD on proposals to reform the benefit system which led to legislative changes and to the establishment of the Welfare Working Group, to which the Treasury has also made a significant contribution.

Progressing Treaty of Waitangi settlements

This area emerged as a priority sector during the year and our focus was on large settlements with the potential to set precedents. We expect a number of settlements to meet major milestones in 2010/11.

Housing

Housing was another area where we provided in-depth advice during the year. The Treasury worked closely with Ministers, Central Agencies, the Department of Building and Housing and Housing New Zealand Corporation to drive better value for money in social housing. This has been reflected through the Corporation's letter of expectations and statement of intent and is being pursued further through the work of the Housing Shareholders' Advisory Group.

Outcome: Improved State Sector Performance (continued)#

Managing Overall State Sector Expenditure within a Sustainable Fiscal Track#

Budget 2010 was underpinned by a strong cross-Treasury effort to align the Government's spending and revenue plans with its fiscal strategy. Maintaining ongoing constraint in spending is likely to become more challenging in future budgets.

Figure 1 below shows that the (annual) growth rate of core Crown operating expenditure, which peaked at over 12% in 2008/09, is expected to slow to 4% by the end of the forecast period. These figures include expenditure growth from all sources, not just that from new policies. The 9% increase forecast for 2010/11 includes some significant increases owing to one-off items that are not part of the operating allowance. This spike in 2010/11 is not expected to be repeated in following years, with much lower spending growth further out.

Figure 1: Core Crown Operating Expenditure Growth[2]

Source:  The Treasury

Commercial Portfolio Performance#

The monitoring role of the Treasury's COMU during the year under review was aimed at improving the financial performance of the Crown's portfolio of companies, including SOEs and CFIs.

In particular, in 2009/10 we:

• implemented a continuous disclosure regime covering the nine largest SOEs
• developed, consulted with SOEs on, and then introduced a set of standardised financial performance measures for SOEs, for inclusion in 2010/11 Statements of Corporate Intent
• ran valuation models for the three electricity generator-retailers, and commissioned and published independent valuations
• worked with shareholding Ministers to more clearly identify the skills that boards require and to seek out suitable candidates with such skills
• supplied governance training activities to emphasise the focus on performance and to support an influx of “new blood” in the director candidate pool, and
• since November 2008, provided advice and other support to Ministers around the appointment and/or reappointment of 23 chairs and 123 directors or members.

The overall performance of the portfolio has improved slightly over the year in review.

Working with Other Central Agencies#

During the year, the Treasury worked closely with our Central Agency partners (the DPMC and the SSC), recognising that all three agencies are jointly responsible for leading performance improvements within and across the State sector, albeit with distinctive roles and perspectives.

Central Agencies worked together on improving the State sector model and addressing the sectors and issues addressed above and, in addition, we made joint progress in three particular areas:

• Implementing the PIF: the Treasury has been working in close collaboration with other Central Agencies to progress this programme. Central Agencies have engaged several departments during 2009/10 and completed assessments of the Department of Conservation, the Ministry of Foreign Affairs and Trade and Te Puni Kōkiri. The reviews and the resulting action plans will be published on the SSC website[3] on completion. Central Agencies will monitor the progress that agencies make against their action plans. Early evidence suggests PIF is likely to be an effective tool for lifting agency performance.
• Managing State sector industrial relations: In conjunction with SSC, we helped Government set the context for State sector pay negotiations and monitor the performance of agencies, holding significant talks during the year. Settlements have been subsequently reached with police, nurses (and significant proportions of the health sector workforce), border agencies and a number of smaller agencies. These settlements have been consistent with the Government’s fiscal and economic strategy and the Government’s expectations for pay and employment conditions in the State sector. There has been restraint in State sector wage settlements compared with recent years: public sector settlements are now no longer ahead of private sector settlements and all settlements have been funded from within baselines.
• Supporting performance information: Jointly with SSC, we developed a “toolkit” aimed at supporting conversations between Ministers and departmental chief executives about getting better financial and performance information. Feedback from Ministers suggests that this is a useful way to encourage better performance information. We have continued to work with other Central Agencies to provide advice to Ministers on ensuring the public sector is well placed to meet future challenges.

Meeting our performance measures

As indicated above, Central Agencies have piloted and refined a PIF to enable a more comprehensive review of agency and sector performance than has been possible to date. This was one of our key success indicators during the year. The aim is to deliver a measurable strengthening in performance as agencies implement action plans arising out of the PIF process. The Treasury views the success of this project as an ongoing priority and will continue to monitor progress. Another is the rate of growth of public sector expenditure. Our broad work ahead of Budget 2010 assisted the Government to meet its objective to curb the rate of spending growth.

Organisational Health and Capability#

Changes in our Organisational Strategic Direction#

Over 2009/10 we have made significant changes to the way we work, the way we are organised and how we exercise leadership to better manage and accommodate the changes in our environment.

In 2009, the Treasury conducted a review of our leadership functions, positions and structure, with the aim of lifting overall organisational performance. The context that prompted the review included: (a) an external environment that had undergone radical changes – global financial crisis and a new Government with new requirements; (b) a recognition that the nature of our business functions had changed; (c) a need to keep making progress on the change objectives raised in our 2006 “Stepping Up” review; and (d) a desire to position the Treasury for the future and develop future leaders.

The main changes arising from the leadership review were:

• having a smaller, tighter ELT, with the appointment of two Deputy Chief Executives to work with the Secretary to the Treasury and to act as a Treasury Board
• mechanisms to bring together strategic thinking across the Treasury’s three outcomes so that Ministers receive advice that is joined-up, forward-looking, innovative and solutions-focused
• mechanisms to promote more flexible prioritising of the Treasury’s resources across all its outcome and result areas, so that it is agile and responsive to Ministers’ needs
• ways to make the Treasury a more integrated organisation that effectively leverages its own skills and expertise, as well as its external relationships, in order to achieve results for its customers
• a focus on behavioural change to promote accountability, consistency (“one Treasury”) and influence
• greater clarity around decision-making and advisory responsibilities
• establishment of two new positions to assist in building economics skills internally (Chief Economist); and the financial capability within the public sector (Chief Accountant)
• initiatives to incorporate more commercial expertise and disciplines into key areas of its work; for example, on State sector performance, on management of the Crown’s balance sheet, ownership monitoring and on operational service delivery
• integration of the CCMAU’s functions within the Treasury, to create a single unit that provides ownership monitoring and performance advice to Ministers, and
• consolidation of CCMAU and the Treasury’s monitoring functions.

We will continue developing the organisation so that it demonstrates the responsiveness and adaptability that we expect of all State sector agencies.

Leadership and Management#

The leadership review in the first half of the year defined key Treasury behaviours that are crucial to us achieving our organisational goals. The Treasury's managers created a leaders' charter and a programme of work commenced to support leaders to act in ways that will create a culture that will more effectively deliver us our results.

Our intention in 2009/10 to create measures to gauge improvement in leadership and management was delayed as we implemented the outcomes of the leadership review. As a result of the implementation of this review, our senior leaders have a new emphasis and we have commenced using specific and targeted survey tools to create measures of leadership impact.

Two new learning programmes were designed and delivered to build the Leadership and Management Foundations Programme for new managers and the Emerging Leaders Programme for emerging technical and programme management leaders and people leaders outside formal management roles.

In early September, the Secretary announced the appointment of three non-executive directors to the Board. The trio, Paul Baines, Susan Macken and Joan Withers, are experienced company directors who will bring a great deal of governance and commercial wisdom to the Treasury's top table. The Treasury has worked closely with the SSC in establishing the Board.

Strategy and Policy#

In 2009/10 we introduced advisory forums, which are an opportunity to debate strategic issues across the Treasury. The forums develop advice for the ELT (and the Treasury Board that is being established). The forums are a means to generate greater cross-Treasury discussion and resolution of issues. This work is assisted by a Strategic Policy Advisor, whose role is to pull together and drive strategic policy thinking across the Treasury.

We continue to use the Treasury Quality Standards for Policy Advice as a key component in staff training and setting expectations in individual work plans. The focus for the future will be to continue to use the learning from quality reviews to further develop the expertise, tools and systems we need to deliver the best advice to Ministers that we can. In 2010/11 we intend to conduct a second external review of the quality of a selection of our written advice to formally assess our performance against the Quality Standards, following on from a similar review in 2008/09.

External Engagement#

Effective external engagement is an important component of the work that the Treasury does. In 2009/10, we adopted a more systematic and deliberate approach to our external engagement. The appointment of the two new Deputy Chief Executives, and the redefinition of the Deputy Secretaries' roles, has lifted the effectiveness of the Treasury's external engagement.

By building relationships with a range of stakeholders we aim to encourage an informed two-way flow of information and to significantly strengthen our understanding of real-time economic trends, and emerging views among different sectors operating in the economy. Through this engagement with Ministers, government agency leaders, business leaders, local government and community organisations, sector representatives, unions, commentators, financial sector leaders and others, the Treasury fulfils its responsibility to encourage and to facilitate evidence-based discussion and decision-making in both the public and private sectors.

During the 2009/10 year the organisation introduced a Customer Relationship Management-type model for managing its interactions with external stakeholders, and it is providing the basis for a better-informed, better-connected Treasury. A lot of this engagement is low-key and informal, taking the form of one-on-one meetings or boardroom presentations. But during the year the Treasury also delivered a number of important presentations and keynote speeches. The Secretary to the Treasury made a key address in July 2009 on public sector performance in which he challenged the sector to get out of its comfort zone. There were also addresses to manufacturing, employer, banking, legal and other audiences which provided an opportunity to set out the critical issues facing the New Zealand economy.

Value for Money and Organisational Efficiency#

The Treasury is committed to managing in a value-for-money manner.

The Treasury continued to ensure we provide efficient and effective services to Ministers through the year by:

• ensuring our support structures were delivered efficiently and effectively
• investing in people and systems to develop the skills needed to deliver
• continuing to improve the efficiency of our processes and systems to reduce cost of our services, and
• reviewing the Treasury’s organisational structure alignment to better meet the future needs of Ministers.

For example, one of the changes was to implement Cabinet's agreement that the CCMAU would no longer be a semi-autonomous body. This allowed the Treasury to bring together all Treasury and CCMAU monitoring, appointments and governance functions into a consolidated unit called the Crown Ownership Monitoring Unit (COMU) as well as to make savings in the way the group is supported. This change, which supports elements of a number of work programmes from across the Treasury's three outcomes, allows the Treasury to increase its flexibility in responding to changing priorities and ensure it is efficient and effective, and recognises the need to think about the longer-term positioning of the public sector management system, its overall public sector productivity agenda and create synergies between the commercial and non-commercial areas of the public sector.

The Treasury has been participating in the benchmarking work under the BASS programme and the all-of-government procurement reform. Ongoing assessments arising out of these projects will assist us to adopt best practices across our operations.

During the year the Treasury continued to reprioritise its expenditure within its core programmes, building on changes made in Budget 2009, to ensure that it is well placed to advise Ministers on medium-term and longer-term challenges and priorities.

Work also began on developing a medium-term financial strategy for the Treasury and this work will continue in 2010/11. Steps already completed include the implementation of detailed out-year budgets, identification of key future costs pressures and identification of options on rationalisation.

Our People#

A major focus for the year has been the development of a five-year People Capability Strategy for the Treasury. The Strategy sets out principles for the capability we need to deliver our business across all our roles and functions and what this means for us in the future, consistent with fiscal parameters. It then details the approach we will take to our people management levers such as attracting, acquiring, deploying and utilising, leading, developing and demanding performance. The objective is to ensure the Treasury has the capability to deliver on our outcomes and results over the next five years by ensuring all our efforts are mutually supporting a clear and coherent vision.

The People Capability Strategy will be signed off and communicated in early 2010/11 and new work streams started, with a focus on detailed workforce planning and review of performance management. However, during 2009/10 a number of initiatives to implement the Strategy have been progressing in tandem with strategy development:

• We have reviewed our remuneration framework and adopted a more flexible approach which allows targeting our remuneration spend to support our organisational goals and finance strategy.
• We have become sharper and more responsive about deploying our people to areas of highest priority, moving them in a more flexible way and increasingly adopting a project approach to major pieces of work.
• As part of the leadership review, we created the new roles of Chief Economist and Chief Accountant in order to increase our depth of professional leadership and external influence in these areas.
• We have made significant investment in talent mapping with a view to identifying and developing our high potential senior analysts and creating viable and rewarding career pathways for people. This programme will expand to other roles in 2010/11.

The Treasury surveyed staff to assess their engagement in July 2009 and achieved a participation rate 94%. The results were positive compared with the NZ State Sector database, with engagement at the 62nd percentile. The information gained from the survey has supported the development of greater alignment of individual workplans with organisational results for 2010. The Treasury will be running the survey again in 2010/11.

Equal Employment Opportunities#

The Treasury continued to participate in processes and surveys to inform Equal Employment Opportunities (EEO) approaches including contributing to New Zealand's 2010 report on Convention on the Rights of Persons with Disabilities and initiatives from SSC. The Treasury continues to focus on equal opportunity and diversity through assessing core processes for recruitment, selection and development initiatives for fairness. This year the Treasury's staff set up a Senior Women's network to increase the ability to share ideas and support for initiatives such as mentoring. The Treasury delivered several development programmes focused on Māori engagement, implications for policy advice and language.

Risk Management#

The Treasury's risk management practices use an approach modelled on the Joint Australian/New Zealand International Risk Management Standard. Risk management in the Treasury is implemented through business processes such as strategic and operational planning and project management. Risk management functions, roles and frameworks also exist in specific operational areas including NZDMO and NZECO.

We oversee and manage our overall set of risks through a Risk and Audit Committee, which includes experienced external members who provide independent perspectives. Our intention is for this committee to become an official sub-committee of the Board. We will review and revise, if required, its specific roles and functions to align with the Board's charter.

We are currently improving our strategic risk management approach to ensure there is systematic and regular assessment and monitoring of key strategic risks facing the Treasury. The first stage of this approach was a facilitated workshop with our senior leaders to identify our key strategic risks and agree their priority ranking. These risks will regularly be monitored, reviewed and reported, by being integrated into regular performance reporting.

A Risk Advisor has recently been appointed, with responsibility for further developing and maintaining an appropriate enterprise-wide risk management approach, including further refinement of strategic risk management assessment, monitoring and reporting.

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 2010.
• The supplementary schedules fairly reflect the assets, liabilities, contingencies and commitments managed by the Treasury on behalf of the Crown as at 30 June 2010 and revenues and expenses managed by the Treasury on behalf of the Crown for the year ended on that date.

John Whitehead
Secretary to the Treasury

30 September 2010

Fergus Welsh
Chief Financial Officer
(countersigned)

30 September 2010

The Treasury's Output Expense 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 through 19 output appropriations during the 2009/10 year. The following pages provide information on the Treasury's most significant work undertaken during the year and the standards that applied to some of that work. Two of the 19 appropriations were originally delivered by the CCMAU, a semi-autonomous unit of the Treasury, but were integrated into the Treasury's main work programme in November 2009.

The following table provides an overview of the linkages between the Treasury's outcomes and objectives, the impacts we seek to have and the appropriations through which we are funded.

Vote Finance Output Expense Performance#

Macroeconomic Policy Advice and Management MCOA#

This includes work under the following appropriations:

• Economic and Tax Forecasting
• Fiscal Management
• Fiscal Reporting
• Policy Advice: Fiscal and Macroeconomic, and
• Management of Crown Lending and Crown Bank Accounts.

The following table shows the overall cost of this MCOA.

Economic and Tax Forecasting#

Scope of Appropriation#

This output class is limited to the preparation of economic and tax forecasts, and monitoring of and reporting on economic and tax conditions.

Significant Work Completed During 2009/10#

• Provided the Minister of Finance with regular weekly and monthly economic updates. During the year, we changed the focus of the monthly updates from reporting on data released to include more interpretation of macro and fiscal developments. This has helped to stimulate public debate on the New Zealand economy, as witnessed by media coverage and comment that the release of these monthly updates has generated.
• Provided the Minister of Finance with previews and commentaries on key data releases.
• Produced updated macroeconomic and tax forecasts for the Half Year Economic and Fiscal Update (HYEFU) in December 2009 and the 2010 Budget in May 2010.
• Produced macroeconomic impact estimates and tax costings for the 2010 Budget’s tax reform package.

Fiscal Management#

Scope of Appropriation#

This output class is limited to the development of the budget strategy and advice, and activities of the annual budget process.

Significant Work Completed During 2009/10#

• Reviewed the Budget 2009 process including the forming of recommendations for Budget 2010.
• Substantially redesigned the budget process which increased the scrutiny on baseline expenditure and better supported the Government to advance its priorities consistent with its fiscal strategy.
• Released budget guidance.
• Convened a public service Chief Executives Group to provide appropriate opportunities for these stakeholders to assist in the design and management of the budget process.
• All budget-related outputs were delivered to the required quality standard in accordance with the overall timetable and the Public Finance Act 1989.

Fiscal Reporting#

Scope of Appropriation#

This output class is limited to preparing fiscal forecasts, monitoring of and reporting on fiscal conditions, preparing the Financial Statements of Government, providing advice on the application and development of generally accepted accounting practice as it applies to the Crown and monitoring the adequacy of departmental financial management controls.

Significant Work Completed During 2009/10#

• Prepared the annual and monthly Financial Statements of Government, Fiscal Forecasts and monthly Controller Reports in accordance with the Public Finance Act 1989.
• Provided central government leadership on accounting standard setting frameworks including representation on international and domestic accounting standard setting boards. This work included significant input into the release of discussion documents on the statutory framework for financial reporting in New Zealand.

Policy Advice - Fiscal and Macroeconomic#

Scope of Appropriation#

This output class is limited to the provision of fiscal and macroeconomic policy advice.

Significant Work Completed During 2009/10#

• Published Challenges and Choices: New Zealand’s Long-term Fiscal Statement in October 2009.
• Published a technical working paper on Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position in January 2010.
• Published the BPS, including medium-term fiscal projections, in December 2009.
• Published the FSR in May 2010. After taking advice from the Treasury, the Minister of Finance changed the net debt objective from 30% of GDP to 20%.
• Presented the Minister of Finance with options for implementing a spending cap. The proposed spending cap was not adopted, but it has identified enough issues that there is strong appetite to investigate other options for achieving similar outcomes. This has led to the review of the fiscal management approach.
• The “Fiscal Anchor”: Provided advice on the benefits of setting numerical objectives for fiscal measures other than net debt, such as net worth.
• Fiscal consolidation: The global financial crisis, combined with increased government spending and tax cuts over the previous few years, meant that in Budget 2009 the Government’s operating balance was projected to be in deficit for at least the next 10 years. The Treasury provided advice on how to advance the return to surplus and how it might help to reduce vulnerabilities and support economic growth.

Management of Crown Lending and Crown Bank Accounts#

Scope of Appropriation#

This output class is limited to the management of Crown lending and Crown and departmental bank accounts.

Significant Work Completed During 2009/10#

• Advanced $785.9 million distributed as follows: $380 million to KiwiRail, $232.6 million to DHBs, $142.8 million to Housing New Zealand Corporation and $30.5 million to the Auckland Transition Agency.
• Managed risk on $223.5 million of interest rate swaps transacted for Housing New Zealand Corporation.

State Sector and Economic Performance Policy Advice and Management MCOA#

• Policy Advice: Economic Performance
• Policy Advice: State Sector Performance
• New Zealand Export Credit Office
• Management of Liabilities, Claims Against the Crown and Crown Properties
• Crown Deposit Guarantee Scheme
• Crown Wholesale Guarantee Facility

The following table shows the overall cost of this MCOA.

Policy Advice - Economic Performance#

Scope of Appropriation#

Policy advice on the Government's economic strategy and policy settings and their effect on New Zealand's economic growth.

Significant Work Completed During 2009/10#

• Supported the Capital Market Development Taskforce and advised on options.
• Advised on the Securities Act 1978 review on issues of disclosure, transparency and investor protection, including advice on the establishment of a Financial Markets Authority.
• Provided support in conjunction with IRD to the Tax Working Group in the form of secretariat and papers. This assisted the Tax Working Group in the delivery of its report: A Tax System for New Zealand's Future.
• Delivered in conjunction with IRD advice and support to Ministers that enabled the development, announcement and implementation of the centre-piece of Budget 2010 – the Budget 2010 Tax Package. This included the associated communication material.
• Provided advice on innovation issues, including business R&D incentives and technology transfer, the structure and governance of public sector innovation agencies, and the CRI system (as part of the CRI Taskforce).
• Advanced the Closer Economic Relations (CER) investment protocol.
• Managed review of Overseas Investment Act 2005.
• Advised the Government on the establishment of a possible Productivity Commission, which Ministers agreed to establish.
• Proposed and implemented changes to the Regulatory Impact Assessment system to support better quality regulation.
• Advised the Government on climate change targets in preparation for and after the Copenhagen Climate Change conference.
• Advised on and implemented legislation to extend the Crown Deposit Guarantee Scheme to 31 December 2011.
• Regularly reviewed pricing for the Crown Wholesale Guarantee Facility and advised on the closure of the Facility which took place on 30 April 2010.

Policy Advice - State Sector Performance#

Scope of Appropriation#

Policy advice on the effective and efficient use of State resources including improved decision-making and performance management systems and the efficient management of Crown assets.

Significant Work Completed During 2009/10#

• Advice on industrial relations across the State sector (in concert with central and sector agencies).
• Advice on improving value for money (VfM)/smarter better public services, including: supporting the Cabinet Expenditure Control Committee (ECC) agenda; implementing BASS; setting up Cross Agency Programme Management Office; helping initiate the Review of Expenditure on Policy Advice; and monitoring key departments and Crown entities.
• Advice on the Crown’s balance sheet and risk, and on specific commercial investment opportunities for the Crown.
• Health sector: advice to Ministers on the scope for improving VfM and productivity to support the Budget 2010 objectives, and on options for improving institutional settings.
• Justice sector: advice, working with Central Agencies and sector agencies, to address drivers of crime, reducing costs and volumes in the justice sector.
• Defence sector: advice to Ministers on the Defence Review progress of the White Paper and on major investments proposed by the sector.
• Benefit system: in-depth advice on the benefit system to prompt and frame strategic debate.
• Advice on further improving the effectiveness and efficiency of public services.
• Advice on options for fiscal consolidation, concerning programme or policy design, to help Ministers manage the fiscal crisis.
• Pilot, refine and implement the PIF to improve agency capability and performance (acting in concert with other Central Agencies).

New Zealand Export Credit Office#

Scope of Appropriation#

Implementation of the Government's Export Credit Guarantees policy and operations of NZECO.

Significant Work Completed During 2009/10#

• A total of 118 new policies were issued in 2009/10, supporting exports of $266.2 million.
• The Working Capital Guarantee has not been utilised by the banks, in light of the banks’ reduced appetite for new lending (post the global financial crisis). NZECO is working, as a matter of priority, with all the banks as we recognise that access to working capital is a key constraint on exporters’ ability to achieve growth targets, in line with the objectives of the Medium-term Growth Agenda.
• NZECO paid one claim during the period amounting to $136,370. This was in relation to the NZECO short-term trade credit guarantee. As a percentage of NZECO’s total portfolio, this claim represents 0.106%. This is well below NZECO's provisioning estimates, and is also less than the experience by the private sector or other export credit agencies.

Management of Liabilities, Claims Against the Crown and Crown Properties#

Scope of Appropriation#

Management of contractual or Treaty of Waitangi-related claims against the Crown and the management of New Zealand House, London.

Significant Work Completed During 2009/10#

• Concluded Court of Appeal case regarding residual obligations from Maui Gas contracts.
• Conducted an out of court settlement to seek reimbursement of supply costs from Maui partners.
• Undertook ongoing management of the transfer of legal titles of SOEs and of the Crown’s day-to-day contractual obligations.
• Concluded work to settle the Crown’s liability in an estate claim.
• Terralink litigation settled following mediation process.
• Provided ongoing administration on payments relating to Taitokerau Forests Limited.
• Provided advice on various aspects of Rugby New Zealand 2011 Limited.
• Provided advice on commercial aspects of Treaty negotiations.

Crown Deposit Guarantee Scheme#

Scope of Appropriation#

This output class is limited to the implementation and operation of the Crown's Deposit Guarantee Scheme excluding expenses incurred in connection with administering claims under a guarantee or indemnity given under the Scheme.

Significant Work Completed During 2009/10#

• This report covers the period up to September 2009 when, as part of the decision to offer an extended guarantee scheme for the period from 13 October 2010 to 31 December 2011, a new appropriation covering the operation of the Deposit Guarantee Scheme was introduced.
• Development and refinement of the provisioning methodology for entities considered more likely than not to default.
• Based on the Mascot Finance Limited experience, the Treasury concluded that a more robust and scalable solution to payout was required. Following analysis of the options and tendering, the decision was made to outsource to CIS.
• Provided input into the advice on the need for an extended guarantee scheme and led operational design of the extended scheme.
• Commenced a review of potential modifications to the original scheme with a view to determining whether or not changes were required.

Crown Wholesale Guarantee Facility#

Scope of Appropriation#

This output class is limited to the implementation and operation of the Crown's Wholesale Guarantee Facility.

Significant Work Completed During 2009/10#

• The Crown Wholesale Guarantee Facility was terminated on 30 April 2010 reflecting that market conditions had stabilised to a degree that enabled participants to access funding markets without reliance on a Crown guarantee.
• Regular reviews of pricing of the Facility to ensure that it continued to meet its objectives without exposing the Crown to unnecessary risk or distorting market incentives.
• Regular reporting on guaranteed and unguaranteed issuance was developed to support monitoring (usage and pricing).

Other Vote Finance Appropriations#

Infrastructure Advice and Coordination#

Scope of Appropriation

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

Significant Work Completed During 2009/10

• Publication of the first National Infrastructure Plan.
• Preparation and introduction of the Infrastructure Bill.
• Assistance provided to the Department of Corrections and the MOE on business cases for PPP projects (both approved).
• Review of KiwiRail’s 10-year turnaround plan.
• Processed and analysed the second set of 10-year capital intentions submitted by major asset-owning public sector agencies for the budget.
• Continued work building towards specific outputs in 2010/11:
  1. development of a new business case standard and guidance for use by public sector agencies in preparing business cases
  2. development of a toolkit to assist departments develop, negotiate and manage PPP projects, and
  3. building an ongoing pipeline of PPP projects.

Crown Guarantee Schemes#

Scope of Appropriation#

This appropriation is limited to the implementation and operation of the Crown's Deposit Guarantee Scheme and the Crown's Wholesale Guarantee Facility excluding expenses incurred in connection with administering claims under a guarantee or indemnity given under the Scheme.

Significant Work Completed During 2009/10#

• Delivered the Deed of Guarantee for the extended Crown Deposit Guarantee Scheme.
• Developed and delivered a revised Deed of Guarantee applying within the current guarantee period including the ability to issue non-guaranteed securities in order to facilitate transition off the guarantee. The revised deed took effect on 1 January 2010.
• Completed delivery of the payout solution using CIS.
• Completed a guidance manual for complex claims that cannot be resolved via CIS as they require expert (legal) involvement.

Permanent Legislative Authorities#

Appropriations for the New Zealand Debt Management Office#

In 2008/09 NZDMO received funding through a single Permanent Legislative Authority (PLA) for Debt and Related Financial Asset Management. In 2009/10 this funding was split across four separate appropriations: Management of Crown Lending and Crown Bank Accounts (see pages 34 and 35) and three PLAs:

• Administration of Crown Borrowing PLA
• Administration of Derivative Transactions PLA, and
• Administration of Investment of Public Money PLA.

Information is provided for each appropriation individually later in this section.

Administration of Crown Borrowing PLA#

Scope of Appropriation#

This appropriation is limited to expenses incurred in connection with administering borrowing by the Crown, as authorised by section 61(1) of the Public Finance Act 1989.

Significant Work Completed During 2009/10#

• The final 2009/10 domestic debt programme was $12.5 billion, a $4 billion increase on the programme announced at the beginning of the year. This allowed us to pre-fund future borrowing requirements while market conditions remained favourable.
• The 2009/10 annual average cost of new borrowing was 4.15%, compared with a long-run average cost of around 6%.
• A number of measures were introduced to improve liquidity in the domestic market. The bond tranche size was increased from $6 billion to $8 billion, and we confirmed that we were actively considering the reintroduction of inflation-indexed debt.
• At year-end there were $7.8 billion treasury bills outstanding in the market. Treasury bills outstanding peaked at $9.2 billion in September. In April we re-introduced the one-year treasury bill, providing investors with an additional short-term government security and increasing the range of funding options available to NZDMO.
• NZDMO, in conjunction with the Minister of Finance where appropriate, promoted New Zealand government securities at conferences and investor meetings in Europe, Asia, New Zealand and Australia.

Notes:

Administration of Derivative Transactions PLA#

Scope of Appropriation#

This appropriation is limited to expenses incurred in connection with administering derivative transactions of the Crown, as authorised by section 65H(2) of the Public Finance Act 1989.

Significant Work Completed During 2009/10#

• NZDMO uses a relatively small set of vanilla derivatives to manage interest-rate and currency risk in the portfolio. During 2009/10, new derivative transactions entered into included currency swaps and interest-rate swaps.
• Risk associated with the changing market value of derivative positions was successfully managed within NZDMO’s average monthly VaR target for the investment and derivatives portfolio.

Administration of Investment of Public Money PLA#

Scope of Appropriation#

This appropriation is limited to expenses incurred in connection with administering the investment of public money, as authorised by section 65J(1) of the Public Finance Act 1989.

Significant Work Completed During 2009/10#

• As at 30 June 2010, NZDMO administered marketable securities valued at $4,142 million, deposits valued at $470 million and a cash balance of $8,053 million. Cash and securities were used to fund government operations, to provide short-term liquidity if required and to help repay bond maturities in the longer term.
• Asset holdings increased during the year as NZDMO pre-funded future borrowing needs, and invested the proceeds into fixed-income securities.
• Assets are invested primarily in AAA- and AA-rated securities. The high quality of the asset portfolio, in conjunction with NZDMO’s asset-liability matching policy, means the portfolio value had very low volatility, as reflected in an average monthly VaR during 2009/10 of less than $1 million.

Administration of Guarantees and Indemnities Given by the Crown PLA#

Scope of Appropriation#

This appropriation is limited to expenses incurred in connection with administering the guarantees and indemnities given by the Crown, as authorised by section 65ZG of the Public Finance Act 1989.

The appropriation was required to administer the guarantee provided to entities under the Crown Deposit Guarantee Scheme, including the management of Crown risk and administration expenses incurred in processing claims under the guarantee.

Significant Work Completed During 2009/10#

• Successfully completed payouts of all claims following defaults by Mascot Finance Limited and Strata Finance Limited, where creditors made a claim.
• Initiated payouts for Vision Securities Limited, Rockforte Finance Limited and Viaduct Capital Limited.

Vote Crown Research Institutes Output Expense Performance#

Crown Company Monitoring Advice to the Minister of Research, Science and Technology and the Minister for Economic Development#

Scope of Appropriation

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

Significant Work Completed During 2009/10

• Prepared advice for Ministers on the performance of the CRIs, NZVIF and REANNZ.
• Managed, on behalf of responsible Ministers, the appointment of CRI, NZVIF and REANNZ directors and monitored the performance of those boards and directors.
• Assisted the responsible Ministers in formulating ownership expectations in relation to the governance practices of the companies.
• Prepared advice on the Statements of Corporate Intent and strategic plans of the CRI, NZVIF and REANNZ boards.
• Completed performance reports on a quarterly, half-year and full-year basis to analyse the performance and accountability documents prepared by each company.
• Hosted training programmes for recently appointed and aspiring directors.
• Hosted professional development updates for existing Crown directors.
• Hosted a one-day induction seminar for new CRI and REANNZ directors.

Vote State-Owned Enterprises Output Expense Performance#

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

Scope of Appropriation

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

Significant Work Completed During 2009/10

• Established COMU to increase the efficacy of the Crown’s monitoring of performance of SOEs and Crown companies.
• Implemented a change in focus of monitoring to focus on accountability, transparency and performance.
• Implemented a continuous disclosure regime for the nine largest SOEs.
• Assisted the responsible Ministers in formulating ownership expectations in relation to the governance practices of the companies.
• Prepared advice on the Statements of Corporate Intent and strategic plans of the SOEs and Crown companies.
• Completed performance reports on a quarterly, half-year and full-year basis to analyse the performance and accountability documents prepared by each company.
• Commissioned independent valuations of the three electricity SOEs.
• Implemented financial performance measurements for the SOEs.
• Hosted training programmes for recently appointed and aspiring directors.
• Hosted professional development updates for existing Crown directors.
• Hosted a one-day induction seminar for new directors.
• Provided assistance to other agencies regarding nominations for boards.

The Quality of the Treasury's Policy Advice#

Scope#

The Treasury applies a consistant quality standard to policy advice provided through all appropriations. The policy standard is published in full on pages 130 and 131 of this Annual Report.

Ministerial Servicing Performance 2009/10#

The Treasury drafts responses to Ministerial Correspondence (MCs), Parliamentary Questions (PQs) and Official Information Act 1982 requests (OIAs) for consultation with, or approval by, the responsible Minister.

The Treasury provides these services to the:

• Minister of Finance, Associate Ministers of Finance and/or other Ministers, on referral from the Minister of Finance or an Associate Minister of Finance
• Minister for Infrastructure
• Minister for Regulatory Reform
• Minister of Research, Science and Technology, and
• Minister for State-Owned Enterprises.

There are two categories of requests: OIA requests made to Ministers (MOIAs) and OIA requests made to the Treasury (TOIAs).

Estimated and actual volumes for each output appropriation for the 2009/10 financial year are itemised below:

Financial Statements - Departmental#

for the year ended 30 June 2010

Overview of Departmental Financial Results#

for the year ended 30 June 2010

The following significant movements in actual results between the 2009/10 and 2008/09 years, and actual results against the 2009/10 Supplementary Estimates budget, are explained below:

Movements between Main Estimates Budgets and Supplementary Estimates Budgets are explained in the published Supplementary Estimates of Appropriation.

Significant Actual Movements Between 2008/09 and 2009/10

Revenue Crown for departmental outputs increased by $4.2 million, mainly owing to increased capacity from budget initiative funding and greater consultancy spend for Deposit Guarantee Scheme.

Personnel increased by $2.9 million mainly owing to increased capacity from budget initiative funding and a fall in staff turnover.

Operating costs decreased by $2.2 million owing to lower transactional costs in NZDMO and a reduction in legal advice for the Deposit Guarantee Scheme.

Consultants increased by $3.5 million mainly owing to greater complexity and therefore more resources for the Deposit Guarantee Scheme and additional funding for the BASS project.

Debtor - Crown increased by $1.1 million owing to higher spend in June 2010 for the Deposit Guarantee Scheme and BASS project.

Property, plant and equipment decreased by $1 million owing to lower capital expenditure on computer hardware.

Taxpayers' funds decreased by $0.6 million owing to the repayment of capital provided for the Treasury accommodation project between 2003 and 2005.

Significant Variances Between 2009/10 Actuals and Supplementary Estimates Budget

Revenue Crown for departmental outputs decreased by $10.4 million, mainly owing to less demand than anticipated for the Crown Deposit Guarantee Scheme, the Crown Wholesale Guarantee Facility and NZECO and delays in personnel recruitment.

Consultants expenses are $2.8 million below budget owing to lower costs than anticipated for the Crown Deposit Guarantee Scheme and NZECO; most of this activity will now occur in 2010/11.

Debtor - Crown decreased by $1.3 million mainly owing to lower expenditure for the Crown Deposit Guarantee Scheme and NZECO in June 2010 than originally expected.

Creditors and other payables decreased by $2.3 million primarily owing to less expenditure than expected in June.

Statement of Comprehensive Income#

for the year ended 30 June 2010

The Statement of Comprehensive Income details the revenue and expenses relating to all outputs (goods and services) produced by the Treasury during the financial year ended 30 June 2010. Total expenses equals total departmental output classes expenditure and appropriations in the Statement of Departmental Expenses and Capital Expenditure Against Appropriations on page 75.

Explanations of significant variances against budget are detailed in the Overview of Departmental Financial Results on page 66.

Statement of Changes in Taxpayers' Funds#

for the year ended 30 June 2010

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

Statement of Financial Position#

as at 30 June 2010

The Statement of Financial Position reports the total assets and liabilities of the Treasury, as at 30 June 2010. Taxpayers' funds are represented by the difference between the assets and liabilities.

Statement of Cash Flows#

for the year ended 30 June 2010

The Statement of Cash Flows summarises the cash movements in and out of the Treasury during the financial year. It takes no account of money owed to the Treasury or owing by the Treasury and therefore differs from the Statement of Comprehensive Income on page 68.

Statement of Commitments#

as at 30 June 2010

Capital Commitments#

There are no capital commitments for this year.

Non-cancellable Operating Lease Commitments#

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

Other Non-cancellable Commitments#

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

Statement of Contingent Liabilities and Contingent Assets#

as at 30 June 2010

Unquantifiable Contingent Liabilities#

The Treasury 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.
• Research in Motion Limited – In accordance with a delegation from the Minister of Finance dated 23 May 2005, the Treasury has granted an indemnity to Research in Motion Limited under a licence agreement for software used in conjunction with Blackberry mobile email devices, covering breach of the licence agreement, intellectual property rights, claims arising from incorrect use of the software, defamation type actions and breach of export restrictions.
• Reuters Services Contract – The Treasury has indemnified Reuters Group PLC and its subsidiaries against any losses arising from the Treasury’s use of certain Reuters services or arising from a breach of the Services Contract relating to the provision of financial information services. Further the Treasury indemnified Lipper (a Reuters company) in respect of third party copyright and intellectual property rights.
• The Treasury has indemnified First NZ Capital against any claims arising from third parties as a result of contract consultancy work undertaken by the company.

Quantifiable Contingent Liabilities#

As at 30 June 2010, the Treasury had no quantifiable departmental contingent assets and liabilities (30 June 2009: nil).

Departmental Capital Expenditure#

for the year ended 30 June 2010

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 2010

The Statement of Expenditure and Appropriations details expenditure against appropriations. Total Departmental Output Classes Expenditure and Appropriations equals total expenses in the Statement of Comprehensive Income on page 68.

There was no unappropriated expenditure incurred during 2009/10 (2008/09: nil).

Notes to the Financial Statements#

for the year ended 30 June 2010

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 Treasury has reported on Crown activities and trust monies which it administers.

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

The financial statements of the Treasury are for the year ended 30 June 2010. The financial statements were authorised for issue by the Secretary to the Treasury on 30 September 2010.

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.

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 Treasury is New Zealand dollars.

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

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

• Presentation of Financial Statements (Revised 2007) replaces NZ IAS 1 Presentation of Financial Statements (Issued 2004). The revised standard requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a Statement of Comprehensive Income. The Statement of Comprehensive Income will enable readers to analyse changes in equity resulting from non-owner changes separately from transactions with owners. The Ministry has decided to prepare a single Statement of Comprehensive Income for the year ended 30 June 2010 under the revised standard. Financial statement information for the year ended 30 June 2009 has been restated accordingly. Items of other comprehensive income presented in the Statement of Comprehensive Income were previously recognised directly in the Statement of Changes in Equity.

The Treasury has not adopted the following standards, amendments and interpretations issued but not yet effective:

• NZ IAS 24 Related Party Disclosures (Revised 2009) replaces NZ IAS 24 Related Party Disclosures (Issued 2004). This standard:
  1. Removes the previous disclosure concessions applied by the Ministry for arm’s-length transactions between the Treasury and entities controlled or significantly influenced by the Crown. The effect of the revised standard is that more information is required to be disclosed about transactions between the Treasury and entities controlled or significantly influenced by the Crown.
  2. Provides clarity on the disclosure of related party transactions with Ministers of the Crown. Further, with the exception of the Ministers of Finance, State-Owned Enterprises and Crown Research Institutes, the Treasury will be provided with an exemption from certain disclosure requirements relating to transactions with other Ministers of the Crown. The clarification could result in additional disclosures should there be any related party transactions with Ministers of the Crown.
  3. Clarifies that related party transactions include commitments with related parties.

The Treasury expects it will early adopt the revised standard for the year ended 30 June 2011.

• NZ IFRS 9 Financial Instruments will eventually replace NZ IAS 39 Financial Instruments: Recognition and Measurement. NZ IAS 39 is being replaced through the following three main phases: Phase 1 Classification and Measurement, Phase 2 Impairment Methodology and Phase 3 Hedge Accounting. Phase 1 on the classification and measurement of financial assets has been completed and has been published in the new financial instrument standard NZ IFRS 9. NZ IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in NZ IAS 39. The approach in NZ IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in NZ IAS 39.

The new standard is required to be adopted for the year ended 30 June 2013. The Treasury has not yet assessed the effect of the new standard and expects it will not be early adopted.

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.

State Sector Retirement Superannuation and KiwiSaver schemes revenue

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

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.

Operating lease

The Treasury leased office premises during the year ending 30 June 2010. Substantially all the risks and benefits of ownership were retained by the lessor, and therefore these leases are classified as operating leases. Operating lease costs are written off to the Statement of Comprehensive Income over the period of the lease.

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 Comprehensive Income.

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 Comprehensive Income.

The Treasury uses derivative financial instruments to hedge its exposure to foreign exchange movements. The Treasury does not hold or issue derivative financial instruments for trading purposes. The Treasury has not adopted hedge accounting.

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value at each balance date. Movements in the fair value of derivative financial instruments are recognised in the surplus or deficit.

The full fair value of a foreign exchange derivative is classified as current if the contract is due for settlement within 12 months of balance date. Otherwise, foreign exchange derivatives are classified as non-current.

Cash and cash equivalents

Cash includes cash on hand and funds on deposits 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 charges.

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

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 costing over $1,000 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 Treasury 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 Comprehensive Income.

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 Treasury and the cost of the item can be measured reliably.

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.

Notes to the Financial Statements (continued)#

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 Treasury 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 Comprehensive Income.

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 cost.

Employee entitlements#

Short-term employee entitlements

Employee entitlements that the Treasury 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 Treasury 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 Treasury anticipates it will be used by staff to cover those future absences.

The Treasury 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. Discount factors of 3.48% to 6% and salary inflation factors of 0% to 3.5% 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 Comprehensive Income as incurred.

Provisions#

The Treasury 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 Treasury 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#

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, IRD is included as part of receivables or payables in the Statement of Financial Position.

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

Commitments and contingencies are disclosed exclusive of GST.

Income tax#

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

Budget figures#

The budget figures are those presented in the Budget Estimates (Main Estimates) and those amended by the Supplementary Estimates, and associated forecasts included in the Main Estimates and Supplementary Estimates and reflected in the Statements of Comprehensive Income, Financial Position, Cash Flows and Changes in Taxpayers' Funds.

Statement of cost allocation policies#

The Statement of Cost Allocation Policies was in place for the 2009/10 year. The details of the policy are outlined as follows:

• 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.

Critical accounting estimates and assumptions#

In preparing these financial statements the Treasury 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.

Notes to the Financial Statements (continued)#

2 - Revenue - Crown#

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

3 - Other Revenue#

4 - Personnel Costs#

Notes to the Financial Statements (continued)#

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 2010 was 7.5% (30 June 2009: 7.5%).

Notes to the Financial Statements (continued)#

7 - Property, Plant and Equipment#

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

Notes to the Financial Statements (continued)#

8 - Intangible Assets#

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

There are no restrictions over the title of the Treasury's intangible assets. No intangible assets are pledged as security for liabilities.

Notes to the Financial Statements (continued)#

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 - 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 Comprehensive Income on page 68 to arrive at the net cash flows from operating activities disclosed in the Statement of Cash Flows on page 71.

Notes to the Financial Statements (continued)#

12 - Financial Instruments#

The Treasury 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 creditors and other payables.

Credit risk

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

The Treasury does not require any collateral or security to support financial instruments with financial institutions with which the Treasury deals, as these entities have high credit ratings. For its other financial instruments the Treasury 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 Treasury 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 Treasury will encounter difficulty raising liquid funds to meet commitments as they fall due.

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

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

13 - Related Party Information#

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

The Treasury 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 Treasury would have adopted if dealing with that entity at arm's length in the same circumstances are not disclosed.

Key management personnel compensation (includes the Chief Executive and his direct reports)

The 2010 year includes compensation for Chief Executive and six direct reports (being four Deputy Secretaries, Acting Executive Director of the National Infrastructure Unit and Director CCMAU) until 23 November, when the leadership structure was changed to establish the Executive Leadership Team of the Chief Executive and two Deputy Chief Executives.

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

14 - Events Subsequent to Balance Date#

There were no events subsequent to balance date that required adjustment to the financial statements or disclosure (2009: none).

15 - Capital Management#

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

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

16 - Explanation of Major Variances Against Budget#

Refer to Department Overview.

Supplementary Financial Schedules - Non-departmental#

for the year ended 30 June 2010

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 116 to 126.

The Department administered $4,343 million of expenses, $4,308 million of revenue, $23 million of capital receipts, $306 million of capital expenditure, $23,979 million of assets and $69,671 million of liabilities on behalf of the Crown for the year ended 30 June 2010.

The financial information reported in these schedules is consolidated into the Financial Statements of the Government, and therefore readers of these schedules should also refer to the Financial Statements of the Government for the year ended 30 June 2010.

Overview#

This overview provides details of significant expenditure and revenue variances between 2008/09 and 2009/10 and between 2009/10 actual and 2009/10 Supplementary Estimates.

Capital Charge

Capital charge receipts in 2009/10 increased by 8.6% compared with 2008/09. This was primarily owing to an increase in the capital base of departments as a result of revaluations of property, plant and equipment and capital contributions from the Crown.

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

The Government provides two guarantee schemes in relation to financial institution deposits: the Crown Deposit Guarantee Scheme and the Crown Wholesale Guarantee Facility. Information on the Government's exposure as a result of these schemes, the management of these exposures and the impact of these schemes is detailed below.

Crown Deposit Guarantee Scheme

Scheme description

On 12 October 2008 the Minister of Finance initiated an opt-in Crown Deposit Guarantee Scheme. The objective of this scheme is to ensure ongoing retail depositor confidence in New Zealand's financial system given the international financial market turbulence. Under the Crown Deposit Guarantee Scheme, fees are payable to the Government by participating institutions if they hold significant deposits (ie, greater than $5 billion) or if they experience significant growth in deposits (ie, greater than 10% per annum). Approved deposit takers to date are listed on the Treasury website.

On 25 August 2009 the Minister of Finance announced that the Government would extend the Crown Deposit Guarantee Scheme from 13 October 2010 to 31 December 2011 with tightened eligibility criteria and additional limitations on coverage of the scheme. The changes to the scheme include restricting coverage to institutions with a credit rating of BB or higher, reducing the guaranteed amount of individual eligible deposits and changing the fee structure to include all deposits.

Scheme management

The Government is managing its exposure to this risk both through the prudential regulation processes for registered banks, and by requiring other deposit takers who sign the guarantee to agree to certain controls on their business including:

• some restrictions on distributions to shareholders
• some assurance that the business dealings of the deposit taker are on arm’s-length terms
• the ability for the Crown to appoint an inspector
• the ability for the Crown to withdraw the guarantee if the business is being deliberately operated in a way to undermine the intention of the guarantee, and
• personal undertakings from directors to ensure the non-bank deposit takers comply with the guarantee.

In addition, the Crown has established a monitoring regime to continually assess the risk associated with the scheme as it develops.

Amounts guaranteed and provision for loss

As at 30 June 2010, 73 financial institutions (2009: 73) had joined the scheme and deposits totalling $133 billion (2009: $124.2 billion) had been guaranteed. This is the maximum exposure and does not include any offset resulting from the recovery of the remaining assets of the financial institution in the event the guarantee is called upon. The Crown assesses the potential loss to be associated with the entities that hold significant deposits (ie, greater than $5 billion) as being remote. It is recognising the revenue received from these institutions over the guarantee period and has made no provision for any loss associated with these entities.

For other entities within the scheme (ie, entities that hold deposits less than $5 billion) a provision has been made to provide for losses that are considered more likely than not to occur. The Crown continually updates both the likelihood of further default actions triggering the guarantee and the expected loss given default. Based on these assessments, the Crown has provided for a net expected loss given default of $748 million as at 30 June 2010 (2009: $816 million), being the cost of future payments to investors after expected recoveries in entities operating under the scheme as at 30 June 2010. In addition, the Crown has included liabilities of $43 million (2009: $15 million) being the cost of payments to investors in entities guaranteed under the scheme which were in receivership as at 30 June 2010.

While the provision represents a best estimate of likely loss, a significant range of outcomes are possible under the scheme in terms of which entities may default and the eventual loss to the Crown following an event of default. This reflects the significant uncertainty as to the value that can be realised from an entity's assets following an event of default. Except as provided on the Treasury website, further information on the Crown Deposit Guarantee Scheme cannot be provided owing to commercial sensitivity.

Crown Wholesale Guarantee Facility

On 1 November 2008 the Minister of Finance initiated an opt-in Crown Wholesale Guarantee Facility. The objective of the opt-in Crown Wholesale Guarantee Facility was to facilitate access to international financial markets by New Zealand financial institutions, in a global environment where international investors were highly risk averse and where many other governments had offered guarantees on their banks' wholesale debt. Under the Crown Wholesale Guarantee Facility, the Government received a fee from each participating institution based on the institution's credit rating and the term and amount of guaranteed debt issued.

Deposit-taking financial institutions utilising the Crown Wholesale Guarantee Facility have applied for a guarantee under the Crown Deposit Guarantee Scheme. In addition to the risk management under the deposit scheme, the Government further manages its risk exposure by:

• limiting the availability of the facility to financial institutions that have an investment grade credit rating (BBB- or better), and have substantial New Zealand borrowing and lending operations (but not to institutions that are simply financing a parent or related company)
• limiting the amount of debt covered by the guarantee to debt up to 125% of the total stock of eligible types of debt in issue prior to the intensification of the crisis
• establishing additional capital buffers by requiring an additional 2% Tier 1 capital buffer above the 4% regulatory minimum, and
• requiring the debt issuer to hedge and manage any foreign exchange risk.

As at 30 June 2010, the value of wholesale securities guaranteed was $10.4 billion (2009: $5.7 billion). No provision is made in these financial statements for losses under this scheme as these are considered remote.

On 10 March 2010 the Minister of Finance announced the closure of the Crown Wholesale Guarantee Facility effective from 31 May 2010. As at 30 June 2010, the Crown had issued 25 guarantee certificates; the benefit of those guarantees will remain in place for the underlying securities until the scheduled maturity of those securities. The terms of these securities range from two to five years. Over time, the value of securities issued with the benefit of Crown guarantees will reduce, with the last guarantee certificate expiring in October 2014.

Overview (continued)#

Dividends#

SOE dividends increased by $538 million from 2008/09 (page 108), primarily owing to an increase in dividends from Meridian Energy and Mighty River Power from those paid in previous years. The aggregate dividend increases were owing to numerous factors including changes in economic and hydrological conditions.

Dividends from Crown entities (TVNZ) reduced by $9 million (page 108) in 2009/10, owing to the impact of the recession on the advertising market.

Other dividends received from the Crown's share in Airports is $0.7 million (page 108) less than that received in 2008/09 primarily owing to the change in the economic climate.

Export Credit Office#

The purpose of the Export Credit Office is to assist New Zealand companies to increase exports by providing government-guaranteed export credit insurance products to New Zealand exporters, particularly for those countries, sectors and contracts that the private sector may not have the capacity or willingness to cover.

Revenue has increased by 22% in 2009/10 of a result of additional insurance guarantees provided during the year. Although there was an increase from last year, the additional amount of cover is well below that forecasted at Supplementary Estimates.

Net Foreign Exchange (Losses)/Gains#

Net foreign exchange losses were $14 million in 2009/10, compared with gains of $21 million in 2008/09, 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 104). The decrease in value of these investments is also reflected in Other share investments (page 110). NZDMO incurred net foreign exchange gain of $3 million in 2009/10, compared with a net loss of $5 million in 2008/09 owing to movements in foreign exchange rates.

Goodwill#

Goodwill in relation to Air New Zealand ($258 million) has been tested for impairment at June 2010 using the June 2009 valuation. The assets and liabilities have not significantly changed and there has been no change in the composition of the balance sheet. There have been no restructuring, fleet changes or any other events occurring during the related period that would indicate significant change to valuation. The June 2009 valuation also exceeded the carrying amount by a substantial margin.

Government Superannuation Fund (GSF) Unfunded Liabilities#

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

The GSF obligation has been calculated by the Government Actuary as at 30 June 2010. A Projected Unit Credit Method, based on balance-date membership data, is used for the valuation. This method requires the benefits payable from GSF in respect of past service to be estimated and then discounted back to the valuation date.

GSF unfunded liability as at 30 June 2010 was $9,937 million (page 111), an increase of $948 million compared with 30 June 2009. This is primarily owing to:

• an actuarial loss recognised in the year (page 104) of $1,231 million owing to movements in the economic assumptions used in calculating the liability
• contributions made by the Crown against the liability (including taxation) during 2009/10 of $916 million, and
• this has been partially offset by the current service costs and interest expenses (appropriated under Other Expenses Incurred by the Crown – GSF Unfunded Liability) (page 105) of $633 million.

The decrease in the Other Expenses Incurred by the Crown - GSF Unfunded Liability from 2008/09 of $328 million relates to the reduction in the discount rates used between the years.

The Government expects to make a contribution of $649 million to GSF in the year ended 30 June 2011.

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

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

These are expenses of the Government Superannuation Fund Authority relating to the management and administration of GSF. The Crown's share for 2009/10 was $22 million, $4 million higher than that in 2008/09 and $4 million higher than forecast. The investment manager expenses are dependent upon the portfolio valuations. The fund portfolio grew during the year much more than originally forecasted.

Hawkes Bay Airport#

Hawkes Bay Airport Ltd was corporatised on 1 July 2009. The transaction was fiscally neutral with $7.4 million appearing in the Schedule of Capital Receipts (page 109) and in the Schedule of Expenditure and Appropriations - Capital Expenditure (page 106). The Crown has a shareholding of 50% in Hawkes Bay Airport.

International Financial Institutions#

There were no contributions made to the IMF for the Financial Transaction Plan lending programme in 2009/10 (page 106) compared with a contribution of $274 million in the 2008/09 year. This reflects the cyclical nature of the IMF lending programme and the previous year's response by the IMF to the international financial crisis.

Invercargill Airport Suspensory Loan#

A facility for a loan to Invercargill Airport of $1.5 million for border security equipment was provided in the 2009/10 Supplementary Estimates, however this was not drawn down in the financial year. The agreed facility expired on 30 June 2010.

Landcorp Protected Land Agreement#

The capital expenditure in relation to the Landcorp Protected Land Agreement for 2009/10 was $16 million (page 106). This is made up of:

• the Crown’s ongoing purchase of redeemable preference shares in payment for land transferred under the Protected Land Agreement of $10 million, and
• the provision of $6.056 million of the accumulated capital costs and losses owing to Landcorp for the transfer of Rangiputa Station under the Protected Land Agreement. This was unappropriated expenditure owing to a change in the Treasury’s recognition test at year end for transfers under this agreement.

Expenditure of $26 million in 2008/09 was for the purchase of redeemable preference shares in Landcorp of $13 million and the inclusion of a new farm agreement for $13 million.

Overview (continued)#

Maui Gas Contract#

The Maui Gas contract expired on 30 June 2009; however, there were a number of outstanding issues that were settled during 2009/10. The Crown's revenues from Maui Gas contract sources have decreased by $16 million as a result of the contract expiring. The decrease in revenues is offset by a reduction in Other Expenses Incurred by the Crown for Maui Gas Contracts of $10 million.

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

The Government has guaranteed superannuation schemes managed by the NPF. As at 30 June 2010 NPF's DBP Annuitants Scheme was in a net deficit position of $1,003 million (2009: $947 million), represented by a gross estimated pension obligation of $1,053 million (2009: $994 million) with net investment assets valued at $50 million (2009: $47 million). No additional provision was required in the year for other pension schemes managed by NPF under the Government's guarantee under section 60 of the National Provident Fund Restructuring Act 1990.

The increase in the Crown's liability for the NPF DBP(A) Scheme under Crown guarantee as at 30 June 2010 was primarily owing to:

• the actuarial loss recognised for the year (page 104) of $95 million resulting from movements in the economic assumptions used in calculating the provision, and
• the unwinding of the interest expense (appropriated under Other Expenses Incurred by the Crown – NPF Schemes – Liability under Crown Guarantee) (page 105) of $38 million.

Offset by:

• payments made against the liability by the Crown during the year of $77 million.

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

National Provident Fund (NPF) - Crown Liability for Scheme Deficiency#

The Crown is liable for the deficiency in the accounts of NPF schemes established pursuant to section 38A(6) of the National Provident Fund Act 1950, authorised by section 72 of the National Provident Fund Restructuring Act 1990. There was a call against this appropriation for 2009/10 of $0.028 million to 31 March 2010 and a provision of $3.7 million for the three months to 30 June 2010 (page 105). The scheme deficiency paid for the year to 31 March 2009 was $34 million. The reduction in the 2009/10 claim was a result ofimprovements in investment markets over 2009.

New Zealand House - London#

Operational costs associated with New Zealand House (including depreciation) are included in Other Expenses Incurred by the Crown – Crown Overseas Properties (page 105). Expenses and revenue are less than in 2008/09 and less than that forecasted at Supplementary Estimates. This reduction is primarily owing to the change in the exchange rate between the two years and reduced occupancy rates in 2009/10.

New Zealand Superannuation Fund#

The reduction in the contribution to the New Zealand Superannuation Fund in 2009/10 by $1,992 million was a result of the Government's decision to reduce the contribution to a one-off contribution of $250 million on 1 July 2009 (page 106).

New Zealand Debt Management Office (NZDMO)#

Interest from investments and other income

NZDMO's interest from investments decreased by $169 million primarily owing to lower interest rates and changes in investment activity levels (page 108).

NZDMO's other income decreased by $15 million primarily owing toreduced interest income on lending to Housing New Zealand Corporation as interest rates have fallen (page 108).

Other expenses

Other expenses - NZDMO largely comprises net interest on NZDMO derivatives (excluding fair value and foreign exchange gains/losses) where net revenue has increased $32 million owing to both interest rate changes and transactional activity (page 108).

Borrowing costs

Borrowing costs have increased by $198 million primarily owing to significantly increased volumes of New Zealand Government stock and treasury bills issued to third parties (page 105).

Other Current Revenue#

Other current revenue has decreased by $41 million in 2009/10. This primarily relates to a reduction in the estimated recovery of government guarantee payments (page 108).

Port Nicholson Block Settlement Trust Loan#

A loan was made to the Port Nicholson Block Settlement Trust for the purchase of properties at Shelly Bay, Wellington, in 2008/09. This loan was repaid to the Crown during 2009/10 and appears in the Schedule of Capital Receipts (page 109).

Public Trust Equity Injection#

Equity injections have been made to the Public Trust in both 2008/09 and 2009/10 to restore its capital adequacy to the guideline level. It is expected that this capital will be repaid to the Crown in future years (page 106).

Rail Issues#

In late 2008/09 it was agreed that the Ministry of Transport be the lead agency for rail policy advice. All rail-related appropriations were transferred to Vote Transport with effect from 1 July 2009.

Reserve Bank Surplus#

The Reserve Bank dividend (formerly known as “notional surplus income”) received by the Crown increased from $168 million in 2008/09 to $675 million in 2009/10 (page 108). This increase arises from a combination of factors including:

• higher net profits in 2008/09 largely owing to realised foreign exchange rate gains of $434 million
• a change in statutory arrangements for the calculation of dividend, which now allows for foreign exchange rate gains to be considered in the payment of the annual dividend (in accordance with the principles set out in the Reserve Bank of New Zealand’s Statement of Intent), and
• a voluntary dividend, a return of surplus capital, of $45 million was also received from the Reserve Bank during 2009.

Rugby New Zealand 2011 Limited#

The $4 million included for Rugby New Zealand 2011 Limited in the Statement of Expenditure and Appropriations schedule under Other Expenses Incurred by the Crown (page 105) in 2009/10 is the recognition of an increase in the Crown's 67% share of forecast loss compared to the 2005/06 estimate provided when the company was established.

Taitokerau Forests Limited#

Loans to Taitokerau Forest Limited of $2.4 million were advanced as per the Loan Agreement during 2009/10. An impairment of the loans of $2.362 million was undertaken as under the Loan Agreement, Taitokerau Forests Limited's liability to the Crown will never exceed the value of their assets (page 106).

Statement of Accounting Policies#

for the year ended 30 June 2010

Reporting Entity#

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

These non-departmental balances are consolidated into the Financial Statements of the Government for the year ended 30 June 2010. For a full understanding of the Crown's financial position, results of operations and cash flows for the year, refer to the Financial Statements of the Government.

Basis of Preparation#

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

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

The financial information reported in these schedules is consolidated into the Financial Statements of the Government, and therefore readers of these schedules should also refer to the Financial Statements of the Government for the year ended 30 June 2010.

Significant Accounting Policies#

Foreign exchange

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

Goods and services tax

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

Commitments

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

Change in Accounting Policies and Comparatives#

Fair value movements have been disclosed separately in the Schedule of Revenue in 2009/10 (page 108) to comply with NZ IFRS 7. In previous years, this movement has not been disclosed separately. The 2008/09 comparatives have been restated to separately disclose the movement in fair value for that financial year.

Subsequent Events#

Subsequent to 30 June 2010 receivers have been appointed to three of the companies that had been included within the provision for net costs to the Crown: Mutual Finance Limited on 14 July 2010, Allied Nationwide Finance on 20 August 2010 and South Canterbury Finance Limited on 31 August 2010. Appointment of receivers to the companies triggered the Crown guarantee under the deposit scheme.

The net cost to the Crown of the defaults of these three companies is expected to be approximately $745 million including the costs of discounting cash flows to present values. The Crown recognised the inherent risk of these entities and provided $728 million for the net cost of their failure within the 2009 annual accounts. The additional $17 million net cost to the Crown currently estimated had been fully provided for during the year, and is included within the total provision of $748 million. There is no material impact on the provision for the net costs to the Crown as a result of the receiverships.

Schedule of Expenses#

for the year ended 30 June 2010

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 105 and 106.

Statement of Expenditure and Appropriations#

for the year ended 30 June 2010

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

Statement of Unappropriated Expenditure#

for the year ended 30 June 2010

There was one item of unappropriated expenditure in Vote Finance in the year ended 30 June 2010.

Under the terms of the Protected Land Agreement, the Crown provides compensation to Landcorp Farming Limited for any accumulated capital costs and accumulated losses/(profits) at time of transfer or sale of any protected land.

An agreement in principle between the Crown and Te Hiku forum to settle a Treaty of Waitangi grievance was signed 16 January 2010. The agreement in principle includes Rangiputa Station which is a property held under the Protected Land Agreement. Although there has been no Deed of Settlement drafted to date, there are other mitigating factors that have rendered the transfer of this property probable and therefore required to be recognised under current New Zealand accounting standards. The Treasury's recognition test had been previously based around a Deed of Settlement position; however, the additional information available in this instance suggests the transfer is now probable.

The estimated current value of the accumulated capital costs and accumulated losses/(profits) is the $6.056 million unappropriated expenditure.

Schedule of Revenue#

for the year ended 30 June 2010

Schedule of Capital Receipts#

for the year ended 30 June 2010

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

Schedule of Assets#

as at 30 June 2010

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