Annual Report of the Treasury for the Year Ended 30 June 2011

Chief Executive's Introduction#

I took up my appointment as Secretary in June 2011 and am delighted, and honoured, to be given the privilege of leading the Treasury. I look forward to working with everyone in the Treasury to achieve our ambitious objective of higher living standards for New Zealanders.

We're at an important historic juncture as the centre of gravity of the world economy moves closer to New Zealand. The re-emergence of China and India as regional centres of economic strength, the growth in the Asia-Pacific region in general, the growing demand for our commodity exports and the arrival of technology that brings us closer to the rest of the world create a "perfect storm of opportunity" for the country's future.

The Treasury has a vital role to play in helping the country seize these opportunities and improve its living standards.

We live in interesting times. Earlier this year, the consensus among economists was that the international economy was recovering nicely. Share prices were rising and financial markets were anticipating that central banks would shortly return monetary policy settings to something approaching pre-global financial crisis normality.

However, within a matter of weeks, the US economy started to stumble and the focus of the financial markets again turned to the outlook for Euro-zone economies - serving to reinforce the Treasury's critical role in providing quality and timely advice to our Minister.

An Eventful Year#

The 2010/11 year was an eventful one. With our advice and assistance being increasingly sought across a range of activity, the Treasury took on additional roles, and May featured two events of particular note - our flagship Budget production, and the departure of Secretary John Whitehead.

Budget 2011 was noteworthy for its forecast for a return to surplus in 2014/15 - one year earlier than previously expected. This was achieved despite the impacts of the Canterbury earthquakes, the slower economic recovery and various other economic setbacks.

A fortnight later, we farewelled Secretary of eight years, John Whitehead, who has taken up the position of Executive Director to the World Bank in Washington. The role represents a strategic opportunity for New Zealand, and will help develop our country's networks and raise its profile for the wider benefit of our public service.

The year also featured two new initiatives: the establishment of the Treasury Board, and the inaugural Tri-Treasury Conference.

The New Treasury Board#

The first meeting of the Treasury Board was held in October 2010. The Board's focus on strategic issues affecting the organisation brings a governance lens to our business, particularly in holding us to account for our performance. The value of a governance board is in taking decisions on strategic issues, strategic direction and organisational management.

The Tri-Treasury Conference#

In February, we were honoured to host the first Tri-Treasury Conference, a gathering of the heads of the New Zealand, Australian and United Kingdom Treasuries. The opportunity to canvass a range of pressing economic and financial issues, and to hear their perspectives on some of the big challenges we are all facing, was invaluable.

Our Evolving Role#

The Treasury's core work is to improve the living standards of New Zealanders through its three outcomes: Improving New Zealand's Economic Performance; A High-performing State Sector that Supports New Zealand's International Competitiveness; and A Stable and Sustainable Macroeconomic Environment.

Our role is evolving, however, and over 2010/11, the Treasury took on additional responsibilities. Our Earthquake Coordination Team was established to help with Canterbury response efforts through the provision of information and advice to Ministers. Work continues on the receivership of South Canterbury Finance (SCF) and the support package for AMI Insurance (AMI), and the Crown Ownership Monitoring Unit (COMU) has been tasked with formulating advice on the Mixed Ownership Model.

A small Treasury team performed the establishment work necessary to set up the Productivity Commission, and Treasury staff supported the Welfare Working Group and Savings Working Group in delivering their final reports. The National Infrastructure Unit (NIU) completed the second National Infrastructure Plan, which was launched at a parliamentary reception.

Key Achievements for 2010/11#

The Earthquake Coordination Team

Treasury advice enabled Ministers to deal quickly with the financial consequences of the Canterbury earthquakes, to coordinate recovery actions and to set up a new authority, the Canterbury Earthquake Recovery Authority (CERA).

This specialist Treasury team has played a crucial role in coordinating the all-of-government response through advice to Ministers on matters such as the estimated macroeconomic and fiscal impacts, insurance and Earthquake Commission (EQC) payouts and various funding initiatives (such as earthquake support subsidies).

Current account and net IIP

Source:  Statistics New Zealand, the Treasury

Budget 2011#

Households' high levels of debt, New Zealand's high net external liabilities and a weak productivity record are symptoms of an economy that has been underperforming over a number of years. We need to turn these indicators around to reduce future risks to the economy's equilibrium and, therefore, to New Zealanders' living standards.

Decisions announced in Budget 2011are designed to facilitate a path toward stronger national productivity performance and faster economic growth, underpinned by a credible fiscal consolidation plan: eliminating the fiscal deficit and returning to surplus on a sustained basis through lowering operating and capital allowances, finding savings and a process of reprioritisation.

Financial Operations#

It has been an eventful year for the Financial Operations Group. The New Zealand Debt Management Office (NZDMO) took advantage of favourable interest rates by pre-funding significant amounts of future borrowing. This peaked with a weekly Government Bond tender of $950 million in January, completing several weeks' worth of the borrowing programme in one fell swoop.

The Government announced early in 2011 that the New Zealand Export Credit Office (NZECO), which has supported more than $1 billion of total exports since it was established, would remain part of the Treasury for the next three years.

And over the course of the financial year, six government-guaranteed institutions defaulted. By the end of June 2011, all eligible depositors - other than those who had yet to make claims or who could not be traced - had been paid. The guarantee schemes transitioned from coverage of more than $133 billion in 70 institutions to just seven institutions with about $2.500 billion worth of deposits.

The Office of the Auditor-General (OAG) has conducted a performance audit of the Treasury's administration and management of the Crown Retail Deposit Guarantee Scheme which had not been completed as I write this foreword.

The National Infrastructure Plan

The Treasury's NIU published its second National Infrastructure Plan in July following consultation with the National Infrastructure Advisory Board and a series of regional infrastructure workshops.

It is designed to reduce uncertainty for businesses by outlining the Government's intentions for infrastructure development over the next 20 years, provides a framework for infrastructure development and includes a series of actions, working towards the next release in 2014.

State Sector Reform

Together with the other Central Agencies (the Department of the Prime Minister and Cabinet [DPMC] and the State Services Commission [SSC]), we prepared advice for Ministers that led to the establishment of a significant programme of work, resulting in the Government's Better Public Services programme. This has the following aims:

• Clear priorities: Focusing on the things that matter most for New Zealanders.
• High-quality services: Ensuring that services are modern, responsive, business-like and provide good value for money.
• Reducing waste: Ensuring that government administration is efficient, streamlined and well organised.

Raising productivity in the State sector is crucial to any successful effort to raise nationwide performance and, therefore, the per capita incomes of New Zealanders over time.

Regulatory Reform

The Treasury provides policy advice on key regulatory sectors that matter for growth, and on how to improve the regulatory management system. We support Ministers to improve the flow of regulation through quality assurance on regulatory impact statements that relate to significant regulatory proposals, and by building agency capability to perform good regulatory impact analysis. We coordinate annual regulatory plans, which set out all anticipated proposals to introduce, amend, repeal or review regulation each year.

In relation to the stock of existing regulation, we provide guidance for agency scanning of the regulation they are responsible for to ensure that it is fit for purpose. We also develop and apply (and help regulatory agencies develop and apply) principles for testing whether regulatory regimes are good practice.

Looking to the Future

My vision for the Treasury is that we will be among the most respected and influential organisations in New Zealand. Our Ministers expect us to provide advice that will shape New Zealand's economic future, and they're looking to us to be more effective State sector leaders.

Ultimately, I'd like to see success defined by the strength of our values - open-minded, bold, challenging and collaborative, passionate and ambitious for our people and our performance - and by a change in the Treasury's impact, image and brand.

We will know that we have achieved this when businesses and agencies across the country respect us for the relevance of what we say, for being good partners, for being able to seize opportunities and solve problems, for being experts at what we do and for being good navigators for New Zealand.

Gabriel Makhlouf
Secretary to the Treasury

Canterbury Earthquake Response#

What the Treasury Does#

Nature and Scope of Functions#

Our Purpose

The Treasury is government's leading economic, financial and regulatory advisor. Our core job is to help the Government improve New Zealand's overall economic performance, and increase the living standards of New Zealanders, through the provision of high-quality advice and services. Our advice contributes to improved performance by making challenging issues more tractable to effective government decision-making. The Treasury supports effective delivery of services by the State sector through its policy advice, and delivers some services directly where it is best placed to do so.

The Scope of Our Work

The Treasury provides advice and services to Ministers, primarily the Minister of Finance, through Vote Finance.

We perform three roles through these portfolios:

• providing policy advice direct to Ministers to facilitate government decisions on changes and initiatives that support better economic performance and higher living standards
• raising the quality of advice and service delivery in the State sector, by leading improvements in State sector management and performance through a shared work programme involving the three Central Agencies - the Treasury, DPMC and SSC - and providing second-opinion advice on the economic and financial implications of other government agencies' proposals, and
• providing services directly, such as monitoring and managing the financial affairs of the Crown, including managing the Crown's debt through NZDMO, and supporting New Zealand's economic performance through the provision of services through NZECO, Crown Wholesale Guarantee Facility and the Retail Deposit Guarantee Scheme.

These outputs are funded through 20 specific departmental output appropriations.

Outcome Areas

This report sets out the progress we made in our three outcome areas: A Stable and Sustainable Macroeconomic Environment; Improved Economic Performance; and A High-performing State Sector that supports New Zealand's International Competitiveness. These outcomes reflect the areas where we have the greatest influence towards achieving the Government's goals.

Success 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 Vision Outcomes and Intermediate Outcomes

The Treasury's Outputs and the Impact on Our Intermediate Outcomes

Our Outcome Performance for 2010/11#

Overview#

Our vision is to be a world class Treasury working towards higher living standards for New Zealanders.

We take account of both current and future living standards to ensure resources are managed efficiently and sustainably. We also consider how key factors influencing living standards are distributed across the population, and how opportunities can be promoted for those who are most disadvantaged.

Over the past year we have reviewed the three key Treasury outcomes that support the Government's priorities whilst contributing to that vision. We have also reassessed the intermediate outcomes that complement the Treasury's primary outcomes, a process that has resulted in a change to how we have articulated the Treasury's intermediate outcomes.

Outcome performance is provided against the measures and indicators agreed in the 2011/12 Statement of Intent (SOI) as the Treasury improved the basis for reviewing performance during the development of the document. In comparison, the statement of service performance, starting on page 27, includes reporting against the measures agreed to in the 2010/11 Information Supporting the Estimates documents as well as some of those contained in the 2011/12 Information Supporting the Estimates documents. The outcomes are: Improved Economic Performance; a High-performing State Sector that Supports New Zealand's International Competitiveness; and A Stable and Sustainable Macroeconomic Environment. These are interconnected and mutually reinforcing. The New Zealand economy strengthened further in the 2010/11 financial year, building on the post-global financial crisis recovery that had commenced in June 2009.

For the Treasury, 2010/11 was a productive year in which we assisted the Government to roll out policies designed to both raise New Zealand's relative economic performance while assisting the necessarily gradual process to unwind large macroeconomic imbalances that have afflicted our economy for decades.

The global financial crisis of 2008/09, and developments in international markets since, have highlighted to New Zealanders that we need to reduce our vulnerability to any future changes in investor sentiment. In particular, households' high levels of debt and the country's high net external liabilities with the world represent a potential future risk to the economy's equilibrium, and therefore a degree of ongoing risk also to New Zealanders' future living standards.

The Treasury's view is that large macroeconomic imbalances will continue to present risks to the economy until they are materially unwound, and that the appropriate Crown response is to strengthen its own balance sheet and fiscal management framework, to adopt measures that further enhance our monetary, regulatory and fiscal frameworks and to progress evidence-based policies that will strengthen the national savings rate.

Decisions announced in Budget 2011, which built on measures adopted in Budget 2010, are designed to facilitate a path toward stronger national productivity performance and faster economic growth, underpinned by a credible fiscal consolidation plan.

Initial indicators of success are beginning to be evidenced through:

• an improvement in growth in tradable sector output compared to the growth in the non-tradable sector
• a forecasted reduction in core Crown expenses as a proportion of GDP, and
• a forecasted reduction in Crown net debt projections.

Budget decisions to better manage Crown spending will, over time, assist to free up resources for more productive uses, which will be a key ongoing mechanism to drive both a strengthening in our economic fundamentals and a reduction in our vulnerability as a society to any unforeseen future external shocks to our economy.

Outcome: Improved Economic Performance#

New Zealand's long-term poor economic performance has seen a relative decline in New Zealanders' living standards compared with high-income countries.

Relative levels of nominal GDP per capita, 1970 to 2009 (OECD Average=100)

Source:  OECD

New Zealand's poor performance is reflected in a lower level of labour productivity, which is associated with relatively low levels of both capital intensity and multi-factor productivity. Reversing the decline in New Zealand's relative standard of living requires policy changes that have the potential to lift productivity across the economy and support a substantial lift in export performance.

How We Have Contributed to This Outcome#

The Treasury has provided advice on key government policies that relate to growth. Highlights from the year include:

• providing advice on integration of the Youth Guarantee and Youth Pipeline, aimed at better identification of at-risk young people; better support and pathways into post-school education and training or career; improving the performance of the student loan scheme; and the provision of high-quality education and training programmes leading to meaningful qualifications
• promoting regulatory reform, providing advice on regulatory sectors that matter for growth and achieving a shift in the quality of the regulatory management system
• developing advice and providing input into the Savings Working Group, resulting in changes to savings and tax systems in 2011
• implementing, with IRD, major tax reforms that were announced in Budget 2010
• contributing to the development of economic frameworks that are used by agencies in the natural resource sector. We advised on New Zealand's climate change commitments, ensuring that the economic implications of options were understood as New Zealand negotiated its climate change strategy, including at the United Nations Climate Change Conference in Cancun, Mexico. We contributed to the secretariat of the Emissions Trading Schemes led by the Hon David Caygill
• contributing to work on how to achieve the greatest value for New Zealand from fresh water, through the development of inter-agency advice on water policy in the lead-up to and following the mid-2011 Report of the Land and Water Forum: A Fresh Start for Freshwater
• developing the second edition of the National Infrastructure Plan, aiming to give businesses confidence that the infrastructure environment will be responsive and support their business growth. The plan has been well received by stakeholders
• providing advice on critical international areas, including reviewing the Overseas Investment Act 2005 (resulting in immediate reduction in compliance and administration costs), concluding a Closer Economic Relations (CER) investment protocol with Australia and supporting ongoing negotiations on the Trans-Pacific Partnership Free Trade Agreement
• engaging in a range of significant international relationships, including new engagements with the US Treasury and Indian Ministry of Finance
• providing secretariat support to the Welfare Working Group on how to reduce long-term dependency for people of working age, and
• significant investment in understanding New Zealand's growth performance, culminating in a growth narrative that integrates both macro- and microeconomic perspectives and indicates key areas for policy change in order to shift New Zealand's growth performance towards a target of 4% per annum.

Outcome: A High-performing State Sector that Supports New Zealand's International Competitiveness#

The quality of expenditure, regulation and other interventions by State sector agencies has a significant impact, both good and bad, on the incomes, opportunities and general wellbeing of individuals. It impacts both directly and indirectly on New Zealand's economic performance, which is a critical dimension of New Zealanders' living standards, particularly through the way it affects individuals' and firms' productivity. Government interventions also have distributional implications; governments have an important role to play in protecting the most vulnerable in our society in ways that enhance overall economic performance.

The ultimate measure of a high-performing State sector is its success delivering on the economic, social and environmental objectives of the Government in a way that is effective, efficient and affordable.

How We Have Contributed to This Outcome#

The Treasury provided advice to Ministers on potential mechanisms to strengthen the budget process and to improve incentives for chief executives of agencies to improve medium-term planning. The Treasury focused in 2010/11 on medium-term strategies for the justice and defence sectors. The Treasury provided secretariat support to the Policy Expenditure Review.

We also released the inaugural benchmarking of back office agency activities, which provided the impetus for Ministers to confidently pursue faster fiscal consolidation in the 2011 Budget. This benchmarking exercise has increased the appetite and capability across agencies for better management information regarding services, including services to the public, and the appetite also for the development of consistent measures for common functions across agencies.

In December 2010, the inaugural Investment Statement of the Government of New Zealand was published and this was followed with a Supplement published in May 2011. These enhanced stakeholder knowledge and insight into the Crown's investment portfolio and enabled the Treasury to give clear advice on changes to the structure of the balance sheet and the ways in which the balance sheet is managed.

COMU has published the first in a series of Annual Portfolio Reports, describing the financial performance of the Crown's commercial entities. An important priority in the commercial area has been to initiate preparatory work on commercial transactions to advance mixed ownership of some SOEs.

We have implemented the CAM framework across government which has been adopted by capital-intensive agencies in the public sector. This framework encourages strong CAM practices which enhance performance and effectively manage risk from Crown infrastructural assets.

In order to minimise debt costs within an appropriate risk profile, we have continued to emphasise marketing to domestic and international investors, which, along with other cross-Treasury policy efforts, have achieved an optimal credit rating for the New Zealand Government. In total, NZDMO issued $19.500 billion worth of bonds with an annual cost of new borrowing in 2010/11 at 4.31%, lower than the long-run average cost of just over 6%.

Central Agencies' shared objective: State sector performance is improved

The Central Agencies (SSC, DPMC and the Treasury) have a shared objective: State sector performance is improved. This recognises that the Central Agencies are jointly responsible for leading performance improvements in the State sector, albeit with distinctive roles and perspectives. The three Central Agencies are committed to ensuring that better services are delivered to New Zealanders, that the State sector's performance is improving and that State sector expenditure is more disciplined.

The Central Agencies work individually and collaboratively across agencies, sectors and the public management system. The Central Agencies' contributions and outputs to deliver on the shared objective are outlined below.

Central Agencies' contributions and outputs to deliver on the shared objective

In 2010/11, among a range of other activities, the Central Agencies had three critical areas they collaborated on:

Performance Improvement Framework

PIF is a joint initiative. Central Agency staff pool their knowledge of reviewed agencies and the context in which they are operating to assist lead reviewers to undertake reviews. Central Agencies work together with agency staff to develop responses and to support and review the implementation of those responses. Finally, staff work together to analyse the growing body of knowledge of agency performance to identify and promote best practice and areas where a whole of system response may be required to lift performance.

Better public services

The Central Agencies share a commitment to build better results from the public services that New Zealanders rely on. DPMC, the Treasury and SSC are working together to provide Ministers with advice on the further potential for State sector reform with a view to redefining New Zealand public services for the 21st century. This work was overseen by a Ministerial Group for State sector reform established in January 2011. It was referred to in the Prime Minister's statement at the opening of Parliament and in the Deputy Prime Minister's speech to the Institute of Public Administration (IPANZ) in March. This work has continued under the governance of the Better Public Services Advisory Group which met for the first time on 25 May 2011. This work can also be referenced on the Better Public Services website: www.dpmc.govt.nz/better_public_services

Review of Expenditure on Policy Advice

The efficiency and effectiveness of government interventions depends considerably on the design of those interventions. The expenses, management and quality of policy advice therefore matters for improving State sector performance. The Government commissioned the Review of Expenditure on Policy Advice in August 2010 to provide advice on the cost and quality of policy advice, as well as the alignment between policy expenditure and the Government's priorities. The Review's final report was provided to the Government in December 2010. On 28 April 2011 the Government announced a suite of actions in response to the Review's recommendations. The Treasury, SSC and DPMC led the development of an implementation plan and are responsible for delivering on a number of the recommendations. Most will be completed in the 2011/12 year.

Demonstrating success#

Kiwis Count#

The Kiwis Count[1] survey was conducted in 2007 and 2009. Further assessments of service quality will be conducted in the 2011/14 period. In 2007, New Zealanders' overall quality score for public services was 68. In 2009, there was a small but significant improvement to 69. This improvement, in a fiscally challenging environment, is an achievement for the State Services. The results compare favourably with a similar Canadian research programme Citizens First. The results show a comparable increase in satisfaction in its first two years of operation and demonstrates that our target of a further improvement in service quality is both significant and challenging.

Overall service quality#

Overall service quality (comparison of New Zealand and Canada)

Source:  SSC

The methodology for Kiwis Count was reviewed in 2010/11 following the successful surveys in 2007 and 2009. Starting in 2011, the Kiwis Count biennial point-in-time survey will be upgraded to a continuous survey with fieldwork 50 weeks of the year and quarterly reporting on a six-month rolling average. This more flexible tool can be adapted to meet future needs and changing priorities. Results will be consistent with previous Kiwis Count surveys and Canadian benchmarks.

Public sector expenditure#

One of the Central Agencies' measures of success regarding improved State sector performance is for Crown spending to remain consistent with the Government's fiscal and economic growth strategies. The long-term objective is for core Crown expenses to ease to around 30% of GDP. Our intention is to support a return to surplus by controlling the growth in operating expenses so that core Crown expenses fall as a percentage of GDP to around 31% of GDP by June 2015 and current forecasts indicate that we are on track to meet this target.

Core Crown expenses (excluding losses) to nominal GDP

Source:  The Treasury

Core Crown expenses were 33.8% of GDP at June 2010 and forecast to be 35.2% at June 2011. While core Crown expenses increased over this time as a result of the Canterbury earthquakes, they are forecast to fall to 31.3% of GDP by June 2015.

This decrease reflects the cessation of "one-off" expenditure such as costs associated with the Canterbury earthquakes, provision for weathertight homes payments and the DGS, as well as a decrease in the amount of new spending forecast over this time. The current forecast of core Crown expenses as a proportion of GDP in 2015 is lower than the forecast contained in the Half Year Economic and FiscalUpdate (HYEFU). This is primarily as a result of the 2010/11 net savings package and a reduction in new spending in the next two budgets (source: Budget Economic and Fiscal Update 2011 [BEFU]).

Outcome: A Stable and Sustainable Macroeconomic Environment#

Net core Crown debt to nominal GDP

Source:  The Treasury

A stable and sustainable macroeconomic environment is required in order to deliver broad and enduring prosperity. High private sector debt levels, built up in tandem with a long-running low national saving rate and a period of extended asset prices, conspired to maintain vulnerabilities for the economy in 2010/11. Instability can be triggered by both domestic and external events, both economic and non-economic, but by maintaining relatively low Crown debt levels, the Government was able to adopt a measure of flexibility to manage shocks to the economy during the year under review. Minimising significant or abrupt adjustments in Crown fiscal policy supports efforts to deliver higher living standards over time.

How We Have Contributed to This Outcome#

The Treasury provided advice to the Government on ways to manage risks associated with New Zealand's high external debt position in what was at times an uncertain global environment, with a particular emphasis on options to achieve faster fiscal consolidation.

In Budget 2011, the Government agreed operating and capital allowances based on targeting spending to where there is most need and benefit, of making sure that the benefits outweigh the costs of interventions and ensuring that State interventions meet or exceed the performance in other developed countries.

During the year we also continued to effectively undertake economic and fiscal monitoring, reporting and forecasting, all critical to identifying emerging risks to macroeconomic stability and for identifying timely policy options where appropriate.

To help deepen our understanding, enhance the quality of public debate and to assist good policy formation, we published working papers on exchange rate variability, the impact of fiscal policy on the business cycle, modelling of fiscal risks, the drivers of New Zealand's relatively high interest rates and a paper on New Zealand's macroeconomic imbalances. Much of this work also formed the basis for a savings discussion document, which was produced to assist the Savings Working Group. We also co-hosted, along with RBNZ and Victoria University of Wellington, a forum on the causes and possible remedies for New Zealand's macroeconomic imbalances.

Enabling and Supporting a Higher-performing Treasury#

Maintaining our Organisational Health and Capability#

Achieving the Treasury's three outcomes requires an ongoing programme to develop the capability of our systems and staff, and a greater level of attention to measuring and assessing the impact we have on our outcomes. An effective Treasury also needs to have line of sight between these outcomes and the work that staff carry out.

Specifically, we have three objectives that reinforce each other:

• We strengthen our leadership role and improve our performance.
• We are an adaptable and productive workforce.
• We are a well-managed public sector organisation focused on continuous improvement.

Impact: We strengthen our leadership role and improve our performance #

Developing a shared understanding across the Treasury about how to lift our performance requires a clear vision from senior leadership. The focus in 2010/11 was on developing systems and structuresthat support strategic leadership and strong governance.

The two new Deputy Chief Executives (DCEs) arrived late in 2009/10 (one of the two DCEs was subsequently appointed as Chief Executive and Secretary to the Treasury). Over 2010/11 the Chief Executive and two DCEs focused on:

• developing a strong Executive Leadership Team (ELT)
• establishing the Treasury Board
• finding ways to work more closely with the third-tier managers as a joint senior leadership team
• refining the decision-making framework, and
• articulating their organisational ambition for the Treasury.

The ELT focused in the beginning of 2010/11 on forming a strong shared vision for the Treasury. They built on this later in the year by working more closely with third-tier managers, to ensure that work under way was well aligned with the vision. In September 2010, ELT established the Treasury Board. The Board is a governance advisory board that supports the Chief Executive to set the Treasury's strategic direction and strengthen its performance. The seven-member Board is chaired by the Chief Executiveand includes three non-executive members and three Treasury executives.

Beyond systemic changes, senior leaders looked at their own leadership styles to better understand the impact of their behaviour on others and how to lead in a way that lifts productivity. This involved implementing tools such as the Leadership Impact Surveys to assess, develop and encourage leadership qualities. These assessments will be repeated in thenext financial year, to determine what changes there have been to the nature of leadership in theTreasury.

Other key initiatives progressed during 2010/11 were:

• an increased focus on external engagement: this has been evidenced by an increased number of speaking engagements by the Chief Executive, Deputy Chief Executive and Deputy Secretaries
• a significant strategic planning exercise to obtain tighter alignment of the activities undertaken by the Treasury with the Government's desired outcomes, and translating that "line of sight" into staff work plans
• evaluation of theTreasury by external PIF reviewers. Key themes raised were that we need to:
  • be clear about what we want to achieve for New Zealand and how we will get there
  • be a "Team NZ" player by having more explicit and consistent two-way external engagement
  • measure our efficiency and effectiveness better
  • progress organisational culture change, and
  • use external expertise better, and
• establishment of a change programme to pace and prioritise the activities under way across theTreasury, to lift performance. The change programme incorporates themes from the PIF review and led ELT to articulate its future organisational ambition for the Treasury. This vision is for the Treasury to play four roles as an organisation - navigator, expert, problem-solver and exemplar. These are set out in more detail in our 2011-2016 SOI.

We measure our progress by:#

We measure staff ratings of leadership through the Gallup employee engagement survey. The rating in September 2010 on the Gallup statement: "I have confidence in the leadership of the Treasury to successfully manage emerging challenges" was 3.5 out of 5. This was re-measured in August 2011.[3]

Members of ELT have delivered over a dozen public addresses and many more presentations to interested groups around the country. Speeches have covered topics such as improving living standards for New Zealanders, addressing macroeconomic imbalances, raising per-capita growth, strengthening New Zealand's international connections and lifting public sector performance. Other senior Treasury leaders have also been involved in giving speeches and presentations around the country. To measure the effectiveness of these and our other engagements, in early 2011/12 we will undertake a survey of our stakeholders. This will give us a better understanding of the role we are currently seen to be playing and what might need to be improved. Results from the survey will be available early in the next financial year and we intend to repeat the survey to assess progress over time.

Impact: We are an Adaptable and Productive Workforce#

During 2010 we developed a Treasury People Strategy (published in August 2010). After analysing the business of the Treasury, we developed the principles to inform and guide our decisions around people management - who we hire; the way we utilise and deploy our people in more effective flexible ways; the support we give our people to develop and grow; and our expectations about leadership and accountability.

People Strategy pillars

People Strategy pillars

The People Strategy identified three top priorities for action in 2010/11:

• Excellence in leadership - development of a clear and measurable leadership framework that will drive the culture change necessary to achieve excellence.
• Workforce planning - understand our needs more precisely and develop a staffing profile that will drive other people-management levers.
• Demanding performance - review of performance management in the Treasury and implementation of changes to frameworks for both performance management and remuneration.

People Strategy roadmap

Implementing the People Strategy: key projects

The following work streams outlined in the strategy were initiated:

Remuneration strategy and framework

A robust remuneration strategy and framework has been rolled out which will enable the Treasury's leaders to evaluate performance and make decisions on remuneration that will attract and retain the diversity of skills we need and reward excellent performance.

Performance management framework

A revised performance management framework has been implemented that will enable change to both the performance management system and the behaviours, incentives and skills that shape the way the system is used. This will continue to be embedded in 2011/12 but has been used to evaluate performance of staff during 2010/11 and to influence the work plans and expectations of staff for 2011/12. A key area of emphasis relates to establishing a clearer line of sight between individual work plans and the outcomes we aim to achieve.

Workforce planning

The objective of our workforce planning is to ensure that the right numbers of people, with the right skills, are in place at the right time to enable the Treasury to deliver its short- to medium-term objectives at least cost and risk to the organisation. During 2010/11, the focus was on understanding the outputs we wanted from our senior people. We are targeting early 2011/12 to make decisions and determine the medium-term "shape" of the Treasury.

Talent management

A revised approach is being used to identify and develop future leadership talent. This helps the Treasury's leadership team ensure that emerging leaders are learning what they need to become excellent leaders.

We have measured our progress by:#

The Treasury aims to move its overall result from its employee engagement survey to above the 65th percentile. This is measured using the Gallup survey tool and benchmarked against the Gallup NZ State Sector database. In 2009, the Treasury was in the 62nd percentile. Employee engagement survey results were measured in August 2010 at a grand mean of 3.86, which is in the 63rd percentile.

Equal employment opportunities

The Treasury believes that diversity is essential to performing our roles effectively. Diversity is a core part of the way we do business rather than part of any particular initiative. As a result, the Treasury places strong emphasis on fostering a diverse workplace and inclusive culture and we are committed to the principle and practice of equality and diversity in our talent management and performance measurement.

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 continued to operate its Senior Women's network, to increase the ability to share ideas and support for initiatives such as mentoring. The Treasury also continued to deliver development programmes focused on Māori engagement, implications for policy advice and language.

Impact: We are an Exemplar of a Well-managed State Sector Organisation Focused on Continuous Improvement#

During 2010/11 we focused on clearly articulating the Treasury's finance strategy; planning for the integration of corporate services across the three Central Agencies; initiation of in-house cost-effectiveness measurement and participation in public sector benchmarking; and the rollout of a risk management framework across the Treasury.

We also improved a number of the internal processes and procedures to manage corporate functions. This improved the Treasury's Departmental Internal Control Evaluation (DICE) rating from 4.39 to 4.5. DICE assessments are performed by each government department's auditors as a way to provide reassurance about the operation of governance and financial activities across all Crown activities. The Treasury's auditors reviewed 27 aspects applicable to the Treasury, with 12 assessed as "excellent" (and five of those had improved from "good" to "excellent" since last year). All other areas were rated as "good".

Financial strategy#

A financial strategy was completed in 2010/11 and was used as the basis for completing the Four-year Budget Plan submitted to Ministers for approval. Work has progressed to address the fiscal challenges outlined in the financial strategy. This work aims to manage the Treasury's work programme within constrained resources. Understanding the shape of the Treasury and the staff profile we require is critical to the next iteration of the financial strategy.

Cost effectiveness#

The Treasury is committed to improving measurement of its performance, including the cost effectiveness of the services we deliver. The Treasury has taken a lead in developing guidance on measuring the cost effectiveness of policy advice and we are involved in a policy advice benchmarking pilot. In April, we commissioned an external review to assess the quality of the Treasury's policy briefings, so we had an independent diagnosis of the strengths and weaknesses of our policy advice. The Treasury was also part of the pilot group for the Better Administrative and Support Services (BASS) programme. The BASS programme found that the Treasury's administrative and support services were 17.3% of total operating costs, which compares relatively well to the median.

The Treasury increased its engagement with business leaders and academics who can share valuable insights on growth and the levers for growth. This engagement involved a series of meetings with business leaders and academics and presentations to a wide range of interest groups across New Zealand, those with insights across the economy (such as professional services firms) and innovative thinkers who can bring new perspectives to the Treasury.

Risk management#

The Treasury's ability to manage in an uncertain and changeable operating environment is enhanced by the quality of our risk management.[4]

A risk advisor was appointed during the year, with responsibility for further developing and maintaining an appropriate enterprise-wide risk management approach, including further refinement of risk assessment, monitoring and reporting. In addition, the Treasury has recently appointed Deloitte to support our audit work.

We have improved our enterprise risk management approach to ensure there is systematic and regular assessment and monitoring of key strategic and operational risks facing the Treasury. Our senior leaders regularly identify and assess the Treasury's biggest strategic and emerging risks, and ensure that we take appropriate actions to manage them. The Treasury has also introduced regular operational risk assessments. We manage risks relating to our various change initiatives and projects to ensure that we anticipate and deal with uncertainty as effectively as we can.

The Treasury's risk management practices use an approach modelled on the Joint Australian/New Zealand International Risk Management Standard. As well as the specific regular risk assessments described above, risk management at 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.

Our overall set of risks is overseen by a Risk and Audit Committee, which includes three experienced external members to provide independent perspectives.

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 2011.
• The supplementary schedules fairly reflect the assets, liabilities, contingencies and commitments managed by the Treasury on behalf of the Crown as at 30 June 2011 and revenues and expenses managed by the Treasury on behalf of the Crown for the year ended on that date.

Gabriel Makhlouf
Secretary to the Treasury

30 September 2011

Fergus Welsh
Chief Financial Officer
(countersigned)

30 September 2011

The Treasury's Output Expense Performance for 2010/11#

Statement of Objectives and Service Performance#

Section 45A of the Public Finance Act 1989

This section provides information about the services and activities (outputs) that the Treasury provided through 20 output appropriations during the 2010/11 year.

The table below provides an overview of the linkages between the impacts that we seek to have (outcomes) and the appropriations through which we are funded to deliver on those outcomes. The following pages provide information on the Treasury's work programme for the year and the standards that applied to key elements of that work. Performance information, where applicable, is also provided against the measures agreed to in the 2010/11 and 2011/12 Information Supporting the Estimates documents.

Vote Finance Output Expense Performance#

Macroeconomic Policy Advice and Management MCOA#

This includes work under the following appropriations:

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

The following table shows the overall cost of this MCOA in the 2010/11 fiscal year.

For the 2011/12 year, the outputs produced under these five appropriations have been integrated into a broader appropriation called Policy Advice - Finance. This new combined appropriation includes policy advice outputs relating to economic performance, State sector performance and macroeconomic performance.

Policy Advice - Fiscal and Macroeconomic#

Scope of Appropriation#

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

Significant Work Completed During 2010/11#

• The fiscal position has been in substantial deficit since 2008/09 in the wake of a domestic recession, the global financial crisis and prior year spending and tax decisions. The economy and fiscal position were further impacted by the Canterbury earthquakes. The Treasury provided advice on how to advance the return to surplus and prudent debt levels, while also providing the necessary resources for the rebuilding of Christchurch.
• Published the Budget Policy Statement (BPS) in December 2010 and the FSR in May 2011. These included an increased focus on Crown risk reporting and uncertainty.
• Provided advice and implemented changes to the Fiscal Management Approach for Budget 2011 that broadened the net of spending captured in the annual operating allowance.
• Provided advice on the Spending Cap (People's Veto) Bill, including fiscal and economic implications, along with a Regulatory Impact Statement for Cabinet consideration. The Spending Cap Bill was approved by Cabinet and introduced to Parliament in August 2011.
• The Treasury, along with RBNZ and Victoria University, organised a high-level policy forum on New Zealand's economic imbalances. The forum generated extensive media coverage and raised the quality of public debate. The Treasury delivered a paper on options for managing the fiscal position in extended upturns in order to avoid procyclicality.
• The Treasury provided advice to help clarify a balance sheet policy framework and support the development of a forward-looking balance sheet strategy. The purpose of this work was to facilitate understanding of the benefits of increasing the Crown's net worth.
• Published a Supplement to the inaugural Investment Statement alongside Budget 2011, allowing for greater scrutiny of the Crown's management of its assets and liabilities and updating the Government's medium-term investment intentions and balance sheet strategy.
• Quarterly report on CFIs was redesigned to improve the assessment information on CFI performance.
• Mixed ownership model decisions announced in Budget 2011 and phase 2 now proceeding with appointment of advisors underway; Financial Analysis Unit up and running and making early progress (eg, migration to CFISnet, dividend and comparable company analysis); SOE business planning completed; comprehensive advice on Electricity Industry Act 2010/EQC/KiwiRail.

For the 2011/12 year, the outputs produced under this appropriation have been integrated into a broader appropriation, Policy Advice - Finance. That combined appropriation includes policy advice outputs relating to economic performance, State sector performance and macroeconomic performance.

Economic and Tax Forecasting#

Scope of Appropriation#

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

Significant Work Completed During 2010/11#

• The 2010 HYEFU and 2011 BEFU economic and fiscal forecasts were produced within the required deadlines. This was achieved in spite of the challenges posed by the uncertainty caused by the Canterbury earthquakes which eroded the quality and availability of data used for forecasting.
• Economic and revenue assessments of the effects of the Canterbury earthquakes were provided to Ministers within a few days of each event occurring.
• Improvements were made to several forecasting models such as goods and services tax (GST), pay-as-you-earn (PAYE) and resident withholding tax (RWT) (interest).
• Resources were allocated to monitoring and analysing the economies of other countries including China and Australia, and international developments such as the European sovereign debt crisis.

Fiscal Management#

Scope of Appropriation#

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

Significant Work Completed During 2010/11#

• Supported Ministers with advice on changes to the budget process to help improve fiscal management and to make decisions about budget package for 2011.
• Provided advice on improving the fiscal management framework and assisted the Government to achieve its fiscal strategy.
• Undertook analysis of agencies' four-year budget plans and provided advice to budget Ministers on whether plans met expectations, possible actions and fiscal implications.

Fiscal Reporting#

Scope of Appropriation#

This output expense is limited to preparing fiscal forecasts, monitoring of and reporting on fiscal conditions, preparing the Financial Statements of the 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 2010/11#

• Provided advice on significant accounting issues across the Crown and provided fiscal input into other reporting products and advice (eg, the Investment Statement and rating agency reviews). For some months of the 2010/11 year this work programme was heavily impacted by the demands for information and advice following the Canterbury earthquakes.
• 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 development of a conceptual framework for the International Public Sector Accounting Standards Board and into the establishment of the New Zealand External Reporting Board.

Management of Crown Lending and Crown Bank Accounts#

Scope of Appropriation#

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

Significant Work Completed During 2010/11#

• Advanced $790.100 million distributed as follows: $394.200 million to DHBs; $185.100 million to Housing New Zealand; $110 million to the New Zealand Transport Agency (NZTA); $55 million to KiwiRail; $41.500 million to the Auckland Transition Agency; and $4.300 million to the Civil Aviation Authority.
• Managed risk on $180 million of interest-rate swaps transacted for Housing New Zealand.
• Established a short-term loan facility to provide the NZTA with flexibility to manage cash flow variations in the National Land Transport Fund. As at 30 June 2011, NZTA had borrowed a total of $110 million under this facility.
• During August 2010, NZDMO facilitated a range of transactions to manage various Crown cash flows arising from the SCF receivership.

Notes:

Average VaR - performance measure

The Minister of Finance has agreed to a limit for average monthly VaR across the whole of NZDMO's operations of $14 million. NZDMO's performance target for the tactical portfolios is set at 10% of the total limit, or $1.400 million.

Value-added from Crown lending

NZDMO derives the value-added figure from its management reporting, which is calculated on a different basis from external Crown financial statement reporting. Historic performance helps guide the establishment of future targets, which are set annually taking into account changes in the external environment.

Permanent Legislative Authority Funding for NZDMO#

NZDMO funding for Debt and Related Financial Asset Management is split across four appropriations: the Management of Crown Lending and Crown Bank Accounts (preceding page) and three PLAs. The PLAs are set out below:

Scope of Appropriations#

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

Significant Work Completed During 2010/11#

Borrowing programme#

• The bond programme announced at Budget 2010 was initially set at a maximum of $12.500 billion. Throughout 2010/11, favourable market conditions allowed NZDMO to increase its bond issuance to meet the Crown's new funding needs following the two major Canterbury earthquakes and to continue to part pre-fund future borrowing needs. The upper limit for the bond programme was revised upward four times to $20 billion.
• In total, NZDMO issued $19.500 billion worth of bonds and successfully completed the largest ever weekly bond tender in April 2011, which raised $1 billion. As at 30 June 2011, bonds outstanding in the market were valued at $51.100 billion.
• NZDMO introduced further measures aimed at increasing demand, diversifying funding sources and thus reducing the cost of the Crown's borrowing, including:
  • increasing the target tranche size from $8 billion to $10 billion for bonds maturing before December 2017 and to $12 billion for bonds maturing on or after December 2017
  • introducing two new bond maturities, March 2019 and April 2023, which will lengthen the average maturity profile and therefore reduce funding risk. In time, these maturities will become liquid benchmark bonds
  • launching a four-year Earthquake Kiwi Bond to help fund the recovery in Christchurch and provide retail investors with a new savings option. As at 30 June 2011, $1.480 million was outstanding
  • implementing new funding risk policy measures that: (1) require NZDMO to accumulate cash (and liquid assets) in advance of a maturing bond and; (2) restricting short-term debt with maturity of less than one year at issuance to less than 25% of total debt outstanding
  • resuming issuance of one-year US-dollar Euro Commercial Paper, and
  • undertaking work for the reintroduction of a new inflation-indexed bond, appointing a syndicate to lead distribution of the bond and monitoring market conditions on an ongoing basis.

Derivatives programme#

• NZDMO uses a relatively small set of vanilla derivatives to manage interest-rate and currency risk in the portfolios. During 2010/11, new derivative transactions entered into included currency swaps and interest-rate swaps as well as foreign-exchange (FX) options.
• Risk associated with the changing market value of derivative positions was successfully managed within NZDMO's average monthly VaR target for the tactical portfolios.
• In 2010, NZDMO received approval from the Minister of Finance to transact FX options for departments that have a special need for better management of foreign currency risk and have obtained separate ministerial approvals.
• There are significant benefits to the Crown by having NZDMO transact FX options on behalf of departments, as opposed to leaving each to deal with the market separately. The benefits include:
  • cost savings in the form of better option pricing given the volume of NZDMO's FX business
  • improved management of credit risk facilitated by NZDMO's existing credit support agreements, and
  • efficiency gains arising from NZDMO's IT infrastructure.
• Up until 30 June 2011, NZDMO had transacted 12 FX options in three currencies for the approved departments.
• NZDMO continued to maintain regular contact with the credit rating agencies during the year to assist them in their assessment of New Zealand's credit worthiness, including extensive discussions with Standard & Poor's (S&P) following its rating outlook change from "Stable" to "Negative" in November 2010. Following the Canterbury earthquake in February 2011, NZDMO acted quickly to provide relevant available information, resulting in affirmations of New Zealand's sovereign ratings by the three main international credit rating agencies.

Marketing efforts and interactions with international stakeholders#

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

Investment programme#

• As at 30 June 2011, NZDMO managed marketable securities valued at $3,286 million, deposits valued at $117 million and a cash balance of $14,360 million. These assets were used to fund Crown operations, to provide short-term liquidity if required and to help repay debt maturities as they fell due. Asset holdings increased during the year as NZDMO pre-funded future borrowing needs owing to uncertainty introduced by the two major Canterbury earthquakes and the financial position, and changes to funding risk policy.
• 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 2010/11 of less than $1 million.

Expenditure in the Administration of Crown Borrowing PLA was $300,000 (6%) under Supplementary Estimates owing to lower foreign legal fees owing to exchange rate movements. Expenditure in the Administration of Investment of Public Money PLA was $132,000 (16%) under Supplementary Estimates owing to lower registry and custodial charges owing to a lower demand for KiwiBonds than forecast and exchange rate movements.

Notes:

Aggregated performance targets for PLAs

• Performance targets for Administration of Crown Borrowing PLA, Administration of Derivative Transactions PLA and Administration of Public Money PLA have been aggregated. The performance targets were specified as a total for activity across these output classes because this provided a more meaningful measure of the outputs produced by NZDMO.

Compliance with risk management policies - performance measure

To improve transparency, the 2010/11 target explicitly identifies the number of breaches considered acceptable under existing NZDMO policy.

Value-added from management of the tactical portfolios meets target level

NZDMO derives the value-added figure from its management reporting, which is calculated on a different basis from external Crown financial statement reporting. The "tactical" portfolios are those where NZDMO is able to conduct discretionary transactions to manage risks: specifically, the liquidity, departmental and FX portfolios.

NZDMO values its portfolio(s) by the commonly-used methodology of calculating net present values from all future cash flows using zero-coupon discount curves which are generated at least daily from current market data. Generally, no counterparty credit spreads are applied to the curves.

NZDMO uses current spot FX rates to translate foreign-currency net present values to New Zealand dollars. The value-added measure is primarily used to compare current performance against historic performance. Historic performance helps guide the establishment of future targets, which are set annually taking into account changes in the external environment.

Average VaR - performance measure

The Minister of Finance has agreed to a limit of $14 million for average monthly VaR across the whole of NZDMO's operations. NZDMO's performance target for the tactical portfolios is set at 10% of the total limit, or $1.400 million.

State Sector and Economic Performance Policy Advice and Management MCOA#

This includes work under the following appropriations:

• Policy Advice Economic Performance
• Policy Advice State Sector Performance
• New Zealand Export Credit Office
• Management of Liabilities, Claims Against the Crown and Crown Properties

The following table shows the overall cost of this MCOA.

For the 2011/12 year, the outputs produced under this appropriation have been integrated into a broader appropriation, Policy Advice - Finance. That combined appropriation includes policy advice outputs relating to economic performance, State sector performance and macroeconomic performance.

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 2010/11#

• The Treasury developed a narrative intended to inform and integrate the Treasury's advice on stable and sustainable growth and has begun to quantify the potential impact of possible reforms on growth. This narrative provides the basis for consistent and coherent policy proposals to government and external engagement.

Taxation

• Legislation giving effect to Budget 2010 decisions were enacted - GST/taxation changes in place in October.
• The Treasury investigated, and provided advice on, taxation changes, including options to improve the efficiency and fairness of the tax system for consideration in Budget 2011. A programme for considering capital tax reform is under way.

Implementing the regulatory system

• The Treasury provided advice on, and support for, the introduction of the Regulatory Standards Bill and supported the enactment of the New Zealand Productivity Commission Act 2010, which established the Productivity Commission.
• By year-end the Treasury was focused on the delivery of advice on systems for managing the stock of regulations, including systems for scanning regulations and planning for improvements and assessing the regulatory stock against principles for best practice regulation.

Financial regulation and review of the Securities Act 1978

• The Treasury worked with Ministry of Economic Development (MED) and other agencies to provide guidance on the review of the Securities Act 1978 and proposed changes to financial sector regulation. Key changes agreed to include the establishment of the Financial Markets Authority and changes to disclosure and liability regimes aimed at building investor confidence in New Zealand's securities markets.

Improving advice on management of natural resources

• The Treasury contributed to the development of economic frameworks used by agencies in the natural resource sector. We advised on New Zealand's climate change commitments, ensuring that the economic implications of options were understood, and contributed to the secretariat of the Emissions Trading Schemes led by the Hon David Caygill. We also contributed to the development of interagency advice on water policy leading up to and following the Land and Water Forum's Report of the Land and Water Forum: A Fresh Start for Freshwater.
• We also provided advice on the natural resource aspects of individual Treaty of Waitangi settlements.

Supporting effective international engagement

• The Treasury worked with the Ministry of Foreign Affairs and Trade (MFAT) and MED to enhance New Zealand's international connections. In particular, the Treasury:
  • completed a review of the Overseas Investment Act 2005
  • completed negotiation of the CER Investment Protocol with Australia, supported ongoing work to progress a Single Economic Market with Australia and contributed to the development of the NZ Inc strategy for Australia
  • supported ongoing negotiations of the Trans-Pacific Partnership Free Trade Agreement, particularly in relation to the investment chapter, and
  • supported a range of ministerial international engagement, including with Asia-Pacific Economic Cooperation (APEC), the International Monetary Fund (IMF) and the World Bank.

Supporting the Welfare Working Group

• The Treasury assisted the Welfare Working Group to undertake a comprehensive review of the benefit system and to deliver its findings and recommendations to the Government in February 2011. Since the Government received the report, the Treasury has been working with the Ministry of Social Development (MSD) on a comprehensive programme of work in response to the Welfare Working Group's recommendations.

Develop policy options supporting savings and investment

• The Treasury authored the discussion document Savings in New Zealand: Issues and Options to help set the scene for the Savings Working Group. We also provided analytical and technical support to the Savings Working Group. The Treasury and IRD advised on, and implemented reforms to, KiwiSaver's subsidy structure in Budget 2011. In 2011/12 we will focus on building on our understanding of the drivers of savings behaviour in New Zealand and on considering some other recommendations of the Savings Working Group in the areas of capital taxation, KiwiSaver default providers and asset decumulation.

Supporting improvement in secondary education and youth transitions

• In 2010/11 the Treasury provided advice on the Youth Guarantee Scheme, led by the Ministry of Education (MOE), and the Youth Pipeline, led by MSD. The Youth Guarantee provides fully subsidised tuition and support to 16- and 17-year-olds who are not in education, to increase educational attainment and to improve transitions between school, tertiary and work. The Youth Pipeline is aimed at better identification of and intervention for at-risk young people. The focus of this work for 2010/11 and continuing next year is that proposals are cost-effective, evidence-based and likely to deliver high-quality educational outcomes.
• In June 2011 Cabinet noted the progress to date regarding the implementation of the Youth Guarantee, agreed to expand the Youth Guarantee scheme and agreed to the next stages of implementation. The Treasury has been working closely with MOE on a medium-term Schooling Strategy.

Supporting innovation and the public science system

• The Treasury assisted with implementing changes in the science sector, including the science agencies' merger into the new Ministry of Science and Innovation (MSI), the recommendations of the CRI Taskforce and initiatives to support business R&D/technology transfer. The Treasury has worked with other agencies to provide advice on key proposed science and innovation initiatives, including the review of R&D support for the high-value manufacturing and services sector. The Treasury's work aims to deliver more effective taxpayer support for business innovation and a more commercial focus of Crown R&D expenditure to deliver greater economic dividends for New Zealand.

Competition

• The Treasury has worked with other agencies to assess competition within the dairy sector.

Expenditure is $403,000 (3%) under Supplementary estimates as a number of projects designed to increase the Treasury's impact on economic performance were delayed. An amount of $400,000 will be transferred into 2011/12.

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 2010/11#

The Treasury has actively promoted better State sector performance through a series of system-wide initiatives, designed to improve performance information/signals, institutions and incentives and to lift agency capability in key areas (notably policy advice, project/programme management and benchmarking).

Improving performance information, signals, institutions and incentives

Better public services

• The Treasury has substantially contributed to joint Central Agency work on "better public services" - which is a core component of improving the performance of the State sector. This work has included advice on institutional settings including clustering activity and Crown entities, contestability and creating incentives for continuous improvement. This work forms the overarching story behind and context for many of the other outputs produced.

Performance improvement framework

• The Treasury has supported SSC in the implementation of PIF through funding, secondment of staff, direct input to review processes and analysis of systemic implications of review findings.

Review of performance management tools

• Between October 2010 and May 2011, the Treasury and SSC jointly reviewed the effectiveness of the current suite of performance management tools in the State sector. The evidence collected through this project, and the conclusions drawn, are being used to inform ongoing work on State sector reform.

Joint Treasury/OAG work programme on improving the quality of non-financial performance information

• In 2009/10 and 2010/11, the Treasury and OAG worked jointly to provide support to selected agencies during the preparation of their SOI and Information Supporting the Estimates. The purpose of this work programme is to help agencies improve the quality of their non-financial performance information, in advance of the revised audit standard for service performance information being applied. The final year of this work programme will be 2011/12.

Other initiatives to improve transparency

• The Treasury provided advice to the Minister on the capital charge regime for departments and Crown entities. The Treasury developed and implemented new capital charge rules, more consistent than those in place earlier, and conducted a consultation process with all statutory Crown entities regarding these rules. As a result, the Crown Entities (Capital Charge Rules) Regulations 2011 were made. These regulations provide a proper legal basis for the collection of capital charges from Crown entities.

Improving agency capability

Policy expenditure review

• The Treasury and SSC established and funded the Review of Expenditure on Policy Advice. The Government commissioned the Review of Expenditure on Policy Advice in August 2010 to provide advice on the cost and quality of policy advice, as well as the alignment between policy expenditure and the Government's priorities. The Review's final report was provided to the Government in December 2010.
• On 28 April 2011 the Government announced a suite of actions that respond to the Review's recommendations. The Treasury, SSC and DPMC developed a detailed implementation plan.
• Ten projects arising from the Review of Expenditure on Policy Advice are being implemented by Central Agencies and/or departments. The Treasury continues to implement two of the projects, which will be completed during 2011/12: (i) Definition of policy advice/reorganisation of appropriations and (ii) Policy benchmarking. The Treasury commenced work on a third project with SSC: Designing and trialling Heads of Profession. The Heads of Profession project will run through to December 2011.

Project and programme management

• The Treasury gained support for the adoption of an informal standard for project and programme management across the public sector.

State sector efficiency

• The Treasury primarily focused on the following issues to shift resources to where they are most effective and services delivered efficiently:
  • supporting top-down expenditure management mechanisms
  • improving the effectiveness of State interventions (particularly in welfare and housing)
  • driving greater value for money in big sectors (notably health, justice, defence and ACC), and
  • managing big cost pressures (such as remuneration, property and back office functions).
• These four considerations drive much of our routine Vote-related work.

Supporting better top-down expenditure management mechanisms

• We completed a Treasury Paper on the size of government in New Zealand, and in particular the relationship between size and economic growth. This work has helped inform the next phase of our Better Aligning Expenditure and Priorities work - supporting a direction focused on medium-term expenditure choices and trade-offs to support top-down expenditure management. Empirical work on fiscal incidence was a core component of this advice.

Improving the effectiveness of State interventions

Housing

• The Treasury provided a range of advice to support the Government's consideration of and response to the Housing Shareholders' Advisory Group report. This work contributes to the objectives of achieving more effective and efficient social housing services through better tenant management, better management of social housing assets and increased contestability in supply.
• This included advice to support Cabinet Strategy Committee (STR) consideration of a new direction for social housing (September/October), specific proposals for reforms (November) and budget implications (March).
• A particular focus for advice in the second half of the year was the establishment of the Social Housing Unit (April/May).
• The Treasury has also played a key role in supporting the development of advice from lead departments (Department of Building and Housing [DBH] and MSD) on reforms of financial assistance and the integration of housing needs assessment with assessment for other forms of social support. These two streams of work will report during 2011/12.
• The Treasury has played a role in supporting DBH and CERA's work on housing implications of the Canterbury earthquakes (such as the provision of temporary housing). In particular, the Treasury has provided second-opinion advice and assistance on the fiscal and economic consequences of proposals.

Promoting value for money in major sectors#

Health sector#

• Given the very significant public expenditure on health, its future cost pressures and the importance of health services to living standards, the Treasury's priority objective is to maximise health benefits while managing current and future health spending within the Government's fiscal strategy.
• We played a key role in ensuring that the Ministry of Health's (MOH) Four-year Budget Plan provided options to operate within the Vote Health budget allocation and securing a fiscally prudent capital allocation, and in pushing forward advice on key elements of the system that drive costs and performance.
• We provided advice and support to MOH on the restructure of its policy function, which took place in late 2010. There has been more limited policy change during 2010/11 compared with the changes to the structure of the health system made in 2009/10. As a result, we have focused on investigating longer-term options for supporting better system performance and lower expenditure growth. We expect the value of this work to be realised in joint work with MOH in 2011/12, including on primary care policy and evaluation of the new health system structures.
• The Treasury engaged with the sector directly in a number of ways, including presenting an economic and fiscal overview to DHB chairs, board members and chief executives. The purpose of this was to support them in understanding and managing the sector's response to the fiscal challenge, and in ensuring future health system cost-effectiveness and sustainability.
• Capital Assessment Guidelines were issued to DHBs to assist the development of capital projects - these are based on the whole-of-government Better Business Case guidance. However, requests for capital approval that are not supported by adequate information and analysis continue to be provided to Ministers. DHBs and MOH rarely consider alternative procurement methods and there is little evidence that regional solutions are being properly considered. We expect this to improve over time.
• Owing to resourcing pressures, some deliverables that the Treasury expected to close late in 2010/11 will be completed in 2011/12 - this includes advice on overall institutional settings for the public health system and future directions for primary healthcare.

Justice sector#

• We worked with justice sector agencies on a range of initiatives to enhance public safety, reduce crime, lower the number of offenders entering the criminal justice system and improve outcomes such as recidivism rates. We have paid particular attention to the sector's ability to deliver improved outcomes within the context of the Government's fiscal strategy.
• We provided advice on prison capacity planning and the justice sector asset base, which represent significant investments for government.

Supporting the Defence review#

• We supported the development of the Defence White Paper which sets the direction of Defence policy for the next 25 years. The Treasury also focused on the related Value for Money review of the New Zealand Defence Force, which sought to balance capability within the Government's fiscal strategy. On the basis of this work, Ministers agreed an ambitious savings target. The Treasury has since closely engaged with the New Zealand Defence Force to monitor the implementation of the savings plan and to ensure the savings are realised.

ACC#

• The policy reform agenda and resources have focused on introducing competition to the Work Accountand options to expand the Accredited Employer Programme. We have provided advice on other options for improving performance across the Scheme and how the turnaround can be sustained.
• ACC continues to improve performance ($3.600 billion surplus projected at 30 June; Non-Earners Account appropriations reduced by $638 million across the forecast period); significant reductions for earners (17%) and employers (22%) are expected in 2011/12.

Education#

• Advice on performance and productivity improvements proposed by the Early Childhood Education Taskforce and subsequent policy development. We stepped up our focus in the early childhood education (ECE) sector developments area in order to address emerging issues. The Treasury will be using the four-year budget planning process, ECE taskforce and Welfare Working Group processes to influence future direction and spending.
• The weathertightness of school property has also been a focus of advice, with MOE progressing work around its future funding needs and approach to weathertightness.

Managing big input cost pressures#

Advice on State sector remuneration issues#

The Treasury has advised Ministers on how to manage State sector wage demands in accordance with the Government Expectations for State Sector Wage Settlements. The Treasury works closely with SSC in the provision of this advice.

In the past year, all collective employment negotiations have met these expectations, so that:

• wage settlements for the State sector have been funded from within departmental baselines, and
• wage settlements generally are not in advance of private sector settlements.

The Treasury has also provided advice to Ministers on pressures anticipated for 2011/12 and beyond and a strategy for responding to these pressures, and advised on implications for changes in superannuation policy for the State as an employer.

• BASS programme: The Treasury completed the first annual benchmarking exercise for administrative and support services designed to increase transparency and scrutiny regarding the cost and quality of internal services. This work supported agencies in understanding leading practice, identifying opportunities for improvement and setting targets. This work also supported the establishment of a property centre of expertise in MSD to strengthen the quality of property management across government, and stakeholder support for the launch of cross-agency improvement programmes for HR and finance functions. BASS has also increased agency capability and appetite for better management information regarding service performance, including services to the public.
• Shared ICT initiatives: The Treasury has developed funding mechanisms for DIA's implementation of the IAAS (Infrastructure as a Service) shared ICT service to enable it to generate estimated savings of $50 million over the first five years. We also considered options for accelerating the pace of shared ICT initiatives that will generate significant savings across the State sector (funding sources for these are still being explored).

Other Treasury initiatives to manage costs#

Implementation of the findings from the review of the compliance costs for Crown entities.

Provided advice to the Minister on progress in reducing debt owed to the Crown.

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 2010/11#

• NZECO has exceeded its 2010/11 external engagement target, with a total of 435 one-on-one meetings, seminars and presentations.
• A total of 59 new policies were issued in 2010/11 - with total exposure of $161.870 million supporting exports of $261.250 million.
• NZECO approved an additional $62 million of exposures which are under offer. These transactions are expected to be completed in 2011/12.

NZECO was $1.191 million (37%) under Supplementary estimates. Several bids by NZECO clients for large overseas contracts were unsuccessful in the later part of the year and, as a result, NZECO year-end expenditure was under budget, particularly in costs for US surety bonds and legal costs.

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 2010/11#

Residual liabilities overseen by Financial Operations:

During 2010/11, Financial Operations commenced responsibility for ensuring the ongoing effective and efficient management of the Crown's residual obligations and contingent liabilities relating to:

• the obligation to complete the statutory vesting of the elecricity generation assets that were originally sold to the Electricty Corporation of New Zealand (ECNZ)
• the Crown Loan and Grants to Taitokerau Forests Ltd
• the remaining Crown-owned Geothermal Wells, and
• certain other obligations arising from statute, contract and historic Treaty of Waitangi settlements that the Crown is still responsible for.

During the period, the following significant pieces of work were undertaken or completed:

• Four land assets were vested in a former SOE to discharge an outstanding contractual obligation.
• Agreement was reached in respect of the Mount York repeater station site.
• Negotiations were advanced for legalisation of the remaining electricity generation assets to be transferred in the Taupo region.
• Ongoing contractual obligations to Taitokerau Forests Ltd were administered effectively and in accordance with stipulated agreements.
• The remaining Crown-owned Geothermal Wells were appropriately maintained.

Building Industry Authority

The Building Industry Authority (BIA) remains a joint defendant in claims before the courts and the Weathertight Homes Resolution Service relating to BIA's previous role as regulator of the building industry. BIA has been disestablished and absorbed into DBH. To prevent conflicts of interest, the Treasury was given responsibility for managing weathertight claims against BIA on behalf of the Crown from 1 July 2005. The number of such claims against BIA (and thus the Crown) has reduced over time owing to court decisions for the Crown.

In May 2010, the Crown announced its intention to assist homeowners to get their leaky homes repaired by contributing 25% of agreed repair costs (with affected local authorities also contributing the same amount). That project has been advanced by DBH. This package has implications for weathertightness claims.

New Zealand House

Continued to manage New Zealand House in London in a manner that maximises the ongoing return on the property while managing associated risks.

Expenditure is $206,000 (32%) under Supplementary estimates as a contingency was retained for funding for managing the potential liabilities of the former BIA and $191,000 will be transferred into 2011/12.

Infrastructure Advice and Coordination#

Scope of Appropriation#

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

Significant Work Completed During 2010/11#

National Infrastructure Plan

• The National Infrastructure Plan was completed and ready for publication during the financial year, and formally launched in early July. The Plan has been well received by Ministers and stakeholders. The Treasury will now focus on working with other government and non-government agencies to implement the Plan over the next three years.

Public Private Partnerships

• The Treasury continued to invest in the development of the PPP market as part of its core business in order to build a pipeline of viable projects, thereby giving assurance to both the public and private sectors of the Government's commitment to this new form of procurement where it provides value for money for taxpayers.
• In relation to potential PPP transactions, the Treasury:
  • advanced two projects into procurement phase - the Wiri Prison project and the Hobsonville Schools project
  • advanced two projects into strategic assessment/business case phase - the Whole of Government Radio Network project and the Defence Base Consolidation project, and
  • continued to assess sectoral opportunities for PPPs in relation to social housing, transport and health.
• The Treasury continued to work on the PPP Toolkit, which is intended to be a repository of guidance material available for use by the public sector in relation to PPPs. The draft PPP Standard Contract is the lynchpin of the PPP Toolkit. The development of the Toolkit, and the draft Contract in particular, is intended to streamline and improve the consistency of PPP procurement processes across the public sector, and provide the market with some transparency and comfort around the practice implemented and messages issued during the procurement process. This is critical to ensuring the integrity of the PPP market in New Zealand.

Capital asset management  (CAM)

• The Treasury continued its work on improving the effective management of the Crown's physical assets, in line with government policy. A notable feature was the rollout in July 2010 of a new set of Cabinet expectations for capital investment proposals supported by the Better Business Cases guidance for departments and Crown entities. The guidance is based on material used in the UK and in state of Victoria, Australia. A significant effort was put into raising awareness of these new expectations and in training officials from Central Agencies and capital-intensive agencies in the use of the guidance materials.
• During the year, the Treasury completed its third survey of capital intentions of 15 capital-intensive agencies. It reported to Ministers on the potential scale and affordability of agency capital investment requirements over the next 10 years, under current policy settings. This work resulted in the Cabinet Expenditure Control Committee inviting six agencies to report back on the drivers of their capital intentions and options for managing pressures within baselines.

Utilities code

• The Treasury administers the Utilities Access Act 2010, which came into force on 5 August 2010. The Treasury is working with an industry group to facilitate the development of a Utilities Access Code. Following extended industry consultation, the Code is expected to be submitted later in 2011 for Ministers' approval under the Act.

Ultra-fast broadband

• The Treasury worked with MED and Crown Fibre Holdings Ltd to implement the Government's Ultra-fast Broadband policy. By the end of May 2011, Crown Fibre Holdings had signed contracts with Telecom, Enable, Northpower and WEL Networks which together meet the Government's policy objective of giving 75% of New Zealanders access to ultra-fast broadband. This involved complex commercial and regulatory policy issues, and was achieved within the funding the Government has provided. As fibre is progressively deployed, the Treasury will continue to be involved to oversee the Government's commercial relationships and ensure successful completion.

Expenditure was $247,000 (5%) under Supplementary estimates owing to delays in completion of projects for CAM and the development of the PPP Toolkit. This under-expenditure will be transferred into 2011/12.

Crown Guarantee Schemes#

The Crown Guarantee Schemes work programme was spread across two appropriations in 2010/11, including on PLA. They were:

• Crown Guarantees Schemes, and
• Administration of Guarantees and Indemnities Given by the Crown PLA.

Scope of Appropriations#

In the order listed above are:

• Crown Guarantees Schemes - This appropriation is limited to the implementation and operation of the Crown's Deposit Guarantee Scheme (DGS) and Crown's Wholesale Funding Guarantee Facility (WFGF) excluding expenses incurred in connection with administering claims under a guarantee or indemnity given under the Scheme.
• Administration of Guarantees and Indemnities Given by the Crown PLA - This appropriation is limited to expenses incurred in connection with administering of guarantees and indemnities given by the Crown, as authorised by section 65ZG of the Public Finance Act 1989.

All work related to DGS in the 2010/11 year is captured under the Crown Guarantee Schemes appropriation following the combination of the previously separate appropriations for Crown Deposit Guarantee Scheme and Crown Wholesale Guarantee Facility from October 2009.

Significant Work Completed During 2010/11#

• An accelerated payment process was developed and implemented, to minimise the costs to the Crown when paying depositors of SCF.
• Entities in the Scheme continue to be actively monitored, with the monitoring process being brought in-house for the extended scheme.
• Monitoring processes have been put in place for the receiverships of entities whose investors have been paid out under the Scheme. Receivers have provided updated estimates of the expected recoveries under the Scheme.
• High-level monitoring of the bonds issued under WFGF continues.
• WFGF was closed in April 2010. The value of securities issued with the benefit of the Crown guarantee will reduce over time as these securities mature. The last guarantee certificate is due to expire in October 2014. Any remaining work related to these issuances in the 2010/11 year is captured under the Crown Guarantee Schemes appropriation following the combination of the appropriations for the retail and wholesale schemes from October 2009.

Administering payments

• Payout of investors of all entities that failed under the original guarantee scheme was completed in a timely manner.
• An accelerated payment process was developed and implemented for SCF to enable the costs to the Crown of failure to be minimised.
• In order to address matters of public interest in SCF, documents related to SCF's inclusion in the Scheme, monitoring while in the Scheme, its ultimate failure and the Crown's payout of its investors were proactively released to the public.
• Payout processes were updated and refined to reflect the changed nature of the guarantees in the extended scheme.
• As at 30 June 2011, 79% of guaranteed deposits in Equitable Mortgages Ltd (EML), the sole entity under the extended scheme to have failed, had been paid out. On average, payments were made within 25 days of receipt of a completed claim form.

The Crown Deposit Guarantee Schemes was under-spent by $1.416 million (52%) compared to Supplementary estimates. A contingency of $1 million was retained owing to the inherent uncertainties of the Scheme, the riskiness of the guaranteed entities and the market in which they operate, and the complexity of the guarantee itself. This will be transferred to 2011/12.

PLA expenditure was $3.457 million (53%) under-spent owing to slower payout than planned, increased efficiency of payment by outsourced partner and completing legal analysis within the Treasury. An amount of $1 million will be transferred to 2011/12.

Establishment and Monitoring of Crown Investment in AMI#

Scope of Appropriation#

This output expense is limited to the negotiation and establishment of the Crown's investment in AMI and the ongoing monitoring of that investment.

Significant Work Completed During 2010/11#

Following the 22 February 2011 Canterbury earthquake, AMI approached the Crown seeking financial support as a result of concerns that AMI's capital reserves and reinsurance would not be sufficient to meet potential claims. On 7 April 2011, the Crown entered into a five-year arrangement to subscribe for $500 million in called but unpaid convertible preference shares in AMI.

• Negotiation and implementation of the financial support package for AMI.
• Appointment of a director to AMI's Board.
• Establishment and ongoing monitoring of claims processing.
• Management of the Crown's interest in AMI through attendance at executive management meetings, Board meetings and regular engagement with the company and its advisors.

In April, Cabinet approved funding of $1.650 million for the Treasury's costs associated with AMI. This was under-spent owing to the time lag in recruiting staff, some costs being borne directly by AMI and cheaper inspection costs. The support agreement with AMI allowed for the majority of establishment costs incurred by the Treasury to be recharged to AMI, the recovery of which has been recognised as revenue.

Establishment of the New Zealand Productivity Commission#

Scope of Appropriation#

This appropriation is limited to the establishment costs of the New Zealand Productivity Commission.

Significant Work Completed During 2010/11#

The New Zealand Productivity Commission Act received Royal assent on 20 December 2010 following a policy and Select Committee process spanning much of 2010. The Treasury procured office premises and put in place an agreement for the provision of back office services with IRD to allow the Commission to be operational on 1 April 2011.

Establishment of the New Zealand Productivity Commission was $177,000 (27%) under Supplementary estimates owing to minor delays in recruiting Commission staff prior to the New Zealand Productivity Commission establishment date of 1 April 2011.

Vote State-Owned Enterprises#

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 Ministers' shareholding responsibilities or as responsible Ministers for the New Zealand Lotteries Commission and Public Trust.

Significant Work Completed During 2010/11

Performance monitoring of SOEs

• Embarked on changes to COMU's monitoring approach, especially for the commercial portfolio, in order to increase the level of shareholder engagement with boards about things such as their strategies, financial forecasts including their capital expenditure plans, and dividend policies.
• Continued to increase the level of transparency and accountability by re-launching the COMU website and by reviewing the Continuous Disclosure Regime. In 2011/12 the Continuous Disclosure Regime is being extended to cover all SOEs and Television New Zealand Ltd (TVNZ).
• Commissioned commercial valuations of six major SOEs (Genesis, Meridian, Mighty River Power, New Zealand Post, Solid Energy and Transpower) and provided comprehensive advice on a range of issues. These included coordinating a process to facilitate the transfer of the Tekapo A & B power stations from Meridian to Genesis under the Electricity Industry Act 2010, ongoing advice about KiwiRail and advice about establishing an Uncalled Capital Facility in respect of New Zealand Post/Kiwibank.
• Published the inaugural Annual Portfolio Report describing the financial performance of government-owned enterprises that have full or partial commercial objectives.
• Created the Financial Analysis Unit as a centre of financial expertise within COMU.

Improving public sector monitoring

• Embarked on changes to COMU's monitoring approach, especially for the commercial portfolio, and looking at the development of better guidance and tools to support monitoring across the public sector and especially for the commercial portfolio.
• Commenced activity to advance COMU's role as a Centre of Expertise in ownership monitoring and governance. This has included the codification of all COMU's monitoring and board appointment activities, which are now in the process of being listed on our website. Trial programmes to assist other monitoring agencies have been put in place. In the 2011/12 year we will build on this establishment work to implement a structured approach within COMU to ensure our outputs and activities reflect best practice, and that our assistance to other agencies is delivered in a meaningful and structured manner.

Mixed Ownership Model

• The Treasury provided advice, and undertook background work, on ownership of commercial entities. This culminated in the announcement in the 2011 Budget of the Government's intention to proceed, following the General Election, with extending mixed ownership to Genesis, Meridian, Mighty River Power and Solid Energy, as well as reducing the Crown's majority stake in Air New Zealand.
• Following the Budget announcement, the Treasury has started preliminary preparations so that, should the new government decide to proceed following the General Election, a programme will be able to be commenced promptly. This would be a significant new activity for the Treasury, spanning several years.

Expenditure was $517,000 (12%) under Supplementary estimates owing to company scoping work that could not be completed in 2010/11. This under-expenditure will be transferred into 2011/12.

Vote Crown Research Institutes#

Crown Company Monitoring Advice to the Minister of Science and Innovation and Other Responsible Ministers#

Scope of Appropriation

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

Significant Work Completed During 2010/11

Performance monitoring of CRIs

• Built on work and analysis developed in 2010, the Treasury developed a more detailed and comprehensive set of performance information on the entities that are monitored in the 2011 Annual Portfolio Report, specifically financial performance measures relating to CRIs.

Ministry of Science and Innovation (MSI)

• The Taskforce Review of CRIs saw the development of Statements of Core Purpose for each CRI and a new focus to the Statements of Corporate Intent. COMU worked with MSI on the development of the new accountability documents and managed the transition of primary monitoring responsibilities from COMU to MSI.

The Quality of the Treasury's Policy Advice#

Scope#

The Treasury applies a consistent quality standard to policy advice provided through all appropriations. The policy standard is published in full on page 64 of this Annual Report.

Review of the Quality of the Treasury's Policy Advice 2011#

In 2009 we commissioned an external review of a sample of the Treasury's advice and in 2011 we conducted a similar but more focused review using Howard Fancy, a director of economic and policy research firm Motu, as an independent external reviewer. The intent of the 2011 review was to:

• assess the quality of a sample of reports against the published quality standards
• provide advice about how the quality of the advice reviewed could have been improved, and
• comment on any changes in quality in 2011, compared with a review conducted in 2009.

The review looked at a sample of the Treasury's work over the year (six work streams).

In addition to assessing the work against our published Quality Standards, the review looked for opportunities for improvement.

The review found that a consistent standard of work is being achieved and maintained by the Treasury. All six work streams were assessed as performing between satisfactory and very good. Variability between individual reports and between work streams was generally low. The review found that Ministers could be confident that the Treasury achieves and maintains satisfactory levels of quality.

To the extent that comparisons can be made with the 2009 results, the 2011 review found that the Treasury:

• has a good breadth of institutional knowledge across both subject matter and the processes of government
• uses a robust approach to identifying and contextualising issues and problems in order to provide a clear basis for analysis
• has a strong and appropriate focus on fiscal implications
• provides advice that is solution and customer focused
• has a clear customer focus on the Minister of Finance
• is generally clear and concise in its communication, and
• has a strong capability to be reactive.

In order to improve the overall effectiveness and quality of the Treasury's policy advice, the review recommended that the Treasury:

• have a stronger focus on outcomes, including a more explicit focus on assuring value for money and on the likely effectiveness of policies
• ensure that work is framed by a broad view that looks beyond the immediate policy intent to also consider wider context and how policy can be most effectively delivered
• broaden its focus beyond risks to also consider potential opportunities and how these opportunities might be realised
• shift from a focus on issues to looking at broader system approaches that seek to change underlying thinking, capabilities and practices, and
• improve the presentation and usability of material provided to Ministers.

The Treasury is considering the findings and recommendations in order to develop a programme of improvements that aligns with other performance improvement work already under way.

Quality Standards for Policy Advice#

Ministerial Servicing Performance 2010/11#

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, the Minister for Infrastructure, the Minister of Science and Innovation and the Minister for State-Owned Enterprises.

There are two categories of OIA requests: OIA requests made to Ministers (MOIAs) and OIA requests made to the Treasury (TOIAs). The number of PQs listed below relates to written PQs only.

Estimated and actual volumes for MC, PQ and OIA requests referred to the Treasury by the Minister's Office for 2010/11 are presented below:

Ministerial Servicing will not exceed budgeted costs.

Financial Statements - Departmental#

for the year ended 30 June 2011

Overview of Departmental Financial Results#

for the year ended 30 June 2011

The following significant movements in actual results between the 2010/11 and 2009/10 years, and actual results against the 2010/11 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 2010/11 and 2009/10

• Operating expenses increased by $1.600 million mainly owing to costs of processing increased level of payments to investors as part of the Deposit Guarantee Scheme (DGS).
• Consultants expenses decreased by $900,000 mainly owing to a reduction in activity as part of the DGS offset by increases in projects for BASS, infrastructure and mixed ownership model.
• Debtor - Crown has decreased by $2.048 million as the prior year expenditure was significantly higher in June for the DGS and BASS project.
• Taxpayers' Funds has decreased by $600,000 owing to the repayment of capital provided for the Treasury accommodation project between 2003 and 2005.

Significant Variances Between 2010/11 Actuals and Supplementary Estimates Budget

• Revenue - Crown for departmental outputs was lower by $10.050 million, mainly owing to less demand for the DGS facility and NZECO and lower costs for establishment of monitoring of AMI.
• Consultants expenses are $4.600 million below budget owing to lower costs incurred for DGS, NZECO and monitoring of AMI.
• Debtor - Crown has decreased by $2.100 million mainly owing to lower expenditure in June than forecast for DGS, NZECO and establishment of AMI.

Statement of Comprehensive Income#

for the year ended 30 June 2011

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 2011. Total expenses equals total departmental output classes expenditure and appropriations in the Statement of Departmental Expenses and Capital Expenditure Against Appropriations on page 74.

Explanations of significant variances against budget are detailed in the Overview of Departmental Financial Results on page 67.

Statement of Changes in Taxpayers' Funds#

for the year ended 30 June 2011

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.

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

Statement of Financial Position#

as at 30 June 2011

The Statement of Financial Position reports the total assets and liabilities of the Treasury, as at 30 June 2011. Taxpayers' funds are represented by the difference between the assets and liabilities.

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

Statement of Cash Flows#

for the year ended 30 June 2011

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.

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

Statement of Commitments#

as at 30 June 2011

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.

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

Statement of Contingent Liabilities and Contingent Assets#

as at 30 June 2011

Unquantifiable Contingent Liabilities#

The Treasury has the following unquantifiable contingent liabilities:

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

As at 30 June 2011, the Treasury had no quantifiable departmental contingent assets and liabilities (30 June 2010: nil).

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

Departmental Capital Expenditure#

for the year ended 30 June 2011

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

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

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 2010/11 (2009/10: nil).

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

Notes to the Financial Statements#

for the year ended 30 June 2011

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 2011. The financial statements were authorised for issue by the Secretary to the Treasury on 30 September 2011.

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 except for certain financial instruments.

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:

• 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 Department 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 results in additional disclosures if there are any related party transactions with Ministers of the Crown.
  3. Clarifies that related party transactions include commitments with related parties.

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

• 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.
• IFRS 13 replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. It explains how to measure fair value when it is required or permitted by other IFRSs. It does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards.

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 2011. 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.

Notes to the Financial Statements (continued)#

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 FX 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 FX derivative is classified as current if the contract is due for settlement within 12 months of balance date. Otherwise, FX 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.

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.

Notes to the Financial Statements (continued)#

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 2.84% 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 (GSF) 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 2010/11 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.
• 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 based on the direct staff hours.

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#

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 2011 was 7.5% (30 June 2010: 7.5%).

7 - Property, Plant and Equipment#

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

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 70.

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.

Notes to the Financial Statements (continued)#

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 2011 year includes the ELT (Chief Executive and two DCEs) and the Treasury Board fees that were introduced in November 2010.

The 2010 year includes compensation for Chief Executive and six direct reports (being four Deputy Secretaries, Acting Executive Director of NIU and Director Crown Company Monitoring Advisory Unit [CCMAU]) until 23 November 2009, when the leadership structure was changed.

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

14 - Events Subsequent to Balance Date#

There were no events subsequent to balance date that required adjustment to the financial statements or disclosure (2010: 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 Departmental Overview.

Supplementary Financial Schedules - Non-departmental#

for the year ended 30 June 2011

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 106 to 117.

The Department administered $5,017 million of expenses, $4,081 million of revenue, $176 million of capital receipts, $942 million of capital expenditure, $31,605 million of assets and $90,504 million of liabilities on behalf of the Crown for the year ended 30 June 2011.

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 2011.

Overview#

This overview provides details of significant expenditure and revenue variances between actual results in 2009/10 and 2010/11 and between 2010/11 actual results and 2010/11 Supplementary Estimates.

Asian Development Bank - Increase in Capital#

The 5th General Capital Increase was paid to the Asian Development Bank in 2010/11 (page 98). The payment was $65.125 million compared to the forecast of $71 million owing to changes in exchange rates and a discount offered.

AMI Insurance Limited (AMI)#

On 7 April 2011 the Government provided a financial support package for AMI to give policyholders certainty and to ensure an orderly rebuild of Christchurch after the earthquakes.

The Government has entered into a five-year arrangement to subscribe for $500 million in convertible called, but unpaid preference shares in AMI. On the fifth anniversary of the agreement date (7 April 2016) the Government committed to make the payment of $500 million if the amount is not paid earlier or if AMI has not terminated the arrangement by that date.

Payment of up to $500 million for the convertible preference shares may happen at any time prior to the fifth anniversary, either on request from the company or at the option of the Crown. The Crown can require paid-up preference shares to be converted to ordinary shares if a "trigger event" occurs, or if the Crown decides that it is necessary or expedient in the public interest to convert the shares. The Crown obtains the power to determine the board of directors either if a "trigger event" occurs, or if a payment is made on the convertible preference shares. "Trigger events" include non-compliance with the Crown support arrangement, an insolvency event and a material adverse event.

For the purposes of financial reporting, AMI has been consolidated into the Financial Statements of the Government on the basis that the Government has the capacity to direct the operating and governing policies of AMI (through its option to make a partial payment and take control of the Board) and is directly impacted by the risks, or benefits from, AMI's operations.

The fair value of AMI on acquisition was $159 million. This estimate makes use of a valuation of the AMI business performed by Deutsche Bank Limited and completed in August 2011, and also takes into account the costs associated with the Canterbury earthquakes.

As the Crown's support package of $500 million is not expected to be paid immediately, a discount is made to adjust for the time value of money.

A commitment fee of $15 million was paid to the Crown by AMI for this facility.

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 DGS and the WGF. 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

The Government operates an opt-in Retail Deposit Guarantee Scheme for financial institution deposits. On 12 October 2010 the original retail deposit guarantee scheme expired. The Extended Retail Deposit Guarantee Scheme commenced on 12 October 2010, immediately upon expiry of the previous scheme and will expire on 31 December 2011. The extended scheme has tightened eligibility criteria and additional limitations on coverage of the Scheme. The Crown guarantee is limited to those entities participating in the extended scheme and excludes deposits accepted by participating entities without the benefit of the guarantee.

As at 30 June 2011, four financial institutions were actively participating in the extended scheme with deposits totalling $1.500 billion covered by the guarantee. This is the maximum exposure and does not include any offset resulting from the recovery of the remaining assets of these financial institutions in the event the guarantee is called upon. The Crown assesses the risk of default by the entities participating in the extended scheme to be unlikely and, therefore, as at 30 June 2011 no provision is considered necessary in relation to the amount guaranteed by the Crown under the extended guarantee.

As at 30 June 2011, nine entities guaranteed under DGS had been placed into receivership; eight of these entities were guaranteed under the original DGS and one under the extended guarantee scheme. The Crown has met its obligations to depositors under the original scheme, the residual obligations under the extended scheme are recognised as liabilities and its rights of recovery from the receivers are recognised as assets (see note on receivables).

New appropriations

To reduce the fiscal costs under DGS, two new appropriations were approved during 2010/11 in relation to the default of SCF. A secured loan of $175 million was made to the receivers to remove prior charge holders (see page 98). This has been repaid in full and appears in the Schedule of Capital Receipts (see page 101). Interest was also received and is included under Interest from Investments (see page 100). The second new appropriation of $150 million was required to facilitate a full payout to SCF, in order to reduce interest payable (see page 97).

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

Analysis of recoveries from receiverships

Crown Wholesale Guarantee Facility#

In addition to DGS, the Government operated an opt-in WFGF from November 2008 to April 2010. As at 30 June 2011, 24 guarantee certificates remain in place, and the value of wholesale securities guaranteed was $9 billion. No provision is made for losses under this scheme as the probability of loss is considered remote.

Dividends#

Total SOE dividends received this year have increased by $82 million from 2009/10 (page 100). Particular items to note are that Meridian paid a large special dividend as a result of the sale of Tekapo A and B to Genesis as required by the Electricity Industry Act 2010 reforms, and that Mighty River Power's dividend declined compared to the large special dividend it paid in the previous year.

Dividends from Crown entities (TVNZ) increased by $3 million (page 100) in 2010/11, owing to increased profits for the 2009/10 financial year.

Other dividends received from the Crown's share in Airports is $300,000 (page 100) less than those received in 2010/11 primarily owing to the change in the economic climate.

Overview (continued)#

Earthquake Commission#

The Government approved two new appropriations during 2010/11 as a result of the Canterbury earthquake in September 2010 (page 97).

Land remediation

Approval was given for $141.100 million for remediation to residential land affected by the September 2010 earthquake over and above the standard required by EQC. EQC negotiated Memoranda of Understanding (MOUs) with both Waimakariri District Council (WDC) and Christchurch City Council. Both MOUs were close to being signed before the 22 February 2011 event. However, as Christchurch sustained substantial land damage in the 22 February 2011 event, it was determined that Christchurch land remediation should be de-coupled from this process to allow further time to understand the impacts on Christchurch. The MOU signed by WDC is estimated to cost $37.200 million and this has been accrued. A further $4.200 million was also expensed under this appropriation for the Spencerville pilot project.

Land insurance payments

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

New Zealand Export Credit Office#

The purpose of NZECO is to assist New Zealand companies to increase exports by providing government-guaranteed export credit insurance products to New Zealand exporters. NZECO is particularly focused on providing guarantees in the sectors and countries for which the private sector does not currently provide cover.

Revenue has increased by 44% in 2010/11 as a result of new export dealsguaranteed during the year, which have resulted in an associated increase in contingent liabilities as noted on page 104.

Goodwill#

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

Overview (continued)#

Government Superannuation Fund Unfunded Liabilities#

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

The GSF obligation has been calculated by the Government Actuary as at 30 June 2011. 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 2011 was $10,152 million (page 102), an increase of $215 million compared with 30 June 2010.

This is primarily owing to:

• an actuarial loss recognised in the year (page 96) of $574 million owing to movements in the economic assumptions used in calculating the liability. 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 97) of $636 million, and
  • contributions made by the Crown against the liability (including taxation) during 2010/11 of $993 million.

The Government expects to make a contribution of $679 million to GSF in the year ended 30 June 2012.

In addition to its obligations to past and present employees, because GSF is liable to income tax under section HJ 1 of the Income Tax Act 2004, the Crown will be required to make additional contributions equivalent to the tax on future investment income. Additional detailed note disclosures required under New Zealand Generally Accepted Accounting Practice (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 (page 97). The Crown's share for 2010/11 was $26 million, $4 million higher than that in 2009/10 and $1 million higher than forecast. The investment manager expenses are dependent upon the portfolio valuations. For some active investment managers, their performance, and accordingly their fees, exceeded the forecast. The fund portfolio grew during the year much more than originally forecasted.

Government Superannuation Fund - Employers' Contribution#

The employers' contribution to GSF has increased from $36 million in 2009/10 to $54 million in 2010/11 as a result of the Government's decision to increase the employer contribution rates in certain GSF schemes from 1 July 2010 (page 100).

GST Compensation for GSF and National Provident Fund (NPF) Recipients#

This appropriation was approved and applied to compensation for recipients of GSF and NPF owing to an increase in the GST rate in October 2010 (page 97).

Hawkes Bay Airport#

Hawkes Bay Airport Ltd was corporatised on 1 July 2009. The transaction was fiscally neutral with $7.400 million appearing in the Schedule of Capital Receipts (page 101) and in the Schedule of Expenditure and Appropriations - Capital Expenditure (page 98). The Crown has a shareholding of 50% in Hawkes Bay Airport.

International Financial Institutions (IFI)#

Contributions of $183 million were made to the IMF lending programme in 2010/11 (page 98) against a forecast of $148 million. Payments have been made to several countries during 2010/11 reflecting the response by IMF to the current international financial crisis. No contributions were made in the 2009/10 year.

Landcorp Protected Land Agreement#

The capital expenditure in relation to the Landcorp Protected Land Agreement for 2010/11 was $17 million (page 98) against a Supplementary Estimate budget of $27 million. The final payment of $17.347 million for the Crown's purchase of redeemable preference shares for land transferred under the Protected Land Agreement was made this year. The Supplementary Estimates budget included a provision of $9.700 million for the accumulated capital costs and losses which will be owing to Landcorp when the land held under the Protected Land Agreement is transferred. Timing of transfers is difficult to ascertain and this budget will be carried forward to meet commitments when they arise.

Overview (continued)#

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

The Government has guaranteed superannuation schemes managed by NPF. As at 30 June 2011, NPF's DBP Scheme was in a net deficit position of $981 million (2010: $1,003 million) (page 102), represented by a gross estimated pension obligation of $1,020 million (2010: $1,053 million) with net investment assets valued at $39 million (2010: $50 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 decrease of $22 million in the Crown's liability for the NPF DBP(A) Scheme under Crown guarantee as at 30 June 2011 was primarily owing to:

• payments made against the liability by the Crown during the year of $75 million.

Offset by:

• the actuarial loss recognised for the year (page 96) of $16 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 97) of $37 million.

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

National Provident Fund - 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 2010/11 of $16,000 to 31 March 2011 and a provision of $1.500 million for the three months to 30 June 2011 (page 97). The scheme deficiency paid for the year to 31 March 2010 was $28,000. The reduction in the 2010/11 claim was a result ofimprovements in investment markets over 2011.

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 97). Expenses and revenue are less than in 2009/10 and less than those 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 2010/11.

New Zealand Productivity Commission#

The New Zealand Productivity Commission was established on 1 April 2011 with an equity injection of $500,000 provided by the Crown (page 98). The operational expenses funded for the first quarter of its operations were $1.210 million (page 97). A surplus existed at 30 June 2011 and this was returned to the Crown in August 2011.

New Zealand Superannuation Fund#

No contributions were made to the New Zealand Superannuation Fund in 2010/11 as a result of the Government's decision. A one-off contribution of $250 million was last made on 1 July 2009 (page 98).

New Zealand Debt Management Office#

Interest from investments and other income

NZDMO's interest from investments increased by $71 million primarily owing to changes in investment activity levels of New Zealand dollar and United States dollar market bonds (page 100).

NZDMO's other income increased by $12 million primarily owing toincreased interest income on lending to DHBs and Housing New Zealand Limited (page 100).

Other expenses

Other Expenses - NZDMO largely comprises net interest on NZDMO derivatives (excluding fair value and FX gains/losses) where net revenue has decreased $19 million owing to both interest rate changes and transactional activity (page 100).

Borrowing costs

Borrowing costs have increased by $755 million primarily owing to significantly increased volumes of New Zealand Government stock issued to third parties (page 97).

Other Current Revenue#

Other current revenue has increased by $126 million in 2010/11. This primarily relates to an increase in the recovery of government guarantee payments during 2010/11. Funds received from receivers of defaulted entities were $42 million above the Supplementary Estimates forecast as a result of timing difference only (page 100).

Other Fees#

Other fees of $17 million were received in 2010/11. This relates to a commitment fee of $15 million paid by AMI to the Crown in relation to the Crown's purchase of equity in AMI. Other fees received were in relation to the Crown providing an Uncalled Capital facility to New Zealand Post (page 100).

Reserve Bank Surplus#

Dividends received by the Crown from RBNZ decreased from $675 million in 2009/10 to $290 million in 2010/11 (page 100). The principal reason for the reduction was that the dividend received during 2009/10 was abnormally high as a result of RBNZ:

• reducing its unhedged FX position, and consequently FX gains of $434 million were realised with $390 million distributed, and
• a voluntary payment of $45 million, comprising retained earnings which were surplus to the Bank's capital requirements.

Rugby New Zealand 2011 Limited#

There is no expected change in the forecast loss for Rugby New Zealand 2011 Limited in 2010/11. The 2009/10 results recognised an increase in the Crown's 67% share of forecast loss compared to the 2005/06 estimate provided when the company was established (page 97).

Taitokerau Forests Limited#

Loans to Taitokerau Forests Limited of $800,000 were advanced as per the Loan Agreement during 2010/11. No impairment of the loans was necessary in 2010/11 as the valuation of the Taitokerau Forests Limited assets was higher than the valuation of the loan liability to the Crown as at 30 June 2011 (page 98).

Statement of Accounting Policies#

for the year ended 30 June 2011

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 2011. 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 2011.

Significant Accounting Policies#

Foreign exchange

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

Goods and services tax

All items in the financial statements, including appropriation 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.

Schedule of Expenses#

for the year ended 30 June 2011

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 97 and 98.

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2011.

Statement of Expenditure and Appropriations#

for the year ended 30 June 2011

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

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2011.

Statement of Unappropriated Expenditure#

for the year ended 30 June 2011

There was one item of unappropriated expenditure in Vote Finance in the year ended 30 June 2011.

Funding for the transfer of equity of Dispute Resolution Services Limited from ACC to the Crown was appropriated in the 2011/12 financial year; however, the actual transfer took place during 2010/11 resulting in unappropriated expenditure.

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2011.

Schedule of Earthquake Expenditure under s25 Public Finance Act 1989#

for the year ended 30 June 2011

Earthquake expenditure was incurred for emergency works and rapid inspections for uninsured households in the Canterbury region by EQC.

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2011.

Schedule of Revenue#

for the year ended 30 June 2011

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

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2011.

Schedule of Capital Receipts#

for the year ended 30 June 2011

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

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2011.

Schedule of Assets#