Annual Report of the Treasury for the Year Ended 30 June 2013

Higher Living Standards for New Zealanders#

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Higher Living Standards for New Zealanders

Chief Executive's Introduction#

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As Chief Executive of a department with a broad view across the State sector, I am conscious that the work of government touches all our lives, throughout our lives. What the State sector does, how it goes about doing its work and how well it does it, has a direct impact on everyone in the country. That brings with it a great deal of responsibility and expectations.

There are clear expectations from the Government that the State sector will deliver results. And there are clear expectations from the public that the State sector operates efficiently, delivers services that work for people and businesses and focuses on the things that really matter for New Zealand.

My leadership team and I are determined that the Treasury meets those responsibilities and expectations. We are committed to lifting our capability to deliver higher quality advice, analysis and services in better ways. We want the Treasury to be increasingly influential as an organisation through being more collaborative, more outward-facing, more productive and better at our core business. Two elements that I believe will continue to be critical to the Treasury’s success are a greater focus on diversity – primarily in how we think, but also in how we behave – and a greater focus on stewardship.

Diversity#

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Diversity is recognised as critical to business performance around the world. At the Treasury we are intent on creating a culture where there is diversity of thought, with leaders who are able to bring out diverse thinking and to harness it.

An example of our progress on this during the year has been the embedding of the Living Standards Framework in our work. Our vision is to be a world-class Treasury working towards higher living standards for New Zealanders, so our policy advice considers five key dimensions that are important for living standards: economic growth, sustainability for the future, increasing equity, social infrastructure and managing risk.

This approach was used for Affording our Future: Statement on New Zealand's Long-term Fiscal Position, which was published in July 2013. Every option in the document regarding ways to meet New Zealand's long-term fiscal challenge was developed through the application of the Framework.

Real-world challenges have also encouraged us to diversify our thinking. The global financial crisis has taught us a few important lessons that have shaped our policy advice. In particular, it reinforced the need for a strong fiscal policy platform and emphasised the importance of identifying and managing systemic risks.

Another way we are bringing diverse ideas and perspectives into our work is through greater external engagement. The Treasury is a much more outwardly focused organisation than in the past and the quality and impact of our work is better because of it. For instance, in recent months we have held workshops with businesses, iwi, non-government organisations and social services to ask them what they see as the opportunities and challenges for economic growth in New Zealand, and ways to make that growth compatible with equity and environmental considerations. Other examples include meeting with sole parents as we developed our policy advice on welfare reforms, and working with each of KiwiRail’s business units to understand the challenges in their turnaround plan.

Part of thinking and behaving differently for the Treasury is improving the way we work with others in the State sector. One highlight for us has been the co-production with the Ministry of Business, Innovation and Employment (MBIE) of a comprehensive programme to improve housing affordability. We helped establish the foundations of a more effective and efficient social housing system through our policy and Budget advice, and through working with a number of different agencies such as MBIE, Housing New Zealand Corporation (HNZC) and the Tamaki Redevelopment Company. Another highlight has been combining our efforts with others including the Overseas Investment Office, New Zealand Trade and Enterprise (NZTE), Ministry of Foreign Affairs and Trade (MFAT), MBIE, Ministry for Primary Industries and Statistics New Zealand on issues about foreign direct investment.

Having greater diversity in the people who work for the Treasury can also help us to think and act differently. I acknowledge that there is still a way to go for the Treasury to have a more diverse workforce, and we certainly want to do better in this regard. Behind the headline figures we are making progress, particularly in lifting the proportion of women in leadership roles. For example, a recent recruitment and promotion process for Principal Advisor positions resulted in the appointment of seven women and two men.

Stewardship#

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Our leadership team is conscious of its stewardship responsibilities for the Treasury, ensuring our organisation is well equipped to look after the Crown's medium- and long-term interests in a sustainable way. I believe a focus on stewardship is important, not just for the Treasury's own performance, but for the whole State sector.

Stewardship has to be shown at all levels. At an agency level, leaders need to ensure their organisations have the capability to work effectively for current and future governments and provide them with free, frank, expert advice. At a sector level it is imperative that we work towards the sector's broader goals, which can mean putting aside departmental interests for the greater good, or perhaps taking on accountabilities outside our normal ambit. And at a system level, we have to put our efforts into driving the capabilities, processes and actions that will lift performance across the State sector and maximise its collective impact.

At a policy level, agencies need to ensure advice that informs government decisions is built on a strong foundation. We have to make sure what looks like a good policy idea is backed up by solid evidence and quality analysis. It is also our duty to review how effective we are being. That means taking a hard look at whether a policy is having the impact we thought it would, whether a service is delivering value for money or what the connections are between an area of regulation and economic, social and environmental outcomes.

The Treasury and our Central Agency colleagues at the State Services Commission (SSC) and the Department of the Prime Minister and Cabinet (DPMC) have a role as stewards of the State sector system. We see ourselves as a corporate centre, looking across the whole operation, working with agencies to deliver, identifying where things need to change and what needs to happen to achieve a step-change in the quality of public services, and the outcomes we achieve for New Zealanders. The Government expects us to ensure State sector leaders are supported, challenged and more effectively held to account for their performance.

This year the Central Agencies integrated the previously required four-year Budget Plans and Workforce Strategies into a single Four-year Plan document. The Plan specifies our strategic objectives, how our resources will be applied to delivery of these and key risks or opportunities that need to be managed. It also gives Ministers greater confidence over delivery of better quality services within financial constraints.

Another stewardship-related initiative that the Treasury and SSC have taken is the establishment of the Performance Hub, a joint team of policy analysts who are responsible for producing and maintaining a big-picture understanding of how the State sector is performing. The team is our ‘architect' for the State sector, developing advice on how well the system is working and what we need to do to improve it.

A further big milestone during the year was the passage in July 2013 of the State Sector Reform and Public Finance Reform Bill. This legislation is important for enabling greater collaboration around results and system leadership. The law also makes it clear to State sector leaders that stewardship responsibilities are relevant, not only to Crown assets – as opposed to departmental assets – but also to legislation administered by departments.

Improving Our Core Business and Being More Productive#

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Complementing our focus on diversity and stewardship is a commitment to improving how we do our core business.

One such area is managing the Crown's balance sheet. There is greater attention now - across the globe - on the size of the contingent liabilities facing governments. It is also critical for New Zealand to maintain stable and prudent debt levels. The effective and efficient use of the many billions of dollars of resources on the Crown's balance sheet is therefore very important for our economic performance. Later in 2013 the Treasury will publish the next Investment Statement, which will shed further light on the management of the Crown's balance sheet.

We also want to become a more effective “Ministry of Finance” and get better at driving performance improvements in the State sector. Among our efforts to achieve this have been giving our people better tools and training and a more intensive graduate development programme.

A Continuous Improvement programme for our corporate and policy work has been rolled out across the Treasury. It focuses both on “hard” processes (for example, improving economic and tax forecasting, and Official Information Act 1982 processes) and “soft” processes (such as improving meeting skills, and more effective prioritisation and decision-making). This programme is helping to ensure we are spending our time on the right things, not just the things the Treasury has done in a certain way, and assists us to deliver more for less.

The Economy#

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A fundamental part of our core business is to effectively fulfil our role as the Government's lead advisor on economic issues, and during the year the economy has performed steadily. After a slow recovery from recession, real gross domestic product (GDP) growth has picked up, with the economy recording growth of 2.5% in the year to March 2013. GDP per person has nearly recovered to its pre-global financial crisis level. The economy is expected to sustain this recent improvement, with the economy forecast to grow at an average pace of around 2.5% per year over the next four years. As reported in the Budget, the growth outlook reflects the net impact of a number of supporting and constraining influences. On the supportive side are the Canterbury rebuild, a high terms of trade, low interest rates and less risk-averse households and firms.

Despite easing from peaks reached in May, the exchange rate remains elevated and will act as a constraining force on growth and rebalancing in the economy. Drought conditions earlier in the year have also impinged on growth in the first half of 2013. Global conditions remain supportive of demand for soft commodities such as dairy and meat, and therefore income growth in the economy, although a sustained pick up in global growth is still subject to uncertainty. Despite there being improved signs for the US economy, and to a lesser extent Europe, focus has recently shifted to risks in emerging markets.

As the economy continues to expand, unemployment is anticipated to gradually decline from its current rate of above 6% to around 5% by 2017. Growing tax revenue associated with the improving economy, combined with expenses growing at a slower rate than in the past, is expected to see the Government's operating balance before gains and losses (OBEGAL) return to surplus in 2014/15.

Quality in Action#

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During the year teams and individuals throughout the Treasury delivered top-quality work, and out of the many examples I will briefly mention three.

The first is the Government Share Offer programme, which has been and remains a very big undertaking for the Treasury. The public listing of Mighty River Power was achieved successfully and accomplished its main targets. We are now preparing for the listing of Meridian Energy later in 2013.

The second is the borrowing programme managed by the New Zealand Debt Management Office (NZDMO). Among the highlights during the year were the settlement of the largest ever bond maturity - $10 billion - and the first issue of inflation-indexed bonds since 1999. NZDMO was a finalist for “Debt Issue of the Year” and “Excellence in Treasury” in the 2013 INFINZ Awards.

The third example is our work on legislation and regulation disclosure requirements. The new requirements bring greater transparency to the content of legislation and the process used to develop it, which encourages better legislative quality.

Looking Ahead#

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The Treasury has some big opportunities and challenges before it.

The world is more complicated, more volatile and changing faster than ever before. It makes effective policy-making more challenging than ever before. But I also believe this is a fantastic moment in time for our country. We are now part of the region that is the centre of global economic activity and where demand for our products and services is growing - New Zealand needs to grab that opportunity.

Across the State sector, delivery of better public services within tight financial constraints is important. The Treasury and the rest of the State sector will need to have a relentless focus on results and have these results underpin how we design policy, implementation and incentives. We also need to evaluate the results and change our approaches if we need to, accepting that sometimes you have to fail if you are to learn and improve. It is part and parcel of stewardship.

The Treasury will also remain committed to thinking, acting and engaging differently. It is absolutely fundamental to us being an effective and influential organisation, respected for providing sound advice that policy-makers and the public can be confident about.

We may still have a way to go to be the best organisation we know we can be, but the Treasury is full of smart, skilled and dedicated people who are determined to make a real difference for New Zealanders. It is truly a privilege to lead them. I thank them all for their efforts over the past year, and in anticipation of a productive and successful year ahead.

Gabriel Makhlouf
Secretary to the Treasury

24 September 2013

Treasury Governance#

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The Treasury Board is a governance body that supports the Secretary to the Treasury to meet the organisation's strategic goals and ambitions. The Board does this by testing key strategic decisions, offering external expertise and perspectives and providing a strong advisory function.

Treasury Board#

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The Board is not required by statute and is an innovation in the public sector. Its role and operating practice have evolved over time.

The Board's principal purpose is to hold the Chief Executive to account in an advisory capacity. The statutory responsibilities and accountabilities of the Chief Executive and the State Services Commissioner remain unchanged. The Board:

• tests high-level strategy set by the executive
• advises on strategy execution
• links the Treasury with external expertise, and
• provides an independent perspective on any area raised by the Chief Executive.

The Board aims to replicate the discipline provided by a private sector governance board as far as possible within the public sector management system, providing additional challenge, accountability and external expertise to the executive.

Non-executive Board Members#

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The Treasury Board is currently made up of six non-executive members, the Chief Executive and Deputy Chief Executive. Current non-executive members of the Board are listed below:

Mr Paul Baines

Mr Paul Baines has a significant background in financial and strategic management. He sits on the boards of the New Zealand Institute of Economic Research (NZIER), the Todd Corporation and is Chair of the Gilles McIndoe Research Institute. He is a former Chair of Barnardos and has served on the boards of Fletcher Building, the Reserve Bank of New Zealand (RBNZ) and Telecom New Zealand.

Mr Whaimutu Dewes

Mr Whaimutu Dewes has a broad range of experience in private and public sector management and governance. He is currently the Chairman of Aotearoa Fisheries Limited and is a director on the boards of Contact Energy, HNZC, Ngati Porou Seafoods, Ngati Porou Forestry and Ngati Porou Holding Company. He is of Ngati Porou and Ngati Rangitihi descent.

Professor Harlene Hayne

Professor Harlene Hayne is Vice-Chancellor of the University of Otago, where she has helped to lead the commercialisation of the university's intellectual property and built strong research links with the private sector. Her current Fellowships include the Royal Society of New Zealand and the American Psychological Society, and she has served on the Royal Society's Academy Council, the Marsden Fund Council and the New Zealand National Science Panel. She is Co-Chair of the Office of the Prime Minister's Science Advisory Committee Working Party on Reducing Social and Psychological Morbidity during Adolescence. Professor Hayne was made an Officer of the New Zealand Order of Merit in 2009 for her services to scientific and medical research.

Dr Susan Macken

Dr Susan Macken is an experienced company director and consultant. She is a director of the Bank of New Zealand, Fertility Associates and Tamaki Redevelopment Company. She is Chair of Crown research institute Environmental Science and Research. Previous directorships have included Southern Cross Healthcare, the NZ Racing Industry Board and the NZ Trade Development Board. She has worked for the World Bank as an economist.

Sir Ralph Norris

Sir Ralph Norris serves on the boards of Fonterra Co-operative Group, Fonterra Shareholder Fund and Origin Energy. He is a member of the Council of the University of Auckland and a Fellow of the New Zealand Institute of Management and the New Zealand Computer Society. His 40-year career in banking included roles as Chief Executive of the Commonwealth Bank of Australia and ASB Bank, and he is also the former Chief Executive of Air New Zealand. Sir Ralph was formerly Chairman of the New Zealand Bankers' Association, Australian Bankers' Association and the New Zealand Business Roundtable, and was previously a Director of the Business Council of Australia. Sir Ralph was made a Knight Companion of the New Zealand Order of Merit in 2009.

Joan Withers

Ms Joan Withers is a full-time company director with significant senior executive and corporate governance experience. She is Chair of Mighty River Power Ltd, Deputy Chair of Television New Zealand (TVNZ), Chair of Auckland International Airport Ltd and an independent director of ANZ Bank New Zealand. She was previously Chief Executive of Fairfax Media in New Zealand and of the Radio Network. Ms Withers stepped down from the Board for most of the 2012/13 year owing to the participation of Mighty River Power in the Government Share Offer programme.

Note: Positions are as at date of publication. Brief biographical information about the Treasury’s Executive Leadership Team (ELT) is on pages 127 to 128.

Risk and Audit Committee (RAC)#

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The RAC is a committee of the Treasury Board. The Committee supports the Chief Executive by providing independent advice, assurance and observations on the adequacy of the internal control and management systems, processes and activities across the Treasury.

The Committee comprises two members of the Board (Susan Macken and Paul Baines) plus an independent person (Roy Tiffin) with significant public sector audit committee experience. The primary benefit of the RAC is its independence and objectivity in relation to management, and the specialist skills of members.

The focus of the Committee includes:

• risk management framework and processes
• internal control environment and mechanisms
• internal and external audit activities relating to the Treasury and non-departmental activities managed and administered by the Treasury on behalf of the Crown
• processes relating to the preparation and audit of financial statements of the Treasury and of the Financial Statements of the Government
• the integrity of performance information (including financial reporting)
• the governance framework and processes, and
• policies, processes and activities to ensure compliance with legislation, policies and procedures.

The RAC does not manage risk on behalf of the organisation. Rather, it engages with management on areas of risk and provides advice and assurance to the Board and Chief Executive on the completeness, effectiveness and relevance of the arrangements in place to manage risk and ensure sound financial management in the Treasury.

In discharging these responsibilities the RAC separates its focus between Treasury operations and the preparation of the Financial Statements of the Government. During 2012/13 the RAC met five times.

Mr Roy Tiffen

Mr Roy Tiffin serves in an independent advisory role on the Treasury's Risk and Audit Committee. He has extensive audit and probity experience, and in addition to consulting work is currently a member of several public sector audit committees. Mr Tiffin was an Audit Partner at KPMG in Wellington from 1999 to 2004, and previously an Audit Partner at Deloitte in South Africa. He was also the Director of Audit New Zealand from 1994 to 1999, and in 2005, was the President of the New Zealand Institute of Chartered Accountants (NZICA).

About Us#

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Our Vision - Higher Living Standards#

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The Treasury's overarching vision is to be a world-class Treasury working toward higher living standards for New Zealanders. The Living Standards Framework identifies four essential factors that are essential to current and future living standards:

We also recognise that there is a range of dimensions of economic and social life that affect living standards and we have identified five key indicators that are particularly important in the current environment. These are reflected in the Living Standards pentagon below.

Living Standards pentagon

Our Outcomes - Our Role in Creating Higher Living Standards#

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

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

Detailed information about progress on each of the outcomes is included on pages 20 to 32.

Our People and Our Values#

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

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

The Work We Do#

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The Treasury has five different roles:

Highlights of the Year#

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More detail about our achievements in 2012/13 are presented on pages 40 to 60.

• Borrowing Programme. NZDMO issued $14 billion of government bonds in 2012/13. Notably this included the introduction of the first New Zealand Government inflation-indexed bond instrument since 1999. NZDMO also lengthened the maturity profile of bonds on issue, by reducing the volume of short-term Treasury Bills outstanding, and introducing new bonds with maturities in 2020 and 2025, effectively reducing refinancing risk.
• Government Share Offer Programme (GSO). We managed the public listing of Mighty River Power. Forty-eight percent of the company was sold raising $1.7 billion, and the Government met its New Zealand ownership threshold target of 85%.
• Both the borrowing and GSO programmes are important components of managing the Crown balance sheet and ensuring the Government has funds to invest in priority initiatives.
• Welfare Reform. We worked with the Ministry of Social Development (MSD) on the policy phase of welfare reform and in the implementation of the key elements of an investment approach to welfare. The investment approach shifts the focus of the benefit system to the long-term costs of welfare receipt with the aim of improving the employment prospects of clients who have the greatest risk of long-term benefit receipt.
• Legislation and Regulation Disclosure Requirements. We introduced disclosure requirements for new legislation and regulation produced by the Government. The new requirements seek to improve legislative quality by increasing the transparency of the development process and the content of legislation, and facilitating greater scrutiny.
• The Changing Face of the Treasury. The Treasury is taking on new ways of working, new ways of thinking and new ways of engaging. Over the past year this has included improving our external engagement, embedding the Living Standards Framework, working more collaboratively and using continuous improvement processes.
• Housing. Housing has emerged as a government priority and the Treasury supported the Government on a number of fronts. Together with MBIE we are leading a comprehensive programme to improve housing affordability. We provided advice on improving the effectiveness and efficiency of the  social housing system. We took on monitoring responsibility for HNZC and implemented a new monitoring regime.
• Better Public Services. Alongside our Corporate Centre colleagues we have led the implementation of the Better Public Services programme of reform. We supported the passage of the State Sector and Public Finance Reform Bill. We led the establishment of a Seed Fund and provided advice on and support for the Government’s 10 Result areas and functional leadership across the system. These initiatives are designed to create opportunities for greater collaboration and improved system leadership.
• Enhancing the Fiscal Management Approach. This year we worked in collaboration with our Corporate Centre colleagues to integrate the previously required Four-year Budget Plans and Workforce Strategies into a single Four-year Plan document. These were a key input into the Budget 2013 process and helped the Government to remain on  track to achieve its 2014/15 return to surplus target. Increasingly,  we are drawing together our work on fiscal performance with a broader set of performance indicators, which supports the direction of the Better Public Services work.
• Long-term Fiscal Statement. The Treasury published  a Long-term Fiscal Statement on 11 July 2013. The process involved using our Living Standards Framework, engaging with a diverse range of groups and undertaking a broad range of options analysis. With Victoria University, we established an external panel of experts, held a conference and created an online “Long-term Fiscal Calculator”. This is expected to contribute to greater public understanding of the scale and drivers of long-term fiscal pressures.

Looking Ahead#

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

• Making the most of uncertainty and change. The world continues to be a dynamic place with the formation of new trade blocs and alliances; the march of technology; the changing nature of doing business; and the European economy and the financial markets remaining volatile. This environment creates opportunities for New Zealand. We are now part of the region that is the centre of global economic activity; demand from the middle classes in Asia for our products and services will grow as they grow in number; and technology – in particular broadband – means we are getting closer to the rest of the world. The Treasury will continue to monitor international developments and local economic indicators so we can help the Government create appropriate policies to counter these challenges and benefit from the opportunities. We are also using the global financial crisis to learn and shape our policy advice. For example, it reinforced the need for a strong fiscal policy platform and emphasised the importance of identifying and managing systemic risks. We need to ensure that we are resilient to any shocks that might come our way.
• The Growth Agenda. New Zealand needs sustainable growth in incomes in order to achieve higher living standards. We’ll continue to recommend improvements in tax and regulatory settings; we’ll work to ensure that we are making the right infrastructure investments; we’ll aim to improve the international competitiveness of our business environment; we’ll seek greater integration and connections with the global economy’s resources, knowledge and economies of scale; and we’ll seek enhanced skills and labour productivity as part of the plan to grow the economy.
• Better Public Services. People expect better public services, delivered to them in more accessible, responsive and flexible ways. They also expect these services to be value for money. Together with our Corporate Centre colleagues (SSC and DPMC) we’ll collectively lead the State sector to deliver outstanding results for New Zealanders while achieving the Government’s fiscal strategy. We’ll assist agencies to find new ways to work, behave and interact with each other and with New Zealanders. For example, we have commenced the Optimise Finance programme designed to improve department financial management across the State sector. We’ll help agencies to manage within the tight fiscal constraints and to develop sustainable financial management plans. Increasingly, we are drawing together our work on fiscal performance with a broader set of performance indicators to get a comprehensive picture of how agencies are delivering the objectives of Better Public Services.
• Focusing on the balance sheet. The Crown currently owns around $240 billion of assets funded by $180 billion in liabilities, leaving $60 billion in equity. Apart from improving our ability to manage risk, the effective and efficient use of these resources plays a critical role in the performance of the economy. Even small improvements to the management of the balance sheet could free up capital for priority areas and generate efficiencies. We are taking a much closer look at the Crown’s balance sheet. As part of this we have more closely aligned asset and liability management responsibilities within the Treasury and are also reviewing the way we manage oversight of Crown companies and entities to maximise the value from these assets.
• Changing the Treasury. We aim to be among the most respected and influential organisations in New Zealand, renowned for credible analysis and well-researched evidence that presents a more complete picture of complex issues. We want to be an exciting place to work. While we are making real progress in thinking differently, working differently and engaging differently, we still have further to go.

State of the Economy#

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A better understanding of New Zealand's economic performance is important to the Treasury; it informs our short-term economic and fiscal forecasts, our long-term fiscal projections and our wider policy advice.

We are involved in a process of listening, learning and testing our understanding of the issues influencing economic performance with a broad range of stakeholders. This process has included workshops in Auckland, Wellington and Christchurch, a seminar series to bring in alternative perspectives, a cross-government panel to test our work and visits to businesses and others throughout New Zealand.

In addition to policy settings around tax, regulations, infrastructure and macroeconomic stability, the Treasury's work on economic growth is also examining a set of inter-related themes. These themes include export performance and international competitiveness, economic growth and living standards, competition and innovation and the role and performance of the State sector. In examining these themes we are looking at a wider set of comparator countries beyond Australia, as well as a broader set of economic statistics, including those that examine the dispersion of performance within industries.

As this work develops, we will move into the testing period with key stakeholders, including academics, government agencies and other groups.

From a living standards viewpoint New Zealand does particularly well on the Organisation for Economic Co-operation and Development (OECD) quality of life measures such as health, civic engagement, education, safety, environment and life satisfaction.

OECD quality of life measures

Source:  OECD (2013) Better Life Index (www.oecdbetterlifeindex.org)

We also know that New Zealand does less well on material living conditions, as reflected in measures such as income per capita and productivity.[1]The gap in New Zealand's GDP per capita reflects a gap in the level of labour productivity (output per hour worked) with some offset created by slightly higher than average labour utilisation (hours worked per capita).

GDP per capita as a proportion of OECD average

Source:  OECD

New Zealand's productivity performance was the subject of a July 2013 symposium organised by the Productivity Hub, a partnership of public sector agencies with interests in productivity analysis and policy.[2]

Previous OECD analysis has indicated that, given generally good policy settings, GDP per capita in New Zealand is predicted to be 20% above the OECD average. Yet New Zealand's actual GDP per capita is some 23% below the OECD average.[3] Preliminary OECD research for the productivity symposium suggests that the productivity gap and lack of convergence is not well explained by relative investment in physical or human capital. In contrast, comparatively remote access to markets and low investment in innovation (as measured by research and development intensity) together can account for between 13% to 20% of the gap.

New Zealand's relatively small size, distance from markets and particular industry and export mix necessitate looking at comparator countries beyond OECD front-runners such as the United States and Australia. Notwithstanding structural differences between Australia and New Zealand, the broad similarity of institutions, significant migration flows and the comparability of productivity statistics still makes Australia a useful comparator. Since the mid-1990s, the period over which comparable official productivity statistics for Australia and New Zealand are available, labour productivity growth in New Zealand has been below Australia's. Growth in multifactor productivity (output growth relative to combined growth in labour and capital) has been broadly similar in the two economies. However, the capital-to-labour ratio in Australia has grown twice as fast, reflecting high investment in mining-related activity.

Source: Statistics New Zealand

The productivity symposium also included new comparisons of trans-Tasman productivity levels on an industry basis. The main conclusions from this analysis include:

• Labour productivity levels in New Zealand across all market industries were more than a third lower than in Australia, in 2009. New Zealand’s lower multifactor productivity accounted for 58% of this gap, with relatively lower skills and capital per worker accounting for 3% and 39% respectively.
• Australia’s labour and multifactor productivity exceeded that of New Zealand in 12 of the 24 market industries, while New Zealand was ahead on both productivity measures in five industries.
• The labour productivity gap can be assessed in terms of the contribution from differences in the structure of the two economies. It is estimated that 30% of the labour productivity gap comes from such differences, with employment in Australia more concentrated in certain high labour productivity industries such as mining, utilities (electricity, gas and water) and financial services. The other 70% of the gap is accounted for by productivity differences across the two economies within the same industry.

In addition to differences in the productivity of the same industries across countries, a number of international studies have found large differences in productivity of firms across the economy and within narrowly defined industries. For example, the productivity of a New Zealand firm in the 90th percentile is around seven times that of a firm in the 10th percentile, and there is considerable variation in the ratio across different industries.

The productivity symposium, and previous Treasury analysis, has considered the impact of the exchange rate on international competitiveness, exports and wider productivity performance. In March 2013 the Treasury and RBNZ hosted a forum on exchange rate issues and policy implications.[4] The forum examined both the cyclical movements in New Zealand's real exchange rate, as well as its persistently high level since the mid-2000s.[5] The relationships between changes in the real exchange rate and adjustments in the economy depend on the nature of the shocks affecting the economy, including external shocks such as a rising terms-of-trade.

Looking beyond the short to medium term, New Zealand's international competitiveness will be influenced by a range of factors beyond relative prices and costs, including the ability of the economy to adapt to changing external influences, and ultimately its overall productivity performance.

International competitiveness as measured by real exchange rates (relative unit labour costs)

Source:  OECD

In terms of external influences, the New Zealand economy has demonstrated significant flexibility and adaptability in responding to large shocks in recent years. Longer term trends influencing the economy include the fact that New Zealand is now part of the region that is the centre of global economic activity. Demand from the middle classes in Asia for New Zealand products and services will grow as they grow in number.

Composition of world GDP

Source:  OECD (2007)

The indicators in the Economic Development Indicators report provide additional information on New Zealand's wider international competitiveness and can also be used to assess the quality of New Zealand's institutions.

For example, New Zealand maintained its third ranking out of 185 countries in the World Bank's Ease of Doing Business 2013 rankings. New Zealand was 26th in 2008 on the OECD Product Market Regulation Barriers to Entrepreneurship indicator.

Finally, summaries of the most recent policy assessments of New Zealand by the International Monetary Fund (IMF) and OECD can be found on pages 125 and 126.

The Treasury's Performance Framework#

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The Treasury's Performance Framework

Our Outcome Performance#

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Improved Economic Performance#

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New Zealand's average GDP per capita growth for the past six decades has been poorer than all other OECD countries. In order to maintain New Zealand's living standards we need to materially narrow the income gap between New Zealand and the most advanced economies (see page 14 for a graph comparing New Zealand's GDP per capita with other countries). New Zealand's economic growth performance relative to other countries is improving, with New Zealand's real GDP growth projected to exceed the aggregate OECD growth rate from 2012.

New Zealand real per capita GDP growth (production measure)

Source:  Statistics New Zealand

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

New Zealand real tradable and non-tradable GDP

Source:  The Treasury, Statistics New Zealand

Achieving improved economic performance requires policy changes with the potential to lift productivity across the economy and support a substantial lift in export performance. The Treasury provides policy advice that focuses on three intermediate outcomes that will contribute towards improved economic performance, which are reported on below. The OECD's 2013 Economic Survey of New Zealand provided broad endorsement of New Zealand's approach to policy priorities to lift growth, while highlighting the challenges in achieving long-term sustainable growth.

Intermediate Outcome: Improved Business Environment#

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New Zealand's business environment needs to strongly outperform other countries to overcome the disadvantages of size and distance. The Government impacts on the business environment particularly through its policies relating to education, welfare, tax, savings incentives, regulation, science and innovation, infrastructure and the management of natural resources.

Over the year we provided advice to Ministers, alongside the Ministry of Economic Development (MED) and subsequently MBIE, on implementation, coordination and next steps in the Government's business growth agenda. We commenced work on refreshing our medium-term economic strategy thinking, which sets out what the Treasury considers important to achieve economic growth. This has seen us engaging with other public sector agencies along with the private sector and non-government sector to garner their perspectives. We also provided support to MBIE during its establishment and supported the establishment of Callaghan Innovation.

We have continued to work with the Inland Revenue Department (IRD) to deliver the Government's tax policy work programme. This helped the Government to make decisions in a range of areas, including improving the tax settings for mixed-use assets, salary trade-offs, foreign superannuation and specified mineral mining, and in making changes to the thin capitalisation rules. These changes help to achieve the Government's revenue strategy, which supports a broad-base, low-rate tax system that raises revenue as efficiently and fairly as possible.

The Treasury published the 2012 National State of Infrastructure Report which provides an update on progress and challenges in the infrastructure sector. Broadly positive ministerial and stakeholder feedback on the National Infrastructure Plan indicates solid progress and emerging clarity on the way forward.

Through our role in assessing major Regulatory Impact Statements and by helping to build agency capability, we aim to increase the proportion of significant Regulatory Impact Statements meeting most or all of Cabinet's regulatory impact analysis (RIA) requirements. We set a target of 90% by 2013 although in 2012/13 only 71% of departments' Regulatory Impact Statements achieved this. In addition, we introduced disclosure requirements for legislation and regulation produced by the Government, and Regulatory Stewardship Expectations for departments.

We provided advice to ensure that policy settings maximise the value of New Zealand's significant natural resource endowment. We worked with the Ministry for the Environment (MfE) on a package of Resource Management Act 1991 (RMA) reforms that, if implemented well, should significantly improve planning outcomes in the medium to long term, leading to increased value derived from natural and physical resources and reduced costs, delays and complexity between regional and local council plans. We also worked with MfE on the 2013 freshwater reforms aimed to improve the effectiveness of water management.

The Treasury continued to support the recovery of the Canterbury region. This included supporting a greater whole-of-government approach to dealing with issues in Christchurch, the central-city rebuild and the formalisation of a cost sharing agreement between the Crown and Christchurch City.

During the year the Government announced a comprehensive programme to improve housing affordability which is being jointly led by the Treasury and MBIE. The Treasury's advice helped the Government to develop this work programme. Subsequently, our work on this work programme helped the Government to deliver the Housing Accords and Special Housing Bill which was introduced on Budget night.

For more detail on our policy outputs in this area, see pages 40 and 44.

Intermediate Outcome: New Zealand has a More Internationally Competitive Economy#

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

The Treasury provided economic strategy advice to the Minister of Finance on improving our international competitiveness. In supporting the Government's Business Growth Agenda and the associated targets to increase trade flows, the Treasury provided advice on trade and free trade agreements, including contributing to research into trade in services and supporting the Trans-Pacific Partnership activities. The Treasury also led a seven-agency working group on inward and outward foreign direct investment, undertaking research into the impact of foreign investment on the New Zealand economy and what factors can support foreign investments to benefit New Zealand economic growth and employment.

We have continued to build relationships with our foreign counterparts so that we can influence policy-making by other countries and international institutions. In the past year we held dialogues with our counterparts in the US, China, India and the Republic of Korea to increase the profile of international issues that are important to New Zealand and increase our depth of understanding of those countries. We managed New Zealand's ownership interests in international financial institutions and New Zealand's input into international Finance Ministers' forums, such as the East Asia Summit Finance Ministers meeting.

The Treasury also delivered NZECO products and services to increase exports that otherwise would not have occurred owing to constrained access to trade finance or appropriate risk mitigation techniques. For more information on NZECO outputs, see pages 46 to 49.

Intermediate Outcome: Enhanced Human Capital and Labour Supply#

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Skills influence productivity and growth directly, through their impact on labour productivity and labour utilisation; and indirectly, through their effect on other drivers of growth, such as innovation and international connectedness. The Government has outlined a number of results it wishes to achieve with respect to enhancing New Zealand's human capital and labour supply.

Over 2012/13 the Treasury worked alongside MSD in the policy development phase of welfare reform and in the implementation of the key elements of an investment approach to welfare. The investment approach shifts the focus of the benefit system to the long-term costs of welfare receipt with the aim of improving the employment prospects of clients who have the greatest risk of long-term benefit receipt. Substantial progress has been made on implementing the accountability and outcome aspects of this approach. The Treasury has also worked with MSD on the development of a model for managing resources and funding.

In addition, we advised on progress towards the Better Public Services skills and employment results outlined in the box above. We worked with other agencies to ensure the change agenda across early childhood education, schooling and tertiary education is evidence based, cost effective and well integrated with wider welfare and labour market policies. Collectively, the changes across the education system are seeking to lift our educational participation and achievement. Our specific areas of focus have included work on partnership schools, school property, the review of the New Zealand Teachers Council and capital business cases for Canterbury Tertiary Education Institutions. Current funding policy settings are financially sustainable but improvements are required to ensure that maximum value for money is being obtained in the education area.

A Stable and Sustainable Macroeconomic Environment#

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A stable and sustainable macroeconomic environment is a fundamental precursor for strong, sustained economic growth and higher living standards. Macroeconomic stability (as partly indicated through inflation, see graph below) provides households and firms with the predictability and certainty they need to make good decisions about employment, saving, investing, innovating and pursuing opportunities.

Inflation and inflation expectations

Source:  Statistics New Zealand, RBNZ

Moody's has New Zealand's credit rating as AAA, while the other two of the three major rating agencies have us remaining at AA. This is largely owing to the perceived vulnerability associated with New Zealand’s large negative net international investment position that has arisen from a long-standing gap between national saving and investment. Importantly, government debt remains low by international standards notwithstanding the increase experienced over recent years (see graph below).

Net core Crown debt

Source:  The Treasury

Achievement of our desired outcomes in this area requires a further lift in economic and fiscal performance. Global economic and financial conditions, such as the exchange rate, continue to have a major negative bearing on domestic economic and financial developments and overall macroeconomic stability.

Intermediate Outcome: A Stable Macroeconomic Environment#

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The Treasury's work aims to help keep economic activity close to full employment levels, keep economic variability to a minimum and avoid abrupt negative economic adjustments when hit by shocks. Over the year the global economy and financial market conditions improved, but overall conditions remain fragile and subject to ongoing risks. Financial stability risks have increased, however, with house price growth increasing and private debt levels increasing again.

A Stable Macroeconomic Environment#

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Economic variability

The standard deviation of New Zealand's annual real GDP growth (which shows economic variability) was around 2 percentage points in the 10 years to 2012 (10th out of 34 OECD economies), compared to 2 (12th out of 28) and 2.5 (21st out of 34) in the 1980s and 1990s respectively. This shows an improvement in New Zealand’s relative ranking, with GDP variability now in the lowest third of OECD countries.

Macroeconomic vulnerability

The Treasury forecasts in the Budget 2013 Economic and Fiscal Update (BEFU) show the current-account deficit increasing from current levels, such that the net international liability position also begins to increase again. The net international liability position fell as a share of GDP between March 2009 and March 2011 partly owing to re-insurance inflows associated with the Canterbury earthquakes, but has since increased slightly and remains at a high level by international standards.

Over the year, we provided advice on macroeconomic policy settings and frameworks, and on fiscal policy and strategy. This included advice to the Government on the impact of government policy on the macroeconomic environment. This advice enabled the Government to operate fiscal policy in a way that contributed to macroeconomic stability, balancing short- and medium-term requirements and supporting the economic recovery, while remaining on track to meet its fiscal objectives over the medium term.

We supported the Government to table amendments to the Public Finance Act 1989 designed to ensure the fiscal responsibility principles help reduce future cyclical rises in interest and exchange rates. We continued to provide economic and fiscal monitoring, reporting and forecasting.

We provided advice to the Minister of Finance on the Memorandum of Understanding (MOU) with RBNZ which sets out the purposes and processes for the use of macro-prudential tools. We provided joint advice with RBNZ on the implicit guarantee of the financial sector, and worked with Trans-Tasman Banking Council agencies to enhance cross border crisis resolution strategies.

IMF's 2013 Article IV report and the OECD Survey of New Zealand endorsed the key elements of our macroeconomic framework and current policy settings.

Intermediate Outcome: Fiscal Position Returned to a Sustainable Footing#

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Returning the fiscal balance to surplus and reducing government net debt back to prudent levels will contribute to macroeconomic stability over the short term and increase fiscal sustainability. The act of reducing the fiscal deficit will directly reduce upward pressure on interest and exchange rates over the next few years and help manage external vulnerabilities. Returning to surplus on a sustained basis will restore the fiscal buffer provided by low debt, will increase public saving and reduce future borrowing and finance costs.

Fiscal Position Returning to a Sustainable Footing#

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Budget forecasts show the operating balance (before gains and losses) returning to surplus in 2014/15 and core Crown expenses reducing to around 30% in 2015/16 (see graph below).

Core Crown expenses

Source:  The Treasury

The Budget also shows that gross new capital requirements over the next four years are forecast to be met from the balance sheet.

In addition, projections in the Fiscal Strategy Report (FSR) show net core Crown debt falling below 20% of GDP by 2020/21.

The Treasury, through our advice on fiscal policy and budget and balance sheet management, has worked to assist the Government to achieve its fiscal objectives as outlined in the box above. This included helping deliver a Budget that allowed for a modest amount of new operating spending and the first significant amount of capital spending from the Future Investment Fund. The 2013 Budget was in line with both short-term fiscal intentions and long-term objectives in the Budget Policy Statement (BPS).

The Treasury published a Long-term Fiscal Statement on 11 July 2013. The Statement projects that if core Crown expenses were to revert to their historic rates of growth from the 2015/16 fiscal year (taking into account legislative settings and expected future demand for various government services), expenses would soon outstrip revenue. Policy changes will be necessary on either the spending or revenue sides, or both, in order to keep to prudent government debt levels over the long term. The two spending areas that are projected to see the most pressure are public healthcare and New Zealand Superannuation.

The Government's fiscal strategy (discussed above) adopts a more restrained fiscal path than that outlined in the Statement on the Long-term Fiscal Position. If the current fiscal strategy were followed until 2020, it would lead to a significant improvement in the Treasury's long-term fiscal projections (although some underlying pressures would remain).

The Auditor-General tabled a report on the Statement in Parliament on 8 August 2013. The Auditor-General noted that since the Treasury's first Statement, published in 2006, the Treasury has improved how it prepares its long-term fiscal statements, making them more inclusive. Overall, the Treasury is assessed to have done a good job in preparing Affording Our Future, and presenting it in an easy-to-understand format. The Auditor-General's report also made some recommendations about how the Treasury could further improve its long-term fiscal reporting, including that consideration be given to using a wider set of indicators.

The media response to the Statement has been balanced and measured, and largely reflects the Statement's key messages. Both the Statement itself and the attendant response from the media and other commentators can be expected to contribute to greater public understanding of the scale and drivers of long-term fiscal pressures.

In addition, the Treasury continued to provide quality fiscal monitoring, reporting and forecasting (for more information on these outputs, see page 46).

A Higher Performing State Sector that New Zealanders Trust, Delivering Outstanding Results and Value for Money#

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

The FSR specifies the Government's long-term objective is to reduce core Crown expenses to below 30% of GDP. Current forecasts show that we are on track to achieve that around 2017 as shown in the graph on page 26. Given the limited resources available, the State sector needs to be aligned and organised to achieve a core set of critical, measurable priorities and to deliver these well.

The Government has set 10 challenging Results to be achieved over the next three to five years. A number of the Result areas are on track to achieve their targets – for example, immunisation and reducing crime. In a number of the other Result areas it is too early to call the trend or claim success, but there are encouraging indicators. For example, early childhood education (ECE) participation is up 0.8% on the March 2012 figure and 41% of New Zealanders are transacting with Government online (for a selected bundle of services), up from about 30% nine months ago. More detail is available at: www.ssc.govt.nz/better-public-services

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

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Delivering more progress on key results and better public services depends on ensuring the right mix of interventions (expenditure, regulatory and ownership) are in place and there is sustained performance improvement across the State sector.

Measuring performance#

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We continued our focus on developing or enhancing tools to understand performance in the State sector. We ran the third year of the Better Administrative and Support Services (BASS) benchmarking exercise,[6] we developed and introduced a common indicator set for policy advice and continued to support SSC in the delivery of the Performance Improvement Framework (PIF) (see box below). These measurement tools, together with Four-year Plans (discussed further below), engagement surveys, audit results and other published data sources, now enable a much better understanding of State sector performance, at an agency, sector and system level.

Better public services#

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The Better Public Services programme sets out the next phase of public sector reforms. It is focused on getting the system working to deliver better results and improved services for New Zealanders; delivering better value for money through greater collaboration, innovation and continuous improvement; and strengthening system leadership.

The Treasury, alongside SSC and DPMC as the “Corporate Centre”, has a key role in ensuring the successful implementation of the Better Public Services programme. To enable the Corporate Centre to play a stronger and more cohesive leadership role, we established a joint venture called the “State Sector Policy and Performance Hub” (the Performance Hub) in February 2013. The Performance Hub will undertake performance monitoring of the system and provide advice on improving its performance.

The Treasury also led and supported a number of initiatives as part of the Better Public Services programme. With our Corporate Centre colleagues, we supported the passage of the State Sector and Public Finance Reform Bill, the provisions of which were passed in July 2013, which will enable greater collaboration around results and system leadership. We led the establishment of a Better Public Services Seed Fund designed to remove actual and perceived barriers to agencies working together. We provided advice on and support for the Government’s 10 Result areas and the increasing role of functional leadership across the system (in the Information Communication Technology, procurement and property areas).

A prime example of the type of changes the Better Public Services programme is seeking to achieve is the Wiri Prison PPP deal that was closed this financial year after several years of effort. The Treasury worked in partnership with the Department of Corrections on this initiative. The initiative was procured on an outcomes basis with the primary focus on rehabilitation. This has built experience, demonstrated new ways of undertaking procurements and is the first contract of its kind in the world.

Enhancing fiscal management#

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This year we worked in collaboration with our Corporate Centre colleagues to integrate the previously separately required Four-year Budget Plans and Workforce Strategies into a single Four-year Plan document. These were a key input into the Budget 2013 process and are designed to provide Ministers and Central Agencies with a clear and integrated view of an agency's/sector's direction on strategy, financial performance and workforce, and to show how agencies will achieve their priorities within baseline.

Overall, the integrated plans this year were of a much higher standard than previous Four-year Budget Plans and separate Workforce Strategies, providing richer information to understand agencies' ability to deliver on the Government's priorities and other intentions.

The financial picture shows that significant cost pressures will arise over the next four years and a number of key agencies have a significant challenge to manage within baselines (and indicative new funding allocations). Notwithstanding this, the aggregate “funding gap” has significantly reduced from last year's plans, reflecting an increased ability by agencies to manage within available funding.

Delivering value for money#

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There is some evidence that agencies are looking to lift the pace of planned operational changes in order to drive improved value from current spending and achieve “more for less”. It is evident that those agencies that have the most developed strategy were able to provide the best understanding of how they will be able to manage their resources in the next four years to deliver on the Government's intentions. This aligns with the PIF lead reviewer findings that “best institutions are clear about their purpose; know how they can add most value to New Zealand now and in the future; and are clear about their strategy for delivering that value”.[7]

Over the year we helped establish the foundations of a more effective and efficient social housing system through our policy and Budget advice, and through working with a number of different agencies such as MBIE, HNZC and the Tamaki Redevelopment Company. We took on the role of monitoring HNZC and introduced a new monitoring framework for this role.

We continued to work alongside departments to improve their performance; including working closely with IRD on their business transformation programme and working with the New Zealand Defence Forces on the Defence Mid-Point Rebalancing Review which is seeking to achieve a sustainable funding path for Defence. We also worked with the Justice sector to develop options to ensure it can live within baselines and with the Office of Treaty Settlements to provide a funding base to maintain momentum in Treaty Settlements. We worked closely with the Ministry of Health (MOH) on a number of issues, including advice for Cabinet on the redevelopment of the Christchurch and Burwood hospitals, having previously supported the partnership group that developed the business case; we also worked with the Ministry on the development and costing of options to respond to litigation by family carers.

Improving performance and financial management capability#

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We have continued to work on improving the performance and financial management capability of the State sector (including our own). A key element of this was the commencement of the “Optimise Finance” programme designed to improve department financial management. Optimise Finance is an initiative working with a group of 11 agencies to deliver a business case considering how to encourage demand for more strategic financial management services; improve strategic financial management and governance capabilities; leverage the sector's size to achieve economies of scale and adopt best practices; and simplify and streamline finance services within and across agencies.

The Treasury developed a programme designed to improve our performance and financial management capability. Over the year this included the development of a new graduate induction programme, updating our written guidance and reference materials, developing a knowledge management tool and developing and piloting new tools to support financial analysis of departments.

The Treasury continued to provide guidance and support to agencies to ensure activities comply with the Public Finance Act 1989 and Cabinet directions.

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

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The State sector manages just over $240 billion worth of assets - across three portfolios of social assets (such as roads and schools), commercial assets and financial assets and liabilities. Currently the overall composition and shape of the Crown balance sheet appears reasonable but there is no objective measure to support this conclusion.

The Treasury's roles with respect to these assets include ensuring there are incentives to use existing capital well, introducing private sector capital and commercial disciplines where this is appropriate and advising on the allocation of capital to its highest value use. These activities and interventions are designed to increase State sector productivity and the ability of the Crown to deliver more for less.

Financial assets and liabilities#

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This year the Treasury started implementing a more operational approach to managing the Crown's balance sheet which takes a portfolio management view that focuses on aggregate Crown risk exposures (financial and otherwise), returns and performance of all the components of the balance sheet. We will also seek to increase the efficiency of financial operations within the Crown.

We provided advice on the performance of Crown Financial Institutions (CFIs). The two largest CFIs, the New Zealand Superannuation Fund (NZSF) and Accident Compensation Corporation (ACC), combined manage more than 85% of the Crown's investment assets. Both entities are ahead of their longer term performance objectives.

NZDMO issued $14 billion of government bonds in 2012/13 with the cost of new borrowing being 3.05%, compared with a benchmark of 5.5%. Notably this included the introduction of the first New Zealand Government inflation-indexed bond instrument since 1999. NZDMO also lengthened the maturity profile of bonds on issue, by reducing the volume of short-term Treasury Bills outstanding, and introducing new bonds with maturities in 2020 and 2025, effectively reducing refinancing risk. (For more information on NZDMO outputs, see pages 50 to 52.)

Social assets#

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While there have been no formal independent assessments of agency asset management maturity in 2012/13, there is evidence that the level of maturity is improving in agencies that have previously had large gaps between current and target maturity. Compared with the situation in 2011/12 this means capital intentions forecasting is likely to be more reliable, key asset-related risks are being better managed and real options are more likely to be analysed.

We continued to play a lead role in influencing the quality of investment analysis, accountability and performance through Budget, monitoring and guidance processes. An independent review of our Better Business Cases guidance materials confirmed the materials and associated support services are both valued and effective. The Treasury is now routinely capturing and reporting to Ministers and Corporate Centre stakeholders, information from all departments and key Crown agents on significant capital projects planned or underway.

Commercial assets#

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We provided advice on the performance of SOEs and significant entity-specific issues, including undertaking a considerable amount of work in relation to Solid Energy.

The most recent economic profit analysis, completed in 2011, suggested the Crown's portfolio of commercial entities has generally met its cost of invested capital. We analysed the extent to which the Crown's financial and commercial assets met their cost of capital and benchmark returns, publishing the results in the Treasury's Annual Portfolio Report (APR). The Treasury also commenced a work programme to strengthen our monitoring of the commercial assets owned by the Crown. We also reinvigorated a Crown director development programme offering a tailored range of events to improve governance knowledge and capability. For more information on these outputs, see pages 57 and 58.

We managed the successful public listing of Mighty River Power. The listing achieved its targets including a threshold of 85% to 90% New Zealand ownership on listing. For more information on these outputs, see pages 54 and 55.

A Higher Performing Treasury: Our Organisational Health and Capability#

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

We have four objectives that reinforce each other:

• Every member of staff, led by our ELT, lives our values.
• We work collaboratively with others to achieve our outcomes, informed by an understanding of what is happening in the real world.
• We are an adaptive and productive workforce.
• We are a well-managed public sector organisation focused on continuous improvement.

Living our Values#

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The Treasury is seeking to lift its performance by changing the Treasury's culture - how we go about our business - so that the way all Treasury people work is representative of and aligned to the Treasury values: bold and innovative; collaborative and challenging; adaptable and focused; passionate and ambitious.

Our 2012 follow-up PIF review found that we had made good progress since our first review and had stronger leadership, but that a gap still existed between the desired culture and values for the organisation and the current reality. This is to be expected as culture change takes time. We have a change programme in place which includes a range of initiatives driven by our leadership team that will further embed our vision and values. We are re-energising the programme by focusing on having teams take ownership of change and be more specific about how they need to change.

There are a number of examples of our values in action across the Treasury. For example, we are demonstrating passion and ambition for our staff by ensuring we offer flexible career pathways and developing a comprehensive development programme for our graduates. There are many examples of our teams collaborating with others, including the extensive engagement with a diverse range of groups that was undertaken to develop the 2013 Long-term Fiscal Statement. We are getting better at adapting to changing priorities through a focus on cross-Treasury prioritisation and embedding more systematic approaches to project management.

Leadership is important for organisational culture and change. Over recent years our leadership team has been working on establishing a collaborative and challenging executive team dynamic. ELT members are surveyed every two years, and the last survey was done in May 2012. That survey showed an improvement in the behaviours being targeted.

Working Collaboratively#

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We are seeking to improve the Treasury's external leadership role, in both the economic and State sector areas. We particularly want to lift our financial and performance management capability, as part of an effective Corporate Centre, and collectively lead the State sector to deliver outstanding results for New Zealanders. In doing so, we will work in partnership with other agencies and use our complementary skills to lift State sector performance.

Our 2012 follow-up PIF review found that, while we had made progress since our first review, we still need to improve in some areas. These include the quality of our performance analysis and advice and the way we engage externally. These are priorities within our change programme. For example, we are investing in giving our staff better tools and training to enable us to be more effective in our Ministry of Finance role (as part of the Corporate Centre). We are refining and more systematically applying our Living Standards Framework to our policy analysis so that we incorporate a wider range of perspectives in our advice. An increasing number of teams across the Treasury are co-producing advice with other agencies where it makes sense to do so, as well as proactively engaging with a wide range of stakeholders to exchange ideas and ensure our advice is grounded in reality.

We also want to engage with New Zealanders to better understand how we can make a difference. We are committed to greater depth and breadth of two-way engagement with external stakeholders in all areas of our work, with the aim of lifting the quality of our advice and being more influential by tapping into real-world external expertise.

The last Treasury stakeholder survey was in August 2011. It showed that, while stakeholders are interested in the Treasury, they want more frequent and richer engagement, and more collaboration and partnership. We expect to undertake a stakeholder survey towards the end of 2013. In the interim, the Communications team is scanning and synthesising other sources of feedback from our stakeholders on how the Treasury is conducting its business, including media coverage and formal/informal feedback, which reveals some positive views of our performance.

An Adaptable and Productive Workforce#

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We need a workforce that can adapt quickly and act to meet changing demands within the limited financial resources available to us. We need to be able to prioritise work swiftly and reallocate resources when required. We must all be clear about our contribution to our outcomes, deepen our capability to influence and improve our ability to assist other agencies to deliver the Government's economic and better public services agendas through effective, ongoing, two-way working relationships.

Over the year we have improved our guidance material on how to provide policy advice quality assurance and on our policy advice, financial management and performance management roles; developed a new graduate induction programme; updated our Workforce Strategy as part of our Four-year Plan; and improved our ability to prioritise across the organisation.

The Treasury undertook its fourth Gallup Q12 survey during September 2012. The participation rate was 92%. Employee engagement at the organisational level has been steady year-on-year with the Treasury sitting on or about the 44th percentile in Gallup's worldwide database in the last three years and the 67th percentile in the Worldwide Public Administration database. The percentage of engaged employees continues to improve, up from 34% in 2010 and 37% in 2011 to 42%. We will continue to focus on improving our employee engagement.

The Treasury places importance on diversity to ensure our thinking and actions are informed by a diverse range of views. We need to understand different perspectives, constantly look for new insights and recalibrate our views in light of new evidence so an emphasis on diversity benefits the Treasury's reputation, credibility and performance.

The Treasury launched its Diversity Strategy in February 2012 with a focus on three key areas: diversity of thinking including new approaches to problem-solving and creativity; ethnic diversity to better reflect the views of the broader society that we serve; and the proportion of women in senior leadership roles. Actions over the past year have included the introduction of new tools and techniques, including training a number of staff to green belt standard in Lean Six Sigma, to promote diversity of thinking; a revamp of our cultural responsiveness programme; the launch of a new series of seminars for staff which invites key external people to talk to us about Mōori economy, institutional arrangements and other issues; and the establishment of a mentoring programme.

The Treasury's headcount has increased over the last few years owing to us taking on a number of new roles including the absorption of the Crown Company Monitoring Advisory Unit into the organisation, the establishment of the National Infrastructure Unit and Central Agency Shared Services (CASS) unit, and the organisation managing the DGS and the Government's Share Offer programme. The last two programmes will not see ongoing increases in the Treasury's numbers. Alongside taking on these new functions we have been reviewing our efficiency which has led to some offsetting decreases not seen in the net figures in the tables.

Note

The above data only includes permanent and fixed-term employees. It does not include anyone on secondment, leave without pay or current vacancies as at 30 June.

The increase in headcount at 30 June 2013 reflects the filling of vacancies at that time and the transfer of new functions to the Treasury.

A Well-managed Public Sector Organisation Focused on Continuous Improvement#

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The Treasury has a leadership role in lifting the performance of the State sector. Our objective is to be recognised by our peers and through independent review as an example of how a well-managed organisation operates. We will continue making improvements to our systems and processes to allow maximum resources to go to the priorities identified in our Statement of Intent (SOI).

This year has involved the bedding in of CASS which was established in March 2012. CASS has already delivered a number of system improvements (for example, implementing a single payroll system, monthly financial forecasting and making substantial progress on moving to a standard operating environment) with benefits including improved resiliency, security and risk reduction. It has achieved its planned efficiency savings (see below). In addition, all functions have maturity models and action plans to improve maturity.

We have also established a Continuous Improvement programme of work. This has seen three Lean Six Sigma reviews undertaken on Treasury processes which have resulted in efficiency savings being made for two of these processes with the third area still in the process of implementing the changes. We have continued to work on improving our planning, project management and risk management processes.

Risk Management#

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The Treasury's risk management practice is based on an approach modelled on the Joint Australian/New Zealand International Risk Management Standard (ISO 31000:2009). The Treasury's ability to manage in an uncertain and changeable operating environment and to achieve our outcomes is enhanced by the quality of our risk management.[9]

Our enterprise risk management approach ensures there is systematic and regular assessment and monitoring of key strategic and operational risks facing the Treasury. Our senior leaders regularly identify and assess the Treasury's biggest strategic and emerging risks, and ensure that we take appropriate actions to manage them. Our overall set of risks is overseen by a Risk and Audit Committee (a committee of the Treasury Board), which comprises three experienced external members to provide independent perspectives.

Consistent with good practice, we intend to review our risk management approach during 2013/14.

Our internal audit function complements the risk management approach by providing assurance to the Board and senior management that key risks are being managed appropriately and that internal controls are operating effectively. The areas of focus are selected using a risk-based approach. During 2012/13 internal audit reviewed management activities in the following areas: CASS, NZDMO and the Crown Ownership Monitoring Unit (COMU).

Statement of Responsibility#

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

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

In the opinion of the Secretary to the Treasury:

• the Department’s financial statements and statements of service performance fairly reflect its financial position and operations for the financial year ended 30 June 2013, and
• the supplementary schedules fairly reflect the assets, liabilities, contingencies and commitments managed by the Treasury on behalf of the Crown as at 30 June 2013 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

24 September 2013

 

Sara Brownlie
Acting Chief Financial Officer (countersigned)

24 September 2013

Statement of Service Performance#

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Our Service Performance#

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This section describes the 11 groups of outputs that the Treasury was funded to deliver in 2012/13 and assesses our delivery against the performance measures set out in the Information Supporting the Estimates 2012.

Collectively these output expenses support the achievement of the outcomes set out on pages 20 to 32 of this Annual Report.

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

The diagram on pages 18 and 19 of this report illustrates the relationship between our output expenses, our intended impacts (also known as intermediate outcomes) and our outcomes.

Policy Advice - Finance#

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Scope of Appropriation#

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

Significant Work Completed#

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During 2012/13, the Treasury provided advice on:

Social policy

• Social housing reform, including future options for HNZC, the growth of the third sector and Budget and legislative changes to enable Income Related Rent Subsidies to be paid to tenants of community housing providers, the introduction of reviewable tenancies and the transfer of social housing waiting list management to MSD. This will ultimately lead to better integration of welfare and housing assessments and a more diverse social housing sector. We provided advice on the Tamaki Transformation Programme and establishment of the Tamaki Redevelopment Company to catalyse regeneration and intensification of housing in an area of Auckland that is predominantly state-owned housing.
• The affordability of housing, including developing options for a whole-of-government response to the Productivity Commission report, and working with MBIE and other agencies to progress specific elements of the work programme. The Treasury helped to shape the content of the Housing Accords and Special Housing Areas legislation and assisted in meeting the tight legislative deadline. We have guided the development of other projects such as a market-level study into the construction sector, and a review of development contributions by the Department of Internal Affairs (DIA). Investigations by the team have increased the public sector's understanding of the link between infrastructure provision and housing development.
• The health system and its performance, including the Christchurch hospital rebuild and family caregiver arrangements and funding. Litigation involving family caregivers represented a significant fiscal risk to the Crown and we worked closely with MOH and Crown Law to develop policy and legislative options, as well as providing quality assurance for the Ministry's costing methodology.
• The options for addressing child poverty, following the release by the Children's Commission of the Solutions to Child Poverty in New Zealand: Evidence for Action report in December 2012. The Treasury's approach has been to take a broad view of child wellbeing and bring a dynamic perspective about how children's early years can affect life chances and policies to improve opportunities for children.
• The progress being made on a variety of education issues including Budget 2013, partnership schools, school property, a review of the New Zealand Teachers Council and proposals for capital business cases for Canterbury Tertiary Education Institutions. The Treasury worked closely with the Ministry of Education (MOE) and Central Agencies to support the Ministry's performance and work on specific issues.
• Welfare policy and on the design and implementation of an investment approach to welfare, with the aim of reducing the level of long-term welfare dependency. The investment approach shifts the focus of the benefit system to the long-term costs of welfare receipt with the aim of improving the employment prospects of clients who have the greatest risk of long-term benefit receipt. We also worked with MSD on the development of a model for managing resources and funding, the implementation of a multi-category appropriation and the establishment of key performance indicators.
• Proposals for the Christchurch Justice sector and Emergency Services precinct and options to enable the Justice sector to operate within baselines. The Treasury worked closely with the Ministry of Justice (MOJ), and the broader Justice sector, on these issues.

Resource management

• The options for reforming resource management through the Resource Management Bill 2012 and Resource Management Reform 2013. This included clarifying the national direction and tools; simplifying and reducing the requirements for resource consent, introducing a time limit for consents for medium-sized projects, considering Māori interests in resource management earlier in the planning process and streamlining the process for Auckland's first unitary plan.
• The options for reforming management of water resources. Key decisions were made on the collaborative planning model for freshwater and for Māori participation. The Treasury assisted MfE and the Ministry for Primary Industries' (MPI) joint work programme with regional councils that has provided economic analysis of limits in a number of water catchments.

Infrastructure

• A multi-agency work programme on the Government's priority infrastructure projects, including, for example, the Roads of National Significance, publication of the first annual infrastructure report Infrastructure 2012: National State of Infrastructure report, and prepared the infrastructure Business Growth Agenda report. Further updates will be undertaken in 2013/14 leading to the next National Infrastructure Plan in 2015.
• A range of national infrastructure issues including performance indicators, scenario modelling and demand management tools to help assess the ability of infrastructure sectors to meet New Zealand's infrastructure needs. This work will continue through 2013/14.
• Worked with central government agencies, the Auckland Policy Office and the Auckland City Council, to establish an investment principles framework for the Auckland Unitary Plan that is consistent with the National Infrastructure Plan. We also provided advice and support on implementing the Auckland Plan.
• The medium- to long-term issues regarding transport funding, which resulted in adjustments to Fuel Excise Duty and Road User Charges.

The effective recovery of the Canterbury region

• Advice covered a broad range, including the central city Blueprint for Christchurch and associated anchor projects, housing and insurance markets in Christchurch, cost-sharing options between the Crown and the Christchurch City Council, monitoring of the recovery, zoning in Christchurch, fiscal management of earthquake-related expenditures and policy regarding earthquake-prone buildings. More broadly, the Treasury also advised on the options for change to the Earthquake Commission Act 1993.

Better public services

• The Treasury partnered with SSC and DPMC on a programme that aims to deliver better public services at a lower cost. Advice included the further development of specialist functional leadership within the public sector in information technology, procurement and property; design and approvals for seed funding to support the programme with specific funding going to developing functional leadership in Finance, Human Resources and development of Analysis for Outcomes, which will analyse government datasets to support the Better Public Services programme.
• Changes to the State Sector Act 1988, the Public Finance Act 1989 and the Crown Entities Act 2004 contained in the State Sector and Public Finance Reform Bill, and supported the passage of the Bill through the House. This legislation gets the system as a whole better at working together to deliver results, support more meaningful reporting, strengthen leadership across the system and provide greater flexibility in funding programmes that span multiple agencies.

Budgeting and financial management

• New Zealand’s fiscal outlook and risks to support the fiscal decisions that were taken in Budget 2013 and the associated BPS and the FSR.
• The future funding options for the New Zealand Defence Force and the Office of Treaty Settlements to sustain their momentum with the Treaty Settlements programme.
• The impact of tax settings, along with IRD, culminating in the Taxation of Savings and Investment Review.

International relationships and external engagement

• The advancement of regional economic integration and the Government’s Business Growth Agenda and the associated target to increase trade flows through the Trans Pacific Partnership (TPP) negotiations throughout the period: in particular, analysing proposals on SOEs and investment policy; leading negotiations and drafting of the regulatory coherence chapter of the proposed agreement; and developing a framework for assessing the overall costs and benefits of the resulting TPP package. The Treasury also chaired negotiations on SOEs at the Auckland round of negotiations on the TPP agreement.
• The Minister of Finance's programme of international visits, including to the IMF/World Bank annual meetings in Tokyo, represented New Zealand at the Asia-Pacific Economic Cooperation (APEC) Finance and Leaders' meetings, took part in the US/NZ Partnership Forum, held economic dialogues with the US and Australian Treasuries and the Indian Ministry of Finance and supported a range of other inward and outward visits including by the Secretary to China, and by the Finance and Expenditure Committee Chair to the annual meetings of the Asian Development Bank in New Delhi in order to advance New Zealand's interests abroad.
• Engaged with OECD and IMF on their Economic Survey and Article IV reports, and with rating agencies on their sovereign rating assessments so that New Zealand was accurately represented and New Zealand perspectives were considered.
• Jointly hosted, with RBNZ, an Exchange Rate Policy Forum for business people, business and labour organisations, domestic and international policy advisors and academics, and set up an inter-agency investigation into the impacts of foreign direct investment and overseas direct investment which is reporting to Capital Markets Ministers responsible for the Business Growth Agenda.

Our economy and fiscal position

• Domestic and international economic developments to support decision-making, including an initial assessment of the impact of drought and the ongoing Euro crisis. Analysis of these issues was documented in Monthly Economic Indicator reports.
• The risks to the Crown of the implicit guarantee of the financial sector, and worked with Trans-Tasman Banking Council agencies to enhance cross-border crisis resolution strategies.
• An MOU that was established with RBNZ regarding the purposes and processes for the use of macro-prudential tools with the aim of safeguarding the stability of our economy and financial markets. A new Policy Targets Agreement was also agreed with RBNZ to govern the future operation of monetary policy.
• The Crown's long-term fiscal position. This work published under the title Affording our Future provides 40-year projections on the fiscal position, and identifies challenges that will face future governments, such as those arising from society’s ageing population, and provides members of the public with information on evidence-based options for meeting those challenges. The Treasury ran a collaborative public engagement process to test ideas with a broad range of external experts prior to publication. The Office of the Auditor-General (OAG) provided a positive assessment of this work in its review, Commentary on Affording our Future: Statement on New Zealand's Long-term Fiscal Position. OAG looked at the Statement, the process used to prepare it and the underlying financial model and assumptions used to support it as part of its own work programme. Their report can be viewed at: http://www.oag.govt.nz/2013/long-term-fiscal-position

Expenditure is $1.102 million under the Supplementary Estimates budget. Approval has been granted to transfer this under-expenditure to 2013/14 to complete a range of work programmes owing to delays in some corporate projects and work related to changes in the Public Finance Act 1989.

The output expense structure under Vote Finance was rationalised at the end of 2011/12 and this output now includes the former output class Infrastructure Advice and Coordination which spent $3.99 million in 2011/12. Functions previously delivered under the Policy Advice – Finance output class were transferred to the output class Provision of Financial Operations Services and Operational Advice in 2012/13 to align with a government-wide common scope for policy advice.

Provision of Financial Operations Services and Operational Advice#

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Scope of Appropriation#

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This appropriation is limited to the provision of services that support the performance of the State sector, including fiscal reporting, forecasting and monitoring; provision of Export Credit; and the management, administration and monitoring of Crown Guarantee Schemes, Crown Lending, Crown Investments and Crown Bank Accounts.

Significant Work Completed#

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During the year the Treasury:

Performance improvement and capability building

• Worked with SSC and DPMC on PIF assessments and revisions to the assessment framework. Ten PIF reviews were completed and published during the 2012/13 year, with another two published shortly after year-end. We also contributed to discussion on six PIF follow-up reviews of agencies that were first reviewed in earlier years.
• Supported the Department of Corrections to negotiate and close the Wiri Prison PPP contract and continued work on future and potential PPP opportunities with a number of other agencies, including working with the New Zealand Transport Authority (NZTA) on Transmission Gully which is proceeding as a PPP contract.
• Delivered 74 Better Business Case (BBC) training sessions, which were attended by 1,200 people from across the wider public sector with growing attendance by representatives from SOEs, private sector and consultancy firms, investment banks and infrastructure businesses. We also conducted a national evaluation to determine the extent to which the objectives of BBC were being achieved, and the evaluation indicted that BBC had a positive impact on the quality of business case thinking and that it is generally fit for purpose.
• Continued to improve performance metrics for the BASS exercise to enhance its utility for decision-makers. This included introducing a more detailed breakdown of ICT expenditure, and enhancing measures of effectiveness in the BASS 2011/12 fiscal year report. We also commissioned an independent review of BASS, which found that the programme was perceived positively by agency managers and highlighted the need to improve performance management capability across the State sector.
• Established new measurement across a range of activities to improve our understanding of State sector performance and to assist better decision-making. Within the three main components of this work, we:
• developed the Policy Measurement programme, including providing guidance to agencies and working with them in preparation for reporting against the 2012/13 fiscal year
• developed and tested a repeatable approach to measuring performance in front-office service delivery across agencies. This will enable us to better monitor changes over time, and
• developed and maintained a single data set on State sector projects and programmes (planned and underway) to enable increased visibility of core capital use; improved modelling, analysis and advice to decision-makers; and created a basis to support better investment decisions on the management of social assets in the long term.
• Commenced work on the Optimise Finance initiative, which is focused on ensuring the finance function is efficient and effective and helps to drive improvement in the performance of government agencies.

Fiscal reporting, forecasting and monitoring

• Delivered Budget 2013, consistent with the Government's fiscal strategy of returning to operating surplus in 2014/15 and funding all new capital requirements from the existing Crown balance sheet.
• Government operating and capital spending to enable Ministers to manage short- and longer-term spending pressures, reallocate government spending and reprioritise the balance sheet.
• Produced tax and economic forecasts of the outlook for the New Zealand economy to inform future fiscal policy advice and to inform the public about the basis of that advice, helping both government and business to make informed decisions about spending and investment. Analytical work examining historical and forecast estimates of potential growth was incorporated into the 2012 HYEFUs.
• Produced the Financial Statements of Government, which this year included a high-level summary “the fiscal overview” to serve as a useful roadmap for readers.
• Worked with the External Reporting Board (XRB) to establish a taskforce to deal with “mixed group” accounting issues identified by the Treasury. Implemented new SOE and Crown entity variance reporting for Budget 2013.

New Zealand Export Credit Office

• Issued 68 new policies with a total exposure value of $65 million and supporting exports of $319 million. The number of formal applications for NZECO's support in 2012/13 was higher than last financial year resulting in a higher value of exports supported. New exposure was lower than our forecast targets for the year because the majority of policies were for lower guarantee amounts and shorter duration compared to previous years.
• Advised several export credit agencies about the support for small and medium-sized enterprises (SME), including a presentation to the APEC SME Trade Finance conference in Manila. We also worked with other government agencies on the options for generating greater export growth, the internationalisation of New Zealand firms and the mechanisms for supporting New Zealand's Free Trade Agreements. In December 2012, Cabinet approved an increase of the maximum term for SME loan guarantees to 36 months and also enabled the Treasury to issue performance guarantees directly to foreign government and public agency buyers.
• Delivered seminars on trade finance to exporters, banks and external agencies to improve awareness of how NZECO guarantees mitigate risk and improve competitive advantage. Reflecting the emphasis on external engagement, 53% of businesses supported by NZECO during the year were new clients.

New Zealand Debt Management Office 

• Advanced $1,114 million distributed as follows: $624 million to District Health Boards (DHBs); $152 million to Housing New Zealand; $120 million to NZTA; $108 million to KiwiRail; and $110 million to Auckland Council. The advance to the Auckland Council was made up of nine loans to enable it to develop the Auckland metro rail network through buying electric multiple units (EMUs) and building an EMU depot.
• Managed risk on $224 million of interest-rate swaps transacted for Housing New Zealand.
• Engaged with banks, departments and MBIE on the inclusion of the Crown's transactional banking arrangements within a broader tender of all-of-government banking services. The tender is expected to occur in the 2013/14 year.

Regulatory reform 

• Provided options for reform of the regulatory management system, leading to Cabinet agreement to high-level expectations for department regulatory stewardship responsibilities, and disclosure requirements for legislation and regulation produced by the Government.

Guarantee schemes

• Transfer of the residual assets from receiverships under the DGS was completed during the year. There have been no defaults of wholesale issuances under the wholesale funding guarantee facility so no work was required on this output over the year.

Managing the Crown's balance sheet

• The Treasury has undertaken a considerable amount of work in relation to Solid Energy, including ongoing discussions with its bankers over a capital restructure, an internal review of the Treasury's monitoring of Solid Energy and a large Official Information Act (OIA) release given the public interest in the company.

Expenditure is $3.277 million under the Supplementary Estimates budget. Approval has been granted to transfer this under-expenditure to 2013/14 to complete a number of projects owing to timing delays associated with corporate projects, government banking tender, NZECO, policy improvement programme, development work on using advanced analytics across the State sector and financial functional leadership.

Functions previously delivered under Policy Advice - Finance were transferred into this output in 2012/13 where they did not meet the government-wide scope definition for Policy Advice.

Further explanation of this transfer is found in the document Performance Information for Appropriations 2012/13 - Vote Finance - Part 1.4 Reconciliation of changes in appropriation structure.

The surplus in this output class is attributable to a prior year rental rebate.

Permanent Legislative Authority Funding for New Zealand Debt Management Office#

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Scope of Appropriations#

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

• 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#

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NZDMO provides Treasury services, and administers loans, to other parts of the Crown according to government policy. These services provide net cost savings to the Crown, through centralised borrowing and lending activities. This results in a lower debt servicing expense for the Crown than individual entities borrowing separately. Central treasury management saves on transaction costs and provides risk management benefits to the Crown.

During the year, NZDMO:

Borrowing programme

• Issued $14 billion of government bonds, achieving the targeted programme size. This compared to $13.5 billion in 2011/12. The funding included the introduction of a 2025 inflation indexed bond, with an initial syndication offering raising $2.5 billion from the market.
• Introduced a new April 2020 maturity nominal bond to the market, by syndication, raising $2 billion.
• Repaid its largest ever bond maturity ($9.982 billion) in April 2013. Risk and funding policies ensured that bond maturity obligations were met in full.
• Moved to announcing tender dates and volumes for debt issuance at the beginning of each quarter. This was done to provide market predictability and to encourage activity in the secondary market.

Marketing efforts and interactions with international stakeholders and credit rating agencies

• Promoted government bonds and New Zealand generally in local and international markets. This included accompanying the Minister of Finance on overseas investor missions, developing and strengthening intermediary and investor relations, providing information to the international credit rating agencies for their annual rating reviews, and engaging with sovereign peers.
• Accompanied the Minister of Finance on visits to London, Frankfurt, Tokyo, Hong Kong and New York to update investors on the New Zealand economy and the NZDMO issuance strategy.
• Participated in and presented at a number of investor and sovereign peers conferences and forums, including the Euromoney Global Borrowers and Investors Forum, CBA Capital Markets Conference, OECD Working Party on Debt Management, Australian and New Zealand Debt Capital Markets Forums and the Australian Central Financing Authorities Annual Conference.
• Provided background information and responded to international media interest in New Zealand capital markets, including interviews with Bloomberg and Kanga News.
• Hosted several visiting delegations from developing international debt management offices, including a study visit from representatives of the Bangladesh Ministry of Finance. Visiting investors, including sovereign wealth funds, Asian central banks and Japanese institutions, were briefed on the economy and debt issuance strategy.
• Engaged with the three rating agencies (Moody’s, S&P and Fitch) to assist them in their assessments of New Zealand’s creditworthiness. This included briefing them on the developments in the New Zealand economy, organising meetings with relevant officials, commentators and Ministers.

Derivatives programme

• Successfully managed risks associated with the changing market value of the NZDMO asset portfolio within the target average monthly Value at Risk (VaR).
• Investigated the implications and options involved in responding to international regulation designed to move over­-the-counter derivatives towards being centrally cleared.

Investment programme

• Managed marketable securities valued at $2.401 billion, deposits valued at $99 million and a cash balance of $4.585 billion. 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.
• Assets were invested in a high credit quality portfolio, predominantly made up of AAA- and AA- rated securities.

Performance measurement

Performance targets have been specified as a total for activity across all three PLA output classes, as it is more meaningful to aggregate the quantitative targets across these output classes.

Administration of Crown Borrowing PLA is $1.139 million under the Supplementary Estimates budget. This is owing to lower costs associated with debt services, commissions and process management fees.

Note

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

Provision of Financial Services to the New Zealand Local Government Funding Agency (Revenue-dependent Appropriation)#

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Scope of Appropriation#

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This appropriation is limited to expenses incurred in connection with the provision of financial services on a commercial basis to the New Zealand Local Government Funding Agency (LGFA).

Significant Work Completed#

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During 2012/13, the Treasury:

• Continued to provide services to LGFA. These services include bond tendering, processing on-lending to local councils, executing investment and derivative transactions, settling transactions and providing regular valuation, finance and risk reports.
• Managed risk on $1,327 million of interest-rate swaps transacted for LGFA.

A service level agreement was in place and fees were charged to cover costs.

In December 2011, Cabinet agreed that NZDMO would provide a standby liquidity facility and outsourced service to the New Zealand Local Government Funding Agency. A revenue-dependent appropriation (RDA) was established and an annual fee negotiated between the two parties to recover the cost of providing the service.

Implementation of Mixed Ownership Model#

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Scope of Appropriation#

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• This appropriation is limited to policy, operational and transactional work to implement the MOM.
• In December 2011, Cabinet approved a new Departmental Output Expenses Multi-year Appropriation (MYA) for costs incurred in implementing Government Share Offers. Policy work leading up to the establishment of this appropriation was undertaken under the Departmental Output Expense: Extending the Mixed Ownership Model appropriation and funding of $2.802 million was transferred from that appropriation. Funding of $14 million was also transferred from the Non-departmental Other Expense MYA: Direct Sale Costs for Implementing the Mixed Ownership Model.
• This MYA will expire on 30 June 2015

Significant Work Completed#

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During 2012/13, the Treasury:

• Successfully defended legal challenges to the programme in both the High Court and Supreme Court.
• Completed the Mighty River Power Initial Public Offer (IPO) in accordance with the schedule and within budget. The IPO met the Government’s objectives of widespread New Zealand ownership and raised $1.7 billion for the Crown’s Future Investment Fund. The proceeds from the 48% of shares sold were above book value, and over 110,000 New Zealanders subscribed for shares in the company representing a New Zealand ownership level of 86.5%.
• Commenced work on the preparation of Meridian for the next public offer, market conditions permitting.

Expenditure is $13.505 million under the Supplementary Estimates budget. This is an MYA and the result against budget reflects the uncertain timing of the work programme. The full amount underspent is transferred to 2013/14.

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

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Scope of Appropriation#

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

Significant Work Completed#

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During 2012/13, the Treasury:

• Carried out a second opinion monitoring role in respect of the eight CRIs and reported on them in the Treasury’s 2012 APR.
• Provided second opinion advice and guidance to MBIE on its monitoring of CRIs and Research and Education Advanced Network New Zealand (REANNZ).
• Provided advice on NZVIF business planning and risks and opportunities.
• Assisted Ministers with 20 board appointments for CRIs, New Zealand Venture Investment Fund Ltd (NZVIF) and REANNZ.

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

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Scope of Appropriation#

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

Significant Work Completed#

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During 2012/13, the Treasury:

• Provided Quarterly Reports on the performance of SOEs, Crown entities and other monitored entities. To achieve this, we engaged with monitored agencies, provided advice on strategy and planning documentation and ensured compliance with statutory requirements for SOIs, Statements of Corporate Intent (SCIs) and Purchase Agreements of monitored entities.
• Commenced a work programme to strengthen our monitoring of commercial assets owned by the Crown through a focus on structures and incentives, governance and monitoring tools and procedures.
• Analysed Post Investment Reviews of SOEs’ major capital projects and business acquisitions and reported the results of these back to shareholding Ministers. The reviews showed that the majority of SOE investments have been successful.
• Engaged with companies on their dividend policies as part of the annual round of business planning and SCIs, because these impact on capital structures.
• Published the 2012 APR to increase the transparency of the performance of monitored entities, and revised the Owners' Expectations Manual for SOEs and other Treasury-monitored entities. This manual states the expectations that Ministers have of SOEs.
• Assisted Ministers with 68 appointments and reappointments, and the appointments to establish boards for the Crown Irrigation Investment Company Ltd and the restructured KiwiRail entities.
• Undertook work on the long-term strategy and capital needs of Kiwibank, and in respect of a divestment of Datacom by NZ Post.
• Provided advice regarding KiwiRail’s Turnaround Plan progress and a proposed Balance Sheet Restructuring, which was implemented on 31 December 2012, and should assist in the reporting and monitoring of its commercial progress.
• Provided advice on the completion of a Strategic Review of the Kordia Group Ltd.
• Reinvigorated the tailored Crown director development programme to improve governance knowledge and capability.
• Assumed responsibility for appointing board members and monitoring the performance of ACC, Housing New Zealand, Network for Learning, Crown Irrigation Investments and the Tāmaki Redevelopment Company.

Expenditure is $754,000 under the Supplementary Estimates budget. Approval has been granted to transfer up to $500,000 of this under-spend to 2013/14 to continue additional monitoring work that had been delayed.

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

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Scope of Appropriation#

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

Significant Work Completed#

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During 2012/13, the Treasury:

• Completed the transfer of residual assets from receiverships under the DGS.
• Progressed resolution of outstanding litigation acquired by the Crown from receivers as part of the transfer of residual assets from receiverships under the DGS.
• Did not undertake any other work in respect of this output, as there were no defaults of wholesale issuances under the Wholesale Funding Guarantee Facility (WFGF).

Administration of Guarantees and Indemnities is $890,000 under the Supplementary Estimates budget. The under-expenditure reflects the winding down of claims and delays in progressing resolution of outstanding litigation owing to a rescheduling of hearing dates.

Shared Support Services#

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Scope of Appropriation#

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

Significant Work Completed#

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During 2012/13, the Treasury:

• Delivered finance, human resources, information management and technology services to SSC and DPMC.
• Made substantial progress on moving the Central Agencies to a standard operating environment; the benefits of this include improved resiliency, security and risk reduction. In addition, the payroll systems of the three agencies were moved onto a more reliable and sustainable platform.
• Achieved the objectives for its first year of operation; which entailed reducing risk, building resilience and savings in running costs.

Expenditure is $1.619 million under the Supplementary Estimates budget and this is also reflected in the lower departmental revenue for these services.

Ministerial Servicing Performance 2012/13#

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

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

The Treasury implemented a new workflow management system in July 2012, to support efficient work practices.

During 2012/13 we reviewed our internal OIA processes using Lean Six Sigma methodology and principles. An important aim of that review was to look at ways of improving the timeliness of the Treasury's responses to OIA requests. At the close of this year, we are yet to see the full return on this investment, and we will be continuing to focus on improving our timeliness through 2013/14.

Agreed measures for ministerial servicing are set out on page 131.

The Quality of the Treasury's Policy Advice#

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The Treasury has a quality standard for policy advice that is applied to all appropriations. The Quality Standards for Policy Advice are published in full on pages 129 and 130 of this Annual Report.

Review of the Quality of the Treasury's Policy Advice 2013#

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This year we established an internal panel to review a sample of the Treasury's policy advice for the 2012/13 year. This is a process we established in 2012 and follows two previous external reviews conducted by Howard Fancy in 2009 and 2011.

The intent of the review was to:

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

This year the panel was run jointly with SSC and was led by experienced policy leaders within the Treasury and SSC. It looked at a representative sample of advice selected using a randomised methodology.

The review found that:

• the average grade for assessed reports was 7.2 out of 10, and
• 81% of assessed reports were graded 7 out of 10 or higher.

These results mean we have achieved our target of achieving at least an average of 70% and provide confidence that, overall, the Treasury achieves and maintains satisfactory levels of quality. The results are also broadly consistent with the findings from last year's review process, with the Treasury continuing to score well on the “analytical rigor” and “set in the wider strategic context” dimensions and less well on the “customer focus and persuasive” dimension.

A number of actions put in place following the previous review are at an early stage of implementation. The Treasury is still working through the findings of the current review and identifying what lessons can be learned and further actions taken to lift the quality of our policy advice.

Financial Statements – Departmental#

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for the year ended 30 June 2013

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

1. Statement of Accounting Policies
2. Revenue Crown
3. Other Revenue
4. Personnel Costs
5. Capital Charge
6. Other Operating Expenses
7. Debtors and Other Receivables
8. Property, Plant and Equipment
9. Intangible Assets
10. Departmental Capital Expenditure
11. Creditors and Other Payables
12. Return of Surplus to Crown
13. Provision for Employee Entitlements
14. Reconciliation of Net Surplus to Net Cash Flows from Operating Activities
15. Related Party Transactions
16. Events After Balance Date
17. Financial Instruments
18. Capital Management
19. Explanation of Major Variances Against Budget

Statement of Comprehensive Income#

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for the year ended 30 June 2013#

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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 2013. Total expenses equals total departmental output classes expenditure and appropriations in the Statement of Departmental Expenses and Capital Expenditure Against Appropriations on page 67.

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

Statement of Changes in Equity#

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for the year ended 30 June 2013#

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

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

Statement of Financial Position#

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as at 30 June 2013#

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The Statement of Financial Position reports the total assets and liabilities of the Treasury as at 30 June 2013. Taxpayers' funds are represented by the difference between the assets and liabilities.

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

Statement of Cash Flows#

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for the year ended 30 June 2013#

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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 64.

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

Statement of Departmental Expenses and Capital Expenditure Against Appropriations#

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for the year ended 30 June 2013#

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The Statement of Departmental Expenses and Capital Expenditure Against Appropriations details expenditure against appropriations. Total Departmental Output Classes Expenditure and Appropriations equals total expenses in the Statement of Comprehensive Income on page 64.

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

Statement of Commitments#

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Capital Commitments#

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There are no capital commitments for this year ( 30 June 2012: Nil).

Non-cancellable Operating Lease Commitments#

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

Other Non-cancellable Commitments#

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

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

Statement of Contingent Liabilities#

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Unquantifiable Contingent Liabilities#

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The Department has the following unquantifiable contingent liabilities:

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

Quantifiable Contingent Liabilities and Assets#

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As at 30 June 2013, the Department had no quantifiable departmental contingent assets and liabilities (30 June 2012: Nil).

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

Notes to the Departmental Financial Statements#

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for the year ended 30 June 2013#

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1  Statement of Accounting Policies#

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

In addition, the Treasury has reported separately 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 2013. The Financial Statements were authorised for issue by the Secretary to the Treasury on 24 September 2013.

Statement of compliance

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

Basis of preparation

Measurement base

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

Functional and presentation currency

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

Changes in accounting policies

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

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

• Amendments to NZ IAS 1 Presentation of Financial Statements. The amendments introduce a requirement to present, either in the Statement of Changes in Equity or the notes, for each component of equity, an analysis of Other Comprehensive Income by item. The Treasury has no other comprehensive income.
• Amendments to NZ IFRS 7 Financial Instruments: Disclosures – The amendment reduces the disclosure requirements relating to credit risk. Note 17 has been updated for the amendments.

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

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

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

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

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

Significant accounting policies

Revenue

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

Revenue Crown

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

Revenue other

State Sector Retirement Superannuation and KiwiSaver Schemes revenue

In 2012 revenue other included reimbursements by SSC for contributions made by the Treasury to the State Sector Retirement Superannuation Scheme and the KiwiSaver Scheme, and the tax credits for contributions to KiwiSaver received from IRD. From the 2013 year onwards, the Treasury has not been reimbursed.

Cost recoveries

The Treasury fully recovers costs it incurs on behalf of other agencies by invoicing for the service provided. 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 leases

The Treasury leased office premises during the year ended 30 June 2013. Substantially all the risks and benefits of ownership were retained by the lessor, and therefore these leases were classified as operating leases. Operating lease costs are recognised as an expense in the Statement of Comprehensive Income on a straight-line basis over the period of the lease.

Financial instruments

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

Cash and cash equivalents

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

Debtors and other receivables

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

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

Derivative financial instruments

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

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

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

Non-current assets held for sale

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

Any impairment losses for write-downs of non-current assets held for sale are recognised in the Statement of Comprehensive Income.

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

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

Property, plant and equipment

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

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

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

Additions

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

Disposals

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

Subsequent costs

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

Depreciation

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

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

Intangible assets

Software acquisition and development

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

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

Staff training costs are recognised as an expense when incurred.

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

Amortisation

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

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

Impairment of property, plant and equipment and intangible assets

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

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

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

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

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

Creditors and other payables

Creditors and other payables are measured at cost.

Employee entitlements

Short-term employee entitlements

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

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

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

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

Long-term employee entitlements

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

The calculations are based on:

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

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

Superannuation schemes

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

Provisions

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

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

Equity

Equity is the Crown's investment in the Treasury and is measured as the difference between total assets and total liabilities. Equity is disaggregated and classified as taxpayers' funds and Memorandum Accounts.

Commitments

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

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

Goods and services tax (GST)

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

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

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

Commitment and contingencies are disclosed exclusive of GST.

Income tax

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

Budget figures

The budget figures are those included in the Department's Budget Estimates for the year ended 30 June 2013, which are consistent with the financial information in the Main Estimates. In addition, the Financial Statements also present the updated budget information from the Supplementary Estimates.

Statement of cost allocation policies

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

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

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

Central Agency Support Services (CASS) cost allocations

A cost allocation model relating to CASS-specific costs has been added from 7 March 2012 with the creation of the shared services model incorporating the Treasury, SSC and DPMC.

Critical accounting estimates and assumptions

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

Retirement and long service leave

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

Notes to the Departmental Financial Statements#

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2  Revenue Crown#

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

3  Other Revenue#

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4   Personnel Costs#

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2013 Salaries and wages costs have increased by $5.037 million from 2012. The main reason for the increase is owing to a full 12 months of CASS and recovery of costs for personnel on secondment is treated as revenue rather than offset against salaries.

5  Capital Charge#

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The Treasury pays a capital charge to the Crown based on taxpayers' funds at 30 June and 31 December each year. The capital charge rate for the 2013 year was 8% (2012: 8%).

6  Other Operating Expenses#

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7  Debtors and Other Receivables#

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

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

8  Property, Plant and Equipment#

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

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

9  Intangible Assets#

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

Additions for the 2011/12 year included $910,000 transferred from SSC and DPMC with the set up of CASS.

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

10  Departmental Capital Expenditure#

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11  Creditors and Other Payables#

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12  Return of Surplus to Crown#

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The return of operating surplus to the Crown is required to be paid by 31 October each year. The Treasury has a surplus of $402,000 to return to the Crown for the period ending 30 June 2013 (30 June 2012: Nil).

13  Provision for Employee Entitlements#

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

In determining the appropriate discount rate the Department adopts the central table of risk-free discount rates and CPI assumptions provided by the Treasury to all departments.

14  Reconciliation of Net Surplus to Net Cash Flows from Operating Activities#

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15  Related Party Transactions#

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

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

The Treasury has received funding from the Crown of $74.628 million to provide services to the public for the year ended 30 June 2013 (2012: $72.319 million).

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

The Treasury also purchased and sold goods and services from entities controlled, significantly influenced or jointly controlled by the Crown. Purchases from these government-related entities for the year ended 30 June 2013 totalled $5.401 million (2012: $3.126 million). These purchases exclude capital charge and include air travel from Air New Zealand, ACC levies, legal advice from the Crown Law Office and service provided by other government departments primarily being Audit NZ, Department of Prime Minister and Cabinet, Ministry of Foreign Affairs and Trade, State Services Commission, Department of Internal Affairs, Ministry of Economic Development and Statistics NZ.

Key management personnel of the Treasury at 30 June 2013 included the ELT (Chief Executive, one Deputy Chief Executive and nine Deputy Secretaries) plus the Director CASS and the Treasury Board fees.

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

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

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There were no related party transactions involving key management personnel or their close family members. No provision has been required, nor any expense recognised, for impairment of receivables from related parties (2012: Nil).

16  Events After Balance Date#

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There were no events subsequent to balance date that required adjustment to the Financial Statements or disclosure (2012: Nil).

17  Financial Instruments#

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17A Financial Instruments#

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

17B Financial Instrument Risks#

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

Currency risk 

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

Interest rate risk

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

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

Credit risk

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

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

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

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

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.

Contractual maturity analysis of financial liabilities, excluding derivatives

The table below analyses the Treasury's financial liabilities into relevant maturity groupings based on the remaining period at balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.

18  Capital Management#

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The Treasury's capital is its equity, which comprises taxpayers' funds and memorandum accounts. Equity is represented by net assets.

The Treasury manages its revenues, expenses, assets, liabilities and general financial dealings prudently. The Treasury's equity is largely managed as a by-product of managing income, expenses, assets, liabilities and compliance with the Government Budget processes, Treasury Instructions and the Public Finance Act 1989.

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

19  Explanation of Major Variances Against Budget#

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Statement of Comprehensive Income#

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The following major variations occurred between the 2012/13 and the 2011/12 Actuals:

• The implementation of the government share offers work programme increased costs in 2012/13 by just over $3.7 million compared to 2011/12.
• The provision of shared support services to Central Agencies began in March 2012. 2012/13 is the first full year of operation and both revenue and expenditure increased by $4 million compared to 2011/12.

The following major budget variations occurred between the 2012/13 Actuals and the 2012/13 Supplementary Estimates budgets:

• The majority of the current-year variance in expenditure and revenue relates to the multi-year funding provided for the government share offers ($13.505 million). The uncertain timing of this work programme means that this funding will be transferred to future periods.
• In addition, approval has been given to transfer up to $5.240 million of operational funding into 2012/13. These approvals are detailed under each output in the Statement of Objectives and Service Performance section of this report.

Statement of Financial Position#

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The following major variations occurred between the 2012/13 and the 2011/12 Actuals:

• The decrease in debtors and receivables reflects better CASS charges between agencies in 2012/13, now that billing details are clearer.
• The debtor Crown reflects costs in June, as cash is received in arrears. The increase for 2012/13 reflects the higher expenditure.

The following major budget variations occurred between the 2012/13 Actuals and the 2012/13 Supplementary Estimates budgets:

• Supplementary Estimates capital expenditure on IT assets was expected to be higher following the integration of CASS. More of this work will now be completed in 2013/14.

Supplementary Financial Schedules - Non-departmental#

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for the year ended 30 June 2013#

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

1. Capital Charge
2. Crown Guarantee Schemes: The Retail Deposit Guarantee Scheme (DGS) and Crown Wholesale Funding Guarantee Facility (WFGF)
3. Dividends
4. Earthquake Commission
5. EQC Apportioned and Unclaimed Damage Expense
6. Goodwill
7. Government Superannuation Fund Unfunded Liabilities
8. Government Superannuation Fund Authority - Crown's Share of Expenses
9. Government Superannuation Fund - Employers' Contribution
10. International Financial Institutions (IFIs)
11. Invercargill Airport Limited
12. Landcorp Protected Land Agreement
13. Mighty River Power Initial Public Offer
14. National Provident Fund Defined Benefit Plan (DBP) (Annuitants) Scheme Provision
15. National Provident Fund - Crown Liability for Scheme Deficiency
16. New Zealand Export Credit Office
17. New Zealand House - London
18. New Zealand Superannuation Fund
19. New Zealand Debt Management Office
20. Other Current Revenue
21. Reserve Bank Surplus
22. Southern Response Earthquake Services Limited
23. Solid Energy New Zealand Limited
24. Taitokerau Forests Limited

Schedule of Expenses#

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for the year ended 30 June 2013#

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The Schedule of Expenses summarises expenses that the Department administers on behalf of the Crown. Details of non-departmental expenditure and appropriations are provided in the Explanatory Notes to Supplementary Statements and Schedules - Non-departmental on pages 99 to 106.

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 2013.

Schedule of Expenditure and Appropriations#

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for the year ended 30 June 2013#

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

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2013.

Statement of Unappropriated Expenditure#

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for the year ended 30 June 2013#

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There was one item of unappropriated expenditure in Vote Finance in the year ended 30 June 2013.

A technical breach of the appropriation resulting from transfers of Deposit Guarantee Assets into CAML before joint Ministers confirmed the in-principle transfer request, (note 2(b)).

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 2013.

Schedule of Revenue#

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for the year ended 30 June 2013#

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Comparatives have been restated to reflect 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 2013.

Schedule of Capital Receipts#

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for the year ended 30 June 2013#

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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 2013.

Schedule of Assets#

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as at 30 June 2013#

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

In addition, the Treasury monitors 15 SOEs and 17 Crown entities. The investment in these entities is consolidated in the Crown Financial Statements on a line-by-line basis. The investment in these entities is not included in this schedule.

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2013.

Schedule of Liabilities#

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as at 30 June 2013#

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

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2013.

Schedule of Commitments#

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as at 30 June 2013#

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

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2013.

Schedule of Contingent Liabilities#

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as at 30 June 2013#

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

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

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

Decrease in contingent liabilities is owing to exchange rate fluctuations and contributions made to IMF as part of IMF's response to the financial crisis.

Unquantifiable Contingent Liabilities#

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

Contingent Assets#

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The Department, on behalf of the Crown, has no contingent assets (2012: Nil).

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

For a full understanding of the Crown's financial position and the result of its operations for the year, refer to the consolidated Financial Statements of the Government for the year ended 30 June 2013.

Statement of Trust Monies#

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as at 30 June 2013#

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(a) Unclaimed Money

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

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

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

(b) Mighty River Power Initial Public Offer Trust Account

During the year, the Crown opened a Mighty River Power Initial Public Offer Trust Account to facilitate the partial sale of Mighty River Power. The sources of funds relate to proceeds from the sale of shares and distributions relate to refunds paid to investors. The funds are transferred to the Crown upon completion of the IPO.

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 2013.

Statement of Accounting Policies#

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for the year ended 30 June 2013#

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Reporting Entity#

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

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 2013.

Basis of Preparation#

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

Measurement and recognition rules applied in the preparation of these non-departmental supplementary financial schedules are consistent with NZ GAAP and Crown accounting policies and are detailed in the Financial Statements of the Government. Recognition and measurement rules comply with NZ IFRS and other applicable financial reporting standards, as appropriate for public benefit entities.

Significant Accounting Policies#

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The accounting policies set out below have been applied consistently to all years presented in these financial statements.

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

Public Benefit Entities new accounting standards framework - NZ PBE standards

The Government will transition to the new Public Benefit Entities suite of standards for the next year. The Treasury will issue new accounting policies based on the new standards. If there are adjustments on transition to the new suite of NZ PBE standards, the comparatives for 2013/14 will need to be restated.

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

Commitments

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

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

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Explanatory notes provide details of significant expenditure and revenue variances between actual results in 2011/12 and 2012/13 and between 2012/13 actual results and 2012/13 Supplementary Estimates.

1  Capital Charge#

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Capital charge revenue increased by $55.836 million from 2011/12 year predominantly owing to new capital charge rules, which commenced on 1 July 2011 where departmental memorandum account deficits are now being included in the capital charge calculation. For the current year, the new rules were applied to entities’ June 2012 and December 2012 net assets and memorandum account balances. In the prior year the impact of memorandum accounts was only applied on entities’ December 2011 balances.

2  Crown Guarantee Schemes: The Retail Deposit Guarantee Scheme (DGS) and Crown Wholesale Funding Guarantee Facility (WFGF)#

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The Government provided two guarantee schemes in relation to financial institution deposits: DGS and WFGF.

2(a)  Retail Deposit Guarantee Scheme#

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

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

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

Analysis of recoveries and payments from receiverships#

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2(b) Crown Asset Management Limited#

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CAML was established to manage recoveries from the remaining assets of receiverships which defaulted under the Retail Deposit Guarantee Scheme where the Crown was the sole creditor. In Budget 2012, $500 million was allocated for equity injections into CAML under a capital appropriation. The transfer of assets to CAML was only partially completed as at 30 June 2012 and therefore a transfer of the remaining capital appropriation was approved for completion of the acquisition of the residual assets of the other receiverships. During the year the Crown injected $54.809 million, a combination of cash and non-cash equity injections into CAML to fund the transfer of Deposit Guarantee Scheme assets into CAML and to provide funding to acquire the property portfolio of SRESL. During the year, the Crown received capital distributions of $116.822 million from CAML.

2(c) Crown Wholesale Funding Guarantee Facility#

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In addition to DGS, the Government operated an opt-in WFGF from November 2008 to April 2010. As at 30 June 2013, 13 guarantee certificates remained in place, and the remaining value of wholesale securities guaranteed was $3.470 billion. No provision is made for losses under this scheme as the probability of loss is considered remote.

3  Dividends#

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Total SOE dividends received this year have increased by $243.905 million from 2011/12. Particular items to note are that Transpower paid a higher dividend by $252.700 million compared to prior year as a result of the company opting to use more debt to fund the upgrade of its network and posting an increase in annual profit.

Air New Zealand dividends increased by $16.084 million; this is mainly owing to increased profits during the half year ended 31 December 2012 compared to prior year.

Dividends from Crown Entities includes $11.287 million paid by TVNZ compared to prior year of $13.828 million.

Other dividends received are from the Crown's share in Christchurch, Dunedin and Hawkes Bay Airports which are $1.787 million lower than those received in 2011/12. This is mainly owing to Christchurch International Airport's interim dividend for the year ended 30 June 2011 having been paid during the 2011/12 financial year, making the prior-year dividend streams particularly high.

4  Earthquake Commission#

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4(a)   Land remediation#

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During the year, full settlement for the amount of $4.433 million has been made to the Earthquake Commission (EQC) for the outstanding claim for the remediation to residential land affected by the September 2010 earthquake over and above the standard required by EQC.

4(b)   Land insurance payments#

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

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

4(c)   Earthquake Commission Underwriting Fee#

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Each year since 1986 EQC has paid the Crown an “underwriting fee”. This fee represents a premium-like charge on EQC for the Crown's role as an insurer of last resort. For the current year the Crown received $10 million (2012: $10 million).

5  EQC Apportioned and Unclaimed Damage Expense#

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A new appropriation was set up for funding (if required) to resolve the issue of EQC not being able to pay for damage to insured property where no claim has been made for the specific earthquake event that the EQC apportionment process indicates was a cause of damage. For the year ended 30 June 2013, no payment was made against this appropriation.

6  Goodwill#

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Goodwill in relation to Air New Zealand of $258 million (2012: $258 million) has been tested for impairment under NZIAS 36. As a result of the impairment testing, no impairment was identified.

7  Government Superannuation Fund Unfunded Liabilities#

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

The GSF obligation has been calculated by the Government Actuary as at 30 June 2013. 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 2013 was $11,908 million, a decrease of $1,633 million compared with 30 June 2012.

This is primarily attributed to an actuarial gain recognised in the year of $1,251 million (2012: $3,896 million loss) mainly owing to the increase in short- and medium-term discount rates over the year, the strong investment returns achieved by the Fund and the Crown contributions made. Contributions made by the Crown against the liability during 2012/13 were $658 million (2012: $699 million).

An increase was offset owing to the current service costs and interest expenses (appropriated under Other Expenses Incurred by the Crown - GSF Unfunded Liability) of $276 million (2012: $192 million).

The Government expects to make a contribution of $750 million to GSF in the year ended 30 June 2014.

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 equivalents to IFRSs for this liability are included in the Financial Statements of the Government.

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

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These are expenses of the Government Superannuation Fund Authority relating to the management and administration of GSF. The Crown's share for 2012/13 was $24.767 million, $2.186 million higher than that in 2011/12. 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 faster during the year compared to prior year.

9  Government Superannuation Fund - Employers' Contribution#

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The employers' contribution to GSF has decreased from $46.600 million in 2011/12 to $42.089 million in 2012/13. This is because of reduced memberships and lower average employee salaries which attracted lower employer contributions.

10  International Financial Institutions (IFIs)#

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Contributions of $35.164 million were made to the IMF lending programme in 2012/13 compared to forecast of $47.433 million. Payments have been made to several countries during 2012/13 reflecting the response by IMF to the current international financial crisis. Capital withdrawals of $5.082 million (2012: Nil) were made by IMF representing a repayment of advances to IMF to supporting countries in financial difficulties. During the year, a net gain of $1.349 million on revaluation of IFIs' investment was recorded as a result of New Zealand dollar FX rate movement (2012: $6.767 million loss).

11  Invercargill Airport Limited#

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During the year, the Crown impaired its investment in Invercargill Airport Limited for the full value of the investment held of $3.106 million. The Crown has reduced its stake from 45% to 2.82% of the company owing to additional capital raising by other shareholders.

12  Landcorp Protected Land Agreement#

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This year, the current Protected Land Agreement has been amended to require annual settlement of accumulated costs instead of when one of the properties held under Protected Land Agreement is transferred. As a result, current year provision of $18.870 million includes amounts for the accumulated operating and capital expenditure from 1 July 2007 to 30 June 2013 for all protected land. During the year, the Landcorp Protected Land Agreement appropriation has been disestablished and replaced with two new appropriations namely, the Landcorp Protected Land Agreement – Operating, and the Landcorp Protected Land Agreement – Capital. The operating expenditure appropriation was set up to cover the operating costs in managing protected land, which were $17.607 million cumulatively over the five-year period. The capital appropriation was set up to cover the costs of capital expenditure associated in managing protected land of $5.591 million over the past five years. Farming profits and forestry revenue came to $4.328 million and this was recorded in Other Current Revenue. Prior year’s capital expenditure of $7.774 million against Landcorp Protected Land Agreement appropriation has been subsequently reversed in the current year by way of technical adjustment.

13  Mighty River Power Initial Public Offer#

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On 14 May 2013 the Crown sold 48.2% of its investment in Mighty River Power. The Crown received gross cash proceeds of $1.69 billion from the Mighty River Power offer. Direct costs of sale of $21.511 million have been netted off from gross proceeds giving a gain of $1.5 billion over the historical carrying value of the investment in Mighty River Power.

New Zealand retail investors in the Mighty River Power share offer receive one loyalty bonus share for every 25 shares they hold for two years from the allotment date, 14 May 2013, up to a maximum of 200 bonus shares. This loyalty scheme has been recognised in the Schedule of Expenses on page 87 as an expense and in the Schedule of Liabilities on page 94 as a corresponding liability reflecting the value of the maximum allocation of bonus shares. The total maximum cost of the loyalty bonus scheme to the Crown was estimated to be $24.677 million at the allotment date. As at 30 June 2013, the loyalty bonus share scheme liability has been revalued although no estimate has been made for future sale of shares by investors. The liability was reduced partly owing to a decline in the Mighty River Power share price, attributed amount of $2.764 million and the fact that a number of investors have sold their shares and the shares sold are no longer eligible for the loyalty bonus shares. The sale of shares has therefore reduced the liability by $466,000. In total, the liability reduced by $3.229 million and a consequential gain recognised.

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

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The Government has guaranteed superannuation schemes managed by National Provident Fund (NPF). As at 30 June 2013, NPF's DBP Scheme was in a net deficit position of $977 million (2012: $1,076 million), represented by a gross estimated pension obligation of $1,011 million (2012: $1,114 million) with net investment assets valued at $34 million (2012: $39 million). No additional provision was required in the year for other pension schemes managed by NPF under the Government's guarantee under section 60 of the National Provident Fund Restructuring Act 1990.

The decrease of $99 million in the Crown's liability for the NPF DBP(A) Scheme under Crown guarantee as at 30 June 2013 was primarily owing to:

• payments made against the liability by the Crown during the year of $74 million, and
• the actuarial gain recognised for the year of $52 million resulting from movements in the economic assumptions used in calculating the provision, and

offset by:

• the unwinding of the interest expense (appropriated under Other Expenses Incurred by the Crown – NPF Schemes – Liability under Crown Guarantee) of $27 million.

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

15  National Provident Fund - Crown Liability for Scheme Deficiency#

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The Crown is liable for the deficiency in the accounts of NPF schemes established pursuant to section 38A(6) of the National Provident Fund Act 1950, authorised by section 72 of the National Provident Fund Restructuring Act 1990. There were no calls against this appropriation for 2011/12 to 31 March 2013 (2012: $94,000) and a nil provision for the three months to 30 June 2013 (2012: Nil).

16  New Zealand Export Credit Office#

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

Revenue has decreased by $10.827 million in 2012/13 as a result of a reduction in premium amortisation owing to expiry of a large policy. In addition, the prior year revenue included early recognition of a $7 million unamortised premium on an export credit policy provided for where NZECO was not required to pay back.

17  New Zealand House - London#

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

18   New Zealand Superannuation Fund#

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No contributions were made to the New Zealand Superannuation Fund in 2012/13 as a result of the Government's decision in May 2009 to suspend contributions until there are budget surpluses sufficient to fund contributions.

19  New Zealand Debt Management Office#

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19(a) Interest from investments and other income#

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NZDMO's interest from investments decreased by $58.250 million owing to lower average funds available for investment during 2012/13.

NZDMO's other income decreased by $8.335 million mainly owing to lower funding provided to New Zealand Railways Corporation.

19(b) Other revenue - NZDMO#

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Other revenue - NZDMO comprises net gains on NZDMO derivatives (excluding fair value and FX gains/losses). Current year increase of $10.901 million is attributable to both interest rate changes and transactional activity.

19(c) Borrowing costs#

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Borrowing costs have increased by $220.901 million owing to higher average outstanding volumes of New Zealand government stock issued to third parties during 2012/13.

19(d) Fair value losses incurred by NZDMO#

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Fair value losses incurred are higher in the current year by $187 million owing to a combination of funding situations incurred by NZDMO where the resulting financial instruments are accounted for on different bases.

19(e) Marketable securities, deposits and derivatives in gain#

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Deficits recorded in the Supplementary Estimates and Main Estimates are owing to forecast assumptions used at the time of Budget 2013 in respect of the Crown Settlement Account and Marketable Securities.

20  Other Current Revenue#

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Other current revenue has decreased by $365.352 million in 2012/13. This primarily relates to a decrease in the recovery of government guarantee payments during 2012/13 as five of the DGSs have been transferred into CAML and the majority of the assets have been recovered over the past years. In addition, last year's revenue included a one-off Crown Assistance Fee of $108 million from New Zealand Rugby and a release of Rugby World Cup provision of $6.437 million, a provision which was no longer required. During the current year, the Crown received profits from farms and forestry revenue of $4.328 million from Protected Land managed by Landcorp Farming Limited.

21  Reserve Bank Surplus#

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Dividends received by the Crown from RBNZ decreased from $210 million in 2011/12 to $160 million in 2012/13 owing to reduction in RBNZ's surplus. The principal reason for the reduction is mainly owing to lower net interest income earned, FX losses and changes in the market value of financial instruments.

22  Southern Response Earthquake Services Limited#

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The Crown Support Deed (CSD) with SRESL has been revalued to its net present value in June 2013 to recognise the likely profile of cash drawdowns over the 10-year life of the Deed including the balance that will be payable in 2021. This valuation is purely driven by SRESL's expected cash draw down profile and the associated unwinding of the discounting over the life of the agreement.

23  Solid Energy New Zealand Limited#

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During the year, the Crown initiated a new capital appropriation of $50 million for Solid Energy New Zealand Limited. This appropriation is for the funding of any urgent liquidity issues the company faces. For the year ended 30 June 2013, there has been nil amount paid to the company.

24  Taitokerau Forests Limited#

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Loans to Taitokerau Forests Limited of $1.359 million were advanced as per the Loan Agreement during 2012/13. For the current year, impairment in Taitokerau loans was not necessary 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 2013 (2012: $379,000 impairment). In the current year, the Crown received $1.263 million (2012: $947,000) repayment of the Taitokerau Forests Advance.

New Zealand Debt Management Office#

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

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

NZDMO's major responsibilities involve:

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

NZDMO managed $17.797 billion of assets, $81.671 billion of liabilities, $432 million of revenue and $3.368 billion of expenses on behalf of the Crown for the year ended 30 June 2013. Further information on NZDMO's performance in managing the Crown's sovereign-issued debt and related financial assets is provided on pages 46 and 47 and pages 50 to 52.

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

Schedule of Assets and Liabilities#

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as at 30 June 2013#

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Schedule of Revenues and Expenses#

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for the year ended 30 June 2013#

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Classes and Categories of Financial Instruments#

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

Derivatives#

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As at 30 June 2013, the value of derivatives was as follows: