Annual Report of the Treasury for the Year Ended 30 June 2017

Chief Executive's Introduction#

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We have recently defined a vision of being a world-leading Treasury working towards higher living standards for New Zealanders. This Annual Report shows how we are fulfilling that vision as the Government's lead adviser on economic and financial policy. I am proud of the course we have set towards this important aspiration.

The year required our work to focus on providing expert advice that helps support New Zealand to maintain solid economic performance and significantly improved fiscal results. We also welcomed a new Minister of Finance as part of changes to the Government at the end of 2016. This was our first change in Minister in eight years.

Budget work continues to be a hallmark of our support for the Minister and the decisions the Government makes about the economy. This year was no exception. Fiscal strategy advice helped inform the setting of a new net debt target and we published, for the first time, a plain English overview of the Budget Economic and Fiscal Update (BEFU).

As well as the immediate focus of the Budget, during 2016/17 we delivered He Tirohanga Mokopuna, our 2016 Long-term Fiscal Statement (LTFS). He Tirohanga Mokopuna is a substantial achievement that provides our assessment of the fiscal challenges and opportunities for at least the next 40 years, and the choices we have to respond to them. Its development involved considerable engagement with a broad range of stakeholders from around the country.

Over 2016/17 we made further headway on embedding diversity and inclusion within our organisation. Diversity and inclusion make the Treasury stronger and more resilient, and gives us capacity for greater insights in the advice we provide. We are honoured to have had our efforts recognised at the 2017 Institute of Public Administration New Zealand (IPANZ) Public Sector Excellence Awards by winning the Excellence in Improving Diversity and Inclusiveness in the Public Sector category.

Another major highlight has been the development and launch of our new Organisational Strategy. The Strategy sets out our aspirations for what we do and how we work over the next few years to raise living standards of New Zealanders. It articulates our vision and ambition in response to the challenges that are presented by the global environment, as well as the core operational responsibilities that are a cornerstone of the Treasury's work. I look forward to sharing this later in the year in our updated Statement of Intent. For this Annual Report we have used the strategic framework set out in our 2015-19 Statement of Intent to report progress on our seven Strategic Intentions.

I would like to thank all of our staff for their expertise, effort and dedication that help us to be an effective organisation. Because of their work and commitment to public service, 2016/17 has been another successful year for the Treasury. And with the implementation of our Organisational Strategy, I believe next year will be better yet. I look forward to leading a strongly aligned, focused, capable and connected Treasury in the year ahead, because together there is much we can achieve.

Statement of Responsibility#

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I am responsible, as the Secretary to the Treasury, for:

• the preparation of the Treasury's Financial Statements, and Statements of Expenses and Capital Expenditure, and for the judgements expressed in them
• having in place a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial reporting
• ensuring that end-of-year performance information on each appropriation administered by the Treasury is provided in accordance with sections 19A to 19C of the Public Finance Act 1989, whether or not that information is included in this Annual Report, and
• the accuracy of any end-of-year performance information prepared by the Treasury, whether or not that information is included in the Annual Report.

In my opinion:

• the Financial Statements fairly reflect the financial position of the Treasury as at 30 June 2017 and its operations for the year ended on that date, and
• the Forecast Financial Statements fairly reflect the forecast financial position of the Treasury as at 30 June 2018 and its operations for the year ending on that date.

 

Gabriel Makhlouf
Secretary to the Treasury

29 September 2017

Section One#

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Our Strategic Direction#

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Our Story

We are the Government's lead economic and financial adviser. We provide advice to the Government on its economic framework, on its fiscal strategy and on achieving value for money from its investments. We implement government decisions and are also responsible for the Financial Statements of the Government, for ensuring effective management of the assets and liabilities on the Crown's balance sheet and for publishing economic and fiscal forecasts.

Our vision is to be a world-leading Treasury working towards higher living standards for New Zealanders. We want to grow wellbeing through improving the country's human, social, natural and physical/financial capital. We work with others - across the government and non-government sectors, in New Zealand and overseas - to turn our vision into reality. We believe in applying rigorous analysis to the best available evidence, using our Living Standards Framework to guide us.

We embrace diversity and inclusion as they strengthen us, as individuals and as an organisation. Our values reflect our aspirations, for ourselves and for New Zealanders:

• bold and innovative, so that we understand how and when to take risks, learn from failures and build on successes
• collaborative and challenging, so that we work with others, collaborating but also challenging them and ourselves
• adaptable and focused, so that when the facts change, or ministerial priorities change, we don't delay and we maintain our standards, and
• passionate and ambitious, for our performance, for our people and for New Zealand.

We believe in the importance of a trusted, professional, public service: our stewardship responsibilities embody kaitiakitanga; we work to support the Treaty partnership between the Crown and Māori; and we are transparent, objective, impartial, and free and frank in our advice.

Promoting higher living standards for New Zealanders

During the 2016/17 year, the Treasury continued to develop its thinking about how to support the Crown to lift New Zealand's performance so we achieve our vision of higher living standards for New Zealanders.

In November 2016, the Treasury released the 2016 LTFS, He Tirohanga Mokopuna. The LTFS takes a long-term view of government finances over the next 40 years in the context of broader living standards, reflecting that fiscal policy and other government policy issues over this timeframe need to be geared towards the overall wellbeing of New Zealanders and lifting living standards. Sustainable government finances are both a precondition to improving long-term living standards, and likely to be a result of high and generalised levels of wellbeing that enable New Zealanders to participate fully in society and the economy, and to live lives they have reason to value.

The Treasury uses a living standards framework to take into account in our advice a broad range of factors, both material and non-material, that impact on New Zealanders' wellbeing. This framework is based on four types of capital stock: financial and physical capital (eg, machinery, buildings, housing, financial assets); human capital (eg, health, skills, knowledge); social capital (eg, cultural norms and practices, trust, regulatory and legal institutions); and natural capital (eg, water, biodiversity, clean air). In the framework, businesses, households and the Government use and manage the capital stocks in various ways to generate flows of material and non-material benefits that people enjoy. The diagram presented below illustrates these stocks and flows, with some examples of the wellbeing flows.

During the year, the Treasury continued to develop its capability to measure and assess the capital stocks and flows of wellbeing benefits, and the impacts on current and future wellbeing of government policies and changing societal, environmental and technological influences. He Tirohanga Mokopuna and its associated background papers were one important step in this process. With this ongoing work programme we aim to inform and stimulate debate about New Zealand's longer-term future and the challenges and opportunities for greater levels of wellbeing, and to provide strategic direction to our ongoing policy advice work and organisational priorities.

We measure our progress through the relative stocks and flows of our Four Capitals, and New Zealand's wellbeing indicators

How We Work 

Capability

As the Government's lead economic and financial adviser we require a very high level of economic and financial expertise, as well as analysis and evaluation skills. We use a mix of recruitment and development to grow the capability of our people to:

• provide strong and effective leadership (within the Treasury and externally)
• communicate and engage confidently with others to convey ideas and gain input, and
• implement ideas and plans (including project and portfolio management skills) effectively.

We grow the capability of our senior leaders in areas highlighted for development through the Leadership Insight Assessment. We also maximise opportunities for our leaders at all levels to learn through on-the-job experiences such as rotations and internal and external secondments. We are proud of our strong tradition of recruiting first-rate graduates from a wide variety of academic disciplines, which adds to our diversity of thinking.

We continue to build on our talent management and succession planning work to ensure that we have clear sight of our current and future leadership talent, a clear plan to develop and retain them and a good pipeline for succession into critical roles.

We measure our success in growing capability in our priority areas through: statistics related to the recruitment of people with technical knowledge and experience in our key areas and uptake of formal opportunities for development; and improved internal and external feedback.

Stakeholder engagement

Ultimately, the Treasury's work affects all New Zealanders, so they all have a stake in what we do.

We have made substantial advances in embedding good engagement practice in our business, which has been well received by agencies and others in the community. Stakeholders are assigned among the Deputy Secretaries (members of our Executive Leadership Team) who meet regularly to discuss the progress that they are making through their engagement programmes.

As a steward, we have a clear responsibility to facilitate development of the Crown-Māori relationship. We recognise the importance of working with others to lift State sector capability, and are building our own capability in order to do this effectively.

The Treasury's Pacific Strategy 2016-20: Le tofa mamao ma le fa'autautaga (meaning - 'the wisdom to visualise the future and the ability to take us there') aims to contribute to raising living standards for New Zealanders by helping the Treasury advise government on what matters most for Pacific peoples in New Zealand.

In a fast-changing world, every part of the Treasury has a heightened need to connect internationally to manage risk and take advantage of opportunities for New Zealand. The Treasury's International Engagement Strategy has five specific goals:

• Bring global perspectives into the Treasury's thinking and produce world-leading work
• Create opportunity and manage economic risk for New Zealand through economic diplomacy
• Help the Minister of Finance represent New Zealand effectively
• Uphold New Zealand's reputation in the world, and
• Manage operational risks for the Crown.

Decision-making, accountability and planning

How we make decisions

Executive Leadership Team

The Executive Leadership Team is made up of the Secretary (Chief Executive) and five Deputy Secretaries, and is our pre-eminent decision-making body. They are accountable for the strategic leadership of the Treasury with a focus on outward-facing and cross-cutting issues; where decisions are more likely to have a material impact on the outcomes, functions or reputation of the Treasury as a whole. The Executive Leadership Team members are accountable for the delivery of the Treasury's Strategic Intentions.

Kaiurungi - 'The people who steer'

The Treasury's Chief Operating Officer (Deputy Secretary, Strategy, Performance and Engagement) chairs Kaiurungi, which consists of our seven directors and Chief Financial Officer. They are responsible to the Executive Leadership Team for delivering on the agreed Strategic Intention work programme and for ensuring the programme of work across all directorates will deliver on the Treasury's overall objectives and is well-aligned with strategy.

Additional assurance mechanisms

Our key assurance mechanisms consist of:

• The Treasury Board. This is an external advisory group that supports the Treasury's Secretary and Executive Leadership Team in ensuring that its organisational strategy, capability and performance make the best possible contribution to the achievement of its goals.
• The Risk and Audit Committee. This committee is a sub-committee of the Board with an independent chair and three additional external members. It provides assurance and advice to the Secretary relating to the effectiveness and adequacy of internal control and risk management systems, processes and activities across the Treasury.
• Financial Statements of the Government Audit Committee. This is an external advisory committee that provides advice and observations to the Secretary relating to key issues and risks that affect the production and audit of the Financial Statements of the Government. The Committee comprises an independent chair and two additional external members.
• Commercial Operations Advisory Board. This Board supports the Deputy Secretary, Financial and Commercial Operations through providing guidance on the strategic approach and work programme priorities of the Treasury's commercial operations portfolio and Debt Management Office.

Forums

The Treasury holds a variety of different forums to engage staff in decision-making. These forums are where we draw out diverse views, collectively resolve a Treasury position and share information among ourselves.

Leaders' Forums bring together Deputy Secretaries, Directors, Managers, Team Leaders and Principal Advisers from across the Treasury to share, discuss and build understanding. We use them to test thinking from the Executive Leadership Team and Kaiurungi, generating and exploring ideas and solutions from the practical, on-the-ground perspective of the people who lead our teams and their work programmes.

Planning and monitoring performance

In 2016/17 we conducted a performance review each trimester to assess progress to date and to establish forecast performance objectives. The process engaged Kaiurungi and the Executive Leadership Team in a series of performance-focused conversations. Outtakes from these meetings flow through to a trimester conversation with our Minister. The process supported an incremental approach to planning where adjustments can be made to take into account any changes in priorities or aspirations.

Diversity and inclusion

Why does diversity and inclusion matter to us?

Our vision is to be a world-leading Treasury working towards higher living standards for New Zealanders. We believe that we are best placed to achieve our vision when we embrace diversity of thinking, adopt inclusive ways of working and effectively engage with and better represent the many different communities that make up New Zealand. As a more diverse and inclusive Treasury we are able to:

• better anticipate and offer a more robust understanding of the challenges and opportunities ahead
• provide higher-quality thinking, analysis, services and solutions, and
• build a more engaged and productive workforce who feel valued and included.

Strategic imperatives and performance measures

Diversity and inclusion has been an important priority for the Treasury for a number of years. We finalised our first diversity and inclusion strategy in 2012 and produced a refreshed strategy in 2014 and again in 2017, informed by independent assessments of our diversity and inclusion culture. Our diversity and inclusion strategy is focused on three broad areas:

• developing and engaging our leaders, and publicly championing diversity and inclusion
• fostering an inclusive culture and knowledge of diversity among our staff, and
• embedding diversity and inclusion approaches within our human resources (HR) systems, policies and processes.

We regularly track and report on the diversity of our workforce and our leadership team, which we see as essential in order to understand where we are and where we want to get to, using the measures on the following page.

We commission independent assessments of our diversity and inclusion culture involving qualitative research conducted with a large number of Treasury staff to understand the progress we are making and to hold ourselves to account. In 2016, three- quarters of staff spoken to said that the Treasury was 'invested' (or even more committed) in diversity and inclusion, which means diversity and inclusion is a priority and we have some formalised initiatives underway. This is an improvement from our last assessment several years ago. We are continuing to enhance efforts in this area to make the Treasury even more diverse and inclusive in the future.

Significant diversity and inclusion initiatives in 2016/17

The key actions we have been taking in each strategic area and our focus going forward are outlined below.

Leadership

• The Secretary to the Treasury co-leads the diversity and inclusion work stream in Better Public Services 2.0 and is a Diversity Champion for the Global Women's Champions for Change initiative. Our leadership development programmes have diversity and inclusion approaches woven into them. Small groups of leaders participate in the Ruku Ao programme delivered through Toi Whakaari to build skills in collaboration and working with difference.
• Diversity and inclusion training is provided to managers to help mitigate against unconscious bias and develop inclusive practices.

Inclusive culture

• We have continued to build our engagement with Māori and Pasifika communities, our cultural understanding and the extent to which the Treasury is culturally inclusive, and this will remain an important focus in the coming period. Key engagements included the stakeholder workshops run across New Zealand to inform He Tirohanga Mokopuna (our LTFS), released in November 2016. He Tirohanga Mokopuna also had key content translated into te reo Māori.
• We have continued to implement Puna Kaupapa, a strategy to build our capability and support our increasing work in the Crown-Māori area, and to create an environment where Māori perspectives are better integrated into our thinking and business.
• The Treasury holds pōwhiri in its whare whakairo, Ngā Mokopuna a Tāne, at least every two months, as well as mihi whakatau.
• We have implemented the first year of our Pasifika Strategy 2016-20, including taking teams through workshops to build their understanding of the Pacific operating model and develop their thinking on Pacific economic performance. We held Pasifika stakeholder events in Auckland, Wellington and Christchurch, established an internal Pacific Network for staff and supported a Pacific senior officials inter-agency group.
• Internal awards continue to be presented, including the Kwok Award given to the team that has demonstrated excellence and growth in the Crown-Māori area, and the Ngā Whetū o Matariki awards to recognise staff who demonstrate improved cultural awareness.
• Tools and techniques from Lean, Agile and Design Thinking have continued to be deployed across the organisation to give staff practical ways of surfacing a diversity of perspectives, ensuring all voices are heard and generating innovative ideas and solutions. We developed and are rolling out training workshops to support staff to understand and mitigate against unconscious bias and adopt inclusive work practices.

Human resources systems, practices and processes

• He Manaaki, our new approach to performance, reward and recognition, was launched in 2017 and has diversity and inclusion principles embedded within it.
• The Treasury was the 2017 recipient of the Excellence in Improving Diversity and Inclusiveness in the Public Sector award from IPANZ. This award recognised the steps we have taken to reduce the scope for unconscious bias in our graduate and internship recruitment processes.
• The Treasury is committed to reducing its gender pay gap. In 2016/17, we undertook extensive analysis of the drivers of our pay gap and developed a comprehensive set of recommendations to address this, which are being implemented.

Our Strategic Framework for 2016/17 

Leadership priorities

On the journey to achieve our vision, throughout the 2016/17 year we maintained our focus on three overarching priorities that help us to drive our work and deliver successful results for the New Zealand public we serve:

• The investment approach is embedded in modern policy and decision-making with a focus on engagement, implementation, monitoring and design. In 2016/17, the main focus was on the Budget and Budget process, as well as social investment with one of the key activities being our support for the Ministry for Vulnerable Children, Oranga Tamariki.
• New Zealand achieves a higher and more sustainable growth path: we focused on delivering a refreshed Business Growth Agenda, and strengthened our work in housing and infrastructure, especially in relation to the Crown Infrastructure Partnerships proposal, the City Rail Link project negotiations and post Auckland Transport Alignment project work streams.
• Successful leadership: internally we organised ourselves around our vision, which culminated in the launch of our new Organisational Strategy and alignment of our work to the Strategy. Externally we continued our proactive and deliberate system leadership, especially in the areas of diversity and inclusion, economic leadership and regulatory quality.

Our journey to our new Organisational Strategy

Our strategic framework has been refreshed in 2017 with the launch of our new Organisational Strategy, to take effect from 1 July 2017. In this we reconfirmed our commitment to our vision, and have outlined our reason for being in our mission. We have refocused our role and purpose into three interlinking areas. We have also identified four strategic priorities where we want to invest in more work to help us deliver our mission and achieve our vision.

With the new Organisational Strategy, we have redefined our business objectives to better measure our success toward our mission - and these can be attributed to the Treasury's areas of responsibility and influence. We stand by the strength of our values, and seek to further embed diversity and inclusion in who we are and what we do.

Further details of our new Organisational Strategy will be reflected in our future Statement of Intent and Annual Reports. This 2016/17 Annual Report reports on our progress over the past year towards achieving our seven Strategic Intentions, based on our 2015-19 Statement of Intent. Hence, the framework on the previous page has continued to be used as the frame for this report. Further details on the seven Strategic Intentions are provided in the next section of this report.

Our Strategic Intentions#

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The reporting against each of the Treasury's seven Strategic Intentions, on pages 13 to 45 meets the requirement for this Annual Report to include an assessment of the Treasury's operations and its progress in relation to its Strategic Intentions. In particular, the reporting against the seven Strategic Intentions sets out a range of priority, core business-as-usual and medium-term investment work programmes. The Strategic Intentions framework supports our efforts to balance resources across work programmes.

New Zealand has an Internationally Connected and Competitive Business Environment

Overview of aims and key deliverables

International connections

We supported cross-agency work for the launch of Trade Agenda 2030 and advised Ministers on changes to immigration policy.

Other key highlights over the 2016/17 year included:

• The value of international projects supported by New Zealand Export Credit Office's (NZECO's) General Contract Bond Guarantee passed $1 billion, involving over 100 projects across 31 countries.
• Advice to Ministers on improvements to the investment screening regime in the Overseas Investment Act 2005. These exemptions were developed in response to feedback from stakeholders on the Government's consultation on the proposed changes to the application fees for the Overseas Investment Office.
• Working with the Overseas Investment Office on a new directive letter from the Minister of Finance to support the Office's ongoing improvement programme.
• Advice to Business Growth Agenda Export Ministers on non-tariff measures facing New Zealand exporters.
• Collaborating with Inland Revenue and the private sector on how to take action against aggressive international tax planning while maintaining New Zealand as an attractive investment destination.

Housing supply

We contributed to interagency policy development, the Housing Infrastructure Fund, Crown Infrastructure Partnerships, Urban Development Legislation and the Fundamental Reform of the Planning System. We are contributing senior staff full-time to the interagency team that is working on the Fundamental Review, with an early focus on objectives and approaches.

Our work with the Crown Infrastructure Partnerships initiative has seen the Treasury lead discussions with councils and developers on a high-level model for Special Purpose Vehicles for investment in housing-related infrastructure. Our policy work in this area has focused on understanding the barriers to competitive land markets.

Business environment

We drafted the Government's Regulatory Management Strategy. This Strategy was released by the Government in April 2017. A key element of the Strategy is the 2017 updated Cabinet Expectations of Regulatory Stewardship, which extend the scope of the initial Expectations to highlight regulatory implementation and practice.

We provided advice:

• on the next set of Productivity Commission inquiry topics and Terms of Reference on the two new inquiries into: Opportunities and Challenges of a Transition to a Lower Net Emissions Economy for New Zealand; and State Sector productivity, and
• to the Minister for Regulatory Reform and Parliamentary Under-Secretary on changes to Cabinet's Regulatory Impact Analysis requirements. These were designed to increase the effectiveness of impact analysis. These changes, subsequently endorsed by Cabinet, were implemented during July 2017.

Progress in our medium-term indicators of success

Case study: New Zealand Export Credit Office

People have the Capability and Opportunities to Participate in Society and the Economy 

Overview of aims and key deliverables

A sustainable growth plan

We published He Tirohanga Mokopuna, the Treasury's 2016 LTFS, on 22 November 2016. It showed that, while current government finances remain relatively strong, fiscal pressures are projected to increase significantly over the next 40 years. Our modelling found that improving social sector outcomes could contribute to reducing the long-term fiscal challenges identified.

We worked with the Ministry of Business, Innovation and Employment (MBIE) to develop policy options on the changing nature of business and employment, with a particular focus on employment opportunities for young people not in employment, education or training (NEET). We encouraged the development of a cross-agency regional NEET strategy, ensuring there is a consistent view of the NEET population. Through this we will have a better understanding of the barriers facing young NEETs that current funding, services and initiatives are not addressing.

Helping disadvantaged people

We supported the establishment of the new Ministry for Vulnerable Children, Oranga Tamariki, seeing it as an opportunity to change the long-term outcomes for at-risk children and reform how the social sector currently operates. Our advice on the new legislative framework will enable the development of an investment approach in Oranga Tamariki, and on the fiscal strategy for Budget 2017 and future Budgets to ensure new funding is targeted where we believe it will have the biggest impact.

We have continued to support the development of social investment approaches across the social sector, including employment, social housing, justice, education, health and vulnerable children. We collaborated to design the methodology for the draft vulnerable children's valuation and embed the use of this valuation and evidence to inform future investment decisions.

We incentivised agencies to understand the impact of their services and interventions by introducing a new social investment track in Budget 2017 which rewarded proposals with good evidence and potential. This resulted in $321 million being allocated for 14 social investment initiatives designed to tackle long-term issues for vulnerable New Zealanders.

We developed a new data analytics tool called Insights which provides information about children and youth at risk, youth transitions to adulthood and services for children and youth drawn from a range of public sector agencies. We presented it in an easy to use interactive format which includes data visualisation and mapping.

Welfare and support system

As the external monitor of the Ministry of Social Development's (MSD's) investment approach, we provided quarterly reporting to Ministers on progress, and suggested areas for future focus. A particular focus was the process for investing in improved employment and social outcomes for their clients.

Pathways into the labour market

We supported the Ministry of Education (MoE), and briefed the Minister of Finance on the education reform programme. This included the funding review, learning support, Education Infrastructure Services and Investing in Education Success.

We worked closely with MoE and MBIE to respond to the Productivity Commission's report on new models of tertiary education.

Progress in our medium-term indicators of success

There is a Faster Improvement in Māori Living Standards

Overview of aims and key deliverables

Working with iwi

In 2016/17 we have further embedded our stewardship role for the Crown-Māori Relationship by supporting central agency CEOs and cross-public sector work to strengthen coordination, capability and longer-term strategic direction.

We continued to contribute to interagency collaboration with Ngāi Tūhoe, which is developing options for decentralising some of the Crown's activities to support better outcomes for whānau and hapū to the iwi. Among other things, this initiative is an opportunity to explore new ways for the Crown to work with iwi to support their aspirations.

Building the Māori economy

We have also influenced the Government's Māori economic development strategy and policies through the Māori Economic Development Advisory Board, Māori Virtual Policy Unit (across Te Puni Kōkiri (TPK), MBIE and Ministry for Primary Industries) and ongoing collaboration across agencies. Working closely with MBIE and TPK, a more action-oriented Māori economic development strategy for the He Kai Kei Aku Ringa refresh 2017-2021 has been developed. This includes quantifiable indicators and goals embedded into existing government strategies.

We supported TPK on Te Ture Whenua Māori Land Reform decisions. Our role has often been a critical friend evidenced in our role to assess Māori economic development Budget initiatives. We also advised Ministers ahead of key Crown–Māori meetings, from the Iwi Chairs Forum at Waitangi to the just-established Iwi–Crown Economic Taumata.

Māori education

To further support accelerated and sustained gains in Māori education achievement, we have worked with MoE to ensure a focus on Māori education achievement is incorporated into policy development on education sector performance improvement and strategic financing.

Social housing

Our Social Housing Transaction Unit continues to enhance the Crown-Māori Relationship through effective engagement with iwi and hapū about their rights and interests in areas for proposed social housing transfers. We have generated increased interest by collaborating with iwi to develop proposals that meet several government and iwi strategic objectives.

Progress in our medium-term indicators of success

The State Sector Efficiently and Effectively Delivers Results for New Zealanders

Overview of aims and key deliverables

Budget 2017

In May 2017 the Government successfully delivered its annual Budget. The Treasury supported the Minister of Finance in the development of the Budget by:

• advising on Budget strategy
• preparing the macroeconomic and fiscal forecasts to set the context for the Budget
• managing the Budget initiative process, including assessing proposals from Vote Ministers and providing advice on how initiatives should be prioritised within available spending allowances, and
• preparing Budget documents and communication collateral, such as the Estimates, the BEFU and the Fiscal Strategy Report.

For Budget 2017 we built on prior work to embed a social investment approach into the Budget cycle, focusing on the needs of citizens, using data to help identify what works, taking a longer-term view and managing risks to the achievement of outcomes. In particular:

• We updated our cost benefit analysis tool (CBAx), which contains a database of impacts designed to help agencies assess the likely costs and benefits of policy initiatives. All Budget 2017 initiatives were required to be accompanied by cost benefit analysis in order to support evidence-based investment decisions. We delivered CBAx training and support to agencies as they prepared Budget initiatives.
• We adapted the Budget process by creating a new funding track (Track 1) for social investment initiatives. Track 1 initiatives were those that were closely aligned with the principles of social investment; in particular having a high return on investment, a high level of confidence in achieving the intended outcomes, easily measurable success and an ability to be scaled up if successful. The Government invested $321 million across 14 initiatives developed through Track 1.
• Our Social Investment Panel played a key part in our assessments of Track 1 initiatives.

We also continued to use the Capital Investment Panel to assess proposals for new capital investments and introduced a new peer review process to support the Government's Business Growth Agenda.

As part of our ongoing work to increase transparency and accessibility of Budget and fiscal information, we published for the first time the BEFU Basics, a plain English version of the Treasury's BEFU.

New approaches to delivering outcomes

We are leading work on how innovative approaches to contracting could deliver better outcomes, particularly in the social sector. For example, we advised the Government on its response to the Productivity Commission's report on More Effective Social Services, which recommended a number of changes to make social services more responsive and client centred. The Government's response includes:

• further work to embed evidence-based practices in social services, including the creation of the Social Investment Board and the Social Investment Agency
• increased focus on high-needs populations; for example, the creation of the Ministry for Vulnerable Children, Oranga Tamariki, and
• allowing more devolution of social service provision to allow individuals and communities more access to assistance.

Lifting the performance of the State sector

In recent years, the Treasury has put in place additional mechanisms to support public sector transparency. One of these is the Four-year Plans (4YPs), which require agencies to provide insights into how the agency plans to create increasing value for its customers and New Zealanders over the medium term with the funding and balance sheet it has available. In 2016/17 we worked with agencies on their long- and medium-term planning, Budget documents and annual reporting to support improved planning, reporting and performance.

While 4YPs have made a positive contribution in the five years since they were instituted, we have not seen improvement where it is most needed and the Minister of Finance has agreed to make a few changes. To increase the value from 4YPs for 2018 we will take a targeted, sequenced approach by:

• focusing primarily on larger departments, in particular those that do not yet have comprehensive 4YPs, concentrating our support in a more targeted way
• sequencing the 4YP better with other similar products and requirements (eg, Strategic Intentions, Long Term Investment Plans (LTIPs), Performance Improvement Framework (PIF)), and
• inviting small to medium-sized departments to formally submit their 4YP every two years, and Parliamentary Agencies every three years.

We have also worked closely with the State Services Commission (SSC) on the 2017 refresh of the BPS results.

Building and maintaining financial capability

The Office of the Government Accountant (OGA) continues to drive work to lift the strategic capability of the finance function across the public sector. In 2016/17 the OGA launched a cross-government Finance Development Programme, which includes training for future Chief Financial Officers. The year also saw the launch of a shared work space for finance professionals, allowing public sector finance professionals to share work and experiences and learn from each other. There is also work underway to develop a talent pipeline across the public sector for future finance professionals.

Social housing

As part of the Government's Social Housing Reform Programme, we are working closely with MBIE, MSD and Housing New Zealand Corporation (HNZC) to improve tenants' outcomes and increase the number and quality of social housing places. A key component of this work is the creation of a market for social housing in which registered community housing providers participate alongside HNZC.

2016/17 saw the completion of the Tauranga transaction, transferring 1,138 former Housing New Zealand houses and tenancies in Tauranga for an initial 25-year term. There will be 153 more social housing places in Tauranga as a result of the transfer, and Housing New Zealand will use the transfer proceeds to build more social houses in the areas of most demand.

The Government has identified Christchurch as the next area for a transfer of Housing New Zealand properties, and is proposing that up to 2,500 social houses be transferred to community housing providers.

A proposed transfer of a number of Housing New Zealand properties in Horowhenua will now not proceed, owing to the relatively small scale of the transaction and the complexities involved with transferring those particular properties. However, the Horowhenua District Council may yet transfer some of its council-owned properties to community housing providers, in a separate process.

Supporting other agencies to deliver government priorities

As well as leading system-level programmes, we have supported other agencies in achieving the Government's goals for a more efficient and effective State sector:

• We worked with Inland Revenue as it undertakes its Business Transformation project, a multi-stage change programme to modernise tax administration in New Zealand.
• We worked with the SSC in developing a strategy for major public sector wage negotiations occurring in 2016/17. This included the $2 billion pay equity settlement for 55,000 care and support workers in aged and disability residential care and home and community support services.
• We supported the Ministry of Health on the first social bond pilot, with the purpose of improving employment outcomes for people with mental health conditions.

Progress in our medium-term indicators of success

The Crown Balance Sheet is Managed Effectively and Efficiently

Overview of our aims and key deliverables

Overall achievements

We have managed the performance and risk profile of the Crown's assets and liabilities to support the Government's medium-term objectives.

We ensure the core Crown debt portfolio is well-managed, that long-term value and appropriate financial, commercial and social returns are achieved from the assets the Crown owns and that risks to the Crown's balance sheet are well-managed, consistent with government risk appetite.

Managing the balance sheet

The 2014 Investment Statement forms the basis for the Treasury's balance sheet management strategy which in turn informed the Treasury work plan for 2016/17. This year we began scoping and producing the 2018 Investment Statement. The balance sheet strategy supports the Crown to:

• manage risk
• own the right assets
• manage them well, and
• fund them in a sustainable manner.

These fit in with our overall goal of managing the Crown balance sheet effectively and efficiently with the overall composition, performance and risk profile of assets and liabilities supporting an increase in living standards for New Zealanders.

Managing the core Crown's funding requirements 

NZDMO oversees the Government's borrowing requirements and associated activities, with a goal of managing debt in a way that minimises costs over the long term while keeping risk at an appropriate level. In managing core Crown funding requirements through 2016/17, NZDMO:

• planned, communicated and carried out the borrowing programme within agreed cost and risk parameters
• managed the Crown's net cash flows and associated risks, and
• improved NZDMO's business continuity readiness through the implementation of a new technology platform.

In addition, NZDMO advised the Government on the importance of maintaining a sustainable bond market. This led to a government commitment to maintaining a minimum level of New Zealand Government Bonds on issue being included in the 2017 Fiscal Strategy Report.

Monitoring performance of Crown investments and assets

We endeavour to ensure that the Crown's assets achieve appropriate financial, commercial and social returns, risks and long-term value. The Investor Confidence Rating (ICR) was introduced in 2015 to create incentives (rewards and sanctions) for agencies that can demonstrate a high level of management maturity, asset performance and successful delivery of investments. This year we completed the third tranche of ICR which was publicly released in June, and are well through the fourth and final tranche of round one assessments. We have agreed changes to ICR for round two so it now includes procurement capability assessments. We have also continued our assistance and assessment of major investment projects, continued the public release of the pipeline of investments and the release of the major project performance reports, for transparency and more informed decisions.

In January we released our second annual report from 2015/16 on the way that the Government manages investments. This supports the Government's investment system to increase transparency, highlight projects that have been delivered and identify areas for improvement.

With respect to the Crown's commercial and financial portfolio, our Commercial Operations group has sought to drive strategic alignment between the shareholders and entities with a focus on efficient use of capital and improved commercial performance. Advice was provided to Ministers on governance issues and 150 board appointments.

Major commercial transactions included completion of the tendering process for the Puhoi to Warkworth Highway and Schools 3 Public-Private Partnerships, sale of Solid Energy's mining assets and Ōtākaro Limited completing procurement for the Christchurch Convention Centre.

Improving the management of infrastructure services

We have worked with other government agencies, local government and the private sector to implement the initial actions outlined in the National Infrastructure Plan. The Plan provides a better understanding of infrastructure services needed in the future and how we manage existing assets.

In October we released the 2016 State of Infrastructure report, a year one follow up to the National Infrastructure Plan. We also released the latest version of the infrastructure 10-year Capital Intentions Plan and, together with Infrastructure Partnerships Australia, launched the Australia and New Zealand Infrastructure Pipeline.

Management of balance sheet risks

The Treasury continued to increase its understanding of the potential impact of financial risks on the Crown balance sheet. A focus has been improving knowledge of the impact of shocks on the balance sheet through use of stress testing. Our work has helped us advise the Government on fiscal and risk management, and to work with agencies to improve the efficiency and effectiveness of the management of specific assets and liabilities of the Crown.

Progress in our medium-term indicators of success

The Economic Cycle is Managed in a Way that Supports Sustainable Growth 

Overview of our aims and key deliverables

Overall achievements

Over the year, our core work was delivered as planned, with the delivery of the Budget Policy Statement, Fiscal Strategy Report, Half Year Economic and Fiscal Update 2016 (HYEFU16), BEFU2017, the LTFS, Financial Statements of the Government, plus a milestone report for the legislative review of the Earthquake Commission Act 1993. We also provided advice on New Zealand Superannuation policy changes, as well as briefings for incoming Ministers and policy advice consequent to the Kaikōura earthquake.

Fiscal policy

• We provided a range of fiscal strategy advice that helped inform the setting of a new net debt target, the appropriate level of allowances as set at HYEFU and BEFU and that helped inform Budget decisions.
• We sponsored a session on fiscal policy at the annual New Zealand Association of Economists conference in July and gave three presentations: New Zealand's post-Global Financial Crisis fiscal consolidation experience (subsequently published as a Treasury working paper), New Zealand's Fiscal Management Approach, and Insights for New Zealand from the literature on fiscal targets.

Long-term fiscal pressures

• The LTFS was released on 22 November 2016, alongside the refreshed and extended Long-term Fiscal Model.

Financial stability

• The Treasury participated in the Trans-Tasman Banking Council meetings in December 2016 and May 2017. The next meeting of the Council is scheduled for November 2017 and will be chaired by the Treasury.
• The International Monetary Fund (IMF) completed and publicly released the findings from its Financial Sector Assessment Program. The Treasury is coordinating with officials from MBIE, the Reserve Bank of New Zealand (RBNZ) and the Financial Markets Authority to consider over 100 IMF recommendations.
• Financial market infrastructure, outsourcing and capital consultation papers were advised on and released or advanced to legislation.

Macroeconomic frameworks

• The Treasury has been reviewing the monetary policy framework to inform advice on a new Policy Targets Agreement by March 2018.
• We commissioned papers from international experts on contemporary issues in monetary policy and held a workshop on contemporary issues in monetary policy.
• A preliminary version of a new core macro-economic forecasting model has been created. Planning for implementation has been completed and options for sequencing and timing of introducing the new model are being decided.
• We have explored options for extending macroeconomic analytical tools to support future empirical and policy analysis.

Progress in our medium-term indicators of success

The Treasury is a High-performing Organisation 

Overview of our aims and key deliverables

Supporting higher performance

In 2016/17, we set ourselves a challenging work programme to continue to shift our culture, capability and capacity to better meet strategic goals.

The Treasury's Organisational Strategy

A major focus for the year was the development of a new Organisational Strategy. The Strategy sets out our aspirations for what we do and how we work over the next few years to raise living standards of New Zealanders. The Strategy sets out the Treasury's vision and ambition in response to the challenges that are presented by the global environment. It also outlines four strategic priorities that will be a focus for investment over the next few years, as well as articulating the core operational responsibilities that are a cornerstone of the Treasury's work.

Following the internal launch of the Strategy in February 2017, implementation began with a review of how we organise ourselves, and new processes including:

• a prioritisation process - to work to free up capacity to pursue new investments
• a new business planning and budgeting approach - to plan deliverables for 2017/18
• a review of governance arrangements - to improve decision-making and accountability
• outcomes mapping - to identify how we have an impact on wellbeing, and
• a coordinated approach to communications and change management to support implementation.

We are now well placed to begin implementation in 2017/18 and beyond.

Delivering essential business support

We completed a refresh of five floors of No. 1 The Terrace, introducing linear desking with stand/sit options and more collaborative work areas. This project enables more efficient use of existing space, improved health and safety options and a more modern working environment. Design work has commenced on the Treasury's future accommodation move to the lower floors of 1-3 The Terrace, as part of the whole-of-government Wellington Accommodation Project, Phase Two in 2019.

The Treasury provides HR, finance and IT support to all central agencies in a shared services model. In 2016/17, following an agreement between Central Agency Chief Executives, a plan to improve the delivery of shared services was developed and implemented, including a new Finance Service Model, and ownership and governance processes.

A diverse and inclusive culture

Diversity of thinking

A description of our diversity and inclusion work programme is outlined on pages 8 to 10.

Māori and Pacific capability

Our wharenui - Nga Mokopuna a Tane - is the heart of the Treasury. We have made a commitment to incorporating Te Ao Māori into our everyday work. In 2016/17, initiatives include:

• Te Puna Wai, who support and lead the Treasury with waiata and tikanga in pōwhiri.
• Seventy-three staff completed te reo Māori courses - tau kē! Staff are also encouraged and supported at tertiary level as well.
• Two sessions of He Uru Whetu - marae day visits to Ngāti Toa at Takapuwahia marae. They focus on te reo Māori, Treaty of Waitangi and pōwhiri.
• Work with teams to support individual/team development in Māori capability - work consists of mihimihi, te reo Māori, Māori engagement and Tikanga Māori.
• A Māori Capability survey was conducted in June 2017 to identify the baseline of mātauranga Māori (Māori knowledge) and participation in things Māori within the Treasury. This information will inform the next steps for Puna Kaupapa to enhance Māoricapability. It was reported 189 staff have participated in pōwhiri at the Treasury.

We are continuing to build our Pacific capability and responsiveness to Pacific diversity and inclusion. Workshops on the Pacific operating model and Pacific analytical frameworks have been undertaken to build our internal capability and diversity of thinking. We have also run successful regional engagement events with Pacific economic stakeholders and leaders to hear what they consider matter to Pacific communities and families and how we can help accelerate Pacific living standards. We are continuing to test the applicability of our Living Standards Framework in identifying the capital products relevant to Pacific communities and, looking forward, we are undertaking an innovative project to quantify and understand the value and contribution of Pacific New Zealanders to the New Zealand economy now and in the future.

Building capability and supporting performance

Economic and policy capability

In 2016/17 we have re-established the Chief Economic Advisor's office with a focus on supporting the implementation of the Organisational Strategy and building internal economic and quantitative capability.

As part of delivering that approach, we have developed a plan to integrate economics into a continuous professional development process for Treasury staff modelled on the successful Finance Development Programme that the Treasury has run for finance professionals.

A key component of the new approach will also be development of peer to peer learning, 'masterclasses', based on sharing the practical knowledge of experienced economists in the Treasury and the wider public sector.

Recruitment and development

We have explored a variety of tools and options to broaden the diversity of our applicant pool. We are working on greater automation of our recruitment software to provide an improved customer experience and reduce administration inputs.

The new 'He Manaaki' approach to performance, development and growth has been rolled out with training support to all people leaders, and employees are now progressively attending workshops aimed at supporting them to have more effective conversations with their people leader.

Tools and systems that support our work

Information capability

The Treasury Information Capability (TIC) programme is developing a new data and analytic capability. An aim of the programme is to lift the data and analytic maturity of the Treasury. This will involve simplifying and improving access to secure, trusted and high-quality data to support more accurate, persuasive and timely advice and decision-making. This will contribute to realising the Treasury vision of higher living standards for New Zealanders.

This year has involved establishing the required cloud-based technological foundation necessary to make data applications and connections to data sources operational. Selected business initiatives were also developed to make specific data sources more accessible and usable. Lifting the data and analytic maturity of the Treasury will also involve improving organisational competencies (eg, improving data management practices, increasing data literacy and supporting the introduction of new data visualisation and analytical tools).

Managing risk

We have developed and implemented a new risk management framework for the Treasury. This has resulted in enhanced risk management practices and awareness across the business. Business continuity plans have also been reviewed, updated and tested, including two exercises, as well as practical use following the Kaikōura earthquake.

Identifying and managing risk is a key part of our planning. Our high-level strategic and operational risks are documented in a risk register and our risk management arrangements include regular discussions and review by our Executive Leadership Team and Kaiurungi. We also completed a review of our Risk and Audit Committee Charter to enhance its ability to provide quality independent advice to the Secretary. Our assurance model is based on the 'three lines of defence'. The first line is our staff and managers, the second line is executive oversight and specialist advice and the third line is independent oversight from our internal and external auditors and the Risk and Audit Committee.

New Zealand Business Number Implementation

The Treasury is subject to Cabinet Circular (16) 3 New Zealand Business Number - Implementation Requirements that was issued on 25 May 2016 which sets out requirements for us to implement the New Zealand Business Number (NZBN). NZBN is a universal identifier that will help businesses to easily update, share key information and interact with each other. This has been introduced to streamline all essential business information, and over time will become the only number businesses will need to use to interact with a range of other businesses and government agencies.

The Treasury is a Tier two agency and must implement NZBN requirements by 31 December 2018. We have updated our Financial Management Information System to enable the use of NZBN against our accounts payable, accounts receivable and vendor information. We are also developing a new contract management system within our Financial Management Information System which will make use of the NZBN. An assessment is required to ascertain whether there are any other systems and processes that will be impacted by NZBN. This will be completed by the end of 2017.

Progress in our medium-term indicators of success

Section Two#

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Departmental Appropriations#

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This section of the report describes the groups of outputs that the Treasury was funded to deliver in 2016/17 and reports on what was achieved with each appropriation against what was intended to be achieved and how performance would be assessed as set out in the supporting information to the 2016/17 Estimates and 2016/17 Supplementary Estimates.

The output appropriations support the achievement of the Strategic Intentions set out on pages 13 to 45 of this Annual Report. Those pages provide readers with further information on the significant progress and key achievements we made using expenditure from these appropriations.

Administration of Crown Borrowing, Securities, Derivative Transactions and Investment Permanent Legislative Authority (PLA)

What is intended to be achieved with this appropriation

This appropriation is intended to achieve the administration of the Crown's financing requirements so as to raise sufficient funds to finance the Crown's cash deficit while minimising the cost to the Crown of such borrowing.

What was achieved with this appropriation

Note: Operating costs associated with the delivery of the Crown Debt Management function were below budget owing to lower than budgeted process management and consulting fees.

Significant achievements

During 2016/17, the Treasury:

Borrowing programme:

• Issued $7.95 billion of New Zealand Government bonds, achieving the required programme size. This compared to $8.0 billion in 2015/16.
• Introduced a 2037 New Zealand Government nominal bond, raising $2.0 billion through the initial issue via syndication.
• Introduced a 2040 New Zealand Government inflation-indexed bond, raising $1.5 billion through the initial issue via syndication.
• Re-purchased $5.8 billion of the December 2017 New Zealand Government nominal bond, enabling investors to reduce holdings ahead of the maturity, in turn providing more liquidity for investment into other New Zealand Government securities.

Investment programme:

• Managed asset portfolios that, at 30 June 2017, included marketable securities of $7.1 billion and a cash balance of $7.8 billion. Funds were invested in predominantly AAA and AA rated securities.

Treasury services:

• Provided a range of other financial markets services for the Crown. This included financial risk intermediation, management of the Crown's transactional obligations with the IMF, managing Crown lending and providing financial markets risk management and capital markets advice as required.

Investor relations and market development: 

• Provided advice that supported the Government communicating an intention to maintain levels of New Zealand Government bonds on issue at not less than 20% of GDP over time. This supportslong-term investor confidence in the New Zealand Government bond market.
• Promoted New Zealand Government securities in local and international markets. This included overseas investor missions to the UK, USA and Europe and support of inbound investor visits. These developed and strengthened intermediary and investor relations.
• Participated in, and presented at, a number of investor and sovereign peers conferences and other fora.
• Engaged with the three rating agencies (Moody's, Standard & Poor's and Fitch) to assist them in their assessments of New Zealand's creditworthiness. This included briefing the rating agencies on developments in the New Zealand economy and organising meetings with relevant officials, commentators and Ministers.

Technology platform development:

• Completed the implementation of a new technology platform that supports end-to-end transaction capture, settlement, accounting, reporting and control functions for NZDMO. This delivered an uplift in NZDMO's current and potential capability and significantly improved NZDMO's operational risk profile. The implementation enabled the retirement of NZDMO's legacy application and significantly improved NZDMO's business continuity capability.

Administration of Guarantees and Indemnities given by the Crown PLA

What is intended to be achieved with this appropriation

This appropriation is intended to achieve efficient and effective administration of the Crown's Guarantees and Indemnities, including the Wholesale and Retail Deposit Guarantee Schemes.

What was achieved with this appropriation

Note: This budget provides for any residual activity after the closure of the Retail Deposit Guarantee Scheme. Apart from some administration costs, no other expenditure was required during 2016/17.

Significant achievements

During 2016/17, the Treasury:

• managed the reimbursement for work undertaken by Solid Energy in relation to the Crown's rehabilitation indemnities, and
• commenced the process to transfer rehabilitation indemnities to new mine owners at which point the management of the indemnities will be undertaken by an independent escrow agent.

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

What is intended to be achieved with this appropriation

This appropriation is intended to ensure appropriate financial and social returns, and long-term value is achieved from the State-Owned Enterprises (SOEs), Crown entity companies (CECs) and Crown entities monitored under this appropriation.

What was achieved with this appropriation

* This has been the result of changes to board sizes being agreed by Ministers, and decisions to hold some vacancies meaning that appointments were not made.

Note: The underspend is owing to savings generated by staff vacancies throughout the year and less utilisation of consultants than planned.

Significant achievements

During 2016/17, the Treasury provided ownership, performance monitoring and governance advice to the Minister for State Owned Enterprises and other responsible Ministers in respect of the Ministers' shareholding responsibilities. This included advice on:

• the appointment of Directors to Boards
• Directors' fees
• the financial performance of the SOEs, Crown entities and other monitored entities
• transactions, including (i) the partial sale of Kiwi Group Holdings Ltd by NZ Post; (ii) the sale of Fairway Resolution Ltd; and (iii) Crown Irrigation Investments Ltd funding provided to Central Plains Water Stage 2
• capital funding provided to Kiwi Rail Holdings Ltd
• repurposing Crown Fibre Holdings as Crown Infrastructure Partners to accelerate the construction of water and roading infrastructure for housing development, and
• the sale and wind-down of Solid Energy's assets, in preparation for a solvent liquidation in March 2018.

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

What is intended to be achieved with this appropriation

This appropriation is intended to ensure appropriate financial and social returns, and long-term value is achieved from Crown research institutes and Crown entities monitored under this appropriation.

What was achieved with this appropriation

* This has been the result of changes to board sizes being agreed by Ministers, and decisions to hold some vacancies meaning that appointments were not made.

Note: Expenditure within this appropriation is broadly in line with what was budgeted.

Significant achievements

During 2016/17, the Treasury provided services in relation to ownership, performance monitoring and governance matters to the Minister of Science and Innovation and other responsible Ministers in respect of the Ministers' shareholding responsibilities of the Crown research institutes. This included:

• advice and services in relation to the appointment of Directors to Boards
• advice on Directors' fees, and
• support and guidance provided to MBIE in its role as monitor of the Crown research institutes and other Crown entities.

Policy Advice - Finance

What is intended to be achieved with this appropriation

This appropriation is intended to enable and facilitate ministerial decision-making that achieves for New Zealand improved economic performance, a high-performing State sector and a stable and sustainable macroeconomic environment.

What was achieved with this appropriation

1. This year's result indicates that a greater focus on quality of advice is needed. Our advice review process suggests a particular need to focus on our advice being fit for purpose: responsive to audience need; clear on the reason for and action from the advice; and high-quality in its communication.
2. Survey was sent to the Minister's office on 15 August 2017. However, the result was not available at time of publishing.
3. Continuing improvement as experience across departments grows, but barriers to quality remain.
4. Measure removed in the Supplementary Estimates in April 2017.

Note: The underspend is mainly owing to delays in projects that involved the use of external resources.

Significant achievements

During 2016/17:

Regulatory management:

• The Government released its Regulatory Management Strategy in April 2017, including an update of the Government's Expectations for good regulatory practice (http://www.treasury.govt.nz/regulation/system/strategy).
• The Statutes Repeal Bill was introduced into Parliament and received Royal Assent in June 2017. It repealed or partially repealed 137 Acts that are no longer needed (http://www.legislation.govt.nz/act/public/2017/0023/24.0/whole.html#DLM6807612).
• The Treasury provided advice on a number of new process requirements to encourage a more consistent and proportionate approach to regulatory impact analysis, which have now been implemented (http://www.treasury.govt.nz/regulation/impact-analysis).

Fiscal strategy:

• The Treasury provided advice on the macroeconomic and fiscal outlook and risks, and the Government's fiscal strategy, to inform the Government's decisions for the 2017 Budget.

Budget 2017:

• Budget 2017 announced new operating investments of $1.8 billion, new capital investment of $4 billion and a Family Incomes Package of $2 billion. The decisions taken in Budget 2017 were in line with the Government's short-term fiscal intentions set out in the 2017 Budget Policy Statement.

Welfare system:

• We provided regular reporting on the welfare valuation model. We work with MSD to strengthen their investment strategy.

Provision of Financial Operations Services and Operational Advice

What is intended to be achieved with this appropriation

This appropriation is intended to improve economic performance and financial stewardship across the State sector and export and financial markets, through provision of relevant and timely operational support, services and advice.

What was achieved with this appropriation

1. We have built on last year's successful introduction of the CBAx spreadsheet tool designed to help agencies undertake cost benefit analysis. In Budget 2017, 136 initiatives were required to complete a CBAx; of those, 105 provided one. In addition, 29 initiatives were exempted because the initiative was not suited to an assessment.
   
   This is an improvement on the 2015/16 result of 73% and a good result in year two of the tool, although it falls short of our ambition. We are changing CBAx requirements on departments, to learn from the experience of Budget 2017. We intend to target CBAx at the areas of social sector and social investment in Budget 2018 - CBAx is our premium CBA tool and we want to direct use of it where it will add the most value. We are also designing a clearer and more principled exemptions process and continuing to support Vote Analysts and departments to lift CBA capability.

2. Only 38% of departments submitted 4YPs in 2017 that the Treasury considered 'comprehensive'. Medium-term planning is good practice in a well-developed public management system but recent results show that work is needed to support more departments to have comprehensive 4YPs. As a result, we are putting in place a more targeted, well-supported approach for 4YPs for 2018 and we are also working to align 4YPs with other similar strategic planning requirements (LTIPs and Strategic Intentions).
3. The coverage and quality of benefits information is steadily improving.
4. Compliance is generally high (including for small investments). Overall compliance was compromised in several cases where decisions were made under urgency or when the capital investment was incidental to the primary reason for the decision.
5. This measure was not as representative as intended and has been changed for 2017/18 to better reflect the work the Treasury does and how we add value. Other feedback from the survey used to gather data for the 2016/17 measure suggested that our investment advice is providing value (which was not captured by a question limited to information about the status of major projects). The new measure will assess Ministers' satisfaction with the Treasury's investment advice.
6. NZECO's role is to provide capacity to the private sector, and this lower result reflects stronger private sector capacity, as well as applications not meeting NZECO's credit standards. During the year, NZECO issued a total of 53 committed offers, and as at 30 June 2017 there are six outstanding offers.
7. NZECO's policies met the market's demand for supporting mainly small and medium-sized enterprises (SME) exporters and/or smaller value export contracts. This support was to a diverse range of markets across 29 countries, with most being outside of New Zealand's traditional export markets.
8. This reflects NZECO's aggregate premium being lower than previous years as a consequence of NZECO's policies being for smaller-value, shorter-tenors (often in support of SMEs).
9. This ratio reflects that NZECO's premium plus recoveries exceeded the total value of claims paid and provisioned, over the last five years. However, NZECO did not meet the 40% maximum ratio that it sets internally.

Note: The underspend is mainly owing to delays in projects that involved the use of external resources.

Significant achievements

During 2016/17, the Treasury carried out work in the following key areas:

Government financial reporting:

• Produced unqualified audited Financial Statements of Government for 2015/16, including a 'Snapshot' which is intended to be an accessible summary of the financial results. Interim financial statements provided a regular and timely update of the Government's finances.
• Progressed the Government's commitment to the Open Government Partnership, including commissioning stakeholder research which confirmed that New Zealand's fiscal reporting is considered one of the most transparent in the world; however, potential improvements could still be made.

Investment management and asset performance:

• We continued our work with investment-intensive agencies and government investment Ministers to improve key aspects of the Government's investment management system, including asset performance, benefits from major investments and long-term planning.
• We also continued to roll out the ICR which gives government stakeholders an evidence-based assessment of agency capability and performance and identifies areas for improvement.

Fiscal and State sector management/strategic performance improvement:

• Medium-term planning is good practice in a well-developed public management system and in 2016/17 we continued to support 32 agencies to improve the quality of the 4YPs.
• We also started work to align 4YPs with other similar strategic planning requirements (LTIPs and Strategic Intentions), given the perception of cluttered strategic planning requirements.

New Zealand Export Credit Office:

• Underwrote export sales of $182 million into 29 countries. Exporters from the marine, high-tech manufacturing, primary, wine, ICT and renewable energy sectors were able to secure new contracts or increase the value of their sales via the support of NZECO's financial solutions.
• While the number of total policies and total exports supported did not meet our forecast targets, in part it was owing to several examples of private insurers and banks stepping in to support exporters, after NZECO's initial support helped increase their export turnover and profitability.

Compliance with risk management policies and parameters for management of Crown lending and Crown bank accounts: 

• Total advances to Crown entities at the end of the period was $4.8 billion. Over the period NZDMO administered any drawdowns, interest repayments, principal repayments as well as providing any risk management and accounting required as a result of these transactions.

Shared Support Services

What is intended to be achieved with this appropriation

This appropriation is intended to achieve quality, efficient support services for other agencies.

What was achieved with this appropriation

Note: The underspend is owing to the service level agreements with the agencies setting a work programme less expensive than appropriation limits.

Significant achievements

During 2016/17, the Treasury carried out work in the following key areas:

Systems and processes of internal controls:

• Quality and timeliness of financial and payroll services have been achieved.
• Access and availability of IT systems has been at or above expected service levels and there has been no significant loss or impairment of data integrity.
• A project to increase the resilience of IT systems through the use of high availability data centres commenced and systems were successfully transitioned between May and August 2017.
• Cloud services have been adopted for some applications and this will continue in 2017/18 as the shared services move further towards an 'as a service' model.
• Dedicated HR programmes were delivered for both SSC and DPMC, and a number of improvements to technology services were also delivered.
• In response to an annual survey, over 90% of customers rated the service as mostly satisfied or above.

New governance arrangements:

• The Treasury is the owner of the shared services function and is responsible for the efficient and effective delivery of the services and overall stewardship. Directors of Finance, HR and IT are responsible for customer satisfaction, internal controls, process efficiency and the cost effectiveness of their respective functions. Bi-lateral meetings with each customer are the primary relationship management vehicle and are used to provide two-way feedback; agree expectations for both parties; identify and resolve issues; and monitor service performance.

The Treasury - Capital Expenditure PLA

What is intended to be achieved with this appropriation

This appropriation is intended to achieve the renewal, upgrade or redesign of assets in support of the delivery of Treasury services.

What was achieved with this appropriation

Significant achievements

During 2016/17, the Treasury's capital expenditure was primarily targeted towards the renewal and upgrade of IT assets used to support the three central agencies, in line with its capital asset management plan. In addition, 2016/17 was the first year of the TIC project, and some initial expenditure was incurred in relation to the design of the fitout of the Treasury's new premises at No 1 The Terrace that it will be moving into in 2019 as part of the whole-of-government Wellington Accommodation Project, Phase Two.

Ministerial Servicing Performance 2016/17

The information in this section, while not part of our Appropriations, provides information on our performance in providing services to Ministers.

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.

Agreed measures and standards for ministerial servicing

Multi-category Appropriations (MCA)#

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Greater Christchurch Anchor Projects MCA

What is intended to be achieved with this appropriation

This appropriation is intended to achieve the management of Anchor Projects and divestment of Crown-owned land in Christchurch.

What was achieved with this appropriation and each of its categories

Note: The underspend is mainly owing to delays in completion of Convention Centre and other Anchor Projects.

Significant achievements

During 2016/17:

• Ōtākaro Limited was incorporated under Schedule 4A of the Public Finance Act 1989 in February 2016, and has been fully operational since the disestablishment of Canterbury Earthquake Recovery Authority (CERA) in April. The appropriations for each Anchor Project, previously established in Vote Canterbury Earthquake Recovery, were transferred to Vote Finance as set out above. Funding for each Anchor Project is drawn down by the company on a quarterly basis, under a Project Funding Agreement with the Crown.
• Ōtākaro Limited has completed its first full year of operations. It has successfully completed one project, the Earthquake Memorial, and is in the process of transferring this and other packages of partially completed projects to their final owners (MCH and the Christchurch City Council). The second of the four major Anchor Projects, the Christchurch Convention and Exhibition Centre, is due to begin construction in September 2017.

Inquiries and Research into Productivity-related Matters MCA

What is intended to be achieved with this appropriation

This appropriation is intended to achieve:

• inquiries in accordance with the New Zealand Productivity Commission Act 2010, and
• research in accordance with the Productivity Commission Act 2010.

What was achieved with this appropriation and each of its categories 

Significant achievements

During 2016/17, work was carried out in the following key areas:

• The Productivity Commission delivered two inquiries into productivity-related topics. The first inquiry, New Models of Tertiary Education, considered how well New Zealand's tertiary education system is set up to respond to emerging trends in technology and the internationalisation of education, and changes in the structure of the population, and the skills needed in the economy and society. Following the release of the report, the Government released its formal response, setting out a clear direction for future work that will focus on four key areas: creating a more student-centred system; meeting the needs of industry through relevant, responsive and supportive teaching; improving performance across the system; and enabling and encouraging innovative new models and providers. The Commission also released an inquiry into Urban Planning. The Government is considering the findings of the report and will release a response in due course.
• The Commission also undertook research into, and promoted the public understanding of, productivity-related matters, publishing a number of research reports. One example was 'Achieving New Zealand's productivity potential', which was a research paper that drew on the Productivity Commission's body of work to outline reasons why New Zealand has generally struggled to lift productivity over the past four decades and the broad areas of policy reform that would help in turning that around. The Commission also coordinated the Productivity Hub – a grouping of four agencies that coordinates productivity analysis across the public sector. The other key agencies in the Hub are the Treasury, MBIE and Statistics New Zealand. During 2016/17 the Hub continued its focus on firm-level analysis of New Zealand's productivity performance. The Productivity Hub hosted a workshop on 16 June 2017, where researchers, officials and academics from New Zealand and overseas met to deliver presentations and discuss productivity-related matters.

Social Housing Reform MCA

What is intended to be achieved with this appropriation

This appropriation is intended to achieve the development of a variety of social housing in New Zealand and grow the community housing sector by making the Housing New Zealand Corporation stock available to social providers.

What was achieved with this appropriation and each of its categories

Note: Expenditure against the Social Housing Reform Programme MCA was lower than the Supplementary Estimates balance, largely as a result of the Expression of Interest and Request for Proposal stages for the proposed Christchurch transfer occurring later than originally planned with some expenditure now likely to fall in 2017/18 rather than in 2016/17.

Significant achievements

During 2016/17, the Treasury:

• Successfully concluded the first transfer of Housing New Zealand properties and tenancies to a non-government community housing provider. In March 2016, three of five respondents were invited to formally respond to the Request for Proposal, and in August 2016 Accessible Properties Ltd (APL, a subsidiary of IHC) was selected as preferred provider. Contractual Close (the signing of a Capacity Contract and a Sale and Purchase Agreement) followed on 15 December 2016. On 1 April 2017 APL took over responsibility for the 1,138 Housing New Zealand properties and tenancies in Tauranga.
• Initiated a proposed transfer of up to 2,500 HNZC properties and tenancies in Christchurch, in November 2016. Respondents are expected to respond to a Request for Proposals by 25 September 2017.
• Developed a robust contractual framework as part of the Tauranga transaction process. This framework will serve as a basis for future transactions. It has been widely accepted by the market, and is being used by MSD to inform development of their contracts.

Independent Auditor's Report#

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To the Readers of the Treasury's Annual Report for the Year Ended 30 June 2017

The Auditor-General is the auditor of the Treasury (the Department). The Auditor-General has appointed me, Brent Manning, using the staff and resources of KPMG, to carry out, on his behalf, the audit of:

• the financial statements of the Department on pages 82 to 92, that comprise the statement of financial position, statement of commitments, statement of contingent liabilities and contingent assets as at 30 June 2017, the statement of comprehensive revenue and expense, statement of changes in equity, and statement of cash flows for the year ended on that date and the notes to the financial statements that include accounting policies and other explanatory information;
• the performance information prepared by the Department for the year ended 30 June 2017 on pages 13 to 61, and 63 to 69;
• the statements of expenses and capital expenditure of the Department for the year ended 30 June 2017 on pages 75 to 80;
• the schedules of non-departmental activities which are managed by the Department on behalf of the Crown on pages 94 to 100 that comprise:
  • the schedules of assets; liabilities; commitments; and contingent liabilities and assets as at 30 June 2017;
  • the schedules of expenses; and revenue for the year ended 30 June 2017;
  • the statement of trust monies for the year ended 30 June 2017; and
  • the notes to the schedules that include accounting policies and other explanatory information.

Opinion

In our opinion:

• the financial statements of the Department on pages 82 to 92:
  • present fairly, in all material respects:
    • its financial position as at 30 June 2017; and
    • its financial performance and cash flows for the year ended on that date; and
    • comply with generally accepted accounting practice in New Zealand in accordance with Public Benefit Entity Reporting Standards.
• the performance information of the Department on pages 13 to 61, and 63 to 69:
  • presents fairly, in all material respects, for the year ended 30 June 2017:
    • what has been achieved with the appropriation; and
    • the actual expenses or capital expenditure incurred compared with the appropriated or forecast expenses or capital expenditure; and
  • complies with generally accepted accounting practice in New Zealand.
• the statements of expenses and capital expenditure of the Department on pages 75 to 80 are presented fairly, in all material respects, in accordance with the requirements of section 45A of the Public Finance Act 1989.
• the schedules of non-departmental activities which are managed by the Department on behalf of the Crown on pages 94 to 100 present fairly, in all material respects, in accordance with the Treasury Instructions:
  • the assets; liabilities; commitments; and contingent liabilities and assets as at 30 June 2017;
  • expenses; and revenue for the year ended 30 June 2017; and
  • the statement of trust monies for the year ended 30 June 2017.

Our audit was completed on 29 September 2017. This is the date at which our opinion is expressed.

The basis for our opinion is explained below. In addition, we outline the responsibilities of the Secretary to the Treasury and our responsibilities relating to the information to be audited, we comment on other information, and we explain our independence.

Basis for our opinion

We carried out our audit in accordance with the Auditor-General's Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. Our responsibilities under those standards are further described in the Responsibilities of the auditor section of our report.

We have fulfilled our responsibilities in accordance with the Auditor-General's Auditing Standards.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of the Secretary to the Treasury for the information to be audited

The Secretary to the Treasury is responsible on behalf of the Department for preparing:

• financial statements that present fairly the Department's financial position, financial performance, and its cash flows, and that comply with generally accepted accounting practice in New Zealand.
• performance information that presents fairly what has been achieved with each appropriation, the expenditure incurred as compared with expenditure expected to be incurred, and that complies with generally accepted accounting practice in New Zealand.
• statements of expenses and capital expenditure of the Department, that are presented fairly, in accordance with the requirements of the Public Finance Act 1989.
• schedules of non-departmental activities, in accordance with the Treasury Instructions, that present fairly those activities managed by the Department on behalf of the Crown.

The Secretary to the Treasury is responsible for such internal control as is determined is necessary to enable the preparation of the information to be audited that is free from material misstatement, whether due to fraud or error.

In preparing the information to be audited, the Secretary to the Treasury is responsible on behalf of the Department for assessing the Department's ability to continue as a going concern. The Secretary to the Treasury is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless there is an intention to merge or to terminate the activities of the Department, or there is no realistic alternative but to do so.

The Secretary to the Treasury's responsibilities arise from the Public Finance Act 1989.

Responsibilities of the auditor for the information to be audited

Our objectives are to obtain reasonable assurance about whether the information we audited, as a whole, is free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit carried out in accordance with the Auditor-General's Auditing Standards will always detect a material misstatement when it exists. Misstatements are differences or omissions of amounts or disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of readers, taken on the basis of the information we audited.

For the budget information reported in the information we audited, our procedures were limited to checking that the information agreed to the Department's information on strategic intentions/statement of intent.

We did not evaluate the security and controls over the electronic publication of the information we audited.

As part of an audit in accordance with the Auditor-General's Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. Also:

• We identify and assess the risks of material misstatement of the information we audited, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• We obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Department's internal control.
• We evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Secretary to the Treasury.
• We evaluate the appropriateness of the reported performance information within the Department's framework for reporting its performance.
• We conclude on the appropriateness of the use of the going concern basis of accounting by the Secretary to the Treasury and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Department's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the information we audited or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Department to cease to continue as a going concern.
• We evaluate the overall presentation, structure and content of the information we audited, including the disclosures, and whether the information we audited represents the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the Secretary to the Treasury regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Our responsibilities arise from the Public Audit Act 2001.

Other information

The Secretary to the Treasury is responsible for the other information. The other information comprises the information included on pages 1 to 12, but does not include the information we audited, and our auditor's report thereon.

Our opinion on the information we audited does not cover the other information and we do not express any form of audit opinion or assurance conclusion thereon.

Our responsibility is to read the other information. In doing so, we consider whether the other information is materially inconsistent with the information we audited or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on our work, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Independence

We are independent of the Department in accordance with the independence requirements of the Auditor-General's Auditing Standards, which incorporate the independence requirements of Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board.

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

 

Brent Manning
KPMG
On behalf of the Auditor-General

Wellington, New Zealand

Section Three#

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Statements of Expenses and Capital Expenditure#

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Statement of Budgeted and Actual Expenses and Capital Expenditure Incurred Against Appropriations
for the year ended 30 June 2017

The Statement of Budgeted and Actual Expenses and Capital Expenditure Incurred Against Appropriations details expenditure against appropriations. Total departmental output classes expenditure and appropriations equal total expenses in the Statement of Comprehensive Revenue and Expenses on page 82. Total non-departmental output classes expenditure and appropriations equal total expenses in the Schedule of Expenses on page 94.

Statement of Expenses and Capital Expenditure Incurred Without, or in Excess of, Appropriation or Other Authority

for the year ended 30 June 2017

Expenses and capital expenditure incurred without appropriation or outside scope or period of appropriation

Nil. (2016. Nil)

Expenses and capital expenditure incurred in excess of appropriation

Nil. (2016. There was unappropriated expenditure of $4,464 in the Non-departmental Other Expense appropriation – Crown Residual Liabilities.)

Statement of Capital Injections for the year ended 30 June 2017

The total capital contribution for 2016/17 is $4.548 million which is made up of:

1. Capital contributions have been received from DPMC and SSC for $3.403 million relating to the accumulated depreciation on IT and accommodation assets transferred under the control of CASS when CASS was implemented.
2. The Business Information Hub project required a capital injection of $1.145 million.

Financial Statements#

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Departmental
for the year ended 30 June 2017

Statement of Comprehensive Revenue and Expenses

Statement of Changes in Equity

Statement of Financial Position

Statement of Cash Flows

Statement of Commitments

Statement of Contingent Liabilities and Contingent Assets

Notes to the Departmental Financial Statements and Non-departmental Schedules

Statement of Comprehensive Revenue and Expenses
for the year ended 30 June 2017

The Statement of Comprehensive Revenue and Expenses details the revenue and expenses relating to all outputs (goods and services) produced by the Treasury during the financial year ended 30 June 2017. Total expenses are equal to total departmental output expense appropriations and departmental output expense categories in the Statement of Budgeted and Actual Expenses and Capital Expenditure Incurred Against Appropriations on page 75.

Statement of Changes in Equity
for the year ended 30 June 2017

The accompanying accounting policies and notes form part of these Financial Statements.

Statement of Financial Position
as at 30 June 2017

The Statement of Financial Position reports the total assets and liabilities of the Treasury as at 30 June 2017. Taxpayers' funds are represented by the difference between the assets and liabilities.

The accompanying accounting policies and notes form part of these Financial Statements.

Statement of Cash Flows
for the year ended 30 June 2017

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 Revenue and Expenses on page 82.

The accompanying accounting policies and notes form part of these Financial Statements.

Statement of Commitments

Commitments are future expenses and liabilities to be incurred on contracts that have been entered into at balance date.

Non-cancellable operating lease commitments

The Treasury has non-cancellable operating leases on its principal premises at No 1 The Terrace, Wellington until 30 June 2020. These operating lease commitments have been recorded at their gross values in the Statement of Commitments.

Statement of Contingent Liabilities and Contingent Assets

Contingent liabilities and contingent assets are reported at the point at which the contingency is evident or when a present liability is unable to be measured with sufficient reliability to be recorded in the financial statements.

Unquantifiable contingent liabilities

The Treasury has unquantifiable contingent liabilities for carpark licences and a deed of lease against certain damages or loss caused by our use of those carparks and premises.

The Treasury also granted indemnities to Reuters services contract in respect of breaches of licence agreements and contracts.

Quantifiable contingent liabilities and assets

As at 30 June 2017, the Treasury had no quantifiable departmental contingent assets or liabilities (30 June 2016: Nil).

The accompanying accounting policies and notes form part of these Financial Statements.

Notes to the Departmental Financial Statements and Non-departmental Schedules

for the year ended 30 June 2017

1  Statement of Accounting Policies

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

In addition, the Treasury has reported separately on the Non-departmental Schedules which present financial information on public funds managed by the Treasury on behalf of the Crown, and Trust monies which it administers on behalf of the Crown.

The primary objective of the Treasury is to provide services to the public rather than making a financial return to equity holders. Accordingly, the Treasury has designated itself as a public benefit entity for the purposes of New Zealand Public Benefit Entity International Public Sector Accounting Standards (NZ PBE IPSAS).

The Financial Statements of the Treasury are for the year ended 30 June 2017. The Forecast Financial Statements are for the year ending 30 June 2018. These Financial Statements were authorised for issue by the Secretary to the Treasury on 29 September 2017.

The Departmental Financial Statements and the financial information reported in the Non-departmental Schedules are consolidated into the Financial Statements of the Government and readers of these schedules should also refer to the Financial Statements of the Government for the year ended 30 June 2017.

Statement of compliance

The Financial Statements and unaudited Forecast Financial Statements of the Treasury and the Non-departmental Schedules 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), Treasury Instructions and Treasury Circulars. Measurement and recognition rules applied in the preparation of the Non-departmental Supplementary Financial Schedules are consistent with NZ GAAP and Crown accounting policies and are detailed in the Financial Statements of the Government. These Financial Statements have been prepared in accordance with Tier 1 NZ PBE accounting standards.

Basis of preparation

The Financial Statements have been prepared on an historical cost basis, modified by the revaluation of certain assets and liabilities, and prepared on an accrual basis, unless otherwise specified.

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.

Budget figures shown as Mains

The 2017 budget figures are those included in the Department's Budget Estimates for the year ended 30 June 2017, which are consistent with the financial forecast information submitted for the BEFU for the year ending 2016/17.

The budget and forecast figures are unaudited and have been prepared using the accounting policies adopted in preparing these Financial Statements.

Forecast figures

Basis of preparation

The 2018 forecast figures are for the year ending 30 June 2018, and are consistent with the financial forecast information submitted for the BEFU for the year ending 2017/18.

Forecast Financial Statements have been prepared in accordance with the accounting policies expected to be used in the future for reporting historical general purpose financial statements.

These Forecast Financial Statements have been prepared in accordance with NZ PBE IPSAS, based on BEFU incorporating assumptions as to future events that the Treasury reasonably expects to occur, associated with the actions it reasonably expects to take. They have been compiled on the basis of existing government policies and ministerial expectations at the date that the information was prepared.

The forecasted results will remain substantially the same as the previous year. The main assumptions were as follows:

• The Treasury's activities and output expectations will remain substantially the same as the previous year focusing on the Government's priorities.
• Personnel costs were based on current wages and salary costs, adjusted for anticipated remuneration changes.
• Operating costs were based on historical experience and other factors that are believed to be reasonable in the circumstances and are the Treasury's best estimate of future costs that will be incurred.

Additional factors that could lead to material differences between the Forecast Financial Statements and the 2017/18 Actual Financial Statements include changes to the baseline budget through new initiatives, transfer of funding across financial years or technical adjustment.

Authorisation statement

These Forecast Financial Statements were authorised for issue by the Secretary and Chief Executive of the Treasury on 26 April 2017. The Secretary and Chief Executive is responsible for the Forecast Financial Statements presented, including the appropriateness of the assumptions underlying the Forecast Financial Statements and all other required disclosure. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual financial results achieved for the period covered are likely to vary from the information presented, and the variations may be material.

Foreign Exchange

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

Statement of cost allocation policies

The Treasury 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 cannot 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.

Critical accounting estimates and assumptions

There are no critical accounting estimates and assumptions made in preparing these Financial Statements.

2  Revenue Crown - Non-exchange

Revenue from the Crown is measured based on the Treasury's funding entitlement for the reporting period. The funding entitlement is established by Parliament when it passes the Appropriation Acts for the financial year. The amount of revenue recognised takes into account any amendments to appropriations approved in the Appropriation (Supplementary Estimates) Act for the year and certain other unconditional funding adjustments formally approved prior to balance date. There are no conditions attached to the funding from the Crown. However, the Treasury can incur expenses only within the scope and limits of its appropriations. The fair value of Revenue Crown has been determined to be equivalent to the funding entitlement.

3  Other Revenue

4  Personnel Costs

5  Property, Plant and Equipment and Intangibles

Leasehold improvements: The Treasury has non-cancellable operating leases on its principal premises at No 1 The Terrace, Wellington until 30 June 2020. A project has been undertaken to refit and refresh several floors at 1 The Terrace. The useful life was determined based on the estimated moving date to 1–3 The Terrace.

Intangible assets: The total intangible assets consist of software acquired from third parties and software generated internally. The cost of an internally generated intangible asset represents expenditure incurred in the development phase of the asset only. Intangible assets with finite lives are reviewed annually to determine if there is any indication of impairment.

6  Capital Charge

The capital charge is recognised as an expense in the financial year to which the charge relates. The Treasury pays a capital charge to the Crown based on its equity as at 30 June and 31 December each year. The capital charge rate for the year ended 30 June 2017 was 7% from 1 July 2016 to 31 December 2016 and then 6% from 1 January 2017 (2016: 8.0%).

7  Other Operating Expenses

The Social Housing Reform Programme is being coordinated by the Treasury and therefore the consultancy work is funded via the Treasury, although the programme has application outside of the Treasury's internal functions. In addition to the above departmental expenditure, fees of $1.341 million were paid to KPMG for direct sales costs relating to the Social Housing Reform Programme. These fees are included in Non-departmental Multi-category output expenses. The Treasury also incurred $135,000 for KPMG non-audit services.

8  Creditors and Other Payables

9  Employment Entitlement Provisions

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

In determining the appropriate discount rate, the Department has adopted the central table of risk-free discount rates and Consumer Price Index assumptions provided by the Treasury to all departments.

10  Reconciliation of Net Surplus to Net Cash Flows from Operating Activities

11  Related Party Transactions

All related party transactions have been entered into on an arm's-length basis and are therefore exempt from the need for disclosure.

The Treasury is a wholly-owned entity of the Crown and received funding from the Crown of $84.773 million to provide services to the public for the year ended 30 June 2017 (2016: $85.382 million). The Government significantly influences the roles of the Treasury as well as being its major source of revenue.

In conducting its activities, the Treasury is required to pay various taxes and 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 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 2017 totalled $3.760 million (2016: $3.739 million). These purchases include air travel from Air New Zealand, and Accident Compensation Corporation (ACC) levies. Transactions with other government agencies (ie, government departments and Crown entities) are not disclosed as related party transactions when they are consistent with the normal operating arrangements between government agencies and undertaken on the normal terms and conditions.

Key management personnel compensation

Key management personnel of the Treasury as at 30 June 2017 were the Secretary and the Executive Leadership Team (five Deputy Secretaries).

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 Members of Parliament (Remuneration and Services) Act 2013. They are paid under Permanent Legislative Authority, and are not paid by the Treasury.

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

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 (2016: Nil).

12  Events After Balance Date

There were no events subsequent to balance date that required adjustment to the Financial Statements or disclosure (2016: Nil).

13  Explanation of Major Variances Against Budget

The Treasury achieved a higher net surplus than estimated, mainly as a result of delays in the final quarter of the year in commissioning a number of projects which involved the use of external resources. Most of these projects will now be undertaken in 2017/18. Some variances in the Statement of Financial Position and Statement of Cash Flows are timing differences only, resulting from the timing and receipt of cash payments to suppliers and receipts from the Crown. Taxpayers' funds are marginally higher than estimated owing to the earlier receipt of a capital injection owing from SSC than estimated, but this timing was in line with the original budget.

Supplementary Financial Schedules#

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Non-departmental
for the year ended 30 June 2017

Schedule of Expenses

Schedule of Commitments and Contingent Liabilities

Schedule of Revenue and Capital Receipts

Schedule of Assets and Liabilities

Statement of Trust Monies

Explanatory Notes to Supplementary Statements and Schedules - Non-departmental

Schedule of Expenses

for the year ended 30 June 2017

The Schedule of Expenses summarises expenses that the Treasury 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 98 to 100.

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 2017.

*Details on Government Superannuation Fund (GSF) and National Provident Fund (NPF) related balances are presented in the note: Retirement Plan Liabilities and Provisions to Financial Statements of the Government of New Zealand for the year ended 30 June 2017 respectively.

Schedule of Commitments and Contingent Liabilities

as at 30 June 2017

The Department, on behalf of the Crown, has entered into non-cancellable contracts in relation to New Zealand House in London at a value of $0.983 million for the year ended 30 June 2017.

Disclosure of contingent liabilities incurred by the Crown is detailed in the Financial Statements of the Government of New Zealand for the year ended 30 June 2017.

Schedule of Revenue and Capital Receipts

for the year ended 30 June 2017

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 2017.

Schedule of Assets and Liabilities

as at 30 June 2017

The Schedule of Assets and Liabilities summarises the assets and liabilities that the Treasury administers on behalf of the Crown.

In addition, the Treasury monitors 12 SOEs, four mixed ownership model entities and 22 Crown entities. The investment in these entities is consolidated in the Crown Financial Statementsonaline-by-line basis.The investment in these entities is not included in this Schedule.

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 2017.

Statement of Trust Monies

as at 30 June 2017

(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.

During the year, there has been $2.467 million of contributions (2016: $4.6 million) and $3.353 million (2016: $1 million) of distributions made from the Trust Account. Interest earned on the Trust Account for the year was $0.120 million (2016: $0.150 million).

(b) Government Share Offer Trust Accounts

Over the past two years the Crown opened Initial Public Offer Trust Accounts to facilitate the partial sale of Meridian, Genesis and Mighty River Power. The source of funds relates to proceeds from the sale of shares and distributions relate to refunds paid to investors.

There has been insignificant movement in the Trust Accounts for both the 2016/17 and 2015/16 financial years.

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 2017.

Explanatory Notes to Supplementary Statements and Schedules - Non-departmental

Explanatory notes provide details of significant Treasury Non-departmental expenditure and revenue variances between actual results in 2015/16 and 2016/17. All Non-departmental balances are included in the Financial Statements of the Government of New Zealand, with the exception of impairment of investments.

1  International Financial Institutions (IFIs)

Treasury Crown has a total share investment of $382.365 million in IFIs which include the following institutions: Asian Development Bank, International Bank of Reconstruction and Development, International Finance Corporation, Multilateral Investment Guarantee Agency and Asian Infrastructure Investment Bank (2016: $394.999 million).

Capital receipts of $7.058 million were received from IMF members, representing repayment of earlier advances originally made to support members in financial difficulties (2016: $445.546 million).

During the year, a loss of $17.360 million on revaluation of IFIs' investment was recorded as a result of New Zealand dollar foreign exchange rate movement (2016: $17.895 million).

2  Ōtākaro Limited and Greater Christchurch Anchor Projects

CERA was disestablished on 18 April 2016 as the Government transitioned from leading the recovery to establishing long-term, locally-led recovery and regeneration arrangements. Responsibilities for the continuation of the key Anchor Projects Programme and precincts in Christchurch, along with managing the Crown's property assets in the central city, are now carried out by Ōtākaro Limited, a Crown entity.

For 2016/17, the Crown incurred $19.972 million in respect of Ōtākaro operating grant (2016: $7.285 million) and $152.302 million in respect of Greater Christchurch Anchor Projects MCA (2016: $50.250 million).

The transfer of assets to Ōtākaro Limited amounted to $35.108 million (2016: $204.452 million), representing the fair value of Anchor Projects assets, funded via an equity injection by the Crown of $29.208 million and the issuance of an additional Vendor Finance Loan of $5.900 million. Interest is charged on a base risk-free rate plus interest margin, whereby the interest margin represents a concessionary component of the loan and is funded via operating funding to Ōtākaro Limited, Management of Anchor Projects by Ōtākaro Limited appropriation.

Some of the land transferred to Ōtākaro for the Anchor Projects, rather than being built on, will become new public space for the people of greater Christchurch and visitors to enjoy. Under the cost-sharing agreement signed by the Crown and the Christchurch City Council ('the Council'), any land for Anchor Projects that forms part of the 'public realm' will vest in and be maintained by the Council. The vesting date is yet to be determined. The creation of this space will be an asset for the people of Christchurch for generations to come.

The Crown has recognised a provision of the 'public realm' land that will be transferred to the Council at a future date. The vesting provision as at 30 June 2017 is $42.552 million (2016: $11.090 million).

3  New Zealand Debt Management Office

Detailed disclosures of borrowings and financial instruments are included in the Financial Statements of the Government.

(a) Debt servicing

During 2016/17, debt servicing expenses have decreased owing to lower average volumes of long-term debt (Government Bonds) combined with lower average interest rates and decreased inflation indexation expenses.

(b) Other income, fair value and Foreign Exchange gains - NZDMO

Comparing with 2015/16, the significant variance was caused by realised fair value losses on Government Bonds repurchased in 2016/17. In addition, $274 million are mostly unrealised fair value losses on interest rate swaps, Crown entity loans and cross-currency interest rate swaps.

(c) Borrowings

For the year ended 30 June 2017, borrowings have increased, with higher long-term (Government Bonds) borrowings. There were no short-term Government Bonds as at 30 June 2017. Bonds due to mature in 2017/18 have been reclassified as current borrowings as at 30 June 2017.

4  Other Current Revenue

Significant balances included in Other Current Revenue are: Employers' Superannuation contributions, Reserve Bank Surplus, Earthquake Commission guarantee fee, recovery of Crown's costs from third parties in respect of Anchor Projects programme and rental income from New Zealand House. The 2016/17 Other Current Revenue is significant lower mainly owing to less surplus made by the Reserve Bank to the Crown.

5  Southern Response Earthquake Services Limited (SRESL)

The Crown's commitment of financial support to SRESL for the ongoing settlement of its Canterbury earthquake claims is embodied in a Crown Support Deed (CSD). The CSD provides two key capital instruments: $500 million of convertible preference shares (the Preference Shares); and the $500 million Uncalled Ordinary Share facility which has been extended by $250 million during the year to reflect the additional support necessary to enable the company to settle all its outstanding claims.

The financial obligations to SRESL under the Uncalled Ordinary Share facility have been revalued to their net present value at 30 June 2017. This valuation is driven by SRESL's expected cash drawdown profile based on the underlying outstanding insurance claims valuation, and its discounting over the life of the CSD. The insurance claims valuation was completed by Finity Consulting Pty Limited.

Included in the Statement of Departmental and Non-departmental Expenses and Capital Expenditure Against Appropriations is interest unwind expense recognised on the outstanding liability for the year of $7.520 million (2016: $16.370 million).

During the 2017/18 year, it is estimated the Crown is to pay $331 million to SRESL to assist in settling its outstanding claims. This amount was included in Current Liabilities - Provisions in the Schedule of Assets and Liabilities (2016: $264 million).

6  Solid Energy New Zealand Limited

The Crown provided separate indemnities for each of Solid Energy's mine sites in 2015. The indemnities create a liability provision for the Crown and an asset for Solid Energy. In 2016, the Crown agreed to take on the uncapped liability for acid mine drainage (AMD) at Stockton mine through a Deed of Commitment with Solid Energy and the relevant councils. The previous indemnity for Stockton AMD will be extinguished once the new mine owner succeeds Solid Energy under the Deed of Commitment.

As at 30 June 2017 the Solid Energy provision is made up of $102 million current provision and $67 million non-current provision, representing the maximum amount of the Crown's liability to indemnify Solid Energy, or third parties should mines sell.

7  Social Housing

The Government's Social Housing Reform Programme is focused on the development of a more diverse supply of social and affordable housing to meet the diversity of tenants' needs. An important aspect of the programme is the transfer of HNZC homes to community housing providers.

In 2016/17, a major milestone in the Social Housing Reform Programme was achieved through the transfer of 1,138 properties to Accessible Properties Limited in Tauranga. The Crown also advanced a further loan to the Tāmaki Redevelopment Company for $3 million (2016: $8.5 million) to enable the continuation of the Social Housing Reform Programme by enabling supply of both social and affordable housing in Auckland following the transfer of ownership and management of 2,873 properties in the Auckland suburbs of Glen Innes, Panmure and Point England to the Tāmaki Redevelopment Company in 2015/16.

During the year, the Crown incurred $3.051 million (2016: $4.176 million) of direct costs in respect of the Social Housing Reform Tauranga and Invercargill Programme. The Treasury incurred $8.282 million in managing this programme (2016: $8.263 million).

The Treasury's management of the Social Housing Reform Programme aligns with its monitoring responsibility of HNZC and Housing New Zealand Limited (HNZL), and during the year ended 30 June 2017, $277.784 million of debt was refinanced under the HNZC and HNZL debt refinancing appropriation within Vote Finance.

8  Events after balance date

There were no events subsequent to balance date that required adjustment to the Financial Statements or disclosure.

Section Four#

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Minister of Finance's Reports on Non-departmental Appropriations [B.14 (Finance)]#

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Pages 101 to 103 of this document meet the requirement, set out in the supporting information to the 2016/17 Estimates or 2016/17 Supplementary Estimates, for information on certain non-departmental appropriations to be reported by the Minister of Finance.

Although the reports are presented in the same document as the Treasury's Annual Report, they do not form part of the Treasury's Annual Report for the year ended 30 June 2017 (including reporting by the Treasury on appropriations for that year).

Refinancing of Housing New Zealand Corporation and Housing New Zealand Limited Debt

What is intended to be achieved with this appropriation

This appropriation is required when Housing New Zealand Corporation and Housing New Zealand Limited refinance their loans and is intended to enable the Treasury to monitor and administer the expenditure on refinancing.

What was achieved in this appropriation

Significant achievements

• In 2016/17, 15 refinancing requests were actioned for Housing New Zealand, totalling $275,777,378.

Ahu Whenua Trust Ex-gratia Payment

What is intended to be achieved with this appropriation

This appropriation is to achieve settlement of claims in negotiations which are being led by the Treasury.

What was achieved in this appropriation

Significant achievements

During 2016/17, Cabinet agreed to a final settlement offer that will be made to the Trust in 2017/18.

Stockton Acid Mine Drainage Historical Mining Rehabilitation

What is intended to be achieved with this appropriation

This appropriation is intended to achieve meeting the Crown's obligation to pay for expenses incurred for acid mine drainage rehabilitation relating to historical mining operations at Stockton Mine.

What was achieved in this appropriation

Note: This appropriation was established in 2016/17 for future year expenses. Therefore, no expenditure was incurred in 2016/17.

Significant achievements

During 2016/17, the Treasury:

• provided advice and support on the appropriate contractual arrangement to manage the Crown's acid mine drainage liability at Stockton Mine following Solid Energy's expected sale of the mine to new owners
• engaged with Solid Energy subject matter experts to further develop understanding of the Crown's acid mine drainage liability, and
• commenced development of a process to explore the options for managing the acid mine drainage liability going forward.

Other Non-departmental Appropriations#

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Management of Anchor Projects by Ōtākaro Limited

What is intended to be achieved with this appropriation

This appropriation is intended to achieve continuation of Christchurch earthquake recovery of the Anchor Projects Programme and divestment of Crown-owned land in Christchurch.

What was achieved in this appropriation

Significant achievements:

Refer to the Greater Christchurch Anchor Projects MCA on pages 63 to 65 for performance information on the Anchor Projects Programme.

Note: As a Schedule 4A company, Ōtākaro Limited is required to produce a Statement of Intent and a Statement of Performance Expectations and these are published on the company's website. Ōtākaro Limited also reports on its performance in its Annual Report; this includes its performance in the construction and management of Anchor Projects financed from this appropriation. The 2017 Annual Report will be publicly available on the company website in November 2017.

Loan Facility for Tāmaki Redevelopment Company

What is intended to be achieved with this appropriation

This appropriation is intended to enable Tāmaki Redevelopment Company Limited to accelerate regeneration action.

What was achieved in this appropriation

Significant achievements:

During 2016/17:

• This loan facility allowed Tāmaki Redevelopment Company (TRC) to fund its development programme, repairs and maintenance, and general working capital.

Note: As a Schedule 4A company, TRC is required to produce a Statement of Intent and a Statement of Performance Expectations and report on its performance in its Annual Report. These documents can be obtained from http://www.tamakiregeneration.co.nz/about-trc/key-documents.

List of Acronyms#

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