Statement of Intent 2009-2012

Foreword: Minister of Finance#

The work done by the Treasury is crucial to achieving the Government's goal of greater prosperity, security and opportunities for all New Zealanders.

In these volatile times, my main priority is managing New Zealand's path through the economic downturn. As much as possible I aim to reduce the impact of the recession on people while putting New Zealand in a strong position to take advantage of better economic times when they come.

My second priority is to lift the performance of the New Zealand economy. The Government can best do this by improving regulations and improving the investment in, and governance of, national infrastructure.

My third priority is to make government investment and expenditure more productive and effective. I want to ensure there is discipline around public spending and that New Zealand is getting better value from the money it puts into the public sector. This will include our objective of increasing frontline services.

This Statement of Intent sets out how the Treasury will help us move forward with these priorities. Its financial crisis response, including medium-term fiscal consolidation and work on more efficient State sector spending, will be of immediate benefit. Its medium-term investment work will strengthen our economy when the crisis is over.

The National Infrastructure Unit established within the Treasury will help ensure the Government's infrastructure programme is strategically sound and helps build a more competitive and productive economy.

The Treasury's outcomes - improved economic performance, a stable and sustainable macroeconomic environment and improved State sector performance - are more relevant now than ever.

I look forward to working closely with the Treasury to achieve a more prosperous, secure and opportunity-rich New Zealand.

Hon Bill English

Minister of Finance

Introduction from the Chief Executive#

This Statement of Intent explains how the Treasury is responding to the most challenging economic situation in most people's living memory.

We are focusing on the financial crisis in the short term, but are also keeping our eye on the period of economic recovery to come.

As the Government's chief economic, fiscal and regulatory advisor, our goal is to improve New Zealanders' standard of living through our three outcomes: improved economic performance; a stable and sustainable macroeconomic environment; and improved State sector performance.

These outcomes dovetail nicely with the Minister of Finance's priorities: managing New Zealand's path through the economic downturn; making the New Zealand economy more productive; and making government expenditure more productive and effective.

The economic downturn requires our immediate attention, and we are helping the Government manage through the current situation, preparing for the risks ahead and helping to deliver the Government's three- to five-year fiscal strategy.

We are also focusing on making the State sector more efficient and effective through improved performance and better monitoring, among other measures.

Meanwhile we are progressing work on some key initiatives, among them the new National Infrastructure Unit, which will help to optimise Government's long-term investment in national infrastructure, and the Crown Wholesale Guarantee Facility and Crown Deposit Guarantee Scheme, which have helped to retain access to international wholesale markets and rebuild confidence in the New Zealand financial sector.

As circumstances permit, we will move into longer-term work, looking for example at productivity, natural resource management, investment and savings.

To be effective in this rapidly changing world, the Treasury needs to be responsive and nimble. It is important that we use all the information and connections we can to focus on the horizon ahead and to maximise our use of opportunities. To do this, we will continue to engage with stakeholders and remain alert for opportunities to engage more widely. This approach ensures we are able to support the Government with well-informed and pragmatic advice, tailored to meet New Zealand's changing circumstances.

These are not the best of times, but neither are they the worst. I have great confidence in the abilities of Treasury staff to put into action the ideas contained in this Statement of Intent, for the benefit of all New Zealanders.

John Whitehead

Secretary to the Treasury

Ministerial Statement of Responsibility#

I am satisfied that the information on future operating intentions provided by my department in this Statement of Intent and the Information Supporting the Estimates is in accordance with sections 38, 40 and 41 of the Public Finance Act 1989 and is consistent with the policies and performance expectations of the Government.

Hon Bill English

Responsible Minister for the Treasury

8 May 2009

Chief Executive's Statement of Responsibility#

In signing this statement, I acknowledge that I am responsible for the information contained in the Statement of Intent for the Treasury. This information has been prepared in accordance with the Public Finance Act 1989. It is also consistent with the proposed appropriations set out in the Appropriations (2009/10 Estimates) Bill, as presented to the House of Representatives in accordance with section 13 of the Public Finance Act 1989, and with existing appropriations and financial authorities.

John Whitehead

Chief Executive

Counter-signed: John Matheson

Chief Financial Officer

Nature and Scope of Functions#

The Treasury is Government's leading economic, financial and regulatory advisor. Our job is to help the Government improve New Zealand's overall economic performance, and to increase the living standards of New Zealanders, through the provision of high-quality advice and support. Like other government agencies, the Treasury manages its work programme through a focus on key outcomes that support government priorities.

Our main services are:

• providing advice on economic, financial and regulatory matters, including through the National Infrastructure Unit
• monitoring and managing the financial affairs of the Crown, including managing the Crown's debt through the New Zealand Debt Management Office
• supporting New Zealand's economic performance through the provision of services through the Export Credit Office, Crown Wholesale Guarantee Facility and the Deposit Guarantee Scheme
• assessing the economic and financial implications of other government agencies' proposals, and
• working with the Department of Prime Minister and Cabinet and the State Services Commission to lead improvements in State sector management and performance.

The Treasury provides advice and services through 14 output classes provided to the Minister of Finance and one output class provided to the Minister for Infrastructure under Vote Finance.

Legislation we administer#

The Treasury currently administers around 33 pieces of legislation plus the Appropriation and Imprest Supply Acts relating to each financial year, and various Finance Acts, on behalf of the Government. Most significant of these are the Public Finance Act 1989 and the State-Owned Enterprises Act 1986 (http://www.treasury.govt.nz/abouttreasury/legislation).

The Public Finance Act 1989 provides the platform for the advisory roles expected of us by the Government. The Treasury's scope includes an interest in institutions, macroeconomic performance and structural policy issues and financial advice to the Government.

Outcomes we contribute to#

As the Government's lead economic, financial and regulatory advisor, the Treasury contributes to higher living standards by providing sound and timely advice to the Government on three outcomes. The relationship between these output classes and our three outcome areas is illustrated in the diagram on page 6.

• Improved economic performance

Increasing incomes and living standards for New Zealanders.

• A stable and sustainable macroeconomic environment

Enhancing economic growth by enabling individuals, businesses and the Government to plan more effectively for the longer term. We achieve this through low and stable inflation rates, predictability in tax and spending, and minimising unnecessary volatility in aggregate output (GDP).

• Improved State sector performance

Ensuring the State sector provides well-targeted, effective and cost-efficient services to the public. The Treasury works closely with the State Services Commission and the Department of Prime Minister and Cabinet to lead the drive for improved wider State sector agency, policy and system performance.

Outputs we deliver#

The Treasury delivers a range of policy advice, financial forecasting and reporting, administration and management outputs. These fall under the output classes listed below for the 2009/10 year. The following simplified diagram shows the relation- ship between our 15 output classes, our three outcomes and the three groups through which we manage the Treasury's work. The complex linkages between the work undertaken in the three outcomes is not represented in this diagram.

Rather than providing policy advice on all fiscal and economic issues, the Treasury focuses on issues with regulatory or policy implications that have a significant or pervasive impact on the performance of the economy as a whole.

The Crown Company Monitoring Advisory Unit (CCMAU)#

CCMAU is a stand-alone unit within the Treasury. This unit provides ownership, governance and performance advice under two output class appropriations:

• Crown company monitoring advice to the Minister of Research, Science and Technology and the Minister for Economic Development (Vote Crown Research Institutes), and
• Crown company monitoring advice to the Minister for State-Owned Enterprises and other Responsible Ministers (Vote State-Owned Enterprises).

The Executive Director of the Unit is directly accountable to the Secretary to the Treasury for the Crown's investment in CCMAU and for CCMAU's performance.

Strategic Direction#

The Government priorities#

We have revised our strategic direction for the period covered by this Statement of Intent (SOI) in light of the current economic and fiscal environment.

The Government has signalled three priorities for the Treasury for the next few years and these priorities underpin the strategic direction. The Government's main priorities are:

• managing New Zealand's path through the economic downturn - reducing the impact and putting New Zealand in a strong position to take advantage of better economic times
• making government investment and expenditure more productive and effective, and
• making the New Zealand economy more productive, and in particular, improving regulations and improving our investment in national infrastructure.

Taking into account the Government's priorities, we defined the five Treasury priorities listed below. Focusing on these over the next three years will not only ensure that the Treasury meets the Government's needs and expectations, and monitors progress along the way, but that we build and maintain clear connections between these priorities and the broader base of our work programme.

Investing in the long term: our strategic result areas#

The new priorities mean a change in focus for the Treasury. The four strategic result areas (SRAs) agreed in 2007 remain important areas of work; and they still offer the potential to deliver the greatest benefits to long-term productivity and sustainability once through the crisis. These are areas where we will have greatest impact, are best able to meet Ministerial expectations and fill current gaps. They are, of course, only part of our full work programme, which will depend on the state of the economy and other critical factors in our external environment. The symbols in the diagram on pages 10 and 11 show the areas of work that contribute to these priorities within our broad portfolio.

The four SRAs are:

• long-term fiscal sustainability, in particular, advising on the options for managing long-term fiscal challenges and for promoting an understanding of long-term fiscal issues
• increased economic benefits to New Zealand in full through developing international connections
• improved natural resource management to ensure a sound basis for sustainable and productive economy, and
• achieving a substantive increase in the contribution to New Zealand's economic growth and living standards through a focus on its collective skills base and the skillsthat are needed for improved future economic performance.

The Treasury's focus on these SRAs is important for the long-haul; however, over the next 12 to 18 months we will focus primarily on assisting the Government to understand and respond to the economic crisis, while foregoing some of this longer-term investment work. In the context of delivering on immediate priorities, we will continue to identify and respond to opportunities that have the potential to provide benefits to long-term productivity and sustainability.

To ensure that we continue to optimise our impact and focus on the right things at the right time, we will reassess the focus and the balance of our strategic approach midway through the period covered by the SOI. We aim to resume our previous investment in longer-term SRA work toward the latter part of this SOI term.

Working with our Central Agency partners#

The Treasury works alongside its two Central Agency partners, the Department of Prime Minister and Cabinet (DPMC) and the State Services Commission (SSC), to lead the State services to improve the quality of the services they provide, within existing baselines.

Working together ensures that we maximise the impact of the work we do by ensuring that our approaches and our messages to the sector are well-aligned and that Ministers receive the best possible advice for decision-making.

The Central Agencies share three broad aims. These are:

• working together to gain traction on difficult or enduring cross-agency results and policy areas
• lifting the performance of agencies, and
• enhancing public sector management systems.

Each year we agree particular areas of focus within these broad aims. The intended focus of our Central Agency work for the next three years is explored in more detail in pages 16 to 18 of this SOI.

Relationship Between the Government's Priorities, Outcomes, Strategic Result Areas, Output Classes and Outputs#

Relationship Between the Government's Priorities, Outcomes, Strategic Result Areas, Output Classes and Outputs

RELATIONSHIP BETWEEN THE GOVERNMENT'S PRIORITIES, OUTCOMES, STRATEGIC RESULT AREAS, OUTPUT CLASSES AND OUTPUTS
NB: The symbols in this table are used to show how the five priorities set out on pages 7 and 8 of this SOI are integrated into aspects of the Treasury's work programme.
The Government's priorities
Greater prosperity, security and opportunities for all New Zealanders
The Minister of Finance's priorities
Lifting the performance of the New Zealand economy.⊗	Making government investment and expenditure more productive and effective. ◊ ∞ ♦	Managing New Zealand's path through the economic downturn - reducing the impact and putting New Zealand in a strong position to take advantage of better economic times when they come. *
Outcomes
Improved economic performance Improving New Zealand's productivity is crucial for a better standard of living and relies on smarter use of the country's capital, skills and other resources. The Treasury will continue to provide advice on the wide range of policies affecting productivity.	Improved State sector performance The ongoing pursuit of a better performing State sector is of fundamental importance because of its economic implications and effects on New Zealanders' welfare. Our primary concern is to see better services delivered for less.	A stable and sustainable macroeconomic environment Our focus is on the institutional frameworks that promote macro stability and the sound operation of fiscal policy. We have specific responsibilities in terms of fiscal policy and give effect to these through the Budget.
Treasury Output Classes and Outputs
Multi-Class Output Appropriation (MCOA): Economic performance and State sector performance - policy advice and management		MCOA: Macroeconomic policy advice and management
Policy advice: Economic performance ⊗ Providing analysis and advice on a range of government policies that affect productivity and economic growth including: financial markets that function well, with appropriate investment and savings frameworks * productivity ⊗ tax policy settings to support competition and productivity appropriate and effective competition and regulatory frameworks ⊗ Regulatory Management System. We will also pursue the following strategic result areas: International Connections * Natural Resource Management - in particular, climate change and water management ⊗ Skills ⊗	Policy advice: State sector performance Our key State sector performance outputs include: Work with other Central Agencies and departments to provide advice and analysis on delivering improvements to public management systems that shift the public sector to a more efficient and effective base. In particular, we will: ◊ Deliver discipline around government spending and ensure that the public sector provides good value for money. Work with Ministers and chief executives to upgrade public sector management practices so that they deliver better and smarter public services for less. Analyse, monitor, report and/or advise on: performance in fiscally significant areas such as health and education the performance of agencies that significantly impact on firms and economic growth, and management of State sector remuneration.	These output classes all contribute to the outcome of a stable and sustainable macroeconomic environment in New Zealand. As part of this we will work on the following strategic result area: Long-term fiscal sustainability ◊
		Policy advice: Fiscal and macroeconomic * Provision of fiscal and macroeconomic policy advice.
		Fiscal management * ◊ Development of the Budget strategy and assisting with management of the Budget process.
		Fiscal reporting ∞ Preparing fiscal forecasts, monitoring of and reporting on fiscal conditions; preparing the financial statements of the Government; providing advice on the applications and development of generally accepted accounting practice as it applies to the Crown; and monitoring the adequacy of departmental financial management controls.
Crown Wholesale Guarantee Facility * Operation and advice on the Crown's Wholesale Guarantee Facility.		Economic and tax forecasting Preparation of economic and tax forecasts and monitoring of and reporting on economic and tax conditions.
Crown Deposit Guarantee Scheme * Operation and advice on the Crown's Deposit Guarantee Scheme.		Management of Crown lending and Crown bank account Management of Crown lending and Crown and departmental bank accounts.
Management of Claims Against the Crown, Contractual Liabilities and Crown Properties Managing commercial, contractual, legal and Treaty-related claims against the Crown.		NZDMO – three output classes: Administration of Borrowing Expenses incurred in connection with administering borrowing by the Crown - section 61(1) Public Finance Act Administration of Derivative Transactions Expenses incurred in connection with administering derivative transactions of the Crown - section 65H(2) Public Finance Act Administration of Investment of Public Money Expenses incurred in connection with administering the investment of public money - section 65J(1) Public Finance Act.
New Zealand Export Credit Office (NZECO) Managing export credit insurance, bonding and working capital products to exporter.
Output Class Infrastructure Advice and Coordination ♦ Analysis and advice on government investment in infrastructure. Focus on increasing productivity and economic growth through smarter investment in telecommunications, transport and other publicly-owned assets - this includes work on capital asset management with capital-intensive agencies.

Operating Intentions#

The Treasury is looking to have an impact on three outcomes. Each outcome area includes core work, work on the Government’s priorities, work on strategic result areas and collaborative work with other agencies. We outline our focus for the next three years for each outcome area in the following pages.

Outcome: improved overall economic performance#

What are we seeking to achieve?

New Zealanders aspire to have living standards that are among the best in the world. Achieving this requires a commitment to raising our incomes and improving economic growth, and the key to achieving this is improving New Zealand's productivity. Productivity is about how efficiently a firm or organisation can turn its inputs, such as labour and capital, into outputs. Our capacity to raise our income depends primarily on our ability to raise the level of output per worker.

The Treasury's research has identified five areas that lie at the heart of lifting productivity: innovation; enterprise; investment; skills; and natural resources (see the diagram below). In addition, our work on international connections, one of the Treasury's four SRAs, and good State sector performance are critical to supporting these drivers. Understanding how we can use these five drivers better is a central part of our strategy for providing the Government with advice on how to lift New Zealand's productivity.

What will we do to achieve this?

Over the past year, the global economy has experienced a very significant deterioration. To improve economic growth and living standards we will support the Government by providing advice on how to implement growth-enhancing policies in relation to both:

• management of the short-term economic challenge, and
• the longer term, as more favourable economic conditions return.

This means that the Treasury will need to be more selective in its work over the next few years. In the short term it also means we will have less opportunity to invest in understanding some of the longer-term issues in all our strategic result areas.

Responding to the crisis

The Treasury will respond to the global economic crisis by providing policy advice and undertake operational activities to help the Government manage the New Zealand economy through a difficult period, and to help the economy respond in ways that will best advance productivity goals once world growth resumes.

We will provide policy advice to the Government around the financial sector, provide options on measures to lessen the impact of the downturn and provide advice on policies that will have the most beneficial impact on our future productivity. We will also undertake operational roles to support the economy such as managing a Deposit Guarantee Scheme and the Wholesale Guarantee Facility for the financial sector. The purpose of both schemes is to ensure continued confidence in our banking system by guaranteeing money deposited or lent to our banks. Our aim is to ensure:

• an early resumption of economic growth is accompanied by a rise in trend productivity
• we continue to maintain a robust and efficient financial sector
• we have durable institutional arrangements in place for the longer term, and
• crisis interventions are consistent with medium/long-term economic policy direction.

The New Zealand Export Credit Office (NZECO)

We will continue to provide financial guarantee products for New Zealand exporters and banks. Our products help exporters manage risk and capitalise on trade opportunities around the globe. The global financial crisis and global recession have led to increased demand for NZECO’s products and an increased requirement for education on how to use these products.

Regulatory quality

The Government has assigned the Treasury the responsibility for overseeing and coordinating its regulatory quality system, reflecting its concern that poor-quality regulation is holding back productivity, innovation and investment. Our priorities in the near future include:

• providing advice, in collaboration with the Ministry of Economic Development (MED), on redesigning and strengthening the regulatory quality management system to support the Government's objective of less and better quality regulation
• advising and managing the Government's regulatory reform agenda for the next two years
• advising on institutional arrangements that best enable improvements in the stock of existing regulation, and
• providing secretarial support to the taskforce established by the Government to take forward the Regulatory Responsibility Bill and giving effect to the Government's response to the taskforce's report.

Infrastructure

Enhancing infrastructure planning and ensuring higher-quality asset management are important parts of the Government's economic agenda. The Treasury's work relating to infrastructure is organised through the National Infrastructure Unit, which the Government established as the primary source of support for the Minister for Infrastructure. One of the key contributions the Unit will make is to provide advice to the Government on the formulation and implementation of a 20-year National Infrastructure Plan or “blueprint” for New Zealand. We will also take an active role in encouraging best practice project appraisal, identifying barriers to more efficient and effective infrastructure investment and developing new approaches to infrastructure procurement.

Continuing to focus on longer-term challenges

Last year, the Treasury committed to working on four SRAs, three of which had particular significance to the economic performance outcome. We highlighted these as strategic priorities, not only because they have the potential to have pervasive impacts on New Zealand's economic performance in the medium to long term, but also because we believed that our investment in these areas, framing the debate and crystallising strategic options and trade-offs, offered the greatest potential return. Of course, the SRAs do not represent all of our contributions to the outcome or everything that we think is important for growth.

As we noted on page 8, we agreed to continue our focus on these SRAs over the next three years, particularly in investment work on longer-term challenges and opportunities. The three SRAs with direct relevance to the economic performance outcome are:

• International connections - Given New Zealand’s geographical remoteness and dependence on trade, we need to view the five productivity drivers through an international lens. International connections are about flows of people, capital, ideas and trade in and out of New Zealand, and we need to use these to increase productivity and growth in the New Zealand economy. This includes taking an international perspective on our domestic policies.
• Skills -Achieving a substantive increase to New Zealand's economic growth and living standards through a focus on New Zealand's collective skills base.
• Natural resource management to ensure a sound basis for a sustainable and productive economy. We are seeking economic sustainability for New Zealand in a world of limits. We want to see the New Zealand economy using natural resources sustainably and productively.

While the SRAs are where we want to put more of our focus over the longer term, we will continue to provide advice on the wide range of policies and cross-cutting issues that affect productivity. These include advice on financial markets, investment and savings, supporting innovation and tax.

Natural resource management

While we are limited in our ability to progress the SRAs in the short term, we will seek to lead the policy debate on how to achieve an economy that is both sustainable and productive. We will focus on natural resource management, specifically regarding climate change and water management.

We will advise on the implementation of effective and predictable policies to meet New Zealand's current climate change commitments and help efficient adjustment to climate change to occur. With respect to climate change, we are aiming to ensure New Zealand meets national emissions targets at low economic cost and that the domestic carbon price is close to international prices. With respect to water management, we are seeking allocation systems for water that encourage productive use.

How will we demonstrate success in achieving this?

We will assess our impact by monitoring trends in the following economic performance measures. The Treasury has an indirect impact on these through our policy advice.

Productivity measures - labour productivity, capital productivity and multifactor productivity

Higher productivity measures indicate that we are producing greater value with the same amount of labour and being smarter about bringing together people, equipment and ideas to develop products and services. New Zealand's annual average productivity is low, relative to many other economies. In 2006 New Zealand's productivity ranked 22nd of 30 nations in the OECD and around 25% below the OECD average and 30% below Australia. We are looking to increase New Zealand's productivity rates gradually over time and to reduce the gap between us and other OECD economies.

International comparisons of our gross domestic product (GDP) and gross national product (GNP) per capita

GDP and GNP are important measures for the Treasury because the difference between our incomes and those of the leading OECD countries primarily reflects our economy's productive capacity - how effective our businesses are at combining labour and capital - and the prices of what we produce. While the Treasury does not have a direct impact on GDP, it can have an indirect impact through the policy advice it provides to the Government. We have experienced relatively high growth rates over the past 10 years. However, we have revised the outlook for growth in New Zealand's trading partners downwards progressively. Therefore, in our December economic and fiscal forecasts we forecasted weaker GDP over the next few years. We estimated growth at 0.8% in 2010, followed by recovery to around 3% in 2011 and just below 4% in 2012 and 2013. Although we expect growth will be weak, one possible measure of the strength of our economy will be to compare our performance with similar economies to see whether their growth rates have been able to rebound more quickly and strongly.

Measuring our service performance

Our output performance measures are included in the Estimates. As much of our outputs are policy advice, we will be using the Treasury quality standard for ensuring the quality and timeliness of these outputs. We have also defined measures for the more operational functions we perform.

Outcome: Improved State Sector Performance#

The performance of the State sector can enhance or constrain New Zealand's economic performance and the achievement of the Government's wider social objectives. Better health, education and labour market outcomes support improved productivity and living standards. Improved efficiencies mean that resources can be used for other purposes, including reducing debt levels.

Public expenditure currently accounts for 42% of New Zealand's GDP. While this is not high internationally, there is scope to reduce this expenditure without undermining the outcomes the Government is seeking to achieve. The significant increases in public expenditure over the past decade or so have not resulted in commensurate improvements in outcomes.

What are we seeking to achieve?#

During the period covered by this SOI, we will be seeking changes in State sector performance to deliver:

• greater effectiveness - better achieving the outcomes the Government has prioritised, and
• increased efficiencies - achieving the same or better results with fewer resources.

In the current economic climate, it is critical that State services are delivered within a sustainable fiscal track.

Our overall goal for this period is:

“Improved effectiveness and efficiency of State sector services, within a sustainable fiscal track.”

What will we do to achieve this?#

The Treasury will undertake a range of actions to help bring about the above improvements. These fall into two categories:

• improving the effectiveness of the State sector model, and
• providing advice on priority issues and sectors.

Improving the effectiveness of the State sector model

The State sector model enables Ministers to specify their performance requirements and requires chief executives to deliver and report on these requirements. The model incorporates an annual performance cycle, which provides opportunities for intervention at the following key points:

• setting and clarifying the Government's expectations of agency performance
• allocating and prioritising resources consistent with the Government's expectations, agreeing price, quantity and standards measures and ensuring these are included in the accountability documents to encourage the expected performance, and
• monitoring and assessing the performance of agencies, and their chief executives, at intervals during the year and following the end of the year.

The Treasury will engage at appropriate points to assist Ministers to achieve the results they are seeking, with a focus on helping government agencies to perform more effectively and efficiently. We will do this in conjunction with the other two Central Agencies: the DPMC and the SSC.

More specifically, we will provide guidance, advice and feedback to agencies on how best to give effect to Ministers' decisions and expectations through the information supporting the Estimates, statements of intents and output plans. We will also work with agencies to lift performance in specific areas. Areas for focus in 2009/10 are agencies' abilities in:

• managing capital assets
• undertaking value-for-money reviews as part of an ongoing process of change to deliver better services with fewer resources, and
• managing financial performance.

Again, this work will include providing guidance and advice to agencies and feedback on specific proposals. We will particularly target those agencies that are significant in terms of either their capital assets, the scale of any value-for-money review or the size of the votes that agencies administer. For the former, the agencies we intend to work most closely with are those responsible for state housing, school property and corrections facilities. Large votes include health, social development and education.

The Treasury will assist the Government by monitoring progress on outcomes and outputs, and providing advice on how well agencies, sectors and the State sector overall are performing. Key deliverables for this include:

• six-monthly reporting on the performance of significant Crown entity performance, and
• piloting and further refining the performance improvement framework.

Providing advice on priority sectors and issues

We will put additional focus on priority sectors and issues. This includes actively working alongside the relevant agencies and providing contestable advice to Ministers. We prioritise sectors and issues because of:

• fiscal or economic significance
• challenges they present in respect of policy, implementation or governance, or
• risks or difficulties they present to progressing government objectives.

For 2009/10, we will give particular attention to proposals for new capital purchases and those on industrial relations. Both are key drivers of overall new government expenditure.

Work in specific sectors will be:

• the effectiveness of tertiary education and schooling
• justice sector outcomes
• some aspects of health funding, and
• the defence review.

Our advice will focus on highlighting possible options in terms of price, quantity and standards, alternative forms of implementation and provision, and incentives to ensure ongoing improvements in effectiveness and efficiency.

Sustainable State sector spending

Controlling growth in overall government expenditure is essential to managing within a sustainable fiscal track and achieving a stable and sustainable macroeconomic environment. This objective is even more necessary as the downturn in economic growth is reflected in lower tax revenue and higher government expenditure in some areas, such as benefit payments.

Over the next three years, we will assist the Government to achieve a sustainable fiscal track through:

• constraining the overall level of government expenditure
• managing the long-term fiscal track for critical areas of expenditure, such as health, education and benefits, and
• identifying opportunities for fiscal consolidation, where appropriate.

Working with our Central Agency partners

The Treasury is one of three Central Agencies that are responsible jointly for leading performance improvements within the State sector. Each agency has its own specialty focus in leading change in the State sector. These agencies, and their specialty contributions, are:

• the DPMC, which guides the process of collective decision-making, conveys the Cabinet's decisions to the relevant Ministers and officials and ensures that the Cabinet receives well-conceived and coordinated advice. DPMC also works to ensure that the State sector responds to the Government's priorities
• the SSC, which appoints and manages chief executives within the public service, provides leadership in improving the capability of agencies, sectors and systems and ensures that the Government's priorities are the focus of the State sector, and
• the Treasury, which monitors and manages the financial affairs of the Government and provides economic, fiscal and regulatory policy advice. The Treasury is the key agency for supporting Ministers in balancing priorities through the Budget process. The Treasury provides insight into the efficiency and effectiveness of government agencies and their interventions.

Over the next three years, the Central Agencies will be working to:

• ensure improved services are delivered to New Zealanders and that the State sector delivers on government priorities
• deliver improved State sector performance, and
• deliver more disciplined State sector expenditure.

Working together on these aims will enable us to maximise the impact of our actions through more consistent and reinforcing interventions.

How will we demonstrate success in achieving this?#

During the 2009/10 year, the Central Agencies will be working together to pilot and refine a performance improvement framework to enable more comprehensive assessment of agency and sector performance than has been possible to date. The framework will enable assessments of performance and capacity, for the State sector overall, as well as for particular agencies and sectors.

A key indicator of the fiscal impact of State sector performance is the rate of growth of public sector expenditure. Given our current economic challenges, we expect this rate of growth to reduce for the next few years.

Measuring our service performance

Our output performance measures are included in the Estimates. These focus on two categories of work: policy advice and vote analysis. We will be using the Treasury quality standard for ensuring the quality and timeliness of the former and this year have introduced a new measure to monitor our performance in the latter.

Outcome: A Stable and Sustainable Macroeconomic Environment#

What are we seeking to achieve?#

A stable and sustainable macroeconomic environment allows individuals, businesses and the Government to plan more effectively for the longer term, contributing to higher economic growth and higher living standards for New Zealanders. By creating an appropriate environment for sustainable growth, macroeconomic performance is fundamental to all of the Government's policy objectives.

The New Zealand economy faces large challenges over the next few years as it deals with the effects of the global financial crisis. The economy is enduring a relatively prolonged period of negative or low growth, which will translate into a sustained period of operating deficits and increasing government debt. Unless corrective action is taken, government debt will reach levels not considered prudent. This will occur even before the pressures of an ageing population have an increasing effect on the fiscal position from the 2020s onwards. In turn, this will lead to reduced confidence in the New Zealand economy by international investors and rating agencies, leading to higher costs of borrowing and hence a negative impact on growth.

In light of this situation, we will be assisting the Government with the following over the next three years:

Economic and tax forecasting, and fiscal reporting

• Policy decisions are based on the most accurate forecasts possible of the economic and fiscal outlook, and a good understanding of developments in the economy and the key underlying drivers of the outlook. They take account of the higher degree of uncertainty than usual around the future path of the economy.

Policy advice: Fiscal and macroeconomic

• Debt as a percentage of GDP is stabilised at a prudent level, while taking appropriate account of the short-term impact of the Government's fiscal decisions on the economy. This will involve moving out of operating deficits (that is, closing the gap between the expenditure and revenue tracks) in a reasonable timeframe.
• Action is taken to meet longer-term fiscal challenges, including the greater fiscal pressures that arise from an ageing population from the 2020s onwards. A sustainable long-term fiscal position will aid economic growth through keeping borrowing costs low and stable and providing a reasonable degree of certainty to individuals about the future path of government spending and taxes. As noted on page 8, long-term fiscal sustainability remains one of the Treasury's four SRAs.
• We learn the lessons from the period of economic imbalances that preceded the economic downturn (for example, asset price bubbles). Any changes in the areas of fiscal, monetary, regulatory and tax policy that have merit in light of those lessons are made; that is, changes that would lead to greater stability in the macroeconomic environment (for example, inflation and GDP growth) in the future.
• A framework is adopted for managing the risks on the Crown balance sheet at both the aggregate and individual entity levels (State-owned enterprises [SOEs] and Crown Financial Institutions [CFIs]), which helps ensure that the management of those risks is consistent with the Government's overall fiscal strategy. This is an area of increased priority for the Treasury, in line with the Government's priorities.

Fiscal management

• The Budget process is consistent with the Government's overall fiscal objectives and ensures government spending is value for money; that is, it delivers desired outcomes at a reasonable cost.

Debt management

• The NZDMO keeps debt servicing costs as low as possible in a difficult borrowing environment.

There are strong links between the results we are seeking in the macroeconomic outcome and the results sought in the economic performance and State sector performance outcomes. In the economic performance outcome, for example, we are helping the Government respond to the global financial crisis and to lift productivity so that the New Zealand economy comes out of the economic downturn in a stronger position. Regulatory and tax policy settings are relevant to ensuring the stability of the macroeconomy.

The performance of the State sector is fundamental to achieving a sustainable fiscal position as overall public sector productivity and the spending paths in key sectors, such as health, education and welfare, have substantial impacts on the aggregate fiscal position.

What will we do to achieve this?#

In light of the economic situation, over the next three years we will focus on assisting the Government by:

Economic and tax forecasting, and fiscal reporting

• Producing forecasts of the economic and fiscal outlook at least twice yearly (Budget Economic and Fiscal Update [BEFU] and Half Year Economic and Fiscal Update [HYEFU]), providing regular updates on developments in the domestic and international economies and providing monthly updates on the Government's fiscal position.

Policy advice: Fiscal and macroeconomic

• Providing advice on:
  • how the Government can stabilise debt at a prudent level, and assisting the Minister of Finance to produce the annual Fiscal Strategy Report (FSR)
  • any changes the Government can make in the areas of fiscal, monetary, regulatory and tax policy to promote the stability of the macroeconomy, and
  • adopting a framework for managing risks on the Crown balance sheet, and operationalising this at both the aggregate and individual entity levels.
• Producing the next Statement of the Long Term Fiscal Position by June 2010, promoting understanding of the long-term fiscal challenges within the public sector and among the wider public, and providing advice on expenditure and revenue options to address long-term fiscal pressures in ways that are consistent with ensuring value for money and promoting economic growth.

Fiscal management

• Assisting the Government in managing the annual Budget process and providing advice to assist the Government to make expenditure and revenue decisions that contribute to its overall fiscal objectives, advance its other priorities and ensure value for money from expenditure. This will include assisting the Minister of Finance in producing the annual Budget Policy Statement (BPS).

Debt management

• Managing and issuing Crown debt in a way that minimises borrowing costs and managing the financial assets under the control of the DMO in a way that maximises long-term returns within an appropriate risk management framework.

The Treasury will work closely with a range of government agencies, including the Reserve Bank, and engage with the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF).

How will we demonstrate success in achieving this?#

We will have demonstrated success when:

• in the annual FSR released on Budget Day, the Government shows that its fiscal plans will lead to levels of debt and net worth being maintained at, or returned to, prudent levels over the 15-year projection period
• decisions are taken that help stabilise government debt and tax burdens as a percentage of GDP in 40 years under credible and reasonable assumptions
• debt management strategy achieves an annual average borrowing cost from new issuance of core Crown debt that is lower than the long-run average cost of debt, and
• New Zealand is one of the better performing OECD economies with respect to GDP and inflation variability.

The above success measures encapsulate what we need to achieve to meet the key challenges arising from the economic downturn. The first two measures relate to ensuring that the fiscal position is sustainable over time. The third measure is important because of the large increase in debt issuance that will result from the economic downturn. Finally, the fourth measure is about avoiding a repetition of the large build-up of imbalances in the economy that contributed to the current economic downturn.

Having volatility in GDP and inflation at reasonable levels is conducive to long-term economic growth, as high volatility can have a negative impact on the decisions of individuals and businesses; for example, investment decisions. Defining an absolute measure of volatility is difficult, particularly as some level of volatility is not problematic, but measuring ourselves against other OECD economies gives a good guide to our performance.

Measuring our service performance

In addition to the above measures of our impact, we have agreed a range of output performance measures for the 2009/10 financial year including a set of specific measures relating to managing the debt portfolio with an appropriate degree of risk. These measures are included in the Estimates.



Managing Quality and Cost-effectiveness#

Like other government departments, the Treasury takes a “Managing for Outcomes” approach to planning and performance; focusing our efforts on the key outcomes and the contributing results that support the Government's objectives and using our skills and capability planning to ensure we contribute effectively. As other agencies contribute to the same outcomes, much of our work involves a degree of collaboration.

The Treasury continues to focus on the cost-effectiveness of its outcomes and the outcomes across the wider State sector and these can be difficult to measure.

Insomeresults,theTreasuryismorereadilyabletodistinguish the impact of its effort, as for example the impact of the NZDMO work. The objective of the NZDMO is to maximise the net returns on its portfolio management activities within appropriate levels of risk. In these areas, the Treasury has developed measures that highlight the impact of our effort over time. In the case of the NZDMO, we assess our impact through the following three measures:

• the annual profit generated (value added) for the Crown
• market risk (interest-rate and foreign-exchange-rate risk), and in particular, the average monthly value at risk, and
• input costs per transaction.

In these and similar areas we provide specific measures and targets relating to the annual profit generated through lending, the management of market risk, the value of new exposure for medium to long-term credit insurance, bonds and working capital for the forthcoming year. These measures are published in the Vote Finance Estimate of Appropriations.

In contrast to the more tangible outputs discussed above, a significant amount of the Treasury's work involves supporting the Government through policy advice, including second-opinion advice on the work programmes of other government agencies. The contribution made by policy advice is more difficult to measure. Advice does not always result in a clear and/or measurable change, and where it does, the gains of such advice are often realised incrementally over a period of years from a cumulative series of interventions. These characteristics make the analysis of cost-effectiveness inherently difficult.

The focus of our approach is to ensure our work is good value for money and to demonstrate the impact of our work through progress made towards desired changes in our outcomes. We have identified key impact measures for each of the three outcomes areas in the Operating Intentions of this SOI.

In addition to measuring progress toward our desired outcomes or the results contributing to them, we use a framework for measuring the quality of policy advice, Treasury Quality Standards for Policy Advice. Consistent with the focus on cost effectiveness, a central tenet of the Treasury framework is that quality policy advice should be “fit for purpose”.

The quality standard provides a way of testing agreed dimensions of the quality of our advice: whether it is analytically rigorous and set in a wider strategic context, the timing reflects the necessary imperatives, it is customer focused and persuasive and our internal control processes for quality have been effective. The measures apply independently of whether the Government accepts the advice we provide. The standard is published on pages 35 and 36 of this SOI.

In tandem with the introduction and implementation of the standards in 2008/09, at the time of writing we are commissioning an external review of several areas against this standard. The review will support our continuous improvement approach and provide a clear understanding of the quality of our advice, where we excel and where we can improve. It will also establish a benchmark against which to compare future performance.

In addition to external reviews, stakeholder feedback provides an important measurement of the quality of our policy advice, our management within our delegated authority constraints and our performance against our annual performance objectives. We will continue to seek formal feedback from the Minister three times a year regarding the quality and timeliness of our performance.

Managing in a Changeable Operating Environment#

The environment the Treasury faces has changed dramatically over the past year and it is continuing to do so. The global economic situation has deteriorated significantly and it seems likely that a high degree of uncertainty will persist for some time. In addition, we are advising a new Minister and Government with a different set of priorities. The Treasury's success over the next few years will depend on our ability to adapt to these changing circumstances and to continue to provide sound and useful economic advice that positions New Zealand well for the coming years.

Four main factors characterise this new operating environment.

1 The financial crisis#

The deterioration in the global economic and domestic fiscal situation, and how to manage through it, is a central issue for the Government and the Minister of Finance, and for the Treasury as their principal economic and fiscal advisor. The situation is dynamic and volatile; external and domestic events continue to emerge and uncertainty remains around the likely depth and duration of the recession. Keeping abreast of the current situation and anticipating emerging issues requires fleet-footedness, flexibility and pragmatism.

The diagnosis underlying our existing strategic framework - lifting New Zealand's long-run productivity including work on our SRAs - remains robust. However, the current situation requires a change in focus of effort in these areas, with more emphasis on taking opportunities to address the long-term challenges as they arise; scoping and considering practical options for change, and making these happen. The Government has also introduced new policies, such as the wholesale and retail deposit guarantees, that require a larger operational role in assessing and managing risk.

2 Ministerial needs and expectations#

The new Government clearly signalled its priorities for the Treasury in letters between the Minister of Finance and the Prime Minister in early 2009. These priorities focus on managing through the downturn, making the New Zealand economy more productive and making government expenditure more productive and effective.

For the period covered by this SOI, the Government expects the Treasury to assist it to:

• progress its economic and fiscal priorities, including leading change processes within and beyond the public sector
• understand the current situation, its implications for New Zealand's economy and to identify, manage and mitigate emerging risks
• anticipate, and in many cases take a leadership role in giving effect to changes to policies, incentives and institutional settings to ensure New Zealand is well-placed to return quickly to robust and sustainable productivity-led growth, and
• anticipate and deal with challenges as the international and domestic economic situation unfolds.

In all of the above, the Treasury is expected by Ministers to take a leadership role, as an economic and fiscal advisor, and as a Central Agency.

3 Focus on constraining State sector spending while improving performance#

A key challenge in State sector performance is the Minister of Finance's expectation that the Treasury as a Central Agency provides advice that considers issues across portfolios and the State sector. One of this Government's priorities is to deliver real discipline around government spending and extract better value within much tighter expenditure constraints.

The Treasury employs a range of tools to drive improved performance and governance. These include systemic approaches as well as some advice specific to particular sectors. The current focus in this area involves work on the “responsibility model”, the State sector's performance framework, Capital Asset Management practices and stronger financial monitoring.

4 Our changing world and its impacts on the way we work#

The new environmental challenges we face mean that the Treasury must adapt its working style to meet different expectations and circumstances. In particular, we must:

• be more flexible, shifting resources to deal with temporary but important issues, and
• accommodate new functions to deliver on the Government's priorities; these may require different skills outside the scope of our policy advice, including more specialised in commercial and financial management.

These organisational challenges will inform and influence the way in which the Treasury develops its organisational strategy over the next year.

Managing Risk#

The Treasury identifies, assesses and manages risks, using a risk management framework modelled on the joint Australian/New Zealand Standard 4360:2004. The framework captures the broad range of risks that affect our business, including organisational risks arising from strategic direction and environment.

The Treasury's risk management framework is implemented through business processes such as policy advice, strategic and operational planning and project management.

We are currently reviewing our risk management framework to ensure we are actively improving risk management processes across the Treasury.

The Treasury undertakes a number of specialist functions and roles where additional risk management frameworks and processes are utilised. These include:

The New Zealand Debt Management Office (NZDMO)#

NZDMO is managing risks through the use of:

• specialist risk management roles
• a specific risk management framework for the portfolios managed by the NZDMO, and
• an independent advisory board to provide quality assurance on the NZDMO's activities, risk management framework and business plan.

The New Zealand Export Credit Office (NZECO)#

NZECO is managing risks through the use of:

• expert underwriting analysis by international specialists who have institutional knowledge in risk assessment, and
• an independent advisory board of specialists in finance and insurance risk assessment, pricing and risk management to review the final analysis and make recommendations for approval of each transaction and undertake ongoing monitoring.

Crown risks in the financial sector#

The Treasury is operating two guarantee schemes on behalf of the Crown that relate to the financial sector: the Deposit Guarantee Scheme and the Wholesale Guarantee Facility. Exposure to risks is being managed through the prudential regulation processes for registered banks, and by requiring other deposit takers who sign the guarantee to agree to certain controls on their business including:

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

Specific monitoring of non-bank institutions whose depositors are covered by the retail deposit guarantee takes place, with follow-up of any issues identified on a case by case basis. Banks whose depositors are covered by the scheme are monitored under the prudential supervision regime that applies to banks under the Reserve Bank Act 1989.

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

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

The Treasury has a key role to play in helping the Government manage the impact of a national or regional emergency. As a Central Agency, our role includes facilitating an all-of-government response. In addition, as an organisation, we must prepare for adverse events that might disrupt our own operations or affect the safety of our staff or visitors. The Treasury has a Crisis Plan outlining the crisis response structure, roles and people required, to ensure we respond effectively to a significant emergency affecting us or the New Zealand economy. The Crisis Plan is subject to regular updates and a programme of testing.

Organisational Health and Capability#

Over recent months, the Treasury has revised its strategic policy direction in response to changes in the political and economic environment. To deliver against this strategy, we will continue to look hard at the capability - the people, skills, systems and support - that the Treasury needs to be productive, now and in the future. Further, the demands relative to our budget means we must continue to improve our productivity, sharpen our focus and deliver value for money.

Organisational strategic direction#

“Stepping Up”, the strategic change programme we began in 2007, continues to provide a focus for efforts around our organisational culture and business practices. Our SOI for the last two years describes the programme in some detail. For 2009/10 the Strategic Leadership Team has identified three priority areas: thought leadership; management and leadership; and results.

Thought leadership is about having more impact as an organisation. For 2009/10, our focus will be on improving:

• Quality of thinking: anticipating the next set of issues and the ones after that; being creative and seizing opportunities; challenging accepted wisdom
• Quality of process: bringing disparate views together; turning ideas into solutions; following through
• Quality of persuasion: using those ideas to lead the debate externally and influence key decision-makers.

The quality of management and leadership has an impact on the engagement and productivity of staff and therefore on the effectiveness of the Treasury as a whole. In recent years, the Treasury has worked with its managers to lift management competency across the board. We will continue with this investment and will be introducing measures to gauge improvement during the 2009/10 financial year.

Our results framework is the means by which we communicate and monitor what we are going to do and how we are going to use our resources to do it. In 2009/10 the changes we are aiming for are:

• More consistent use of results as the planning and prioritisation tool that allows us to optimise a whole-of-Treasury impact
• Good understanding by all staff of the results and how they contribute to the Treasury's overall impact
• More effective monitoring and better understanding of progress on results through measuring and reporting impact.

As part of our quest for continuous improvement and to lift the Treasury's overall performance, we undertook a detailed review of the Organisational Performance Group (OPG) in 2008. OPG was reconfigured to include a “strategy and decision support cluster” to deliver a number of initiatives resulting from the review, including:

• the provision of joined-up advice on results, finance and human resources for senior decision-makers, aimed at ensuring that the right people have the right information at the right time to make the right decisions and communicate them to the right audience, and
• the development of an integrated three- to five-year organisational capability strategy for the Treasury which sets out the people, finance and infrastructure requirements that will enable us to deliver on our strategic policy priorities.

The overall objective of both of these initiatives is a step change in the quality of leadership and management decision-making, which will be manifested in a high-performing, high-productivity Treasury.

Organisational capability#

The heart of strategic capability is our people. In recent years, the challenge has mainly been attracting and retaining top performers in an external marketplace where job seekers have largely called the shots. This year, the current economic crisis is likely to take some pressure off the recruitment market.

Assess our capability to produce what is required#

Being clear about which skills, experience and attributes directly contribute to successful performance lies at the heart of an organisational strategy. We want to improve our understanding of, and response to, our capability risks, ensuring we can not only meet immediate needs but also anticipate future needs with improved strategies to acquire or grow the talent we need. We need to identify talented individuals and to make the most of the talent we have.

The first step in this process is to understand where the talent lies in our organisation by mapping critical people and critical skills. Commencing with the senior analyst role, we will progressively map our capability to close any skill gaps.

Attract, develop and retain the right people#

To attract and retain the right people, the Treasury needs to develop a better understanding of the sorts of features that keep current employees engaged and clearly identify us as the employer of choice.

Last year, we began using the Lominger framework, a research-based, competency framework to identify and develop key management competencies and leadership practices. This year, we will continue with this approach. We are also running targeted training for our senior analysts.

We plan to improve employee engagement and retention, manage staff turnover and build our reputation as an employer in order to improve retention and attract people with the right skills.

In order to achieve this, we will:

1 introduce an employee engagement survey and action plans to assess and address the level of employee engagement (studies indicate that a high level of employee engagement drives superior organisational performance), and

2 review our reward and recognition strategyto ensure we are rewarding performance that makes a difference. A reward and recognition strategy is more than just remunerating staff. It also provides different ways to reward achievement, not limited to monetary gains.

Equal employment opportunities at the Treasury#

This year, the Treasury will continue to embrace the new equal employment opportunities (EEO) policy for the public service, Equality and Diversity, which took effect in April 2008¹. We will continue our commitment to appointments on merit and to the four EEO groups: Māori;ethnic or minority groups; women; and people with disabilities.

Departmental capital and asset management intentions#

The Treasury's work is aimed at making an impact on issues important to New Zealanders. To make the right impact, we must meet customer needs, provide consistent high-quality advice and increase productivity. Our capital asset strategy supports these goals and we have invested in a work environment that supports flexibility, mobility and efficiency, which also assists in attracting high-performing staff.

A key component of the Treasury's capital asset strategy is the department's computing environment. The Treasury made a significant investment by replacing desktop computers with mobile “tablet” computers in 2008/09. The investment was made within the Treasury's existing capital budget. Tablet computers allow staff to work when and where they need, from other desks, in other agencies and from home. Staff members are achieving productivity increases by getting access to information when they need it, making effective use of waiting time and through greater ease of sharing information. While tablet computers are more expensive than desktop computers, because we no longer need to maintain an additional pool of laptops, the overall number of computers we need to maintain has been reduced.

The NZDMO operates an in-house designed and maintained treasury system encompassing full front, middle and back office functions. Over the past 18 months, this system has developed to encompass open market tender functionality for Government Securities tenders and the development of a five-year Crown cash forecasting module. In addition to the in-house treasury system, NZDMO maintains and operates a SWIFT installation² used for the majority of NZDMO's financial markets payments and confirmations.

The Treasury has also invested in back-up systems to ensure continuity in key business areas. Business continuity is particularly critical for NZDMO activities. The Treasury rents a small disaster recovery site with back-up systems for key business processes in Auckland and a small amount of office space away from its head office in Wellington, which we share with the Reserve Bank.

The Treasury's forecast capital expenditure is set out below reflecting the replacement and upgrade of existing assets. The capital expenditure forecast movements largely reflect the three- to four-year cycle of replacing tablets, which will smooth over time. The main transition from desktop computers to tablet computers occurred during 2008/09 and replacements of the current stock will occur in 2011-2013. Similarly, server equipment replacement in previous years was deferred in order to invest in more manageable server storage and server blade architecture in 2008/09.

A key capital investment planned for 2009/10 is the replacement of the 10-year-old telephone system, which is expected to improve the department's flexible working strategy.

Internally generated software in out-years includes ongoing development of the NZDMO in-house treasury system to ensure it remains fit for purpose.

Other software purchases in 2008/09 included the purchase of a Records Management System and a Directors' Database by CCMAU.

The Treasury will continue to:

• ensure capital is directed to the highest priorities across the Treasury, gaining benefits from rationalisation where possible, and
• update and monitor the Treasury's 10-year Capital Plan on an annual basis so that capital requirements are anticipated and assessed alongside Treasury-wide strategies.

The Crown Company Monitoring Advisory Unit#

Executive Summary#

CCMAU is at the forefront of commercial ownership monitoring and governance advice to the Government. It is responsible for a portfolio of companies and commercial entities³, which represent a significant part of the Crown's balance sheet and whose performance, therefore, is critical to the development of the wider economy.

The new Government's expectations of the portfolio include a much sharper focus on financial performance and achieving higher rates of return than have generally been achieved in recent years. They also mean that the companies and entities will be expected to take greater responsibility for managing the issues that impact on their performance.

CCMAU is well placed to assist Ministers achieve the Government's objectives, notwithstanding the change in focus.

CCMAU's measure of success is the level of satisfaction expressed by our two Vote Ministers. We will continue to seek formal feedback on a six-monthly basis, and informally at regular intervals in between. In addition, we will also judge our success by the way all stakeholders react to our change in focus.

CCMAU needs to be able to provide a suite of benefits, consistent with public sector norms, that attracts the very best people. To that end, CCMAU is committed to providing staff with appropriate training and industry knowledge development opportunities.

CCMAU's role and purpose#

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

With the Government wanting to better manage the entire Crown balance sheet, CCMAU's role is to focus on encouraging SOEs, CRIs and Crown companies and entities, singularly and collectively, to meet or exceed the Crown's performance expectations, particularly in the current challenging economic conditions. Those performance expectations include a much sharper focus on financial performance and achieving higher rates of return than have generally been achieved in recent years.

CCMAU provides a range of services that enable Ministers to hold boards accountable for creating shareholder value. These services cover four broad areas.

• Ownership environment management - maintaining a strategic perspective over the ownership environment and assisting Ministers to improve the clarity and awareness of the owner's expectations with a focus on performance.
• Performance monitoring - increasing the evaluation of performance against agreed targets and external measures and, where necessary, advising Ministers on actions they can take (or are being taken by the companies and entities themselves) to address performance that is below expectations.
• Issues management - assisting Ministers to respond to correspondence, parliamentary questions and Official Information Act requests, and ensuring the companies and entities take responsibility for managing issues that could impact on their performance.
• Governance - identifying and screening potential directors, managing the board appointment process and director fee-setting in the context of desired ownership outcomes and taking a leading role in ensuring best practice corporate governance of SOEs, CRIs and Crown companies and entities is achieved.

To achieve this purpose, CCMAU is structured around four sector-focused teams supported by a pan-unit corporate team that provides administrative and legal services. Details of each team, and the companies they are responsible for, follow.

Science and Innovation Team#

The portfolio of companies monitored by this team comprises the eight CRIs, NZVIF and REANNZ. These Crown entity companies provide or support research that will contribute to New Zealand's economic growth. The portfolio had total assets of $739.5 million as at 30 June 2008.

Energy, Land and Environment Team#

This portfolio comprises two sector groups - the energy sector, and the land and environment sector. All companies in the portfolio are SOEs.

The energy sector companies include the three generator-retailers (Meridian, Genesis and Mighty River Power), Transpower, Solid Energy and the residual business of ECNZ. As at 30 June 2008, they had $17.4 billion in total assets.

The six land and environment sector companies are more diverse in nature and have total assets of around $1.9 billion. Landcorp is by far the largest company in this sector with $1.7 billion in assets, but the others still have a major impact on the economy. They include AsureQuality, MetService, QV and ACP.

Communications, Services and Infrastructure Team#

This team monitors a diverse group of companies and entities in the broadcasting, telecommunications, services and transport infrastructure sectors. The group includes five SOEs (Airways, Kordia, LML, NZ Post and KiwiRail Group), two Crown entity companies (RNZ and TVNZ), three partly Crown-owned airports (CIAL, DIAL and IAL) and a partly Crown-owned shipping company (PFL). Collectively, these companies had gross assets under their control of approximately $22.6 billion as at 30 June 2008, with NZ Post ($8 billion) and KiwiRail Group ($11.9 billion) accounting for most of this total.

Appointments and Governance Team#

This team manages, on behalf of responsible Ministers, the board appointment process for all the SOEs, CRIs and Crown companies and entities monitored by CCMAU. Broadly, this process includes identifying the skills needed on each board, identifying a range of suitable candidates for consideration and managing various processes that enable Ministers to confirm the appointments and reappointments that occur each year. The team also manages the board fee-setting process, aspects of the induction of new directors and CCMAU's director training and development activities, and has a role in setting and monitoring the best practice governance expectations for the whole portfolio.

Strategic Direction#

CCMAU will provide appropriate and timely advice to Ministers to ensure Crown companies and entities clearly understand and are motivated towards improving their financial performance and returns to the shareholder.

A key focus for CCMAU in the year ahead will be on raising the performance of the SOE portfolio. We consider there are a number of ways in which we can assist Ministers to achieve the required uplift in performance. In particular, SOE shareholding Ministers should:

• identify and appoint commercially competent directors
• set clear expectations, including financial performance targets for the SOEs, and be unequivocal about boards achieving these targets
• publicly disclose SOE performance analysis and commentary
• discuss and agree specific dividend policies with each SOE
• expect greater financial disclosure by SOEs, to match that of their private sector counterparts
• expect SOE boards to exert industry best practice governance over subsidiaries, and increase the transparency of subsidiaries' performance to shareholders, and
• expect SOE boards to conduct credible annual commercial valuations of the company.

In terms of the Crown companies and entities, our focus in the science and innovation sector will be on ensuring that the CRIs continue to maintain their financial viability while delivering research results of public good and commercial value and, in some cases, commercialising goods and services within acceptable risk limits.

Operating Intentions#

CCMAU is committed to improving, and where necessary rationalising, its existing outputs to meet the revised expectations of our key stakeholders. This will include a greater emphasis on financial analysis, increasing the transparency and disclosure of performance information, and maintaining our focus on ensuring the best-qualified directors are appointed to each and every board and ensuring that the overall commercial experience and acumen of the board is enhanced. CCMAU will focus less on issues management than in the past.

Starting with the 2009 business planning round, we expect to engage actively with each SOE, Crown company and entity board to ensure they produce comprehensive, challenging and informative statements of corporate intent (SCI) that align with Ministers' expectations. For SOEs, this means putting in place a series of measures to achieve a material improvement in financial performance with an emphasis on dividend policy, commercial valuations and increasing the level of financial disclosure. Ministers expect a similar focus on financial performance from the CRIs, Crown entity companies and other statutory entities that CCMAU monitors.

CCMAU will put in place a financial performance monitoring and reporting regime that mirrors the private sector, and review its quarterly performance report to ensure its focus is consistent with the Government's desire for greater financial performance across the portfolio. We will ensure the results of our performance monitoring are disseminated more widely via our website. Equally, we will aim to have SOEs and Crown companies and entities increase their levels of public disclosure of performance not only through fulfilling their statutory obligations, but also in other ways such as by the larger SOEs holding annual meetings.

CCMAU will continue the process initiated by Ministers in early 2009 to increase the core commercial competency of all boards. This will be evidenced by an increase in the number of directors with broad commercial governance experience appointed to the boards of CCMAU-monitored companies and entities; and ultimately in enhanced commercial performance from the companies and entities themselves.

As part of our associated governance activities, we will review the governance expectations contained in the Owner's Expectations Manual to ensure they align with accepted best practice, develop our candidate pool to ensure Ministers' desire for commercially focused directors is met, leverage off the new web-based candidate and board management system and review our governance professional development programme.

Our main measure of success is the level of satisfaction expressed by our two Vote Ministers. CCMAU's ability to make a step change in its ownership, performance monitoring and governance activities in a timely manner, in response to the new Government's expectations, will be a key determinant of Ministerial satisfaction. In addition, we will also judge our success by the way all stakeholders react to CCMAU's change in focus.

Organisational Health and Capability#

It is important that CCMAU can provide a suite of benefits, consistent with public sector norms, that attracts the very best people. To that extent, in consultation with the Treasury, we will continue to ensure we have staff policies that reflect modern best practice.

CCMAU is committed to ensuring that staff are fully equipped to meet Ministers' expectations. Therefore, we will continue our recent emphasis on upskilling staff and developing their industry knowledge. In 2009/10, CCMAU will also continue to pay attention to the wellbeing of its staff and ensure they enjoy an appropriate work-life balance.

The new board appointment and management system introduced in early 2009 will provide positive benefits for CCMAU by reducing the administration involved in maintaining candidate records and increasing our ability to respond to the growing number of requests for potential director candidates from other organisations, both within and outside the public sector.

Equally, CCMAU's leadership role in the international network of ownership monitoring agencies will continue through until 2010. We will continue to leverage off this leadership role so that our own activities to meet Ministers' new expectations are informed by international best practice. We followed a very successful workshop in London in 2007 with a similarly successful event in Victoria, Canada in 2008. Feedback from participants was very positive about making this an annual event.

Our website will continue as the major means of informing the New Zealand public about what we do and how well the companies and entities we monitor are performing. With Government's determination to be more transparent about SOE and Crown company and entity performance, we will publish a wider range of information that will allow greater scrutiny of that performance.

Murray Wright

Executive Director

The Treasury Quality Standards for Policy Advice#

The Treasury Quality Standards for Policy Advice

Quality policy advice is fit for purpose
This Quality Standard for Policy Advice sets out the characteristics or dimensions of policy advice that will best enable it to promote well-informed high-quality decision-making by Ministers. However the quality dimensions below are not a checklist and not all dimensions will be equally important in every case - judgements are required at the outset about how to apply and balance the quality dimensions to ensure a particular piece of advice is fit for purpose in achieving the result sought. When undertaking a piece of work, explicit consideration needs to be given to the following: What point are Ministers at in their decision-making process? Can the Treasury add value? What are our opportunities to have an impact? What result are we seeking by providing a piece of advice? How should the quality dimensions below be applied and balanced to achieve this result? What is the relative priority of this piece of work? What level of investment is warranted?
Dimensions of quality policy advice
Analytically rigorous (Analysis)	Set in a wider strategic context (Applied analysis)	Customer focused and persuasive (Advice)
Relevant frameworks Appropriate analytical frameworks are used, and: knowledge is up-to-date and informed by recent thinking and literature in the field assumptions behind the frameworks used are explicit and consideration has been given to how they will be expected to play out in the real world (a world which includes information and transaction costs, market failure, government failure, etc), and consideration has been given to less traditional frameworks and whether they would add innovative or useful perspectives.	Strategic Advice is set in the context of the Treasury's results and informed by a strategic view about what is important. We are explicit about the relative importance and materiality of the issue, in fiscal, economic and strategic terms. Connections across policy issues are made, ensuring that Ministers receive a whole-of-government perspective. Advice considers the long-term implications of decisions and provides a perspective that goes beyond immediate impacts. We frame issues and help set the agenda.	Clear Advice is compellingly presented. It is: brief and concise - key messages should be readily apparent to the reader easy to read - has a clear and logical structure, avoids technical jargon and uses visual devices such as charts and tables where possible pitched to suit the target audience - uses appropriate language, style and level of detail, and framed in terms of how it fits with previous advice and communications with the Minister.
Robust reasoning and logic Advice has a clear purpose, problem definition, evaluation of options against criteria and assessment of risks and opportunities. We come to a conclusion and give action-oriented recommendations.	Practical Issues of implementation, technical feasibility, practicality and timing are considered and advice accurately identifies compliance, transitional, legislative, revenue and administrative implications and costs.	Timely Reports should meet Ministers' need for advice that helps in the decision-making process (even if it means, at times, that advice is not fully developed) and indicate when a decision is required.
Evidence-based Analysis is supported by relevant evidence: Empirical methods are sound, data gaps are identified and the level of confidence/certainty in our empirical base is explicit. We draw on New Zealand experience of current and past policy interventions and, where relevant, the experience of other countries. We give our best judgement despite data imperfections; we acknowledge information limitations and advise within them.	Public sector consultation Ministers receive advice that enables them to engage with their colleagues on a fully informed basis because: thorough and timely consultation with other government departments has occurred and points of difference, and the reasons for these, are set out, and where possible, advice is developed in conjunction with relevant government agencies.	Politically aware Advice: demonstrates awareness of the wider environment and political situation is based on a clear understanding of the desired outcomes of the Minister/ Government relates to the perspectives of Ministers, even if suggesting something that tests those perspectives, and recognises choices and constraints Ministers face, and includes a range of options to address these.
Free and frank Our advice is honest, impartial and politically neutral - we have a duty to alert Ministers to the possible consequences of following particular policies, whether or not such advice accords with Ministers' views. Good free and frank advice is offered with an understanding of its political context and the constraints within which the Minister is operating.	Perspectives of wider stakeholders We understand and advise Ministers on the perspective of groups outside the public sector, consult with key stakeholders and provide advice on communications where appropriate.	Solution focused We are proactive, anticipating, as well as responding to, Ministers' needs. Advice suggests a clear way forward (“Here is what you can do” as well as “Here is a problem”) and includes a range of practical options (first best advice, but also second and third).
Quality involves continuous improvement
At the end: Did we achieve the result we were seeking? Were our judgements about what would be fit for purpose correct? What would we do differently next time? How can we capture and share this learning?

Monitoring of Crown Agencies#

The Treasury has sole monitoring responsibility for the following:

• Earthquake Commission (EQC)
• National Provident Fund (NPF)
• New Zealand Superannuation Fund (NZSF)
• Government Superannuation Fund (GSF)
• Air New Zealand Ltd

CCMAU has sole monitoring responsibility for the following:

• New Zealand Lotteries Commission (Lotteries)
• Pacific Forum Line Ltd (PFL)

CCMAU has a lead monitoring role with support from the Treasury for the following:

State-Owned Enterprises:

• Airways Corporation of New Zealand Ltd (Airways)
• Animal Control Products Ltd (ACP)
• AsureQuality Ltd (AsureQuality)
• Electricity Corporation of New Zealand Ltd (ECNZ) (the residual company)
• Genesis Power Ltd (Genesis)
• Kordia Group Ltd (Kordia)
• Landcorp Farming Ltd (Landcorp)
• Learning Media Ltd (LML)
• Meridian Energy Ltd (Meridian)
• Meteorological Service of New Zealand Ltd (MetService)
• Mighty River Power Ltd (Mighty River Power)
• New Zealand Post Ltd (NZ Post)
• New Zealand Railways Corporation (KiwiRail Group)
• Quotable Value Ltd (Quotable Value)
• Solid Energy New Zealand Ltd (Solid Energy)
• Timberlands West Coast Ltd (Timberlands)
• Transpower New Zealand Ltd (Transpower)

Other Crown companies:

• New Zealand Venture Investment Fund Ltd (NZVIF)
• Radio New Zealand Ltd (RNZ)
• Television New Zealand Ltd (TVNZ)
• Research and Education Advanced Network New Zealand Ltd (REANNZ)

Crown Research Institutes:

• AgResearch Ltd (AgResearch)
• Institute of Environmental Science & Research Ltd (ESR)
• Institute of Geological & Nuclear Sciences Ltd (GNS Science)
• Landcare Research New Zealand Ltd (Landcare Research)
• National Institute of Water & Atmospheric Research Ltd (NIWA)
• New Zealand Forest Research Institute Ltd (Scion)
• The New Zealand Institute for Plant & Food Research Ltd
  (Plant & Food Research)
• The Horticulture and Food Research Institute New Zealand Ltd (HortResearch)

Other:

• Christchurch International Airport Ltd (CIAL)
• Dunedin International Airport Ltd (DIAL)
• Invercargill Airport Ltd (IAL)

Crown entity:

• Public Trust (Public Trust)