Part 1: The operating environment for central government

Central government: Results of the 2015/16 audits.

This Part describes the operating environment for central government agencies in 2015/16. It provides some context for this report – in particular, for the audit of the financial statements of the Government of New Zealand (the Government's financial statements).

The Government's financial statements consolidate financial information from all the organisations that are part of central government.1 We audit each of these organisations each year. We need to understand the operating environment for these different organisations because the Government's priorities and expectations drive how organisations plan, prioritise, spend, and report the funding approved by Parliament.

An environment of continued changes

Constant change has been the main characteristic of the last seven years. The current operating environment for government reflects developments and the culmination of considerable changes during the last seven to eight years. The timeline in Figure 1 shows some of the significant events and changes in that period, including the Government's response to the global financial crisis in 2008 and the Canterbury earthquakes in 2010 and 2011. We discuss these in more detail below.

Alongside these unexpected major events, the Government has introduced reforms that affect how entities conduct their business, deliver policy, and, importantly for our work, report financial and service performance. New accounting standards introduced specifically for the public sector have also affected the accounting and reporting of many public entities.

This period has also been characterised by a re-balancing of centralised and devolved decision-making and delivery of public services. On the one hand, the central agencies now have a stronger "corporate centre" role and some other entities have new functional leadership roles. Also, changes to the State Sector Act 1988 in 2013 established a legal obligation on departmental chief executives to be responsive to the collective interests of government.

On the other hand, the Government is using a changing mix of ways to deliver services, including by contracted organisations from the private and non-government sectors. New ways of contracting for outcomes, including social bonds, are being piloted. Shared service initiatives have also affected accounting, reporting, and auditing, with third parties or subsidiaries increasingly managing corporate functions such as finance and procurement. This can result in confusion in entities about where accountability for decision-making and expenditure resides.

Adverse external events have also led to significant government interventions. The global financial crisis created significant economic risks for New Zealand, one of which was a loss of confidence in local financial institutions, potentially leading to a flight of funds from the country. In response to this, the Government intervened directly by establishing the Crown Retail Deposit Guarantee Scheme (the Scheme). Ultimately, the Crown guaranteed up to $133 billion through the Scheme and paid out more than $2 billion under the Scheme for institutions that failed, most notably South Canterbury Finance Limited.

As a consequence of payments made to depositors of failed finance companies under the Scheme, the Crown inherited the beneficial interest in the proceeds from the secured assets of the receiverships. The Crown subsequently recovered proceeds of $1.2 billion from these receiverships. After taking account of the fees the Crown earned from the Scheme of about $0.5 billion, the net cost to the Crown was about $0.3 billion.

We examined the Scheme in 2011 (the year it was closed)2 and noted in a follow-up review in 2014 that the Treasury was applying a more carefully considered and controlled response to unexpected events.3 An example of this was when Allied Mutual Insurance (AMI) requested financial assistance in dealing with the volume of claims from the Canterbury earthquakes.

The Government also established the Financial Markets Authority (FMA) to provide closer controls and regulation of New Zealand's capital markets to restore investor confidence after the global financial crisis. This directly affects public entities such as state-owned enterprises and mixed-ownership model companies and their auditors, because the FMA's mandate includes regulating some activities of state-owned enterprises and mixed-ownership model companies.

The other significant events that led to major government interventions were the Canterbury earthquakes of 2010 and 2011. We discuss the effects and response to these events in more detail below.

Figure 1
Timeline of events affecting public service delivery, reporting, and auditing

2008 Global financial crisis.

Government intervention to support institutions. Beginning of period of government deficits.

Change of government with new priorities.
2010 Auckland Council established.

Methodology for discount rates agreed for all entities.
2010-11 Earthquakes in Canterbury.

Canterbury Earthquake Recovery Authority established with budget of $5.5 billion for Christchurch rebuild.
2011 Auditor-General issues AG-4 (Revised): The Audit of Service Performance Reports.

Establishment of Financial Markets Authority.

Inland Revenue Department reviews tax recognition policies.

Government department mergers: Department of Internal Affairs (incorporating Archives New Zealand and the National Library); Ministry of Science and Innovation (replacing Foundation for Research, Science and Technology and the Ministry of Research, Science and Technology).

Productivity Commission established.

Social sector trials.
2011 External Reporting Board established as a Crown entity responsible for accounting and auditing assurance standards in New Zealand (July).
2012 External Reporting Board issues new Accounting Standards Framework.

Better Public Services launched, identifies 10 key results.

The Budget introduces four government priorities (see paragraph 1.12).

Departments required to produce four-year plans combining strategic direction, medium-term delivery, financial planning, organisational capability, and workforce strategy.

Ministry of Business, Innovation and Employment established (merging Building and Housing, Labour, Economic Development, and Ministry of Science and Innovation).

Functional leadership introduced.

Investing in services for outcomes – social investment approach.
2012 Public Finance (Mixed Ownership Model) Amendment Act 2012 establishes new class of entity.
2013 The Treasury issues its long-term fiscal statement, Affording our future.

State sector legislative reforms (see Figure 2).
2014 Public Benefit Entity standards (including International Public Sector Accounting Standards) come into effect for public sector entities (July).
2015 State Services Commission establishes new role of Deputy Commissioner, Auckland (March).

Cabinet grants Ministers and departments increased flexibility in allocating resources.

Reporting on key audit matters new requirement under ISA (NZ) 701 for certain entities.

Auditor-General issues AG-4: The audit of performance reports, incorporating legislative changes from state sector reforms.
2016 Canterbury Earthquake Recovery Authority disestablished and functions distributed to several entities; Ōtākaro Limited and Regenerate Christchurch established.

Changes to income tax recognition applied.

New Zealand Health Strategy launched. National Health Board disestablished.

Social Housing Reform Programme legislation enacted (Housing Corporation (Social Housing Reform) Amendment Act 2016).

Establishment of Investing in Children Programme.

Announcement of new Ministry for Vulnerable Children (August).

Government priorities

The Government's four priorities are:

  • to responsibly manage the Government's finances;
  • to build a more competitive and productive economy;
  • to deliver better public services to New Zealanders; and
  • to support the rebuilding of Christchurch.

These four priorities have been in place since 2012. The two priorities most relevant to our audit of the Government's financial statements are the management of the Government's finances and rebuilding Christchurch. The Government has estimated that the cost to the Crown for rebuilding Christchurch will be $17.1 billion. Not surprisingly, given high public interest, the continuing effect of the work to rebuild Christchurch on the Government's financial statements remains a focus of our audits.

Managing finances

In its first term (2008-11), the Government signalled that the negative effects of the global financial crisis on the economy would result in a period of deficits. The Government aimed to return to surplus as soon as possible, initially by 2015/16, and then after forecasts in 2011 had indicated an earlier improvement, by 2014/15. This would be achieved in part by constraining government spending, with the consequence that baseline funding for many public entities had limited or no increases for several years. A modest surplus, measured by the total Crown operating balance before gains and losses (OBEGAL), was reported in 2014/15. In 2015/16, the OBEGAL was a surplus of $1.8 billion, against a budgeted surplus of $668 million.

This climate of financial constraint has played an important part in the individual and collaborative decisions entities have made in recent years, as they look for greater efficiencies to deliver the Government's expectations for improved service delivery as expressed through the Better Public Services goals (see paragraph 1.21).

Leadership from the centre

The State Services Commission (SSC), the Treasury, and the Department of the Prime Minister and Cabinet (DPMC) exercise leadership as the central agencies. As part of this, the SSC uses a Performance Improvement Framework programme to analyse performance challenges at an agency and system level.

The Treasury carries out an annual Benchmarking Administrative and Support Services analysis. This provides information on the cost, efficiency, and effectiveness of administrative and support services in the state sector.

Two government departments have continued their functional leadership roles for the whole of the public sector – the Ministry of Business, Innovation and Employment for procurement and property management and the Department of Internal Affairs for information and communications technology (ICT Strategy and Action Plan).

The objective of functional leadership is to improve the overall effectiveness of common business functions and reduce their overall costs. As part of our 2016/17 work on information, we are examining the Department of Internal Affairs-led Infrastructure as a Service model. The model is a vendor-managed and vendor-hosted solution that allows agencies access to shared storage, computing, and data-centre facilities on a self-service, pay-as-you-use basis.

The Treasury and the SSC share oversight of the four-year plans that government departments prepare annually. The purpose of the plans is to set out a medium-term view of the departments and how they will move closer to achieving their longer-term vision. As part of our 2015/16 work on investment and asset management, we reviewed selected four-year plans and will be reporting on them in 2016/17.

Public sector transformation

The Government launched the Better Public Services programme (BPS) in March 2012. This programme set 10 measurable targets in 2012, which were reset with some changes in February 2015. The SSC provides regular reports of the aggregated results on its website. Results for some of the measures are reported in individual departments' annual reports.

However, the focus on BPS results is only one component of a broader agenda for public sector change. The SSC has outlined four guiding principles for reform to support improvement of service delivery and transformation of the way the public service operates. These principles are "Citizen-Centric" (as opposed to focusing on the agency's needs), "Results Focus", "Leadership", and "Kaitiaki/Stewardship".

The last two principles emphasise the aspiration to work in a more connected way throughout the public sector, and for public sector leaders to take a longer-term view that recognises their responsibility for looking after assets that have been entrusted to their care.

Aligned with this is the "investment approach", led by the Treasury, to achieving social outcomes. This approach emphasises using quality information and technology to better understand the people who need public services and what works, and then adjusting services accordingly.

Quality data also supports investment decisions and the measurement of return on investment. The approach emphasises making early investments aimed at reducing the number of New Zealanders relying on social services in the longer term and reducing the overall cost for taxpayers. Elements of this approach are visible in some BPS results, which use actuarial techniques to measure the present value of savings achieved over time.

Supporting this direction were changes made in 2013 to the three Acts that govern the management of the state sector and public finances. Figure 2 describes the main effects of these changes. We then outline how they are shaping changes in the central government sector.

Figure 2
State sector reforms and changes to legislation

In 2013, Parliament enacted changes to the State Sector Act 1988, the Public Finance Act 1989, and the Crown Entities Act 2004. These changes were aimed at enabling more collaborative behaviour by public entities, strengthening leadership in the state sector, improving reporting, and encouraging better services and value for money.

The amendments were significant changes to the Acts that govern the management of the state sector and public finances. The main changes to each Act and their effect are summarised below.
State Sector Act 1988

Establishes State Services Commissioner as leader of state services.

Strengthened the role of SSC to ensure that government agencies work collectively as a system.

Broadened responsibilities of public service chief executives, including for collective interests of government and long-term stewardship.

Allows delegation of functions and powers between agencies and to non-government providers.

Established new organisational arrangement – departmental agency.
Public Finance Act 1989

Multi-category appropriations established.

Use and administration provisions – allowing one department to use an appropriation administered by another.

Statements of Intent no longer required annually – three-year cycle.

Requirement to report what has been achieved with appropriation.

Specifies the financial responsibilities of departmental chief executives – financial sustainability for the long term and responsibility for managing and advising on non-departmental appropriations.

New class of entities – Schedule 4A companies.
Crown Entities Act 2004

Crown entities required to collaborate with other public entities where practicable.

Enhances ability to give directions to Crown entities to support a whole-of-government approach, including through functional leadership.

Statements of Intent no longer required annually – three-year cycle.

Statements of performance expectations annually.

Focuses reporting and auditing on the group rather than each entity within the group.

Change in the social sector

In April 2016, the Government responded to the recommendations of the Expert Advisory Panel tasked with modernising the Child, Youth and Family division of the Ministry of Social Development by establishing the Investing in Children Programme. The Panel recommended system-wide changes to a "child-centred" approach and a social investment approach to meet the needs of vulnerable children and young people. The programme takes a cross-sector, social investment approach.

In August 2016, the Government announced the establishment of a new Ministry for Vulnerable Children, Oranga Tamariki, to begin operating from 1 April 2017. This will involve the transition of core Ministry functions that relate to supporting vulnerable children and young people to the new entity, which is intended to provide a whole-of-sector, child-centred approach to working with vulnerable children and young people. It will also mean organisational changes for the rest of the Ministry of Social Development.

Social housing

Housing has become a prominent issue in recent years. Social housing cannot be separated from wider housing supply and affordability issues, and interacts with other components of the housing market. These interdependencies, and the need to plan for and match supply and demand, are reflected in the Social Housing Reform Programme and in the way government agencies have organised the provision of housing services, with the Treasury in the lead policy role, the Ministry of Business, Innovation and Employment providing regulatory functions for community housing, the Ministry of Social Development as the single purchaser for government-funded social housing, and Housing New Zealand as the major provider of social housing.

In February 2016, the objectives of the reform programme were given legislative status through the passing of the Housing Corporation (Social Housing Reform) Amendment Act 2016.4 The new legislation also provided powers to transfer Housing New Zealand properties to registered community housing providers. The transfer of significant numbers of properties out of the public sector has required careful consideration of the value of the assets and the effect on the Government's financial statements.

Changes in government arrangements for supporting the rebuilding of Christchurch

The Canterbury Earthquake Recovery Authority (CERA) was a public service department that carried out functions under the Canterbury Earthquake Recovery Act 2011. CERA's role was to provide leadership and co-ordination for the ongoing recovery effort. On 1 February 2015, it became the first (and so far only) departmental agency. It sat within DPMC.

The Greater Christchurch Regeneration Act 2016 confirmed the expiry of the Canterbury Earthquake Recovery Act and the disestablishment of CERA in April 2016. The emphasis of government intervention in Christchurch has shifted from leading the recovery to establishing long-term, locally led recovery and regeneration arrangements.

Two new entities were established for this purpose. Regenerate Christchurch will operate until 30 June 2021 and was set up to lead regeneration activities throughout greater Christchurch. It is governed by a seven-member board, with four members appointed by the responsible Minister and the remainder appointed by Christchurch City Council.

The other new entity is Ōtākaro Limited, a Schedule 4A company under the Public Finance Act 1989. It is charged with delivering Crown "anchor projects" and investments in Christchurch and ultimately support the Crown's exit from these interests on favourable terms. DPMC and the Treasury have joint monitoring responsibility for Ōtākaro Limited. As a Crown company, Ōtākaro Limited should have a greater degree of flexibility and autonomy to pursue commercial options than CERA did, either as a department or as a departmental agency.

DPMC retains overall responsibility for policy and oversight of the two new Christchurch-based entities. Land Information New Zealand has assumed responsibility for demolitions and clearances, and interim land-use management in the residential red zones. The Ministry of Health has taken on responsibility for psycho-social recovery.

The changes that took place in 2015/16 will begin to have their real effect from 2016/17. Given the importance of the regeneration work in Christchurch, high public interest, and the significant financial investment in this work, it will remain a focus for our annual audits of these entities.

New working arrangements in Auckland

Similarly to Christchurch, significant organisational changes have occurred at the local level since the creation of the Auckland "super-city" in 2010. The importance of Auckland to New Zealand's economy was reflected in the establishment in 2015 of the Deputy State Services Commissioner role for Auckland.

The Government's efforts to address housing and transport issues in Auckland have included changes to how central government and Auckland Council work together. Examples of new arrangements targeted at achieving specific outcomes include the Tāmaki Redevelopment Company Limited and its subsidiaries, the Auckland Transport Alignment Project, and the recently announced establishment of a special-purpose entity to deliver the City Rail Link.

Other changes in government

Several government entities have implemented or are currently implementing significant change programmes.

Inland Revenue continued the implementation of its Business Transformation Programme. Initial work on this programme began in July 2011, and it has a planned roll-out through to 2024. This programme will change most aspects of the way that Inland Revenue carries out its work and how people and businesses interact with the tax system.

The Government launched the updated New Zealand Health Strategy in April 2016. The updated strategy notes that maintaining services as they are currently provided will probably become unaffordable and that an increased emphasis on maintaining health and illness prevention is needed.

The Government had previously signalled that there is no planned change to the structure or governance arrangements for district health boards (DHBs). However, the National Health Board, which co-ordinated DHB planning and funding, was disestablished and its functions mainstreamed into the Ministry of Health, which has also been reorganised to position it to lead implementation of the strategy.

New Zealand Health Partnerships, which replaced Health Benefits Limited as the lead shared services entity for the DHBs, began operations on 1 July 2015. New Zealand Health Partnerships is owned by the 20 DHBs and is continuing four programmes begun by Health Benefits Limited, including a shared financial and procurement system and a national infrastructure platform for information technology storage and applications.

The New Zealand Customs Service and the Ministry for Primary Industries are developing the Joint Border Management System. The new system is intended to modernise the border systems of these agencies and enable them to share processes, data, and technology, providing a single customs and biosecurity information system.

The Ministry of Justice is working to improve and modernise the Court system. The changes will result in changes for the Ministry and the way it supports the courts and tribunals. We are carrying out a performance audit on courts modernisation and expect to report during 2016/17.

Fraud awareness and detection

Overall, the number of incidents our auditors have reported of actual or suspected fraud has been relatively stable when compared with the previous year.

However, we have seen an increase in the value of procurement-related fraud, mirroring the experience of other jurisdictions. This includes fraud related to one-off construction contracts or project work, or general procurement that has mainly involved employees with delegated authority entering false, amended, or overstated invoices for payment.

We have also seen an increase in cyber-fraud affecting the entire public sector, including email scams, ransom-ware, and spear-phishing, requiring entities to become more alert and more sophisticated in their approach to cyber-security.

Reputation for integrity

Transparency International published its 2015 Corruption Perceptions index in January 2016. Having held the number one spot on seven previous occasions, in 2015, New Zealand slipped for the second year in succession. New Zealand is now in fourth position.

New Zealand's public sector has an enviable reputation for integrity and transparency, which has been described as this country's greatest competitive advantage. Although New Zealand remains in good company in the index, the fall from first to fourth position serves as a reminder that maintaining the highest standards of transparency and accountability requires continual effort. An ever-changing operating context will always present new challenges and risks that will need to be identified and addressed.

Governance and accountability

From our work this year, we have confirmed that good governance and clear accountability are essential to ensuring that the public sector stays strong and effective. In our report Reflections from our audits: Governance and accountability,5 we noted some common issues and challenges for entities, along with examples of good and emerging practice that public entities can use to help improve their governance and accountability arrangements.

It is vital that the public sector continues to focus on these areas to ensure that we maintain and continue to improve our strong public management system.

1: This includes government departments, state-owned enterprises, Crown entities (including schools, Crown research institutes, and district health boards), Crown and mixed-ownership model companies, Offices of Parliament, Fish and Game Councils, the New Zealand Superannuation Fund, and the Reserve Bank of New Zealand.

2: The Treasury: Implementing and managing the Crown Retail Deposit Guarantee Scheme. Available at

3 The Treasury: Implementing and managing the Crown Retail Deposit Guarantee Scheme. Available at

4: Initially the Social Housing Reform (Transactions Mandate) Bill but renamed.

5: Available at