Reference: 20200360
8 December 2020
s9(2)(a)
Dear s9(2)(a)
Thank you for your Official Information Act request, received on 27 October 2020. You requested:
Could I please request:
Treasury Report T2020/1655: Impacts of COVID-19 on the Crown-owned companies
Treasury Report T2020/1663: KiwiRail Equity Drawdown to Fund Multiple Projects
Treasury Report T2020/1803: Letter to FEC: Petition of Willie Snowden: Help Save Regional Jobs and Businesses
Joint Report by the Treasury and Ministry of Health T2020/560: Auckland and Canterbury District Health Board 2019/20 Annual Plans
Aide Memoire T2020/1759: Meeting with Canadian Minister for Middle Class Prosperity Mona Fortier
Treasury Report T2020/1862: Continuing New Zealand's International Monetary Fund Lending Commitments
We sought an extension for our response to this Official Information Act request on 16 November 2020, due to the complexity of item 1 (see below) and the large number of parties who needed to be consulted on its contents.
1 The Terrace PO Box 3724 Wellington 6140 New Zealand tel. +64-4-472-2733
https://treasury.govt.nz
Information being released
Please find enclosed the following documents:
Item Date Document Description Decision
1. 4 June 2020 Treasury Report and Cabinet paper: Impacts of Release in part COVID-19 on the Crown-owned companies
2. 8 June 2020 Treasury Report: KiwiRail Equity Drawdown to Release in part Fund Multiple Projects
3. 8 June 2020 Treasury Report: Letter to FEC: Petition of Willie Release in part Snowden: Help Save Regional Jobs and Businesses
4. 10 June 2020 Joint Report: Auckland and Canterbury District Release in part Health Board 2019/20 Annual Plans
5. 18 June 2020 Aide Memoire: Meeting with Canadian Minister for Release in part Middle Class Prosperity and Associate Minister of Finance, Mona Fortier
6. 25 June 2020 Treasury Report and Cabinet paper: Continuing Release in part New Zealand’s participation in International Monetary Fund Borrowing arrangements
I have decided to release the relevant parts of the documents listed above, subject to information being withheld under one or more of the following sections of the Official Information Act, as applicable:
• section 6(a) - making available this information would be likely to prejudice the security or defence of New Zealand or the international relations of the Government of New Zealand;
• section 6(b)(ii) - making this information available may prejudice the information to the Government of New Zealand on a basis of confidence by an international organisation;
• section 9(2)(b)(ii) –making this information available would be likely unreasonably to prejudice the commercial position of the person who supplied or who is subject to the information;
• section 9(2)(ba)(i) - to protect information provided which is subject to an obligation of confidence, where the making of the available information would be likely to prejudice the supply of similar information, or information from the same source, and it is in the public interest that such information should continue to be supplied;
• section 9(2)(f)(iv) - to maintain the current constitutional conventions protecting the confidentiality of advice tendered by Ministers and officials for the time being;
• section 9(2)(g)(i) – to maintain the effective conduct of public affairs through the free and frank expression of opinions,
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• section 9(2)(g)(ii) – to maintain the effective conduct of public affairs through protecting ministers, members of government organisations, officers and employees from improper pressure or harassment;
• section 9(2)(i) - to enable commercial activities to continue without prejudice or disadvantage;
• section 9(2)(j) – to enable a Minister of the Crown or any public service agency or organisation holding the information to carry on, without prejudice or disadvantage, negotiations; and
• section 9(2)(k) – to prevent the disclosure or use of official information for improper gain or advantage.
Direct dial phone numbers of officials have been redacted under section 9(2)(k) of the Official Information Act to reduce the possibility of staff being exposed to phishing and other scams. This is because information released under the Official Information Act may end up in the public domain, for example, on websites, including the Treasury’s website.
Context
Item 1, Treasury Report and Cabinet paper: Impacts of COVID-19 on the Crown-owned companies, was written based on information accurate as at 27 May 2020. There have since been a number of developments. In particular, Quotable Value has repaid the wage subsidy that it was noted as having received.
Information publicly available
The following information is also covered by your request and is publicly available:
Document Website Address Item Date Description
1. 10 June 2020 Appendices of - https://www.cdhb.health.nz/wp- Joint Report: content/uploads/36b4a088-canterbury-dhb- Auckland and annual-plan-2019-2020.pdf Canterbury District
Health Board 2019/20 Annual https://www.adhb.health.nz/assets/Document Plans s/About-Us/Planning-documents/Auckland- DHB-Annual-Plan-2019-20.pdf
Accordingly, I have refused your request for the documents listed in the above table under section 18(d) of the Official Information Act, as the information requested is publicly available.
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Please note that this letter (with your personal details removed) and enclosed documents may be published on the Treasury website.
This reply addresses the information you requested. You have the right to ask the Ombudsman to investigate and review my decision.
Yours sincerely
Juston Anderson Acting Manager, Commercial Performance
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TOIA 20200360 Table of Contents
1. Treasury Report T2020 1655 - Impacts of COVID-19 on the Crown-owned 1 companies 2. Treasury Report T2020 1663 - KiwiRail Equity Drawdown to Fund Multiple Projects 35 3. Treasury Report T2020 1803 - Letter to FEC - Petition of Willie Snowden - Help 44 Save Regional Jobs and Businesses 4. Joint Report by the Treasury and Ministry of Health T2020 560 - Auckland and 56 Canterbury District Health Board 2019-20 Annual Plans 5. Aide memoire - Meeting with Canadian Minister for Middle Class 72 6. Treasury Report T2020 1862 - Continuing New Zealand's International Monetary 83 Fund Lending Commitments
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COMMERCIAL-IN-CONFIDENCE
Treasury Report: Impacts of COVID-19 on the Crown-owned companies
Date: 4 June 2020 Report No: T2020/1655 File Number: SE-1-2-4
Action Sought
Action Sought Deadline Minister for State Owned Enterprises Agree to the 12 June 2020, to allow for cross party (Rt Hon Winston Peters) recommendations consultation prior to lodgement by 10am on 25 June 2020
Minister of Finance Agree to the 12 June 2020, to allow for cross party (Hon Grant Robertson) recommendations and consultation prior to lodgement by sign the attached Cabinet 10am on 25 June 2020
paper Associate Minister of Finance Agree to the 12 June 2020, to allow for cross party (Hon David Parker) recommendations consultation prior to lodgement by 10am on 25 June 2020
Associate Minister for State Owned Agree to the 12 June 2020, to allow for cross party Enterprises recommendations consultation prior to lodgement by (Hon Shane Jones) 10am on 25 June 2020
Contact for Telephone Discussion (if required)
Name Position Telephone 1st Contact Amanda Wilson Analyst, Commercial Performance s9(2)(k) Shelley Manager, Commercial Performance Hollingsworth
Actions for the Minister’s Office Staff (if required)
Return the signed report to Treasury. Lodge the signed Cabinet paper (with Appendix 1) with the Cabinet Office by 10am on 25 June 2020 – Minister of Finance’s Office only
Enclosure: Speaking notes for SOP Cab paper (Treasury:4289927v1)
Treasury: 4283822v1 COMMERCIAL-IN-CONFIDENCE 20200360 Doc 1 Page 2 of 102
COMMERCIAL-IN-CONFIDENCE Treasury Report: Impacts of COVID-19 on the Crown-owned companies
Purpose of Report
1. This report provides you with a paper to take to the Cabinet Government Administration and Expenditure Review Committee to inform them about the impacts of COVID-19 on the Crown-owned companies monitored by the Treasury.
Background
2. The Treasury has been providing fortnightly updates on the impacts of COVID-19 on the Crown-owned companies that it monitors, based on a number of scenarios that stress-test these companies. 3. This assessment has been completed based on a RAG (red, amber, green) rating over three periods. We have assessed all of these companies on the following dimensions (at a minimum), with a full report on the outcome of that assessment provided to Ministers for companies with red or amber ratings in either the immediate (0-3 months), medium (3-6 months) or longer-term (>6 months). a revenue impacts b cost flexibility c capital expenditure plans, and d balance sheet capacity and liquid resources. 4. This approach has allowed Ministers to identify and prioritise potential interventions required. We update this approach fortnightly in a SITREP format by highlighting any new or amended text from the previous report in red to allow for ease of reading. 5. As the common shareholder across the various company forms, the Minister of Finance has advised that he would like to take the RAG assessments to Cabinet to inform his colleagues on the state of the Crown-owned companies contained in this paper. A draft Cabinet paper has been provided for this purpose.
Scenario
6. To ensure a consistent approach to the modelling provided by the companies, we asked them to provide forecasts based on the Treasury Scenario 5, which assumes Alert Level 4 for one month, Alert Level 3 for one month and Alert Level 2/1 for the balance of a 12-month period. We chose this scenario to provide a stress-test of the companies. The exact details of the scenario are not by themselves important; it was more important to apply a material but still plausible negative shock to the companies and to test their ability to withstand it.
T2020/1655: Impacts of COVID-19 on the Commercial Portfolio Page 2
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COMMERCIAL-IN-CONFIDENCE 7. Under Scenario 5: a. borders are assumed to be closed to foreign visitors for up to 12 months b. world annual average real GDP growth is 9% lower in the 2020 calendar year than forecast pre COVID-19 and 4% lower than forecast in the 2021 calendar year c. service exports fall to around one-third of their previous levels over the year to March 2021 d. the Trade Weighted Index is assumed to fall 6% over the June and September quarters and gradually recovering thereafter, and e. the unemployment rate rises to 13% in the June 2020 quarter before gradually easing.
Cabinet paper
8. The paper is for Cabinet’s information only and is based largely off the 27 May 2020, Commercial Portfolio COVID-19 State of Play (SOP) RAG assessments (T2020/1538 refers). However, for companies that were not able to provide updates on the updated scenario in time, the updates we have received since have been incorporated into the Cabinet paper. 9. For ease of reading, the companies that have been updated are Kiwi Group Holdings, Hawkes’ Bay Airport, Dunedin International Airport and TVNZ. The situation with TVNZ is moving rapidly, as it is in discussions with Ministers and officials on the precise details of a support package, which results in regular changes to its modelling as assumptions are tested. We have also included the latest information from New Zealand Post, however, it has not yet provided Scenario 5 modelling. 10. We have included in the Cabinet paper some general commentary on the steps that the companies have been taking around financial restraint, leave policies and commercial rents, which has been communicated to you in previous versions of the SOP. We have also provided a brief overview of the commitments the Crown has made to date, to support the most affected companies. 11. The full entity RAG (red, amber, green) assessment tables are attached to the Cabinet paper as Appendix 1. 12. Speaking notes are also attached separately to this paper for the Minister of Finance. 13. We have not included the Crown Financial Institutions in the paper.
Next Steps
14. We recommend that the Minister of Finance take the attached paper to the Government Administration and Expenditure Review (GOV) Cabinet Committee on 2 July 2020 and Cabinet on 6 July 2020.
T2020/1655: Impacts of COVID-19 on the Commercial Portfolio Page 3
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COMMERCIAL-IN-CONFIDENCE 15. Below is the anticipated timeline to meet this recommendation:
Action Date
The Minister of Finance to agree and sign 12 June 2020 the Cabinet paper
Cross party consultation 15 June 2020 to 24 June 2020
Cabinet paper lodged By 10am on 25 June 2020
GOV Committee meeting 2 July 2020
Cabinet meeting 6 July 2020
Recommended Action
16. We recommend that you:
a agree that the Minister of Finance, on behalf of shareholding and responsible Ministers, take the attached paper on the impact of COVID-19 on the Crown- owned companies as at 27 May 2020 to the Cabinet Government Administration and Expenditure Review Committee and Cabinet for their information
Agree/disagree Agree/disagree Minister for State Owned Enterprises Minister of Finance
Agree/disagree Agree/disagree Associate Minister of Finance Associate Minister for State Owned
Shelley Hollingsworth Manager, Commercial Performance
Rt Hon Winston Peters Hon Grant Robertson Minister for State Owned Enterprises Minister of Finance
Hon David Parker Hon Shane Jones Associate Minister of Finance Associate Minister for State Owned Enterprises T2020/1655: Impacts of COVID-19 on the Commercial Portfolio Page 4
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COMMERCIAL-IN-CONFIDENCE Commercial-In Confidence
Office of the Minister of Finance
Chair, Cabinet Government Administration and Expenditure Review Committee
IMPACTS OF COVID-19 ON THE CROWN-OWNED COMPANIES Proposal
1. This paper provides an overview of the current impacts of COVID-19 and risk assessment for Crown-owned companies.
2. I bring this to Cabinet for its information on behalf of shareholding and responsible Ministers.
3. The information and analysis is current as at 27 May 2020. The situation with some companies is moving rapidly, particularly companies where support packages are being developed for consideration by Cabinet in the next few weeks.
Relation to government priorities
4. This paper is provided for Cabinet’s information only. No decisions are sought.
Background
5. The Crown owns a number of commercial entities, wholly or in part, and a number of multiple objective entities that have commercial revenue streams. The Treasury provides advice on the performance of these companies and interacts with them on behalf of shareholding Ministers. These include:
5.1 Majority shareholdings in listed companies – Air New Zealand Limited (Air NZ), Genesis Energy Limited, Mercury NZ Limited, Meridian Energy Limited.
5.2 State owned Enterprises (SOEs) – Airways Corporation of New Zealand Limited (Airways), Landcorp Farming Limited (Landcorp), New Zealand Post Limited (NZ Post), KiwiRail Holdings Limited (KiwiRail), New Zealand Railways Corporation, Kordia Limited, AsureQuality Limited, Transpower New Zealand Limited (Transpower), Meteorological Service of New Zealand Limited (MetService), Orillion Limited (formally known as Animal Control Products), Quotable Value Limited (QV) and Electricity Corporation of New Zealand.
5.3 Airport companies (partial ownership) – Christchurch International Airport Limited (CIAL), Dunedin International Airport Limited (DIAL) and Hawke’s Bay Airport Limited (HBAL).
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COMMERCIAL-IN-CONFIDENCE 5.4 Crown entity companies – Television New Zealand Limited (TVNZ), Radio New Zealand Limited and Crown Irrigation Investments Limited.
5.5 Public Finance Act Schedule 4A companies – Crown Infrastructure Partners Limited, Education Payroll Limited (EPL), The Network for Learning Limited, Southern Response Earthquake Services Limited and Ōtākaro Limited (Ōtākaro).
5.6 Statutory entities – Public Trust Limited, The New Zealand Lotteries Commission and Earthquake Commission.
5.7 Other (New Zealand Post majority shareholder) – Kiwi Group Holdings Limited (KGH)
6. The Treasury is also responsible for providing advice on the performance of the Crown Financial Institutions, The New Zealand Infrastructure Commission/Te Waihanga and Kāinga Ora. It also has a secondary role in providing performance advice to Ministers on the Crown Research Institutes and Public Finance Act Schedule 4A company Research and Education Advanced Network New Zealand (REANNZ) and City Rail Link Limited. These entities are not covered in the company assessments attached to this report. Air New Zealand (because of commercial sensitivity) and New Zealand Railways Corporation and Electricity Corporation of New Zealand (because they are shell entities) have also not been included in the assessment. Crown response to date
7. The onset of COVID-19 has placed immense pressure companies across New Zealand and as shareholders of companies in some of the most affected sectors, we have negotiated a number of support packages.
8. To date we have approved in Crown funding to support the Crown-owned s companies to cope with the financial pressures caused by substantial reductions in revenues or flow on impacts as a direct result of COVID-19. This support is made up of the following:
Company Amount ($m) Type of Support
Air New Zealand 900 Loan - with option to convert to equity. The loan has not been drawn on yet
Airways 70 Equity
NZ Post 150 Equity (Including $70m uncalled capital)
Total approved
9. Shareholding Ministers and/or Cabinet are actively considering further support for HBAL, TVNZ and Airways.
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COMMERCIAL-IN-CONFIDENCE Scenario and ratings
10. To ensure a consistent approach to the modelling provided by the companies, the Treasury asked each of them to provide forecasts based on Scenario 5, which assumes Alert Level 4 for one month, Alert Level 3 for a month and Alert Level 2/1 for the balance of a 12-month period. This scenario was chosen as it provides a plausible stress test of the companies – which in itself is more important than the exact details of the scenario.
11. Under Scenario 5:
11.1 borders are assumed to be closed to foreign visitors for up to 12 months 11.2 world annual average real GDP growth is 9% lower in the 2020 calendar year than forecasted pre COVID-19 and 4% lower than forecast in the 2021 calendar year 11.3 service exports fall to around one-third of their previous levels over the year to March 2021 11.4 the Trade Weighted Index is assumed to fall 6% over the June 2020 and September 2020 quarters and gradually recovering thereafter 11.5 The unemployment rate rises to 13% in the June 2020 quarter before gradually easing. 12. Each entity has been assessed based on a RAG (red, amber, green) rating over three periods (immediate (0-3 months), medium (3-6 months) and longer-term (>6 months)). This is to indicate the risk that support may be required for an entity and the definitions are as follows:
12.1 Red – entities are likely to require support from the Crown. 12.2 Amber – entities may require support from the Crown.
12.3 Green – entities are unlikely to require support from the Crown.
Key themes/high risk entities
13. Not surprisingly, the transport, media and services portion of the portfolio is currently most exposed, with passenger numbers decreasing across both the aviation sector and rail tourism, decreased advertising and freight volumes falling.
14. With regards to some of the higher risk companies:
14.1 TVNZ (like many companies in the media sector) is experiencing significant
reductions in total revenue (a reduction of approximately by the end of FY20). TVNZ anticipates having insufficient cash flow to cover working capital requirements by September 2020. Shareholding Ministers are currently considering a draft Cabinet paper on the provision of equity support to TVNZ.
14.2 The Crown has already provided Airways with $70 million of equity. In light of further reductions in air traffic volume and a return to pre-COVID traffic volumes not anticipated until FY24, Airways expects to deplete its cash on hand
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All unmarked redactions on this page under s9(2)(b)(ii) and s9(2)(ba)(i) COMMERCIAL-IN-CONFIDENCE by October 2020. The Treasury is liaising with Airways in determining the amount of further support required and will provide advice to shareholding Ministers by mid-June 2020.
14.3 HBAL, DIAL and CIAL are all suffering from a reduction in passengers as a result of border and Alert Level restrictions. At this stage, CIAL, whilst forecasting a reduction in FY20 revenue, is expected to be able to have sufficient liquidity through its current facilities. To date, DIAL has also not indicated any suggestions of shareholder support being required. HBAL faces a substantial fall in revenue at a time when its costs have increased due to work on its airport expansion project that had started before the onset of COVID-19. s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
Support for HBAL of up to $9m is currently being considered by shareholders (including the two local councils).
14.4 s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
Ōtākaro is also facing delays to the opening of the convention centre as a result of the Alert Level 3 and 4 restrictions, and faces additional costs of to fund ongoing operations s9(2)(b)(ii) and s9(2)(ba)(i) s9(2)(b)(ii) and s9(2)(ba)(i)
14.5 KiwiRail has high fixed costs, with labour being its most significant cost at approximately per annum. Reductions in revenue of approximately are anticipated in FY21 a result of reductions in freight, passenger, property and tourism services. s9(2)(b)(ii) and s9(2)(ba)(i)
14.6 Landcorp is anticipating a decline in revenue from its October 2019 reforecast, however, it anticipates to remain ahead of the original budget for FY20. The current revenue impacts are predominantly in the livestock business, s9(2)(b)(ii)
However, the majority of the impacts are expected to be felt in FY21 with farm gate milk prices anticipated to fall alongside red meat prices resulting in an approximately reduction in revenue in FY21 and a NPAT of
14.7 s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
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14.8 s9(2)(b)(ii) and s9(2)(ba)(i)
Kiwibank was planning to redeem $150m of perpetual capital bonds, however, the Reserve Bank of New Zealand has restricted all banks from paying dividends or making capital payments. This capital is remains with Kiwibank but KGH is now responsible for redemption at a later date. s9(2)(b)(ii) and s9(2)(g)(i)
14.9 NZ Post’s international mail and parcel and domestic mail volumes have been severely impacted by COVID-19, however a large upswing in domestic parcel volumes has somewhat mitigated the impact to revenue. Total revenues for s9(2)(b)(ii) Aprils9(2)(b)(ii) 2020 were and s9(2)(ba)(i) below plan and by (excluding the wage subsidy that NZ Post s9(2)(g)(i) received). The actual cash-flow decrease in April was only than plan, less severe than initially anticipated. The surge in domestic parcel demand is expected to level-off, while the volume impacts to international and mail volumes could be more enduring. To assist with the expected impact on NZ Post’s short-term liquidity, Cabinet has approved equity support for NZ Post totalling $150m, to be provided in two tranches, with the second tranche of $70m only being called if needed. NZ Post’s contract for mail services of $130m will commence on 1 July 2020 for a period of three years, s9(2)(b)(ii) and s9(2)(ba)(i)
14.10 MetService is experiencing immediate impacts in its aviation forecasting segment, due to the impact of Alert Levels and border closures on aviation services. For FY20, it expects a reduction from planned aviation forecasting revenue, and for FY21, a reduction. MetService has reasonably strong balance sheet flexibility in the short-term, but its Wellington building requires seismic strengthening. s9(2)(g)(i)
14.11 QV’s future forecasts are uncertain due to a recent Bill allowing for the Valuer s9(2)(b)(ii) and General to defer revaluations due during the 2020 calendar year for up to one s9(2)(ba)(ii) year. QV’s FY21 revenue could decrease by approximately and s9(2)(g)(i) s9(2)(b)(ii) and s9(2)(ba)(ii) and s9(2)(g)(i) The full impacts on QV’s revenues will not be known until it has confirmation from local councils of their intentions concerning valuations.
15. Other parts of the portfolio have, at this stage, little or no exposure to the direct impacts of COVID-19. For example, the electricity sector is unlikely to face any material impact other than construction delays at the Turitea wind farm, and impacts on customers, which the companies are managing.
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COMMERCIAL-IN-CONFIDENCE Dividend impacts
16. The Crown-owned companies pay around $800m of dividends per annum to the Crown in a normal year. Accounting for the impact of COVID-19, the Treasury is currently forecasting dividends of approximately $730m in FY20 (approximately a 9% decrease).
17. The decline is small relative to the profound impact of COVID-19 for two reasons:
17.1 the listed electricity companies and Transpower pay approximately 75-80% of total dividends. Their dividend payments in FY20 were not affected by COVID- 19 (the last FY20 dividend from the listed companies was paid on 16 April 2020); and
17.2 the majority of portfolio dividends are paid in the first half of the financial year. Only the interim dividend, paid in the second half, is affected in FY20.
18. Predicting dividends beyond FY20 is challenging given the pace at which the economic effects of COVID-19 are unfolding. Assuming that the listed electricity companies and Transpower maintain dividends at around historic levels, and all other companies suspended their dividends entirely, the Crown would receive slightly over $600m in FY21 (approximately 25% less than historic levels).
Actions of restraint and wellbeing
19. In addition to the financial assessments undertaken, I have also sought information from the companies on their approach to financial restraint, leave policies, employment and commercial leases (SOEs only) over this time. Some of the key themes are noted below.
Financial restraint, leave policies and employment
20. I have been advised that the majority of the Crown-owned companies have taken steps to reduce director fees and/or senior leadership remuneration in line with the approach taken by Ministers and Public Sector Chief Executives. Some have also implemented pay freezes (mostly at the senior executive level), cuts to executive bonuses, recruitment freezes and decreases to board development and special fees budgets.
21. There was some difference, mostly at the margins, between the approaches of different companies. This largely reflects:
21.1 different companies having experienced different financial impacts from COVID-19 and so have greater or lesser pressure to make cost savings;
21.2 companies are observing actions taken by others (including the Government) and adjusting its own responses over time accordingly. We expect that the approaches taken by the companies will converge with each other, and with private sector companies.
22. Overall, the majority of companies have taken some steps to show leadership and financial restraint.
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23. The approach taken around employees taking leave or being expected to take leave has varied between companies, again reflecting different impacts on the companies, particularly in relation to those designated as essential during Alert Level 4 and those that were not. A number of entities have been looking at options to reduce their leave balances, asking employees to volunteer to take leave (after consultation) and/or work reduced hours. A number of entities have also implemented some form of special leave for staff unable to work whether that be for health reasons or other personal circumstances. All employees have been paid a minimum of 80% during the period of COVID-19 restrictions.
24. Airways, NZ Post, Air NZ, QV, TVNZ and KiwiRail have accessed the wage subsidy, however, a number of redundancies have also had to be made by some of these companies. The Treasury is working with the companies to understand any future impacts, including on employment, and companies are providing information to shareholding and responsible Ministers under the ‘no surprises’ policy.
Commercial leases
25. None of the SOEs with commercial tenants is planning to increase their rents at this time. A number of the SOEs have offered some form of concession to their leaseholders. The concessions being offered range from short-term reductions in rents to short-term forgiveness of rents and deferred rent.
Financial Implications
26. This paper is provided for information only. There are no financial implications with this paper.
Legislative Implications
27. There are no legislative implications with this paper.
Regulatory Impact Statement
28. This paper is provided for information only and does not seek any policy decisions. Therefore, a regulatory impact statement is not required.
Climate Implications of Policy Assessment
29. There are no climate change implications arising from this paper.
Human Rights and Population Implications
30. There are no human rights or population implications arising from this paper.
Consultation
31. I have consulted with my caucus colleagues, the New Zealand First Party and the Green Party of Aotearoa New Zealand on this paper.
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COMMERCIAL-IN-CONFIDENCE Communications
32. There are no anticipated public communications on this paper.
Proactive Release
33. I do not intend to proactively release the contents of this Cabinet paper, due to the commercially sensitive information that it contains.
Recommendations
34. The Minister of Finance recommends that Cabinet notes:
34.1. the contents of this paper and the challenges that the Crown-owned companies are facing
34.2. that shareholding and responsible Ministers are receiving regular updates on the impacts of COVID-19 on the Crown-owned companies, including analysis on each company’s financial position and early signalling of any potential risks or interventions
34.3. that shareholding and responsible Ministers will continue to monitor the situation and provide early advice to Cabinet on any potential interventions required.
Authorised for lodgement
Hon Grant Robertson Minister of Finance On behalf of shareholding and responsible Ministers
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IN-CONFIDENCE
APPENDIX 1: COMPANY ANALYSIS ON THE IMPACTS OF COVID-19 (Scenario 5)
RAG (Red, Amber, Green) Ratings of exposure to COVID-19: Red – Entities are likely to require support from the Crown Amber – Entities may require support from the Crown Green – Entities are unlikely to require support from the Crown.
MOST AT RISK ENTITIES DUE TO COVID-19 IMPACTS (based on Scenario 5, unless noted)
Entity s9(2)(b)(ii) and s9(2)(g)(i) Exposure/brief commentary
Television New Immediate TVNZ is facing significant negative financial impacts as a result of COVID-19. Shareholding Ministers have Zealand (TVNZ) Term (< 3 taken in-principle decisions on support for TVNZ, months) (Essential service) s9(2)(f)(iv) Medium term (3- 6 months) The Government has announced an immediate media sector support package valued at approximately $50m, Longer- which primarily ($39m) focuses on funding costs payable by media organisations for transmission and NZ on term (>6 Air content over the next six to twelve months. While this is helpful for TVNZ, transmission only relates to months) approximately of its costs. TVNZ’s forecasts do not include potential policy and competitive responses. These responses could have a significant impact on actual outcomes.
• Revenue impacts: the sectors most severely impacted are retail, travel, entertainment, leisure, automotive and real estate, representing of TVNZ’s annual advertising revenue. Under Scenario 5, TVNZ expects to receive approximately of its Q4 FY20 revenue as contracted customers reduce and withdraw from advertising. This includes a $4.9m wage subsidy from the Government. Total reduction in revenue for FY20 is anticipated to be • Cash: s9(2)(b)(ii)
• CAPEX Plans: TVNZ plans to reduce its FY21 capital expenditure by and prioritise essential news services and risk management. • Balance sheet capacity and liquid resources: TVNZ has some level of balance sheet flexibility/optionality, has no debt and has an undrawn $20m BNZ loan facility for liquidity.
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Airways Immediate The Crown has taken steps to support the aviation industry and Airways by providing Airways with financial Corporation of Term (< 3 support of $70 million. In light of further reductions in air traffic volume, Airways will likely need further financial New Zealand months) support in July 2020. The Treasury is liaising with Airways in determining the amount, timing and form of further financial support provided by the Crown. We expect to provide further advice on Airways’ financial support (Essential service) Medium requirements in June. term (3- 6 months) • Revenue impacts: Under Scenario 5, Airways revenue for FY20 would be and NOPAT would be Longer- a loss of FY20 results are subject to impairment testing which currently is anticipated to be term (>6 approximately Revenue for FY21 is anticipated to be with NOPAT loss of Pre- months) COVID levels of recovery are not anticipated until FY24. • Cost flexibility: Airways has finalised negotiations with its unions and s9(2)(f)(iv) s9(2)(f)(iv) This will assist Airways in reducing its headcount by which will result in reducing operating costs by Airways had a closing cash position of at the end of April 2020, which includes $5.5m received from the employee wage subsidy scheme and $70m equity injection from the Crown. The debtor balance at the end of April 2020 was with estimated rate of recovery of Current monthly cash burn is approximately • CAPEX Plans: All non-essential capital expenditure has been postponed. Airways is currently incurring of capital expenditure on a monthly basis, as this is crucial for air traffic safety and cannot be postponed. Expected capital expenditure spend for FY21 and FY22 is expected to be and respectively. • Balance sheet capacity & liquid resources: s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(j) Airways has two term loans of s9(2)(b)(ii) currently available but it has been told by its bank it will need a
An additional intra-month overdraft facility of is also available, but this facility does not decrease the expected cash injection.
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Hawke’s Bay Immediate • Revenue impacts: Under Treasury’s negative scenario, aeronautical and passenger related revenue Airport (HBAL) Term (< 3 streams remain significantly reduced for the remainder of the FY20 financial year and early FY21. HBAL months) expects a reduction in revenue by the end of FY20 ( lower than budget) and in FY21 (65% (Essential service) Medium lower than budget). This forecast includes a gradual improvement in the seat capacity to of pre-COVID levels by the end of FY21. term (3- 6 • Cost flexibility: HBAL has cut all variable costs, examined all other operational expenditure s9(2)(b)(ii) months) s9(2)(b)(ii) . Under Scenario 5, HBAL expects a decline of in Longer- EBITDA ( reduction) and a NPAT in FY20. HBAL expects an EBITDA of and term (>6 NPAT in FY21. months) • CAPEX Plans: HBAL has advised that all non-essential capital expenditure has been deferred but that it intends to complete its Terminal Expansion Project as it is essential and construction has already started. Work on the project stopped during Alert Level 4 but recommenced with Alert Level 3. Completion is due by mid-2021. • Update on HBAL’s staff and salaries: HBAL has applied for the Government’s wage subsidy, and expects to receive $187,809 for the 12 weeks to 30 June 2020.
• Balance sheet capacity & liquid resources: Changes in the operating environment have resulted in pressures on banking covenants and lack of headroom facilities. s9(2)(b)(ii) s9(2)(b)(ii) s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
HBAL and the Treasury have assessed that HBAL will require support of up to $9 million from its shareholders. • General Comments: HBAL has applied to the Infrastructure Reference Group (IRG) to fund the last stage of its terminal expansion. The HBAL Expansion Project was included on the list sent by the IRG to the Economic Development Minister, Hon Phil Twyford, and Infrastructure Minister, Hon Shane Jones, on Monday 18 May. If HBAL were successful, this would reduce the shareholder support required. • Upcoming advice: Shareholding Ministers have agreed in principle to provide HBAL a loan on commercial terms ( s9(2)(j) ) to alleviate the liquidity and financing issues it faces as a result of COVID-19 and directed Treasury to draft a Cabinet paper. In addition, the Treasury will work on structuring the loan arrangements and provide further advice to Ministers.
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Ōtākaro Immediate • Revenue impacts: The Level 4 and Level 3 lockdown period has delayed the opening of the Te Term (< 3 Pae Convention Centre from October 2020 to approximately s9(2)(j) Due to restrictions on months) international travel and the long lead times for reserving convention facilities, sales return to the Medium original forecast estimates by the end of s9(2)(j) resulting in an estimated overall revenue reduction of term (3- 6 s9(2)(j) and s9(2)(ba)(i) months) • Cost flexibility: Ōtākaro has limited scope to reduce costs due to existing construction and convention centre operator contracts in place. Due to delays in the planned October 2020 opening, Longer- Ōtākaro will need to extend the pre-opening costs for the Convention Centre costing approximately term (>6 $3m to $4m until months) s9(2)(j) s9(2)(j)
. In addition, Ōtākaro has a fixed ‘life’, with current funding due to expire in 2023 when its mandate has been delivered. Delays to projects like the Metro Sports Facility could require an extension of Ōtākaro’s operations s9(2)(j) s9(2)(j) • Balance sheet capacity & liquid resources: All of Ōtākaro’s borrowings are held with the Crown. Sale of assets through Ōtākaro’s land divestment programme is an ongoing process, s9(2)(b)(ii) when selling remaining assets. Lower market confidence could potentially impact its ability to divest, s9(2)(b)(ii) and s9(2)(ba)(i) • General Comments: s9(2)(j)
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MetService Immediate • Revenue impacts: Aviation revenue is expected to finish FY20 lower than FY19. Interactive Term (< 3 revenue (advertising) is also impacted by declining economic conditions and for FY20 is forecast to be (Essential service) months) lower than FY19. Other revenue segments are expected to be lower due to less economic
Medium activity. MetService expects to finish FY20 with revenue of below budget. Looking forward under Scenario 5, MetService would expect revenue of in FY21 pre-COVID- term (3- 6 19 budget), with revenue from aviation forecasting the most significantly impacted planned months) pre-COVID revenue) due to border closures. Longer- • Cost flexibility: MetService has cut variable costs and introduced other cost saving initiatives such as term (>6 hiring delays, months)
MetService is targeting a reduction in leave pay provision, and has introduced the option of flexible working. MetService forecasts year-end expenditure to be below budget. No dividend is expected for at least the next three years. MetService’s relatively fixed cost structure means that profitability is expected to be significantly impacted by reduction in revenue, with FY20 EBIT expected to be compared to plan of $4.8m. Looking forward, EBIT is forecast to be in FY21 and in FY22. • CAPEX Plans: MetService has revised its year-end capex spend to a reduction of from forecast. The board has approved the first stage of the seismic strengthening of MetService’s building, which involves moving the data centre off site. The cost of this first phase is approximately and will be funded off the balance sheet.
• Balance sheet capacity & liquid resources: MetService estimates a closing cash balance of for FY20 with a gearing ratio of a reasonably strong balance sheet providing short-term flexibility. However, the cash balance is forecast to drop to by the end of FY21 with the gearing ratio rising to . s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
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Dunedin Immediate • Revenue impacts: DIAL is expecting a reduction in revenue by the end of FY20, by end of International Term (< 3 FY21 and by end of FY22 compared to its pre COVID-19 levels. This represents a Airport (DIAL) months) lower revenue than budgeted (respectively), due to lower aeronautical revenue, reductions in parking, (Essential service) Medium rents and passenger related revenue. Domestic aeronautical revenue forecast for FY21 and FY22 has term (3- 6 been decreased to of budget and is expected to recover to pre COVID-19 levels only by months) FY25. DIAL has forecast its international aeronautical revenue to be zero starting from fourth quarter of Longer- FY20 and for FY21 and FY22. International revenue has been marginal comprising only of the term (>6 budgeted aeronautical revenue for cumulative first to third quarters of FY20. s9(2)(b)(ii) months) • Cost flexibility: DIAL’s costs are mostly fixed but it has identified savings in operating expenses. s9(2)(b)(ii) and s9(2)(ba)(i)
. In FY20 and FY21 DIAL forecasts its EBITDA to be a decline of respectively ( lower than budgeted). In FY21, DIAL will likely make a • CAPEX Plans: In the short-term, DIAL will put on hold all capital expenditure with the exception of the balance remaining on the Terminal Expansion Project. In FY21, DIAL forecasts capital expenditure of . • Balance sheet capacity & liquid resources: By the end of FY20 DIAL is forecasting to have drawn down bank facilities to cover its cash flow requirements. s9(2)(b)(ii) s9(2)(b)(ii)
. s9(2)(g)(i) . DIAL is not expecting to require shareholder support. If the financial situation worsens and support is required, the Treasury will work closely with the Dunedin City Holdings Limited s9(2)(g)(i)
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Christchurch Immediate • Revenue impacts: CIAL is highly exposed to COVID-19. It is expecting a reduction in revenue of International Term (< 3 lower than budget) for FY20. Whilst CIAL has some significant contracted revenue streams (e.g. Airport (CIAL) months) lease rentals), these are reduced in Q4 through rent forgiveness. Under Scenario 5, CIAL is anticipating a (Essential service) Medium NPBTF in FY21, in FY22 and a in FY23. term (3- 6 • Cost flexibility: CIAL’s costs are mostly fixed. The reduction in revenue is likely to flow through to months) profitability. For FY20, a decline of in EBITDA ( reduction) and NPAT of Longer- reduction) is expected. term (>6 • CAPEX Plans: All non-essential operational capex will be halted or deferred throughout the current months) financial year. Should Scenario 5 occur, CIAL would limit its capex for FY21 to Capital expenditure would also be limited to in FY22 and FY23. • Balance sheet capacity & liquid resources: CIAL current gearing ratio is which is below its covenant of CIAL forecasts that with the additional loan facilities, it will be able to cover any liquidity constraints across FY20 and FY21. s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
CIAL would see operating cash flow drop to in FY22 and FY23 respectively. Nonetheless, CIAL anticipates that it will require no shareholder support under the current scenario. • Scenarios modelled by CIAL: CIAL has modelled three different scenarios – pessimistic, optimistic and mid-point. Mid-point is the starting point for CIAL’s Statement of Intent and Business Plan assessments. It foresees the total passenger numbers to return to of pre-COVID in December 2021 (as compared to December 2019). The mid-point scenario used for SOI forecasts operating revenue for FY21 of , NPBTF . The forecast profitability and cash flows increase exponentially for FY22 and FY23. These figures does not foresee a secondary event in calendar 2020 or 2021 years, such as the second wave of COVID-19. • General comments: CIAL’s base level of operational spend in lockdown (excluding wages and salaries) s9(2)(b)(ii) was around of normal costs, this encompasses cleaning, power, maintenance etc., that cannot be stopped when the airport is open. If CIAL needs to review its baseline operating expenditure, it will review wages and salaries. CIAL will make further decisions before spring when it has a better idea of what the structure of the recovery phase looks like and what CIAL needs to take full advantage of that. In general, CIAL expects the base level operating expenditure to be able to be reduced further in FY21. CIAL believes the current facilities provide sufficient liquidity for CIAL to manage through the various scenarios noted (other than a black swan event which would need an alternative funding approach).
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KiwiRail Holdings Immediate KiwiRail’s response to the impact to COVID is based on four phases Respond; Stabilise; Rebuild; Thrive. It Limited Term (< 3 expects to be in the current Stabilise phase for . Forecast EBITDA has months) based on results to April 2020 and forecast revenue and cost impacts for the last two months of 2020, (Essential service) as freight supply chains have reopened and physical capital works recommenced. Medium
term (3- 6 • Revenue impacts: KiwiRail forecasts that COVID-19 will have significant and ongoing impacts on its months) revenue. Revenue is vulnerable in many of KiwiRail’s business activities (Freight, Passenger and Property) Longer- and increased credit risk is expected across its customer base, reflecting the impact of COVID-19 on a term (>6 range of sectors. Based on KiwiRail’s most recent forecasts, it expects that FY21 revenue will be negatively months) impacted by between with Tourism revenue impacted to the greatest extent. • Cost flexibility: KiwiRail has high fixed costs, with labour being its most significant cost at approximately per annum. Some expense reductions will be made as a result of volume reductions (i.e. fuel savings from cancelled trains) and some maintenance work has been deferred to manage cash flow (i.e. dry docks for the Kaiarahi ferry). A range of cost management initiatives are underway, including: o initiatives such as board member, and executive and senior manager remuneration reductions; leave management and reductions; managed retirements and redeployments; a recruitment freeze and suspension of overtime; and o increased focus on managing cash flow forecasting processes and customer credit risk and reducing discretionary spending (e.g. travel, consultants). The most immediate short-term option to manage cash flow is to review and reprioritise capital expenditure. This is not a preferred option as the large majority of KiwiRail’s capital expenditure is funded by Government and includes capital investments such as the NZ Upgrade programme and the Provincial Growth Fund projects. KiwiRail has also made a number of applications to the Infrastructure Reference Group. It is reviewing the extent to which these capital projects offset the impact of COVID-19 for its operating revenue and expenditure. In terms of cash flow forecasting, KiwiRail manages the Main North Line reinstatement and Capital Project funding separately, reflecting that these funds relate to project commitments.
. It will also seek an equity drawdown against Budget 2020 funding for Investment in improved resilience and reliability of core assets for payment in July 2020. • CAPEX Plans: Most staff and contractors have returned to physical work on projects with protocols for meeting COVID-19 safe ways of working implemented. Significant works on the PGF funded North Auckland Line (NAL) will be carried out over June to November 2020. However, KiwiRail has advised that the impact of the COVID-19 on its capital portfolio works will be most severe for the with several s9(2)(b)(ii) factors compounding to create timeframe risk. These factors are access to specialist skills, delivery of
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equipment and materials, and the delay to planned work during April as a result of the Alert Level 4 restrictions. s9(2)(b)(ii) s9(2)(b)(ii) • Balance sheet capacity & liquid resources: KiwiRail currently has a loan facility with
The conversion of KiwiRail’s debt to the Crown to equity through Budget 2020 will increase borrowing headroom, although COVID-19 may impact the level of external borrowing available. • General Comments: KiwiRail has received $27 million from the Government’s wage subsidy scheme.
• Key communications: s9(2)(b)(ii) and s9(2)(g)(i)
Quotable Value Immediate • Revenue Impacts: There are a number of Council ratings revaluations due to take place during 2020, Term (< 3 (Essential service) however, a number of Councils are signalling the preference to delay the work, s9(2)(b)(ii) months) In the last fortnight, the Rating Valuations Act was included in the COVID-19 Response (Further s9(2)(b)(ii) Medium Management Measures) Legislation Bill to allow the Valuer General to defer revaluations for up to one year, term (3- 6 upon submission by Councils and subject to certain criteria. As a result QV’s forecast revenue for FY21 has months) been revised downwards as some Councils, , are Longer- looking to delay their revaluations due to be undertaken in 2020 by up to one year. term (>6 • Cost flexibility and Capex Plans: QV is removing variable costs to reflect reduced activities and deferring months) any non-essential capital expenditure. QV reforecast FY21 EBITDA has fallen significantly, from s9(2)(b)(ii) s9(2)(b)(ii) reflecting that revenue reductions would all fall to the bottom line (an assumption to be strongly tested). Under Scenario 5, EBITDA forecasts for FY21 . s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
• Balance sheet capacity & liquid resources: QV is not likely to need financial support at this stage, but is going to withhold its dividend this year, and for the foreseeable future, to retain a cash buffer. QV has confirmed continued access to private sector credit.
. s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
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• Other:
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New Zealand Post Immediate NZ Post has had two Crown funding streams confirmed through Budget 2020. This includes up to $150m Term (< 3 equity injection for COVID-19 support and to progress its Network Strategy investment and $130m for mail (Essential service) months) services over three years through a contract for services with the Ministry of Business, Innovation and
Medium Employment (MBIE). term (3- 6 The following commentary is not based on the Treasury’s Scenario 5, as NZ Post was unable to prioritise months) this request. It is based on year to date results to 30 April and business planning assumptions. Longer- term (>6 • Revenue impacts: NZ Post’s most recent cash-flow forecast shows that the impact of COVID-19 on revenues and cash will not be as severe as initially signalled. Including the first tranche of the equity months) 1 injection ($80m) and from the wage subsidy, NZ Post is now estimating that its closing cash balance will be at 30 September 2020 (up from an estimated from a forecast prepared 2 on 1 April 2020). NZ Post has reported that domestic parcel volumes (accounting for of its revenues in ‘normal’ trading conditions) experienced unprecedented increases in volumes, with daily volumes so far exceeding Christmas-season peak levels (almost as much as 3x on some days). For the month of April 2020, revenue was below plan, a reduction (or below plan excluding the ). Compared to April last year revenue was down . Depending on its May 2020 results, NZ Post may need to repay the $29m wage subsidy it received if it does not meet the 30% fall in revenue criteria. The reduction was mainly due to revenue from International being under plan (a reduction), and domestic letters below plan (a reduction). Domestic parcel revenue was less severely hit with revenues below plan , but with volumes on plan, . Overall, the actual cash-flow decrease in April was only so the aggregate impacts of COVID-19 on the cash position was not as significant as expected during Level 4. • Cost flexibility: NZ Post’s network is relatively fixed cost, especially if there is a desire to retain employees. NZ Post received a wage subsidy payment of for the month of April 2020. Business-as- usual expenditure for April 2020 was s9(2)(b)(ii) below plan due to lower costs of delivery as a result of decreased volumes. However, costs did not reduce in nearly the same magnitude as the decline in All unmarked redactions on this page under s9(2)(b)(ii) and s9(2)(ba)(i) unless otherwise indicated. 1 s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
2
3
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volumes, reflecting the fixed cost network structure of NZ Post’s business. s9(2)(b)(ii) and s9(2)(g)(i) NZ Post is signalling that additional COVID-19 precautions (such as physical distancing) have put further strain on NZ Post’s parcel network which may increase the costs to deliver the higher volumes of domestic parcels. • CAPEX Plans: NZ Post does not plan to defer major capital expenditure, and management believe its investment in the Network Strategy is still viable in the current market conditions. However, this has not been stress-tested for a potential recessionary environment following the impacts of COVID-19. Given the current economic uncertainty, stress testing for negative scenarios can assist in assessment of whether investments still meet financial objectives. While the equity injection of up to $150m can be used to fund its Network Strategy investment, Ministers have set an expectation that NZ Post consults with them on the updated business case for the investment. NZ Post have not yet indicated when, or if, it will retest the assumptions in the business case. Other business-as-usual capital expenditure has been reduced from per month to per month over the next six months. • Balance sheet capacity & liquid resources: NZ Post had of cash and cash equivalents (excluding non-Treasury cash) as at 30 April 2020. It is due to receive the first tranche ($80m) of Crown equity within the next week which will bring NZ Post’s estimated available cash balance to at the end of June 2020 (versus in the base-case).
• General comments: Looking forward, NZ Post’s management expects strong growth ) for FY21 in domestic parcel volumes as it expects shoppers continue to utilise online channels. It expects that any impacts of a potential recessionary economic environment will be outweighed by the continued uptake of eCommerce. Recovery of international volumes is uncertain and depends on a number of factors such as airfreight capacity and demand for international goods versus domestic goods. International volumes were already impacted pre-COVID-19 by the introduction of GST. On 1 July 2020, NZ Post’s contract for mail services with MBIE will commence, under which NZ Post will be able to invoice on a quarterly basis for the losses incurred in providing Deed-levels of mail services. s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
. MBIE’s policy work to look at the future of mail will need to be accelerated so that a longer-term mail solution can be implemented before funding runs out. • Key communications: The Associate Minister of State Owned Enterprises has sent an updated Letter of Expectations to the NZ Post board on 28 May 2020, regarding managing the impacts of COVID-19 and use of the equity injection.
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Landcorp Immediate Landcorp has assumed in its forecasts a farmgate milk price of s9(2)(b)(ii) for FY21 and FY22, rising to Term (< 3 in FY23. This is consistent with Fonterra’s broad forecast range for FY21. Landcorp has also (Essential service) s9(2)(b)(ii) months) assumed a lower starting price for livestock revenue and has considered other market factors and trends. As
Medium Landcorp’s financials are more affected by commodity prices than Alert Levels, its forecasts under Scenario 5 term (3- 6 have similar results to its Business Plan modelling. months) Longer- • Revenue impacts: Current revenue impacts are predominantly in the livestock business, s9(2)(b)(ii) term (>6 s9(2)(b)(ii) months) s9(2)(b)(ii) . As at 31 March 2020, YTD livestock revenue was below the October 2019 reforecast (but ahead of the original budget) and YTD total revenue was lower than the October 2019 reforecast (but up on the original budget). Milk prices are anticipated to fall in FY21 with Fonterra predicting a range of $5.30/KgMS to $6.90/KgMS. Landcorp’s revenue is highly sensitive to variations in commodity prices and as a result is anticipating a decrease in revenue (from the February review of FY20 forecasts) in FY21 and a decrease in FY22 (from the February review of FY20 forecasts). This is predominantly made up of an approximate decrease in livestock revenue and in milk revenue in FY21. • Cost flexibility: Landcorp’s cost structure is much higher than its farming peers, due to the head office function s9(2)(g)(i) . s9(2)(b)(ii) and s9(2)(g)(i)
• CAPEX Plans - . s9(2)(b)(ii) s9(2)(b)(ii) s9(2)(b)(ii) s9(2)(b)(ii) s9(2)(b)(ii) s9(2)(g)(i) . s9(2)(b)(ii)
s9(2)(g)(i)
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s9(2)(g)(i) Timelines for reaching settlement on Rangedale and Wairio are unclear with Te Arawhiti now suggesting that transfer to Ngāti Kahungunu may not occur until FY22. Landcorp does not have plans to sell any other pieces of land currently, other than Waitangirua and those held under the Protected Land Agreement (PLA) on behalf of the Crown (five farms set aside for Treaty Settlements). PLA transfers are balance sheet neutral for Landcorp and Landcorp will consult with Shareholding Ministers prior to considering the sale of any pieces of land (outside of Treaty Settlements). s9(2)(g)(i)
• Balance sheet capacity & liquid resources: Landcorp has credit lines of and estimate debt s9(2)(b)(ii) s9(2)(b)(ii) peaking at around giving them some headroom. s9(2)(g)(i)
s9(2)(b)(ii)
s9(2)(g)(i) .
• General Comments: Landcorp is estimating a s9(2)(b)(ii) in FY20 and EBITDAR of approximately (down from the October reforecast of $73-78m but still up on the original forecast of $61m). As at 31 March 2020, Landcorp’s NPAT was of its original budget for the year) and EBITDAR was of its original budget for the year). Under Scenario 5, Landcorp is estimating a and EBITDAR of in FY21 followed by a and EBITDAR of in FY22. This results in negative total shareholder returns and no dividends for the next three years commencing in FY21.
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Education Payroll Immediate • Revenue impacts: No adverse revenue impacts as all of EPL’s funding comes from the Ministry of (EPL) Term (< 3 Education. months) (Essential service) • Cost flexibility: In the short-term, EPL is required to do additional work to enable the schools payroll Medium processes to continue during the lockdown s9(2)(b)(ii) term (3- 6 s9(2)(b)(ii) Longer-term, prolonged disruption in the education sector could significantly complicate the months) payroll process, Longer- term (>6 months) • CAPEX Plans:
• Balance sheet capacity & liquid resources: EPL has a $13.2m facility with the Crown with $5m available to draw down ($8m has already been drawn). Drawdowns are planned for June and July 2020 to fund the final implementation stages of the EdPay and maintain key technology infrastructure. s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i)
• General Comments: s9(2)(b)(ii) and s9(2)(g)(i)
Kiwi Group Immediate • Revenue impacts: KGH has not yet finalised its Scenario 5 modelling. However, it is expecting it will Holdings (KGH) Term (< 3 produce results similar to the previous negative scenario. Previously, KGH was anticipating a (NZ Post majority months) reduction in revenue and reduction in NPAT for FY20. The bulk of the impacts would likely be felt in shareholder) Medium FY21 when a reduction in revenue and a decrease in NPAT was anticipated. KGH was (Essential service) term (3- 6 expecting a net for FY21 mainly due to a lower interest margin, higher bad months) debts and investment losses in a lower equity market. Longer- • Cost flexibility: Group companies are relatively cost inflexible. KGH is expecting to hold costs at the term (>6 current levels and to carry its staff through to the end of the 2020 financial year. s9(2)(b)(ii) and s9(2)(g)(i) months) • CAPEX Plans: Depending on the duration of the COVID-19 response, KGH will reassess its capex plan, in particular, s9(2)(b)(ii) and s9(2)(ba)(i) and s9(2)(g)(i) .
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• Balance sheet capacity & liquid resources: KGH is well capitalised and considers it has adequate capital to sustain losses under the negative scenario: Its capital ratio is around 14%, 3.5% above the regulatory minimum. 91% of Kiwibank’s mortgages have loan to value ratios under 80%, so the bank can sustain some defaults without incurring any losses. s9(2)(b)(ii) However, there is a risk that ongoing funding could become more challenging if markets become difficult. s9(2)(b)(ii) and s9(2)(g)(i) We note that the RBNZ has undertaken stress testing of banks using scenarios including one which is similar to the Treasury’s scenario 5. s9(2)(b)(ii) and s9(2)(g)(i)
Kiwibank was intending to redeem $150m worth of Perpetual Capital Bonds – the proceeds of which would have been used to redeem Perpetual Capital Notes (PCN) held by outside parties on 27 May 2020. However, the RBNZ has restricted all banks from paying dividends or making capital payments, so this capital remains within Kiwibank. s9(2)(b)(ii) and s9(2)(g)(i)
• General comments: Based on the information provided by KGH previously, the group appears suitably positioned to weather the downturn in the short-term unless markets become illiquid. The Reserve Bank’s measures to ensure there is sufficient liquidity in the market, including delaying the implementation of the new capital adequacy requirements and implementing a potential $60 billion (up from the previous limit of $33 billion) Large Scale Asset Purchase (LSAP) programme, have been important in assisting liquidity in the near term. s9(2)(g)(i)
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OTHER ENTITIES Mixed Ownership Model Companies (stress testing not completed for MOMs) 0-3 3-6 6+ Months Months Months
Genesis Energy s9(2)(b)(ii) and s9(2)(g)(i) Some exposure to the fall in oil prices via its ownership of 46% of the Kupe oil and gas field. Genesis will be exposed to increased customer credit risk and increased bad debts; however, at this stage the (Essential service) impact is not expected to be material.
Mercury NZ s9(2)(b)(ii) and s9(2)(g)(i) Minor impacts. Mercury will be exposed to increased customer credit risk and increased bad debts; however, at this stage the impact is not expected to be material. Mercury will face delays in completion (Essential service) of the Turitea wind farm due to MBIE’s decision not to grant it as an essential service for construction
work during Alert Level 3 or 4. Winter is likely to further delay completion. Tilt Renewables may be facing similar delays with its Waipipi wind farm, which is under construction in Taranaki.
Meridian Energy s9(2)(b)(ii) and s9(2)(g)(i) Minor impacts. Meridian Energy is exposed to the Tiwai smelter strategic review and it is currently unclear how COVID-19 may affect the smelter or the strategic review (possibly through a global (Essential service) economic slowdown impacting on aluminium prices). Rio Tinto, majority owner of the smelter,
previously announced that potline four at the smelter will close to ensure workplace restrictions resulting from COVID-19 can be managed. Rio Tinto stated that the potline closure is not related to the ongoing strategic review. Meridian will be exposed to increased customer credit risk and increased bad debts; however, at this stage the impact is not expected to be material. On 1 May 2020, the Minister of Energy and Resources wrote to the Chief Executive of Rio Tinto Aluminium to ask for an update on the outcome of Rio Tinto’s strategy review.
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COMMERCIAL-IN-CONFIDENCE State Owned Enterprises
Kordia s9(2)(b)(ii) and s9(2)(g)(i) s9(2)(g)(i) (Essential service) s9(2)(b)(ii) Kordia has made cost reductions of approximately per month, which will be ongoing for the foreseeable future. Such measures include deferring non-essential capital expenditure, reducing subcontractor and material costs for essential works only. s9(2)(b)(ii) and s9(2)(g)(i)
Kordia’s balance sheet is strong and it can borrow up to (assuming it meets its reforecast EBITDA of ) while still maintaining gearing covenant. As at 29 February 2020, net debt was with gearing of Current assets exceed current liabilities by and the liquidity ratio is strong at Bank facilities are currently being renewed (expiry 1 July 2020). Pricing has been credit approved by the BNZ for an extension.
As a worst-case scenario, Kordia has conservatively assumed only of monthly cash receipts in May and June 2020. If it continues past June and the cost reductions remain per month, Kordia’s debt would reach facility limit in May 2021.
Orillion s9(2)(b)(ii) and s9(2)(g)(i) Orillion is able to conduct its normal operations at Alert Level 2, however, given the operational availability of its customers, forecasts net profit before tax (NPBT) of per month for the (Essential service) remainder of FY20. s9(2)(b)(ii) and s9(2)(g)(i)
Orillion’s export prospects are linked to agricultural productivity, and beyond cyclical price effects, is unlikely to be severely impacted over the coming year.
All unmarked redactions on this page under s9(2)(b)(ii) and s9(2)(ba)(i) unless otherwise indicated.
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COMMERCIAL-IN-CONFIDENCE Transpower s9(2)(b)(ii) and s9(2)(g)(i) 90% of Transpower’s revenue is set for the next five years and are not dependant on demand levels, so COVID-19 is not expected to have a material impact on the business. (Essential service) Transpower remains committed to its Statement of Corporate Intent (SCI) targets but ongoing operational issues will mean achieving these may be challenging. If the country were to have an additional 2 weeks at Alert Level 3, it would impact the timing of Transpower’s capital spend by up to ). This is a further impact over and above the from the initial COVID shock.
Transpower’s current forecast Net Profit after tax (before fair value movement) range is above budget of . The variance includes lower maintenance as result of COVID-19 pandemic of this lower maintenance expenditure will be deferred until later in RCP3. From 1 April 2020, pricing reduced, driven by the lower regulated return rate set for the five-year period for RCP3. This reduces the revenue by over the last three months of the 2019/20 financial year and is largely offset by lower finance costs in the same period.
Transpower’s draft Business plan indicates NPAT of for 2020/21. Transpower has not yet factored in any sustained longer term impacts from COVID-19 as this has yet to play out.
AsureQuality s9(2)(b)(ii) and s9(2)(g)(i) After ending the first three quarters of forecast EBIT AsureQuality (AQ) advises it is well placed to exceed or at least meet its forecast EBIT for FY20 ($21.2m). (Essential service) Under Treasury Scenario 5, AQ expects to be relatively sheltered from economic impacts given its role in providing assurance services to the food and primary production sectors. To date, AQ has experienced a decrease in demand across some business units s9(2)(b)(ii) s9(2)(b)(ii) , and anticipates an approximate reduction in revenue over the next 14 months. s9(2)(b)(ii) and s9(2)(g)(i)
All unmarked redactions on this page under s9(2)(b)(ii) and s9(2)(ba)(i) unless otherwise indicated.
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COMMERCIAL-IN-CONFIDENCE Statutory Entities
Public Trust s9(2)(b)(ii) and s9(2)(g)(i) Under Scenario 5, Public Trust is expecting FY20 net profit to decrease by bringing expected FY20 net profit down to and FY21 profit to decrease mainly due (Essential service) to a compressed interest margin, lower fee revenues and reduction in productivity in the retail side of
their business. s9(2)(g)(i) Therefore, it is not considering changes to its cost profile for FY21. However, should Scenario 5 eventuate, it could undertake actions to mitigate some of the potential losses. s9(2)(g)(i)
The New Zealand Despite the negative impacts of COVID-19 on Lotto’s sales, Lotto is forecasting a year-end net profit of Lotteries ahead of budget), due to extremely strong results in the previous 3 quarters. Lotto Commission plans to distribute to the Lotteries Grants Board, higher than budget and retain of FY20 profit to cover capital projects. For FY21, Lotto is budgeting for sales to average of pre- COVID-19 levels, starting at and recovering to by the end of the year, with sales expected to reach . Lotto is not planning to decrease expenditure, citing that investment is still required in the business and there is still a need to drive sales and maintain momentum. Lotto is forecasting a net surplus of for FY21.
Earthquake No current impacts. s9(2)(j) and s9(2)(g)(i) Commission Longer-term, there is a possibility that levy revenue could be negatively affected if homeowners decide to stop paying for fire insurance cover for their properties. (Essential service) The Board has made a commitment that there will be no redundancies for the remainder of 2020.
All unmarked redactionson this page under s9(2)(b)(ii) and s9(2)(ba)(i) unless otherwise indicated.
s
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COMMERCIAL-IN-CONFIDENCE Crown Entity Companies
Radio New Zealand s9(2)(b)(ii) and s9(2)(g)(i) As a Lifeline Utility broadcaster, RNZ is prioritising essential service public information channels and news. (Essential service) s9(2)(b)(ii) . RNZ was also
approached by media companies seeking relief from its AM transmission charges (2.5% of RNZ’s total revenue, $1.2m p.a.), however, through its immediate media sector support package, the Government is waiving these charges for six months and RNZ will be compensated accordingly. These pressures are further exacerbated given RNZ’s $7.25m per annum time-limited funding has not yet been extended beyond FY21. Ministers have agreed in-principle to the extension of this time-limited funding into out years.
Crown Irrigation s9(2)(b)(ii) and s9(2)(g)(i) No material impacts expected. s9(2)(g)(i) Investments s9(2)(g)(i) CIIL has sufficient capital and liquidity (including its uncalled capital) to meet its obligations to fund its investments. CIIL has been repaid in full ($53.9m) for its debt facility in Central Plains Water Limited and is preparing a proposal for shareholding Ministers approval on potential support options for Waimea s9(2)(j) This is limited to assistance with COVID-19 related costs and we will provide formal advice following receipt of a proposal. Schedule 4A Companies The Network for s9(2)(b)(ii) and s9(2)(g)(i) N4L does not expect any adverse financial impacts over the short or longer-terms, provided Crown Learning funding continues at current levels. (Essential service)
Southern s9(2)(b)(ii) and s9(2)(g)(i) No current impacts as company’s business activities relate to the settlement of liabilities arising from Response historic events (the Canterbury earthquakes). However, in the longer term, claims settlement rates Earthquake may be slower than previously projected due to reduced customer interaction, particularly the ability to Services have face-to-face meetings.
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COMMERCIAL-IN-CONFIDENCE
Crown s9(2)(b)(ii) and s9(2)(g)(i) No impacts to CIP revenues from COVID-19 as revenues come from Crown or are accounting-based. Infrastructure CIP currently has significant cash s9(2)(b)(ii) This figure is high because the company made a Partners s9(2)(b)(ii) capital call from its UFB appropriation before the onset of COVID-19.
In response to the Alert Level 4 lockdown, CIP reduced short-term cash flow, but has since been supporting the Infrastructure Reference Group in the development of a ‘shovel-ready’ projects list. s9(2)(b)(ii) and s9(2)(g)(i)
s9(2)(g)(i)
CIP can operate within current cash reserves until the end of September 2020. The company will use current cash for all programmes to avoid drawing cash from other appropriations (and this will reconcile once business as usual is re-established). CIP prefers this approach over having excess cash in the bank.
s9(2)(b)(ii) and s9(2)(g)(i)
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Talking points for Cabinet Government Administration and Expenditure Review Committee on 2 July 2020: Impacts of COVID-19 on the Crown-owned companies
On Thursday 2 July 2020, the Government Administration and Expenditure Review Committee (GOV) will consider the paper titled “Impacts of COVID-19 on the Crown- owned companies”.
This paper provides an overview of the current impacts of COVID-19 and risk assessments for the Crown-owned companies monitored by the Treasury. This paper contains current assessments as at 27 May 2020.
To date, the Crown has approved $1.2b in Crown funding to support Air New Zealand, Airways, NZ Post and s9(2)(b)(ii) to cope with the financial pressures caused by substantial reductions in revenue or flow-on impacts as a result of COVID-19. Additional funding is being considered for Hawke’s Bay Airport, TVNZ and Airways.
To ensure a consistent approach to modelling by the companies, the Treasury asked each of the companies to provide forecasts based on its Scenario 5, which assumes Alert Level 4 for one month, Alert Level 3 for one month and Alert Level 2/1 for the balance of a 12-month period. This scenario was chosen to provide a stress testing of the companies.
Each company has been assessed based on its potential financial position and ability to absorb any shocks to indicate where support may be required from the Crown.
The transport, media and services portion of the portfolio is currently most exposed, with passenger numbers decreasing across both the aviation sector and rail tourism, decreased advertising and freight volumes falling.
The highest risk entities are currently TVNZ, Airways, Hawke’s Bay Airport, Dunedin International Airport, Christchurch International Airport, Ōtākaro, KiwiRail, Landcorp, Education Payroll, Kiwi Group Holdings, NZ Post, MetService and Quotable Value.
There is likely to be an approximate 9% decrease in dividends received in FY20 and 25% decrease from historic levels in FY21, although dividend payments in out-years are less foreseeable.
The majority of the companies have shown leadership through this time and exercised financial restraint, in particular, with senior executive remuneration.
Shareholding and responsible Ministers are receiving fortnightly updates on the financial impacts and risks across the portfolio and will continue to manage any funding risks as they arise.
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IN-CONFIDENCE
Treasury Report: KiwiRail Equity Drawdown to Fund Multiple Projects
Date: 8 June 2020 Report No: T2020/1663 File Number: SE-2-25-0 (General and Administration)
Action sought
Action sought Deadline Minister for State Owned Sign the attached share subscription agreement 17 June 2020 Enterprises authorising the purchase of $27 million in KiwiRail shares (Rt Hon Winston Peters) Refer a copy of this report to the Minister of Transport Minister of Finance Sign the attached share subscription agreement 17 June 2020 authorising the purchase of $27 million in KiwiRail shares (Hon Grant Robertson) Refer a copy of this report to the Minister of Transport
Contact for telephone discussion (if required)
Name Position Telephone 1st Contact Ann Webster Principal Advisor, s9(2)(k) s9(2)(g)(ii) Commercial Performance Juston Anderson Acting Manager, Commercial Performance
Minister’s Office actions
Refer a copy of this report to the Minister of Transport Return the signed report and the signed share subscription agreement to the Treasury
Note any feedback on the quality of the report
Enclosure: Yes (attached)
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IN-CONFIDENCE
Treasury Report: KiwiRail Equity Drawdown to Fund Multiple Projects
All unmarked redactions on this page under s9(2)(b)(ii) and s9(2)(i) Purpose of Report
1. This report seeks shareholding Ministers’ approval for, and execution of, a $27 million equity injection into KiwiRail Holdings Limited (KiwiRail).
KiwiRail has requested an equity injection of $27 million
2. KiwiRail has appropriations for rail capital expenditure project in 2019/20 in Vote Transport of:
• $30.54 million for New Zealand Upgrade programme - Transport.
• $40 million from the Provincial Growth fund for Marsden Point Line land purchases from Vote Transport: Tuawhenua Provincial Growth Fund - Transport Projects Multi-Category Appropriation.
3. KiwiRail has provided documents asking that Ministers sign a subscription agreement to authorise an equity drawdown from these appropriated funds. These documents are:
• A letter from the Chair of KiwiRail, Mr Brian Corban, requesting an equity injection of $12 million to fund KiwiRail’s capital expenditure requirements for the New Zealand Upgrade Programme. This letter advises that is for the Papakura to Pukekohe electrification; is for the third main line, Wiri to Quay Park; and is for the Wellington Rail Programme. (Attached as Annex One.)
• A payment request for $15 million under the terms of the Land Acquisitions for the Marsden Point Rail Link Funding Agreement between shareholding Ministers and KiwiRail. (Attached as Annex Two.)
• A subscription agreement for Ministers’ signatures. (Attached as Annex Three.)
2. In total, KiwiRail is requested a $27 million equity drawdown, which is within the appropriated amounts provided in the 2019/20 financial year. It is also consistent with KiwiRail’s Establishment Report for the New Zealand Upgrade Programme rail projects and the Land Acquisitions for the Marsden Point Rail Link Funding Agreement.
3. The $27 million equity injection sought would be provided to KiwiRail by way of a share subscription. Each shareholding Minister would purchase 13.5 million ordinary shares at $1 per share.
4. The Ministry of Transport and the Ministry of Business, Innovation and Employment have been consulted on this paper.
Risks
4. While there are a range of risks associated with both the projects, including as a result of the COVID-19 pandemic, there are no significant risks associated with signing the subscription agreement. KiwiRail’s requests are consistent with the Estimates of Appropriations and the arrangements for each project.
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IN-CONFIDENCE
Next Steps
5. The process for shareholding Ministers to approve and execute this equity drawdown is for each Minister to sign their copy of the share subscription agreement that is attached to this report as Annex Three.
6. Each shareholding Minister can sign a separate copy, or counterpart, of this share subscription agreement. It is not necessary for both Ministers to sign the same copy. The share subscription agreement complies with the legal requirements of the Companies Act 1993, the State-Owned Enterprises Act 1986 and with KiwiRail’s constitution. Electronic signatures are acceptable.
7. The equity drawdown is scheduled to occur before Friday, 19 June 2020.
Recommended Action
We recommend that you:
a sign the attached share subscription agreement authorising the issuing of, and subscription for, $27 million of ordinary capital in KiwiRail to be paid before Friday, 19 June 2020.
Agree/disagree. Agree/disagree. Minister for State Owned Enterprises Minister of Finance
b refer a copy of this report and the attached material to the Minister of Transport.
Agree/disagree. Agree/disagree. Minister for State Owned Enterprises Minister of Finance
Juston Anderson Acting Manager, Commercial Performance
Rt Hon Winston Peters Minister for State Owned Enterprises
Hon Grant Robertson Minister of Finance
T2020/1663 KiwiRail Equity Drawdown to Fund Multiple Projects Page 3
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All unmarked redactions on this page under s9(2)(b)(ii) and s9(2)(i)
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s9(2)(b)(ii) and s9(2)(i)
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IN-CONFIDENCE
Treasury Report: Letter to FEC: Petition of Willie Snowden: Help Save Regional Jobs and Businesses
Date: 8 June 2020 Report No: T2020/1803 File Number: SE-1-3-21 (Project 20)
Action sought
Action sought Deadline Minister of Finance Send the attached letter to the 12pm on Friday, 12 June 2020 Finance and Expenditure Committee (Hon Grant Robertson)
Contact for telephone discussion (if required)
Name Position Telephone 1st Contact Danni Thian Senior Analyst, s9(2)(k) Commercial Performance Juston Anderson Acting Manager,
Commercial Performance
Minister’s Office actions
Return the signed report to Treasury. Send the attached letter to the Finance and Expenditure Committee ([email protected]) by 12pm on Friday, 12 June 2020
Note any feedback on the quality of the report
Enclosure: Yes (attached)
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IN-CONFIDENCE
Treasury Report: Letter to FEC: Petition of Willie Snowden: Help Save Regional Jobs and Businesses
This report provides you with a letter to the Finance and Expenditure Committee (FEC) in response to a petition brought to FEC by Willie Snowden, requesting the Crown loan facility with Air New Zealand Limited be tagged to maintaining aircraft maintenance facilities and capacity in Nelson.
As at 21 May 2020, over 18,700 people have signed the petition.
FEC has requested you respond to the petition by 12pm on Friday, 12 June 2020. We have drafted a response letter (attached). This letter is consistent with how you have responded to similar Ministerial requests on the Nelson maintenance facility.
Recommended Action
We recommend that you send the attached letter to the Finance and Expenditure Committee.
Juston Anderson Acting Manager, Commercial Performance
Hon Grant Robertson Minister of Finance
T2020/1803 Letter to FEC: Petition of Willie Snowden: Help Save Regional Jobs and Businesses Page 2
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Dr Deborah Russell Chairperson Finance and Expenditure Committee Parliament
Dear Deborah
I wish to thank Mr Willie Snowden for his petition to the Finance and Expenditure Committee, suggesting that the Government’s loan facility to Air New Zealand Limited be tagged to retain the Regional Maintenance facility and heavy engineering capacity for turboprop aircraft in Nelson. I also wish to thank the over 18,700 people who have signed the online petition to this effect. I am responding to the petition on behalf of the Government, as I am responsible for the Crown’s shareholding in Air New Zealand.
Thank you also for your patience while we have been responding to the unprecedented challenges of COVID-19. As I am sure you will appreciate, events have moved rapidly and the situation continues to evolve.
Air New Zealand will play an important role in our economic recovery when the disruption caused by this global pandemic is over.
Unfortunately, as Air New Zealand’s Chief Executive, Greg Foran, has noted, COVID-19 has seen Air New Zealand earning revenue of $5.8 billion to earning what he described on 31 March 2020 as shaping up to be less than $500 million annually. As a result, it is clear the Air New Zealand that emerges from COVID-19 will be a much smaller airline, and could take years to return to its former size.
Regrettably, this means that the company is considering significant redundancies for staff, and is taking steps to reduce costs to reflect the new realities it, and other airlines around the world, are facing.
One of those steps taken was the proposal by Air New Zealand to move its turboprop aircraft heavy maintenance function from its regional maintenance facility in Nelson to Christchurch, while retaining line maintenance in Nelson.
I appreciate that this is a stressful time for the affected community. However, Air New Zealand has operational independence from the government, so the Government is not able to interfere in this process. We are supporting Air New Zealand and the unions to work as closely and constructively as possible.
Air New Zealand assures me that it is working closely with all affected people to discuss the options available to them and ensure they and their families are supported during this difficult time.
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The Government's expectation is that Air New Zealand will act as a fair and reasonable employer and, at a minimum, meet the requirements of all relevant legislation. The Government also expects management will uphold the social licence of Air New Zealand as an iconic New Zealand firm and make its best endeavours to treat staff fairly and kindly in managing the changes resulting from the global pandemic. I have had regular conversations with the Board Chair, Dame Therese Walsh, who assures me that Air New Zealand understands these expectations.
This is an unprecedented global event and protecting New Zealanders’ health and stopping the spread of the virus is the Government’s number one focus. We are committed to cushioning its effects and making the recovery as rapid as possible.
The Government has committed to a range of initiatives to help New Zealand respond and rebuild: we will continue to introduce new opportunities to help Kiwis through this.
Yours sincerely
Hon Grant Robertson Minister of Finance
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To: Finance and Expenditure Committee (Attention: Mary Drakeford)
From: Willie Snowden s9(2)(k) Subject: Petition of Willie Snowden: Help Save Regional Jobs and Businesses (written submission in support of) Date: 24th May 2020
**Please treat this submission with urgency, as irreversible changes begin the 2nd June**
I am a local businessman with a serious concern for the region of Nelson/Tasman/Marlborough and the economic and social impact Air NZ is putting on our region and the lack of Government support or interest in this.
In compiling this submission I have obtained supporting information from Air New Zealand Ex-General Managers, Base Managers and also other prominent aviation and airline figures who are absolutely dumbfounded and equally concerned with Air NZ’s decision in regards to the Air NZ Regional Maintenance Base in Nelson.
Please note that a copy of the petition wording that was supported by over 16,000 people is attached at the end of this submission. We have continued to collect signatures that now top 18,700.
Introduction
Air NZ, along with the Government as a majority shareholder, is one of the country’s largest employers and plans to lay off 3750 staff due in part to the effects of Covid-19.
Air NZ has laid off many pilots, cabin crew and airport workers. This is understandable as they physically have no work.
Air NZ has, however, confirmed last week (15th May 2020) that it will take away its Turbo-prop Heavy Maintenance from its Nelson base to Christchurch at a loss of 89 highly skilled Regional jobs. Unlike the other Air NZ staff made redundant, these Nelson jobs have not lost work due to Covid-19 directly, Air NZ is choosing to take the work in Nelson and relocate it to Christchurch - that’s the difference, it’s Air NZ’s choice.
Air NZ has stated that “Covid-19 Impact on Maintenance: Air NZ turbo-prop, no change”. So clearly Nelson’s work has not been impacted.
The loss to the Nelson and top of the south region is not just the 89 jobs and estimated $10 million dollars annually to the community. These staff will have to leave the region, taking their partners and children as well. Also the Heavy Maintenance work in Nelson supports many other businesses that may also close or be severely impacted.
Nelson has and will continue to be hit hard with the reduction in tourism. Shovel-ready projects are good but the aviation jobs lost are highly skilled and highly paid that contribute to the community two-fold. It’s far easier to retain proven high paying jobs in an industry that will recover than create new jobs from scratch.
The Government is a majority shareholder, and even though it cannot directly affect the operation of Air NZ, it can influence it by loaning money to Air NZ and imposing conditions or requirements. Even without this the Government needs to morally uphold its commitments to New Zealand by supporting Regional NZ, by doing its best to retain highly skilled jobs, even more so in this time of need.
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Background on Air NZ bases in NZ
Air NZ has three heavy Maintenance bases:
. Auckland E&M (Engineering and Maintenance) for Jet aircraft maintenance . Christchurch E&M for Jet aircraft maintenance . ANZRML (Air NZ Regional Maintenance Ltd) in Nelson for Turbo-prop (or propeller) aircraft maintenance.
Above: Q300 Turbo-prop aircraft Above: ATR Turbo-prop aircraft.
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Nelson Base (ANZRML) History as advised by Ex-Managers
. 1998 - Air NZ has owned this base since 1998, where it was “Air Nelson Technical” and carried out the same type of work it does today. Air NZ purchased Air Nelson due to its “regional low-cost” structure that Air NZ could not compete with. . 2005 - Air Nelson Technical began maintaining its current 23 Bombardier Q300 aircraft. . 2011 - Air Nelson Technical gained all “Mount Cook Airlines” ATR aircraft from Air NZ E&M in Christchurch partly due to its low-cost structure and a minimum of a 10% reduced labour cost in Nelson. . 2015 – Air NZ decides to rename to Air NZ Regional Maintenance Ltd and use the low-cost structure and labour costs to “make money” by attracting overseas external party aircraft work. . 2019 - Air NZ starts to take “ATR” work away from Nelson and carry out Heavy Maintenance on ATRs in Christchurch. This is because Christchurch has already had a reduction in workload, and even though Nelson is cheaper it seems that Air NZ has decided that it costs more to have Engineers standing around doing nothing in Christchurch. Even prior to Covid-19 Christchurch E&M was struggling to be economic. Removing work from Nelson, drives up Nelson’s costs. . 2020 Air NZ announces it is to move all Q300 and ATR heavy maintenance from Nelson to Christchurch, with the main reason being Christchurch has lost a “Virgin Australia” contract and need the Q300 and ATR work to replace it.
The problem with Air NZ’s confirmed plan to take Nelson work and relocate it to Christchurch is that all of the aviation experts I spoke with, state that Worldwide, Turbo-prop aircraft are typically maintained at Regional locations with low-cost bases, unlike Jet Aircraft that are maintained in International Airport hubs.
Of the 12 Airlines that operate ATR aircraft in the Asia/Pacific region we are in, only one maintains its Turbo-prop aircraft together with Jet aircraft, as it’s just not cost effective to do so.
An example to explain this principle in simple terms, is if you take a Mini to a Mercedes dealer to be fixed:
. The hourly rate is greater . The overheads are greater . It takes longer as it’s not their expertise, hence it costs more . The quality is less as again it’s not their expertise.
Same can be said for a Turbo-prop aircraft taken to a Jet aircraft maintenance bases.
In contradiction to this information, at Air NZ’s Turbo-prop Maintenance base in Nelson , (ANZRML) Air NZ confirmed on the 15th of May 2020 that it is to lay off 89 aircraft engineers and support staff and take away the “Heavy Maintenance work” that already exists in Nelson and move it to Air NZ’s Christchurch base seemingly because that Christchurch base has lost a large proportion of 3rd party work with the Virgin Australia collapse.
Air NZ believe that by moving the work to Christchurch, they can save 10 million dollars per annum, but no details or figures have been provided by Air NZ to support this. This information has been requested by the employment unions which also have repeatedly asked for Air NZ to slow down this rushed process.
Not made public in the Air NZ proposal is the fact that 7 trainees will also have to leave the region and an additional 6 warehouse staff will also be made redundant, however they work within ANZRML but are actually Air NZ employed staff, yet again more losses from the region. Total staff estimated at 102.
Air Nelson the Airline (also located in Nelson) itself merged with Air NZ in November 2019. Since then 26 highly skilled staff have already left the Nelson region and an estimated further 20 will leave the region over the next 6 to 12 months. Total 46, over and above the ANZRML staff losses.
It can be seen from the above that the Nelson base is paying for the loss of work at the Christchurch base and that the Air NZ reaction is to just close a base rather than fix the root cause which is Christchurch’s uneconomic position.
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Staff Counter Proposal
The affected Nelson staff wrote a comprehensive counter proposal which was presented to Air NZ. In this proposal staff highlighted that they could save the 10 million dollars that Air NZ was aiming to save (by moving the work from Nelson to Christchurch) by instead implementing an operational restructure and also a staff reduction of 31% at its Nelson Base. This could then save a large number of regional jobs short term and create the opportunity for creating more regional jobs long term when the economy picks up after Covid-19.
Air NZ took only one week to review this proposal (using a very stretched and rushed Management group) to decide to carry on with Air NZ’s original proposal to close the Heavy Maintenance work in Nelson ANZRML base, with no opportunity for it to be re-established.
The Air NZ decision to move this work from Nelson to Christchurch , while being an immediate saving by way of making the 89 staff redundant, will in the short term and long term create a large increase in costs to maintain these aircraft in Christchurch .This will potentially increase domestic travel costs for the New Zealand public, thereby stifling domestic travel when it is urgently needed to stimulate our economy.
Air NZ’s planned timeline for the move
Air New Zealand has decided to move turboprop heavy maintenance from ANZRML in Nelson to its Christchurch facility. This will see ATR turboprop heavy maintenance relocate from Nelson to Christchurch from mid-2020 with a first round of redundancies, followed by Q300 heavy maintenance by October 2020 with a final round of redundancies.
What will be the result of these job losses from moving work to Christchurch?
. Loss of an estimated $10 million dollars to the Nelson region . Further impact to at least 10 businesses that support ANZRML and subsequent economic impact . Loss of Staff in the Nelson region that are key figures in Community and Volunteer groups . Poor public perception of Air NZ, due to its lack of regional support (this is the last regional Air NZ base left) . Poor public perception of the Labour Government in its lack of regional support which is worsened due to the Government being a 52% shareholder in Air NZ . Higher costs for domestic air travel, due to increased maintenance cost moving the work from Nelson to Christchurch. Something that will not help the NZ economy at this time when air travel needs to be stimulated. . Loss of very viable career path for local young people . Options to gain a foothold in a high profile industry like aviation maintenance are rare in the Tasman District.
What I and the petition supporters would like from the Government Select Committee review
We have heard no comment from the Labour Government on this issue. Staff emailed Grant Robertson (Minister of Finance) only to get a generic reply regarding unrelated Flight Attendants which highlights the fact that no-one in the Government seems to understand or are concerned about what is going on here, therefore we ask that:
1/ The Government asks Air NZ to immediately halt this rushed, unprepared and unjustified (by lack of evidence of proposed cost benefits) move of work from Nelson until this Select Committee review is complete (this needs urgent priority as changes begin the 2nd June).
2/ The Government Select Committee is requested to review Air NZ’s proposal, and also the Staff counter proposal. As the Government is a 52% shareholder, it should fully understand the consequence of this action before it is made.
3/ Please inform the Air NZ board of Directors the “Staff’s” side of the story, rather than just the Air NZ executive side being the only source of information. Possibly by arranging a meeting involving staff and unions.
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4/ To save highly skilled jobs in Nelson it does not require funding by the Government per the staff counter proposal. However the ensure regional support the Government should require that the $900 million Government loan to Air NZ could have additional conditions applied to require preservation of Regional Jobs.
5/ A real solution would be to consider further subsidies for Air NZ and other airlines to fly regional routes. Most countries around the world subsidise poor performing routes to keep communities connected. With Covid-19 this is even more important as currently Airlines have to fly with half passenger loads, that is not cost effective for Air NZ or other airlines to do so. If the Government wants to stimulate the entire NZ economy, it needs to subsidise these routes using the $600 million fund already in place for the aviation sector. If this is done, requirements for Air NZ to do its best to preserve highly skilled jobs in Regional locations such as Nelson can be added and jobs such as this can be retained.
Now is not the time for New Zealand overall or for Air NZ to get rid of all highly paid, highly skilled staff in a time that there are no opportunities for them and when it’s these people that will help fund the rebuild of the NZ economy when the industry recovers. These highly trained staff skills, once lost to other industries and even countries, will be impossible to replace.
It is extremely disappointing that one day after Air NZ announced the job losses in Nelson, Air NZ announced it is to spend millions of dollars upgrading its international business class cabins, when international travel is not planned to recover for some time. This is very poor form putting this project before saving regional jobs of its own loyal staff.
16th May 2020 - one day after the confirmed loss of 89 Nelson ANZRML jobs.
https://www.stuff.co.nz/business/industries/121524648/coronavirus-air-new-zealand-forges-ahead-with-new- business-class-cabin-despite-covid19-chaos
I ask you the Government, as a 52% shareholder in Air NZ - what has been done to retain these highly skilled jobs in Nelson? And how does this reflect on the Governments commitments to retain jobs and support regional New Zealand?
We need this Air NZ decision halted until the review is completed and any recommendations actioned.
Please do not hesitate to contact me for further or supporting information and any clarification.
Thank you for this opportunity to provide a submission.
Regards
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Willie Snowden
s9(2)(k)
Petition wording that 16,000 people signed 12th May 2020 as stated on www.Change.org
https://www.change.org/p/shane-jones-minister-of-economic-development-help-save-regional-jobs-your- regional-businesses-before-it-s-too-late
Covid-19 is sadly affecting people’s jobs all over the country where businesses have lost work. In Nelson Air NZ has a standalone business, Air NZ Regional Maintenance, that maintains the Turboprop aircraft of Air NZ. Covid-19 has NOT directly impacted the Nelson base and they still did have plenty of work to continue. However Air NZ has proposed to take this work from the region of Nelson and relocate to its bigger Christchurch base, as that base has lost work. So Air NZ's Nelson base has not been directly affected like the majority of the country by Covid-19, Air NZ are choosing to take this work - that’s the difference.
This means approx 100 jobs will be lost in Nelson and is estimated to have at least a $10 million impact to Nelson and the “Top of the South” economy, and also impact the many smaller businesses that rely on the Nelson base’s flow-on work.
The Government says it wants to preserve jobs, but as a 52% owner of Air NZ, the Government itself is NZ’s largest single employer in NZ to lay off the most staff, estimated at 3500.
If you live in Nelson, own a business, or support a business in Nelson this will impact you in some negative way. Nelson is the last Regional base Air NZ has left, all others have been closed. Air NZ and the Government (the majority shareholder in Air NZ) have a responsibility to all of NZ to promote and develop Regional NZ.
You can help! Please support us by signing this petition asking Air NZ and the Government to uphold their responsibilities to Regional NZ and reconsider this proposal.
Note: Petition numbers at the 21th May 2020 is now over 18,700.
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Refused under s18(d). Document available at: https://www.adhb.health.nz/assets/Documents/About-Us/Planning-documents/Auckland-DHB-Annual-Plan-2019-20.pdf
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Refused under s18(d). Document available at: https://www.cdhb.health.nz/wp-content/uploads/36b4a088-canterbury-dhb-annual-plan-2019-2020.pdf
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Reference: T2020/1759 IM-3-7 (Canada)
Date: 18 June 2020
To: Minister of Finance (Hon Grant Robertson)
Deadline: Before the meeting on 23 June
Aide memoire: Meeting with Canadian Minister for Middle Class Prosperity and Associate Minister of Finance, Mona Fortier
You are speaking with the Canadian Minister for Middle Class Prosperity and Associate Minister of Finance, the Honourable Mona Fortier, on Tuesday 23 June at 8:15 am – 9:00 am.
This note provides context, biographical information, questions and talking points, and background information on key topics for the meeting. Context
Minister Fortier has expressed a strong interest in hearing about New Zealand’s wellbeing policy framework, how the framework has been used during the COVID-19 pandemic, the lessons learned from the use of this framework, and the impacts of the pandemic on wellbeing over the short and long term. Accordingly, our recommended objectives for the call are: • share information about New Zealand’s use of the living standards framework and wellbeing analysis, and how it has been used to respond to the COVID-19 pandemic, • gain insights into the Canadian government’s thinking about wellbeing analysis and policy, and the impacts of the COVID-19 pandemic on wellbeing in Canada – including for indigenous peoples, and • enhance the positive bilateral relationship by building a new Ministerial-level relationship.
Format You will be talking with Minister Fortier by telephone.
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Biographical information
The Honourable Mona Fortier was elected to the Canadian Parliament in 2017, in the Ottawa – Vanier electorate. She is part of the Liberal Party of Canada – Parti Libéral du Canada. Minister Fortier was appointed as Minister of Middle Class Prosperity and Associate Minister of Finance in December 2019. Her responsibilities include developing cross- government approaches to ensure that the prosperity and quality of life of the middle class are central to government policy-making. This includes better incorporating quality of life measurements into government decision-making and budgeting – with a specific mandate to draw on lessons from countries like New Zealand and Scotland. Prior to being elected, Minister Fortier worked as the Chief Director of Communications and Market Development at Collège La Cité (the largest French language college of applied arts and technology in Ontario) and managed her own strategic communications consulting firm. Her expertise covers the areas of health care, education, job creation, and francophone affairs. Minister Fortier’s previous engagements with the New Zealand Government Minister Fortier has not previously met with New Zealand Ministerial counterparts. She met with New Zealand High Commissioner in Ottawa, Martin Harvey, prior to lockdown in Canada. Other recent and upcoming New Zealand-Canada bilateral engagements
Recent and upcoming Ministerial engagements include: • A phone call between Prime Minister Trudeau and Prime Minister Ardern in May. The Prime Ministers exchanged views on respective national measures to combat the COVID-19 pandemic. • A number of in person visits over the last year: Hon Ron Mark visited Victoria and Ottawa in January 2020; Hon Tracey Martin visited Vancouver and Toronto in October 2019; Hon Carmel Sepuloni visited Ottawa in June 2019; Hon Dr Megan Woods visited Ottawa in May 2019; and Hon Nanaia Mahuta visited Toronto in April 2019. • The meeting you attended on Friday 19 June, with the Finance Ministers of the Five Eyes countries (including Canadian Finance Minister Bill Morneau). We are also working to set up a bilateral call with Minister Morneau. • A call scheduled on 24 June between Minister Shaw and the Canadian Minister of Environment and Climate Change, the Honourable Jonathan Wilkinson, to discuss global climate change efforts in the wake of COVID-19. Minister O’Connor is also scheduled to speak with his Canadian counterpart, the Honourable Marie-Claude Bibeau, Minister of Agriculture and Agri-Food, on the same day.
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Recent and upcoming engagements between Treasury officials and Canadian counterparts include: • A call in May 2020 between Treasury Secretary Caralee McLiesh and Canadian Deputy Minister of Finance Paul Rochon, discussing Canada’s and New Zealand’s Covid-19 Economic Response Plans, as well as international engagements and wellbeing. • A presentation in February 2020 by New Zealand Treasury officials on both the Living Standards Framework and the broader Wellbeing Approach, for officials from the Canadian Department of Finance. We have offered to assist further as their work progresses. • A virtual Five Treasuries meeting (including Canada and New Zealand) scheduled to take place on 24 June. This will be focused on the economic recovery from COVID-19. Questions and talking points
• What is the current status of the COVID-19 pandemic in Canada? • How does your portfolio sit amongst, and work, with the range of economic and finance portfolios in your government? • What wellbeing impacts are you seeing beyond health? • What steps has the Canadian Government taken to date to measure wellbeing and incorporate it into public policy? How is work progressing on incorporating wellbeing within budgeting? • I note your responsibilities include job creation. How is Canada thinking about active labour market policies in response to COVID-19? • How is the Canadian Government thinking about indigenous wellbeing during this crisis and beyond? The bilateral relationship • New Zealand values its close and friendly relationship with Canada. We are like- minded countries in many policy areas, especially in our focus on lifting our people’s living standards. • The close cooperation between our governments has never been more important in this unprecedented time. I am pleased to see that a wide range of virtual meetings have taken place between Ministers and officials of our two countries. • I understand that Treasury and Department of Finance officials have been talking about our approach to wellbeing and the Living Standards Framework. • I trust that these conversations have been helpful, and I can assure you that Treasury officials are happy to continue providing assistance in this area. • New Zealand’s approach continues to evolve, and we are keen to learn from other countries’ experiences. Economic impact of COVID-19 in New Zealand and the Government response • New Zealand has largely succeeded in eliminating coronavirus, however the economic impacts of the pandemic will continue to be felt for a long time.
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• New Zealand is currently operating at alert level 1 of our 4-level alert system. The Treasury’s (as yet untested) assumption is that economic activity will be around 7.5% below normal levels, under level 1. • Recent modelling from the Treasury forecasts an economic contraction of around 6.5% in the year to June 2021 compared to the previous year. We also expect unemployment to peak at around 8.5% later this year.
• These figures are lower than previously anticipated, thanks to the success of health measures. However as you know, there is significant uncertainty in these forecasts.
• There are some initial signs that activity in the June quarter may have held up better than expected. For example, while there has been an increase in unemployment beneficiaries, this has been lower than expected. The economic response
• New Zealand is pursuing three overlapping waves of response. To date, this has largely focused on providing immediate support to the health system, firms and households, and a recovery wave, focused on stimulus measures to kick start economic activity as lockdown measures are eased.
• We are increasingly turning attention to the third wave – rebuild and reset – focused on resetting for our new normal. • This is an opportunity to reset our economy, to take account of the massive disruption to some sectors, and to address some of the long-standing challenges we face. Use of wellbeing and Living Standards Framework analysis to inform the COVID- 19 response and lessons learnt • A number of new lockdown surveys have shown that wellbeing has generally held up well. • There have been some improvements, such as a sense of community, trust in government and trust in each other, and a reduction in alcohol consumption, gambling, and most kinds of crime. • However, there has been an increase in unemployment beneficiaries from under 150,000 in March to over 190,000 now. • Because unemployment is a major driver of poor wellbeing across multiple domains, we have a big focus on job retention (through the wage subsidy) and job creation (through fiscal stimulus and support to firms), as well as income protection (through the COVID-19 Income Relief Payment). • We are also focusing on the disproportionate impact the unfolding recession will have on different groups. Historically, recessions have harmed Māori, Pacific and youth wellbeing more than that of other groups. This recession will also have a greater impact on regions more exposed to international tourism. • The crisis has also highlighted a need for more regular wellbeing information. Officials are working to establish quarterly wellbeing indicators to complement our traditional annual and biennial indicators, now that the lockdown surveys are ending.
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Indigenous wellbeing • In New Zealand, we have developed the He Ara Waiora framework to measure and reflect an indigenous Māori view of individual and community wellbeing. • We are starting to use this framework to assess the impact of the COVID-19 crisis and to think about the recovery phase. • The New Zealand Treasury will shortly be publishing a document outlining how we have used both He Ara Waiora and the Living Standards Framework to think about the crisis. The document should be on the Treasury’s website in mid-July. • History tells us that Māori tend to be disproportionately affected by crises such as this. The full impact on Māori employment, for example, is not yet known, but many Māori businesses and employees will be affected by the halt to international tourism. • However, iwi and other Māori groups have been showing their strengths by isolating and caring for vulnerable sections of their communities. • There have been relatively few COVID-19 cases among Māori so far – making up nine% of all cases, compared with a sixteen% proportion of the population. 2020 APEC Finance Ministers’ Meeting (if asked)
Host year • The Malaysian Prime Minister has formally requested that we shift our host year back.
• s6(a) and s9(2)(f)(iv)
•
• The New Zealand Government will decide how to respond to this proposal shortly.
Finance Ministers’ agenda • I welcome the offer the Canadian Department of Finance has made to support New Zealand to reflect wellbeing and inclusive growth in New Zealand’s host year themes. • We expect COVID-19 and its aftermath will be front and centre in the Finance stream’s efforts over the next few years. • However, we still very much believe a wellbeing lens should shape how we go about this. s6(a) and s9(2)(f)(iv)
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Budget 2020 (if asked) • Budget 2019, our first wellbeing budget, focused investment around the five Budget Priorities: mental health; improving child wellbeing; supporting Maori and Pasifika aspirations; building a productive nation; and transforming the economy. • These priorities were selected using a collaborative and evidence-based approach. This was a critical first step for embedding wellbeing into the way our fiscal policy works. • Before COVID-19, Budget 2020 was designed to continue progressing work begun in Budget 2019, based on refined versions of those five priorities. • In March and April, the package was reoriented at pace, to focus on activities that would support New Zealand’s response to and recovery from COVID-19. • This work relied on a wellbeing lens to consider the needs of New Zealanders and the environment alongside our economy. • We have established a NZ $50 billion COVID-19 Response and Recovery fund, which builds on an initial NZ $12.1 billion support package announced in March. Background information
Key facts on Canada and the bilateral relationship are provided in Annex 1. Headline information on Canada • There have been over 100,000 cases and over 8,000 deaths in Canada. Ontario and Quebec are the hardest hit provinces. Numbers continue to increase at a steady rate nationally, although there are indications that the COVID-19 curve is flattening in many parts of the country. • The Canadian Prime Minister announced on 18 June that the federal government will give a fiscal update on 8 July. This will include a snapshot of the state of the Canadian economy, international comparisons of the COVID-19 response, and new forecasts. • The Canadian Budget 2020 was not tabled in March due to COVID-19. Economic impacts of COVID-19 in Canada In March 2020, Canada started to put in place public health measures to slow the spread of COVID-19. These included the mandatory closure of non-essential businesses, schools and public institutions, travel restrictions and physical distancing. Statistics Canada’s March GDP report underscored the widespread impact of measures introduced to contain the spread of COVID-19 on all segments of Canada’s economy. Real gross domestic product fell 7.2% in March as 19 out of 20 industrial sectors declined. Canada’s economy contracted at an annualized pace of 8.2% in the first quarter. Preliminary information indicates an 11% decline in real GDP in April. Canada’s unemployment rate rose to 13.7% in May, despite the economy adding 289,600 jobs in May as several provinces began to ease public health restrictions and allow some non-essential businesses to re-open. This followed a record-breaking loss of more than three million jobs from February to April.
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As Canada’s thirteen provinces/territories start to gradually open, there are a few positive signs starting to emerge. Housing sales in Toronto (Canada’s biggest city) jumped by 55% in May from April, and the average selling price gained 4.6%. Compared with late March, Canadians started spending again in May on things like a round of golf and clothes. Commercial transport trucks crossing into Canada from the US each week jumped 15.6% in the third week of May, from a low in early April (although volumes are still down 25% from a year earlier). New job posting were up 20% on 29 May compared with 3 May (though this is subdued compared with 2019). April’s international trade report (released 4 June) underscored the severe impacts of COVID-19 on Canadian trade flows. Merchandise exports fell by 29.7% in April to CAD$32.7 billion (the lowest level in more than 10 years). Merchandise imports declined by 25% to CAD$35.9 billion. Almost all of the reduction in trade activity in April was due to lower trade flows between Canada and the United States, reflecting the high degree of economic integration between the two countries. Canada’s large sectors continue to be heavily impacted by COVID-19. Energy prices were down 23.7% on a year-over-year basis in April, and energy exports fell by over 40%. The tourism sector has taken a significant hit, with cross-border travel between the US and Canada at a near standstill. Accommodation services contracted 30.9% in March, and major Canadian airline carriers reported a 41% decline in revenues. Economic and fiscal responses taken in Canada Despite several signs of positive growth as the country starts to reopen, the Canadian economy is going to require ongoing support from both monetary and fiscal policy. This is particularly so given the expectation that Canadians will need to live with the long tail of the virus for the foreseeable future. To date, the government has committed more than CAD 150 billion in direct COVID-19 related aid, including income support and wage subsidies. A range of support programmes for vulnerable Canadians impacted by COVID-19 has also been announced. This includes support to seniors, low income Canadians, food banks, youth and students, as well as homelessness, women’s shelters/sexual assault centres, mental health support and community support programmes. Funding is being provided via direct support to individuals, through provincial and territorial governments, and to non-governmental organizations. Separate support programmes are in place for indigenous populations in Canada (outlined below). The Bank of Canada announced on 3 June that it would be holding its benchmark interest rate steady at 0.25%, down from 1.75% in late February. The Bank also announced that it had revised its GDP estimates – now forecasting GDP to decline between 10 and 20% in the second quarter of 2020 compared with the fourth quarter of 2019 (as opposed to a decline of between 15 and 30% forecast in April). However, the
bank has cautioned that uncertainty about how the recovery will unfold remains high. Most commentators agree that Canada was well enough positioned pre-COVID to weather this economic storm. The federal government entered the pandemic with one of the healthiest fiscal positions among advanced global economies, with the lowest debt-to-GDP ratio in the G7.
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However, a major challenge will be developing a plan for the federal government’s finances during the recovery. Parliamentary Budget Officer Yves Giroux has estimated that the federal deficit is on track to be CAD 260 billion this year (nearly five times larger than the CAD 56 billion deficit during the financial crisis in 2009). Federal debt could reach CAD 1 trillion this fiscal year. Impacts of COVID-19 on wellbeing in New Zealand Living Standards Framework analysis highlights that there are likely to be significant and inter-connected impacts from COVID-19 on New Zealanders’ wellbeing across the wellbeing domains. There are risks of disproportionate impacts on existing vulnerable groups, which reinforce existing inequalities. However, there may also be impacts on new groups of people, particularly a number of people experiencing economic hardship for the first time as unemployment rises. There are also risks for the four capitals: • Human capital may decline through impacts on educational achievement and erosion of skills from long-term unemployment or some skills becoming less relevant in a changing economy.
• There is also potential for the crisis to erode Social capital via declining trust in the core institutions of state if policies are not seen to mitigate distributional impacts, economic and social impacts are not well-managed, or if there are significant delays in restoring core services.
• Unlike war or a natural disaster, COVID-19 will leave Physical capital relatively unscathed but may lead to ‘stranded’ or under-utilised assets. Financial capital will likely be drawn down, perhaps close to exhaustion, for businesses, households and government.
• While some of the gains to Natural capital from lower traffic and energy use during lockdown may be sustained, economic conditions may affect the ability of firms or households to make investments to improve environmental performance.
Indigenous economic development and wellbeing Through Budget 2020, the government will invest over $900 million in response to COVID-19 to support Iwi, whānau and Māori to rebuild. Key features include additional funding to Whānau Ora ($136 million), a Māori employment package ($200 million) for Government to will work in partnership for job opportunities in the regions, and support for Māori tourism.
He Ara Waiora As a Māori wellbeing framework, He Ara Waiora complements the LSF analysis by helping understand the unique way this crisis affects Māori. It highlights that Māori are particularly vulnerable to the negative health, economic and social impacts of the crisis, which threaten to deepen existing inequities. He Ara Waiora is a framework that provides guidance on which aspects of wellbeing are important to focus on as ends:
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• Wairua (spirituality) is at the centre of the model
• Te taiao (the environment) is also near the centre. The indigenous perspective offered here is that spiritual and environmental wellbeing are preconditions for human wellbeing.
• Wellbeing in te ira tangata (the human domain) is linked to the concept of mana (power, authority). People thrive where they are empowered to grow and develop, connect with others, and to access the resources they need. This applies both at an individual and a collective level, such as within iwi (tribal groups). The framework also offers five principles as the means for supporting wellbeing. For example, one of these principles is the value of manaakitanga, which is about enhancing the mana of others through proper care and respect. In terms of negative impacts, the crisis has also impacted spiritual health and psycho- social wellbeing, due to suspending many tikanga (customary practices) and due to fears about the impact of COVID on kaumātua, elders and other vulnerable members. History tells us the potential health risks and economic impacts on Māori are serious.
Canadian indigenous response To date, there has been low numbers of COVID-19 cases among indigenous Canadian communities. The federal Government has announced a series of support measures for indigenous people in Canada impacted by COVID-19. This includes funding for community support (CAD 305 million), business loans (CAD 306.8 million), health support (CAD 100 million), education financial assistance (CAD 75 million), support to norther communities (CAD 72 million) and assistance to shelters including for those affected by domestic violence (CAD 10 million).1 Targeted indigenous programmes are designed to ensure individuals do not slip through the cracks and more generally to ensure COVID-19 does not further marginalise an already vulnerable population. Indigenous people are also eligible to access general support programmes available to all Canadians. There are increasing economic ties between indigenous communities in Canada and New Zealand. As a recent example, a virtual exchange between Māori and Canadian Indigenous business professionals known as “Indigi-X” will be launched by the end of June. This private sector initiative is looking to foster closer business connections and opportunities between New Zealand and Canada. The initiative has received endorsements by the Canadian Trade Commissioner in Auckland, and non-financial support from the High Commission in Ottawa and Te Puni Kokiri.
John-David Chaker, Analyst, International, s9(2)(k) Kate Yesberg, Team Leader, International, International, s9(2)(k)
1 As of 29 April 2020.
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Annex 1: Canada key facts
The New Zealand-Canada relationship Canada is a close and natural partner for New Zealand. Our Commonwealth heritage, Five Eyes security and intelligence partnership, shared respect for democracy and the rule of law, strong people to people links, and trade ties form the bedrock of the relationship. Our worldviews are underpinned by shared parliamentary, legal, social, and defence traditions. This is reflected in our instinctive like-mindedness on most issues. Canada is one of the largest sources of new foreign direct investment into New Zealand, driven by the activities of large pension funds that are in a rapid growth phase and seeking stable overseas markets such as New Zealand. Canada was New Zealand’s 14th largest trading partner for goods and services in 2019. Services exports drove strong trade growth and made up 40% of total exports to Canada in 2019, one of the highest ratios for any of New Zealand’s export destinations. However this has been severely impacted by COVID-19. Under CPTPP, 99% of existing New Zealand exports are tariff-free. The New Zealand and Canadian (Liberal Party) Government agendas are closely aligned, and we have a number of similar domestic policy priorities. Canada’s interest in looking to New Zealand for responses to policy issues has increased under the Trudeau Administration. Canadian and New Zealand policy makers regularly share perspectives and experiences on a variety of issues, including indigenous reconciliation, housing and criminal justice reform. Canadian political overview In the October 2019 federal election, the Liberal Party of Canada secured a second- term in Government, but without a majority. s6(a) and s9(2)(g)(i)
Political system key facts Political system: Canada is a confederation with a parliamentary democracy. Federal Government: Liberal Party (Minority Government) Federal legislature: Bicameral Parliament consisting of a 338-member House of Commons and a 105-appointed member Senate where members are appointed by the Governor General with the advice of the Prime Minister.
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Last election: 21 October 2019 Next election due: October 2023 Head of government: Prime Justin Trudeau (since 4 November 2015) Head of state: Queen Elizabeth II. Represented by Governor General, Her Excellency Julie Payette, who was sworn in October 2, 2017.
Economic overview (2019) GDP: US$1.65 trillion (2019) GDP growth: 1.6% (2019) GDP per capita: US$51,357 (2019) Total exports: US$447 billion (2019) Main exports: Crude Petroleum, Cars, Refined Petroleum, Vehicle Parts and Petroleum Gas. Total imports: US$453 billion (2019) Main imports: Cars, Delivery Trucks, Refined Petroleum, Crude Petroleum and Computers. Unemployment: 13.7% (May 2020)
Canadian trade profile – key points Canada is a G7 member. Its trade with the USA is the largest bilateral trading relationship in the world. Agriculture, energy, mining and forestry account for more than 50% of total exports. Machinery, equipment and other manufactures account for the majority of remaining exports. Capital goods imports include machinery, crude oil, chemicals, and durable consumer goods.
New Zealand trade with Canada (year ended March 2020) Ranking NZ’s 14th largest trading partner NZ Exports NZ$1.23 billion NB: Actual may be higher as as some products are re-exported to Canada via the United States and not reflected in official statistics
Main exports Tourism, beef, wine, lamb, agritech NZ Imports NZ$915.07 million Main imports Aircraft parts, tourism, fertilizers, wood products
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Treasury Report: Continuing New Zealand’s participation in International Monetary Fund borrowing arrangements
Date: 25 June 2020 Report No: T2020/1862 File Number: IM-1-1-11 (New Arrangements to Borrow (NAB))
Action Sought
Action Sought Deadline Minister of Finance Agree to seek Cabinet’s approval to 6 July 2020 (Hon Grant Robertson) continue New Zealand’s participation in the International Monetary Fund’s (IMF) borrowing arrangements: the New Arrangements to Borrow and Bilateral Borrowing Agreements.
Provide feedback on the attached draft Cabinet Economic Development Committee paper.
Agree that the Treasury can indicate to the IMF that the Bilateral Borrowing Arrangement contract can be finalised for signature.
Contact for Telephone Discussion (if required)
Name Position Telephone 1st Contact Shay Duckworth Analyst, International s9(2)(k) s9(2)(g)(ii)
Kate Yesberg Team Leader, International
Actions for the Minister’s Office Staff (if required)
Return the signed report to the Treasury
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Note any feedback on the quality of the report
Enclosure: Yes (draft Cabinet Economic Development Committee paper attached)
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Treasury Report: Continuing New Zealand’s participation in International Monetary Fund borrowing arrangements
Executive Summary
On 16 January and 30 March 2020, the International Monetary Fund (IMF) Executive Board agreed a package of changes to two borrowing arrangements, the New Arrangements to Borrow (NAB) and Bilateral Borrowing Agreement (BBA), in order to maintain the IMF’s lending capacity. IMF Managing Director, Kristalina Georgieva, has requested that New Zealand consent to the changes to the NAB and sign a new BBA contract. Once brought into effect, the key changes for New Zealand would be:
a. a reduction in New Zealand’s total lending commitments under these two arrangements from about NZD 2.282b to about NZD 2.132b,
b. transferring most of New Zealand’s commitments from the BBA to the NAB, and
c. extending the time that the lending commitments will be in place, so that the BBA contract terminates at the end of December 2023 instead of the end of December 2020, and the NAB terminates at the end of December 2025 instead of November 2022.
New Zealand’s continued participation in these borrowing arrangements helps the IMF to support a stable global economy. The IMF is seeking to maintain its lending capacity of SDR 717b (NZD 1,539b), s6(b)(ii)
The United States of America (US) is not a BBA participant but agreed to double its NAB commitment on 27 March 2020. Most of the reduction in New Zealand’s and other participants’ total commitments, including New Zealand’s, are a result of the increased US commitment. Despite the change in commitments, there will be no change to members’ levels of representation in IMF governance arrangements.
Continued participation would maintain the Crown’s current risk profile, with a small reduction in risk as a result of the decrease in total maximum lending commitments.
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Recommended Action
We recommend that you:
a agree to seek Cabinet’s approval to continue New Zealand’s participation in the International Monetary Fund’s borrowing arrangements – the New Arrangements to Borrow and Bilateral Borrowing Agreements – including the changes requested by the Executive Board.
Agree/disagree.
b provide feedback on the attached draft Cabinet Economic Development Committee paper.
c note that the Treasury has reviewed the draft Bilateral Borrowing Agreements contract provided by the IMF, and considers that it will have the effect described in this Treasury Report. A copy has been provided to your office.
Noted
d agree that the Treasury can indicate to the IMF that Cabinet will consider the new Bilateral Borrowing Agreements contract as drafted, so the IMF can begin finalising the contract for you to sign if Cabinet agrees to the changes.
Agree/disagree.
Kate Yesberg Team Leader, International
Hon Grant Robertson Minister of Finance
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Treasury Report: Continuing New Zealand’s participation in International Monetary Fund borrowing arrangements
Purpose of Report
1. This report seeks your agreement to the International Monetary Fund (IMF)’s request that New Zealand continue to participate in the New Arrangements to Borrow (NAB) and the Bilateral Borrowing Agreements (BBA). This is a package of changes to the borrowing arrangements which the IMF are seeking participants’ agreement to, in order to maintain its lending capacity. 2. This report seeks your comment on a draft Cabinet paper seeking agreement to continue New Zealand’s lending commitments consistent with the request by the IMF’s Executive Board. 3. It also seeks your agreement to indicate to the IMF that Cabinet will consider the new BBA contract as drafted, so the IMF can begin finalising the contract for your signature.
Background
4. New Zealand has committed to lending funds under the IMF’s three main lending resources: a Quota: a member country’s permanent financial commitment. New Zealand’s quota is SDR1 1.252b (NZD 2.688b), which is 0.26 per cent of the IMF’s total quota. b New Arrangements to Borrow (NAB): a backstop funding facility which can be activated once quota is nearly exhausted. There are 38 NAB participants, including most developed and emerging market economies with strong balance of payments positions. New Zealand agreed to join the NAB in 2010 [CAB Min (10) 1/1 refers] and extended the commitment in 2016 [EGI-16-MIN-0336 refers]. Our current lending commitment is SDR 340m (NZD 730m), which is 0.19 per cent of the total NAB commitments. c Bilateral Borrowing Agreements (BBA): a secondary backstop funding facility which can be activated the NAB is nearly exhausted. It was established to increase the IMF’s resources and maintain confidence in its ability to respond in a major global financial crisis. There are 40 participants, including most participants of the NAB with the notable exception of the United States. New Zealand agreed to participate in 2012 [CAB Min (12) 21/16 refers] and extended the commitment in 2016 [EGI-16-MIN-0336 refers]. Our current lending commitment is USD 1b (NZD 1.559b2), which is 0.23 per cent of the total BBA commitments. 5. In order to lend funds to members, the IMF requests foreign exchange from other members with strong balance of payments and reserve positions. The IMF aims to call on members proportionately to their share of the commitments. 6. New Zealand’s contributions to the NAB are loans, which are repayable over a period of up to 10 years. BBA contributions are similar, except they are repayable over a shorter period which can be renewed. The financial impact of lending under the agreements are the difference between the interest rate for government borrowing and the interest rate agreed by the IMF. The Reserve Bank of New Zealand acts as the banker for IMF transactions involving New Zealand, and has an agreement with the Treasury to provide foreign exchange when requested by the IMF.
1 Special Drawing Rights (SDR) are the IMF’s reserve currency. New Zealand dollar rates are calculated at 2.146850 as at 19 June 2016. 2 USD exchange rate is 1.558621 NZD, calculated using the IMF’s exchange rates as of 19 June 2016.
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7. Neither the NAB nor the BBA are currently active. However, the IMF has indicated that it may need to call on these resources to respond to the economic impacts of COVID-19. New Zealand was called on to lend resources under the NAB after the Global Financial Crisis.
Analysis
The IMF has requested that New Zealand continue its commitments with about a 6.7 per cent reduction
8. On 16 January and 18 March 2020, the IMF Executive Board agreed a package of changes to the NAB and BBA. The aim of the changes is to maintain current lending capacity by doubling the NAB and reducing the BBA by an equivalent amount. Once brought into effect, the key changes for New Zealand would be: a reducing New Zealand’s total lending commitments under these two arrangements from about NZD 2.282b to about NZD 2.116b, b transferring a portion of New Zealand’s commitment under the BBA to the NAB, and c extending the time that the lending commitments will be in place, so that the BBA contract terminates at the end of December 2023 instead of the end of December 2020, and the NAB terminates at end of December 2025 instead of November 2022. 9. IMF Managing Director, Kristalina Georgieva, has requested that you, in your role as New Zealand’s Governor of the IMF, consent to the changes to the NAB and sign a new BBA contract. Table 1 below illustrates how these changes will impact New Zealand’s maximum lending commitments under the NAB and BBA. The currencies in the table are the currencies of the commitments made in each arrangement. Table 1: Requested changes to New Zealand’s IMF maximum lending commitments. Existing arrangements Requested changes
NAB SDR 340m Terminates SDR 680m Terminates (NZD 730m) November 2022 (NZD 1.46b) December 2025
BBA USD 1b (NZD Terminates USD 431m Terminates 1.56b) December 2020 (NZD 672m) December 2023
Total NZD 2.286b NZD 2.132b
10. The United States of America (US) is not a BBA participant but agreed to double its NAB commitment on 27 March 2020. Most of the reduction in New Zealand’s and other participants’ total commitments, including New Zealand’s, are a result of the increased US commitment. The reduction in our total commitments would happen when enough participants agree to the NAB changes
11. The NAB changes would be brought into effect once there is agreement from participants representing 85 per cent of the total lending commitments, and no earlier than 1 January 2021.
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12. The BBA contract is drafted so that, if the increased commitments under the NAB are not brought into effect, then the current maximum BBA lending commitments for all members would remain unchanged. This means that if New Zealand agrees to continue participating in both the NAB and BBA, but the threshold for bringing the NAB into effect is not met or New Zealand chooses not to support the requested changes to its commitments, then New Zealand’s current maximum commitments would continue until the arrangements terminate. If the threshold to bring the NAB changes into effect is met, New Zealand’s current commitment will be extended to the end of December 2025, even if New Zealand does not consent to doubling New Zealand’s current commitment. 13. s6(b)(ii)
14. Given the interaction between the NAB and the BBA changes, we recommend that you seek Cabinet’s agreement to maintain the USD 1b maximum lending commitment under the BBA contract until the NAB changes come into force, at which time the maximum lending commitment will reduce to USD 431m (NZD 672m). The requested changes are aimed at maintaining the IMF’s ability to respond to a crisis
15. The IMF is seeking to maintain its lending capacity of SDR 717b (NZD 1,539b), s6(b)(ii)
16.
17.
As of 15 June, the IMF had received requests for emergency financing from more than 80 countries and the IMF had provided 69 countries with a total of SDR 18.1b (NZD 38.9b). New Zealand’s continued participation will help support a stable global economy
18. The Treasury considers that there are still strong grounds for New Zealand’s participation in the NAB and BBA. New Zealand began participating in the NAB and the BBA for the following reasons: a These arrangements support New Zealand’s position on the need to unwind imbalances in the global economy. They reduce the need for countries to hold very large quantities of foreign exchange reserves as insurance against a crisis. b New Zealand supports multilateral approaches, including a greater role for the IMF in crisis management. c Most developed and emerging economies with strong balance of payments positions participate in these lending arrangements. d In times of crisis, New Zealand may need to draw upon these resources. It may be harder to make a case for assistance if we had not been willing to support a well- resourced IMF, when we had the capacity to do so.
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19. In our view, New Zealand’s continued participation in the NAB and BBA is justified on these grounds, s6(b)(ii)
Withdrawing could also be interpreted as a signal that New Zealand does not support multilateral responses to global economic crises. s6(b)(ii)
20. New Zealand has advocated for the IMF to remain primarily a quota based organisation to reduce the need for arrangements such as the BBA. However, there will likely be an ongoing need for a backstop arrangement to provide flexibility to respond quickly to emerging global financial issues. The NAB fulfils this function and has a well-established and robust governance framework. 21. s6(b)(ii)
22.
23.
Financial Implications
24. New Zealand’s contributions under the NAB and BBA are treated as IMF financial assets in the Financial Statements of the Government of New Zealand. New Zealand earns interest on the contributions at a standard rate agreed by the IMF. Payments are ultimately funded by the Government’s borrowing programme and are factored into fiscal updates based on IMF forecasts of estimated loan requests and repayments. Operating balance impacts are limited to the effect of interest earned on the asset vis-à-vis its funding cost. 25. New Zealand’s participation in the NAB results in uncalled capital and is treated as a quantifiable, possible contingent liability. This contingent liability fluctuates each month depending on the closing month’s foreign exchange rates and the residual contingent liability balance of any outstanding loans. 26. Continued participation in these borrowing arrangements would maintain the Crown’s current risk profile, with a small reduction in risk as a result of the decrease in total maximum lending commitments. Calls on New Zealand to provide resources under the NAB or BBA fall within the scope of the permanent legislative authority established under Section 5 of the International Finance Agreements Act 1961. Therefore renewal of these borrowing arrangements would have no impact on appropriations. Changes to the lending profile are treated as forecast changes. 27. Participants can request that these lending commitments are put on hold if they are facing their own balance of payments challenges. 28. If New Zealand does not consent to the NAB changes, there will be no change to New Zealand’s contingent liabilities. If New Zealand does not continue participating in the BBA, there will be a reduction in New Zealand’s contingent liabilities of USD 1b (NZD 1.559b).
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The IMF have requested confirmation that they can begin finalising the BBA contract
29. We are seeking your agreement that the Treasury can advise the IMF that it can begin finalising the contract for signature. The IMF provided a draft BBA contract for review, and the Treasury considers that the contract will establish the changes described above. It is largely the same as the 2016 BBA contract currently in place, with changes to allow for the reduction in New Zealand’s maximum lending commitment when the NAB comes into effect. A copy of the draft contract with tracked changes from the 2016 BBA has been provided to your office.
Next steps 30. Subject to your agreement to seek Cabinet’s approval to continue New Zealand’s participation in the IMF borrowing agreements, the next steps would be:
Event Date
The Treasury will provide you with an updated draft of the attached DEV paper, 8 July incorporating your feedback.
Ministerial consultation 9-15 July
DEV considers the paper 22 July
Cabinet considers the recommendations 27 July
The IMF provides your office with a final BBA contract for signature n/a
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Annex 1: Cabinet Economic Development Committee paper
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In Confidence Office of the Minister of Finance Chair Cabinet Economic Development Committee
Continuing New Zealand’s participation in International Monetary Fund borrowing arrangements Proposal
1 This paper seeks agreement to New Zealand’s continued participation in the International Monetary Fund’s (IMF) borrowing arrangements: the New Arrangements to Borrow (NAB) and Bilateral Borrowing Arrangements (BBA), including changes requested by the IMF’s Executive Board. The requested changes would extend the period of New Zealand's lending commitments and reduce New Zealand’s total lending commitments under these two arrangements by about 6.7 per cent. Relation to government priorities
2 The Government has indicated strong support for multilateralism. This is a routine renewal of a financial commitment to the International Monetary Fund that requires Cabinet approval. Continuing participation in these borrowing arrangements supports a multilateral approach to addressing international financial crises.
Executive Summary
3 On 16 January and 30 March 2020, the International Monetary Fund (IMF) Executive Board agreed a package of changes to two borrowing arrangements, the New Arrangements to Borrow (NAB) and Bilateral Borrowing Agreement (BBA), in order to maintain the IMF’s lending capacity. IMF Managing Director, Kristalina Georgieva, has requested that New Zealand consent to the changes to the NAB and sign a new BBA contract. Once brought into effect, the key changes for New Zealand would be:
3.1 a reduction in New Zealand’s total lending commitments under these two arrangements from about NZD 2.282b to about NZD 2.132b,
3.2 transferring most of New Zealand’s commitments from the BBA to the NAB, and
3.3 extending the time that the lending commitments will be in place, so that the BBA contract terminates at the end of December 2023 instead of the end of December 2020, and the NAB terminates at the end of December 2025 instead of November 2022.
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4 New Zealand’s continued participation in these borrowing arrangements helps the IMF to support a stable global economy. The IMF is seeking to maintain its lending capacity of SDR 717b (NZD 1,539b), s6(b)(ii)
5
6 The United States of America (US) is not a BBA participant but agreed to double its NAB commitment on 27 March 2020. Most of the reduction in New Zealand’s and other participants’ total commitments, including New Zealand’s, are a result of the increased US commitment. Despite the change in commitments, there will be no change to members’ levels of representation in IMF governance arrangements.
7 Continued participation would maintain the Crown’s current risk profile, with a small reduction in risk as a result of the decrease in total maximum lending commitments.
Background
8 New Zealand has committed to lending funds under the IMF’s three main lending resources:
8.1 Quota: a member country’s permanent financial commitment. New Zealand’s quota is SDR1 1.252b (NZD 2.688b), which is 0.26 per cent of the IMF’s total quota. 8.2 New Arrangements to Borrow (NAB): a backstop funding facility which can be activated once quota is nearly exhausted. There are 38 NAB participants, including most developed and emerging market economies with strong balance of payments positions. New Zealand agreed to join the NAB in 2010 [CAB Min (10) 1/1 refers] and extended the commitment in 2016 [EGI-16-MIN-0336 refers]. Our current lending commitment is SDR 340m (NZD 730m), which is 0.19 per cent of the total NAB commitments.
1 Special Drawing Rights (SDR) are the IMF’s reserve currency. New Zealand dollar rates are calculated at 2.146850 as at 19 June 2016.
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8.3 Bilateral Borrowing Agreements (BBA): a secondary backstop funding facility which can be activated the NAB is nearly exhausted. It was established to increase the IMF’s resources and maintain confidence in its ability to respond in a major global financial crisis. There are 40 participants, including most participants of the NAB with the notable exception of the United States. New Zealand agreed to participate in 2012 [CAB Min (12) 21/16 refers] and extended the commitment in 2016 [EGI-16- MIN-0336 refers]. Our current lending commitment is USD 1b (NZD 1.559b2), which is 0.23 per cent of the total BBA commitments. 9 In order to lend funds to members, the IMF requests foreign exchange from other members with strong balance of payments and reserve positions. The IMF aims to call on members proportionately to their share of the commitments.
10 New Zealand’s contributions to the NAB are loans, which are repayable over a period of up to 10 years. BBA contributions are similar, except they are repayable over a shorter period which can be renewed. The financial impact of lending under the agreements are the difference between the interest rate for government borrowing and the interest rate agreed by the IMF. The Reserve Bank of New Zealand acts as the banker for IMF transactions involving New Zealand, and has an agreement with the Treasury to provide foreign exchange when requested by the IMF.
Analysis
The IMF has requested that New Zealand continue its commitments with about a 6.7 per cent reduction
11 On 16 January and 18 March 2020, the IMF Executive Board agreed a package of changes to the NAB and BBA. The aim of the changes is to maintain current lending capacity by doubling the NAB and reducing the BBA by an equivalent amount. Once brought into effect, the key changes for New Zealand would be:
11.1 reducing New Zealand’s total lending commitments under these two arrangements from about NZD 2.282b to about NZD 2.116b, 11.2 transferring a portion of New Zealand’s commitment under the BBA to the NAB, and 11.3 extending the time that the lending commitments will be in place, so that the BBA contract terminates at the end of December 2023 instead of the end of December 2020, and the NAB terminates at end of December 2025 instead of November 2022.
12 The IMF has asked New Zealand to consent to the changes to the NAB and sign a new BBA contract. Table 1 below illustrates how these changes will impact New Zealand’s maximum lending commitments under the NAB and BBA. The currencies in the table are the currencies of the commitments made in each arrangement.
2 USD exchange rate is 1.558621 NZD, calculated using the IMF’s exchange rates as of 19 June 2016.
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Table 1: Requested changes to New Zealand’s IMF maximum lending commitments. Existing arrangements Requested changes
NAB SDR 340m Terminates SDR 680m Terminates (NZD 730m) November 2022 (NZD 1.46b) December 2025
BBA USD 1b Terminates USD 431m Terminates (NZD 1.56b) December 2020 (NZD 672m) December 2023
Total NZD 2.286b NZD 2.132b
13 The United States of America (US) is not a BBA participant but agreed to double its NAB commitment on 27 March 2020. Most of the reduction in New Zealand’s and other participants’ total commitments, including New Zealand’s, are a result of the increased US commitment.
The reduction in our total commitments would happen when enough participants agree to the NAB changes
14 The NAB changes would be brought into effect once there is agreement from participants representing 85 per cent of the total lending commitments, and no earlier than 1 January 2021.
15 The BBA contract is drafted so that, if the increased commitments under the NAB are not brought into effect, then the current maximum BBA lending commitments for all members would remain unchanged. This means that if New Zealand agrees to continue participating in both the NAB and BBA, but the threshold for bringing the NAB into effect is not met or New Zealand chooses not to support the requested changes to its commitments, then New Zealand’s current maximum commitments would continue until the arrangements terminate. If the threshold to bring the NAB changes into effect is met, New Zealand’s current commitment will be extended to the end of December 2025, even if New Zealand does not consent to doubling New Zealand’s current commitment.
16 s6(b)(ii)
17 Given the interaction between the NAB and the BBA changes, I am also seeking agreement to maintain the USD 1b maximum lending commitment under the BBA contract until the NAB changes come into force, at which time the maximum lending commitment will reduce to USD 431m (NZD 672m).
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The requested changes are aimed at maintaining the IMF’s ability to respond to a crisis
18 The IMF is seeking to maintain its lending capacity of SDR 717b (NZD 1,539b), s6(b)(ii)
19
20
As of 15 June, the IMF had received requests for emergency financing from more than 80 countries and the IMF had provided 69 countries with a total of SDR 18.1b (NZD 38.9b).
New Zealand’s continued participation will help support a stable global economy
21 I consider that there are still strong grounds for New Zealand’s participation in the NAB and BBA. New Zealand began participating in the NAB and the BBA for the following reasons:
21.1 These arrangements support New Zealand’s position on the need to unwind imbalances in the global economy. They reduce the need for countries to hold very large quantities of foreign exchange reserves as insurance against a crisis. 21.2 New Zealand supports multilateral approaches, including a greater role for the IMF in crisis management. 21.3 Most developed and emerging economies with strong balance of payments positions participate in these lending arrangements. 21.4 In times of crisis, New Zealand may need to draw upon these resources. It may be harder to make a case for assistance if we had not been willing to support a well-resourced IMF, when we had the capacity to do so. 22 In my view, New Zealand’s continued participation in the NAB and BBA is justified on these grounds, s6(b)(ii)
Withdrawing could also be interpreted as a signal that New Zealand does not support multilateral responses to global economic crises.
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s6(b)(ii)
23 New Zealand has advocated for the IMF to remain primarily a quota based organisation to reduce the need for arrangements such as the BBA. However, there will likely be an ongoing need for a backstop arrangement to provide flexibility to respond quickly to emerging global financial issues. The NAB fulfils this function and has a well-established and robust governance framework.
24 s6(b)(ii)
25
26
Financial Implications
27 New Zealand’s contributions under the NAB and BBA are treated as IMF financial assets in the Financial Statements of the Government of New Zealand. New Zealand earns interest on the contributions at a standard rate agreed by the IMF. Payments are ultimately funded by the Government’s borrowing programme and are factored into fiscal updates based on IMF forecasts of estimated loan requests and repayments. Operating balance impacts are limited to the effect of interest earned on the asset vis-à-vis its funding cost.
28 New Zealand’s participation in the NAB results in uncalled capital and is treated as a quantifiable, possible contingent liability. This contingent liability fluctuates each month depending on the closing month’s foreign exchange rates and the residual contingent liability balance of any outstanding loans.
29 Continued participation in these borrowing arrangements would maintain the Crown’s current risk profile, with a small reduction in risk as a result of the decrease in total maximum lending commitments. Calls on New Zealand to provide resources under the NAB or BBA fall within the scope of the permanent legislative authority established under Section 5 of the International Finance Agreements Act 1961. Therefore renewal of these borrowing arrangements would have no impact on appropriations. Changes to the lending profile are treated as forecast changes.
30 Participants can request that these lending commitments are put on hold if they are facing their own balance of payments challenges.
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31 If New Zealand does not consent to the NAB changes, there will be no change to New Zealand’s contingent liabilities. If New Zealand does not continue participating in the BBA, there will be a reduction in New Zealand’s contingent liabilities of USD 1b (NZD 1.559b).
Other Implications
32 There are no human rights, legislative, regulatory, Treaty of Waitangi, climate change, gender, or disability implications arising from this paper.
Consultation
33 The Ministry of Foreign Affairs and Trade and the Reserve Bank of New Zealand, have been consulted in the preparation of this Cabinet paper. They agree with its contents.
Publicity
34 Media interest is not anticipated.
Proactive Release
35 I intend to release the Cabinet paper proactively in whole, within 30 business days. Proactive release will be subject to redaction as appropriate under the Official Information Act 1982.
Recommendations
36 I recommend that the Committee:
36.1 Note that the IMF has requested that New Zealand continue participating in the New Arrangements to Borrow (NAB) and Bilateral Borrowing Agreements (BBA), with three key changes:
36.1.1 reducing New Zealand’s total lending commitments under these two arrangements from about NZD 2.282b to about NZD 2.116b,
36.1.2 transferring most of New Zealand’s commitment under the BBA to the NAB, and
36.1.3 extending the time that the lending commitments will be in place, so that the BBA contract terminates at the end of December 2023 instead of the end of December 2020, and the NAB terminates at end of December 2025 instead of November 2022. 36.2 Note that the NAB changes will not come into effect until there is agreement from participants representing 85 per cent of the total lending commitments, and no earlier than 1 January 2021;
36.3 Authorise the Minister of Finance to consent to New Zealand’s continued participation in the NAB until the end of December 2025, including a doubling of the maximum commitment to SDR 680m (NZD 1.44b); and
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36.4 Authorise the Minister of Finance to sign the contract extending New Zealand’s participation in the BBA from end 2020 to end 2023, and maintaining New Zealand’s USD 1b (NZD 1.56b) maximum lending commitment under the BBA contract until the NAB changes come into force, at which time, the maximum lending commitment will reduce to USD 431m (NZD 672m).
Authorised for lodgement
Hon Grant Robertson
Minister of Finance
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Annex 1: New Arrangements to Borrow participants and proposed commitments
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Annex 2: Bilateral Borrowing Agreements participants
s6(b)(ii)
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