Current policy work

Three other priorities are in earlier stages of policy development. These are: reviewing the broader electricity market, irrigation, and getting better procurement and management of the Crown's physical assets.

Electricity sector review

Electricity plays a vital role in developed economies. This means that the Government has a critical interest in ensuring the market generates an adequate supply of power at a fair price. Constrained hydro-electricity generation (due to dry winters), and occasional transmission failures have led to rationing campaigns and some outages. Business perception surveys[3] show declining confidence in our electricity system and suggest that willingness to invest in energy-dependent activities is abating.

The findings from the most recent electricity sector review, in 2009, concluded that the price for electricity is roughly in line with the long-run marginal cost of generation investment. The review also concluded that generation safety margins are expected to increase in the next decade (see the sectoral analysis on electricity in Part 3). Transmission capacity is also expected to benefit from increased investment by Transpower. The review noted that supply vulnerability was likely to persist due to the dominance of hydro electricity, and concluded that improvements to the market could be made to better manage this vulnerability.

The review made 29 recommendations to improve electricity market operation. These include measures to improve:

• the management of dry years
• downward pressure on generation costs
• procedures for upgrading transmission services
• retail competition and prices restraint, and
• governance of the electricity sector.

The Electricity Industry Bill was introduced in December 2009[4] and has been referred to the Finance and Expenditure Select Committee for consideration. The Bill includes initiatives to increase competition, increase security of supply and improve governance.

Irrigation

Irrigation can increase productivity in large tracts of arable land and the productivity improvements enabled by irrigation are often much higher than the financial cost of providing it. However, competing uses, environmental concerns and Treaty issues also need to be considered. Farmers attempting to develop irrigation schemes face significant ‘collective action' problems and must overcome a number of regulatory barriers. Clearing these hurdles has typically been taking 10-15 years.

The Government wants to ensure that appropriate schemes can be built. Tensions between competing uses for water will never be eliminated but the Government believes that wasted effort and uncertain outcomes can be reduced. Cabinet has therefore agreed to a new strategic direction for fresh water. This includes a three-pronged approach to improvements to fresh water management:

• a stakeholder-led collaborative process run by the Land and Water Forum that will develop shared outcomes, goals and long-term strategies for fresh water
• engagement between ministers and the iwi leaders group to advance discussions on resolving high-level freshwater issues, including iwi/Māori rights and interests, particularly in freshwater management and allocation initiatives, and
• concurrent scoping of policy options on matters including freshwater allocation, quality and infrastructure.

In particular, the Government is looking at ways to improve the regulatory framework to support optimal rural water infrastructure development as part of the resource management reforms and ‘New Start for Fresh water' work programme.

Better management of the Government's physical assets

The performance of the Government's own infrastructure is an important component of the national economy. The Government is the largest owner of built assets in New Zealand. The carrying value of its physical assets is more than $110 billion.^[5] Across all departments, Crown entities and state-owned enterprises, it spends over $6 billion annually on maintenance of the asset portfolios and on the purchase of physical assets to support the delivery of government services to the community.

The state sector has a mixed record of long-term asset management: the Office of the Auditor-General has reported on some notable procurement failures, and on gaps in asset management capability and practices.^[6] For the broader economy to perform to its potential, the state sector must do better, both in the quality of new investments and in maximising the service potential from its asset portfolios.

The Government sees strategic asset management as an important part of the agenda for modernising the delivery of public services, delivering value for money and minimising risk associated with this significant commitment of budgetary resources.

Since 2008, there has been increased focus on the asset performance and investment intentions of selected departments and Crown entities responsible for managing large or critical parts of government asset portfolios. In addition, the Government has adopted the UK Gateway assurance regime for all high-risk projects undertaken by those types of government entities.

The Government intends to press ahead with strategic asset management disciplines that will support the objectives of the National Infrastructure Plan in four main ways:

• Getting better use out of existing assets and networks through a combination of demand management and asset performance (in terms of availability, utilisation, condition and fitness for purpose). In some cases, this will avoid the need to invest in new assets.
• Improving up-front government decision-making processes and the information used in these processes, to focus on whole-life cost effectiveness, i.e. the relationship between physical assets, service levels, risks and outcomes in different sectors, underpinned by robust economic analysis of investment choices.
• Ensuring asset management practice is built and shared right across the public sector, using knowledge and expertise from local government and overseas jurisdictions to achieve common standards, methods, language and information.^[7]
• Requiring regular disclosure and reviews of the long run (10 years or more) capital intentions and asset management performance of those government agencies responsible for managing large or critical parts of the government asset portfolio.

The Government also intends to improve its procurement processes and evaluation of procurement options. For appropriate projects, it is anticipated that performance will be improved by accessing the skills and expertise available in the private sector. This initiative may entail contracting out, public private partnerships, alliancing or other procurement methods where they will provide value for the taxpayer.

This approach will expand the scope for innovation in design, construction and management of new assets. Private finance may be used where appropriate to pass the risk to those best placed to manage it. For example, the Government is investigating whether more prison capacity could be delivered by use of a public private partnership.

This initiative, while still under development, is likely to include the following actions:

• directing government agencies to publish and report results against standardised asset plans
• commissioning a programme of external asset management performance audits, and
• reviewing the financial delegations that apply between Cabinet, ministers, chief executives (for departments) and crown entity boards, for capital investments and disposals.