Reference: 20250288
23 May 2025
F Jones
[FYI request #30814 email]
Dear F Jones
Thank you for your Official Information Act 1982 (the Act) request, received on 24 April
2025. You requested the following:
An unredacted version of the briefing paper to Minister of Finance on the Kāinga
Ora Independent Review (T2023/1989) as I believe 9(2)(f)(iv) should no longer
apply
Analysis that determined the 10,200-figure provided on page 6 of T2023/1989
The internal financial forecasting models which the Treasury received from
Kainga Ora
Information being released
Please find enclosed the following documents:
Item Date
Document Description
Decision
Treasury Report T2023/1989:
1. 5 December 2023
Kāinga Ora Independent Review
Release in full
I have decided to release the document listed above, subject to information being
withheld under one or more of the following sections of the Act, as applicable:
• 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, and
• section 9(2)(k) – to prevent the disclosure of information for improper gain or
improper advantage. This reduces the possibility of staff being exposed to
phishing, social engineering and other scams. This is because information
released under the Act may end up in the public domain, for example, on
websites including Treasury’s website.
Information to be withheld
There are additional documents covered by your request that I have decided to
withhold in full under section 9(2)(b)(ii) of the Act – to protect the commercial position of
the person who supplied the information, or who is the subject of the information.
1 The Terrace
PO Box 3724
Wellington 6140
New Zealand
tel. +64-4-472-2733
https://treasury.govt.nz
Item Date
Document Description
Decision
12 September
Consolidated forecast model
Withhold in full under
2. 2023
(PREFU)
s9(2)(b)(ii)
Consolidated forecast model
Withhold in full under
3. 10 October 2023
(HYEFU)
s9(2)(b)(ii)
Analysis that determined the 10,200-figure
The 10,200 figure (on page 6 of Item 1) was calculated from Kāinga Ora’s consolidated
forecast
model at PREFU 2023 (Item 2).
In making my decision, I have considered the public interest considerations in section
9(1) of the Act.
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
Olivia Paterson
Acting Manager, Housing and Urban Growth
2
BUDGET-SENSITIVE
Treasury Report: Kāinga Ora Independent Review
Date:
5 December 2023
Report No:
T2023/1989
File Number:
SH-18-1-1-1
Action sought
To:
Action sought
Deadline
Minister of Finance
Indicate your preferred:
8 December 2023
(Hon Nicola Willis)
•
Level of involvement in in the establishment and
governance of the independent review.
•
Structure for an independent review of Kāinga Ora
and additional supporting actions.
Direct the Treasury to work with HUD to establish the
independent review.
Contact for telephone discussion (if required)
Name
Position
Telephone
1st Contact
Max Christie
Analyst, Housing and
s9(2)(k)
s9(2)(g)(ii)
Urban Growth
Emily Pearse
Principal Advisor,
Financing Infrastructure
and Urban
Development
Geraldine Treacher
Manager, Housing and
Urban Growth
Minister’s Office actions (if required)
Return the signed report to Treasury.
Refer to the Minister of Housing’s office.
Note any
feedback on
the quality of
the report
Enclosure:
No
Treasury:4893493v6
BUDGET-SENSITIVE
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Treasury Report: Kāinga Ora Independent Review
Executive Summary
This report provides you with context on Kāinga Ora – Homes and Communities (Kāinga
Ora) and advice on an independent review. As a Responsible Minister for Kāinga Ora
alongside the Minister of Housing, you have a role to oversee and manage the Crown’s
interests in the entity, especial y considering its substantial fiscal impacts.
Kāinga Ora is a capital-intensive Crown Entity that owns most of the Crown’s state housing
assets and is the Crown’s urban development agency. It provides tenancy services to nearly
200,000 customers and owns and maintains around 70,000 homes.
The size of the organisation means Kāinga Ora has a significant impact on the Crown’s fiscal
indicators, with contributions of $4.0 bil ion towards OBEGAL deficits and $13.2 billion
increase to net debt over the forecast period. Kāinga Ora faces challenging financial
sustainability issues, with an operating deficit forecast to grow from $520 mil ion in 2022/23
to $1.1 billion in 2027/28, driven by interest on the debt-financed capital investment
programme.
Treasury and the monitoring agency, the Ministry of Housing and Urban Development
(HUD), have been reviewing Kāinga Ora over 2023, with the fol owing key findings:
1.
There has been significant growth in the operating costs of providing public housing,
including growth in personnel of 2,000 FTE (145%) since 2017/18, and little
assessment of the impact or value of the increased investment in tenancy services.
2.
The actual costs for redevelopments of public homes were less than budgeted for in
2022/23, and acquisitions of homes from private developers (when land value is
excluded) cost less than redevelopments.
3.
According to Kāinga Ora’s current forecasts, the amount of debt required to deliver
existing commitments is $1.136 billion lower than what was anticipated during the
Budget 2023 process. This difference is already incorporated into the Crown’s fiscal
forecasts.
4.
Kāinga Ora’s debt projections, which inform the Crown’s fiscal forecasts, vary
significantly between fiscal updates and contain assumptions like generating $6 billion
revenue from the sale of public homes. The model developed by Kāinga Ora to inform
Budget 2023 decisions on operating funding for new units used assumptions that have
since been substantively revised. These forecasts are heavily dependent on the
Government’s decisions on the pace and scale of the public housing growth and
renewals programme, and further investigation is warranted.
5.
Kāinga Ora’s information management systems for public housing (that could inform,
for example, how or why the delivery pipeline faces delays) are not fit to provide the
Board with sufficient information to govern effectively. This also limited HUD and the
Treasury’s ability to progress the SFF Review.
We understand that the Minister of Housing has requested that HUD develop a Cabinet
paper for consideration by Cabinet on 18 December 2023 which is expected to seek
agreement around the structure and scope of the review. The Treasury is working with HUD
on the development of the Cabinet paper, and we are seeking your direction around the level
of involvement that you wish to have.
We recommend that the Independent Review be led by a senior independent person
supported by a cross-agency group and expert consultants as needed.
T2023/1989:Kāinga Ora Independent Review
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2
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Subject to your steer on the scope and form of an independent review, the Treasury wil
engage with HUD to develop a draft Terms of Reference to support a consultation process
with the Kāinga Ora Board (which is requirement under the Crown Entities Act).
We also recommend that joint Ministers refresh the Kāinga Ora Board, establish your
relationship with the Board, and set out a new Letter of Expectations that, among other
things, asks Kāinga Ora to provide concrete savings options to be considered in Budget
2024.
Recommended Action
We recommend that you:
a
note the key findings of the 2023 joint Spending, Funding and Financing (SFF) Review
of Kāinga Ora, which the Treasury worked on jointly with HUD
b
note Kāinga Ora’s information systems for public housing are insufficient to provide the
Kāinga Ora Board with the consistent information needed to govern effectively, and we
expect Kāinga Ora to deliver you with a plan for improving its capabilities by the end of
the year
c
note that the Minister of Housing has requested that HUD develop a Cabinet paper for
consideration by Cabinet on 18 December 2023 which is expected to seek agreement
around the structure, scope, and the level of involvement from Ministers, Cabinet and
Kāinga Ora. The Treasury is working with HUD on the development of the Cabinet
paper
d
indicate your preferred level of involvement in the establishment and governance of
the independent review (circle one):
i.
Directly govern jointly with the Minister of Housing as the review progresses
[Treasury recommended] Yes / no
i .
Delegate governance to the Minister of Housing and stay updated on progress.
Yes / no
e
indicate your preferred governance structure for the independent review (circle one):
i.
A targeted review led by the Kāinga Ora Board
Yes / no
i .
An independent review led by an external consultancy accountable to Ministers.
Yes / no
iii.
Rolling targeted reviews with an independent senior lead accountable to
Ministers
[Treasury recommended] Yes / no
f.
direct the Treasury to work with HUD to establish the independent review in line with
the terms described in this report
Directed / not directed.
T2023/1989:Kāinga Ora Independent Review
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g.
note that the Treasury supports refreshing the Board, refreshing Kāinga Ora’s Letter of
Expectation and establishing your relationship with the Board. HUD, as the primary
monitor, will provide further advice on these issues
h.
indicate whether you would like to discuss these issues with officials
Yes / no.
i.
note that the findings of the SFF Review have been discussed with Kāinga Ora, but the
actions moving forward remain sensitive
j.
refer and
discuss with the Minister of Housing
Referred / not referred
Discussed / not discussed
Geraldine Treacher
Manager, Housing and Urban Growth
Hon Nicola Willis
Minister of Finance
_____/_____/_______
T2023/1989:Kāinga Ora Independent Review
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Treasury Report: Kāinga Ora Independent Review
Purpose of Report
1.
This report provides you with:
a.
context on Kāinga Ora, including its financial and delivery performance and the
key findings from Treasury’s recent work reviewing Kāinga Ora’s spending,
funding and financing (SFF Review), and
b.
our recommended terms and preferred governance structure for the Independent
Review of Kāinga Ora (Independent Review).
Kāinga Ora is a Crown Agent with roles in public housing and urban
development
2.
In 2019, Housing New Zealand Corporation and KiwiBuild were merged to form Kāinga
Ora – Homes and Communities (Kāinga Ora), a capital-intensive statutory Crown
Agent established under the Kāinga Ora – Homes and Communities Act 2019 (KOA)
with new urban development functions. You and the Minister of Housing are
responsible for administration of the KOA and for the management of the Crown’s
interests in the Kāinga Ora.
3.
The obligations in the KOA are described at a relatively high level, meaning that Kāinga
Ora has significant autonomy to determine in practice how it meets its statutory
obligations.
4.
Broadly speaking, Kāinga Ora has two key roles. It:
a.
owns and maintains around 70,000 public houses and provides home ownership
products and other services, including tenancy services to nearly 200,000
customers and their families, and
b.
delivers urban developments that connect homes with jobs, transport, open
spaces and the facilities for communities. This includes accelerating the
availability of build-ready land and supporting the build of a mix of housing of
different types, sizes and tenures.
5.
The Ministry of Housing and Urban Development (HUD) is the primary monitoring
agency for Kāinga Ora. HUD is responsible for the day-to-day administration of funding
to Kāinga Ora and monitoring Kāinga Ora financial and delivery performance.
6.
The Treasury is a secondary monitor with a particular interest in Kāinga Ora’s balance
sheet management and fiscal impacts. The Treasury also provides the Minister of
Finance with advice on Kāinga Ora’s investment activities given their significant fiscal
implications.
7.
Informed by its annual reports over the last few years and our experience working with
Kāinga Ora, it is the Treasury’s view that Kāinga Ora is struggling to meet its housing
delivery targets and that it is not sufficiently able to demonstrate the value for money of
its activities.
8.
We also consider that Kāinga Ora’s financial performance is weak and worsening, and
that the Kāinga Ora Board is not governing these concerns effectively.
T2023/1989:Kāinga Ora Independent Review
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5
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OBEGAL Impacts
9.
The costs of running Kāinga Ora and funding its activities across both roles is
significant and escalating. Kāinga Ora had an operating deficit of $520 million in
2022/23, compared to a $76 million surplus in 2017/18. The deficit is forecast to grow
to $1.1 billion in 2027/28.
This will have an aggregate negative impact of $4.0
billion on OBEGAL over the forecast period.
10. Interest on the significant recent and forecast increases to debt is the main driver of the
forecast impact on OBEGAL, while organisational growth (e.g., FTE growth) was the
main driver of the cost growth between 2017/18 and 2022/23.
11. Most of Kāinga Ora’s revenue comes from the Crown in the form of the Income-
Related Rent Subsidy, which meets the difference between market rent and tenant rent
(which is capped at 25% of a tenant’s income). In addition, there is some supplemental
income, including in appropriations for specific urban development activities.
Table 1: OBEGAL impacts from Kāinga Ora’s activities
FY23/24
FY24/25
FY25/26
FY26/27
FY27/28
Absolute
Change
Change
FY24-28
FY24-28
[$M]
[$M]
[$M]
[$M]
[$M]
[$M]
[%]
Total Revenue
2,460
2,608
2,764
3,022
2,987
562
21%
Interest Expense
(533)
(719)
(914)
(1,091)
(1,177)
(558)
121%
Depreciation
(416)
(504)
(565)
(615)
(615)
(199)
48%
Maintenance
(658)
(649)
(679)
(712)
(712)
(54)
8%
Other
(1,440)
(1,397)
(1,402)
(1,515)
(1,484)
(76)
3%
Adjustments1
(26)
25
72
12
(79)
N/A
N/A
OBEGAL Impact ~ Operating
(613)
(636)
(725)
(899)
(1,080)
(324)
71%
surplus / (deficit) after tax
Net Debt Impacts
12. At June 2018, Housing New Zealand held $2.7 bil ion in debt. Since then, significant
capital investment has been debt financed, bringing Kāinga Ora’s total debt to
$12.3 billion as at 30 June 2023.
13. Kāinga Ora’s debt is forecast to increase to $25.5 billion by June 2028, with
an impact
on net debt of $13.2 billion (i.e., the net increase to borrowing) over the forecast
period.
14. Kāinga Ora’s borrowing is driven by investment in the public housing portfolio, which
Kāinga Ora’s forecast assumes will be offset by $6 billion in revenue from the sale of
10,200 public homes over the forecast period. These sales partially offset the new
public houses built, such that Kāinga Ora forecast no change in the size of public
housing portfolio between 2025/26 and 2027/28 (additions are equal to demolitions and
sales). The Treasury does not consider this to be a reasonable assumption and have
identified other assumptions that undermine the efficacy of the forecast modelling; the
viability of their forecasting warrants further investigation.
1
Various adjustments are made by Kāinga Ora and by the Treasury for reporting purposes.
T2023/1989:Kāinga Ora Independent Review
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6
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Table 2: Net Debt impacts from Kāinga Ora’s activities
FY23/24
FY24/25
FY25/26
FY26/27
FY27/28
[$M]
[$M]
[$M]
[$M]
[$M]
Public Housing
4,139
2,715
1,484
1,626
1,626
Other
206
264
1,514
1,373
(611)2
Adjustments3
357
423
(1,512)
460
(902)
Net Debt Impact
4,703
3,402
1,485
3,459
113
Appropriated borrowing
5,240
3,880
854
-
-
Closing Debt Forecast
17,006
20,408
21,894
25,353
25,466
15. Attachment 3 provides further detail on how Kāinga Ora’s operating balance and
balance sheet interact with the Crown’s fiscal indicators, and on Kāinga Ora’s funding
model.
Treasury and HUD have been reviewing Kāinga Ora
16. In late November 2022, the previous Government agreed to provide Kāinga Ora with a
Crown lending facility to meet its financing needs. It also agreed that al future
borrowing needs would be centralised and met by New Zealand Debt Management,
rather than private markets [DEV-22-MIN-0240 refers]. New Zealand Debt
Management borrows centrally and then ‘on lends’ to Kāinga Ora significantly lowers
borrowing costs at a whole-of-Crown level. This provides financing certainty and
cheaper debt to Kāinga Ora and greater transparency to the Crown.
17. The Government further requested that the Treasury and HUD undertake a
comprehensive review of the spending, funding, and financing of Kāinga Ora (SFF
Review). The SFF Review has:
a.
assessed the costs associated with the provision of public housing,
b.
compared the level of borrowing required to that set aside at Budget 2023, and
c.
explored the assumptions in the model underpinning Budget 2023 decisions on
operating funding.
18. Kāinga Ora has provided a range of information where available to support the review.
However, the information Kāinga Ora use to manage its public housing operations has
either been inconsistent between systems or missing key financial and project
management information. This has limited the progress of the review.
19. The Treasury considers that the information systems used by Kāinga Ora are not fit to
provide the Board with sufficient information to govern effectively. The previous
Government requested that Kāinga Ora to develop and submit a plan by late 2023 to
improve its information systems and data capability.
2
$1.4 billion in cash reserves are forecast to be used instead of debt to cover costs in 2027/28. These reserves are
forecast to be built up with debt from $204 million at end of 2024/25
3
Various adjustments are made by Kāinga Ora and by the Treasury for reporting purposes.
T2023/1989:Kāinga Ora Independent Review
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Costs associated with the provision of public housing
20. Costs associated with the provision of public housing found in the SFF Review are
outlined in Table 3 below.
Table 3: Summary of costs associated with public housing
Category
Number of
Assets
Total Direct Costs
Non-Direct Costs4
Costs to Operate in 2021/22
Maintenance and Asset
Management
70,000 homes
$1.1 B
$11,700 per property $3,600 per property
Tenancy Services
70,000 tenancies $0.23 B
$1,600 per tenancy
$2,200 per tenancy
Capitalised Cost to Build in 2022/23
Redevelopment
(excluding land cost)
1,381 units $0.84 B
$609,000 per unit
Initial analysis
Developer-led projects
Based on a small sample
attributes around
$574,000 per unit
(excluding land costs)
size
$35,000 per new unit
Developer-led projects
in enabling functions
(including land costs)
1,080 units $0.84 B
$775,000 per unit
21. Maintenance and tenancy services are the two key services in providing public
housing. Maintenance costs are driven by the aging legacy portfolio (average age of
44 years) while the tenancy services function has grown to meet the complex needs of
its tenants. Kāinga Ora currently lacks an approach to validating resourcing against
output measures (to ensure value-for-money is being achieved) but is intending to
undertake a post-implementation review of the tenancy services operating model after
2023.
22. Kāinga Ora’s build programme is mostly made up of redevelopments on existing
properties and purchases of properties from private developers. The Review found that
the costs for redevelopments (that have no land acquisition costs) are generally less
than budgeted for, and developer-led projects (when land-value is excluded) cost less
than redevelopments. This likely means that the lending facility appropriation is larger
than it needs to be, and Kāinga Ora may be able to use this headroom to fund other
activities.
23. An independent quantity surveyor concluded that Kāinga Ora redevelopment costs are
marginally higher than a modest market home (once differences in size are accounted
for) because Kāinga Ora tend to provide higher quality housing than private
developers. This does not explain al of the difference in cost between Kāinga Ora
redevelopments and developer-led projects. We hypothesise the additional cost are
driven by its pre-construction activities.
Kāinga Ora now forecasts that less debt is required than anticipated at Budget 2023
24. In October 2023, the previous Government agreed to appropriate $9.474 billion to the
Kāinga Ora borrowing appropriation (in addition to the $500 mil ion existing
appropriation) to enable the shift of debt raising from the private market to the Crown.
25. Kāinga Ora’s Consolidated Forecast Model (CFM) now indicates that the expected
debt needs of the growth and cost pressures that were appropriated for is now forecast
at $8.838 billion. This is $1.136 bil ion lower than the borrowing appropriated. This is
already accounted for in the fiscal forecasts.
26. Separately, the debt projections for 2023/24 to 2025/26 submitted by Kāinga Ora to
New Zealand Debt Management (developed in the CFM) have increased from
$9.700 billion in the January 2023 submission to $11.655 billion in the October 2023
4
Note that these are cash costs based on allocations of costs from across the organisation to these activities. The direct
costs include capital and operating maintenance and repairs costs, and direct personnel costs. The non-direct costs
include attributed portions of organisation-wide expenses such as rates, interest, tax, and back office overheads.
T2023/1989:Kāinga Ora Independent Review
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submission. This increase conflicts with a decrease that would have been expected,
given the current forecast is now lower than anticipated at Budget 2023. It speaks to
the disjointed nature of the financial reporting lines coming from Kāinga Ora to the
Treasury and to its Board.
27. The debt projections across the forecast period include substantive assumptions like
generating $6 bil ion revenue from the sale of public homes, and that Kāinga Ora will
build or buy 1,900 more homes by June 2025 than they currently have in their
procurement, contract, and construction pipelines combined.
28. Analysis suggests that there may be additional headroom included in the forecasts that
could be removed without changing delivery to significantly decrease the forecast
impact on net debt. Areas for further investigation include public housing growth and
renewals, and cash reserves.
Kāinga Ora now models that the cost of operating new homes is less than modelled at
Budget 2023
29. The Long-term Investment Plan (LTIP) was used by Kāinga Ora to build a single-unit
model that projected cashflow, revenue and expenses, and the balance sheet over the
lifetime of a new unit built in 2023/24.
30. This model underpinned the Budget 2023 decisions to appropriate additional operating
funding for the net new units.
31. Since Budget 2023, the LTIP has been updated. The key change of note is that the
assumed cost-to-build decreased from $813,681 (B23 model) to $717,943 (current
model). The model assumes that 50% of the new units require land acquisitions,
estimated on average at $196,527 (B23 model) and $118,066 (current model). The
sum of these is the assumed debt need: $1,010,208 (B23 model) and $836,009
(current model). The main drivers of this change are:
a.
Kāinga Ora’s new agile framework for housing developments (i.e. Project
Velocity) which is expected to deliver 13% savings on each unit.
b.
Land values were previously based on the portfolio-wide average and how now
been updated to reflect the average of a subset of the newer homes in the
portfolio.
32. This cost to build flows into the single-unit model to forecast an expected operational
cost5 of $57,745 per unit in FY2024/25, which is $6,900 per unit less than modelled at
Budget 2023.
33. This is higher than portfolio average, forecast to be $37,493 in FY2024/25, because
new units are 100% debt financed. Most of the existing portfolio have no associated
debt servicing costs. Interest costs make up over half of the new unit costs in the first
decade.
34. These revisions to the LTIP model more closely align with the actual cost-to-build
figures found in the SFF Review. This wil support future decisions to avoid
appropriating more funding than required.
Kāinga Ora is drafting a business case for its urban development activities
35. Kāinga Ora’s urban development activities are currently funded directly by the Crown
through appropriations in Vote Housing and Urban Development. The
Homes and
Communities appropriation is set to decrease from $82 million in 2023/24 to $21 mil ion
in 2024/25 (and into the future). This funding profile was set by the previous
Government subject to better information on the ongoing Costs.
5
Operational costs include: interest expense ($40,251), debt repayments ($3,126), rates ($3,765), maintenance ($1,890),
tenancy management ($3,206), back office costs ($2,512) and other expenses ($2,232).
T2023/1989:Kāinga Ora Independent Review
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36. Kāinga Ora is preparing a business case to inform Budget 2024 decisions on the level
of funding for their urban development activities, some of which are legislatively
required. We can advise you on this further during the Budget 2024 process and wil
continue to push Kāinga Ora to develop scalable options for Ministers to make
informed decisions.
There are several issues that warrant further analysis or action
37. From the work undertaken as part of the SFF Review, the key issues identified include:
a.
Kāinga Ora’s debt forecasting, which feed into the Crown’s fiscal forecasts, are
based on significant assumptions the Treasury consider should be revised, and
which should be more transparent to HUD, Treasury, the Board, and Ministers
moving forward.
b.
Kāinga Ora’s information systems are insufficient to provide the Kāinga Ora
Board with the consistent information they need to govern effectively, and we
expect Kāinga Ora to deliver you with a plan for improving their capabilities by the
end of the year.
c.
The Kāinga Ora Board has not been taking appropriate action to manage the
concerning financial sustainability issues faced.
d.
It is unclear that value-for-money is being achieved from Kāinga Ora’s operating
activities.
Establishing an independent review of Kāinga Ora
38. Ministers have few levers for influencing Kāinga Ora’s decision making and
performance (refer Attachment 4). The Responsible Minister may review a Crown
entity’s operations and performance under s132 of the Crown Entities Act (2004),
although this is seldom used explicitly. Before undertaking a review under that section,
the Responsible Minister must consult with the entity on the purpose and nature of the
review, and consider any submissions made by the entity on the proposed review.
39. You and the Minister of Housing are the current Responsible Ministers for Kāinga Ora.
We understand that you intend to establish an independent review of Kāinga Ora.
40. An independent review can springboard off the findings of the 2023 joint review, feed
into savings options that should be provided by Kāinga Ora for Budget 2024, and
provide options for improving their ongoing operations to achieve the objectives
outlined below.
41. We note that the Minister of Housing has requested that HUD develop a Cabinet paper
for consideration on 18 December 2023. We are working with HUD on the development
of a Cabinet paper, and seek your view around objectives, structure, scope, and the
level of involvement that you wish to have.
Objectives
42. Given Kāinga Ora’s significant impact on the Crown’s fiscal indicators and challenging
financial sustainability issues, we consider that the key objectives of an Independent
Review should be to improve Kāinga Ora’s financial sustainability and ensure they are
providing value for money by:
a.
Identifying opportunities to improve cost effectiveness and value for money
across Kāinga Ora’s programmes, beginning with those areas that have the
highest levels of expenditure.
T2023/1989:Kāinga Ora Independent Review
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b.
Identifying opportunities to rebalance investing cash flows with operating cash
flows to reduce the agencies reliance on debt funding and reduce OBEGAL
impacts.
c.
Ensuring that Kāinga Ora’s funding and financing settings are fit for purpose (i.e.,
market-rent settings, operating supplement, and 100 percent debt funding) and
enable Kāinga Ora to undertake its statutory functions in a manner that is
financial y sustainable.
d.
Improving governance, oversight, and enabling greater transparency over the
cost of delivery in Kāinga Ora’s programmes and functions.
Structure
43. There are a number of options for how an Independent Review could be structured and
governed. Detail on the benefits and constraints of each option are provided in
Attachment 2. In brief, the key options include:
Option 1: A targeted review led by the Kāinga Ora Board.
Option 2: An independent review led by an external consultancy accountable to
Ministers.
Option 3: Rol ing targeted reviews with an independent senior lead accountable to
Ministers
[Treasury recommended].
44. The Treasury recommends Option 3 on the basis that it would preserve the
independence of the review and maintain your control over review processes and
outcomes. Dividing the programme into targeted pieces of work also enables the level
of engagement with Kāinga Ora’s Board to be adapted to the nature of the review
questions for each workstream (which may limit the need to rely on Crown Entities Act
powers). It would also create greater flexibility in procuring appropriate consultancy
services.
45. In all cases we would expect the involvement of HUD, Treasury and DPMC in the
review governance structures and at working level.
Scope
46. Given work undertaken to date, critical areas for enhancing Kāinga Ora’s performance,
ensuring value-for-money and improving financial sustainability (in order of priority) is
provided in Table 4 below. Please note that we have worked closely with HUD in
identifying these priority areas.
Table 4: Recommended sequencing of workstreams for Independent Review
Priority Area
Description
Comment
1 Public housing
Reviewing the Board oversight, operating It is recommended that the public
delivery
and investment models for public
housing delivery operating model is
housing delivery (new build,
prioritised in the review because of the
redevelopment and acquisition) including
size of public housing spend, and the
the validation of processes and
significant impact which it has on net
standards to ensure that they are value
debt. We also believe that information
for money and are not “crowding out”
currently available to support an
other investment.
understanding of actual cost in this area
is not currently adequate to support good
decision making or provide assurance to
Ministers.
2 Kāinga Ora’s
Reviewing the need for the scale of
The overall operating model and service
overall operating
corporate overheads and Kāinga Ora’s
levels (particularly corporate overheads
model and
tenancy management function.
and tenancy management) are
service levels
recommended as a second priority
because of the level of spend associated
with these areas and because of the
significant increases in head count
associated with this work.
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Priority Area
Description
Comment
3 Kāinga Ora’s
Reviewing the asset management
The average age of the portfolio is a key
maintenance
strategy, including the appropriate
driver of maintenance costs. There are
programmes
average age of the portfolio and how
choices about how quickly existing stock
Kāinga Ora decide to renew or retrofit
is retrofitted and renewed over the
older homes.
coming years, and how this is balanced
with government’s intention to continue
growing the portfolio.
4 Kāinga Ora’s
Reviewing the role of land acquisitions
Kāinga Ora’s LSPs and urban
Large Scale
and processes to ensure that these are
development functions have been given
Projects and
value for money and not “crowding out”
a lower priority because it is unclear to
urban
other investment).
us how these fit with the Government’s
development
intentions for the infrastructure sector
functions
and for city deals. Reviewing these
operating models later provides time for
decisions on Kāinga Ora’s urban
development role.
47. Attachment 1 provides an overview of the proposed general scope for each of the
priority areas identified in Table 4.
48. It is not recommended that the Independent Review consider benchmarking or maturity
frameworks. Previous experience suggests that like-for-like comparisons would be
difficult to achieve, and that frameworks tend to look at structures rather than the
quality of information or oversight. Given this, the Treasury’s view is that the review
should focus on building an in-depth understanding, particularly around costs.
49. We consider that the Independent Review should also assess how Kāinga Ora’s
funding and financing model (including the management of its balance sheet) could be
changed to:
a.
Improve Kāinga Ora’s financial sustainability, and
b.
Incentivise its ability to meet Government priorities (for example, promoting
housing supply and construction of houses in areas of New Zealand which
currently experience housing shortage and/or where it is relatively more
expensive or uneconomic to build).
50. Given the scale of Kāinga Ora’s activity in each of these areas it is recommended that
the work be conducted on a rolling basis in order of agreed priority, in paral el to the
funding and financing workstream.
51. In addition, it is recommended that work within each of these four workstreams is
structured to provide Ministers with short term findings and recommendations within
two to three months, fol owed by detailed work to analyse alternative models, provide
Ministers with options on service levels and engage the Kāinga Ora Board on detailed
implementation.
52. Timeframes in the table below are indicative, subjective to the chosen approach,
procurement, and available resourcing and information from Kāinga Ora.
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Table 5: Indicative timeframes and deliverables
Deliverable
Timeframe
Establishment
Establishment phase + procurement
December 2023 – January 2024
processes
Public Housing
Interim report +
January – March 2024
Delivery
savings options for Budget 24
Final report
April – June 2024
Operating
Interim report
July– September 2024
Model
Final report
October– December 2024
Funding and
Interim report
July – December 2024
Financing
report
January– June 2024
Budget 2025 decisions
November 2024 – April 2025
Subsequent areas if desired:
Maintenance programme
TBC
Urban development functions
TBC
Budget 2026 decisions
From November 2025
Your level of involvement
53. In order to ensure the objectives of the independent review is achieved, the Treasury
and the Minister of Finance roles are important to ensuring a suitable fiscal lens is
applied to improve cost effectiveness and ensure value for money.
54. Given the significant fiscal implications, we recommend that you remain directly
involved in decisions around objectives, scope, and structure of the independent
review.
55. Alternatively, you could delegate decisions and governance to the Minister of Housing.
If this is your preferred option, we wil ensure that you are kept updated on progress
and that you fulfil any relevant responsibilities under the Crown Entities Act.
Additional actions to improve the impact of the Independent Review
56. As the monitoring lead for Kāinga Ora, HUD is responsible for providing advice to you
and the Minister of Housing on Board appointments and related issues. We have
discussed the below actions with HUD, and understand it is well placed to advise
further. If you indicate you would like these to progress, we will work with HUD on this
advice.
Refreshing the Kāinga Ora Board
57. To improve the likely impact of the Independent Review, it is recommended that there
is a refresh of the Board. This would enable you to reset the relationship between
Kāinga Ora and Ministers and ensure the Board are aligned with the intent of an
Independent Review.
58. To provide context, five of Kāinga Ora’s members have been on the Board since
establishment, and three, including the Chair and Deputy Chair previously served on
the Board of Housing New Zealand. The agency is due a refresh of its Board and
changing the Chair, Deputy Chair and one or two of the longer serving members
provides an opportunity to bring new skil s, thinking and experience to achieve the
needed change.
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Resetting the relationship with the Board
59. A refresh of the Board is also an opportunity to reset the relationship between the
Government and the agency through Board induction processes provided by your
monitoring agencies, and through regular face to face meetings with the Chair. Note
that a key aspect of your role as responsible Minister is to hold the Board accountable
for the performance of the entity. Meeting regularly with the Chief Executive has
potential to dilute that accountability and may reduce the Board’s ability to govern
effectively.
Refreshing the Letter of Expectations
60. In addition, a new Letter of Expectations provides an opportunity for Ministers to set
clear expectations regarding Kāinga Ora’s engagement in the review process, and to
position yourself as an active purchaser of housing outcomes, including regional
targets.
61. Given current fiscal constraints this is also an opportunity to signal the expectations
that Kāinga Ora provide concrete savings options to feed into Budget 2024 and that
cash management policies will be tightened along with the debt drawdown framework.
62. As such, it is also recommended that Kāinga Ora’s Letter of Expectation is updated
prior to the Review commencing.
Additional levers
63. Other levers that you may wish to consider drawing on are outlined in Attachment 4.
These include, with your powers under the Crown Entities Act, directly requesting
information, issuing direction to give effect to policy, and requesting a review.
Next Steps
64. We expect the Minister of Housing will seek advice on the independent review and the
additional actions from HUD.
65. Subject to ministerial preferences, the Treasury wil engage with HUD to develop a
draft Terms of Reference for the independent review that can be used as a basis for
consultation with the Kāinga Ora Board.
66. We will also commence engagement with HUD and DPMC regarding agency roles and
cross-agency governance. As HUD is the primary monitor for Kāinga Ora, HUD will be
the Agency lead for the review (unless Ministers direct otherwise).
67. We will work with HUD to report back to you and the Minister of Housing to confirm the
draft Terms of Reference, agency roles and governance prior to engaging with the
Kāinga Ora Board.
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Attachment 1: Proposed scope for each area of investigation – Independent Review
Description
Timeframe
Short-term
1 Comprehensively describe and analyse Kāinga Ora’s current operating and investment models in terms of the service
levels it provides to customers, its personnel expenses, and number of employees (i.e. level of FTE), investing cashflows,
decision-making criteria etc.
First 2 – 3 months
2 Provide Ministers with recommendations for ways in which the efficiency and value for money of Kāinga Ora’s current
operating and investing models could be improved by delivering more for less, or by limiting or ceasing some activities.
Medium-Term
3
Describe and analyse alternative operating models which Kāinga Ora could adopt which would provide different levels of
service to [customers] (including, higher, lower, and differently distributed levels of service), while still satisfying Kāinga
Ora’s statutory obligations.
4
Provide Ministers with choices over service levels and costs for Kāinga Ora’s statutory functions.
Next 2 – 3 months
5
Critically evaluate Kāinga Ora’s operating and investing models in terms of the distribution of responsibilities and decision-
making powers across Ministers, HUD and Kāinga Ora, and provide choices for alternative distributions, and consider
whether this distribution is fit for purpose, or whether a more active role for Responsible Ministers would better serve the
Government’s objectives.
6
Engage with the Kāinga Ora Board and HUD to agree implementation plans (including enhanced monitoring and reporting)
for consultation with / decision-making by Ministers.
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Attachment 2: Options around structure of the Review
Option 1: Kāinga Ora Board led targeted review
Option 2: External consultancy led fully
Option 3: Rolling targeted reviews with an
independent review
independent senior lead [Treasury
recommended]
Direct the Kāinga Ora Board to commission an
Commission a review led by an external consultancy
Establish an independent lead (for example, a very
independent review within a scope set by Ministers,
that reports to Ministers via HUD, Treasury and
senior former public service official) for a series of
reporting to the Board.
DPMC.
targeted reviews of work areas supported by a
cross-agency working group and any expert
Benefits
Benefits
consultants required.
• This approach is consistent with and reinforces the
• This approach maximises your control over the
Board’s statutory responsibility for the agency's
review scope and review processes. It may also
Benefits
performance and ensures the buy-in and engagement
provide greater access to resources and skil sets, • This approach preserves the independence of
of the Board in implementing review recommendations.
providing flexibility to accommodate a broader
the review and maintains your control over
It does not require use of the Minister’s powers under
scope. However, unless the Board are wil ing
review processes and outcomes. Dividing the
the Crown Entities Act and should have better access
participants in the review you may need to use
programme into targeted pieces of work also
to agency information systems and resources than an
your Crown Entities Act powers to ensure
enables the level of engagement with and
external review.
engagement and provision of information.
involvement of Kāinga Ora’s Board to be
Constraints
Constraints
adapted to the nature of the review questions for
• We consider that this option requires a refresh of the
• Given the length of the review period this
that stage, which may limit the need to rely on
Kāinga Ora Board.
approach is likely to be expensive and is not
Crown Entities Act powers. It also creates
greater flexibility in procuring appropriate
• The downsides of this approach are that you will have
guaranteed to be effective. Consultancy staff may
consultancy services.
no direct control over the review scope, reviewer
identify opportunities for improvement, but
Constraints
selection, or review processes and findings. There may
delivery of change will be the responsibility of the
also be some matters that are not strictly within the
Board and agency management.
• Identifying an appropriate independent reviewer
Board’s remit (funding and financing settings) or which
• The size and scale of Kāinga Ora’s investment
is a key risk. Unless the Board are wil ing
the Board may feel conflict with their statutory duties
activities means that it would be difficult to find a
participants in the review you may need to use
(particularly structural or system role matters).
New Zealand based consultancy firm with the
your Crown Entities Act powers to ensure
scale and capability to undertake a review of this
engagement and provision of information.
kind, that does not already do a substantial
volume of work for Kāinga Ora. This likely means
bringing a consultancy from off-shore (Australia)
to undertake the review work.
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Attachment 3: Kāinga Ora’s Financial Context
Fiscal Indicators
1.
Kāinga Ora provides forecast balance sheets, income statements, and cashflow
statements to the Treasury at each economic and fiscal update.
2.
The operating surplus/deficit has a direct impact on OBEGAL: if Kāinga Ora forecast a
deficit of $4 billion over the forecast period, there is a $4 billion impact on OBEGAL
(subject to any top-down adjustments performed by the Treasury).
3.
Kāinga Ora holds a significant balance sheet. In 2022/23, it held total assets of
$45.1 billion (most of which is in the property portfolio of around 70,000 homes) and
total liabilities of $14.7 billion. Most of its liabilities are split between market debt and
Crown loans to Kāinga Ora.
4.
Kāinga Ora debt is incorporated into the Crown’s net debt fiscal indicator.
5.
The previous Government agreed that Kāinga Ora would only borrow from the Crown
going forward. There is an appropriation in Vote Housing and Urban Development that
sets the limit to the lending facility agreed by Cabinet. Currently, there is $9.974 billion
in the appropriation.
6.
However, this amount was only intended to cover the investment in public home
purchasing and developing (growth and renewals) to June 2025 and other cost
pressures to June 2026, because there was insufficient information and uncertainty to
commit to lending beyond this period at Budget 2023.
7.
In addition, Kāinga Ora also have approval for $2 billion in relation to the Kāinga Ora
Land Programme. Not all of this is forecast to be drawn down but there are a couple of
approvals that will be required over the short-term that relate to Ferncliff and
Plimmerton. On the LSP's the Crown funds the difference between costs and revenues
from the HAF so it is arguably not debt funded. From a cash flow perspective Kāinga
Ora will need to forecast cost and revenue separately. HAF funding for the LSPs is
paid by HUD in arrears so there will be borrowing for working capital requirements (i.e.
the size of the cash lake is a function of the entire capital draw, not just public housing
purchasing and delivery).
8.
Kāinga Ora’s forecasts “look through” the appropriated lending facility. For the HYEFU,
their debt projection submitted to New Zealand Debt Management forecasts
$16.9 billion in new debt by June 2028. The Treasury has made a top-down adjustment
that revises the forecast so the impact on the Crown’s net debt is forecast at
$13.2 billion in new debt by June 2028.
Funding model
9.
Kāinga Ora has several sources of revenue, which can be thought of as revenue for
public housing activities and revenue for urban development activities.
Revenue for public housing activities
10. Public housing activities are funded through a market rent model. Kāinga Ora charge
tenants subsidised market rent, such that they only pay up to 25% of their income. The
Crown pays this Income-Related Rent Subsidy (IRRS) to Kāinga Ora, appropriated for
in the
Purchase of Public Housing Provision appropriation and administered by HUD.
The appropriation is not automatically inflation adjusted, so when market rents increase
there is pressure on the appropriation, which has led to decisions to increase the
appropriation annually over recent years.
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11. Market rents are determined by prevailing market conditions for similar homes in the
same region. For example, median weekly rental prices for a 3-bed house are $745 in
Auckland Central and $560 in Palmerston North. These are then adjusted according to
several variables on house quality and tenancy services provided.
12. When Kāinga Ora build new homes that are not offset by demolitions or sales (i.e., they
grow the public housing portfolio), they can also seek the Operating Supplement (OS)
from the Crown to a cap of 100% of market rent. The OS is also appropriated for in the
Purchase of Public Housing Provision appropriation. It is intended to help meet the
difference between the market rent collected and the operating costs of a new home so
that Kāinga Ora have financial incentive to grow the portfolio (following Minister’s
decisions to do so). Operating Subsidy is relatively new, so it does not make up much
of Kāinga Ora’s current funding.
13. There are two key implications of this funding model for operating public housing:
a
There is more financial incentive to invest in housing in high-rent areas than low-
rent areas, which we hypothesise has caused Kāinga Ora to build fewer new
homes in the regions.
b
The cost to operate many new homes (especial y renewed homes where no OS
can be claimed) wil not be sufficiently met by market rent, driving an operating
deficit.
Revenue for urban development activities
14. The Crown also pays Kāinga Ora to undertake various urban development activities.
15. Some of the funding is appropriated for in the
Homes and Communities appropriation,
with only $21 mil ion per year appropriated for from 2024/25 onwards (compared to $82
million in 2023/24).
16. It is mostly time-limited; the previous Government decided to only provide one year of
funding through Budget 2023 with the expectation that Kāinga Ora produce a business
case to inform decisions at Budget 2024. Kāinga Ora is preparing this business case.
We have set the expectation that it will provide detailed options for the level of funding
for the urban development activities moving forward, (with clarity on which are
legislatively required), which we not available at Budget 2023.
17. There are various other activities, like Large Scale Projects, that are funded through
other Crown appropriations. Kāinga Ora also collect minimal revenue from 3rd party
sources, such as by leasing houses to Community Housing Providers.
18. Depending on Kāinga Ora’s financial management, there may be cross-subsidisation
(e.g., revenue for public housing activities used for urban development activities, or
vice versa), but we have not confirmed this.
19. Kāinga Ora’s Consolidated Forecast Model forecasts the following revenue over the
forecast period:
FY23/24
FY24/25
FY25/26
FY26/27
FY27/28
[$M]
[$M]
[$M]
[$M]
[$M]
Rent revenue (tenant rent, IRRS, OS)
1,885
2,154
2,325
2,420
2,420
Urban development revenue
178
185
190
189
189
Other revenue (e.g., sales)
396
269
248
414
378
Total Revenue
2,460
2,608
2,764
3,022
2,987
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Attachment 4: Levers for Influence
Responsible Minister(s) have relatively few levers to influence Kāinga Ora’s performance.
Ministers:
•
Have influence through regular meetings with the Chair, and through the feedback
provided to the Board on performance reporting.
•
Have the opportunity to influence the organisation’s direction and performance through
their input into the Statement of Intent, Statement of Performance Expectations, and in
the (usually annual) Letter of Expectations (LoE) to the Board.
•
Have influence through funding settings and through feedback on investment proposals
that come to them for consultation.
•
Have the power to request information relating to the operations and performance of
the entity (s133). This power is rarely, if ever used. Ministers and their monitors usually
prefer to work with agencies to improve information provision over time and use the
LoE to signal where further improvement is needed. Failure to provide information may
be due to inadequacies in recording or data systems. A statutory request is of little help
in that circumstance.
•
May direct an entity to give effect to government policy (s103) or support a whole of
government approach (s107), but may not direct an entity in relation to any statutorily
independent function, or direct the performance or non-performance of a particular
“act” (s113). This power is rarely, if ever used. This is in part because it is sometimes
seen as a nuclear option, and in part because of the limitations on what can be
directed. There are, however, some matters that a Board may feel run contrary to their
statutory duties and where use of this power may be appropriate.
•
My review the entity’s operations and performance (Crown Entities Act (2004) s132).
This power is rarely, if ever used. Ministers and their monitors usual y prefer a more
col aborative approach to reviews because this improves the likelihood of review
findings being implemented. There are, however, some matters that a Board may feel
run contrary to their statutory duties and where use of this power may be appropriate.
•
Have power to appoint and remove members of the Board.
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