22. A number of options were considered for the role of the Minister of finance as set out below (These are discussed in more detail in the following section):

    Option 1: Shared Responsibility for Ownership

23. This option would involve the Minister of Health and the Minister of Finance serving as joint Responsible Ministers. This scenario is analogous to the current HHS model where both the Minister of Health and the Minister of Finance are shareholding Ministers. Under this scenario, both Ministers would need to agree DHB ownership performance targets and would monitor DHB performance against those targets, and against the backdrop of the Crown's wider fiscal interest.

24. This option would provide the Minister of Finance with the best opportunity to manage the fiscal risks associated with the sector. It largely mirrors the arrangements that are currently in place for Hospital and Health Services. Treasury and CCMAU note that they consider that there have been some benefits from this approach, in particular, bringing financial expertise and focus to the sector and providing a consistent joint Crown position. The Ministry of Health considers that this may reduce accountability of the Minister of Health as responsible Minister in some circumstances.

25. Officials note that DHBs will be different in nature to HHSs and as a result the current arrangements for HHSs may not be the most appropriate.

26. While officials consider this option would provide the Minister of Finance with the best opportunity to manage fiscal risks, there are also some disadvantages, which are discussed below, and on balance, this is not the preferred option.

    Option 2: Risk-Based Approach (preferred option)

27. A second possibility that has less involvement for the Minister of Finance but should be sufficient to manage fiscal risks, would be to tailor the level of involvement of the Minister of Finance to the situation. In particular, this would involve:
    1. joint Ministerial approval being required for DHB decisions that involve significant fiscal cost and risk;

    2. the Minister of Health consulting the Minister of Finance on decisions that have a lower fiscal cost and risk; and

    3. increased Minister of Finance involvement when a DHB represents a fiscal risk to the Crown through poor performance.

Option 1: Shared Responsibility for Ownership

28. Ministers taking shared responsibility for the ownership performance of DHBs would provide the Minister of Finance with the best opportunity to manage the fiscal risks associated with DHBs.

29. This would operate much as the joint responsibility under HHS shareholding Minister arrangements currently operates. The emphasis for accountability and approval would centre around the reporting framework for the DHBs.

30. Under this arrangement, any ownership related decisions would need to be jointly agreed by the Ministers of Health and Finance. This would include any decision which:
    1. impacts the balance sheet (including capital injections, investment decisions, debt raising, capital withdrawals etc);

    2. impacts the operating or cashflow performance of DHBs (including funding levels, operating costs, purchasing requirements etc);

    3. sets performance targets relating to the financial statements of DHBs;

    4. relates to the strategic direction of DHBs (including significant changes to service provision arrangements).

31. Within this context, the Minister of Finance would be required to approve, in conjunction with the Minister of Health, the financial component of DHB's:
    1. high level Strategic Plan;

    2. annual plan and statement of intent; and

    3. any other reporting and accountability documents provided by DHBs.

32. The arrangements under this option should also include provisions for the Minister of Finance to delegate ownership responsibilities to the Minister of Health as the performance of the sector improves. The Minister of Health would then have sole responsibility for any delegated components.

33. Although this arrangement would provide the Minister of Finance with a high degree of comfort around managing the fiscal risks associated with DHBs, there are some disadvantages with this:
    1. it requires a high level of commitment from the Minister of Finance, which may not be reasonable given other commitments within the Minister's portfolio;

    2. it may be interpreted as reducing the responsibility of the Minister of Health for performance within the sector;

    Option 2: Risk-Based Approach (preferred option)

34. Option 2 would reduce the Minister of Finance's role while maintaining sufficient involvement to adequately manage fiscal cost and risks. Our assessment is that this represents the minimum level of involvement the Minister of Finance could undertake while adequately managing fiscal costs and risks.

35. Any decisions that involve significant fiscal cost or risk would require approval from both the Ministers of Health and Finance. These include decisions regarding:
    1. significant capital investments ;

    2. major transactions¹;

    3. the provision of equity injections; and

    4. any terms and conditions around the approval of such decisions.

36. Decisions which involve less fiscal cost and risk but which still represent a risk to the Crown's fiscal position would require the Minister of Health to consult with the Minister of Finance. These include decisions regarding the approval of financial plans and performance targets contained in each DHB's annual plan, strategic plan and Statement of Intent, including:
    1. operating and cashflow statement performance;

    2. balance sheet structure and maintenance;

    3. capital asset maintenance and replacement plans;

    4. any significant changes in a DHB's strategic direction;

37. Under this scenario, it is also recommended that the Minister of Finance's role in regard to particular DHB's be escalated depending on the extent to which the DHB is considered to represent a fiscal risk. For example, if the financial performance of a DHB deteriorates and the risk it represents increases, the role of the Minister of Finance should be escalated. The accountability workstream is currently developing the rewards and sanctions framework for DHBs. This has a report back date of August. To reduce complexity and avoid confusion within the sector, it would be preferable for the escalation process in relation to Minister of Finance's role to be defined as part of this framework.

38. Officials therefore recommend that, if Ministers chose to accept this risk-based role for the Minister of Finance, that the escalation path and implications be considered as part of the report back on the rewards and sanctions framework. In order for the Minister of Finance to be able to asses the level of risk in an individual DHB the regular financial performance information will be provided to the Minister of Finance for example the monthly financial report on DHBs. In addition the Minister would be provided with the risk assessment of each DHB. In the event that the Minister of Finance has a different view on the level of risk there would need to be a discussion between the Ministers of Health and Finance to resolve the difference in views. Officials recommend that the process for advising and resolving this difference of view be reported back with the work on incentives and sanctions by 31 August 2000.

39. It is noted that on establishment of the DHBs there is a higher level of risk to the Crown than would be expected as DHBs become more experienced. It is therefore recommended that the Minister of Finance would be involved at the maximum level initially.

40. In particular, I recommend that initially the Minister of Finance, in addition to his usual role under this option:
    1. has the ability to request from the DHB any information relevant to the ownership interest;

    2. agrees the financial components of the DHB's annual plan, strategic plan and Statement of Intent;

    3. agrees any terms and conditions around the support of these documents; and

    4. has the ability to request that Treasury, in consultation with the Ministry of Health and CCCMAU, undertake a review of the financial performance of the DHB.

41. I further recommend that the Minister of Finance have this level of involvement with any DHB whose financial performance is poor enough that they are considered a significant fiscal risk.

¹The definition and use of 'significant capital investment' and 'major transactions' is included in the report District Health Board Investment and Balance Sheet Management: Further Work (back)