2018/19 Annual Review of the Commerce Commission

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Reports of select committees on the 2018/19 annual reviews of Government departments, Offices of Parliament, Crown entities, public organisations, and State enterprises

Volume 1

Financial Statements of the Government for the year ended 30 June 2019 Economic Development and Infrastructure Sector Education Sector Environment Sector External Sector Finance and Government Administration Sector

Fifty-second Parliament April 2020

Presented to the House of Representatives

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Contents

Crown entity/public Select Committee Date presented Page organisation/State enterprise

Financial Statements of the Finance and Expenditure 19 Mar 2020 13 Government of New Zealand for the year ended 30 June 2019 Economic Development and Infrastructure Sector

Accident Compensation Education and Workforce Not yet reported Corporation

Accreditation Council Economic Development, 27 Mar 2020 24 Science and Innovation AgResearch Limited Economic Development, 10 Mar 2020 25 Science and Innovation Air New Zealand Limited Transport and Infrastructure 25 Mar 2020 31

Airways Corporation of New Transport and Infrastructure 24 Mar 2020 38 Zealand Limited

Callaghan Innovation Economic Development, 26 Mar 2020 39 Science and Innovation City Rail Link Limited Transport and Infrastructure 25 Mar 2020 47

Civil Aviation Authority of New Transport and Infrastructure 26 Mar 2020 54 Zealand

Commerce Commission Economic Development, 27 Mar 2020 60 Science and Innovation

Crown Infrastructure Partners Transport and Infrastructure 31 Mar 2020 68 Limited

Earthquake Commission Governance and 13 Mar 2020 74 Administration

Electricity Authority Transport and Infrastructure 24 Mar 2020 75

Electricity Corporation of New Transport and Infrastructure 24 Mar 2020 75 Zealand Limited

Genesis Energy Limited Transport and Infrastructure 24 Mar 2020 75

KiwiRail Holdings Limited Transport and Infrastructure 31 Mar 2020 76 I.20E

Crown entity/public Select Committee Date presented Page organisation/State enterprise

Kordia Group Limited Economic Development, 27 Mar 2020 82 Science and Innovation

Maritime New Zealand Transport and Infrastructure 24 Mar 2020 38

Mercury NZ Limited Transport and Infrastructure 24 Mar 2020 75

Meridian Energy Limited Transport and Infrastructure 24 Mar 2020 75

Meteorological Service of New Economic Development, 26 Mar 2020 83 Zealand Limited (MetService) Science and Innovation

Ministry of Business, Innovation Economic Development, Not yet reported and Employment Science and Innovation

Ministry of Transport Transport and Infrastructure 31 Mar 2020 88

New Zealand Post Limited Economic Development, 26 Mar 2020 95 Science and Innovation New Zealand Productivity Economic Development, 27 Mar 2020 103 Commission Science and Innovation New Zealand Railways Corporation Transport and Infrastructure 31 Mar 2020 76 New Zealand Tourism Board Economic Development, 10 Mar 2020 104 Science and Innovation New Zealand Trade and Enterprise Economic Development, 26 Mar 2020 110 Science and Innovation New Zealand Transport Agency Transport and Infrastructure 23 Mar 2020 116 New Zealand Venture Investment Economic Development, 27 Mar 2020 82 Fund Limited Science and Innovation Takeovers Panel Economic Development, 27 Mar 2020 24 Science and Innovation Te Kāhui Whakamana Rua Tekau Finance and Expenditure 13 Mar 2020 127 mā Iwa — Pike River Recovery Agency Transport Accident Investigation Transport and Infrastructure 24 Mar 2020 38 Commission Transpower New Zealand Limited Transport and Infrastructure 24 Mar 2020 38 WorkSafe New Zealand Education and Workforce Not yet reported

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Education Sector Education New Zealand Education and Workforce Not yet reported Education Payroll Limited Education and Workforce Not yet reported Education Review Office Education and Workforce 9 Mar 2020 132 Institute of Environmental Science Economic Development, 27 Mar 2020 139 and Research Limited (ESR) Science and Innovation Institute of Geological and Nuclear Economic Development, 27 Mar 2020 139 Sciences Limited (GNS Science) Science and Innovation Landcare Research New Zealand Economic Development, 27 Mar 2020 140 Limited (Manaaki Whenua) Science and Innovation Ministry of Education Education and Workforce Not yet reported National Institute of Water and Economic Development, 26 Mar 2020 141 Atmospheric Research Limited Science and Innovation (NIWA) Network for Learning Limited Education and Workforce Not yet reported New Zealand Forest Research Economic Development, 27 Mar 2020 139 Institute Limited (trading as Science and Innovation Scion) New Zealand Institute for Plant and Economic Development, 27 Mar 2020 140 Food Research Limited Science and Innovation New Zealand Qualifications Education and Workforce Not yet reported Authority Research and Education Advanced Economic Development, 27 Mar 2020 82 Network New Zealand Limited Science and Innovation (REANNZ) Tertiary Education Commission Education and Workforce Not yet reported

Environment Sector Department of Conservation Environment 25 Feb 2020 146 Energy Efficiency and Environment 1 Apr 2020 153 Conservation Authority Environmental Protection Authority Environment 31 Mar 2020 154 Ministry for the Environment Environment 1 Apr 2020 159 New Zealand Walking Access Environment 1 Apr 2020 153 Commission Parliamentary Commissioner for Environment 1 Apr 2020 153 the Environment Predator Free 2050 Limited Environment 31 Mar 2020 166

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External Sector Ministry of Defence Foreign Affairs, Defence and 6 Mar 2020 171 Trade Ministry of Foreign Affairs and Foreign Affairs, Defence and 6 Mar 2020 181 Trade Trade New Zealand Customs Service Foreign Affairs, Defence and 14 Feb 2020 192 Trade New Zealand Defence Force Foreign Affairs, Defence and 6 Mar 2020 171 Trade New Zealand Antarctic Institute Foreign Affairs, Defence and 20 Mar 2020 200 Trade

Finance and Government Administration Sector Crown Asset Management Limited Finance and Expenditure 21 Feb 2020 206 Department of Internal Affairs Governance and 13 Mar 2020 207 Administration Department of the Prime Minister Governance and 13 Mar 2020 215 and Cabinet Administration External Reporting Board Economic Development, 27 Mar 2020 24 Science and Innovation

Financial Markets Authority Economic Development, 26 Mar 2020 221 Science and Innovation

Fire and Emergency New Zealand Governance and 13 Mar 2020 229 Administration

Government Communications Intelligence and Security 14 Feb 2020 234 Security Bureau Committee Government Superannuation Fund Finance and Expenditure 21 Feb 2020 206 Authority Guardians of New Zealand Finance and Expenditure 19 Mar 2020 235 Superannuation Inland Revenue Department Finance and Expenditure 6 Mar 2020 244 New Zealand Security Intelligence Intelligence and Security 14 Feb 2020 252 Service Committee Office of the Clerk of the House of Governance and 13 Mar 2020 253 Representatives Administration Office of the Controller and Auditor- Finance and Expenditure 21 Feb 2020 206 General Office of the Ombudsman Governance and 13 Mar 2020 261 Administration Parliamentary Service Governance and 13 Mar 2020 253 Administration Reserve Bank of New Zealand Finance and Expenditure 19 Mar 2020 267 Retirement Commissioner Finance and Expenditure 21 Feb 2020 206 I.20E

Southern Response Earthquake Governance and 13 Mar 2020 276 Services Limited Administration State Services Commission Governance and 13 Mar 2020 282 Administration Statistics New Zealand Governance and 13 Mar 2020 287 Administration The Treasury Finance and Expenditure 19 Mar 2020 13 Volume 2:

Health Sector Auckland District Health Board Health 25 Mar 2020 293 Bay of Plenty District Health Board Health 24 Mar 2020 303 Canterbury District Health Board Health 31 Mar 2020 304 Capital and Coast District Health Health 24 Mar 2020 303 Board Counties Manukau District Health Health 25 Mar 2020 293 Board Hawkes Bay District Health Board Health 24 Mar 2020 303 Health and Disability Commissioner Health 20 Mar 2020 315 Health Promotion Agency Health 20 Mar 2020 320 Health Quality and Safety Health 24 Mar 2020 325 Commission Health Research Council of New Health 24 Mar 2020 325 Zealand Hutt Valley District Health Board Health 24 Mar 2020 303 Lakes District Health Board Health 24 Mar 2020 326 MidCentral District Health Board Health 24 Mar 2020 326 Ministry of Health Health 12 Mar 2020 327 Nelson Marlborough District Health Health 31 Mar 2020 304 Board Northland District Health Board Health 24 Mar 2020 326 New Zealand Blood Service Health 24 Mar 2020 325 Pharmaceutical Management Health 25 Mar 2020 336 Agency (Pharmac) South Canterbury District Health Health 24 Mar 2020 326 Board Southern District Health Board Health 24 Mar 2020 345 Tairāwhiti District Health Board Health 24 Mar 2020 351 Taranaki District Health Board Health 24 Mar 2020 351 Waikato District Health Board Health 24 Mar 2020 352 Wairarapa District Health Board Health 24 Mar 2020 351 Waitemata District Health Board Health 25 Mar 2020 293 West Coast District Health Board Health 31 Mar 2020 304 Whanganui District Health Board Health 26 Mar 2020 359 I.20E

Justice Sector Abortion Supervisory Committee Justice 9 Mar 2020 365 Crown Law Office Justice 13 Mar 2020 366 Department of Corrections Justice 13 Mar 2020 372 Electoral Commission Justice 13 Mar 2020 380 Human Rights Commission Justice 9 Mar 2020 387 Independent Police Conduct Justice 9 Mar 2020 393 Authority Law Commission Justice 9 Mar 2020 365 Ministry of Justice Justice 9 Mar 2020 399 New Zealand Police Justice 9 Mar 2020 407 Office of the Judicial Conduct Justice 9 Mar 2020 414 Commissioner Parliamentary Counsel Office Justice 9 Mar 2020 365 Privacy Commissioner Justice 13 Mar 2020 419 Public Trust Economic Development, 27 Mar 2020 425 Science and Innovation Real Estate Agents Authority Economic Development, 27 Mar 2020 425 Science and Innovation Serious Fraud Office Justice 9 Mar 2020 426

Māori, Other Populations and Cultural Sector Arts Council of New Zealand Toi Social Services and 9 March 2020 431 Aotearoa Community Broadcasting Commission (NZ On Economic Development, 25 Mar 2020 432 Air) Science and Innovation Broadcasting Standards Authority Economic Development, 26 Mar 2020 438 Science and Innovation Drug Free Sport New Zealand Social Services and 20 Mar 2020 443 Community Heritage New Zealand (Pouhere Social Services and 9 Mar 2020 431 Taonga) Community Māori Television Service (Te Māori Affairs 26 Mar 2020 448 Aratuku Whakaata Irirangi Māori) Ministry for Culture and Heritage Social Services and 25 Mar 2020 461 Community Ministry for Pacific Peoples Social Services and 16 Mar 2020 468 Community Ministry for Women Social Services and 9 March 2020 431 Community Museum of New Zealand Te Papa Social Services and 9 Mar 2020 476 Tongarewa Board Community New Zealand Film Commission Social Services and 9 Mar 2020 482 Community I.20E

New Zealand Lotteries Commission Social Services and 9 Mar 2020 488 Community New Zealand Symphony Orchestra Social Services and 26 Feb 2020 489 Community Office of Film and Literature Social Services and 20 Mar 2020 495 Classification Community Radio New Zealand Limited Economic Development, 27 Mar 2020 502 Science and Innovation Sport and Recreation New Zealand Social Services and 9 Mar 2020 488 Community Television New Zealand Limited Economic Development, 2 Apr 2020 511 Science and Innovation Te Puni Kōkiri (Ministry of Māori Māori Affairs 6 Apr 2020 518 Development)

Te Reo Whakapuaki Irirangi (Māori Māori Affairs 26 Mar 2020 528 Broadcasting Funding Agency, also known as Te Māngai Paho) Te Taura Whiri I Te Reo Māori Māori Affairs 9 Apr 2020 542 (Māori Language Commission)

Primary Sector Animal Control Products Limited Primary Production 5 Mar 2020 551 AsureQuality Limited Primary Production 23 Mar 2020 552 Crown Irrigation Investments Primary Production 5 Mar 2020 551 Limited Land Information New Zealand Primary Production 24 Mar 2020 558 Landcorp Farming Limited Primary Production 23 Mar 2020 564 Ministry for Primary Industries Primary Production 23 Mar 2020 572 Quotable Value Limited Primary Production 23 Mar 2020 583

Social Development and Housing Sector Children’s Commissioner Social Services and 9 March 2020 431 Community Housing New Zealand Corporation Social Services and 20 Mar 2020 588 Community Ministry of Housing and Urban Social Services and 9 Mar 2020 595 Development Community Ministry of Social Development Social Services and 9 Mar 2020 602 Community Oranga Tamariki – Ministry for Social Services and 26 Feb 2020 609 Children Community New Zealand Artificial Limb Service Social Services and 9 Mar 2020 488 Community Ōtākaro Limited Governance and 13 Mar 2020 616 Administration Committee I.20E

Social Investment Agency Social Services and 20 Mar 2020 621 Community Social Workers Registration Board Social Services and 20 Mar 2020 628 Community Tāmaki Redevelopment Company Social Services and 20 Mar 2020 634 Limited Community

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Introduction

This is a compendium of select committee reports on the 2018/19 annual reviews of Government departments, Offices of Parliament, Crown entities, public organisations, and State enterprises. It contains all the reports that had been presented to the House by 27 April 2020.

Some reports were unable to be presented by this date, largely because of the disruption caused by COVID-19. They are noted in the Table of Contents, and will be available on the Parliament website when finalised. About this compendium The compendium has been structured to reflect the organisation of the Estimates of appropriations into 10 sector groupings.

Reports on the annual reviews of security agencies, conducted by the Intelligence and Security Committee, are included in the compendium for ease of reference (under the Finance and Government Administration Sector).

The Finance and Expenditure Committee’s report on the annual financial statements of the Government for the year ended 30 June 2019 is debated separately and so is listed separately from the sector groupings. Consideration of reports by the House The annual review reports are considered in the House during the committee stage of the Appropriation (2018/19 Confirmation and Validation) Bill. The debate also provides an opportunity for debate on the Government’s financial position. I.20E

2018/19 Annual review of the Treasury 2018/19 Annual review of the Financial Statements of the Government of New Zealand for the year ended 30 June 2019

Report of the Finance and Expenditure Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Part A: Financial Statements of the Government of New Zealand ...... 2 Crown revenue and expenses have both increased ...... 3 The OBEGAL surplus is substantial… ...... 4 The Government is planning substantial capital spending ...... 4 GDP growth contributes to the state of Government finances… ...... 5 … and immigration contributes to GDP growth...... 5 Kāinga Ora has been permitted to raise more of its own debt ...... 6 Part B: 2018/19 Annual review of the Treasury ...... 7 The Treasury continues to develop its Living Standards Framework ...... 7 The Treasury wants to improve the advice it provides ...... 9 Actual capital spending is often lower than forecast ...... 9 The Treasury has committed to improving information security ...... 10 District Health Boards have collectively reported a deficit ...... 10 Appendix ...... 11

Dr Deborah Russell Chairperson 14

2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT The Treasury and the Financial Statements of the Government of New Zealand for the year ended 30 June 2019

Recommendation The Finance and Expenditure Committee has conducted the annual reviews of the Treasury for 2018/19, and of the Financial Statements of the Government of New Zealand for the year ended 30 June 2019, and recommends that the House take note of its report.

Introduction We met with the Minister of Finance and the Secretary to the Treasury to discuss the Government’s financial statements for the year ended 30 June 2019, released on 8 October 2019. We also met with the Secretary to the Treasury to consider the 2018/19 performance and operations of the Treasury.

This report is divided into two parts. Part A summarises some key points from the Government’s financial statements for the year ended 30 June 2019, and our hearing of evidence with the Minister of Finance. Part B summarises the main points from the Treasury’s annual report for 2018/19, and our hearing of evidence with the Treasury.

Part A: Financial Statements of the Government of New Zealand The 2019 financial statements of the Government provide a consolidated view of the income, expenditure, and assets of all government entities. The statements compare the results for the year ending 30 June 2019 against those for previous years, and the forecasts prepared by the Treasury in previous Budgets.

The Government’s financial statements for 2018/19 show an increased surplus. The operating balance before gains and losses (OBEGAL) was $7.51 billion, up from $5.53 billion in 2017/18, and higher than the approximately $3.5 billion forecast in Budget 2019. However, once gains and losses were included, the total operating balance was a deficit of $2.27 billion, compared with a surplus of $8.40 billion in 2017/18. The variation was in large part due to substantial revaluations of the liabilities of both the Accident Compensation Corporation and the Government Superannuation Fund.

Over the 2018/19 year, the Crown’s assets increased by $25.8 billion, while its liabilities grew by $15.1 billion, for a total increase in net worth of $10.7 billion. This is a smaller increase than in 2017/18, when the Crown’s net worth increased by $19.2 billion. According to the financial statements, this took the Crown’s net worth to $146.3 billion, equal to 48.8 percent of GDP.

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2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT

Crown revenue and expenses have both increased Core Crown tax revenue increased by $6.1 billion, reaching $85.7 billion, or 28.8 percent of GDP. This increase in revenue was attributed to two main factors:

 economic growth, and corresponding growth in revenue from income tax (up 7 percent), corporate tax (up 13 percent), and goods and services tax (up 5 percent) over the year under review  a one-off change in the taxation system that means that certain tax revenue was accounted for earlier than in previous years. The wider OBEGAL surplus occurred partly as a result of this increased revenue, and partly due to the revaluation of KiwiRail’s assets. We discuss the revaluation in more detail below.

Core Crown expenses have also increased, from $80.6 billion in 2017/18 to $87 billion in 2018/19. This took core expenses to 29 percent of GDP, up from 27.8 percent in 2017/18. The Minister noted that this is still below the 30 percent limit set in the Government’s Budget Responsibility Rules.

Core Crown spending rose faster than inflation Government spending rose by about 8 percent in the period covered by this review. Some of us pointed out that this was four times the rate of inflation over the same period, and asked the Minister what the results of this increased spending have been. We discussed several areas of Government spending in this context.

On housing, we asked whether the Minister was satisfied that only 202 houses had been built under the KiwiBuild programme by 30 June 2019. The Minister noted that the spending allocated to that programme was always intended to be over a 10-year period, so the progress of the scheme in the short term has not had a substantial effect on the financial statements of the Government overall. He accepted that the programme’s outcomes were not to his satisfaction, but noted that other housing programmes have been more successful, particularly in the construction of new public housing.

On health spending, some of us noted that by some measures 18 out of 22 district health boards are now performing worse than two years ago. Some of us suggested that this indicates that increased health spending is not resulting in improved performance in the health sector. The Minister disputed this, and pointed to a government programme to reduce the cost of visits to the doctor for many New Zealanders as an example of a positive outcome of spending. He said that the spending was necessary to correct years of underfunding in the sector.

On job growth and access to training, some of us expressed concern that programmes like Mana in Mahi and the Provincial Growth Fund are not providing jobs and training opportunities proportionate to the amount of money being spent on them. The Minister expressed satisfaction with both of these programmes. He noted that both are in their relatively early stages, and said that they are “ramping up” as time goes on. He pointed out that 500 positions in the Mana in Mahi programme have been funded. He was unable to immediately tell us exactly how many jobs had been created by Provincial Growth Fund projects.

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2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT

Spending was also higher than forecast Some of us pointed out to the Minister that final spending was also 5 percent higher than initially forecast. He told us that this money was in part spent on mental health, the Families Package, the BestStart payment for young families, the winter energy payment, and increases to paid parental leave. The Minister said that substantial investment was needed across the state sector, and pointed out that increasing pay in the education and health sectors also accounted for part of the extra spending.

The OBEGAL surplus is substantial… As we noted earlier, the OBEGAL is the operating balance before gains and losses. It is this measure that is often referred to casually as the “surplus”. While we accept that a $7.5 billion OBEGAL surplus is significant, some of us felt that the OBEGAL on its own, out of context, did not accurately reflect the state of the Government’s financial statements. We asked the Minister about some major factors that contributed to the OBEGAL, which are discussed below.

… but some one-off changes contributed to the Government’s balances A key contributor to the surplus was a major revaluation of KiwiRail, increasing the value of KiwiRail and the rail network by around $5.2 billion. This was justified on the basis that the current Government considers KiwiRail to be a public benefit entity, rather than a commercial one. As a result, it is valued under accounting rules that take into account its replacement cost, rather than the financial return it provides. We heard that the Treasury consulted the Auditor-General on the revaluation, and the Auditor-General is satisfied that the valuation process was performed in accordance with the relevant accounting standards.

Some of us do not agree with this change in valuation, or the underlying rationale that KiwiRail should be valued based on its replacement cost alone. Some of us are also concerned that the Treasury was unable to immediately quantify the benefit that New Zealand receives from KiwiRail.

The Minister also attributed some of the OBEGAL surplus to changes in the tax system, which are mentioned above. While the growth in income tax, corporate tax, and goods and services tax is unlikely to be a one-off, the effects of changes to the tax system will not continue to inflate the OBEGAL in future years.

The Treasury’s forecast for 2019/20 is uncertain The Minister noted that the Treasury had previously forecast a small deficit for the current financial year, but figures from the first half of 2019/20 show a small surplus. However, as 2020 continues, the Government may now be slightly in deficit. The Minister suggested that the current year could plausibly end in either a surplus or a deficit, but in either case it would be a small one.

The Government is planning substantial capital spending The Government has increased capital spending markedly, and has announced plans for a further series of large capital spending projects. We asked the Minister about the focus of

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2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT the Government’s current capital spending plans, and where he expects capital spending to go in future.

In the year under review, the Minister said, capital spending focused on the education and health sectors. He noted the Government’s dissatisfaction with the level of capital spending under the previous Government, particularly in these sectors, which is why they were the main focus for the initial increase in capital spending. The Minister also highlighted transport as a priority, and contributions to the New Zealand Superannuation Fund, which had been paused under the previous Government.

We asked for more information about rail projects in particular. The Minister described much of the investment in rail in the year under review as “just the basics”, such as keeping tracks up to date and upgrading engines. In the future, he said, spending will increase further as part of the Government’s plan to move a substantial amount of freight traffic onto rail, and to use metro rail to ease commuter congestion in the main cities.

The Minister noted that, more broadly, the Government’s low net debt will allow it to continue to invest in further capital projects in future. He told us that even after all of the spending in the Government’s recently announced infrastructure investment proposals, net core Crown debt will still only be around 21.5 percent.

Capital spending is easier to promise than deliver Some of us expressed concern that the Government may not be able to spend all the capital funding it has allocated, pointing to a historic tendency for the Government to underspend on infrastructure in particular. The Minister accepted that the public sector has often not been ready to deliver the sort of major programmes that the Government has planned, but he expects that to improve in the future. He rejected any assertion that the Government does not have an excellent track record in delivering its projects.

We discuss the delivery of capital projects in more detail later in this report, as part of our review of the Treasury.

GDP growth contributes to the state of Government finances… We pointed out that while the Minister initially expected GDP growth of around 3.6 percent in the current year, that forecast is being revised downward, to around 2.2 percent. The Minister attributed this to the slowing global economy, rather than any Government missteps, and said that New Zealand is still growing relatively more quickly than many similar countries, even at that lower rate.

… and immigration contributes to GDP growth We note that GDP growth has helped the Government to achieve a surplus despite increasing its spending. However, some of us consider that focusing on nominal GDP growth figures obscures the important role that immigration continues to play in growing the New Zealand economy. We asked the Minister for further information about immigration, its effects on GDP, and how New Zealand’s GDP growth looks without the boost from immigration.

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2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT

The Minister noted firstly that New Zealand’s real GDP growth per capita is just under 1 percent, which is substantially lower than the headline figure of 2.2 percent nominal growth. He noted that this is broadly in line with the 5- and 10-year averages for real GDP growth per capita. However, he accepted that a change in immigration policy designed to slow immigration is likely to have an impact on nominal GDP growth in future.

Slowing immigration may lead to slowing GDP growth Some of us have had communications from people who are struggling to immigrate to New Zealand because of long Immigration New Zealand processing times, rather than because of policy or eligibility changes. The Minister accepted that this is happening in some cases, but was confident that the cases brought to the attention of members of Parliament were only a small minority in the context of the 40,000 net immigrants to New Zealand each year. He noted that some changes in visa processing temporarily led to delays, and said that this is being addressed. We were also told that the Treasury’s forecasts of economic growth already take into into account the Government’s lower immigration targets.

Kāinga Ora has been permitted to raise more of its own debt Certain Government agencies, including the New Zealand Transport Agency and Kāinga Ora – Homes and Communities, are allowed to borrow externally, without going through the Treasury or adding to core Crown debt. Their debt is managed by the agencies themselves, and as a result does not show up directly on the Government’s balance sheet. We asked the Minister what proportion of Kāinga Ora’s current debt ceiling of $7 billion had been used, and what this debt says about the Government’s overall liabilities.

The Minister was unable to provide us with an exact figure, but noted that while there was scope for up to $7 billion of debt to be held by Kāinga Ora, this limit had not yet been reached. He pointed out that the previous Government first created this debt facility, and while it has been expanded under his watch, it is still accounted for using the same principles as previously. He told us that there are no plans for any other agencies to receive the same power to raise their own debt, nor to increase the debt limits for agencies that currently have that power.

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2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT

Part B: 2018/19 Annual review of the Treasury The Treasury provides the Government with its main economic and financial advice. This advice covers New Zealand’s economy, the Government’s fiscal strategy, and recommendations for ensuring the effective financial management of the Crown’s assets and liabilities.

The Treasury is also responsible for publishing economic and fiscal forecasts and the financial statements of the Government.

Financial performance and audit results The Treasury received total revenue of $114.23 million in 2018/19. Of this, over $100 million came from Vote Finance, while most of the balance came from payments from other central agencies for support services. Expenditure over the period was $102.12 million, leading to a surplus of $12.11 million.

Comments from the Auditor-General The Auditor-General rated the Treasury’s management control environment as “very good”, and its financial information and supporting systems and controls, and performance information and supporting systems and controls as “good”. These ratings are the same as for the last three years. We note that previously identified deficiencies have been partly resolved, and encourage the Treasury to continue to address the Auditor-General’s recommendations.

The Treasury continues to develop its Living Standards Framework A substantial part of the Treasury’s work has been the development and deployment of the Living Standards Framework (LSF). The LSF is a tool to improve the analysis of the costs and benefits of policy proposals by including analysis of the non-fiscal effects of proposals. A substantial proportion of our discussion with the Treasury dealt with the LSF and its operation.

During our review, some of us expressed concern that this new, broader way of analysing costs and benefits risks diluting the rigour of traditional economic analysis. The Treasury told us that the LSF complements its traditional toolkit well, by incorporating more of the real- world outcomes of policy decisions into its analysis. It considers the LSF an effective way to introduce standardised, systematic analysis of a wider range of factors.

The wellbeing approach to the Budget is informed by the LSF The current Government has taken a wellbeing approach to the Budget, intended to focus on the broader wellbeing of New Zealanders, rather than particular departmental outputs. We heard that the LSF has been an important contributor to this, because it applies a similarly broad focus to individual projects, and helps to identify and quantify how they contribute to overall wellbeing. The Treasury considers this a substantial improvement to the financial scrutiny it has traditionally carried out, because it allows for more holistic consideration of the outcomes of the Government’s work, while still maintaining a high standard of scrutiny in the traditional sense.

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2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT

The LSF is not standardised across all of government Some of us noted that, while the Treasury itself uses the LSF to analyse a very broad range of projects, individual departments and agencies have substantial scope to develop their own wellbeing measurements, which feed into the Treasury’s analysis. We expressed concern that this can lead to a proliferation of expensive projects, in which multiple agencies develop different frameworks to assess the same outcomes. Some of us thought that this would reduce the Treasury’s ability to compare projects across government on a like-for-like basis.

We heard that the Treasury does not intend the LSF to become a single standardised tool to be used all across government. It relies on the expertise of relevant agencies to decide what information to collect, and how to present it. The Treasury’s role is then to improve the aggregation and use of this information.

The Treasury could not confirm the total cost of developing all LSF inputs In light of the fact that agencies across government are developing their own wellbeing measurements to be incorporated into the Treasury’s LSF, we asked whether the Treasury could provide us with the total cost of developing these new measurements. We heard that the total cost to the Treasury of developing the LSF was $1.5 million. Around $1 million of this cost was for the time spent by core Treasury personnel, and the remaining $0.5 million mainly related to payments to external consultants and contractors.

We also asked for information on how much other agencies have spent on developing their own wellbeing measurements. Some of us were concerned at suggestions that the Treasury may not have access to this information. We note that in subsequent answers to the committee, the Treasury has confirmed that it does not have information on how much money other agencies have spent to develop their own wellbeing measurements.

The LSF will continue to be developed and improved upon While the LSF may be an effective tool for assessing the impact of policies on individuals’ wellbeing, we noted that concerns have been raised about its ability to assess wellbeing on a family or whānau level. Similarly, the LSF is not currently effective at measuring New Zealand’s international standing. We asked the Treasury what further work is being done to develop the LSF in these particular areas, as well as more generally.

The Treasury indicated that there are three main areas of focus for developing the LSF. They are:

 improving the wellbeing measurements that the framework is based on  recognising more factors in the LSF, including child wellbeing and cultural capital  moving the LSF from a conceptual tool to a practical one. Adding family and whānau into the LSF is part of the second focus area. However, we heard that access to data may slow this, because much of the wellbeing surveys and reporting done in New Zealand focuses only on individuals. This may make it difficult to access data to add to the LSF, even once these factors are included in the framework. The Treasury told us

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2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT that it is working to change the focus of some data-gathering to ensure that it has the necessary material for its model.

We were told that it is difficult to fit broader matters like international standing and national identity and security into the LSF, because of the complexity of finding the empirical benefit of these factors. Work is ongoing to incorporate these, and other complex matters, into the LSF.

The Treasury wants to improve the advice it provides In its annual report, the Treasury reported that 66 percent of its policy advice in 2018/19 met the quality standard it has set, against a target of 75 percent. Feedback from the Minister of Finance, another important measure of the quality of advice, has been better. The Minister has expressed satisfaction with the quality of advice 80 percent of the time.

Some of us consider that some of the Treasury’s recent analysis was not of sufficient quality, particularly in its regulatory impact analysis of legislation. We asked whether the quality of advice is a focus for the Treasury, and how large its advisory team is, particularly for the cost–benefit analysis of proposed legislation.

The Treasury told us that improving the quality of its advice is a focus area. Quarterly results over the last two years show an upward trend in the quality of advice, albeit from a relatively low baseline. We heard that work to improve the quality of advice has to cover the whole organisation, because there is not one particular team responsible for providing all advice.

The Treasury is not currently providing advice on Ihumātao While discussing advice, some of us asked whether the Treasury had provided the Government with detailed advice on the negotiations at Ihumātao, and whether they had any implications for the reopening of Treaty settlements. The Treasury told us that it is not currently providing any advice on the matter.

More staff were recruited, to fill vacancies and work on specific projects We noted that the Treasury’s total number of staff increased by 12 percent in 2018/19. The Treasury told us that part of the increase is because of a concerted effort to fill more vacancies, when its previous practice has sometimes been to leave a substantial number of vacancies open for some time. This change in practice has been focused on recruiting more economic expertise, particularly from overseas, to improve the quality and quantity of work it can do. There has also been an increase in the number of fixed-term staff, although these were largely interns and business support staff.

Many staff were also hired for the unusually large number of special projects the Treasury was called on to undertake during the year. The development of the New Zealand Infrastructure Commission, Te Waihanga, and the Green Investment Fund were examples.

Actual capital spending is often lower than forecast The Government has announced plans for major capital spending in Budget 2020, and capital spending was a similarly major focus of Budget 2019. However, we note that agencies are often unable to spend the entire capital budget allocated to them. We asked to

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2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT what extent the Treasury monitors this capital underspending, and whether it has detailed breakdowns of where it occurs.

The Treasury accepts that capital spending projections are often optimistic, but it told us that it builds this “optimism bias” into its forecasts. It prepares overall capital spending forecasts for the Government, but is unable to break these forward-looking forecasts down by entity. We heard that information at that level of detail is only available retrospectively. Even then, the Treasury collects and displays information only on capital spending per entity, rather than per project.

We requested a breakdown of capital spending across government over the 2018/19 year. This data shows that total forecast spending on the purchase and construction of physical assets over this period was $10.03 billion, while actual spending was only $8.83 billion. That is, capital spending was $1.2 billion below forecast.

The Treasury has committed to improving information security We discussed the leak of some Budget data in May 2019, and the subsequent inaccurate claims that the Treasury had been hacked. The Treasury reiterated that it regrets its poor information security, and the error it made after the leak occurred. It explained how the incident occurred, and assured us that it has undertaken substantial work to improve its IST processes. An inquiry into the matter is still ongoing, and we await the outcome of that investigation with interest.1

District Health Boards have collectively reported a deficit One further topic of discussion was the substantial collective deficit reported by district health boards (DHBs) across the country. In total, this combined deficit in 2018/19 reached $1.1 billion. We asked whether there is a specific deficit target for DHBs set by the Minister of Finance, and what advice the Treasury has been giving on the matter.

The Treasury noted that around $700 million of this deficit was due to holiday pay liabilities owed to staff that have only recently been discovered. It does not expect these to repeat, but has forecasts of what expected future deficits are, and has built those estimates into its forecasts.

1 The final report of this inquiry was released shortly after our hearing with the Treasury. It can be accessed here. 10 23

2018/19 ANNUAL REVIEW OF THE TREASURY AND FINANCIAL STATEMENTS OF THE GOVERNMENT

Appendix

Committee procedure We met on 7 February and 18 March 2020 to consider the annual reviews of the Treasury and the Financial Statements of the Government for the year ended 30 June 2019. We heard evidence from the Secretary to the Treasury, Caralee McLiesh, and the Minister of Finance, Hon Grant Robertson. We received advice from the Office of the Auditor-General.

Committee members Dr Deborah Russell (Chairperson) Kiritapu Allan Andrew Bayly Rt Hon David Carter Tamati Coffey Hon Judith Collins Hon Paul Goldsmith Ian McKelvie Greg O’Connor David Seymour Jamie Strange Fletcher Tabuteau Dr Duncan Webb

Advice and evidence received We received the following documents as advice and evidence for this annual review. They are available on the Parliament website, www.parliament.nz, along with transcripts of our hearings.

Office of the Auditor-General (Briefing on the Treasury and the Financial Statements of the Government of New Zealand).

The Treasury (Responses to written questions).

11 24

2018/19 Annual review of the External Reporting Board (XRB)

2018/19 Annual review of the Takeovers Panel

2018/19 Annual review of the Accreditation Council

Report of the Economic Development, Science and Innovation Committee

March 2020

The Economic Development, Science and Innovation Committee has conducted the annual reviews of the External Reporting Board (XRB), the Takeovers Panel, and the Accreditation Council, and has no matters to bring to the attention of the House. The committee recommends that the House take note of its report.

Jonathan Young Chairperson 25

2018/19 Annual review of AgResearch Limited

Report of the Economic Development, Science and Innovation Committee

March 2020

Contents Recommendation ...... 2 Introduction to AgResearch Limited ...... 2 Financial overview and audit results ...... 2 Financial viability ...... 3 Future Footprint Programme ...... 3 Revitalised Science Plan ...... 3 Sector developments and trends ...... 4 Maintaining agricultural export productivity ...... 4 Ryegrass genetic modification ...... 4 Gender diversity ...... 4 Appendix ...... 6

Jonathan Young Chairperson 26

2018/19 ANNUAL REVIEW OF AGRESEARCH LIMITED

AgResearch Limited

Recommendation The Economic Development, Science and Innovation Committee has conducted the annual review of AgResearch Limited for 2018/19, and recommends that the House take note of its report.

Introduction to AgResearch Limited AgResearch Limited is a Crown Research Institute, responsible for carrying out scientific research for the benefit of New Zealand. AgResearch aims to drive prosperity by developing knowledge and technology in the agricultural industry. The outcomes it seeks are:

 protected, enhanced, and sustained natural resources  agile, resilient, and adaptive social and biological systems  profitable and sustainable land-based rural enterprise  added-value foods and bio-based products that meet consumers’ needs. Dr Paul Reynolds is the board chair and Tony Hickmott is the acting chief executive. AgResearch has 722 research staff and four research centres: Ruakura (Hamilton), Grasslands (Palmerston North), Lincoln (Canterbury), and Invermay (Mosgiel). Its headquarters are based at Lincoln.

Financial overview and audit results AgResearch’s total operating revenue increased in 2018/19 by $11.5 million, to $157.3 million. This was a change from a five-year decline in most streams of revenue. The most significant increases were $5 million in commercial research revenue and a $4.8 million overall increase in funding administered by the Ministry of Business, Innovation, and Employment through the Strategic Science Investment Fund and contestable funds. AgResearch’s total operating expenditure increased by $5.9 million (to $153.8 million), mainly attributable to increased costs for wages and supplies, consistent with the increase in revenue.

AgResearch made a net loss of $7 million, compared with a budgeted loss of $2.2 million (in 2017/18, it had a loss of $1 million). The loss was mostly due to exiting the partnership with Lincoln University to build a joint campus facility.

The Auditor-General graded AgResearch’s management control environment as “good”. This is a downgrade from the previous year’s assessment of “very good”. The Auditor- General noted a lack of readiness for adopting new accounting standards. This had flow-on effects to other areas of the year-end reporting (taxation calculations, cash flow reporting, and financial statement disclosures).

2018/19 ANNUAL REVIEW OF AGRESEARCH LIMITED

As in 2017/18, the Auditor-General graded AgResearch’s financial information systems and controls as “needs improvement”. The issues identified in the previous year relating to controls within the IT systems have only been partly resolved, with some improvements implemented mid-year.

Financial viability We note that MBIE has AgResearch on watch for financial viability. This means that financial issues have been identified. AgResearch informed us that this is largely due to the size of the building development programme it is doing. It expects that it will remain on watch until the facilities are complete. AgResearch explained that it does not view being on watch negatively, as it demonstrates MBIE’s interest in AgResearch’s development as a business. We will continue to monitor AgResearch’s progression in this area with interest.

We asked what AgResearch’s future financial plans were in place with regards to being on watch. AgResearch told us that it expects modest growth for the forecasted period (2019- 2024). It expects losses through to the 2021 financial year, but it anticipates being in a normalised position beyond this.

Future Footprint Programme AgResearch’s Future Footprint Programme (FFP) included the building of a joint facility with Lincoln University. The original plan involved the entities relocating into the new facility at the same time and working in it together. However, following its decision to exit the partnership, AgResearch is planning to continue the construction alone. AgResearch explained that it intends to work closely with Lincoln as it wants to continue with the collaborative principles of co-locating, but will be continuing the construction independently. Both organisations remain committed to working closely in 2020 in the development of new buildings.

The total capital allowance of the revised Lincoln facility is estimated to be $97.8 million. This cost will be funded through a combination of existing cash reserves, potential asset sales, and external borrowing.

Relocation costs have totalled $0.12 million. Additionally, there has been a total of $0.8 million paid out in relation to restructuring and staff redundancies. The Auditor-General is satisfied that these costs were in line with its contractual obligations.

Joint Food Science Facility Also included in the FFP was the construction of the Joint Food Science Facility with Massey University in Palmerston North. AgResearch told us that this development is continuing to progress well. AgResearch expects the building to be finished in late March 2020 and operating by mid-April.

Revitalised Science Plan AgResearch has now completed its new Science Plan following consultation with its internal and external stakeholders. The plan is an important document that will guide AgResearch’s areas of focus in its research. It aims to be the foundation of the organisation’s strategic and

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2018/19 ANNUAL REVIEW OF AGRESEARCH LIMITED operational thinking. AgResearch is currently focused on understanding the capabilities it will need over the next five years as the Science Plan is rolled out.

Sector developments and trends We discussed trends that are disrupting the primary production sector. One of the major tends is growing awareness about climate change and its effects, such as greenhouse gas emissions from livestock farming. In addition to this, AgResearch acknowledges changing views regarding meat and dairy consumption, including the impacts of meat and dairy alternatives. It noted that, while pastoral research is a large part of its work, food research is becoming increasingly important to address the challenges in this area.

We were told that AgResearch is partnering with key stakeholders and leading technology providers that will support the pastoral sector to be more sustainable and adaptable to sector developments and trends.

Maintaining agricultural export productivity As other regions are becoming increasingly productive in the agriculture sector, we asked AgResearch what is being done to maintain New Zealand’s high output in this area. We heard that the Our Land and Water National Science Challenge is hosted by AgResearch and has a major focus on looking at the value chain. The Challenge has 14 research parties including all of New Zealand’s Crown research institutes and the majority of the country’s universities.

We were told the Challenge involves research around where New Zealand industries could be capturing more value for its producers. The underlying objective of the Our Land and Water National Science Challenge is to be able to enhance the productivity of the sector while maintaining sustainable management of New Zealand’s land and water resources.

Ryegrass genetic modification

Ryegrass is the most common choice of pasture grass in New Zealand, and its cultivars (varieties produced in cultivation by selective breeding) are widely used for animal feed. AgResearch told us about the high metabolisable energy (HME) ryegrass that it is currently testing in the United States. Tests on HME ryegrass have shown that it grows 50 percent faster and produces 23 percent less methane from livestock than conventional ryegrass. It is also able to store more energy for better energy growth and is more drought resistant.

AgResearch noted that under the Hazardous Substances and New Organisms (HSNO) Act, no heritable material from a new organism used in a field trial can be released. This is interpreted to include pollen, which cannot be practically contained. AgResearch would therefore be unable to conduct any future field trials of the HME ryegrass in New Zealand.

Gender diversity

We heard that AgResearch has a gender balance across the organisation. Women hold leadership positions across all layers of the organisation, including a majority female board

2018/19 ANNUAL REVIEW OF AGRESEARCH LIMITED of directors. AgResearch’s annual report notes its work in raising awareness of unconscious bias and defining its zero tolerance for bullying and harassment in the workplace.1

1 AgResearch, Annual Report 2019, page 35.

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2018/19 ANNUAL REVIEW OF AGRESEARCH LIMITED

Appendix

Committee procedure We met on 12 December 2019 and 5 March 2020 to consider the annual review of the AgResearch Limited. We heard evidence from AgResearch and received advice from the Office of the Auditor-General.

Committee members Jonathan Young (Chairperson) Tamati Coffey Andrew Falloon Brett Hudson Gareth Hughes Melissa Lee Clayton Mitchell Dr Deborah Russell Stuart Smith Hon Poto Williams

Office of the Auditor-General (Briefing on AgReseach).

AgResearch (Responses to written questions).

6 31

2018/19 Annual review of Air New Zealand Limited

Report of the Transport and Infrastructure Committee

March 2020

Contents Recommendation ...... 2 About Air New Zealand Limited ...... 2 Financial overview and audit results ...... 2 Focusing on the Pacific Rim ...... 3 Balancing profitability with obligations as the national carrier ...... 3 Offsetting carbon emissions ...... 4 Deferring fleet investment ...... 4 The provision of aviation security ...... 5 Australian alliances ...... 5 Managing problems with the Rolls-Royce engines ...... 6 Appendix ...... 7

Darroch Ball Chairperson

2018/19 ANNUAL REVIEW OF AIR NEW ZEALAND LIMITED

Air New Zealand Limited

Recommendation The Transport and Infrastructure Committee has conducted the annual review of Air New Zealand Limited for 2018/19, and recommends that the House take note of its report.

About Air New Zealand Limited Air New Zealand is the national airline and operates passenger and air cargo services domestically and internationally. It is a public company listed on the New Zealand and Australian stock exchanges. The Crown is a 51.91 percent shareholder and is also holder of the Kiwi Share, a single share that does not carry general voting rights but requires the Crown’s consent for certain actions. This is designed to maintain Air New Zealand’s status as a substantially New Zealand-owned and -controlled company.

An independent seven-member board governs Air New Zealand. Tony Carter stepped down as Chairman in September 2019 and was replaced by Dame Therese Walsh. Also in September, Christopher Luxon stepped down as Chief Executive, a role he had held since 2012. Air New Zealand’s Chief Financial Officer, Jeff McDowall, was acting Chief Executive until Greg Foran, current President and Chief Executive of Walmart US, assumed the role in the first quarter of 2020.

Financial overview and audit results In 2018/19, Air New Zealand generated operating revenue of $5.785 billion. Most is passenger revenue ($4.960 billion) which increased by 5.6 percent from the previous year. Air New Zealand attributes this growth to the launch of new routes to Chicago and Taipei, increased frequency to Singapore, and growth on the trans-Tasman route following the end of the Virgin Australia alliance.

Air New Zealand’s operating expenditure increased by 9.6 percent to $4.605 billion in 2018/19. Fuel costs increased by 28.8 percent, from $987 million to $1.271 billion. Air New Zealand reported that the average fuel price increased 19 percent compared to the prior year, resulting in $191 million of additional costs.

For 2018/19, Air New Zealand recorded a net profit of $270 million. This was a 30.8 percent decrease from the previous year. As well as fuel price increases, other factors that contributed to the change in profitability included the temporary disruption caused by global problems with Rolls-Royce engines, and a slowing of growth in demand.

The Office of the Auditor General issued a standard audit report, and is satisfied that the information it audited fairly reflected the company’s activities for the year and its financial position at the end of the year.

2018/19 ANNUAL REVIEW OF AIR NEW ZEALAND LIMITED

Focusing on the Pacific Rim In October 2019, Air New Zealand decided to withdraw its daily Los Angeles to London service. We heard that Air New Zealand has struggled to compete with other international carriers on the Atlantic route, which have the home-base advantages of being well-known to consumers and enjoying greater economies of scale.

Withdrawing from the Atlantic route will free up capacity for Air New Zealand to focus on its services and alliances in the Pacific Rim, where its brand is recognised and preferred by international visitors for its association with New Zealand. Air New Zealand believes that focussing on the Pacific Rim offers the greatest opportunity for long-term profitable growth.

When it concludes its Los Angeles–London service in October 2020, Air New Zealand will launch a non-stop service between Auckland and New York.

Challenges in the Asian market We heard that Japan remains a good and reliable source of high-value tourism to New Zealand, but demand from China has been more variable. Although there has been massive growth in visitor arrivals from China, Air New Zealand competes against an increasing number of international airlines. These airlines are well-known to consumers in China, have travel partners that allow them to distribute their product very effectively, and have a lower cost-base than Air New Zealand.

Air New Zealand told us it has increased the profitability of its services between New Zealand and China by two means. It has targeted its services to Chinese cities where a high proportion of New Zealanders travel, such as Shanghai. It has also targeted its services to higher-value Chinese and New Zealand consumers who prefer to fly on a premium service, such as those travelling for business.

Some of us observed that Air New Zealand’s fares to and from China can be double those of some Chinese carriers. In this competitive market, Air New Zealand said, Chinese carriers are often prepared to offer lower fares than it would find economic. This could be because the Chinese carriers have a lower cost base or a different expectation for the performance of their operation.

Balancing profitability with obligations as the national carrier Air New Zealand told us it is committed to ensuring its profitability for its shareholders. However, it recognises that a significant amount of its value is derived from its New Zealand- associated brand and remaining aligned to the needs of New Zealanders.

We asked what Air New Zealand thought about the Crown investigating minority stakes in other airlines.1 Air New Zealand told us that its top concerns are that New Zealanders are well served and that all airlines operate in a healthy economic environment. Although, as

1 The Provincial Development Unit, which administers the Provincial Growth Fund, recommended that the Government invest in two unnamed airlines in return for Crown shareholding. The proposal was declined by the Regional Economic Development Ministers in December 2018.

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2018/19 ANNUAL REVIEW OF AIR NEW ZEALAND LIMITED

New Zealand’s national carrier, it would appreciate being part of the dialogue, it remains firmly focussed on its own business growth and obligations.

Supporting regional coverage Air New Zealand told us it has incentives to promote growth in the regions. Adding flights to a regional destination makes it a more attractive proposition for consumers, and this demand further supports and drives growth in services to the regions. Air New Zealand estimates that it has increased the number of seats in its domestic network by 25 percent over five years.

We also heard that Air New Zealand replaced its 19-seater Beech aircraft fleet with 50- seaters. Not only has this increased passenger capacity to the regions, it has also allowed Air New Zealand to lower fares, as the 19-seaters were expensive to operate.

However, operating in the regions continues to present economic challenges, as evidenced by Jetstar’s withdrawal, in November 2019, of its Auckland to Napier, Nelson, New Plymouth and Palmerston North routes, as well as between Wellington and Nelson. We were pleased to hear that Air New Zealand has been assisting these regions by offering discounted rates to customers on cancelled Jetstar routes, increasing their capacity by almost 50,000 seats, and committing to keeping entry-level fares unchanged until the end of 2020.

Some of us expressed concern that fares to the regions are expensive, sometimes costing as much as a flight to Sydney or Brisbane. Air New Zealand told us that its strategy is to offer a broad range of fare options. Offering cheap fares builds frequency on regional routes, but higher fares compensate for the costs of running flights that are in high demand or booked quite late.

Offsetting carbon emissions Air New Zealand offsets 100 percent of its domestic carbon emissions through the New Zealand Emissions Trading Scheme. From 2020, we heard that it will also need to provide carbon offsets for any growth from a base, as part of its participation in the CORSIA agreement.2

Additionally, Air New Zealand’s “FlyNeutral” programme allows customers to elect to voluntarily offset the emissions associated with their flight by adding the cost of carbon offset credits to the total cost of their ticket. In the past year, Air New Zealand customers have offset more than 60,000 tonnes of CO2 through the programme.

Deferring fleet investment We are pleased that Air New Zealand will be replacing its current fleet of Boeing 777-200 aircraft with Boeing 787-10 Dreamliners. The new fleet is expected to improve fuel efficiency by 25 percent. However, Air New Zealand has recently reviewed its network, fleet, and cost base to ensure its profitability and resilience after some slowing in demand growth. As a result of this review, Air New Zealand will defer $750 million of fleet investments and

2 In 2016, the United Nation’s International Civil Aviation Organization (ICAO) adopted the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to address CO2 emissions from international aviation. 4

2018/19 ANNUAL REVIEW OF AIR NEW ZEALAND LIMITED implement a two-year cost reduction programme. We asked what effect the deferral will have on Air New Zealand’s projected financial performance, including fuel efficiency, carbon emissions, and costs.

Air New Zealand told us that the bulk of the deferred investment relates to the new 787-10 Dreamliners. Although deferring their delivery means it will operate a less fuel-efficient fleet, Air New Zealand told us that slower growth in demand means it will require fewer aircraft overall. So even though it will not achieve the reduction in carbon emissions by operating a more fuel-efficient fleet, Air New Zealand’s carbon profile will remain low as it does less flying.

Although we are disappointed by the delay, we note that Air New Zealand operates one of the most fuel-efficient fleets in the world, and was awarded Eco Airline of the Year in 2019.

The provision of aviation security Avsec is New Zealand’s official provider of aviation security, which includes screening passengers and baggage. It is part of the Civil Aviation Authority of New Zealand, a Crown agency.

Air New Zealand told us it is satisfied with Avsec’s operational performance, but is concerned by the rising levies it pays, which are soon to increase by 23 percent. Air New Zealand said it did not have a view on whether the contract for airport security should be put out to tender, but it would be interested in any discussion about this as a key stakeholder. It noted that in some jurisdictions airlines provide their own aviation security services.

Australian alliances We noted that Air New Zealand had concluded an alliance with the Australian carrier Virgin in 2017/18, and entered into a codeshare with another Australian carrier, Qantas, in 2019. We asked why Air New Zealand had changed its strategy and direction away from Virgin and towards Qantas.

Air New Zealand explained that it began its alliance with the low-cost carrier Virgin in 2010. At that time both airlines were trying to implement a hybrid model where passengers could choose from a range of low-cost to full-service options. The aim was that passengers would receive the level of service they had chosen, regardless of which airline operated the flight. However, Air New Zealand’s customers consistently reported that the service from Virgin- operated flights did not meet their expectations.

The alliance also aimed to open up the Australian market for Air New Zealand, where it could benefit from Virgin’s visibility and consumer preference. However, Air New Zealand was able to successfully develop its own brand in Australia and attract Australian customers, especially when it opened new routes to North America. Its reliance on Virgin as a distribution partner in Australia diminished significantly.

When Air New Zealand reviewed what carriers would provide the best service for its customers to connect to points in Australia, it found that Qantas was a better fit, particularly in its price, frequency, access to network, and breadth of destinations. In return for

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2018/19 ANNUAL REVIEW OF AIR NEW ZEALAND LIMITED accessing Qantas’ network in Australia, Air New Zealand gave Qantas access to its domestic network.

We wondered whether the Qantas codeshare would hurt Jetstar’s operations in New Zealand. Jetstar is a low-cost subsidiary of Qantas and also codeshares with Qantas across New Zealand routes. We observed that with Air New Zealand offering more frequent flights across a larger network in New Zealand, Qantas passengers should have more incentives to fly with Air New Zealand. Air New Zealand said that Jetstar has struggled to achieve profitability in New Zealand, even before the codeshare arrangement was introduced.

Managing problems with the Rolls-Royce engines In December 2017, an Air New Zealand flight to Japan had to return to Auckland after one of the Rolls-Royce engines on its 787-9 aircraft failed and had to be shut down. Rolls-Royce engines are fitted to the majority of Air New Zealand’s Boeing 787-9 fleet. It has continued to experience network disruption related to issues with the Rolls-Royce engines since then, including cancellation of more than 80 international flights, affecting 14,000 passengers in November 2019.

We asked about the extent to which the engine issues had disrupted Air New Zealand’s operations, the subsequent cost to Air New Zealand, and what contingencies Air New Zealand had planned for any similar future disruption.

For commercial sensitivity reasons, Air New Zealand could not disclose any details about compensation received from Rolls-Royce. However, it told us that its relationship with Rolls- Royce remained strong and the engine issues had only a relatively minor effect on its financial statements.

Air New Zealand said it immediately brought in leased aircraft and crew to service routes that were disrupted by the engine issues. Although the leased aircraft were expensive and offered a different level of service than customers were used to, it was the quickest and least disruptive solution for customers. Air New Zealand also increased staffing in airports and call centres to respond to the higher level of customer enquiries.

When it became clear that the engine issues were continuing, Air New Zealand brought in three more aircraft on medium-term leases. It said that these additional aircraft give it flexibility in its flight scheduling. One further aircraft is available for contingencies.

2018/19 ANNUAL REVIEW OF AIR NEW ZEALAND LIMITED

Appendix

Committee procedure We met on 14 November 2019 and 19 March 2020 to consider the annual review of Air New Zealand Limited. We heard evidence from Air New Zealand Limited and received advice from the Office of the Auditor-General.

Committee members Darroch Ball (Chairperson) Chris Bishop Paul Eagle Raymond Huo Matt King Jan Logie Jami-Lee Ross Jamie Strange Tim van de Molen

Office of the Auditor-General (Briefing on Air New Zealand).

Air New Zealand (Responses to written questions).

7 38

2018/19 Annual review of the Airways Corporation of New Zealand Limited 2018/19 Annual review of Maritime New Zealand 2018/19 Annual review of the Transport Accident Investigation Commission 2018/19 Annual review of Transpower New Zealand Limited

Report of the Transport and Infrastructure Committee

March 2020

The Transport and Infrastructure Committee has conducted the annual reviews of the Airways Corporation of New Zealand Limited, Maritime New Zealand, the Transport Accident Investigation Commission, and Transpower New Zealand Limited for 2018/19, and has no matters to bring to the attention of the House. The committee recommends that the House take note of its report.

Darroch Ball Chairperson 39

2018/19 Annual review of Callaghan Innovation

Report of the Economic Development, Science and Innovation Committee

March 2020

Contents Recommendation ...... 2 Overview of Callaghan Innovation ...... 2 Financial overview and audit results ...... 2 Unsupported budget bids ...... 3 HealthTech Activator programme ...... 3 Repayable tech incubator grants ...... 3 Scale-Up NZ ...... 4 Rollout of the research and development tax incentive ...... 4 Five-year strategy ...... 5 Investment in the Gracefield Innovation Quarter ...... 5 Clustering of Māori businesses ...... 6 Official Information Act requests ...... 6 Late invoice payments ...... 7 Artificial intelligence ...... 7 Opportunities in the space economy ...... 7 Appendix ...... 8

Jonathan Young Chairperson

2018/19 ANNUAL REVIEW OF CALLAGHAN INNOVATION

Callaghan Innovation

Recommendation The Economic Development, Science and Innovation Committee has conducted the annual review of Callaghan Innovation for 2018/19, and recommends that the House take note of its report.

Overview of Callaghan Innovation Callaghan Innovation is a Crown agent that aims to help businesses in New Zealand succeed through the use of science, technology, and innovation. It offers services to businesses such as technology and product development, access to industry experts and funding, and building skills and capability. Callaghan Innovation is primarily funded by the Crown.

Callaghan Innovation’s board chair is Pete Hodgson, and Vic Crone is the chief executive. With offices in Auckland, Christchurch, and Wellington, it has 367 permanent employees.

Financial overview and audit results In 2018/19, Callaghan Innovation received revenue of $353.5 million. Of this, more than 90 percent came from the Crown, including $242.8 million which it distributed as grants. Total revenue was more than 15 percent higher than in 2017/18.

Callaghan Innovation’s full year surplus of $1 million compared well with its budgeted deficit of $5 million. It reported that this was because of higher overseas commercial revenue and lower expenses during the year.

The organisation’s net assets were $96.1 million, up from $73.6 million in 2017/18. It received a capital injection of $21.1 million in 2018/19.

Audit results The Auditor-General assessed Callaghan Innovation’s management control environment as “very good”, with no recommendations for improvement. He assessed Callaghan Innovation’s financial information and supporting systems and controls as “good”, a downgrade from the previous year. The Auditor-General made five recommendations related to the documentation about grants, payroll controls, and manual journals.

Callaghan Innovation’s performance information and supporting systems and controls were graded “good”, as in the previous year. The Auditor-General recommends that Callaghan Innovation continue to refine and identify outcomes that are directly influenced by its services and that are measurable.

Acquisitions Callaghan Innovation acquired and consolidated two organisations during 2018/19:

2018/19 ANNUAL REVIEW OF CALLAGHAN INNOVATION

 New Zealand Food Innovation Auckland Limited (Callaghan had owned two-thirds of the shares)  New Zealand Food Innovation (South Island) Limited (Callaghan had owned 49.9 percent of the shares). Callaghan Innovation paid $1 each to acquire the remaining shares for each organisation. This resulted in a $421,000 net gain in its financial statements, as the assets acquired were valued at more than the amount paid.

Unsupported budget bids We asked Callaghan Innovation what budget bids it had made for 2018/19 that were not supported by the Treasury or shortlisted for further consideration. We heard that its unsuccessful bids related to cost pressures for depreciation and the increasing costs of its science workforce. Callaghan Innovation told us that, historically, pay rates for its science workforce had not kept pace with the market, so it has been addressing this with its normal appropriations. We heard that the Ministry of Business, Innovation and Employment provided $2.5 million funding to Callaghan Innovation for the next year to assist with cost pressures across the organisation.

Callaghan Innovation told us that it is satisfied with the funding it received. It explained that there is nothing that it does not have funding for that would impede its ability to deliver on its strategy.

HealthTech Activator programme We also heard about the funding Callaghan Innovation received for the HealthTech Activator programme as a part of its funding package for technology incubators. The HealthTech Activator is a coordinated support system, led by Callaghan Innovation, to drive the commercialisation of healthcare technology and the growth of emerging New Zealand companies in this area. The aim is to make it easier for these startups to access the support they need to become successful businesses.

Callaghan Innovation explained that this funding was a component of Cabinet-approved funding, predominantly for the Gracefield Innovation Quarter, but also for its ongoing commitment to the tech incubators.

Repayable tech incubator grants Callaghan Innovation’s Incubator Support Programme supports the commercialisation of complex products and technologies. It helps “deep tech” startup businesses to access grants and repayable loans to use for commercialisation, if they partner with a technology incubator. The incubator co-funds the project, and the startups start repayments when they begin earning revenue.

We asked Callaghan Innovation about the 67 percent reduction in repayable incubator grants in 2019, compared with the previous year. We heard that this reduction is because the current policy period is coming to an end, so there is a natural slowdown in activity.

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2018/19 ANNUAL REVIEW OF CALLAGHAN INNOVATION

Callaghan Innovation is currently determining the next group of incubators for the next eight years.

Applications for funding support We asked what proportion of organisations that come to Callaghan Innovation for funding support get declined. We heard that few grants are actually declined. Some organisations do not get to the application stage, generally because the business does not meet the criteria to receive the funding. They are classed as ineligible as opposed to declined.

Scale-Up NZ We note that Callaghan Innovation had a large increase in its spending on advertising, from $16,223 in 2017/18 to $167,513 in 2018/19. Callaghan Innovation told us that this was largely due to the launch of Scale-Up NZ.

Scale-Up NZ is Callaghan Innovation’s new online platform that aims to connect entrepreneurs, investors, and entities across New Zealand involved in innovation. Its purpose is to make it easier for businesses to find and connect with other businesses and resources to help them innovate and grow. Scale-Up NZ also allows Callaghan Innovation to track the health and development of the innovation system both as a whole and by sector.

The platform launched with 500 profiles, and it has now reached the initial target of 1,000 profiles. Callaghan Innovation believes 2,000 organisations are needed on the platform to be fully representative of the tech and innovation ecosystem in New Zealand, so it is continuing to invest to increase the number of profiles.

Rollout of the research and development tax incentive The Government hopes to see New Zealand spending 2 percent of GDP on research and development (R&D) by 2027. To encourage this, it announced in 2018 that businesses would be able to claim tax credits for their R&D spending. It expects that a tax incentive could benefit a larger number of recipients than the current growth grants.

Callaghan Innovation has been working closely with the Inland Revenue Department to set up processes for the R&D tax credits, which will be available from the 2019/20 financial year. Growth grants will be phased out over the next two years as they are replaced by the tax incentive.

The tax credits aim to make R&D more accessible to more businesses. Callaghan Innovation estimates that 2,000 to 3,000 businesses will be able to benefit from the tax incentive, compared with the 300 businesses currently receiving growth grants.

We heard that, because no new growth grants are being approved, the underspending was being combined with other unallocated funding from appropriations, and reallocated across a range of programmes.1

1 Details are provided in Callaghan Innovation’s response to additional written questions, p.4. 4

2018/19 ANNUAL REVIEW OF CALLAGHAN INNOVATION

Five-year strategy Callaghan Innovation described 2018/19 as a year of good and solid progress. It was the first year of its five-year strategy. The main focus was on keeping services going and improving them incrementally. This included increasing the number of customers it works with, increasing its net promoter score, improving events, bringing in new capability, and developing capability for the coming years.

We were told that Callaghan Innovation made a big investment in developing a view of how an entrepreneur goes through the innovation “ecosystem” from start to finish, and how their experience is with the services along the way. Callaghan Innovation’s focus now is to re- engineer its service to interact with customers at a time that better suits them. The total number of organisations working with Callaghan Innovation in 2018/19 was 2,916, an 8 percent increase from the previous year and exceeding its target of 2,600. The target for 2019/20 will remain at 2,600 organisations.

Callaghan Innovation achieved an overall net promoter score (NPS) of +50 for its services. This was an increase on the previous year’s score of +45. The NPS score is the difference between the percentage of promoters and the percentage of detractors. An NPS score ranges from -100 to +100. A positive score shows there are more promoters than detractors. NPS scores vary across industries, but a positive NPS is generally considered good.

Callaghan Innovation also told us that its IT systems are being modernised. An initial step is transferring all of the IT systems into a cloud app or “enabled ecosystem”. This will allow Callaghan Innovation to move into machine learning and artificial intelligence.

Investment in the Gracefield Innovation Quarter The Gracefield Innovation Quarter (GIQ) remained a major focus for Callaghan Innovation in 2018/19. This is the organisation’s research and development facility in Lower Hutt. The facility contains laboratories, workshops, and other equipment available for short or long term hire by businesses. A lack of investment in the site’s facilities for several decades meant that it was at risk of not meeting its regulatory and health and safety obligations.

Callaghan Innovation received $75 million under Budget 2019 to invest in redeveloping and upgrading the GIQ. This was in addition to $20 million in contingency funding from December 2018 and earlier funding for the highest priority jobs. Improvements to be made with the funding include:

 a new building to meet the special requirements of the Measurement Standards Laboratory  a new building to host flexible laboratory spaces  asbestos management and removal  seismic strengthening for six buildings  improvements and additions for dangerous goods storage  heating, ventilation, and air conditioning replacements  urgent roof and weather tightness remediation

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 re-certification for new health and safety legislation  aged building refurbishment. Callaghan Innovation told us that it is working with its insurance broker on fully quantifying its insurance claim as a result of a fire in December 2018. It has filed a partial claim and received this settlement. It expects to lodge a final claim in the coming few months.

Callaghan Innovation expects work to be completed by 2023. We look forward to seeing the improvements to the Gracefield Innovation Quarter over the next few years.

Clustering of Māori businesses Callaghan Innovation establishes clusters of Māori businesses that have a desire to innovate or create shared opportunities. These collaborations aim to reduce R&D costs and promote knowledge sharing among the partnering businesses. Callaghan Innovation also links up Māori businesses with its sector teams, so they get support with industry-specific expertise.

We were told that the progress of Māori business clusters is measured by looking at how these businesses use its services. For instance, there are now grant customers from the Māori economy where there were none a few years ago. Callaghan Innovation also looks at the resourcing for its Māori economy sector team, including the number of events it holds and what work it is doing.

Māori and Pasifika employment Callaghan Innovation acknowledges that its proportion of Māori employees is low, at 2.4 percent. However, the Māori economy team is not the only place for Māori in the organisation. Others are employed in the construction of the Gracefield Innovation Quarter, including in two senior roles as facilities lead and GIQ programme lead.

We also note that only 1 percent of employees are Pasifika, and asked where in the organisation they are employed. We were told that some are in administrative and operations roles, facilities roles, team leadership roles, and science roles.

Callaghan Innovation told us its aspiration is to see Māori and Pasifika in much higher-skilled and higher-paying roles in the workforce in 10 years’ time, such as scientists and engineers. It believes more basic roles such as taxi drivers, fruit pickers, or simple data analysts will be lost to automation. It is therefore starting to think about how it can champion this transition, and how it can work with others and the Government to support it.

We are looking forward to hearing about its strategy on diversification of staff, including the types of roles they are engaged in.

Official Information Act requests For the year under review, Callaghan Innovation declined 35 percent of OIA requests. We noted that this was a large increase from the 16 percent declined in 2017/18 and 5 percent in 2016/17. We were told that there has been a disproportionate increase in the number of requests relating to commercial information about grant customers.

2018/19 ANNUAL REVIEW OF CALLAGHAN INNOVATION

Callaghan Innovation told us that it is working constructively with the Ombudsman to determine what sensitive information it must release. It said it is trying to strike a balance between transparency for the taxpayer and protecting businesses’ competitiveness. It believes that businesses may be reluctant to apply for grants or R&D tax incentives if doing so runs the risk of their investment strategies or intellectual property being publicly released.

Late invoice payments We asked Callaghan Innovation about its drop in timely invoice payments. We note that in previous financial years, close to 100 percent of invoices were paid on time, compared to 80 percent in 2018/19. Callaghan Innovation told us that the decline was because it changed its financial systems during 2017/18. It estimates that 54 percent of late payments related to small to medium-sized businesses. The average delay for all invoice payments was 35 days. However, due to an error, one invoice payment was delayed by 7 months.

We heard that major process improvements have been made in the second half of 2018/19, and the proportion of prompt invoice payments has now risen to 88 percent.

Artificial intelligence Callaghan Innovation told us about the work it is doing with artificial intelligence (AI). We heard that it is currently upskilling and bringing in new capability to support the movement towards cloud-based and connected systems. From there, its plan is to continue upskilling into automated machine learning.

We were also told about how AI and automated machine learning will influence how Callaghan Innovation operates as an organisation and provides services. For example, it anticipates using an AI-based interactive system to help navigate potential customers or businesses through its services.

Opportunities in the space economy We are interested in New Zealand’s involvement in the space economy, and keen to see it expand. We are aware that Callaghan Innovation has been working with Rocket Lab, and asked what it is doing to encourage other ventures in this area, so there is not just a single player in this market. Callaghan Innovation said that as well as its early investment to help launch Rocket Lab, it has been supporting space capability through one of its business units, KiwiStar Optics, which produces technology such as precision telescopes for astronomy.

Callaghan Innovation said it is encouraging other startups in the space economy and helping them get access to funding, grants, and the research and development tax incentive. It also works with New Zealand Trade and Enterprise around national and international investment to grow businesses in the sector.

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Appendix

Committee procedure We met on 5 December 2019 and 19 March 2020 to consider the annual review of Callaghan Innovation. We heard evidence from Callaghan Innovation and received advice from the Office of the Auditor-General.

Committee members Jonathan Young (Chairperson) Tamati Coffey Andrew Falloon Brett Hudson Gareth Hughes Melissa Lee Clayton Mitchell Dr Deborah Russell Stuart Smith Hon Poto Williams

Office of the Auditor-General (Briefing on Callaghan Innovation).

Callaghan Innovation (Responses to written questions).

2018/19 Annual review of City Rail Link Limited

Report of the Transport and Infrastructure Committee

March 2020

Contents Recommendation ...... 2 About City Rail Link Limited ...... 2 Financial overview ...... 3 Audit results ...... 3 Increase in estimated cost of the project ...... 3 Albert Street construction delays ...... 4 Shift to the link alliance model ...... 5 CRLL’s sustainability goals ...... 6 Appendix ...... 7

Darroch Ball Chairperson

2018/19 ANNUAL REVIEW OF CITY RAIL LINK LIMITED

City Rail Link Limited

Recommendation The Transport and Infrastructure Committee has conducted the annual review of City Rail Link Limited for 2018/19, and recommends that the House take note of its report.

About City Rail Link Limited City Rail Link Limited (CRLL) is a majority-Crown-owned company under Schedule 4A of the Public Finance Act 1989 (non-listed companies in which the Crown is the majority or sole shareholder). The Crown has 51 percent of the voting shares in CRLL (held by the Ministers of Transport and Finance), and Auckland Council has 49 percent. The Crown and Auckland Council contribute equally to CRLL’s funding.

CRLL was created in 2017 to manage the construction of a 3.45km underground railway in Central Auckland, taking over the project from Auckland Transport.

Auckland Council and the Crown are the co-sponsors of the project. They are governed by a sponsors agreement and project delivery agreement. As governors of the project, they cannot be involved in day-to-day operations, which are managed by the board and chief executive. The board of directors has five members who are appointed by shareholders with the approval of Cabinet and Auckland Council’s governing board.

In our oral hearing, we heard from Sir Brian Roche, Chairperson, and Dr Sean Sweeney, Chief Executive Officer.

The project The construction of the City Rail Link is the largest transport infrastructure project in New Zealand’s history. It involves building a 3.45km twin-tunnel underground rail link, connecting Britomart and Mt Eden Station. Two new underground stations will be built at Aotea and Karangahape Road, Mt Eden Station will be redeveloped, and Britomart will become a two- way station. The project is due to be completed late in 2024.

The project would double the capacity of the Auckland rail network, allowing 54,000 people to travel during peak periods. It would also provide opportunities to expand the Auckland rail network in the future, with the possibility of airport and North Shore lines. After completion it will offer development opportunities in the areas that surround the new and redeveloped train stations.

CRLL’s main objectives for the project are to:

• improve transport access to and around Auckland, to cater for a growing city • improve the efficiency and resilience of the transport network of urban Auckland • significantly contribute to lifting and shaping Auckland’s economic growth • provide a sustainable transport solution that minimises environmental effects 2

2018/19 ANNUAL REVIEW OF CITY RAIL LINK LIMITED

• contribute positively to a liveable, vibrant, and safe city.

Financial overview Capital work in progress amounts to $553 million, a $155 million increase from 2018. Property, plant, and equipment now have a net book value of $153 million, a $10.6 million increase. Contributed capital is at $753.3 million, an increase of $130 million since 30 June 2018. This is split equally between the Crown and Auckland Council. This increase reflects shares issued during the year.

CRLL’s total revenue was $3.819 million, 6.5 percent higher than 2017/18’s $3.585 million. Expenditure was $29.115 million, 21 percent lower than the previous year’s $36.868 million. CRLL had a deficit of $25.296 million in 2018/19, 24 percent below the 2017/18 deficit of $33.283 million.

Audit results The Auditor-General rated CRLL’s systems and controls as “good”. This is an improvement from the “needs improvement” rating for financial information and supporting systems and controls in its first year of operations. The auditor made several recommendations, but noted that as CRLL is a new entity, it is still developing many of these controls. CRLL has made progress on the 2017/18 recommendations.

The key performance indicators had mixed results. CRLL is on track for an “excellent” infrastructure sustainability rating for the C1 and C2 contracts (covering works in Britomart Station/Lower Queen Street and Albert Street).1 This is also the minimum standard for the C3 contract (extending to the Western Line at Mt Eden). Unexpected delays with C6 and C7 contracts (Mt Eden stormwater works, and system integration, testing, and commissioning) meant that some completion targets were not met. Construction has complied with consent conditions.

Increase in estimated cost of the project In 2019, the estimated cost of the project was increased to $4.4 million from the original 2014 estimate of $3.4 million. After inheriting the project from Auckland Transport, CRLL chose to have the cost re-estimated. It had the number evaluated by two independent firms.

We asked why the cost had increased. We were told that a choice was made to broaden the scope to build for 9-carriage trains. There was also the addition of a $300 million contingency fund. We also heard that there had been a competitive change in the market, influenced by the Australian market, that had not been foreseen when the first costing was done. In 2014, 2 percent escalation had been planned for. In 2019 it was 6 percent, and projected to stay at this rate for several years. This pushed up the cost of CRLL’s work.

1 The project was initially split into eight delivery contracts, which have undergone some changes. They are explained on page 12 of CRLL’s annual report.

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We heard that the breakdown in the cost increase is: $310 million in contingency costs, $327 million in construction costs, a $250 million provision for 9-car trains, and non-direct costs of $152 million.

CRLL assured us that the reassessment of cost was not done because Auckland Transport had done a poor job. It was because the situation had changed quite a bit in the five intervening years.

Future-proofing the City Rail Link system The choice to move from 6-car trains to 9 was made in an effort to future-proof the City Rail Link. The 6-car model was estimated to reach full capacity only five years after the project’s completion. We note that the 9-car model will entail additional cost for the extra cars, as well as the extension of train platforms to accommodate the longer trains.

Creation of a contingency fund We questioned the large size of the $300 million contingency fund. We were told that this amount was chosen as part of prudent management of such a large project, and is consistent with best practice. An independent audit found that the previous contingency fund was below international standards.

Albert Street construction delays Construction around Albert Street (the C2 stage of construction) was due to be completed by November 2019. This completion date was delayed to December 2020 due to increased urban works and the need to retender contracts. The continued disruption affected some business owners in the area.

We are concerned about the implications of the delays on the project so far. We were told that any increase in cost was marginal and largely administrative. Despite delays in the C2 stage, we were told that the project as a whole is still expected to be completed on time.

CRLL is aware that future stages of the work may generate similar complaints from local business owners. It acknowledged that the construction not only entails a large financial burden, but also imposes a large cost on the community, which is affected by the disruption to business and transport.

Communication between CRLL and business owners Some of us expressed concern that the public messages from Ministers—saying that “material support” was being provided to affected Albert Street business owners—did not match the reality of communication between CRLL’s leadership and business owners. CRLL told us it had been working hard to find a resolution for the affected business owners, and had been meeting with them often to work on solutions. It said the most significant support had been given to a florist and a convenience store owner, with alternative business options offered to the florist. It believed there had been different interpretations of what “material support” could entail, which may have caused confusion. It did not at that stage have a mandate to provide financial support.

2018/19 ANNUAL REVIEW OF CITY RAIL LINK LIMITED

CRLL acknowledged that in hindsight its communications had not been clear and it should have acted sooner to clarify what help it could provide. It plans to take these lessons through the future of the project, and direction has been given from Ministers and Auckland Council to do so.

Establishment of the Business Hardship Programme In our hearing, we heard that CRLL had been given a mandate to do policy work on a hardship fund for businesses affected by the Albert St work. We heard that there was no policy precedent in New Zealand to deal with the solution it was considering, which it described as a “prudent but empathetic” model. CRLL assured us that it was confident the hardship fund could be paid out of its current budget.

Since our hearing, the details of this fund have been released, and the application process has begun. The Business Hardship Programme is running as a pilot programme until C2 construction has been completed towards the end of 2020. Applicants can apply for a maximum “rental loss” of up to $75,000, if their business had been operating before 2017.

Shift to the link alliance model In 2019 CRLL procurement was consolidated into one alliance—the Link Alliance—under the Project Alliance Agreement (PAA). This change was triggered by the need to retender several contracts. The goal was to simplify the many interfaces of a complex project, so they could be managed internally. This also consolidated the C7 contract into the C3 contract. This alliance applies only to parts of the contract that were finalised in 2018/19, and not existing contracts.

The signing of the PAA finished the major procurement activity of the project, and established a new, more collaborative delivery structure for the future capital works. There is still one final contract to be finalised.

The companies involved are:

• Vinci Construction Grands Projects SAS • Downer NZ Ltd • Soletanche Bachy International NZ Limited • WSP Opus (NZ) Limited • AECOM New Zealand Limited • Tonkin + Taylor Limited. CRLL told us that it had looked to overseas examples for guidance on this model. The London Crossrail project broke contracts down into smaller parts, but hindsight showed that this was less efficient than consolidating them. The alliance gives CRLL a breadth of international experience, and more access to lessons from international projects.

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CRLL’s sustainability goals One of CRLL’s goals is to set a benchmark for sustainable infrastructure in New Zealand. It won the Sustainability Business Network’s efficiency champion and supreme awards in 2018.

One of CRLL’s achievements was working with an indigenous firm on the demolition of Mt Eden station. The recovered materials from this demolition were sent to Tonga to help with rebuilding after Cyclone Gita. CRLL told us that this was not the cheapest option, but it was the best for the situation, and the most sustainable.

One sustainability target that CRLL struggles to meet is reducing its use of potable water. Since March 2019, the C1 contract has been using 100 percent non-potable water. CRLL’s target is a 25 percent reduction throughout all of its construction. In 2018/19, it achieved a 15 percent reduction.

In future CRLL will increase its focus on social procurement. It will continue bringing youth into a career when they might be struggling with other options. It will also be working with mana whenua on the design and construction of stations.

2018/19 ANNUAL REVIEW OF CITY RAIL LINK LIMITED

Appendix

Committee procedure We met on 7 November 2019 and 19 March 2020 to consider the annual review of City Rail Link Limited. We heard evidence from City Rail Link Limited and received advice from the Office of the Auditor-General.

Committee members Darroch Ball (Chairperson) Chris Bishop Paul Eagle Raymond Huo Matt King Jan Logie Jami-Lee Ross Jamie Strange Tim van de Molen

Hon Nikki Kaye participated in some of this review.

Office of the Auditor-General (Briefing paper, City Rail Link Limited).

City Rail Link Limited (Responses to written questions).

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2018/19 Annual review of the Civil Aviation Authority of New Zealand

Report of the Transport and Infrastructure

Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Financial overview and audit report ...... 2 Ministerial review into the CAA’s organisational culture ...... 3 The CAA is improving its approach to active inclusion ...... 3 Regulation of drone use in New Zealand ...... 3 Staff changes in the CAA’s board and senior management ...... 4 The CAA aims to improve stakeholder engagement ...... 4 New Southern Sky project ...... 4 The CAA is reviewing aviation fees, levies, and charges ...... 5 Appendix ...... 6

Darroch Ball Chairperson

2018/19 ANNUAL REVIEW OF THE CIVIL AVIATION AUTHORITY OF NEW ZEALAND

Civil Aviation Authority of New Zealand

Recommendation The Transport and Infrastructure Committee has conducted the annual review of the Civil Aviation Authority of New Zealand for 2018/19, and recommends that the House take note of its report.

Introduction The Civil Aviation Authority (CAA) is a Crown entity established in 1992. Its objective is ensuring safety and security in aviation through the legal standards set by the Minister of Transport.

The CAA has two main functions: to regulate civil aviation, and to ensure that it operates safely. Its regulatory functions include policy and regulatory strategy, outreach, certification and licensing, and surveillance and investigation. It delivers security services through the Aviation Security Service (Avsec).

A board of five members governs the CAA and Avsec. The board appoints the CAA’s chief executive who also acts as the Director of Civil Aviation. The CAA employs approximately 1,409 staff.

During 2018/19 there were several personnel changes in the board and senior leadership, which we discuss later in our report. As part of our annual review we met with Graeme Harris, the chief executive, and Janice Fredric, the board chairperson.

Financial overview and audit report The CAA had total revenue of $152.563 million in 2018/19, an increase of 4 percent from the previous year. Expenditure increased by 7 percent to $158.931 million, resulting in a deficit of $6.368 million.

The Auditor-General assessed all the CAA’s systems and controls as “very good”. He noted that in May 2019 the CAA began a review of its organisational design, which aims to improve its regulatory performance. The Auditor-General intends to monitor the resulting changes as part of the 2019/20 audit.

He also drew attention to two reviews about allegations of staff bullying and harassment in the regulatory and Avsec areas. These reviews began at the end of June 2019, and the Auditor-General will consider their effect on the management control environment in his next audit.

2018/19 ANNUAL REVIEW OF THE CIVIL AVIATION AUTHORITY OF NEW ZEALAND

Ministerial review into the CAA’s organisational culture We note that a ministerial review into the CAA’s organisational culture is being undertaken by the Ministry of Transport (MoT). It was requested by the Minister following media reports of bullying and harassment within the organisation. It is focused on the following three areas:

• Reviewing reports of bullying and harassment to understand how they were addressed. • Conducting a workplace culture assessment. • Ensuring that policies and procedures are in place to promote staff wellbeing and a culture of “speaking up”. The review covers the period from 1 January 2015. A report on the review is expected in March 2020. The CAA told us it welcomes the review. It believes the report will give the organisation certainty over the effects of organisational changes since 2015. It also hopes the report will highlight actions it can take to improve further.

The CAA is improving its approach to active inclusion The chair told us the board is working with management to ensure that the organisation’s culture is open and inclusive, and the issues that gave rise to the ministerial review are addressed. The chief executive added that he is passionate about staff feeling safe, respected, and engaged at work. He noted that a large body of evidence shows that a diverse and inclusive workplace produces better outcomes.

The CAA introduced a diversity and inclusion strategy in 2018, and has an active national working group trying to make improvements. The strategy outlines a three-year action plan to create a more diverse, supportive, and inclusive workplace. Initially in 2017 the CAA worked with Diversity Works to undertake a benchmark diagnostic survey. It recorded significant improvement when the survey was repeated in 2018. It expects that other surveys on organisational performance and staff engagement will be used to measure further progress.

Regulation of drone use in New Zealand We heard that the CAA is contributing to work led by MoT to define the regulatory structure for drones. Both the CAA and MoT are considering international developments on the use of drones to inform their work.

We were specifically interested in “beyond visual line of sight” (BVLOS) drone use. This is the use of unmanned drones to cover long distances out of sight of the drone operator. The CAA noted that it is an issue being considered internationally. It said that the CAA and agencies such as MoT, the Ministry for Business, Innovation and Employment, and the Airways Corporation of New Zealand Limited are very aware of the advantages of drone technology. There are many opportunities for BVLOS drone use to contribute in fields such as firefighting, aerial survey work, delivery of pharmaceuticals to rural areas, and others. BVLOS drone use in fields such as these could improve safety.

Although drone technology is advancing quickly, the safety of passenger-carrying aircraft is also a concern. The CAA noted that a pilot would struggle to see and avoid a drone due to

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2018/19 ANNUAL REVIEW OF THE CIVIL AVIATION AUTHORITY OF NEW ZEALAND their small size, and that collision with a drone could cause significant damage. It is focused on balancing the potential benefits of drone use with its safety priorities.

Staff changes in the CAA’s board and senior management We asked about recent substantial changes in the CAA’s board membership, and three recent changes in its senior leadership team. Over the past year, four out of five board members have been replaced, and one board position remains vacant. The CAA told us it was unsure of the reason behind this turnover, but noted that one board member had resigned due to the workload.

Regarding the senior leadership team, the CAA said it is currently focusing on a change from a client-facing structure to a functional structure. It has acknowledged it needs more specific skills in some regulatory areas, and has made staffing decisions based on building expertise in those areas.

We expressed concern that these changes would be disruptive to the CAA, and that institutional knowledge may be lost. The CAA agreed that such changes can cause disruption, but it believes they are appropriate. It said some staff changes are necessary for organisational culture change and to improve capability.

We asked whether these changes would affect management of the CAA’s capital expenditure. Because the CAA’s Chief Financial Officer remains the same, it believes there is sufficient continuity. The board told us it plans to discuss the capital expenditure, and will consider whether it needs external advice.

The CAA aims to improve stakeholder engagement We are aware that some stakeholders have expressed dissatisfaction with the CAA. Some have cited bullying or harassment similar to that being investigated in the ministerial review. The CAA said it was unaware of any such reports, but it has been proactive in inviting stakeholders to report any negative engagement for the CAA to have independently investigated. It also noted that, because it acts as a regulator, some tension with regulated parties is to be expected.

The board plans to improve the way both it and management engage with stakeholders The CAA said one of its new roles is deputy chief executive stakeholder and sector engagement. It sees stakeholder engagement as a significant responsibility.

New Southern Sky project The CAA is leading work on New Southern Sky, an aviation modernisation project approved by Cabinet in 2014. The project aims to ensure the safe, cohesive, efficient, and collaborative management of New Zealand airspace through the use of technology.

We were particularly interested in hearing about the environmental benefits of New Southern Sky. The CAA explained that New Southern Sky introduces approaches for New Zealand airports such as collaborative decision-making. Collaborative decision-making would allow airports to coordinate arrivals and departures before take-off, and could result in a decrease of up to 12.3 million kilograms of carbon dioxide over a year. 4

2018/19 ANNUAL REVIEW OF THE CIVIL AVIATION AUTHORITY OF NEW ZEALAND

The CAA is reviewing aviation fees, levies, and charges The CAA is currently reviewing its fees, levies, and charges to ensure they are set at levels that will allow it to carry out the full scope of its work. Changes as a result of the review are expected to take effect from 1 July 2020 through to 2023. The review was open for public submissions until 14 February 2020.

Some of us expressed concern about the financial sustainability of smaller airports if fees, levies, and charges are increased. The CAA said it has not seen this issue raised through public meetings so far, but said it is possible it will come up when it reviews formal submissions. We will follow this matter with interest.

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2018/19 ANNUAL REVIEW OF THE CIVIL AVIATION AUTHORITY OF NEW ZEALAND

Appendix

Committee procedure We met on 13 February and 19 March 2020 to consider the annual review of the Civil Aviation Authority of New Zealand. We heard evidence from the Civil Aviation Authority of New Zealand and received advice from the Office of the Auditor-General.

Committee members Darroch Ball (Chairperson) Chris Bishop Paul Eagle Raymond Huo Matt King Jan Logie Jami-Lee Ross Jamie Strange Tim van de Molen

Office of the Auditor-General (Briefing on the Civil Aviation Authority of New Zealand).

Civil Aviation Authority of New Zealand (Responses to written questions).

2018/19 Annual review of the Commerce Commission

Report of the Economic Development, Science and Innovation Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Financial overview and audit results ...... 2 New Zealand’s drop in the Global Competitiveness Index ...... 2 Fuel market study ...... 3 Work on short-term consumer credit contracts ...... 4 Aurora Energy ...... 5 Problems regarding online purchases ...... 5 Competition in the supermarket industry ...... 6 Making penalties effective ...... 6 The commission’s baseline capacity ...... 6 Potential merger of Stuff and NZME ...... 7 Appendix ...... 8

Jonathan Young Chairperson

2018/19 ANNUAL REVIEW OF THE COMMERCE COMMISSION

Commerce Commission

Recommendation The Economic Development, Science and Innovation Committee has conducted the annual review of the Commerce Commission for 2018/19, and recommends that the House take note of its report.

Introduction The Commerce Commission is an independent Crown entity. It is responsible for enforcing laws related to competition, fair trading, and consumer credit contracts. It also has regulatory responsibilities covering electricity lines, gas pipelines, telecommunications, dairy, and airports. In 2018, the commission was given power to undertake studies of markets to see how well they work. The commission’s purpose is to achieve the best possible outcomes in competitive and regulated markets for the long-term benefit of New Zealanders.

The commission’s chief executive is Adrienne Meikle. Anna Rawlings took over as chairperson of the board from Dr Mark Berry, who completed his second five-year term in May 2019.

Financial overview and audit results In 2018/19 the commission’s expenditure was $47.9 million, an increase of just over 9 percent from $43.7 million the previous year.

The Auditor-General rated the Commerce Commission’s management control environment and financial information and supporting systems and controls “very good”. It did not identify areas for improvement during its audit.

The Commerce Commission’s performance information and supporting systems and controls were rated “good”. The Auditor-General acknowledged the commission’s significant efforts over the past two years to improve its performance information. It found the commission’s annual report to be engaging and thought that it made good use of case studies. We were pleased to learn this.

New Zealand’s drop in the Global Competitiveness Index We note that New Zealand has dropped in the World Economic Forum’s Global Competitiveness Index, from 13th out of 138 countries in 2017 to 18th out of 140 countries in 2019. New Zealand’s overall competitiveness score was 77.5 out of 100, which is comparable with Australia’s. We asked the Commerce Commission to comment on what factors it believes may have contributed to this drop.

The commission told us the index is a relative measure, and that a wide range of factors would have contributed to New Zealand’s slip in the rankings. It emphasised that all of the work the commission does is focused on improving competitive outcomes.

2018/19 ANNUAL REVIEW OF THE COMMERCE COMMISSION

Fuel market study In December 2019, the Commerce Commission released its first market study, which looked at the factors that may affect competition in the supply of retail fuel and diesel for land transport.1 As a result of its study, the commission formed a view that an active wholesale market does not exist in New Zealand, and that this weakens price competition in the retail market.

We asked about the cost of conducting the study, and were told that the commission spent about $2.5 million. The 2019 Budget allocated $6 million for market studies, expecting each one to cost about $1.5 million. The commission would like more money to complete further studies. However, it also thinks that because this was the first market study, the overall cost might have been higher than is likely in future.

Cost to participants We asked about the costs participants faced in participating in the study, but were told that the commission cannot readily access that information.

We asked whether the commission thought it should consider the effect that complying with the fuel market study information requirements had on the businesses it was studying. We heard that although the Commerce Commission has the ability to compel information, it did not need to use that power during the study in the way it had expected it might. It noted that there was a high degree of cooperation from the industry.

Difference between this study and the MBIE inquiry We asked what issues arose in the study that were materially different to those in the inquiry completed by the Ministry of Business, Innovation and Employment (MBIE) in 2017.2 The commission said it had access to a much broader range of information and was able to have more engagement with the industry than the MBIE study did. However, the findings were similar.

The ability to conduct a market study has enabled the Commerce Commission to assess potential improvements to make the fuel market more competitive. In addition, the commission was able to confirm some of the more speculative comments made in MBIE’s report, using the broader information that it had available to it.

Feedback from market participants We asked what feedback the commission had received from market participants about the accuracy of its report.

The commission said that market participants were invited to provide feedback multiple times throughout the market study process. It told us that it had not yet received specific

1 More information about the Commerce Commission’s fuel market study is available here: https://comcom.govt.nz/about-us/our-role/competition-studies/fuel-market-study 2 More information about the Ministry of Business, Innovation and Employment’s Fuel Market Financial Performance Study is available here: https://www.mbie.govt.nz/building-and-energy/energy-and-natural- resources/energy-generation-and-markets/liquid-fuel-market/fuel-market-financial-performance-study-2017/

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2018/19 ANNUAL REVIEW OF THE COMMERCE COMMISSION feedback from industry participants given that the final market study report was released just a week before our hearing. However, it did not expect many of its recommendations to come as a surprise because it had done thorough consultation and had significant industry participation in the process.

Fuel market profits We are aware of media reports that fuel companies’ retail margin is 25 cents a litre gross and between 3.5 and 4 cents a litre net. Some of us note that this margin does not seem unreasonable. We asked whether the Commerce Commission agrees with these reports, given its statements that it believes profits in the fuel market have been high. It told us that it did not have a specific figure it thought it was reasonable for consumers to pay, because it knows that competition works differently in different regional markets. However, it learnt through its inquiry that the drivers of competition could be working better to reduce the price that consumers pay.

We asked whether the effects of fuel taxes in Auckland were being spread across other regions. The commission said it had found no evidence of that.

The commission’s next market study We asked the commission whether the Minister of Commerce and Consumer Affairs has indicated what the next market study will be. The commission told us that it does not know and does not have a particular view on what the next study should be.

Work on short-term consumer credit contracts We note that the House recently passed the Credit Contracts Legislation Amendment Act 2019, which caps interest and fees on high-cost loans at 100 percent of the principal. We asked the Commerce Commission to update us on the work it is doing on short-term consumer credit contracts, especially predatory lending, and whether it believes it is properly resourced for that work.

The commission told us it had done a range of work on short-term “payday” loans in recent years. It first looked at the type of conduct short-term loan providers were involved in, and brought a number of cases against what it saw as irresponsible lending and high fees. It has also done proactive work in investigating the conduct of mobile traders. The mobile trader business model is usually based on selling goods on credit at higher prices than at traditional retail stores. The commission has also proactively worked on high-cost short-term loans that comply with the Credit Contracts and Consumer Finance Act.

The commission emphasised the importance of not only focusing on prosecutions, but also fully investigating why problems are occurring and providing clear information on the way the industry should operate. The commission said it has invested in building strong relationships with credit advisory and community agencies, which deal directly with consumers. It is aware that complaint numbers can be lower because, amongst other reasons, consumers are often very reliant on the credit they receive.

2018/19 ANNUAL REVIEW OF THE COMMERCE COMMISSION

Fit and proper person test We discussed the new fit and proper person test introduced by the Credit Contracts Legislation Amendment Act. This is an entirely new function for the Commerce Commission. The fit and proper person test requires all directors and senior managers of consumer creditors to be certified by the Commerce Commission as a condition of being registered on the Financial Service Providers Register. The test looks at the character and capability of the directors and senior managers, who will need to demonstrate that they can be trusted to meet their duties under the Act.

Aurora Energy In November 2018, the electricity lines company Aurora Energy engaged consulting firm WSP to independently determine the state of the electricity networks in Dunedin and Central Otago, identifying any critical assets at significant risk of failure. This formed part of its application to the Commerce Commission for a customised price-quality path.3

We noted that 30 percent of Aurora Energy’s power poles were reported to be rotten in 2017. We asked whether its failure to invest in infrastructure in the past has led to an increase in prices for consumers now.

The Commerce Commission told us that it had taken action against Aurora Energy for failing to maintain its network. The commission does not believe Aurora Energy met good industry standards in its maintenance, which means that catch-up spending is needed to improve its infrastructure. The commission is scrutinising a proposal from Aurora Energy on how this will work. Part of the proposal requires it to consult its consumers. The Commerce Commission told us that, because a significant amount needs to be spent on improving the infrastructure, it is inevitable this will result in price increases for consumers.

Problems regarding online purchases We discussed the fact that the Commerce Commission is currently suing the Swiss-based ticket resale website Viagogo. Amongst other things, the Commerce Commission alleges that Viagogo made false or misleading claims, including that:

 it was an official seller of tickets  tickets for an event were about to sell out  it guaranteed that customers would receive valid tickets for their event. We noted that the commission received 585 complaints about online ticket reselling in the last year. It believes most or all were about Viagogo.

The commission told us about other online issues it is looking into, including the accuracy of online reviews and instances where consumers think they are purchasing a one-off item but are actually signing up to a subscription.

3 Price-quality regulation is applied to certain businesses that are regulated under Part 4 of the Commerce Act. It is intended to influence the behaviour of those businesses by limiting what they can recover from consumers.

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Competition in the supermarket industry We asked why the commission has not inquired into the supermarket industry. Given that there are only two major players, there would appear to be a lack of competition.

The commission pointed out that it has only had the power to look proactively at the level of competition in a market since 2018. Previously, its investigations into supermarkets have been limited to specific complaints, such as suppliers complaining about supermarket conduct.

We suggested that the supermarket industry might be a candidate for a self-initiated market study by the commission. However, it reiterated that it does not intend to use that power for its first few market studies.

Making penalties effective The commission told us it is focused on ensuring that penalties are taken seriously and not just seen as a cost of doing business. We asked how it is ensuring that telecommunications companies take their penalties seriously, given the high numbers of complaints in that area.

We heard that, although the level of a penalty is for the courts to decide, the Commerce Commission advocates penalties it believes appropriate in the cases it brings. It noted that penalties have increased markedly in recent years. Regarding telecommunications companies, it said it has brought a number of cases lately about the practice of billing beyond the termination of a contract.

The commission pointed out that just because a number of consumers complain about a company, it does not necessarily mean they will all merit investigating. It also thinks that because a very large number of consumers use telecommunication services daily that may naturally lead to a higher number of complaints.

The commission’s baseline capacity We asked the commission to comment on its staff capacity and how it is ensuring it has access to the skills it needs. The commission told us it has doubled in size in the last seven years and is projected to grow even more because of the functions it has been given. This growth has meant some cost pressures, and it will probably need more resourcing.

We heard about measures the commission is taking to ensure it has people with appropriate skills in areas like cartels, credit contracts, and market studies. As well as recruiting and moving people around the organisation, it is working to grow its capacity, with six interns at present.

We also noted that the commission’s turnover has been relatively high, at 11.2 percent. The commission believes this is not out of line with other state sector organisations. However, to reduce turnover, it is trying to create a physical work environment that people enjoy, and to support staff’s ability to work flexibly.

2018/19 ANNUAL REVIEW OF THE COMMERCE COMMISSION

Potential merger of Stuff and NZME During our hearing, the Deputy Prime Minister announced his openness to the Government allowing a merger of Stuff and New Zealand Media and Entertainment (NZME). We noted that the Commerce Commission had rejected a proposed merger of these two organisations in 2017. It told us it would consider a new application afresh, and said it could not comment on the Deputy Prime Minister’s comments as the announcement had only just been made.

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Appendix

Committee procedure We met on 12 December 2019 and 19 March 2020 to consider the annual review of the Commerce Commission. We heard evidence from the Commerce Commission and received advice from the Office of the Auditor-General.

Committee members Jonathan Young (Chairperson) Tamati Coffey Andrew Falloon Brett Hudson Gareth Hughes Melissa Lee Clayton Mitchell Dr Deborah Russell Stuart Smith Hon Poto Williams

Office of the Auditor-General (Briefing on the Commerce Commission).

Commerce Commission (Responses to written questions).

2018/19 Annual review of Crown Infrastructure Partners Limited

Report of the Transport and Infrastructure Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Performance and audit results ...... 2 Progress on CIP’s core broadband projects ...... 2 Funding from the Provincial Growth Fund ...... 3 Housing infrastructure programme ...... 4 Future developments for CIP ...... 4 Appendix ...... 6

Darroch Ball Chairperson

2018/19 ANNUAL REVIEW OF CROWN INFRASTRUCTURE PARTNERS LIMITED

Crown Infrastructure Partners Limited

Recommendation The Transport and Infrastructure Committee has conducted the annual review of Crown Infrastructure Partners Limited for 2018/19, and recommends that the House take note of its report.

Introduction Crown Infrastructure Partners Limited (CIP) was first founded to manage and oversee the Government’s investment in Ultra-Fast Broadband (UFB), the Rural Broadband Initiative (RBI), and the Mobile Black Spots Fund (MBSF). Initially called “Crown Fibre Holdings”, it was renamed in 2017 when its mandate was broadened. Today, CIP is also tasked with working with the private sector to develop new ways of funding water and roading infrastructure.

CIP is a Crown-owned company, with its shares held by the Ministers of Finance and State Owned Enterprises. Simon Allen chairs its board, and Graham Mitchell is its chief executive.

Performance and audit results CIP does not have a commercial, profit-centred mandate. It has been allocated a set level of funding, and tasked with using that funding to meet certain objectives. Our report therefore focuses on CIP’s achievement of its objectives in its two main focus areas—communications infrastructure and housing infrastructure co-investment—rather than its finances.

Comments from the Auditor-General The Auditor-General rated CIP “very good” on its management control environment, its financial information and supporting systems and controls, and its performance information and supporting systems and controls. This is the Auditor-General’s highest rating, and we note that CIP has now achieved these same ratings for three consecutive years. We commend CIP for this achievement.

Progress on CIP’s core broadband projects CIP gave us progress updates on its 3 core broadband projects—UFB, phase two of the RBI, and the MBSF—as at the end of September 2019:

 The UFB project was 87 percent complete, and had connected around 79 percent of New Zealanders to the ultra-fast broadband network. We heard that uptake for the service, particularly at the highest speeds, was substantially higher than envisaged when the project began.  Phase two of the RBI project was 48 percent complete, and had connected around 40,000 rural homes and businesses to better broadband.

2018/19 ANNUAL REVIEW OF CROWN INFRASTRUCTURE PARTNERS LIMITED

 The MBSF had added cellphone coverage to 26 new tourism sites, and 238 kilometres of state highways. CIP told us that its progress on the RBI and MBSF projects over the 2018/19 year was not as fast as it had hoped, and assured us that this was being remedied. We heard that it expects the rollout of these projects to be “substantially complete” by the end of 2022, while its contracts specify final completion by the end of 2023.

The rollout of both projects to new areas is prioritised based on the population and remoteness of the areas. As a result, progress tends to slow as the project nears completion, because installation of new infrastructure in the most remote areas is more difficult. We heard that this is further complicated by the fact that the mobile towers and antennae funded by CIP are being used by all three major telecommunications retailers, which we heard was a world first. CIP assured us that most of these complicating factors have been worked out, and the companies contracted to build the physical infrastructure are ready to make good progress. We were also told that this new infrastructure can be made 5G capable.

Funding from the Provincial Growth Fund The Provincial Growth Fund (PGF) is contributing to two main areas of CIP’s work:

 extending the coverage of the UFB and RBI projects, particularly on the West Coast of the South Island  providing high speed internet to marae that act as hubs in rural communities, under the Marae Digital Connectivity programme. We heard that the PGF contribution to CIP’s work on the West Coast has allowed CIP to extend UFB coverage to four more towns, and to speed up the process of connecting larger towns to the UFB network. It has also funded the construction of five more mobile towers, and a second fibre link between the West Coast and the rest of the country, from Hawea to Fox Glacier. This will provide back-up capacity in the network on the coast, and will also result in construction work for local contractors and businesses.

Marae digital connectivity project The PGF is also funding a programme to provide access to high speed internet for marae in the Taranaki, Northland, Bay of Plenty, and Tairāwhiti regions. We heard that this came out of discussions with iwi about what could be done to improve the digital divide between different communities in New Zealand. In many remote areas, internet access is still too poor for local children to do schoolwork or for effective communication for tourists. Even in some urban areas, accessing quality public broadband can be difficult. Broadband-equipped marae in these areas can provide access to information and the internet, the way public libraries do in larger communities.

When we heard from CIP, it had connected broadband to 32 marae, and another 127 had applied for the programme. The PGF contributed around $10 million to the programme, while CIP manages it and provides the subject-matter expertise. CIP told us that, once its procurement processes are up and running, it hopes to be able to install broadband in marae within around 60 days of approval. We heard that installation will also provide work in more

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2018/19 ANNUAL REVIEW OF CROWN INFRASTRUCTURE PARTNERS LIMITED remote communities, because installations outside main centres are often handled by smaller local wireless internet service providers.

Housing infrastructure programme Since 2017, CIP has been tasked with improving how housing development, water, and roading infrastructure is funded, and developing new ways of supporting local councils to make infrastructure investments. The first major project it has worked on in this new role is the Milldale housing development, north of Auckland. We had substantial discussions with CIP about how this project is progressing, and what CIP has learned from it so far.

Partnership model to provide infrastructure for Milldale development Major housing developments require substantial water and roading infrastructure to support them. This infrastructure is usually built by local councils, which either borrow to pay for the project, or fund the infrastructure piecemeal over a number of years. CIP is instead intending to work with local councils to provide a substantial share of the funding required for housing infrastructure by other means. This should speed up the construction of the infrastructure, and in turn the construction of housing.

At Milldale, CIP has set up a special purpose vehicle, which has contributed around two- thirds of the overall cost of around $91 million for the water and roading infrastructure needed for the development of around 4,500 new homes. This money was accessed by borrowing from ACC, at a fixed rate of interest, for 35 years. CIP noted that this is the longest duration of debt security currently available in New Zealand. Most of the other third is being met by Auckland Council, with the remainder funded by the developer, Fulton Hogan. The infrastructure is repaid by the owners of property in the development, through an extra levy added to the rates collected by Auckland Council. This levy will run over 35 years, until the loan from ACC is repaid.

CIP expects its work to contribute to better housing affordability in two ways. First, by making more funds available in the short term for planning and infrastructure, councils are more likely to approve the release of land needed for new developments. CIP thinks that this will improve the supply of housing and improve affordability. Spreading infrastructure costs over 35 years also reduces the immediate outlay that property owners would be required to pay if they had to contribute to these costs all at once, when purchasing a property. However, CIP told us that it treats each section in a development as a standard unit, and whether a targeted affordable property is built on that section is outside its remit.

Future developments for CIP Although CIP is happy with how the Milldale project is progressing, we heard it has learned how to make the special purpose vehicle model more effective in future.

Currently, the levy that pays for the cost of the Milldale infrastructure is effectively arranged through individual contracts with each landowner. This creates difficulties where some of the land that is part of the infrastructure project is owned by different developers. Some may be able to free-ride on the infrastructure improvement, as the special purpose vehicle cannot compel them to pay their share. CIP told us that work is being done on legislative changes to

2018/19 ANNUAL REVIEW OF CROWN INFRASTRUCTURE PARTNERS LIMITED correct this problem. However, it still expects the model to be less effective in cases where larger numbers of landowners are involved.

We congratulated CIP on its long-term performance in rolling out broadband infrastructure, and noted that it also seems to be performing well in terms of its newly expanded remit. We asked whether it thinks it could make improvements in any other areas of infrastructure investment or procurement. CIP said it is happy with its performance so far, and noted that, as a Crown-owned entity, it will work on whatever it is directed to work on. However, it would like to remain closely focused on what it does best, rather than risk undertaking activity too far removed from its relatively specialist skill set.

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Appendix

Committee procedure We met on 7 November 2019 and 19 March 2020 to consider the annual review of Crown Infrastructure Partners Limited. We heard evidence from Crown Infrastructure Partners Limited and received advice from the Office of the Auditor-General.

Committee members Darroch Ball (Chairperson) Chris Bishop Paul Eagle Raymond Huo Matt King Jan Logie Jami-Lee Ross Jamie Strange Tim van de Molen

Office of the Auditor-General (Briefing on Crown Infrastructure Partners Limited).

Crown Infrastructure Partners Limited (Responses to written questions).

2018/19 Annual review of the Earthquake Commission

Report of the Governance and Administration Committee

March 2020

The Governance and Administration Committee has conducted the annual review of the Earthquake Commission for 2018/19, and has no matters to bring to the attention of the House. The committee recommends that the House take note of its report.

Dr Jian Yang Chairperson

2018/19 Annual review of the Electricity Authority 2018/19 Annual review of the Electricity Corporation of New Zealand Limited 2018/19 Annual review of Genesis Energy Limited 2018/19 Annual review of Mercury NZ Limited 2018/19 Annual review of Meridian Energy Limited

Report of the Transport and Infrastructure Committee

March 2020

The Transport and Infrastructure Committee has conducted the annual reviews of the Electricity Authority, the Electricity Corporation of New Zealand Limited, Genesis Energy Limited, Mercury NZ Limited, and Meridan Energy Limited for 2018/19, and has no matters to bring to the attention of the House. The committee recommends that the House take note of its report.

Darroch Ball Chairperson

2018/19 Annual review of KiwiRail Holdings Limited 2018/19 Annual review of the New Zealand Railways Corporation

Report of the Transport and Infrastructure Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Appropriateness of for-profit designation ...... 3 Provincial Growth Fund allocation for working capital ...... 3 Maintenance and infrastructure projects ...... 4 Progress on Auckland transport projects ...... 5 Future of West Coast line ...... 5 Improvements to staff engagement ...... 5 Progress on gender pay equity...... 5 Appendix ...... 6

Darroch Ball Chairperson

2018/19 ANNUAL REVIEW OF KIWIRAIL AND THE NEW ZEALAND RAILWAYS CORPORATION

KiwiRail Holdings Limited and the New Zealand Railways Corporation

Recommendation

The Transport and Infrastructure Committee has conducted the annual reviews of KiwiRail Holdings Limited and the New Zealand Railways Corporation for 2018/19, and recommends that the House take note of its report.

Introduction KiwiRail Holdings Limited (KiwiRail) is a state-owned enterprise (SOE) that owns and operates New Zealand’s rail network and the Interislander ferries. Its operations include logistics, shipping, tourism, public transport, infrastructure, rolling stock, and property. KiwiRail is responsible for approximately 3,700 kilometres of track, 253 locomotives, and three ferries, and it employs about 3,700 staff.

The New Zealand Railways Corporation holds the rail network land (about 17,800 hectares), which it leases to KiwiRail at a nominal cost. Its primary purpose is to make railway land available to KiwiRail. The corporation does not have any employees or executives and is not expected to derive any return from the land nor operate a rail business. Its board is accountable to the Minister of Finance and the Minister for State Owned Enterprises, as the shareholding Ministers.

Financial overview For 2018/19, KiwiRail reported total operating revenue of $682.9 million, up 11 percent from 2017/18. Operating costs for the year increased by 16 percent, to $657.2 million, largely because of a $30 million Holidays Act 2003 remediation provision. This resulted in an operating surplus of $26 million, against a target of $55–75 million. Without this one-off charge, KiwiRail’s operating surplus would have increased to $55 million. Compared with the $48 million operating surplus in 2017/18, this reflects a similar surplus of 8 percent of operating revenue.

After taking into account depreciation, impairments, and other charges, KiwiRail reported a comprehensive loss of $324.9 million in 2018/19, compared with $235.9 million in 2017/18. This loss is mainly due to the impairment of KiwiRail’s assets ($249.3 million) and the impairment of assets affected by the Kaikōura earthquake ($131.8 million). A large proportion of the accounting value of KiwiRail’s assets must be written off each year because the network does not generate enough cash flows to cover the required level of reinvestment.

Results of the 2018/19 audit The Auditor-General issued a non-standard audit report for KiwiRail. The auditor’s opinion included an emphasis of matter paragraph, drawing attention to how KiwiRail’s assets are valued and presented in the financial statements. It also highlighted disclosures in the financial statements regarding the pending decisions from the Future of Rail review, led by 2

2018/19 ANNUAL REVIEW OF KIWIRAIL AND THE NEW ZEALAND RAILWAYS CORPORATION

the Ministry of Transport and its partners, and the possible effect of those disclosures on the structure of KiwiRail.

The Auditor-General assessed KiwiRail’s management control environment as “good” and its financial information and supporting systems and controls as “very good”.

The Auditor-General issued a standard audit report for the New Zealand Railways Corporation, assessing its management control environment and financial information and supporting systems and controls as “very good”.

Appropriateness of for-profit designation As an SOE, KiwiRail is expected to operate as profitably and efficiently as comparable businesses not owned by the Crown. Its for-profit designation means its assets are valued on the basis of projected future cash flows. However, in past financial years a number of KiwiRail’s asset classes have not generated significant cash flows, so related capital expenditure has been subject to an impairment provision in its financial statements. This impairment is why KiwiRail has recorded year-on-year losses ($324.9 million in 2018/19 and $235.9 million in 2017/18).

We are aware that in the financial statements of the Government for the year ended 30 June 2019, Treasury changed its valuation approach for the rail freight network, from a commercial basis to a public-benefit basis.1 This resulted in an increase to the value of the rail freight network in the Crown’s accounts to $6.3 billion, compared to $1.0 billion that would have been reported under the previous approach.

We asked KiwiRail whether it should be designated a public-benefit entity rather than a for- profit SOE. KiwiRail explained that there is “no perfect model” for its business, as it competes as a commercial entity but also has a public-benefit role. The board considered the appropriateness of KiwiRail’s designation against the relevant accounting standard when adopting its financial statements. It took into account indicators such as the entity’s stated objectives, the nature of the benefits it provides, and the nature of its funding. The board concluded that the majority of the indicators and KiwiRail’s over-riding purpose supported the assertion that KiwiRail is a profit-oriented entity.

Provincial Growth Fund allocation for working capital In 2018/19, KiwiRail received an $80 million equity injection from the Provincial Growth Fund. This was not the result of a Provincial Growth Fund application, but rather a general contribution towards capital and infrastructure projects across the network. A further $50 million in working capital has been allocated for 2019/20, which KiwiRail has described as essential for regional economic development and productivity.

Some of us expressed concern that KiwiRail will not be able to reliably measure how its working capital allocation benefits regional development, which is the purpose of the Provincial Growth Fund. KiwiRail told us it allocates working capital based on where there is

1 Financial Statements of the Government of New Zealand for the year ended 30 June 2019, p. 15

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2018/19 ANNUAL REVIEW OF KIWIRAIL AND THE NEW ZEALAND RAILWAYS CORPORATION the greatest need and potential benefits. It said the decision to provide working capital, and where this capital comes from, is ultimately one for the Government to make.

Maintenance and infrastructure projects We are aware that in previous years KiwiRail has deferred maintenance and infrastructure work because it has not had the necessary capital. In previous annual reviews, KiwiRail said this had affected reliability for customers and resulted in some lines being taken out of service because it could not afford to maintain them. We asked KiwiRail for an update on its maintenance and infrastructure projects.

In 2018/19, KiwiRail spent $212 million on its rail network, primarily to improve services on key freight lines. KiwiRail told us that it will cost between $300 million and $400 million a year to perform the maintenance work it wants, allowing it to get ahead of track degradation. It said the size of the network means it will take a decade to bring the track up to an acceptable standard. KiwiRail is also replacing much of its aged rolling stock, with a quarter of its 4,750 wagons ready for retirement. We heard that this work is “a must do” because aged wagons pose health and safety risks and can damage tracks. KiwiRail took delivery of 450 new wagons in 2019 and has started work to procure additional locomotives.

Remediation of North Auckland Line Budget 2019 set aside up to $300 million from the Provincial Growth Fund for regional rail initiatives. We understand that KiwiRail intends to use much of this fund for track resilience work on regional routes that have degraded due to past under-investment. From this, $94.8 million has been allocated for remediation work on 54 kilometres of track on the North Auckland Line between Swanson and Whangarei, about 30 percent of the line. This includes upgrading or replacing bridges, maintenance work on tunnels, stabilising embankments, and replacing sleepers and ballasts. We asked KiwiRail whether it is confident the line will be profitable once this remediation work is complete. KiwiRail said that under-investment in the North Auckland Line has meant it now poses a derailment risk, with four derailments in one year. Its locomotives therefore operate at a reduced speed, which makes the business less competitive with other freight companies. Keeping the line well maintained will mean KiwiRail can move freight faster, maintain schedule integrity, and rebuild its market share to previous levels. Work on the line has begun, with one tunnel almost finished and survey work under way on a further 14 tunnels and 7 bridges. KiwiRail expects to operate 10 work fronts on the line in mid-2020.

Reinstatement of Wairoa to Napier line The Provincial Growth Fund contributed $6.2 million towards the reinstatement of the Wairoa to Napier line, after storm damage forced its closure in 2012. Remediation work was completed in June 2019 and the line is expected to be used from February 2020. KiwiRail told us it will take time to attract the market to use the line but it believes it has good potential, with the amount of timber from logging in the region expected to quadruple in the next four years. It said that rail presents an efficient and economical transport option for the East Coast logging sector, which is struggling with inflationary costs and a lack of truck drivers.

2018/19 ANNUAL REVIEW OF KIWIRAIL AND THE NEW ZEALAND RAILWAYS CORPORATION

Progress on Auckland transport projects We understand that design works began on a Third Main Line in January 2019. The line will run alongside an existing track between Wiri and Westfield, responsible for carrying a significant amount of Auckland’s freight volume as well as two passenger lines. KiwiRail told us it has seen “astronomical” growth in demand along the corridor, which has caused scheduling conflicts between passenger and freight services. The new line is expected to remedy this and allow for more frequent and reliable services. KiwiRail said the project is now being considered by the New Zealand Transport Agency.

KiwiRail also plans to extend the electrification of Auckland’s rail network. We heard that a business case for electrification of the line between Papakura and Pukekohe has been completed and is being considered by the New Zealand Transport Agency. We look forward to seeing progress on these projects.

Future of West Coast line KiwiRail noted in its annual report that it expects freight tonnage on the West Coast to decrease in coming years due to a reduction in coal movements. We asked whether the line would be viable without these coal movements. KiwiRail said that although it also transports freight from logging and dairy, the line would be “extremely challenged” without coal. It said that 82,000 passengers also use the line annually, bringing wider benefits to the region.

Improvements to staff engagement We were pleased to learn that staff engagement at KiwiRail improved in 2018/19. In its annual survey, staff gave KiwiRail a net promoter score of +24, up from +1 the previous year and -21 in 2016. In part, KiwiRail attributes this year-on-year increase to changes resulting from HPHE initiatives (high performance, high engagement), which began in 2015. These initiatives aim to improve productivity and efficiency by empowering frontline staff to find solutions to challenges facing the organisation, while improving safety. As one example, KiwiRail said that an HPHE approach enabled staff to double the number of locomotives they service each month, after being given an opportunity to redesign their workstation. We commend KiwiRail for its high staff engagement, and we look forward to seeing the outcomes of further HPHE initiatives.

Progress on gender pay equity At our last annual review, KiwiRail acknowledged it needed improve gender diversity in its organisation and had established a diversity committee to explore opportunities. We heard that, since then, the number of women employed by KiwiRail has increased slightly, from 15 percent to 16 percent. The number of women on its executive team has also increased this year, from two to three. KiwiRail said it is aware that many of its female staff work in lower- paid roles, like administration, and it is in the early stages of work to determine its overall and like-for-like gender pay gap. We look forward to seeing progress in this area.

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Appendix

Committee procedure We met on 5 December 2019 and 19 March 2020 to consider the annual review of KiwiRail Holdings Limited and the New Zealand Railways Corporation. We heard evidence from KiwiRail Holdings Limited and the New Zealand Railways Corporation and received advice from the Office of the Auditor-General.

Committee members Darroch Ball (Chairperson) Chris Bishop Paul Eagle Raymond Huo Matt King Jan Logie Jami-Lee Ross Jamie Strange Tim van de Molen

Marja Lubeck participated in some of this review.

Office of the Auditor-General (Briefing on KiwiRail Holdings Limited and the New Zealand Railways Corporation).

KiwiRail Holdings Limited (Responses to written questions).

New Zealand Railways Corporation (Responses to written questions).

2018/19 Annual review of the Research and Education Advanced Network New Zealand Limited (REANNZ)

2018/19 Annual review of New Zealand Venture Investment Fund Limited

2018/19 Annual review of the Kordia Group Limited

Report of the Economic Development, Science and Innovation Committee

March 2020

The Economic Development, Science and Innovation Committee has conducted the annual reviews of the Research and Education Advanced Network New Zealand Limited (REANNZ), New Zealand Venture Investment Fund Limited, and the Kordia Group Limited for 2018/19, and has no matters to bring to the attention of the House. The committee recommends that the House take note of its report.

Jonathan Young Chairperson

2018/19 Annual review of the Meteorological Service of New Zealand Limited (MetService)

Report of the Economic Development, Science

and Innovation Committee

March 2020

Contents Recommendation ...... 2 About MetService ...... 2 Audit results and financial performance...... 2 Launch of MetService’s new website ...... 2 New weather warning classification system ...... 3 Diversity and inclusion in MetService’s workforce ...... 3 High quality and reach of MetService’s data ...... 3 Overlapping work between MetService and NIWA ...... 4 The Moana Project ...... 4 5G rollout in New Zealand ...... 4 Appendix ...... 5

Jonathan Young Chairperson

2018/19 ANNUAL REVIEW OF METSERVICE

Meteorological Service of New Zealand Limited

Recommendation The Economic Development, Science and Innovation Committee has conducted the annual review of the Meteorological Service of New Zealand Limited for 2018/19, and recommends that the House take note of its report.

About MetService The Meteorological Service of New Zealand (MetService) was established as a state-owned enterprise in 1992. The Minister for State Owned Enterprises and the Minister of Finance are the shareholders on behalf of the Crown. Anthony Howard is the chair of the board and Peter Lennox is the chief executive. In 2020, current board member Sophie Haslem will take over as chair.

MetService has three main strategic goals:

 to provide essential safety information for New Zealanders  to continually modernise the business to keep it economically sustainable  to increase its contribution to New Zealand in the face of climate change.

Audit results and financial performance As in the previous year, the auditor gave MetService “very good” ratings for its management control environment and financial information systems, with no changes recommended.

Financial performance MetService’s total revenue for 2018/19 was $61.116 million. Its net profit was $2.555 million, 13 percent less than the $2.948 million target set in 2018/19’s statement of intent. Compared with 2017/18 this was a 2.3 percent increase in total revenue, and a 23.7 percent decrease in net profit. The final dividend paid for 2018/19 was $1.208 million, up from the previous year’s $1.060 million.

Launch of MetService’s new website MetService launched a new website in August 2019, after two years of development. This was the first update since 2012. MetService’s website is one of the five most visited in New Zealand, with 200 million unique user sessions in 2018/19.

The old website was no longer fit for purpose, as it was reaching capacity for the amount of information it could ingest and display. As a data-rich organisation, MetService needs to enter tens of thousands of pieces of data every day into its website.

We heard that 16,000 people had contacted MetService with feedback about the new website. MetService had encouraged feedback by putting tabs on each page of the website, and is keen to evolve the website based on the feedback received.

2018/19 ANNUAL REVIEW OF METSERVICE

New weather warning classification system In May 2019, MetService introduced a new classification system for weather alerts. This classifies severe weather events into yellow, orange, and red warnings. Red warnings will be used sparingly, for the most extreme weather events. This makes it easier for the public to understand extreme weather events, and aligns with international standards set by the World Meteorological Organization.

These warnings are made in consultation with local government and the civil defence authorities (the National Emergency Management Agency).

Diversity and inclusion in MetService’s workforce Of MetService’s 279 employees, 30 percent are women. Its board is made up of 4 men and 4 women, which it sees as a good influence on the rest of the company. It noted that, among newer, younger staff, the gender balance is even. We are pleased to see more young women scientists starting with MetService.

We are concerned that MetService had a relatively high staff turnover rate of 15 percent in 2018/19, along with increased use of employee assistance programmes and sick leave. We were told that turnover fluctuates, and 15 percent is normal for the company. Its software staff normally stay only two years, as demand for their skills is competitive. We were told that this explained a good part of the turnover, and was to be expected. We note that there is a higher than optimal turnover of staff and we are concerned around continuity and building of institutional knowledge. We would like to hear from MetService in the next annual review about what strategies are being put in place to address this.

We asked what incentives and bonuses are made available to staff, and whether this contributes to a gender pay gap. We heard that the sales and senior leadership teams are offered bonuses as incentives, but this was not standard throughout the organisation.

We note that MetService’s proportion of Māori and Pasifika staff members is very low, at 2 percent. We asked what it is doing to improve this percentage. It said it is working with Māori organisations and schools to engage young people and encourage them to work at MetService.

High quality and reach of MetService’s data MetService produces weather graphics for TVNZ and TV3, weather pages for a majority of the country’s newspapers, and more than 50 weather videos for New Zealand and the South Pacific. MetService fully owns three subsidiaries based overseas. These are: MetraWeather (Australia) Pty Ltd, MetraWeather (UK) Ltd, and MetraWeather (Thailand) Ltd. MetOcean is now fully amalgamated with MetService.

MetService informed us that its forecasting meets a high standard in New Zealand and internationally. These standards are set by the World Meteorological Organization. This high standard is reflected by its recent contract to provide weather graphics to international news provider Al Jazeera. MetService also has a significant influence over the South Pacific region, with stations throughout the area.

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Overlapping work between MetService and NIWA We were interested to hear about the distinctions between MetService’s work and that of the National Institute of Water and Atmospheric Research (NIWA). The core difference, we were told, is that MetService is a state-owned enterprise and inherently competitive, while NIWA is a Crown-owned research entity. MetService’s predictions are focused on the safety of New Zealanders, and NIWA’s are more for scientific purposes.

We asked why two government-funded agencies are needed for weather forecasting work. We were told that MetService provides more immediate, safety-focused forecasts, while NIWA provides longer-term forecasts that are better suited to larger issues, such as climate change. MetService said that, although there are some overlaps, the two organisations were collegial in these, and want to continue collaborating on these in the future.

It is our intent to ask the Auditor-General to investigate and report on the overlap in MetService and NIWA’s work in its next review.

We note that the Commerce Commission is investigating possible anti-competitive behaviour by NIWA and MetService. Its review is looking at the pricing and terms on which competitors can access weather data from MetService and NIWA. Because the investigation is ongoing, we did not discuss it with MetService, but will be interested to learn the outcome in due course.

The Moana Project In September 2018, the Moana Project was awarded $11.5 million from the Government’s Endeavour Fund.1 It is a research project that seeks to better understand heating in the Tasman Sea, and how this affects ocean circulation and heatwaves. This would improve New Zealand’s seafood sector, as well as MetService’s weather predictions. MetService informed us that this was “blue sky” research, and did not overlap with any of NIWA’s existing work.

We were pleased to hear about MetService’s consideration of mātauranga Māori in this research, working with the eastern Bay of Plenty iwi Whakatōhea. We heard that Whakatōhea were chosen because of their responsiveness to consultation, and their access to mussel farms. MetService’s use of mātauranga Māori comes through dialogue with the involved trust, and incorporating Māori ideas into the science it uses.

5G rollout in New Zealand MetService informed us that it looks forward to the rollout of 5G technology in New Zealand. As a data-rich and technology-heavy organisation, the increased download speed would help with its work. MetService said it could see only positives from this technology, as long as the bands were properly managed. It noted that the Ministry of Business, Innovation and Employment’s approach to 5G aligns more closely than it had the previous year.

1 The Endeavour Fund is managed by the Ministry of Business, Innovation and Employment. The fund supports research that has the potential to positively transform New Zealand's economy, environment, and society. 4

2018/19 ANNUAL REVIEW OF METSERVICE

Appendix

Committee procedure We met on 20 February and 19 March 2020 to consider the annual review of the Meteorological Service of New Zealand Limited. We heard evidence from MetService and received advice from the Office of the Auditor-General.

Committee members Jonathan Young (Chairperson) Tamati Coffey Andrew Falloon Brett Hudson Gareth Hughes Melissa Lee Clayton Mitchell Dr Deborah Russell Stuart Smith Hon Poto Williams

Office of the Auditor-General (Briefing on Meteorological Service of New Zealand Limited).

Meteorological Service of New Zealand Limited (Responses to written questions).

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2018/19 Annual review of the Ministry of Transport

Report of the Transport and Infrastructure Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Financial overview and audit report ...... 2 Some performance indicators have not been met ...... 3 The future of rail ...... 3 Recommendations of NZTA board members ...... 5 Strategies to incorporate Māori viewpoints in policy making ...... 5 The ministry prioritises accessibility in policy making ...... 5 Environmental impacts of transport ...... 5 Let’s Get Wellington Moving ...... 6 Provincial Growth Fund ...... 6 Appendix ...... 7

Darroch Ball Chairperson

2018/19 ANNUAL REVIEW OF THE MINISTRY OF TRANSPORT

Ministry of Transport

Recommendation The Transport and Infrastructure Committee has conducted the annual review of the Ministry of Transport for 2018/19, and recommends that the House take note of its report.

Introduction The Ministry of Transport is the Government’s principal transport adviser. It provides impartial, expert advice on transport, mainly as policy advice and support to Ministers. Through this, it aims to:

 improve the overall performance of the transport system  improve the performance of transport Crown entities  achieve better value for money for the Government from its investment in the transport system. The ministry manages and accounts for funds invested in transport. It works with Crown entities, and is responsible for ensuring they are effectively governed, as well as being accountable for their performance. It also works with state-owned enterprises and local government authorities.

Financial overview and audit report The bulk of the Ministry of Transport’s funding comes from the Crown. It received $43.1 million in revenue in 2018/19. Total departmental expenditure was $39.9 million, resulting in a surplus of $3.2 million.

Results of the annual audit The Auditor-General issued a standard audit report for the Ministry of Transport. He rated its financial information and supporting systems and controls as “very good”. He recommended improvements in two other areas: the management control environment, and performance information and supporting systems and controls, which were rated “good”.

The Auditor-General noted that three previous deficiencies in the ministry’s management control environment had not been completely resolved. He again recommended that the ministry progress its work on a formal legislative compliance system, contract management policies and procedures, and systems and controls in response to its fraud reviews. We hope to see progress in these areas, but were reassured to note that manual controls are mitigating any risks in the meantime.

The Auditor-General recommended that the ministry continue to work on previously identified deficiencies in the systems and controls for reporting on its monitoring of Crown entities. He also recommended updating the ministry’s Statement of Intent to include

2018/19 ANNUAL REVIEW OF THE MINISTRY OF TRANSPORT performance indicators that show the ministry’s progress towards its wider outcomes and impacts in the transport sector.

We note that all of the Auditor-General’s recommendations have been made in previous years and hope to see action taken by the time of our next review.

Some performance indicators have not been met The Ministry of Transport has targets for three key performance indicators about policy advice, satisfaction of the Minister, and ministerial servicing. It was unable to meet the targets for these three performance indicators.

It also has medium-term indicators for four areas of work:

 increase port productivity  fewer deaths and serious injuries within the transport system  reduction in growth of carbon dioxide emissions from domestic transport  decrease in congestion in three main metropolitan areas. It did not reach its target for three of these performance indicators. For the fourth measure, a reduction in congestion in three main metropolitan areas, it is on track to meet its target for two out of three centres, with Wellington not on track.

The ministry said that it has been unable to meet these goals due to staff capacity and process issues. It said that while it has made some positive progress, some of its services do not meet the level needed. It has done an internal review focusing on how it can improve its processes.

Staff turnover rates are high We note that the ministry’s turnover rate is 22 percent, which is well above the average public sector turnover rate of 11.8 percent.1 The ministry acknowledged its turnover is higher than comparable entities, and acknowledges that high turnover results in increased cost and decreased efficiency. It said resigning staff often cite opportunities elsewhere as a reason for leaving. The ministry believes that because of its small size it cannot offer the development opportunities staff are seeking, but it is exploring how to resolve this. It concluded that it is not comfortable with the current turnover rate, but is unsure of the main reason for it.

In an effort to reduce turnover, the ministry is trying to improve the working environment. It is introducing a diversity and inclusion strategy, and is incorporating equal employment opportunity actions into its diversity and inclusion framework and action plan. It has also improved its gender pay gap from 12 percent in 2016 to 4.8 percent in January 2019. It hopes these strategies will improve levels of recruitment and retention.

The future of rail The ministry has been working on the Future of Rail project along with KiwiRail, the New Zealand Transport Agency (NZTA), the Treasury, and local government groups. It will help to

1 Source: State Services Commission

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2018/19 ANNUAL REVIEW OF THE MINISTRY OF TRANSPORT inform planning and funding to better integrate rail into New Zealand’s transport system. One of the project goals is to develop the New Zealand Rail Plan, which will summarise the rail strategy for the next decade, and propose the levels of investment needed. The draft New Zealand Rail Plan was released in December 2019.

As part of the project, the ministry presented various proposals to the Government about what could be done with the rail system. Of the options presented, the Government chose to rebuild the network with a focus on having rail contribute to the country’s transport system. The Future of Rail has also highlighted that moving more freight to rail would reduce greenhouse gas emissions. However, to do this the quality of the track and other supporting infrastructure would need to be improved. Government funding of $741 million in Budget 2019 was approved to restore rail tracks and infrastructure. The funding will also be used to replace and upgrade rail assets, and to fund procurement phases for replacing ferries and landside assets.

Plans for a business case for rapid rail between Hamilton and Auckland We were interested in hearing more about the business case the ministry is working on for a rapid rail connection between Hamilton and Auckland. It said that a train service will be running between Hamilton and Auckland from 2020. It is also developing a business case for a more rapid connection between the two cities. Work on the business case has started and is expected to be reported back around April 2020. The business case will show that, on the narrow gauge of the existing railway line, trains could travel up to about 160 kilometres per hour. However, if a different rail gauge were used, trains could travel much faster between the two cities. The ministry also said the business case would include information on the benefits of including links to Tauranga in the network.

The Crown is deciding the preferred partner for rail to Auckland Airport The ministry is also taking a role in the City Centre to Māngere (CC2M) project, which would establish a light rail connection to Auckland Airport. Two groups, NZTA and NZ Infra, have proposed initial business cases for the project.2 The ministry has asked both groups to develop their options further for more consideration. It has provided both groups with a set of requirements for their proposals. We asked why these requirements have not been made available to the public. The ministry said it is because they are treating the process as if it was purely commercial, and is following commercial procedure. It said the requirements documents refined what the CC2M project hopes to achieve so that both parties understood what was being sought. It also said it would release the requirements documents once the proposals were evaluated.

Some of us expressed concern that the Crown is not releasing information on what is being procured to the public. The ministry responded that the purpose of the current process is to decide the preferred delivery partner for light rail, not the preferred solution. It said the purpose of its requirements document is to allow it to see the capability, quality of thinking, and approaches of each delivery partner. This would be used to decide the delivery partner, but the final approach would require more engagement with communities and councils.

2 NZ Infra is a joint venture between the NZ Super Fund and CDPQ Infra, a wholly owned subsidiary of Canadian pension fund Caisse de dépôt et placement du Québec. 4

2018/19 ANNUAL REVIEW OF THE MINISTRY OF TRANSPORT

The ministry confirmed it had received the proposals and was currently evaluating them.

Recommendations of NZTA board members The ministry makes recommendations to the Minister about appointments to the New Zealand Transport Agency’s board. Some of us had received feedback questioning some NZTA board members’ experience and competency. We asked what criteria the ministry considers when recommending appointments to the board.

The ministry said its criteria depend on the position. If it is looking to fill just one position, it will engage with other board members to understand gaps in skills that need to be filled. It then considers candidates against those position-specific criteria, along with their overall competencies. Senior board experience is not a prerequisite, but the ministry does consider the nature of a person’s experience, and whether it is more governance or technical-based. It highlighted that the appointments are made by the Minister, and that not all of its recommendations result in appointments.

Strategies to incorporate Māori viewpoints in policy making We were interested in how the ministry involves te ao Māori in its policy work, and what results this has on project delivery. The ministry told us it has recently created an internal strategy for engagement with Māori. Within that strategy it has acknowledged that the ministry needs to begin by improving its understanding of te reo and tikanga Māori. It also said it struggles to make relationships with many Māori entities due to its small size.

The ministry draws on other agencies’ connections One approach the ministry has taken is to use connections other agencies already have with Māori entities. For example, it met to discuss road safety policy with a group of senior Māori representatives that the Commissioner of Police regularly engages with. It hopes to expand this kind of relationship in a way that is respectful to all involved.

The ministry said it needs to continue to focus on local, place- and people-focused solutions when working on policies.

The ministry prioritises accessibility in policy making We asked whether the ministry considers the needs of ethnic communities when developing policy. The ministry said it is important to understand how policy affects various demographics, and how the effects can be mitigated. It believes certain ethnic and socioeconomic groups can be disproportionately affected by policy changes if they are not taken into consideration in the planning stage. The ministry aims to allow for all communities to have access to transportation while also meeting its performance targets.

Environmental impacts of transport Environmental sustainability is one of the ministry’s five priorities in the outcomes framework it has developed for the New Zealand transport system. The ministry noted that transport accounts for about 19 percent of greenhouse gas emissions in New Zealand, and that this number has increased over time. It wants to significantly lower that percentage.

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The ministry is focusing on several areas to transition towards net zero carbon emissions. They include work on moving to a low-emissions vehicle fleet, reducing greenhouse gases from maritime transport, and carbon offsetting. The ministry said it also needs to consider the resilience of the transport network, and its ability to adapt, especially in the case of extreme weather events. The broader environmental impacts of transport such as pollution from chemicals and noise pollution are also important factors for the ministry.

We asked specifically about the role of mode shift in improving environmental outcomes for transport. (Mode shift is the change in transport supply or use due to increased advantages of one mode over another.) The ministry responded that the scope for rail to remove freight from the road network is one case where mode shift could have a positive environmental outcome. So could an increase in the use of public transport rather than personal vehicles. However, it noted that in cities where this has taken place the public transport systems are experiencing pressure due to an increase in users.

Let’s Get Wellington Moving The ministry has also been involved in the Let’s Get Wellington Moving project. Its role has been to investigate how parts of the project would be funded. We asked why the sequencing of projects announced by the Minister of Transport differs from what the ministry recommended. The Cabinet paper on Let’s Get Wellington Moving prioritises the development of mass rapid transit before changes to roads at the Basin Reserve and a second tunnel through Mount Victoria. However, the ministry had advised that the Basin Reserve and Mount Victoria projects should precede others to mitigate disruption from the development of rapid transit. The ministry told us it provided this advice, but that later discussions about sequencing were held only between Ministers and the Let’s Get Wellington Moving project group. The ministry was not involved in these discussions.

Provincial Growth Fund Since its announcement in early 2018, the Provincial Growth Fund (PGF) has provided funding for a number of transport projects. We asked what role the ministry plays in assessing and analysing projects for funding from the PGF. The ministry said it provides advice on individual proposals, and analyses to what extent a proposal meets the objectives of the PGF. Ultimately, the Provincial Development Unit manages the application process for funding, and the advice sought and received.

We expressed concern that the PGF may be seen as an alternative way to fund a project that NZTA normally would not fund. The ministry responded that the objectives of the PGF, focused on regional development, differ from those for NZTA under the Government policy statement on land transport, which takes a national priority perspective. It could therefore be that some projects might meet the objective of one fund but not the other.

2018/19 ANNUAL REVIEW OF THE MINISTRY OF TRANSPORT

Appendix

Committee procedure We met on 12 December 2019 and 19 March 2020 to consider the annual review of the Ministry of Transport. We heard evidence from the ministry and received advice from the Office of the Auditor-General.

Committee members Darroch Ball (Chairperson) Chris Bishop Paul Eagle Raymond Huo Matt King Jan Logie Jami-Lee Ross Jamie Strange Tim van de Molen

Office of the Auditor-General (Briefing on the Ministry of Transport).

Ministry of Transport (Responses to written questions).

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2018/19 Annual review of New Zealand Post Limited

Report of the Economic Development, Science and Innovation Committee

March 2020

Contents Recommendation ...... 2 About New Zealand Post ...... 2 Financial performance ...... 2 Audit results ...... 3 Mail and parcels ...... 3 Service performance ...... 5 Energy usage and carbon neutrality ...... 6 Post shop changes ...... 6 Appendix ...... 8

Jonathan Young Chairperson

2018/19 ANNUAL REVIEW OF NEW ZEALAND POST LIMITED

New Zealand Post Limited

Recommendation The Economic Development, Science and Innovation Committee has conducted the annual review of New Zealand Post Limited for 2018/19, and recommends that the House take note of its report.

About New Zealand Post New Zealand Post Limited (NZ Post) is a State-owned enterprise providing courier and logistics services, focusing on mail and parcel deliveries.

NZ Post owns 53 percent of Kiwi Group Holdings, which owns Kiwibank.

By law, NZ Post is required to operate as a successful business and achieve the following objectives:

 to be as profitable and efficient as comparable businesses that are not Crown owned  to be a good employer  to exhibit a sense of social responsibility by having regard to the interests of the community in which it operates. The chair is Rodger Finlay, who was appointed in August 2019. The former chair, Jane Taylor, resigned in October 2018, and Jackie Lloyd was acting chair until Mr Finlay’s appointment. The chief executive is David Walsh.

The business operates two separate cash-generating units: mail (letters and untracked parcels) and parcels (tracked parcels).

Financial performance NZ Post Group had a net loss after tax of $121 million for the 2018/19 year, compared with a $13 million profit the previous year. Kiwi Group Holdings contributed $39 million in profit to this result, while the remainder of the NZ Post Group reported a net loss of $160 million. The net loss can be attributed to several large adjustments:

 Mail assets were written down by $51 million, as ongoing losses are forecast in the mail operation.  NZ Post recognised a $38 million liability at 30 June 2019 for the estimated cost of remedying non-compliance with the Holidays Act 2003.  Deferred tax losses of $59 million were written off in 2018/19. The Auditor-General advised us that this was due to forecasts suggesting that the tax losses were unlikely to be used within the forecast horizon. NZ Post had an underlying operating profit of $17 million, compared with a $15 million operating loss in 2018. Taking into account the $38 million provision for remedying 2

2018/19 ANNUAL REVIEW OF NEW ZEALAND POST LIMITED compliance with the Holidays Act, NZ Post’s revenue increased by $35 million in 2018/19, to $912 million. Expenditure increased by $41 million, to $933 million.

Audit results The Auditor-General rated NZ Post’s management control environment as “very good”, and made no recommendations for improvement in this area.

The Auditor-General rated the financial information and supporting systems and controls as “good”, and recommended some improvements. Two areas it needs to address are:

 a highly manual and customised revenue-billing system that does not always meet customers’ billing requirements  the number of different IT systems used (including legacy systems) and the associated control deficiencies. We look forward to seeing progress in these two areas.

Mail and parcels As mentioned earlier, NZ Post operates two separate units: mail (letters and untracked parcels) and tracked parcels. The former is facing the same challenges as other mail services around the world, whereas the latter is expanding as e-commerce volumes grow.

Updating the Deed of Understanding We were told that, under the Deed of Understanding with the Government, NZ Post is obligated to service 2.4 million addresses, letter boxes, and communities. NZ Post has 959 service points, which exceeds the Deed’s requirement for 880.

The Deed of Understanding was due for renewal during 2018/19. Instead, it was mutually agreed to postpone the review. The existing version will continue for now. It was last changed around 2015, when the reduction from six-day to three-day deliveries was made. We were told that NZ Post has kept an open dialogue with the Ministry of Business, Innovation and Employment on this matter.

Delivery time targets We queried whether the delivery time for parcels is reducing. We suggested that, anecdotally, people now feel that they must send parcels earlier to ensure they are delivered in time, especially around Christmas. We also asked about the increasing unpredictability of letter delivery times, which is causing concern for customers, many of whom are elderly.

We heard that, domestically, NZ Post is delivering parcels at about 96 to 97 percent on-time accuracy. For parcels involving an international shipping component, NZ Post must rely on other parties in the global network. For mail, we heard there is 85 to 90 percent accuracy on delivering within three days.

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Declining letter volumes In 2007, NZ Post handled 1 billion letters. By 2019, the volume had fallen to just under 400 million. Mail volumes are forecast to fall to just over 200 million in 2022. The continuing drop in mail volumes is a global trend.

We asked about NZ Post’s plans to ensure that a reliable traditional mail service continues for those who need it. NZ Post told us it considers that a traditional mail service is “incredibly important”. We heard that it has maintained a three-day-a-week delivery for almost five years, and has a very engaged and dedicated frontline workforce.

We heard that the decline in mail volumes should not be viewed as terminal for the delivery of letters, as many responses and alternative delivery models could be adopted.

Future options for mail NZ Post said it does not yet know what the future of the mail system will look like, given the decline in mail volumes. It finds it difficult to know what the minimum volume of letters for a sustainable business is, and exactly when that point would be reached given factors such as customer preferences.

However, it said that the decline in mail volumes does not mean that the mail system is dying. One possible alternative is delivery of letters through the parcel network. We heard that NZ Post is looking at global experiences. We noted an apparent resurgence of post-box type arrangements, as the prevalence of the Parcel Collect service demonstrates.

NZ Post says its plan is to keep honouring the Deed of Understanding, and ensuring it is adequately profitable and has a strong balance sheet. It has about $200 million in cash to help with its infrastructure plans. NZ Post is staying in touch with its shareholders, and Treasury officials are tracking its postal volumes.

Staffing NZ Post employs 4,777 people. It told us it will continue to “optimise” its resourcing levels, as well as seeking other efficiencies in the mail business. It noted that:

As part of this, it is expected that over time we will likely continue to reduce FTE directly employed in our mail business. The numbers and time period over which, and how (such as natural attrition and redeployment), these impacts occur will depend on a number of variables including mail volume decline rates and opportunities that may be created in our growing parcels business.

We noted that some large geographic areas are covered by just a few staff. For example, the West Coast has 6.36 staff across the area. We were told that those staff are based in Greymouth only, and contractors are used for “last-mile delivery” in Hokitika and Westport.

Practicalities when delivering mail Some of us have noticed mail strewn across the pavement because the recipient’s letterbox is full. We wondered what instructions NZ Post gives its delivery staff in such situations.

NZ Post said it has a legal obligation to deliver to the mailbox, so if it is not fit for delivery this can create problems. Sometimes notes are left asking owners to tidy or fix the mailbox.

2018/19 ANNUAL REVIEW OF NEW ZEALAND POST LIMITED

Postal staff are expected to exercise common sense, and there are protocols and procedures for guidance. NZ Post said that postal staff have no legal authority to remove items from a mailbox, so mail may need to be brought back to the mail centre and treated as undeliverable. NZ Post noted that letterboxes are not its sole purview; many other organisations deliver items to mailboxes, such as newspapers and pamphlets.

Growth areas for maintaining profitability We noted that, in contrast with the downward trend in mail items, parcel delivery is a growth area for the business. NZ Post has competitors in both the letter and parcel areas, although carriers do work together for logistical reasons. We discussed what more could be done to improve profitability for NZ Post.

We heard that parcels, especially, are a highly competitive market. NZ Post’s board has asked management to compete for those volumes where it is good business. We heard that the rural network is growing especially well, and that NZ Post wants to ensure other operators are charged appropriately for using NZ Post’s network.

NZ Post mentioned that some competitors will accept an item for mail delivery from a customer even though it does not deliver in the destination area. This leads to the item being delivered through NZ Post. The board has asked management to ensure it is being appropriately remunerated for such deliveries.

We noted that NZ Post has recently released its latest report on e-commerce in New Zealand, called The Full Download 2019.1 NZ Post said the report proved what it is already seeing: New Zealanders are shopping online more often and spending more than ever before. NZ Post noted that sales such as Black Friday and Cyber Monday are entering the New Zealand vernacular. In 2018/19, about 8.2 percent of retail services were bought online. However, there is still room for growth: the figure for the United Kingdom is about 15 percent.

Service performance We asked how customer satisfaction is measured. NZ Post said it uses a few methods: net promoter scores, regular surveys, and the chief executive contacts some of the bigger customers to check personally how the service is going. The chief executive told us that large customers (and, in turn, their customers) are satisfied with current service.

NZ Post said its delivery performance is measured both by independent parties and its own internal checks. The external check is scheduled for March or April each year. Each month, it carries out an internal check by inserting 10,000 test letters into the network to measure accuracy.

We recalled that there had been substantial criticism about postal problems with recent elections for local bodies and school boards of trustees. NZ Post said it had processed a lot of mail for those elections. The feedback from Elections NZ was that it was a strong effort given the complexity of the task. NZ Post said there had been some concerns about the

1 The report can be downloaded from www.thefulldownload.co.nz.

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2018/19 ANNUAL REVIEW OF NEW ZEALAND POST LIMITED process it followed, but the process was based on a lot of planning, and it had been able to respond to most of the concerns raised.

Mail and parcel sorting operations We asked whether NZ Post has up-to-date technology to sort mail, and whether staff numbers would fall if mail volumes continue to reduce. We were told that NZ Post has for many years had some very sophisticated sorting technology for letters; accuracy is high, and the number of people needed is largely settled. This position is unlikely to be affected much by decline in volumes. It said most of its staff are used on the front line in providing “last mile delivery” capability, rather than sorting mail. The number of staff needed is determined more by the geographical challenges of mail delivery, rather than the volume of letters.

Regarding parcels, NZ Post said it also has very good parcel sorting equipment, but other decisions will be needed as more volume comes into its network. We are aware that NZ Post’s parcel facilities are running close to full capacity.

We heard there is a revenue-growth focus, rather than a cost-saving focus, as most low- lying fruit has already been picked from a cost aspect.

Energy usage and carbon neutrality NZ Post is seeking to be carbon neutral by 2030. It said that half of its carbon footprint is out of its direct control, as it depend on the airlines. It is doing what it can to reduce its emissions but at some point it will need to start buying carbon credits. It has set aside about $1.5 million a year for offsetting carbon emissions.

We heard that, as part of its efforts, NZ Post plans to move its fleet of 193 vehicles (cars and vans) to 100 percent electric vehicles by 2025. Currently, it owns more than 465 electric delivery vehicles, including 430 Paxsters.2 It is also working out a method to assist van contractors to convert to electric vehicles.

We queried the 7.5 percent reduction in energy use in its facilities over the last two years. We heard that this is due to newer efficient buildings for its operating sites, and steps to reduce its footprint.

Post shop changes We have been told that the strategic directions of NZ Post and Kiwibank are diverging. As a result, they no longer see benefits in the integrated branch structure they have used since Kiwibank was created. The businesses are in the process of separating their branch networks. For NZ Post, this involves substituting its centrally-owned post shops for agency partnerships with local businesses, such as pharmacies and bookshops.

We recently considered several petitions about changes to post shops in communities around the country. We heard from NZ Post about those petitions, and concluded that there were some consultation and communication problems during those changes to post shops.

2 Paxsters are the small, red delivery vehicles often seen delivering mail to houses. 6

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St Lukes and Sandringham post shops We enquired about recent changes to the St Lukes and Sandringham post shop arrangements. We noted that the changes had not been well publicised, and it had been difficult to find out on behalf of constituents what was happening.

NZ Post told us it uses “multiple avenues” to communicate with the community. It said that the St Lukes post shop has been transitioned to become a standalone Kiwibank, but there are other postal agents nearby. For Sandringham, NZ Post noted that the post shop had moved locations following a change in operator. We are looking forward to hearing further from New Zealand Post on this issue.

Changes are generally well received Regarding the post shop changes, NZ Post said that although some customers may be unhappy, many of them are supportive of the changes because it has often led to longer opening hours. We heard that NZ Post wants customers to be satisfied with the changes. It believes that, on the whole, the customer response has been positive.

We also noted that we had heard some concerns from an agency operator about its contract, and a feeling that agents could be subsidising part of NZ Post’s operation. NZ Post said it would like to look into that matter, as it has had near-unanimous feedback from agents that they are very happy with the arrangement as it creates foot-traffic.

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Appendix

Committee procedure We met between 5 December 2019 and 19 March 2020 to consider the annual review of New Zealand Post Limited. We heard evidence from New Zealand Post and received advice from the Office of the Auditor-General.

Committee members Jonathan Young (Chairperson) Tamati Coffey Andrew Falloon Brett Hudson Gareth Hughes Melissa Lee Clayton Mitchell Dr Deborah Russell Stuart Smith Hon Poto Williams

Office of the Auditor-General (Briefing on New Zealand Post Limited).

New Zealand Post Limited (Responses to written questions).

103

2018/19 Annual review of the New Zealand Productivity Commission

2018/19 Annual review of the Real Estate Agents Authority

2018/19 Annual review of the Public Trust

Report of the Economic Development, Science and Innovation Committee

March 2020

The Economic Development, Science and Innovation Committee has conducted the annual reviews of the New Zealand Productivity Commission, the Real Estate Agents Authority, and the Public Trust, and has no matters to bring to the attention of the House. The committee recommends that the House take note of its report.

Jonathan Young Chairperson

104

2018/19 Annual review of the New Zealand Tourism Board

Report of the Economic Development, Science and Innovation Committee

March 2020

Contents Recommendation ...... 2 About the New Zealand Tourism Board ...... 2 Financial performance over the past year ...... 2 New Zealand’s competitiveness as a destination ...... 2 Processing times for visitor visas to New Zealand ...... 3 International perception of the safety of New Zealand ...... 4 Measures to improve the sustainability of the tourism industry ...... 4 Māori representation and partnerships ...... 4 i-SITE closures ...... 5 Cyber-security ...... 5 Domestic travel in India ...... 5 Appendix ...... 6

Jonathan Young Chairperson

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New Zealand Tourism Board

Recommendation The Economic Development, Science and Innovation Committee has conducted the annual review of the New Zealand Tourism Board for 2018/19, and recommends that the House take note of its report.

About the New Zealand Tourism Board The New Zealand Tourism Board (known as Tourism New Zealand) is a Crown entity established under the New Zealand Tourism Board Act 1991. It promotes New Zealand as a destination for international visitors, and provides advice and information to the Government and industry on tourism-related matters. It also helps to guide the behaviour of visitors to New Zealand, in collaboration with other agencies.

Tourism New Zealand has two subsidiaries, Qualmark New Zealand Ltd and Visitor Information Network Incorporated (VIN), and a joint venture with New Zealand Trade and Enterprise, the New Zealand Way Ltd.

Jamie Tuuta is the chair of the New Zealand Tourism Board. He replaced Dame Kerry Prendergast in April 2019. Stephen England-Hall serves as chief executive.

Financial performance over the past year Tourism New Zealand’s total revenue for 2018/19 was $117.7 million, a reduction of 5.5 percent from the previous year ($124.5 million). Most of its revenue ($111.7 million) comes from the Crown. This was reduced by 4.8 percent from the 2017/18 year ($117.4 million). Total expenditure for 2018/19 was $115.5 million, resulting in a surplus of $2.2 million.

Approximately $1.5 million of the 2018/19 appropriation was not used during the year as Tourism New Zealand halted marketing activity following the 15 March 2019 shootings at Al Noor Mosque and the Linwood Islamic Centre. The Ministry for Business, Innovation and Employment has approved the unspent funds for use in 2019/20.

Audit results Tourism New Zealand’s management control environment, financial information and supporting systems and controls, and performance information and supporting systems and controls were all rated “very good” by the Auditor-General. We commend the board on these results.

New Zealand’s competitiveness as a destination Spending by international visitors was $11.2 billion, an increase of 0.6 percent from the previous financial year, and holiday arrivals were 1,999,599, an increase of 0.4 percent over

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2017/18. However, arrivals declined from a number of markets, including China, New Zealand’s second largest market.

The board informed us that low consumer confidence internationally was causing tourists to postpone long-distance journeys in favour of cheaper, closer destinations. Events which may have contributed to this include the US–China trade war and uncertainty around Brexit. The global context creates a competitive advantage for short-haul destinations and creates higher competition between long-haul destinations for potential visitors. We heard that these conditions may cause revenue in the tourism industry to fall $500 million below initial forecasts over the next 24 months.

In the Chinese market, closer destinations in Japan and Southeast Asia have been favoured, and increased competition from Western Europe has further eroded New Zealand’s position. Numbers of holiday visitors from China have dropped from 343,000 in 2017/18 to 316,069 in 2018/19 (a reduction of 8 percent).

Tourism New Zealand is responding to this issue by increasing investment in New Zealand’s three largest markets: Australia, China, and the USA. The board explained that increased investment in China would allow New Zealand to maintain a presence in the Chinese market. This would put it in a good position when international conditions improve. New flight connections to South Korea and Taiwan are also expected to help attract more visitors.

China–New Zealand Year of Tourism Years of tourism are used to encourage tourism between participant countries. China and New Zealand announced a year of tourism for 2019. This has not prevented declining holiday visitors from China. We were told that the year of tourism aims more to build bilateral relationships than increased tourism volumes.

The board also told us that changes in China’s domestic economy, lack of confidence in long-haul travel, and increased competition have all contributed to decreased visitor numbers to New Zealand.

Processing times for visitor visas to New Zealand At the 2019 Estimates hearing for Immigration appropriations,1 the Minister of Immigration noted concerns about delays in processing visitor visas. At the peak of the delays, 80 percent of visas were processed within 40 days, compared to 15 days in 2017. Tourism New Zealand indicated that processing times have improved, but they have not yet returned to 2017 levels, despite a reduction in total applications. As at November 2019, 80 percent of visas were processed within 22 days. Negative feedback from the industry has reduced as delays have shortened.

The Indian market has been most affected by processing delays. Tourism New Zealand explained that potential visitors consider processing times when making decisions about where to travel. Slower processing reduces New Zealand’s ability to compete. The board

1 The Education and Workforce Committee considered and reported on the 2019/20 Immigration appropriations as part of Vote Labour Market.

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2018/19 ANNUAL REVIEW OF THE NEW ZEALAND TOURISM BOARD also expressed concern about how these delays may negatively affect visitors’ overall travel experience.

We asked how long it would take to regain New Zealand’s reputation after processing delays are resolved. The board was uncertain, but anticipated that it may take “a while” before opinion shifts.

International perception of the safety of New Zealand In light of the recent disaster at Whakaari / White Island, we asked how New Zealand could continue to attract visitors and mitigate safety concerns around its natural environment. The board said it is too soon to assess the reputational effects of the Whakaari disaster, but it discussed how other natural disasters, such as the Canterbury and Kaikōura earthquakes, have affected the international community. In other countries, attention is drawn to New Zealand for a short time, but focus quickly shifts as other news events occur elsewhere. Following the earthquakes, sentiment about New Zealand’s safety did not substantially shift.

Measures to improve the sustainability of the tourism industry We asked how Tourism New Zealand was working to promote sustainability in the tourism sector.

In November 2018, Tourism New Zealand launched Tiaki – Care for New Zealand, together with Air New Zealand, the Department of Conservation, Local Government New Zealand, New Zealand Māori Tourism, Tourism Holdings Ltd, and Tourism Industry Aotearoa. The campaign promotes visitor behaviours to keep them safe, protect the natural environment, and ensure respect is shown for New Zealand’s cultures. The campaign video is shown on Air New Zealand flights, and materials are also distributed through tourism operators.

Tourism New Zealand also looks at where visitors are likely to visit at particular times of the year. It develops itineraries to encourage tourists to go to areas that have suitable infrastructure and are capable of handling that number of visitors. It also has a role in educating local government and the industry about how to mitigate the impact of visitors.

Māori representation and partnerships We are concerned about the low number of Māori staff employed by Tourism New Zealand. Of 153.6 full-time-equivalent staff, only 2 percent identify as Māori. The board explained that it has an active strategy to bring greater diversity into the organisation, with a focus on identifying the barriers preventing under-represented groups from applying for roles. It is also partnering with other institutions to attract Māori and Pasifika staff, and will take on nine interns over the next two years.

Apart from staffing, Tourism New Zealand said it is focusing on partnerships, rather than mere consultation, to build relationships with Māori.

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We are aware of criticism from some iSITEs about the opening hours required of them. We wondered whether pressure from these requirements might have been a factor in the recent closures. We asked whether VIN might consider a more flexible approach to opening hours.

We were told that this was a matter for the board of VIN. It has recently launched a strategic review, looking at the whole framework of the i-SITE network. The focus of the review will be on what the needs of the visitors are and how they can be met, either physically or digitally.

Cyber-security In April 2019, the online accounts of Tourism New Zealand’s staff were targeted with a “password spray attack”. An automatic tool was used to attempt to log in to staff’s accounts. During this period, sign-in attempts ranged from 100,000 to 500,000 a day. None of the attempts was successful, and, after Tourism New Zealand disabled some authentication methods, attacks returned to zero within four days.

Tourism New Zealand services are hosted through organisations like Microsoft, Amazon, and Google, which have a high capacity to defend against attempted cyber-attacks. We heard that staff are briefed on internal cyber-security policies and that simulations of phishing attempts are used to keep staff aware of types of activity.

Domestic travel in India We noted that the market development manager for India had particularly high domestic travel costs, at $40,428. We were told that this staff member’s role requires them to spend long periods of time in both Mumbai and Delhi, and accommodation costs are covered while in Mumbai. The board said that they are investigating a solution that will be more cost effective and beneficial to the health and wellbeing of the staff member.

Note This review was completed and the report drafted prior to the COVID-19 (coronavirus) concerns around impacts around Aotearoa New Zealand tourism.

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Appendix

Committee procedure We met on 12 December 2019 and 5 March 2020 to consider the annual review of the New Zealand Tourism Board. We heard evidence from the board and received advice from the Office of the Auditor-General.

Committee members Jonathan Young (Chairperson) Tamati Coffey Andrew Falloon Brett Hudson Gareth Hughes Melissa Lee Clayton Mitchell Dr Deborah Russell Stuart Smith Hon Poto Williams

Office of the Auditor-General (Briefing on the New Zealand Tourism Board).

New Zealand Tourism Board (Responses to written questions).

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2018/19 Annual review of New Zealand Trade and Enterprise

Report of the Economic Development, Science and Innovation Committee

March 2020

Contents Recommendation ...... 2 Introduction to New Zealand Trade and Enterprise ...... 2 Mitigating the effects of coronavirus on exporters ...... 2 Working with Māori businesses ...... 3 Lifecycle of Focus 700 customers ...... 3 Difference between Focus 700 and Foundation customers ...... 4 Effects of climate change on exporters ...... 5 Cyber security concerns ...... 5 Appendix ...... 6

Jonathan Young Chairperson

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New Zealand Trade and Enterprise

Recommendation The Economic Development, Science and Innovation Committee has conducted the annual review of New Zealand Trade and Enterprise for 2018/19, and recommends that the House take note of its report.

Introduction to New Zealand Trade and Enterprise New Zealand Trade and Enterprise (NZTE) is a Crown Agent. It is the Government’s international business development agency. NZTE helps businesses internationally by growing export companies out of New Zealand, and attracting investment into New Zealand.

NZTE has 617 full-time staff across 50 global locations. Nearly half its staff are located offshore. The chief executive is Peter Chrisp, and the board chair is Andrew Ferrier.

NZTE has two main types of customer: export customers and investment customers. Of its 5,300 export customers, NZTE works intensively with a smaller group called the “Focus 700”: companies that have the growth aspirations and ability to compete internationally.

Investment customers are NZTE’s other primary focus, where its customer strategy involves developing early-stage businesses. To do this, NZTE focuses on its work with the Provincial Growth Fund, supporting Māori economic development, and working with other public sector organisations to attract investment.

Financial performance and audit results In the 2018/19 financial year, NZTE received revenue of $215.7 million, up from $211.1 million in 2017/18. Expenses were $215.3 million, up from $203.4 million in 2017/18. This resulted in a net surplus of $470,000 before income tax, a decrease from its $7.7 million surplus in 2017/18.

The Auditor-General graded NZTE’s management control environment, financial information systems and controls, and performance information and systems and controls as “good”. This is unchanged from the 2017/18 financial year. The Auditor-General made some recommendations for improvements, particularly in quality assurance over its financial statements, and in developing additional performance measures to report on its work with Māori businesses and Expo 2020.

The Auditor-General noted that NZTE is continuing to refine its processes in these areas. We look forward to reviewing its progress in the coming years.

Mitigating the effects of coronavirus on exporters We asked NZTE about the outbreak of coronavirus and what support it will be providing to affected exporters. NZTE told us it is part of a cooperative effort with the Ministry of Foreign Affairs and Trade, the Ministry for Primary Industries, the New Zealand Customs Service,

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2018/19 ANNUAL REVIEW OF NEW ZEALAND TRADE AND ENTERPRISE and the Ministry of Business, Innovation and Employment. Each agency has been assigned different roles, with NZTE focused on the launch of a website acting as the first port of call for affected companies. We heard that the website provides information about which agencies affected businesses can contact for different needs.

NZTE said it has not directly contacted all its customers, but its managers and directors are in contact with customers every day. We also heard that the website is receiving a lot of traffic, with around 6,500 visitors. It expects that there will be constant feedback from visitors.

NZTE noted that there is a lot of uncertainty in the China trade market for the year ahead. It explained that the ability to meet and maintain relationships has been disrupted, so trade connections are slowing down. At this stage, NZTE is hesitant to speculate on what the long- term outcomes may be.

Working with Māori businesses NZTE told us that one of its key strategies of the last 12 months has been focused on the Māori economy. It currently has a portfolio of 177 Māori customers, including 52 in the high- intensity Focus 700 group.

We asked how NZTE measures the impact on Māori businesses of government investment through the Provincial Growth Fund, Te Puni Kōkiri, and Whenua Māori Fund. NZTE told us that the agencies running investment programmes are charged with monitoring the effects; NZTE monitors the effects of its own programmes. We suggested that it would be beneficial for NZTE to be aware of these programmes across different agencies, as these programmes have an impact on Māori being able to do business in the places where they live.

Māori employment at NZTE We note that Māori staff make up 3.9 percent of leadership roles at NZTE, which is lower than its target of 5 percent. Overall, Māori employment at NZTE is 5.1 percent. NZTE said it has an internal group, Te Pora Māori, which is a key part of building up its Māori capacity. We were told that it is focused on creating a strong group of commercially smart, economically focused Māori business advisers at Te Pora Māori. NZTE aims to improve how it works with Māori businesses through this initiative.

Lifecycle of Focus 700 customers We asked how long customers remain in the Focus 700 group, and at what stage they begin to transition out of the programme. We heard that there is no official cut-off for how long a company can stay in the Focus 700, but there is a 20 percent turnover rate. Some companies stay in the programme for a long time, and some leave very quickly. We heard that a typical lifecycle of a company in the Focus 700 is from start-up stage until they are a $200-million or $300-million company. We heard that, when a company’s value exceeds $500 million, the value NZTE can add begins to fall off. The important factor for companies within the Focus 700 is that they have a desire to grow. Otherwise, there is little value that NZTE can help provide them.

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Factors influencing growth for the Focus 700 In 2018, growth by revenue for the Focus 700 group was 82 percent, which was a significant increase from the 42 percent growth in 2017. In 2019, revenue growth fell back to 46 percent. We sought information about what factors may have influenced this drop in growth from 2018.

NZTE said that the biggest drivers of growth are exchange rates and commodity prices. However, fluctuations in growth are expected when comparing one year to the next. We heard that better indicators of growth are the value of export deals and the Net Promotor Score (NPS). For the year under review, NZTE achieved $2.4 billion in export deals for its customers, which was higher than its target of $1.9 billion. It also achieved a NPS for its Focus 700 customers of +62 percent, which was small drop from the previous year’s score of +69.

We asked what global factors are affecting NZTE’s export customers. We heard that, aside from the coronavirus epidemic, trade tensions between the United States and China, and Brexit are current issues that exporters are having to navigate. NZTE said that its focus is to make sure it provides the best information to its customers so they can make informed decisions.

Possibility of increasing the Focus 700 group We asked whether the number of customers in the focus group could be higher than 700. We heard that, although this number could possibly be increased to 1,000, there is a limit to how many companies have the capacity and the ambition to invest. NZTE acknowledged that more companies may be willing to make this type of investment, but it would need a higher budget to be able to work with them.

Difference between Focus 700 and Foundation customers We discussed the main differences in service between the Focus 700 customers and Foundation customers. Foundation customers are NZTE’s investment customers that receive a lighter-touch level of service. The number of Foundation customers increased from 4,883 in 2017/18 to 5,324 in 2018/19.

NZTE told us it commits 80 percent of its organisation to the Focus 700 companies. The account-manager ratio for Focus 700 companies is one per 15 companies. For the Foundation companies, one account manager has 80 companies. Because the Foundation companies receive less service, the NPS for the group is lower. The targeted NPS for the year in review was +30, but the achieved score was +18, a drop from the previous year’s score of +28.

We heard that NZTE is currently doing an internal review to improve how it provides service to Foundation customers. NZTE wants to focus on learning what information Foundation customers need to grow, and then curating that information in a targeted way so that the companies will get more value out of the service. We heard that its continued investment in digital technology will help it to achieve this initiative.

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Effects of climate change on exporters We asked what consideration NZTE’s board has given to the challenges climate change will present for export industries, especially if shipping and aviation are included in the emissions trading scheme. NZTE told us that climate change considerations are not just tack-ons; they are becoming core to organisations’ culture, purpose, and competitive advantage.

We heard about NZTE’s involvement in Te Hono, which is a partnership between New Zealand’s primary sector companies. Te Hono looks at the impact of the sector on the environment and how the industry can be innovative. Last year, Te Hono heard from climate scientists and discussed topics such as the carbon and emissions footprint of companies in the primary sector.

NZTE has recently completed an assessment of its global emissions footprint. As a result, it has factored into its budget a 20 percent reduction in travel expenses. It noted that videoconference technology has enabled it to stick to the reduced travel target.

NZTE explained that climate change considerations can have a positive impact, creating opportunities for competition and innovation. We heard that good businesses want to have a positive impact, rather than being solely profit-driven.

Cyber security concerns We note the importance of cyber security and digital data privacy, particularly for companies that manage sensitive information. We asked NZTE why it allows portable digital storage devices in light of the risks they can pose to cyber security. NZTE told us that it is fully audited by the Government Communications Security Bureau. It explained that it does not have a particular opinion on USB device access, but it remains confident that its overall systems comply with stringent security requirements.

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Appendix

Committee procedure We met on 13 February and 19 March 2020 to consider the annual review of New Zealand Trade and Enterprise. We heard evidence from New Zealand Trade and Enterprise and received advice from the Office of the Auditor-General.

Committee members Jonathan Young (Chairperson) Tamati Coffey Andrew Falloon Brett Hudson Gareth Hughes Melissa Lee Clayton Mitchell Dr Deborah Russell Stuart Smith Hon Poto Williams

Office of the Auditor-General (Briefing on New Zealand Trade and Enterprise).

New Zealand Trade and Enterprise (Responses to written questions).

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Report of the Transport and Infrastructure Committee

March 2020

Contents Recommendation ...... 2 About the New Zealand Transport Agency ...... 2 Financial performance and audit results ...... 2 Regulatory performance ...... 3 Office culture ...... 4 Sustainability and resilience ...... 6 Transport other than cars ...... 6 Risk management ...... 7 Road safety ...... 7 Investment in the network ...... 8 Appendix ...... 11

Darroch Ball Chairperson

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New Zealand Transport Agency

Recommendation The Transport and Infrastructure Committee has conducted the annual review of the New Zealand Transport Agency for 2018/19, and recommends that the House take note of its report.

About the New Zealand Transport Agency The New Zealand Transport Agency (NZTA) is a Crown agent that plans and invests in land transport, manages the state highway network, and regulates the use of the land transport system.

The agency operates from 21 offices across New Zealand. As at 30 June 2019, NZTA employed 1,478 full-time-equivalent staff, an increase of 7.7 percent from 2017/18.

The board has seven members and is chaired by Sir Brian Roche. Mark Ratcliffe was interim chief executive from January 2019 until February 2020, when Nicole Rosie became the permanent chief executive.

Financial performance and audit results For the 2018/19 financial year, NZTA had total revenue of $2.907 billion and expenditure of $2.909 billion. The resulting deficit was $2.5 million. This compares with total revenue of $2.656 billion and expenditure of $2.647 billion in 2017/18. Most of the revenue and expenditure was appropriated through the National Land Transport Fund (NLTF).

NZTA administers the NLTF, which received revenue of $3.93 billion in 2018/19 and had expenditure of $4.024 billion. This compares with revenue of $3.733 billion and expenditure of $3.774 billion in 2017/18. The result in 2018/19 was a deficit of $94 million, compared with a deficit of $41 million in 2017/18.

Audit results The Auditor-General issued two audit opinions: one for the financial and performance statements of NZTA and one for the statements of the NLTF.

For NZTA, he issued an unqualified audit opinion. However, while he is satisfied that the reported results fairly reflect NZTA’s operations, he drew attention to disclosures in the financial statements around the estimates, assumptions, and judgements made in valuing the state highway network. He said that these disclosures help in understanding how the value of these assets may vary over time.

The Auditor-General rated both NZTA’s management control environment and its performance information and supporting systems and controls as “needs improvement”. This differs from its last annual review, when NZTA was rated “good” for these measures. The Auditor-General recommended major improvements. Recommendations related to corporate

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2018/19 ANNUAL REVIEW OF THE NEW ZEALAND TRANSPORT AGENCY procurement and contract management, sensitive expenditure, and non-financial performance information. Other reviews and audits have also made recommendations on how NZTA can improve its systems.1 We note that the recommendations from these reviews are significant enough to require NZTA’s immediate attention.

We note that NZTA has implemented some of these recommendations; also, its entire board has been replaced. We expect NZTA to work quickly to resolve the remaining issues identified. We also expect to see an improved rating at NZTA’s next annual review.

For the NLTF, the Auditor-General issued a standard unqualified audit opinion.

Regulatory performance NZTA is New Zealand’s regulator of the land transport system. It manages the entry of all users into the transport system and monitors each user’s compliance. This role makes NZTA the regulator for a wide variety of transport-related matters. This includes driver licensing, motor vehicle registration, rail services, speed limit management, and road user charges.

NZTA has undergone several reviews of its regulatory capability and performance. Most recently, in October 2019, the Ministry of Transport published its review. The ministry found that “there were significant deficiencies in the Transport Agency’s regulatory capability and approach that over time have led to regulatory failure at the NZTA”.2 Issues identified included weak regulatory leadership and expertise, lack of a clear regulatory strategy, and challenges with regulatory capability and resourcing. While NZTA is not the only state sector organisation with regulatory issues, we are concerned about how it is performing its regulatory function.

The Auditor-General pointed out that NZTA’s previous performance framework showed that the organisation was meeting its regulatory targets. He said that failings in the regulatory functions highlighted a need to refine those performance indicators to accurately measure NZTA’s effectiveness as a regulator.

At its 2017/18 annual review, NZTA acknowledged the issues it was having and said that it did not have enough people to do the work who were sufficiently skilled. This year we heard that, to improve its regulatory performance, NZTA has:

• developed a “back to basics” plan to address regulatory concerns (approved by the board in June 2019) • received $45 million in extra funding for its regulatory function • completed its backlog of open cases related to non-compliance with vehicle testing regulations

1 The following reviews of NZTA took place during 2018/19: Ministry of Transport and Martin Jenkins review of NZTA’s regulatory function, an inquiry into the performance of NZTA in relation to Dargaville Diesel Specialists carried out by Kristy McDonald QC, Deloitte Consulting’s independent report on NZTA’s former Connected Journeys Solutions business group, and Deloitte Consulting’s independent review of procurement, contracting, and conflict of interest issues related to the Zero Harm Apps and related issues. 2 Ministry of Transport, Review into the Regulatory Capability and Performance of the New Zealand Transport Agency, p 2.

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• worked with the Office of the Auditor-General to ensure there is sufficient reporting in its performance statements to reflect regulatory performance issues • significantly increased the number of staff allocated to regulatory functions • increased work on how to improve the quality of its systems to better identify people who are at risk of regulatory non-compliance, so that its databases can be used as part of a risk-based approach. The Government has also announced that a statutory Director of Land Transport will be created. The director will be responsible for carrying out NZTA’s regulatory functions and powers.

We look forward to seeing improvements to NZTA’s regulatory performance.

Regulation of vehicle certifiers NZTA acknowledged that regulating agencies who certify vehicles is an integral part of ensuring the transport system is safe. During the 2017/18 annual review, we heard about NZTA’s progress on resolving the issues with the vehicle certification system that it regulates.

We were interested in what steps NZTA has since taken to improve its role as regulator of vehicle certifiers. NZTA believes it is being a tougher regulator than in the past, using a range of tools at its disposal. It has hired more staff and is auditing registered certifiers more often. It also believes that it escalates issues and triages cases better. It is more active in intervening when there are issues, suspending licences or taking court action when necessary. While it focused on education and coaching in the past, it became clear to NZTA that this was not sufficient in some cases.

NZTA said that some operators would think the system now operates more fairly, but others may think the organisation is too heavy-handed. NZTA said it wanted to be seen as fair and transparent, but as a regulator it needed to take appropriate action when behaviour is unacceptable. We support this approach.

Office culture NZTA has recently gone through a period of change. There have been multiple restructurings over the past few years, including two in the 2018/19 financial year. New chief executives began in January 2019 and February 2020. By the end of 2019, only three members of the leadership team had been in their positions for 12 months. There was also a full board replacement. Given these changes, we wanted to hear that NZTA had a stabilisation plan.

Staff turnover Staff turnover remains high at NZTA. It was 14.5 percent in the 2018/19 year, 2.5 percent above the state sector average. NZTA believes that turnover is high because its staff are in high demand and leave to go to other opportunities. It assured us that it is still able to attract employees.

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NZTA acknowledged it had struggled with its culture in the past. It said that the board is focused on ensuring quality leadership, people, and culture at NZTA. It believes it has a good workplace culture. We heard that 59 percent of staff surveyed during 2018/19 considered NZTA a great place to work. We heard that employees want effective leadership so that they understand the purpose of the organisation and where their roles fit in with that purpose.

We were concerned that, with a new chief executive, more structural changes may lie ahead. NZTA believes that the recent changes provide a clear focus for the organisation and set it up for its next phases of work. NZTA said it was looking at what it wants to achieve, and would use any changes in structure to achieve that.

We are interested in hearing whether NZTA succeeds in improving its office culture. We are particularly interested in the indicators it uses to measure its success.

Relationships within the organisation NZTA acknowledged that different parts of the organisation do not always work together effectively. It believes that having different parts of its organisation working together is critical when engaging with regional New Zealand. To improve cooperation in NZTA, it has created virtual teams with employees from across the organisation.

Relationships with stakeholders We heard that the local government sector had been concerned about a lack of responsiveness by NZTA in dealing with investment decisions. NZTA is starting to address this. In 2019 it conducted a local survey of key stakeholders and co-investors to fully understand their concerns. On average, 39 percent of respondents were positive about their interactions with NZTA.3

NZTA acknowledged that it has become a relatively inward-facing business. We asked what it was doing to improve its relationships with communities and local authorities. NZTA believes that good relationships are built by working together on joint problems. An example of where this had worked well when dealing with crises or emergency events was the work on State Highway 4 after it was damaged in October 2019. NZTA said it is ensuring this cooperation happens regardless of whether or not there is a crisis.

Poor operation of Connected Journeys Solutions unit The Connected Journeys Solutions business unit was set up to develop technology innovations. This year, the unit’s operations were subject to an independent review. The review found that the unit operated outside most of NZTA’s policies, particularly its procurement and recruitment policies. It found that the board and the leadership team had minimal oversight of the unit, including of its budgets.

The operation of this team was one of the primary reasons the Auditor-General downgraded NZTA’s rating for its management control environment to “needs improvement”. NZTA has received recommendations from both its own review and from the Auditor-General, some of

3 New Zealand Transport Agency Annual Report for the Year Ended 30 June 2019, p 25.

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which have been addressed. We expect to see the remaining issues addressed by the time of NZTA’s next annual review.

Sustainability and resilience Moving towards zero carbon We asked how NZTA prioritises sustainability and the environment. We wondered about the issues NZTA might face as it moves to reduce emissions.

NZTA told us about its sustainability policy, in which climate change is a main factor. NZTA acknowledged that 75 percent of greenhouse gas emissions in the transport system come from fuel. To reduce emissions, NZTA is focusing on mode shift, particularly in the main centres, and type of vehicle. NZTA believes it is heading in the right direction to reach zero carbon by 2050.

We also heard that NZTA is looking at the environmental impact of infrastructure. It is exploring sustainable materials for pavement design and using recycled materials in construction.

Resilience of the transport network New Zealand is an island nation with many coastal roads that need to be resilient against weather challenges. We note that there has been increased spending on road repairs for extreme weather events. We were interested in the resilience work NZTA is doing.

NZTA’s spending on emergency works and events has increased over the past few years from about $30 million per year to about $70–80 million. It has found that it also needs more resources in remote locations for this emergency work.

We heard that NZTA is undertaking a resilience study to identify vulnerabilities in the transport system and the best ways to deal with those vulnerabilities in emergencies. It said it also learnt a lot from the work to reinstate the transport network after the Kaikōura earthquake. It is applying these lessons across the network.

NZTA said it looks at all modes of transport when identifying vulnerabilities in the network. It commented on the importance of alternative modes of transport when there are resilience issues on one part of the network. The proposed cycleway between Wellington and the Hutt Valley was used as an example of resilience for the rail line and motorway. NZTA also discussed ensuring that infrastructure such as walking and cycling paths are engineered to withstand weather events. It said that this can cost more, but overall creates a more resilient transport system.

Transport other than cars We asked NZTA about its work on encouraging New Zealanders to shift to modes of transport that are not private cars. This is called mode shift. We heard that, across New Zealand, people are using alternative modes of transport more. NZTA believes its work in this area is progressing well and that the infrastructure is catching up, with more cycleways and walking paths being built.

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Some of us note that private vehicle use is still high, at about 83 percent. We asked about NZTA’s projections for shifts in modes of transport over the next 10 to 15 years. NZTA did not provide figures on this, but said it is working with the Ministry of Transport on developing specific regional targets for mode shift. NZTA pointed out that, although cars are New Zealanders’ primary mode of transport, the percentage of people using public transport is increasing across the country.

We acknowledge that large infrastructure investment is needed to encourage mode shift. NZTA emphasised that such investments were long-term. For public transport, NZTA noted that when a service is of good quality, reliable, and frequent, more people are prepared to use it. For example, about 10 percent more people each year use the Queenstown bus system. This increase has reduced the growth of congestion in the town.

We were interested in NZTA’s partnerships with local councils to encourage mode shift. We heard that each main city must produce a “mode shift plan” which feeds into its regional transport plan. NZTA commented that Ministers have made it clear that mode shift needs to be at the heart of each regional transport plan.

Risk management We were interested in the risks facing the transport network and how NZTA was prepared to manage those risks. NZTA said safety on the network is a priority. It said short-term funds need to be available for critical work as it arises. We heard that NZTA is focused on understanding the network. It has a vehicle that travels the country every year to collect information on the quality of the network. The data allows NZTA to manage risks.

NZTA discussed risks related to the renewal of the network. Roads and bridges require maintenance and renewal to ensure they are safe. NZTA undertakes work in asset planning to manage these risks. It pointed out that roads are some of the Crown’s largest assets. As an asset owner, NZTA must target its maintenance programme to ensure the value of the asset is not compromised.

We heard that the transport network has increased in size significantly over the past decade. For a long period the amount of maintenance funding remained relatively static while the network became larger. More investment is needed to continue to maintain the network.

NZTA has identified some critical technology risks that mean its systems may stop performing and may not be recoverable for extended periods of time. Systems at risk include corporate systems and systems used to manage the transport system. NZTA said it has business continuity plans in place to manage specific events. It aims to secure NLTF funding to upgrade and replace key at-risk systems. It expects this to take two years.

Road safety Safe network programme NZTA aims to reduce deaths and serious injuries on the transport system by 160 a year. One initiative to help achieve this is the Safe Network Programme (SNP).

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NZTA only achieved 48 percent of its plan for the SNP in 2018/19. Its target was 80 percent. NZTA explained that, as many projects were in the early planning stages, construction had not started and the spend rate was lower than expected. It told us about the design and delivery challenges of retrofitting projects on state highways.

While NZTA acknowledged that its spending rate was low, it believes that the summer 2019/20 maintenance programme would increase the progress of the SNP. NZTA told us it has achieved approximately 20 percent of the three-year SNP programme. We are concerned that this percentage is so low given that the SNP is at its halfway point. NZTA said it was committed to achieving the overall target by the end of the programme.

NZTA could not confirm how much additional funding would be needed to maintain these projects once completed. However, it told us it was discussing the amount needed with the Government as part of the development of the next Government Policy Statement (GPS). It said that more maintenance funding would be needed or the level of service across the network would drop.

The SNP identified three priority regions for its first phase: Auckland, Canterbury, and Waikato. Some of us are concerned that these regions, particularly Waikato, were not prioritised as intended. NZTA acknowledged that it was behind the initial targets. It noted that the priority was for speed management in those three regions, and the rest of the infrastructure investment programme was for the whole country. Some of us are concerned that NZTA did not make this clear. NZTA added that more money is being invested in the Waikato for infrastructure as well as the speed management programme.

Road policing The New Zealand Police deliver road policing on behalf of NZTA. In 2018/19, the budgeted expenditure for road policing was underspent by $15 million. The Police also failed to deliver on 5 of its 14 performance targets in road policing. We heard about a shift in focus to other solutions being developed through the new road safety strategy “Road to Zero”. The strategy is being developed by NZTA, the Police, and the Ministry of Transport.

We are concerned that the initiatives related to road policing are underperforming. We expect the changes in the new road safety strategy to help rectify this.

Investment in the network Maintenance programme The summer of 2019/20 marked NZTA’s biggest maintenance programme of the decade. It represents 9 percent investment across the network, compared with the usual 4 or 5 percent.

NZTA said that there has been an increase in heavy vehicle usage in some areas such as central Waikato. It is investing in longer-life pavements so that renewals are not needed as often.

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Government’s infrastructure package The Government recently announced an extra $6.8 billion of funding to tackle the infrastructure deficit in the transport system. We were interested in NZTA’s involvement in developing the infrastructure package.

NZTA said that it advised Treasury on the projects it thought had merit. This included advice on the status of current projects, how quickly they can be progressed, their benefits, the volume of traffic and strain on traffic corridors, and the priorities of communities. The advice to Ministers was based on a short- to medium-term work programme.

We asked whether the effect on carbon emissions was part of the advice given to Ministers. NZTA said that carbon emissions were part of the decision-making programme. NZTA also said it was introducing a new investment framework, part of which will look at how investment impacts the economy in a wider sense, including how it impacts the environment.

NZTA said that it had no decision-making powers over the $6.8 million allocated for transport investment because the money was not allocated to the NLTP. Its role is to provide information upon which Ministers can make decisions.

Auckland light rail As in our 2017/18 annual review, we asked about the progress of NZTA’s bid for the light rail project from Auckland CBD to Auckland Airport. In 2017/18, the Government received an unsolicited bid from NZ Infra.4 The Ministry of Transport is expected to announce in early 2020 whether NZTA or NZ Infra is the preferred delivery partner for this project.

NZTA told us that there is no fixed construction timeline for its proposal because the dates depend on the Cabinet decision. It noted that, as light rail is a significant investment, it would require a significant amount of planning.

Some of us were interested in whether NZTA had been asked to assess the NZ Infra proposal. NZTA acknowledged it had assessed that proposal as an unsolicited bid using Ministry of Business, Innovation and Employment guidelines. It said its advice was whether, as an unsolicited bid, the NZ Infra proposal merited being pursued. It said that it did not evaluate the bid. NZTA told us it was no longer involved in the process and was waiting to hear the decision from Cabinet.

NZTA said it had provided a light rail proposal and had prepared advice on whether light rail is the right answer. NZTA noted that “light rail” has a lot of meanings, from an electric tram to a metro system.

Auckland transport alignment plan We were interested to hear about the implementation of the Auckland transport alignment plan. There are several projects underway as part of this plan, including the path across the Harbour Bridge, the northern corridor extension, and planning to widen the southern motorway.

4 NZ Infra is a joint venture of the New Zealand Superannuation Fund and a Canadian pension fund.

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NZTA said that the Southern Motorway is congested and does not have any capacity to build extra lanes. We heard that good-quality public transport connections are critical to reduce congestion. To support growth in South Auckland, NZTA is currently looking at electrification, a third main line, more stations, and better connection to the airport. We asked for progress updates on the third main line and electrification. NZTA said it had been working with KiwiRail and Auckland Transport on business cases, which were due to go to the NZTA board for approval. Once approved, KiwiRail will lead the implementation of the project.

Waikato Expressway Some of us are concerned about the 18-month delay in the extension of the Waikato Expressway to Piarere. NZTA said that it was still working on that corridor, but that the project had been re-evaluated due to the change in the GPS.

We asked whether any additional safety updates are planned for State Highway 1B, as it will have increased traffic flow for an additional 18 months until the expressway opens. NZTA said that if there was a safety issue, it would invest in State Highway 1B. It pointed out that the road will still be used after the expressway opens, so there is every reason to continue to invest in it from a safety perspective.

Auckland Harbour Bridge As at the date of our hearing on 12 December 2019, a business case for the Auckland Harbour Bridge shared path project had been completed. It was going to the board for approval the next week. NZTA emphasised that this is a complex project and a lot of work has been required to understand the effects on the existing bridge.

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Appendix

Committee procedure We met on 12 December 2019 and 19 March 2020 to consider the annual review of the New Zealand Transport Agency. We heard evidence from NZTA and received advice from the Office of the Auditor-General.

Committee members Darroch Ball (Chairperson) Chris Bishop Paul Eagle Raymond Huo Matt King Jan Logie Tim van de Molen Jami-Lee Ross Jamie Strange

Dan Bidois and Anahila Kanongata’a-Suisuiki participated in some of this review.

Office of the Auditor-General (Briefing on the New Zealand Transport Agency).

New Zealand Transport Agency (Responses to written questions).

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2018/19 Annual review of Te Kāhui Whakamana Rua Tekau mā Iwa—Pike River Recovery Agency

Report of the Finance and Expenditure Committee

March 2020

Contents Recommendation ...... 2 The Pike River Recovery Agency ...... 2 Financial overview and audit results ...... 2 Progress has been made in re-entering the mine ...... 2 The process is being scrutinised by WorkSafe ...... 3 The expected time line ...... 3 Understanding the agency’s mandate ...... 3 Mine rehabilitation and disestablishment of the agency ...... 4 Appendix ...... 5

Dr Deborah Russell Chairperson

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Te Kāhui Whakamana Rua Tekau mā Iwa—Pike River Recovery Agency

Recommendation

The Finance and Expenditure Committee has conducted the annual review of Te Kāhui Whakamana Rua Tekau mā Iwa—Pike River Recovery Agency for 2018/19, and recommends that the House take note of its report.

The Pike River Recovery Agency Te Kāhui Whakamana Rua Tekau mā Iwa—Pike River Recovery Agency was established in January 2018 as a standalone government department. Its purpose is to create and execute a plan for the safe re-entry of the Pike River mine drift (access tunnel) in order to identify evidence that will provide accountability for the 2010 Pike River mine disaster. The agency is funded through Vote Pike River Re-entry.

In November 2018, the Minister Responsible for Pike River Re-entry approved the re-entry plan, and a budget of $36 million was allocated.

The agency employs 27 staff. The chief executive is Dave Gawn.

Financial overview and audit results The Auditor-General issued an unmodified audit opinion on the agency’s financial statements and non-financial performance reporting. The audit report includes an “emphasis of matter” paragraph, which highlights that the financial statements were appropriately prepared on a realisation basis. This is because of the anticipated disestablishment of the agency in 2020/21.

The agency’s expenditure for the year was below its appropriation, due to costs being incurred at a slower-than-expected rate.

Last year we noted that the agency would need to develop performance measures for 2018/19. Its performance measures for the year include planning and operational milestones and targets, as well as satisfaction ratings from the Family Reference Group. We are pleased that the agency has reported strong performance against these measures.

The agency confirmed that additional funds are being sought in the 2020 Budget, because its expected disestablishment is delayed by approximately 12 months. The agency was not able to provide us with further detail as its bid is going through the Budget process.

Progress has been made in re-entering the mine We heard that the year focused on planning for re-entry and sourcing the necessary equipment. The agency has made progress with tunnel re-support and forensic examination work, noting that a stable and controlled fresh air atmosphere has been established and

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maintained right up to the end of the drift. It expects to secure the area near the end of the drift, Pit Bottom in Stone, for detailed forensic examination by the end of April 2020.

The agency said it posts progress updates on its website about every two weeks, or when there is a significant event.

The process is being scrutinised by WorkSafe The agency told us its plans were reviewed by WorkSafe, which gave an exemption to one aspect of the mine safety regulations in the Health and Safety at Work Act 2015. The agency told us it has a good working relationship with WorkSafe, which conducts substantial scrutiny of the process. It believes this scrutiny gives workers confidence, and should give the public confidence. We heard that over 29,000 person hours of risk assessment have been completed. We are pleased that no working days have been lost through workplace accidents during the construction or re-entry to date.

The expected timeline The agency plans to reach the end of the drift by the end of August, and hand over the site to the Department of Conservation by November 2020. It acknowledged that this is a 12- month delay from the original estimate given to the committee in November 2018. We were told that the delays have been caused by various factors, such as the testing of the fresh-air system and the condition of the roof. The agency told us the work will take as long as it takes to be done safely and done right, and that safety is “the overriding bottom-line consideration”.

The agency told us it now expects to be disestablished by February 2021.

Understanding the agency’s mandate The agency’s mandate is to re-enter the drift, not the mine itself. The agency emphasised that it is not expecting to recover human remains, because they are believed to be in the mine. The chief executive acknowledged that the public is not clear about this distinction, and noted that it is a political issue. We heard that the Minister has been clear with the Family Reference Group and the media about the agency’s mandate. The agency holds regular media and community updates, but changing the public perception is a challenge. We heard that any progress beyond the current mandate would cost “an inordinate amount”, and would be a decision for the Government.

Planning for the event of human remains being found in the drift. Despite the agency’s expectation that it would be unlikely to find human remains in the drift, it has plans in place in the event of this happening. The agency is supporting the New Zealand Police and the coroner, which are leading the disaster victim identification team and forensics approaches. Once the first stage of recovery is complete, the Police will reassess their approach and will consider re-entering and going into the mine.

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Mine rehabilitation and disestablishment of the agency The agency told us it has been working with the Department of Conservation on a plan to rehabilitate the mine site. Most of the work is expected to take place after the work in the drift has been completed. The agency expects the $2.316 million allocated for rehabilitation will be sufficient. However, the final cost could be affected by changes to costs for materials, weather conditions, and changes to the timeline. The largest cost within the rehabilitation plan is the remediation of the bridges.

The agency currently expects it will be disestablished in February 2021, which is when the next annual review is likely to take place. We hope that provision can be made to enable Dave Gawn, the chief executive, to attend even if he has completed his tenure at the agency.

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Appendix

Committee procedure We met on 12 February and 18 March 2020 to consider the annual review of Te Kāhui Whakamana Rua Tekau mā Iwa—Pike River Recovery Agency. We heard evidence from the agency and received advice from the Office of the Auditor-General.

Committee members Dr Deborah Russell (Chairperson) Kiritapu Allan Andrew Bayly Rt Hon David Carter Tamati Coffey Hon Judith Collins Hon Paul Goldsmith Ian McKelvie Greg O'Connor David Seymour Jamie Strange Fletcher Tabuteau Dr Duncan Webb

Hon Mark Mitchell participated in some of this review.

Office of the Auditor-General (Briefing on Pike River Recovery Agency).

Te Kāhui Whakamana Rua Tekau mā Iwa–Pike River Recovery Agency (Responses to written questions).

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2018/19 Annual review of the Education Review Office

Report of the Education and Workforce Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Financial and audit results ...... 2 ERO’s operating model ...... 3 Changes to school reviews ...... 3 Additional Budget funding ...... 4 Measuring stakeholder satisfaction ...... 4 Former partnership schools...... 4 Measuring student achievement ...... 5 Appendix ...... 7

Dr Parmjeet Parmar Chairperson

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Education Review Office

Recommendation The Education and Workforce Committee has conducted the annual review of the Education Review Office for 2018/19, and recommends that the House take note of its report.

Introduction The Education Review Office (ERO) is a government department established in 1989 under the State Sector Act 1988. ERO is the external evaluation agency for the pre-tertiary education sector.

ERO has the following core functions:

• National evaluations—of system-level issues either requested by the Minister of Education or instigated by the Chief Review Officer. • Education evaluations—scheduled evaluations of schools, kura, kōhanga reo, and early learning services. • New school assurance reviews—to provide assurance to new school boards and their communities that the school has undertaken suitable administration processes and curriculum preparation. • Private school reviews—carried out under section 35I and Part 28 of the Education Act 1989 and focusing on how well the school meets the criteria for registration. • Home-schooling reviews—of programmes for students exempt from enrolment at a registered school, undertaken in the context of section 21 and Part 28 of the Education Act 1989 and usually at the request of the Ministry of Education. • Special reviews—carried out where a matter needs to be reviewed and reported outside regular reviews. The chief executive officer, who also acts as the chief review officer, is Nicholas Pole.

Financial and audit results Total revenue for 2018/19 was $29.242 million, compared with $29.694 million the previous year. After expenditure, ERO recorded a surplus of $32,000.

The Auditor-General rated both the ERO’s management control environment and its financial information systems and controls as “very good”, and did not make any recommendations for improvement.

ERO’s performance information and associated systems and controls were rated “good”. Deficiencies identified in 2017/18 have mostly been resolved. Some further improvements have been recommended this year. Those recommendations are as follows:

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• ERO should refine the measures that evaluate how it achieves positive changes for learners within the education system and how it presents those measures in its annual report. • ERO should work to boost participation in surveys that are used to evaluate performance measures. It should also try to attain a more representative sample of participants. The Auditor-General did not find any significant matters during the audit.

ERO’s operating model We note that during this year ERO started implementing a new operating model, which was brought to our attention in the previous annual review.

The independent taskforce for the Tomorrow’s Schools review recommended that ERO be disestablished and its functions transferred to a parliamentary commission. The Government’s final decision was to retain ERO and its role in carrying out individual reviews. However, ERO will work to strengthen the capability of schools to undertake self-reviews. Over time, this should allow ERO to play a bigger role in system-wide evaluation and monitoring of the effectiveness of policy settings and delivery of services at a programme level.

We heard that ERO is looking at the feedback the taskforce received during the consultation period to see how it can further improve its operating model. First, ERO is looking at how it can work more closely with schools and early learning services that are struggling or that have complex needs. Second, as mentioned above, ERO will look at how it can build capability in the sector over time so that schools are better able to carry out self-reviews.

Changes to school reviews ERO states that its new operating model supports a “more flexible approach to individual schools and learning services”.1 In 2019, it introduced more flexible review times. In the past, when concluding a school review, ERO would indicate the time frame (for example, two years) before it would conduct the next review. This would indicate how well it thought a school or service was performing. Instead, ERO now provides a summary judgement in its review about the overall quality of the education delivered by the school or service. For example, those judgments could be: “needs development”, “developing”, “well placed”, or “strong”. ERO wants its reports and its discussions with schools to be very clear about why schools are placed where they are and what is required for further improvement.2

We heard that 150 to 200 schools a year receive a judgement of “needs development”. Those schools may be given more intensive assistance and supervision by the Ministry of Education and ERO. ERO is currently undertaking a pilot with seven schools that require intensive assistance, generally visiting each term. ERO is keeping a similar close watch on

1 Education Review Office, Annual Report 2018/19, page 4. 2 Education Review Office, Annual Report 2018/19, page 11.

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about 140 further schools. It is planning to expand the number of schools it monitors this way following the pilot.

Additional Budget funding We asked about the increased funding to ERO in Budget 2019. ERO said it will help fund general cost increases over time, as well as its growing work in early childhood education reviews. Currently, early childhood centres are reviewed every 3.6 years; the additional funding will assist ERO to move toward three-yearly reviews. It will allow ERO to hire ten more reviewers.

Measuring stakeholder satisfaction We were interested in how ERO measures its performance through surveys.

We asked about the State Services Commission’s survey, Kiwis Count. The survey measures satisfaction and trust in government services at the macro level. ERO’s rating in the 2018 calendar year was 70 out of 100, which is an improvement from the 2017 result of 65. We learnt that the sample size for the 2018 survey was 102.

We also asked about ERO’s stakeholder satisfaction surveys. ERO said it invites all schools and early learning services (excluding kura kaupapa Māori and kōhanga reo) that have been evaluated by ERO to respond to its post evaluation survey. This is done a month after review results have been published. The surveys also ask whether ERO added value to what the school is doing, and whether any of their practices will change as a result. It said that, generally, about 40 to 50 percent of schools and about 10 percent of early learning services take up the opportunity. ERO acknowledged the participation rate could be higher, but that it considers it to be a representative sample. We were pleased to hear that views of schools that are performing well are similar to those of schools that are struggling to perform well.

In its annual report, ERO states that 85 percent of education service providers indicated ERO’s evaluations are making a contribution to decisions about how to improve learner outcomes.3 The figure is 84 percent for schools and 88 percent for early childhood learning service providers.4

Former partnership schools We asked about ERO’s involvement in the assessment of former partnership schools, which have become designated character schools. At the hearing, we heard that ERO was conducting “readiness reviews”, which result in reports to the schools’ establishment board of trustees and the ministry. These reviews involve working alongside the establishment board for about a year to regularly visit and see whether the school is ready to operate effectively. The reports outline progress that schools are making, additional support they may need from the ministry, and work they need to do themselves. ERO said the schools

3 Education Review Office, Annual Report 2018/19, page 26. 4 Education Review Office, Annual Report 2018/19, pages 28 and 30. 4

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were progressing well through the process on the way to meeting the requirements to be registered as special character schools.

We heard that readiness reviews are the standard approach for new schools and private schools coming into the state system. ERO said that, while the former partnership schools are progressing well through the readiness reviews, all new schools are vulnerable until their staff and curriculum are settled and they have formed partnerships with agencies and the community.

Measuring student achievement Removal of national standards The requirement for a school to report its students’ performance against national standards was removed in 2018. We asked how the removal of national standards has affected the way that ERO reports. ERO said that, although schools are not using national standards, they undertake other assessment activities. ERO looks at what schools know about their students and how those students are progressing. Additionally, ERO looks at wellbeing in schools and schools’ knowledge about the factors that contribute to student achievement.

ERO does not examine the assessments for each child, but rather looks at the systems the school has for monitoring, and the information that gets reported to the board. ERO acknowledges that schools vary in how they do assessments.

PISA rankings The OECD’s PISA (Programme for International Student Assessment) is an international framework that measures 15-year-olds’ ability to use their reading, mathematics, and science knowledge and skills to meet real-life challenges. PISA results are a snapshot of how those students are performing academically relative to other countries.

We note a downward trend in New Zealand students’ performance in PISA. ERO commented that New Zealand remains in the top group of countries, but that data shows a steady decline in performance, similar to that experienced by other similar jurisdictions such as Australia. ERO said there are some “worrying patterns” in areas such as a fall in reading for pleasure. It has been particularly trying to determine what is behind the PISA results for science.

ERO is worried about a “level of discomfort for many learners” in relation to engagement with the schooling system, particularly for Māori learners, boys, and those from low socioeconomic families and homes. ERO said that the quality of teaching is the “number one influence” on learning outcomes. ERO said its reviews suggest that teaching quality can be variable. We learnt that a recent sample of its reviews suggested that learning outcomes can be variable within schools. ERO said that it has a specific focus on schools’ actions to address inequity within schools, and that is an area of concern in about 60 percent of schools. We heard that schools need to focus on accelerating the progress of at-risk learners. ERO agreed that the addition of learning support coordinators into the school

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ERO also told us that it is finalising some work about integrating overseas-trained teachers.

5 A learning support coordinator (LSC) is a new role to provide learning support for children in schools, especially for those with complex needs. 6

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Appendix

Committee procedure We met between 18 December 2019 and 4 March 2020 to consider the annual review of the Education Review Office. We heard evidence from the Education Review Office and received advice from the Office of the Auditor-General.

Committee members Dr Parmjeet Parmar (Chairperson) Simeon Brown Hon Clare Curran Golriz Ghahraman Hon Nikki Kaye Denise Lee Marja Lubeck Jo Luxton Mark Patterson Jan Tinetti Nicola Willis

Education Review Office (Responses to written questions).

7 139

2018/19 Annual review of the Institute of Geological and Nuclear Sciences Limited (GNS Science)

2018/19 Annual review of the Institute of Environmental Science and Research Limited (ESR)

2018/19 Annual review of the New Zealand Forest Research Institute Limited (trading as Scion)

Report of the Economic Development, Science and Innovation Committee

March 2020

The Economic Development, Science and Innovation Committee has conducted the annual reviews of the Institute of Geological and Nuclear Sciences Limited (GNS Science), the Institute of Environmental Science and Research Limited (ESR), and the New Zealand Forest Research Institute Limited (trading as Scion) for 2018/19, and has no matters to bring to the attention of the House. The committee recommends that the House take note of its report.

Jonathan Young Chairperson 140

2018/19 Annual review of Manaaki Whenua - Landcare Research

2018/19 Annual review of the New Zealand Institute for Plant and Food Research Limited

Report of the Economic Development, Science and Innovation Committee

March 2020

The Economic Development, Science and Innovation Committee has conducted the annual reviews of Manaaki Whenua – Landcare Research, and the New Zealand Institute for Plant and Food Research Limited for 2018/19, and has no matters to bring to the attention of the House. The committee recommends that the House take note of its report.

Jonathan Young Chairperson

141

2018/19 Annual review of the National Institute of Water and Atmospheric Research Limited (NIWA)

Report of the Economic Development, Science and Innovation Committee

March 2020

Contents Recommendation ...... 2 About NIWA ...... 2 Financial performance and audit results ...... 2 Science overlap with MetService ...... 3 Commerce Commission review of NIWA and MetService ...... 3 Access to scientific data ...... 3 Gender diversity ...... 3 NIWA’s three scientific research vessels ...... 3 Rollout of 5G ...... 4 Appendix ...... 5

Jonathan Young Chairperson

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National Institute of Water and Atmospheric Research Limited

Recommendation The Economic Development, Science and Innovation Committee has conducted the annual review of the National Institute of Water and Atmospheric Research Limited (NIWA) for 2018/19, and recommends that the House take note of its report.

About NIWA NIWA was established as a Crown Research Institute (CRI) in 1992. Its purpose is to enhance the economic value and sustainable management of New Zealand’s aquatic environment. It aims to improve understanding of climate and the atmosphere, and increase resilience to weather hazards. NIWA manages some of New Zealand’s most valuable scientific assets.

The chief executive is John Morgan, and Barry Harris is the board chair. NIWA has 697 staff across 15 sites in New Zealand and Australia.

Financial performance and audit results In the 2018/19 financial year, NIWA achieved a profit of $6.176 million, slightly exceeding its target. NIWA’s revenue was $161.3 million, a $9.9 million (6 percent) increase to revenue on the previous year. Earnings contributed $27.5 million before interest, tax, and depreciation.

As at 30 June 2019, NIWA’s assets totalled $172 million. This followed significant investment in science equipment and infrastructure, with capital expenditure of $21.5 million during the year. NIWA’s return on equity for 2018/19 was 6.2 percent.

The Auditor-General has rated NIWA’s management control environment, and financial information systems and controls as “very good”. This rating means that the Auditor-General noted no deficiencies in these areas. These grades are unchanged from 2017/18. We commend NIWA for these results.

Provision for doubtful debt The Auditor-General advised that NIWA has a $1.6 million overdue debt from one organisation for invoices billed in the prior period. NIWA has taken legal action against the debtor and judgment was handed down by the High Court in NIWA’s favour. NIWA’s annual report notes that $153,000 of the total receivable balance is at risk of being uncollected.1 The Auditor-General has used more conservative assumptions, and estimates that $500,000 to $750,000 is at risk.

1 NIWA 2019 Annual Report, page 61. 2

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Science overlap with MetService We asked NIWA whether it agrees that some of its scientific research overlaps with that of the Meteorological Service of New Zealand (MetService). NIWA contended that, while there is overlap in some areas, most of the work the organisations do is different. We note that both organisations provide weather forecasting services. NIWA told us that its weather forecasting is for a different purpose: to help with its scientific research.

We highlighted similarities in the data on the two organisations’ websites, and asked if this results in cost duplication. NIWA told us that the information comes from work it is doing anyway, and it provides a choice for people as to where they want to get their information. It noted that the data often comes from the same place; there is a lot of information sharing, but it does not believe there is cost duplication. NIWA believes the areas of overlap do not warrant providing only one product to potential users.

Commerce Commission review of NIWA and MetService We note that the Commerce Commission is investigating possible anti-competitive behaviour by NIWA and MetService. Its review is looking at the pricing and terms on which competitors can access weather data from MetService and NIWA. Because the investigation is ongoing, we did not discuss it with NIWA, but will be interested to learn the outcome in due course.

Access to scientific data We asked how many clients in New Zealand are buying NIWA’s scientific data. NIWA told us that just over 99.5 percent of the data is free. Where data is not provided for free, it is because there are conditions attached to it. For example, the data may not be exclusively owned by NIWA, or access is limited to NIWA. In some of these cases, it cannot on-sell it or make it available without the approval of whoever paid to have the data collected.

We asked what percentage of government-funded data would be released as open-source. We heard that, with the odd exception, all publicly funded data is released. NIWA said there is a perception that, because it is a CRI, all its data is publicly funded, whereas a lot of its data is not. NIWA added that, to be an effective CRI, it runs under strong commercial principles.

Gender diversity We heard that the majority of NIWA’s science staff recruited over the past 12 months are female. Most of the staff came in as entry-level graduates, but they will start to move up in seniority. We heard that the senior roles are male-dominated—a legacy of previous generations—but this is beginning to change. Overall, 36.4 percent of staff at NIWA are female. We look forward to seeing NIWA’s gender diversity progress in scientific and senior roles.

NIWA’s three scientific research vessels NIWA operates three research vessels: the Tangaroa, the Kaharoa, and the Ikatere. They are used for scientific voyages throughout New Zealand’s exclusive economic zone, and as

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2018/19 ANNUAL REVIEW OF NIWA far afield as South America and the Ross Sea in Antarctica. In 2018/19 we heard they were used quite heavily: for 269, 183, and 104 days at sea, respectively.

We asked about the difference in the times spent at sea, and if this was due to maintenance schedules or lack of funding for research activities. NIWA told us that use of the vessels is demand-driven. We heard that sometimes the science requires more use of vessel-days than in other years, but the three vessels are complementary in their different uses.

RV Tangaroa The Tangaroa is the largest of NIWA’s vessels and spends around 280 days at sea per year. It has two permanent crews who spend alternating months on board. We heard that RV Tangaroa costs almost the same docked at its wharf as it does out doing research: at least $65,000 a day.

RV Kaharoa We heard that the Kaharoa is a 28-metre long vessel and tends to be at sea around six months a year. NIWA is investigating whether to replace Kahora as it is older. It sails anywhere from the east coast of South Africa through to South America. Its work includes activities for the United Nations and fisheries surveys. It does not have a permanent crew and provides less value. Although Kaharoa is still economically viable, NIWA is testing whether the demand for it is likely to grow.

RV Ikatere Ikatere is a smaller, jet-propelled, fast vessel that does mostly in-shore work. It is able to do its work quickly. Ikatere is a low-cost platform that does not need a permanent crew because, with 100 days of use, it is economically viable.

Rollout of 5G NIWA has been transmitting large packets of data for 20 years, so it has no concerns about the rollout of 5G technology. NIWA told us that it is excited about 5G, and notes that any technology that makes data shifting more efficient and cheaper is beneficial.

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Appendix

Committee procedure We met on 20 February and 19 March 2020 to consider the annual review of NIWA. We heard evidence from NIWA and received advice from the Office of the Auditor-General.

Committee members Jonathan Young (Chairperson) Tamati Coffey Andrew Falloon Brett Hudson Gareth Hughes Melissa Lee Clayton Mitchell Dr Deborah Russell Stuart Smith Hon Poto Williams

Office of the Auditor-General (Briefing on NIWA).

NIWA (Responses to written questions).

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2018/19 Annual review of the Department of Conservation

Report of the Environment Committee

February 2020

Contents Recommendation ...... 2 About the Department of Conservation ...... 2 Financial overview and 2018/19 audit results ...... 2 Biodiversity challenges and wins ...... 3 Honouring the Treaty of Waitangi ...... 4 Concessionaires without permits ...... 5 Improving the security of staff ...... 5 Alternatives to 1080 ...... 5 Staff purchase cards ...... 6 Appendix ...... 7

Dr Duncan Webb Chairperson

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Department of Conservation

Recommendation The Environment Committee has conducted the annual review of the Department of Conservation for 2018/19, and recommends that the House take note of its report.

About the Department of Conservation The Department of Conservation (DOC) is responsible for promoting the conservation of New Zealand’s natural and historic heritage. DOC’s aspirational vision is for New Zealand to be the greatest living space on Earth (Kāore he wāhi i tua ati i a Aotearoa, hei wāhi noho i te ao). DOC was established by the Conservation Act 1987.

Lou Sanson has been the Director-General since 2013. During 2018/19 DOC’s senior leadership team has seen the appointment of a new Deputy Director-General Corporate Services (a secondee from the State Services Commission is currently acting in this role), and a Deputy Director-General People and Engagement.

DOC manages $6 billion in capital assets, of which more than 91 percent are Crown-owned (predominantly conservation land). The remaining assets are DOC-owned and include visitor assets, such as tracks, huts, and structures used for conservation services.

Financial overview and 2018/19 audit results DOC received $429.615 million in revenue in 2018/19, nearly 10 percent more than the previous year’s total of $391.411 million. It spent $429.724 million, resulting in a deficit of $109,000. The previous year it spent $384.708 million and had a surplus of $6.703 million. About $56 million, 13 percent of DOC’s revenue in 2018/19, came from sources other than the Crown. This was similar to the previous year. The sources included sponsorships, donations, bequests, and grants, as well as revenue for services to third parties. The Auditor-General assessed DOC’s financial information and supporting systems and controls as “good”.

Areas that need improvement The Auditor-General identified a number of areas where DOC needs to make big improvements, and said making these improvements at the earliest opportunity is critical. DOC’s management control environment was assessed as “needs improvement”. This was a downgrade from “good” in the previous financial year. The auditors found that DOC has shown little progress in addressing previous recommendations in relation to its:  procurement and contract management  information and communication technology work  corporate services.

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The Auditor-General assessed DOC’s performance information and supporting systems and controls as “needs improvement”. This assessment has not changed since its last annual review. The previous year, the auditors recommended that DOC introduce a centralised audit process that would help ensure the accuracy of data from front-line staff. While DOC has introduced a national-led quality assurance programme, the Auditor-General still found issues with the transfer of performance data to DOC’s business planning reporting system. We also heard that, while DOC has a framework for monitoring outcomes, there is a lack of transparency and evidence about how it determines the relevant trends and findings. The Auditor-General recommends that DOC maintain and provide clear evidence and reasons to support the outcome trends indicated in its annual report. We are disappointed that the assessment of DOC’s systems and controls has not improved. We note that this is the second year in a row that DOC has received a “needs improvement” rating. We consider appropriate performance information essential for ensuring that public entities are accountable to Parliament and the public. We hope to see positive developments at our next review.

Biodiversity challenges and wins Birdlife

A record year for the kākāpō We were pleased to hear that DOC had a successful year with its Kākāpō Recovery Programme in 2018/19 with 84 chicks born, even though 7 were lost to aspergillosis.1 The Director-General told us that the population is now at 213, which is a big improvement from 15 years ago, when there were only 86 kākāpō left. We were told that New Zealand’s current kākāpō population is the largest in over a century.

To try to eradicate aspergillosis, DOC is using eDNA analysis of the disease to find out how it entered nests at Whenua Hou (an island west of Stewart Island which holds the majority of the breeding population of kākāpō). The Director-General assured us that the disease is currently under control.

We heard that 2020 will be New Zealand’s biggest ever mast year. This is a challenge for kākāpō recovery, as there are no more suitable islands to place the birds if more chicks hatch.2 The Director-General said that kākāpō breed well as a result of mast years due to the production of rimu fruit, which is necessary for the birds to successfully breed and hatch chicks on the main breeding islands.

Seabirds struggling due to climate change We heard that although DOC has seen success with birds such as the kākāpō and kōkako, New Zealand’s sea birds are struggling. The Director-General told us that the Hoiho (yellow- eyed penguin) and antipodean albatross are being affected by a change in habitat. We

1 Aspergillosis is an infection caused by a type of fungus. It can affect people as well as birds and other animals. 2 A mast year is when some of New Zealand’s native trees seed all at once, and takes place every two to six years. The heavy seeding leads to an increase in introduced predator numbers.

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2018/19 ANNUAL REVIEW OF THE DEPARTMENT OF CONSERVATION heard that the warming of the Tasman Sea is disturbing the Hoiho population and that in 2018 only one chick was born in the wild. The Director-General said that the rising sea surface temperature has also meant female albatrosses have been flying further north than usual to forage in waters beyond New Zealand's exclusive economic zone. He said many of the albatrosses that travel further afield are affected by long-line fishing.

We heard that nearly 25 percent of the world’s seabirds breed in or around New Zealand. We are concerned about these birds and will follow the situation closely.

Marine ecosystems We note that many of New Zealand’s coastal regions are under-represented or have no marine protected areas (MPAs). No new marine reserves or marine mammal sanctuaries were established in 2018/19. The Director-General told us that the Minister of Conservation and the Minister of Fisheries are working to secure a comprehensive marine protection network in the south-eastern South Island.

We heard that another big priority for DOC is to develop a new marine spatial plan for the Hauraki Gulf. The project for this work is called “Sea Change - Tai Timu Tai Pari - Hauraki Gulf Marine Spatial Plan”. It is being undertaken in partnership with mana whenua, Auckland Council, Waikato Regional Council, the Hauraki Gulf Forum, the Ministry for Primary Industries, and the wider public.

We were told that the completion of MPA planning processes for all regions remains a priority for DOC.

Honouring the Treaty of Waitangi Working with Māori We heard that DOC is improving the way it works with tangata whenua. In June 2019, DOC’s senior leadership team held a meeting with iwi leaders. It considers this an important moment in the development of its relationship with Māori. The meeting identified values that will help inform DOC’s future work.

Supreme Court decision We understand that the case of Ngāi Tai ki Tāmaki Tribal Trust v Minister of Conservation was a catalyst for DOC to improve its relationship with Māori.3 The iwi involved won the case and gained the right to re-apply for exclusive rights to conduct commercial operations on Rangitoto and Motutapu islands. It was brought to the court after DOC issued five-year tourism concessions to Fullers and the Motutapu Island Restoration Trust on the islands. The Minister told us in 2019 that the case highlighted the importance of section 4 of the Conservation Act, which requires people to interpret and administer the Act to give effect to the principles of the Treaty of Waitangi.

3 Ngāi Tai ki Tāmaki Tribal Trust v Minister of Conservation [2018] NZSC122. 4

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The Director-General told us that as a result of the case DOC is re-examining its policy and reviewing its national park legislation as well as its general conservation policy. We heard that changes to its policies would take between 18 months and two years.

Concessionaires on conservation land Some of us are concerned that, because of DOC’s work with iwi in response to the Supreme Court case mentioned above, permits for some concession operators on conservation land have been put on hold. These concessionaires are unsure whether they will be able to operate in the future. We are aware that some concessionaires have spent thousands of dollars getting their businesses off the ground and we are concerned for their welfare.

The Director-General commented that DOC is stuck between concessionaires who want their right to operate on the land, and its relationship with Māori. We intend to monitor how DOC manages this balance and hope to see improvements for both concessionaires and Māori.

Concessionaires without permits We heard that DOC carried out an audit to check whether operators at Punakaiki, South Westland, Wanaka, Wakatipu, and Te Anau were operating legally. DOC found that about a quarter of concessionaires were either breaching their conditions or operating illegally. We are concerned about this, but pleased that DOC is planning to extend its compliance checks to other parts of New Zealand.

Improving the security of staff In our last annual review of DOC we expressed our concern about DOC staff being harassed by members of the public. This is particularly the case with people opposed to the predator- control toxin 1080 and DOC’s tahr control activities.

We are pleased to see that DOC has taken these threats seriously by creating a National Security Team to improve the physical security of staff, visitors, and assets. DOC has also introduced a new measuring system for safety incidents to track its health and safety performance.

The Director-General told us that DOC has been investing in social media monitoring to keep an eye on the behaviour of those who are against 1080. We heard that this system is a good way to be aware of any threats that may emerge. We were also told that DOC has used social media to inform people who might be undecided about the benefits of 1080. The Director-General said that the department feels less targeted compared to 2017/18. We are glad to hear this.

Alternatives to 1080 We note that in February 2019 the Government announced a Provincial Growth Fund investment of $19.5 million to develop innovative pest control methods that do not use 1080. We heard that DOC is still exploring alternatives to the toxin, and asked for an update.

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The Director-General said that DOC is using artificial intelligence for some of its trap systems through Predator Free 2050 Limited. It is also watching what Western Australian national parks are doing with gene editing.4 We also heard that DOC is looking into a bait called PAPP (para-aminopropiophenone) which is designed for wild cats. We heard that DOC would consider using it on the Auckland Islands. The Director-General also said that predator-control work on Wellington’s Miramar Peninsula has been an outstanding success.

While we are pleased to hear of DOC’s success in Miramar, some of us are concerned that the Predator Free 2050 initiative is not achieving results fast enough and has lost momentum. We hope to see more progress in this area at DOC’s next review.

Staff purchase cards Some of us are concerned about the number of purchase cards (p-cards) DOC staff hold: about 1,900 cards for 2,500 staff. We asked how it ensures that the cards are used appropriately. We heard that one reason so many p-cards are issued is the remote environment some staff work in. Staff working remotely may need to replace equipment quickly, and filing an expense claim is a laborious process for staff in remote regions.

We were told that DOC has a standard operating procedure which all staff with p-cards must comply with. It has introduced an automated system to monitor expenditure, giving a better idea of what is being spent nationally with p-cards. The Deputy Director-General Corporate Services told us that DOC is not aware of inappropriate expenditure and that the only problems have been process-based, where staff need to be chased up for their receipts. We encourage DOC to investigate ways to improve its system-based controls.

We asked DOC to provide data about any inappropriate spending from its internal audit of p- card expenditure. We were subsequently told that the total amount of transactions refunded by staff due to there being a personal element was less than $12,000. We were told that this equates to less than 0.18 percent of total p-card transactions.

We were also told that the total amount of transactions made by staff using p-cards during 2018/19 was $8.98 million, and that this equates to under 2.1 percent of DOC’s total expenditure. We will continue to monitor this area with interest.

4 Predator Free 2050 Limited was formed on 30 November 2016 as a Crown-owned company under Schedule 4A of the Public Finance Act 1989. It was set up to invest in high-value, large-scale predator-control initiatives, and scientific research into predator control. 6

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Appendix

Committee procedure We met on 5 December 2019 and 20 February 2020 to consider the annual review of the Department of Conservation. We heard evidence from the Department of Conservation, and received advice from the Office of the Auditor-General.

Committee members Dr Duncan Webb Dr Liz Craig Hon Jacqui Dean (from 19 February 2020) Sarah Dowie (until 19 February 2020) Hon Nathan Guy Jenny Marcroft Hon Scott Simpson Erica Stanford Chlöe Swarbrick Angie Warren-Clark

Office of the Auditor-General (Briefing on the Department of Conservation).

Department of Conservation (Responses to written questions).

Department of Conservation, PowerPoint presentation.

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2018/19 Annual review of the Energy Efficiency and Conservation Authority 2018/19 Annual review of the New Zealand Walking Access Commission 2018/19 Annual review of the Parliamentary Commissioner for the Environment

Report of the Environment Committee

March 2020

The Environment Committee has conducted the annual reviews of the Energy Efficiency and Conservation Authority, the New Zealand Walking Access Commission, and the Parliamentary Commissioner for the Environment for 2018/19.

We have no matters to bring to the attention of the House. We recommend that the House take note of our report.

Dr Duncan Webb Chairperson

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2018/19 Annual review of the Environmental Protection Authority

Report of the Environment Committee

March 2020

Contents Recommendation ...... 2 About the Environmental Protection Authority ...... 2 Financial results and 2018/19 audit ...... 2 Hazardous substances ...... 3 Resource management ...... 4 Appendix ...... 5

Dr Duncan Webb Chairperson

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Environmental Protection Authority

Recommendation The Environment Committee has conducted the annual review of the Environmental Protection Authority for 2018/19, and recommends that the House take note of its report.

About the Environmental Protection Authority The Environmental Protection Authority (EPA) has regulatory responsibilities for the management of New Zealand’s environment. The EPA is a Crown agent established in 2011 by the Environmental Protection Authority Act. The EPA:

• manages applications for resource consent proposals of national significance, like new motorways, prisons, and windfarms • makes decisions about hazardous substances (like household chemicals and pesticides) and new organisms (like beetles and wasps) using risk assessment • regulates ozone-depleting substances and hazardous waste • administers and reports on the New Zealand Emissions Trading Scheme • regulates marine activities in the Exclusive Economic Zone and Continental Shelf (EEZ). We discussed the EPA’s 2018/19 annual report and financial audit with its chair, Julie Hardaker, and chief executive Dr Allan Freeth.

Financial results and 2018/19 audit The EPA’s total revenue for 2018/19 was $28.555 million. The EPA is funded by a mix of Crown revenue ($25.517 million) and third-party revenue from transactions like cost- recovery fees and application fees ($3.038 million). Revenue was $0.7 million less than in 2017/18.

The EPA’s expenditure in 2018/19 was $30.429 million, an increase of $0.1 million from 2017/18. It reported a net deficit of $1.87 million for the year, compared with a deficit of about $1 million the previous year.

We heard that the EPA ended the year with a deficit because it was using cash reserves to fund its move from mainframe computer systems to cloud-based computer systems. We were told this is because cloud-based systems are accounted for as operational expense, rather than capital investment. The EPA explained this as an accounting issue specific to cloud-based systems that many government entities are facing, rather than a true operational deficit.

The Auditor-General assessed the EPA’s management control environment and its financial information systems and controls as “very good”, with no recommendations for improvement.

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The Auditor-General assessed the EPA’s performance information and supporting systems and controls as “good”. He noted that the EPA would no longer rely on customer surveys for its performance measurement data. The EPA’s 2018/19 Statement of Performance Expectations relied on customer survey responses for 12 of its 27 performance measures. Low customer response rates to the EPA’s annual survey and high margins of error meant that statistically robust results for 2018/19 were difficult to record. As a result, only four of the 12 customer survey measures were reported against.

We were pleased to note that the EPA’s 2019/20 Statement of Performance Expectations and 2019-2023 Statement of Intent have addressed previous recommendations from the Auditor-General for a more externally-focused performance reporting framework.

Hazardous substances Modernising chemical management We asked for an update on the EPA’s work developing a chemical map of New Zealand. We heard that some 47,000 chemicals have been processed through the map, and the EPA is working with importers and manufacturers to capture more data about chemical imports. We also heard that the EPA has discussed with the Ministry for the Environment the possibility of some legislative changes that would give the EPA power to request that data.

We asked about the ability to assess the health and environmental effects of chemicals across New Zealand using the chemical map. We were told that images of chemical distribution and its environmental effects across the country will soon be produced. Assessing health effects will be harder, particularly because the chronic toxicity of some chemicals is difficult to determine. The EPA hopes to provide prototypes of the chemical map in 2021.

Methyl bromide use In 2010 the EPA (then the Environmental Risk Management Authority) ruled that the timber fumigant methyl bromide would be subject to more controls from October 2020. After then, all users will need to ensure that emissions are recaptured or destroyed. We asked the EPA for an update on the work to find an alternative to methyl bromide.

We heard that the EPA is currently reassessing methyl bromide use, and a decision is due in March 2020. We understand that the reassessment application includes a request to extend the October 2020 deadline. New modelling data shows the dispersion of methyl bromide emissions to be larger than the EPA thought, and work is being done to determine whether the data is correct before the decision is made. We also heard that a separate judicial review of the EPA’s 2010 assessment is under way, and the EPA is eager for the court’s ruling.

We asked how many times methyl bromide had been reassessed in the 2018/19 year. The EPA told us methyl bromide is currently under reassessment, and that process began formally in April 2019. Methyl bromide was reassessed once before, in 2010.

1080 usage and alternatives We asked about alternatives to 1080 as a poison in pest control. We were told that, although finding alternatives to 1080 is not necessarily the EPA’s role, the EPA would soon be

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2018/19 ANNUAL REVIEW OF THE ENVIRONMENTAL PROTECTION AUTHORITY releasing its annual report on 1080 that includes a synopsis of all past research into alternatives. The EPA told us it is not aware of any viable alternatives available.

Investigation into PFOS-containing firefighting foams The EPA released the report on its investigation into firefighting foams containing perfluorooactane sulfonic acid (PFOS) in April 2019. We are concerned by the amount of PFOS firefighting foams that the EPA found in storage or in use during its investigation, and asked what it intends to do next. The EPA said it had found no intentional noncompliance. It is working with those organisations to safely dispose of the PFOS-containing foams. We heard that the EPA will continue auditing the sites it identified as high risk, and all chemicals have now been moved off site for disposal. The EPA has also been working to monitor the phasing out of other foams containing fluorine-type compounds.

Resource management We asked whether the EPA expects that provisions in the Resource Management Amendment Bill (RMA) would give it powers to override local councils.

The EPA explained that its approach to RMA enforcement is to work with local councils in partnership and consultation. It views the provisions in the bill as intending to give the EPA equal power with councils. The EPA said it has no intention to override local councils, but to help them take enforcement action against breaches of the RMA. We also heard that the EPA has asked councils to invite it to assist with RMA enforcement.

We asked whether the EPA takes an active interest in the amount of resources councils put into RMA enforcement. The EPA brought to our attention its annual monitoring report under the HSNO Act (the Hazardous Substances and New Organisms Act 1996) about the compliance action taken by a range of agencies, including councils. The EPA said it has pointed out in its reports, and at times been critical of, the lack of compliance action taken by councils. It added that it has approached these councils to assist them, and looks forward to working with councils on RMA compliance and enforcement in the future.

We noted that an application for a water conservation order for Te Waikoropupū Springs has been taking years to resolve, with the Minister for the Environment setting up a special tribunal to consider it. We asked the EPA whether it thinks there should be legislated timeframes on processes like water conservation orders, as there are for boards of inquiry on nationally significant resource consents.

The EPA told us it is not its role to have a view on the matter. However, the EPA acknowledged the frustration felt by community interests about the Te Waikoropupū Springs conservation order, and would prefer to see all such inquiries completed in a timely manner.

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Appendix

Committee procedure We met on 12 December 2019 and 19 March 2020 to consider the annual review of the Environmental Protection Authority. We heard evidence from the EPA and received advice from the Office of the Auditor-General.

Committee members Dr Duncan Webb (Chairperson) Dr Liz Craig Hon Jacqui Dean Hon Nathan Guy Jenny Marcroft Hon Scott Simpson Erica Stanford Chlöe Swarbrick Angie Warren-Clark

Maureen Pugh replaced Hon Scott Simpson for some of this review. Michael Wood replaced Jenny Marcroft for some of this review. Hon Dr Nick Smith replaced Sarah Dowie for some of this this review.

Office of the Auditor-General (Briefing on the Environmental Protection Authority).

Environmental Protection Authority (Responses to written questions).

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2018/19 Annual review of the Ministry for the Environment

Report of the Environment Committee

March 2020

Contents Recommendation ...... 2 About the Ministry for the Environment ...... 2 Audit results and financial performance...... 2 Freshwater management ...... 3 Waste management ...... 4 Atmosphere and climate change research ...... 6 Appendix ...... 7

Dr Duncan Webb Chairperson

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Ministry for the Environment

Recommendation The Environment Committee has conducted the annual review of the Ministry for the Environment for 2018/19, and recommends that the House take note of its report.

About the Ministry for the Environment The Ministry for the Environment was established by the Environment Act 1986. Its role is to advise the Government, its agencies, and other public authorities on environmental matters, including the operation of numerous Acts that affect the environment. It is funded out of Vote Environment, and works with four Ministers across two portfolios (environment and climate change).

The ministry’s chief executive, Vicky Robertson, has been in the role since April 2015. As at 30 June 2019 the Ministry had 371.6 full-time-equivalent staff. The average length of service is 3.5 years.

The ministry’s vision is to make Aotearoa New Zealand “the most liveable place in the world”. It has long-terms goals to achieve this, covering the air, atmosphere and climate, urban, freshwater, land, and marine environments.

Audit results and financial performance In 2018/19, the Ministry for the Environment reported total revenue of $77.462 million, a 10 percent increase from 2017/18. Expenditure was $72.075 million, 5.7 percent higher than in 2017/18. The four major areas of departmental spending were:

 climate change policy advice  resource management advice  water policy advice  waste minimisation and environmental hazards advice. The Auditor-General rated the ministry’s management control environment, financial information systems and controls, and performance information and supporting systems and controls as “good”. He recommended strengthening the ministry’s finance team, and regularly reviewing the accounting practices relating to the Emissions Trading Scheme (ETS). We note that the ministry intends to commission an independent review of the ETS accounting methodology to ensure it is fit for purpose.

Breach of appropriation in Vote Environment A breach of appropriation occurred in Vote Environment because waste levy revenue was higher than the forecast $36 million. The Waste Minimisation Act 2008 requires 50 percent of revenue collected to be distributed to territorial local authorities. The increase in waste levy

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2018/19 ANNUAL REVIEW OF THE MINISTRY FOR THE ENVIRONMENT revenue in 2018/19 meant that the actual amount paid to territorial local authorities exceeded the appropriation by $448,624. This breach was subsequently validated under the Public Finance Act 1989, and an explanation of the breach tabled in Parliament.

Freshwater management Freshwater management was an important theme in the ministry’s 2018/19 work.

Essential Freshwater proposals The Government’s Essential Freshwater work programme was a major focus for the ministry in 2018/19.1 This joint two-year programme with the Ministry for Primary Industries works towards the ministry’s goal of 90 percent of New Zealand’s lakes and rivers being swimmable by 2040. As part of the programme, three major regulatory documents were released for public consultation in 2019:

 Draft National Policy Statement for Freshwater Management  Proposed National Environmental Standards for Freshwater  Draft Stock Exclusion Section 360 Regulations. We questioned the thoroughness of consultation that was carried out regarding the Essential Freshwater work. Some of us had concerns about the timing of the consultation conflicting with the lambing season, making it harder for farmers to engage with the process. We were told that the ministry was aware that the timing was less than ideal, but it was committed to working through farmers’ concerns. Over 7,000 people attended consultation meetings throughout the country, with four advisory groups traveling to meet them, and 17,500 written submissions received, 60 percent of which were from farmers.

We were told that the challenges differ in managing urban and rural freshwater, so different timeframes were set for urban and rural targets. We asked why rural targets had shorter deadlines than urban. We were told that the rural deadlines are for interim measures, until regional government can update their plans.

Urban water management We heard that urban streams are more polluted than rural, with 90 percent being unswimmable. Although E. coli and other bacteria are the main concerns with this pollution, heavy metals also pose a concern for urban water quality. Copper and zinc from car brake pads, building materials, and zinc roofs are sources of these metals. The ministry sees a need to address these root sources to help manage water quality.

We asked what the ministry’s priorities are in urban freshwater management. Investment in drinking water, stormwater, and waste water infrastructure would be a priority, to better manage sewage and waste water in coastal areas, and improve water quality. This links to the upcoming national risk assessment which would asses New Zealand’s ability to manage rising sea levels.

1 The work programme is outlined in the document, Essential freshwater: Healthy water, fairly allocated, October 2018. https://www.mfe.govt.nz/sites/default/files/media/Fresh%20water/essential-freshwater.pdf.

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Conduct of economic analysis Some of us asked why the economic analysis for the Essential Freshwater proposals was conducted at such a high level. We expected a more in-depth analysis for a proposal of this size. We were told that much of the policy work was done by scientists, who do not take economic effects into account. The science group took a long time to agree on what defined “swimmability”, so there was not enough time before the release of the proposal to conduct economic analysis at that level.

Because of the many possible outcomes of Essential Freshwater’s proposals, the ministry chose to undertake the more detailed economic analysis after the submissions process had finished. The ministry told us that economic modelling can only go so far. The modelling does not take into account how farmers will respond, and what technical innovations there might be.

We were assured that further peer-reviewed economic analysis will be undertaken. We will be interested to see the results of this work.

Working with Māori We were interested to hear about the establishment of Kahui Wai Māori (the Māori Freshwater Forum) in October 2018. Kahui Wai Māori brings together people from different parts of Māori society with expertise in freshwater management to consult on the development of policy options. This is in addition to the already established Iwi Leaders Group, which the Government normally consults before any decisions are made.

Waste management The ministry told us that New Zealand produces a high amount of waste per capita, and has had recommendations from the OECD to reduce its waste.

China’s decision to stop accepting many types of imported waste encouraged the ministry’s existing plans for a circular economy in New Zealand. The move to a circular economy from a linear economy entails moving to a cycle of making, using, and returning materials from renewable sources. This contrasts with a linear model of using natural resources to take, make, and dispose of.

Waste minimisation Single-use plastic bags were banned from July 2019. We asked what the public response has been to the ban. We were told that, although it is hard to measure public opinion, the ministry has seen a surge in interest in making positive change for the environment. It told us that the value of banning plastic bags went beyond the physical footprint of the bags, and was in the mind-set shift of the public. The next stage of this process is finding ways to phase out hard-to-recycle, low-value plastics, and single-use items.

Administering the Waste Minimisation Fund is another way that the ministry has been working towards a circular economy. Although the fund was established in 2010, its biggest year was in 2018, with 49 projects (worth a total of $16.3 million) approved for funding. The focus in this round of funding was on projects that would work towards a circular economy.

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In 2019 action has started under many of the projects, and a further funding round has taken place.

We asked how the ministry assesses what the best options are to reduce waste, as there are many variables to consider. We heard that it uses a hierarchy to help decide which product might be best, and what the easiest substitutes might be.

Product stewardship and labelling Working with businesses towards a product stewardship model is another way the ministry is trying to reduce waste. Product stewardship means the producer remains responsible for the product (and the resulting waste) for the duration of the product’s life. Currently, project stewardship is voluntary under the Waste Minimisation Act, although the ministry notes that regulated schemes are common overseas. The ministry is supporting and consulting with industry on making future plans to increase product stewardship.

Similarly, the ministry notes that it has been given instructions to work with industry to create more informative labelling on products. This will help consumers make more informed decisions about what to do with their waste. Although not directly part of the product stewardship project, this work is complementary.

We considered several petitions relating to these issues in 2018/19. One that we are currently considering is the petition of Niamh Peren—Introduce new & simple labels on food & drink packaging indicating recyclability—which was referred by the House at the end of 2019. We will be interested to see the results of the ministry’s work in this area, and how it might take into account these petitioners’ concerns.

Future management of landfills The unfortunate example of the Fox River landfill, where in March 2019 135,000kg of rubbish was exposed after a storm, drove home to the ministry how significant landfill management will be in the future. There are several other sites of concern in New Zealand, and the ministry has worked with local government to identify them. It told us that recognising the sites was the first step. The next stage, although not currently on its work plan, will be working out how to manage them. The ministry is taking the opportunity to better understand landfills by collecting more data about waste, and surveying landfills.

We asked whether the ministry sees a need for any new landfills in New Zealand, noting that concerns have been expressed about a proposed site in Auckland’s Dome Valley. The ministry did not wish to speculate on this, saying its priority is to minimise the amount of waste produced in New Zealand. It is beginning work with the Ministry of Business, Innovation and Employment to develop waste-to-energy programmes, to make the most of the waste that is still produced.

Kerbside waste management We noted the important role that local government plays in managing waste systems and infrastructure. In particular, we were interested in Auckland Council’s recent announcement of kerbside compost collections beginning in 2021. The ministry said that, although it works with local government in planning kerbside collection systems, it has concerns about how fragmented this is throughout the country.

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The ministry told us that standardising kerbside collection practices throughout the country is a priority for 2019/20 through the National Resource Recovery Programme. This should give people more confidence in knowing the best approach to waste disposal and recycling.

Atmosphere and climate change research We asked when the latest data about New Zealand’s greenhouse gas emissions would be released. The ministry’s biannual report was released in December 2019, and gives predictions of greenhouse gas emissions. The more comprehensive Greenhouse Gas Inventory data, which is produced to an international standard, would be released in April 2020.

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Appendix

Committee procedure We met on 12 December 2019 and 19 March 2020 to consider the annual review of the Ministry for the Environment. We heard evidence from the ministry and received advice from the Office of the Auditor-General.

Committee members Dr Duncan Webb (Chairperson) Dr Liz Craig Hon Jacqui Dean Hon Nathan Guy Jenny Marcroft Erica Stanford Hon Scott Simpson Chlöe Swarbrick Angie Warren-Clark

Office of the Auditor-General (Briefing on the Ministry for the Environment).

Ministry for the Environment (Responses to written questions).

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Report of the Environment Committee

March 2020

Contents Recommendation ...... 2 About Predator Free 2050 Limited ...... 2 Financial results and 2018/19 audit ...... 2 Current expenses and future funding ...... 2 Control programmes and projects ...... 3 Appendix ...... 5

Dr Duncan Webb Chairperson

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Predator Free 2050 Limited

Recommendation The Environment Committee has conducted the annual review of Predator Free 2050 Limited for 2018/19, and recommends that the House take note of its report.

About Predator Free 2050 Limited Predator Free 2050 Limited (PF2050) is a Crown-owned company formed on 30 November 2016, under Schedule 4A of the Public Finance Act. Its purpose is to contribute to the Government’s goal of eradicating possums, stoats, and rats by 2050. The primary aims of PF2050 are:

• to invest in landscape-scale predator control and eradication • to raise funds for co-investment • to invest in breakthrough scientific research. We discussed PF2050’s 2018/19 annual report and financial audit with its chair, Jane Taylor, and chief executive, Ed Chignell.

Financial results and 2018/19 audit PF2050 was funded with a multi-year appropriation of $23.3 million under Vote Conservation for the period 2016/17 to 2019/20, and $5.9 million per year for the period 2020/21 to 2022/23. As at 30 June 2019, it had drawn down all but $9.4 million of the original $23.3 million.

On 19 February 2019 the Minister of Conservation and Minister for Regional Economic Development announced that an additional $19.5 million would be made available to PF2050 through the Provincial Growth Fund (PGF), to expand predator control in regional New Zealand.

This was the second complete financial year for PF2050, and we are pleased the Auditor- General’s audit raised no significant matters. The Auditor-General graded PF2050’s management control environment, financial information and supporting systems and controls, and performance information and supporting systems and controls as “good”.

Current expenses and future funding Salaries and travel expenses We questioned the remuneration paid by the organisation given its relatively small size, with only six full-time staff and one part-time. The chair acknowledged that the top salary was generous, but said it had been set based on independent expert advice. We were told that the salary was set according to the scope of the role and its responsibilities, rather than solely reflecting the number of staff managed. We were also told that other salaries reflect 2

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We asked about the travel expenses, which totalled $95,877 for 2018/19, of which over a third was spent by the chief executive. PF2050 explained that frequently travelling the country for work on its projects was the nature of the chief executive’s job.

Ongoing funding commitment from the Crown We asked about the Crown’s commitment to fund PF2050 after 2023. We were told that PF2050 has allocated its funding for 2020 to 2023 to ensure that most of its current projects will be finished by the end of that period.

PF2050 hopes to secure more funding for its large landscape projects because many are time-dependent, and around 30 projects will be completed over the next 10 years. PF2050 believes it would need an annual budget of around $25 million to complete those projects. However, it is confident that the importance of its work is recognised by the Government, and that it will be funded appropriately. PF2050 emphasised that during the 2020 to 2023 period it can only mobilise projects within the range of its $5.9 million baseline.

Control programmes and projects Genomic resources about ship rats in New Zealand We were interested to learn more about research on the genome of rat populations in New Zealand, and what the research will mean for rodent control.

The research, carried out by Otago University alongside the Commonwealth Scientific and Industrial Research Organisation, has recently passed all final quality checks and is one of the world’s first genome maps for ship rats. We were pleased to hear that the work has been ranked among the best research on mammal genomes in the world, and will soon be released publicly on an international database.

The genome research will help determine more effective ways to target rats by identifying genetic weaknesses, and the geographic dispersion of rat populations across New Zealand. The research will underpin the development of new tools to eradicate pests, like rat-specific toxins, and how to strategically use traps and bait stations to better defend against reinvasion.

Gene-editing technologies We asked PF2050 whether gene-editing technologies pose significant risks. We heard that there are data gaps and unknown risks, and work is needed to ensure gene-editing technologies are safe to use. PF2050 also said its inability to research and use gene-editing technologies is not constraining its work toward the 2050 predator free target.

Monoculture forest plantations We are aware of concerns that monoculture forest plantations, particularly of pinus radiata (pine trees), could serve as breeding grounds for pests. We asked whether those plantations could undermine pest control efforts. PF2050 explained that potential pest habitats like monoculture forests would be a problem if it used more conventional pest suppression

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2018/19 ANNUAL REVIEW OF PREDATOR FREE 2050 LIMITED methods that merely reduce the pest population. However, its method is “hard and fast” pest eradication so there are no pests left, and then it defends the pest-free areas from reinvasion.

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Appendix

Committee procedure We met on 20 February and 19 March 2020 to consider the annual review of Predator Free 2050 Limited. We heard evidence from Predator Free 2050 Limited, and received advice from the Office of the Auditor-General.

Committee members Dr Duncan Webb (Chairperson) Dr Liz Craig Hon Jacqui Dean Hon Nathan Guy Jenny Marcroft Hon Scott Simpson Erica Stanford Chlöe Swarbrick Angie Warren-Clark

Marja Lubeck replaced Chlöe Swarbrick for some of this review.

Office of the Auditor-General (Briefing on Predator Free 2050 Limited).

Predator Free 2050 Limited (Responses to written questions).

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Report of the Foreign Affairs, Defence and Trade Committee

March 2020

Contents Recommendation ...... 2 About the Ministry of Defence ...... 2 About the New Zealand Defence Force ...... 3 Clearing unexploded ordnance from firing ranges ...... 3 Defence capability ...... 5 Defence’s work with other agencies ...... 6 Improving diversity within the NZDF ...... 7 Addressing the gender pay gap at the Ministry of Defence ...... 8 Responding to climate change ...... 8 Cyber defence...... 8 Withdrawal from Camp Taji ...... 9 Support of the NZDF during APEC ...... 9 Appendix ...... 10

Simon O’Connor Chairperson

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Ministry of Defence and New Zealand Defence Force

Recommendation The Foreign Affairs, Defence and Trade Committee has conducted the annual reviews of the Ministry of Defence and the New Zealand Defence Force for 2018/19, and recommends that the House take note of its report.

About the Ministry of Defence The Ministry of Defence is a civilian agency. Its purpose is to provide civilian advice to the Government about defence matters to make New Zealand safe and enhance the security of other nations. To carry out its role, the ministry:

 provides short and long-term advice about New Zealand’s defence interests and challenges  advises the Government on how the New Zealand Defence Force (NZDF) can meet current and possible future challenges  purchases major defence equipment for the NZDF to use  builds and maintains strong defence relationships internationally  provides advice about the NZDF’s performance, and the effectiveness of the overall defence system. Andrew Bridgman is the Secretary of Defence. He replaced Helene Quilter QSO in June 2019.

Financial performance In 2018/19, the ministry’s total revenue was $21.2 million. Its total expenses were $20.8 million, resulting in a surplus of $387,000. This compares with a surplus of $138,000 in 2017/18.

The Auditor-General assessed the ministry’s management control environment, and its financial information and supporting systems and controls as “very good”, with no improvements recommended. These results were unchanged from 2017/18.

The Auditor-General assessed the ministry’s performance information and supporting systems and controls as “good”. He recommended that the ministry improve the two new performance measures that it developed for the Defence Capabilities appropriation.

We were pleased to note that the ministry has implemented the recommendation from the 2017/18 audit. This related to documenting the systems and processes it uses to report on the new performance measures for the Defence Equipment appropriation.

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About the New Zealand Defence Force The NZDF is the only provider of armed forces to the New Zealand Government. The Chief of Defence Force is the Government’s main adviser on military policy. Under the Defence Act 1990, New Zealand’s armed forces are raised and maintained to:

 defend New Zealand and protect its interests  contribute forces under collective treaties, agreements, or arrangements  contribute forces to the United Nations (UN) or other organisations or states for operations in accordance with the principles of the Charter of the UN. The Act also allows the armed forces to be made available to perform public services.

The NZDF seeks to contribute to three outcomes. They are that New Zealand’s national interests are secured, international order is supported, and veterans’ service is honoured.

Air Marshal Kevin Short is the Chief of Defence Force. We join him in extending our deepest sympathy to the families of two personnel who passed away during training exercises in 2019.

We passed on our appreciation to the people of the armed forces and the ministry for their work serving and supporting New Zealand.

Financial performance In 2018/19, the NZDF’s total revenue was $2.786 billion. Its total expenses were $2.750 billion, resulting in a surplus of $35.9 million. This compares with revenue of $2.666 billion and a surplus of $63 million in 2017/18.

The Auditor-General assessed the NZDF’s management control environment, financial information and supporting systems and controls, and performance information and supporting systems and controls as “good”. These all remain unchanged from the previous year. We note that while some recommendations from 2017/18 have been implemented, others remain unresolved. We hope to see these addressed by the next audit.

Clearing unexploded ordnance from firing ranges The New Zealand Provincial Reconstruction Team operated five live firing ranges in Bamiyan, Afghanistan between 2003 and 2013. When New Zealand left, it cleared the ranges to the standard that was required at that time. That standard had been agreed by the Afghan Government, along with NATO, which was running the operation. We heard that the NZDF was unsure whether this was based on a humanitarian standard or a defence standard.

Change in standard New Zealand was notified soon after it left Afghanistan that the standard was changing, but it had not yet been written. The NZDF told us that it made a commitment in 2014 to participate in clearing the ranges when the new standard was known. It has been liaising with the Afghan Directorate of Mine Action Coordination (DMAC). However, the clearance has not yet started, for several reasons.

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First, the new standard had to be agreed. The International Mine Action Service created the standard, in conjunction with the Mine Action Coordination Centre of Afghanistan.

The NZDF has also been working with the Afghan Government to agree the size of the range to be cleared. We heard that initial estimates were for an area five times the size of the range that New Zealand operated in. However, New Zealand has been able to negotiate a smaller area—of 38 square kilometres over five ranges—based on the weapons and systems it used.

The Chief of Defence Force explained that the NZDF does not have the capability to clear such a large area itself. Therefore, it has also needed to contract a company to complete the work.

Process for clearing the ranges In December 2018, DMAC completed a technical survey of the areas to be cleared. The NZDF signed an agreement with DMAC in December 2019 to identify an accredited demining organisation to complete the clearance work. The NZDF said that the objective of the project is to remediate the land to the best possible clearance so that the general population can use it again. A contract to begin that work was due to be signed in early 2020. The work is expected to cost about US$7 million (about NZ$10 million).

The Chief of Defence Force expects the work to begin in about April 2020. It cannot start before then because the area is covered by snow and ice. The NZDF told us that DMAC’s most recent non-technical survey indicated that 52 weeks of work will be needed. However, climatic conditions mean the clearance is likely to take two calendar years. The NZDF said that it hopes to find a creative solution so the work can be done in less time.

We asked whether any New Zealanders would be involved—either for liaison or in the actual clearance. The NZDF said it does not have any personnel in Afghanistan who could be employed as a liaison officer at this time. However, it is considering whether to use one as the project progresses.

Obligations under Protocol V We asked whether New Zealand has a legal liability to clear the ranges to the new standard. The NZDF considers that clearing the ranges to the new standard is more a moral and reputational obligation than a legal one. The NZDF has interpreted that the level of legal risk attached to not clearing the ranges is low.

Identifying the owners of the ordnance We note that New Zealand was not the only country using the ranges in Bamiyan at the time. We were interested to learn that the NZDF destroyed 10 tonnes of Russian munitions in Bamiyan over a seven-month period in 2006 and 2007. Given recent allegations that the Russian foreign ministry made against the NZDF, we encourage the NZDF to record the country that is the likely owner of the ordnance. The Chief of Defence Force told us that it would do so, where the country can be identified.

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Clearing ranges in other parts of the world We asked whether New Zealand may need to return to any other areas where land was only remediated to the standard of the time. The NZDF explained that it has remediated land in several other areas—in the Solomon Islands, which is ongoing, and historically in Cambodia under a UN mandate. However, Bamiyan is the only area that the NZDF is aware of regarding its own ordnance.

Defence capability Defence regeneration and investment An important priority for the ministry is the implementation of the Defence Capability Plan, which was launched in June 2019. The plan outlines the main investments in defence equipment—known as capabilities—that are required until 2030. It also signals investments until 2035.

Opposition members of the committee said they were generally very happy to see an ongoing commitment from the Government to the previous Government’s plan for equipment purchases. However, they expressed concern that defence property is starting to suffer as investment in its regeneration lags.

The Chief of Defence Force explained that the NZDF does not have the capability for large construction projects. Therefore, it needs to agree an alliance with industry partners, which will allow it to start a “large capital spend”. The Chief of Defence Force expects the alliance to be operating by early 2020.

The NZDF told us that it is also undertaking a first principles review to analyse the requirements of the Defence Estate until 2070. The Chief of Defence Force said that the review forms part of the process for making decisions about investment. For example, where a base, such as Devonport, may potentially be moved, the NZDF needs to balance how much it spends there. However, we heard that the review does not prevent expenditure in many cases.

Available capability of the armed forces The Chief of Defence Force updated us about the available capabilities of the air force, navy, and army. As at 12 December 2019, the air force had four serviceable C–130 aircraft, along with one Boeing 757 and one P–3. We were told that the army has enough vehicles for whatever missions it needs to undertake. Also, problems with serviceability of the old Unimogs have been addressed through a replacement programme.

We heard that several navy ships are currently unavailable. Two frigates (Te Kaha and Te Mana) are being upgraded and Manawanui is undergoing fit-out of necessary military equipment. Two inshore patrol vessels (IPVs) have also been removed from service and will be sold.

Delay in the upgrade of Te Kaha The Secretary of Defence told us that Te Mana is expected to return to New Zealand from its refurbishment in mid-2021. However, Te Kaha’s return has been delayed by four months, to

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“later 2020”. We heard that the ministry has a senior team working closely with Lockheed Martin in Canada to mitigate any further delays. The ministry has also engaged Lockheed Martin US. The Secretary of Defence said that the ministry is “kind of concerned”, but is “not panicking”.

The ministry told us that it entered into a fixed-price contract with Lockheed Martin for the installation phase of the two frigate upgrades. It has not had to spend any more than originally planned. We heard that the contract did not include any penalties for delays. However, it is structured so that payments are only made when certain milestones have been completed, so there is a cash flow penalty to Lockheed Martin.

The ministry said it is confident that Lockheed Martin is doing its best to address an upgrade that is much more complex than foreseen. The complexities include areas being more difficult to access than expected, and some work being unable to be done concurrently.

Some of us expressed concern about the ethics of the ministry and the NZDF continuing to give taxpayer money to a company that produces nuclear weapons. Lockheed Martin profits from New Zealand, despite New Zealand and its Government having a nuclear-free stance. When asked about this, the Secretary of Defence told us he was not aware of this consideration forming part of the Government’s decision-making process.

Defence’s work with other agencies We recognised the significance and importance of the NZDF’s work in responding to emergencies, such as the Whakaari / White Island tragedy and the measles outbreak in Samoa. We asked whether there is a joint work programme with other government agencies to support the work of the defence agencies.

The Secretary of Defence cited overseas deployment as an example of the ministry, the NZDF, and the Ministry of Foreign Affairs and Trade (MFAT) working together. When requests or opportunities for deployment of personnel and equipment are considered, each agency takes a role, focusing on several areas. They are whether the deployment meets New Zealand’s interests from the perspectives of national, security, and as an international partner or player interested in the international rules-based order.

The NZDF told us that its funding is based on being ready to support military operations. This means that a certain number of personnel need to be ready for deployment in a security event if required. We heard that this gives the NZDF a contingency to support other government agencies.

The NZDF has agreements with a number of agencies about what it can be expected to provide. It also has a National Maritime Coordination Centre that coordinates support across different agencies. Examples of this work include patrolling for the Ministry for Primary Industries, providing air transport for Antarctica New Zealand, and search and rescue.

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Improving diversity within the NZDF Promoting women within the NZDF As at December 2019, women comprised about 18 percent of uniformed staff in the NZDF. Across the whole organisation, the total was about 24 percent. The Chief of Defence Force recognises that the organisation has a “long way to go”. It has set targets to support change.

We acknowledged the recent promotion of Mel Ross to the position of Deputy Chief of Navy and congratulated her for being the first woman to achieve the rank of commodore.

We asked whether the NZDF has a pathway for women to move to senior ranks. The Chief of Defence Force said that the NZDF cannot wait for the roles to filter down. He said it needs to act to ensure that a pathway exists for women to move to senior ranks. He also said that the biggest problem is retaining staff, rather than recruitment. For example, a number of women who have chosen to leave the organisation were at the rank of colonel.

The Chief People Officer highlighted examples of work to encourage women within the organisation. They include aiming to eliminate bias by having up to 30 percent of its career decision-making boards made up of women and a legal representative. The NZDF also has an active women’s network, and is working to ensure that its pay policy does not discriminate against women.

Improving working conditions within the NZDF We were told that the NZDF introduced flexible working policies as a result of feedback from exit interviews. It said that these are demonstrating some good early results. The NZDF recognises that flexible working is not appropriate for some of its jobs or at certain career stages. However, it considers that it needs to be more flexible at other times. The Chief People Officer added that the organisation is trying to develop a culture where flexible working becomes normalised. She said that encouraging men to also work flexibly is one way of doing this.

The NZDF told us that it has programmes that teach about respectful relationships and unacceptable behaviours. They are part of the training for new recruits and all serving personnel. The Chief of Defence Force acknowledged that a change in culture will take a while, and it still has further work to do.

We heard that the NZDF has several channels for people to report negative experiences. The NZDF has chaplaincy and health services, and social workers are available on its camps and bases. It also has a position known as a sexual assault prevention response adviser. The NZDF described its reporting as a survivor-centric approach. Individuals can choose the most appropriate channel for them, and can decide whether reports of incidents are disclosed or undisclosed.

Commitment to LGBT+ rights The Chief of Defence Force said that attracting and retaining diverse people within the organisation is extremely important. He highlighted the Rainbow Tick that the NZDF had recently gained as an indication of how the organisation is changing.

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We acknowledged the 25th anniversary of LGBT+ personnel being welcomed to serve openly in the NZDF. We also commended the NZDF for beginning to tell challenging stories about its history.

Addressing the gender pay gap at the Ministry of Defence In 2016 the ministry’s gender pay gap was 46 percent. This had reduced to 33 percent by 2018/19. The ministry explained that the gap stems from where people are in the organisation. For example, men hold a lot of senior roles in the capability and policy areas.

The number of female managers has increased from 19 percent in June 2013 to 36 percent as at December 2019. However, the ministry acknowledged that it still has work to do. The Secretary of Defence told us that the ministry needs to use recruitment to increase the number of women in senior roles.

Responding to climate change We welcome the NZDF’s renewed focus on addressing climate change, particularly its emphasis on the Pacific. The Chief of Defence Force highlighted how climate change will change some of its work and cause stress to various nations, including in the South Pacific. For example, fish stocks and their migration and feeding patterns will change, altering the NZDF’s surveillance and monitoring in the region.

The NZDF explained that it will also need different capabilities in the future due to the ferocity and effects of storms. We heard that tropical cyclones in the Pacific Islands are now larger and more vicious, and they recur even before recovery has been completed. The Chief of Defence Force said that the NZDF will need capabilities that enable it to respond more often. We were pleased to hear that the NZDF has built the new capability requirements into the Defence Capability Plan.

Raising atolls in the South China Sea We expressed interest in China’s work to raise atolls above sea level in the South China Sea and convert them into military bases. We asked whether either organisation was aware of any discussions with China about potentially using this technology to help countries that are facing sea level rise. Neither chief executive was aware of any discussions.

Cyber defence The Chief of Defence Force explained that the NZDF has several programmes targeted at protecting its defence systems. He expects these programmes will shape the way it is structured and operates in the future.

The information domain project aims to ensure that the NZDF has systems available to support the large amounts of data that will be generated through technology, such as the network-enabled army programme.1

1 Network-enabled army will extend the digitisation of the army’s work across front-line units. 8

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Another project is investigating cyber defence. It aims to protect NZDF’s systems to ensure that they cannot be disrupted by an adversary and do not cause problems for any coalition partners.

Withdrawal from Camp Taji During the past year the ministry provided advice to the Government about a range of deployments. This included the decision to withdraw NZDF personnel from Camp Taji in Iraq by June 2020 due to the completion of their mission.

The Chief of Defence Force explained that the NZDF was originally training frontline troops, but it has now moved to training the trainers. As a result, it has been able to slowly reduce the number of people it has there, from 75 to 45 in December 2019. It expects to withdraw all of its people by mid-2020. The Chief of Defence Force said that the withdrawal aligns with what the Australians and the coalition are expecting.

Support of the NZDF during APEC The NZDF is a support agency for the Asia–Pacific Economic Cooperation forum, primarily supporting the New Zealand Police. The Chief of Defence Force told us that the NZDF has an early planning agreement about the resources that are required. He said that it can meet all of the requirements at this stage. However, the Chief of Defence Force added that the NZDF will have to consider its commitment and funding if the demand on its resources changes.

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Appendix

Committee procedure We met on 12 December 2019 and 5 March 2020 to consider the annual reviews of the Ministry of Defence and the New Zealand Defence Force. We heard evidence from both organisations and received advice from the Office of the Auditor-General.

Committee members Simon O’Connor (Chairperson) Hon Gerry Brownlee Paulo Garcia Golriz Ghahraman Hon Todd McClay Priyanca Radhakrishnan Hon Aupito William Sio Louisa Wall

Office of the Auditor-General (Briefing on the Ministry of Defence).

Office of the Auditor-General (Briefing on the New Zealand Defence Force).

Ministry of Defence (Responses to written questions).

New Zealand Defence Force (Responses to written questions).

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2018/19 Annual review of the Ministry of Foreign Affairs and Trade

Report of the Foreign Affairs, Defence and

Trade Committee

March 2020

Contents Recommendation ...... 2 About the Ministry of Foreign Affairs and Trade ...... 2 Financial performance ...... 2 Update on human rights issues around the world ...... 3 New Zealand’s relationship with China ...... 4 Resettling detainees from Manus Island and Nauru ...... 4 Response to Russian comments about the NZDF ...... 4 Benefits of the CPTPP ...... 5 Free trade agreement with the European Union ...... 5 Managing the effects of Brexit ...... 5 Trade with the United States ...... 6 Charging a fee to export bottled water ...... 6 Addressing certain matters in trade agreements ...... 7 Helping futureproof the Samoan health system ...... 7 Christchurch terror attacks ...... 8 Hosting the APEC forum ...... 9 Funding for additional staff ...... 9 Responses to OIA requests ...... 9 Appendix ...... 11

Simon O’Connor Chairperson

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Ministry of Foreign Affairs and Trade

Recommendation The Foreign Affairs, Defence and Trade Committee has conducted the annual review of the Ministry of Foreign Affairs and Trade for 2018/19, and recommends that the House take note of its report.

About the Ministry of Foreign Affairs and Trade The Ministry of Foreign Affairs and Trade is responsible for promoting and protecting New Zealand’s interests overseas. By delivering its services, the ministry aims to make New Zealanders safer and more prosperous.

The ministry works for Ministers in four portfolio areas: Foreign Affairs, Disarmament and Arms Control, Trade and Export Growth, and Climate Change. Its functions include:

 providing services for other New Zealand agencies overseas, policy advice and representation for international institutions  pursuing international legal action and dispute settlements  negotiating international agreements and rules and improved market access for exporters  managing New Zealand’s Official Development Assistance programme  administering diplomatic privileges and immunities and consular services. The ministry has 60 posts in 53 countries, with 115 accreditations to other countries and 73 honorary consuls.

Chris Seed is the ministry’s Secretary of Foreign Affairs and Trade and Chief Executive. He began the role in February 2019, replacing Dr Brook Barrington.

The Secretary acknowledged the recent passing of Tessa Temata, the first Pasifika woman to be appointed to the role of New Zealand’s High Commissioner to the Cook Islands.

Financial performance In 2018/19, the ministry’s total revenue was $443 million. Its total expenses were $446.2 million, resulting in a deficit of $3.266 million. This compares with total revenue of $401.8 million and total expenses of $387.4 million in 2017/18.1

The Auditor-General assessed the ministry’s management control environment, financial information and supporting systems and controls, and performance information and supporting systems and controls as “good”. These ratings were all unchanged from 2017/18.

1 The surplus in 2017/18 was partly attributed to lower expenses than forecast because of delays across a range of initiatives. 2

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Update on human rights issues around the world We sought an update on a number of human rights issues, detailed below.

Treatment of the Uighur people We asked about the official position of New Zealand in relation to China’s treatment of the Uighur ethnic minority group. In particular, we are interested in what message has been conveyed to China. The Secretary said that New Zealand has engaged with the Chinese authorities about the issues in Xinjiang on numerous occasions. The Prime Minister raised it during her visit to China in April 2019 and has publicly stated that she voiced her concerns. The Minister of Foreign Affairs and the ministry have also broached the matter in their respective engagements with the Chinese Government and Chinese foreign ministry.

New Zealand has also made representations with other countries at the United Nations (UN) Human Rights Council and the UN General Assembly.

Engaging with Indonesia on West Papua We note that Indonesia has invited the UN High Commissioner for Human Rights to visit West Papua. The Secretary said that New Zealand advocated the visit, as did other Pacific Island Forum countries, and continues to do so. However, we heard that it would be considered unusual for the Commissioner, or her office, to be accompanied by representatives of national governments.

In addition to supporting a visit, we were told that the New Zealand Government regularly discusses West Papua with the Indonesian Government. The Minister of Foreign Affairs also discusses the situation regularly with other partners in the Pacific.

New Zealand’s position on Kashmir The Secretary explained that New Zealand does not take a position on the fundamental issue that is central to the dispute between Pakistan and India over Kashmir. Instead, it tells both sides that the issues need to be dealt with according to international law and UN resolutions, and by using diplomacy. We were told that the Prime Minister raised concerns about recent developments in her meetings with the Prime Ministers of India and Pakistan in September 2019.

Importing phosphates from Western Sahara We discussed whether New Zealand is the only country to continue to import phosphate from Western Sahara. The ministry explained that it regularly engages with a range of parties about Western Sahara. This includes the Polisario Front, the Moroccan Government, the UN system, and the New Zealand companies that are involved there. However, it said that no mechanism exists for New Zealand to ban New Zealand companies from importing the phosphate. Some of us disagreed with this statement, observing that other countries have passed legislation or introduced other frameworks to stop companies from trading in phosphate.

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New Zealand’s relationship with China The Secretary described New Zealand’s relationship with Beijing as “mature”. He said that although New Zealand relies heavily on a strong economic relationship, it can also talk about sensitive issues. This includes New Zealand’s expectations in Hong Kong.

Some of us have heard that China was not “particularly happy” about the Government’s Defence Capability Plan. We asked whether China had recently called in the ministry’s representative for talks about any issues. We were told that neither country has called the other in. Both countries have active embassies, with views exchanged weekly about a range of international matters.

Resettling detainees from Manus Island and Nauru The Secretary explained that New Zealand’s offer to Australia to resettle up to 150 refugees each year from Manus Island and Nauru remains open. We heard that the offer has been regularly raised at prime ministerial and foreign minister engagements since it was made in 2013. The Secretary said that Australia had always been clear that it welcomed the offer but did not intend to access it at that time. He added that New Zealand has said it would be ready to discuss how the offer would be implemented if Australia chose to accept it.

We were told that the ministry has emphasised that any resettlement would be subject to a person satisfying New Zealand’s security and medical assessments. They would also have to be genuine refugees and fit into New Zealand’s refugee intake procedure.

Response to Russian comments about the NZDF We note the Russian foreign ministry’s recent allegations about the New Zealand Defence Force (NZDF). It accused the NZDF of not clearing a firing range appropriately in Bamiyan, Afghanistan, resulting in the deaths of seven children. However, we have heard that the NZDF cleared 10 tonnes of Russian ordnance from Bamiyan in 2006 and 2007.2 We asked what discussions the ministry has had with the Russian Embassy about the appropriateness of its comments.

The Secretary told us that that the ministry made a deliberate decision that the comments were not worthy of a response. This was because of Russia’s record for leaving ordnance, New Zealand’s investments in Bamiyan, and the effort the NZDF has made to clear the range.

We understand that the cost to clear five ranges is estimated at US$7 million. The ministry said that the Minister of Foreign Affairs has not instructed it to engage with the Russians about contributing to some of the costs.

2 We discuss this matter in more detail in our report on the 2018/19 Annual review of the Ministry of Defence and the New Zealand Defence Force.

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Benefits of the CPTPP In December 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) came into force. This offered New Zealand new market access to Canada, Mexico, Peru, and Japan.

On day one of the agreement a number of tariffs were removed, giving New Zealand the same access as some of its competitors. We were pleased to hear that the ministry has been able to quantify some of these benefits to exporters. They include an immediate saving of $26 million to the kiwifruit industry and a value of $50,600 annually to each of the 30 buttercup squash growers that export to Japan.

We are interested in whether any benefits the ministry was anticipating had not eventuated. We heard that the ministry was actually surprised at how quickly the market for frozen beef exports to Japan had recovered from the effects of the Australia–Japan free trade agreement. In the first year of that agreement the value of exports that New Zealand lost was $70 million. In the year that the CPTPP came into force, New Zealand’s exports increased by nearly $30 million. The ministry said it was also surprised at how significant the removal of tariffs was to the kiwifruit industry.

Free trade agreement with the European Union In 2018/19, the ministry held the first four rounds of negotiations for a free trade agreement with the European Union (EU). The ministry told us that three elements complicate the situation for New Zealand:

 The negotiation that is under way with the EU currently includes the United Kingdom.  If the United Kingdom leaves the EU, New Zealand will need to have a preferential agreement with the United Kingdom as soon as it is in a position to negotiate one.  The EU owes New Zealand a series of tariff rate quotas, which were negotiated in 1995. An agreement with the United Kingdom and EU on preserving New Zealand’s access to markets under these quotas was not reached in 2018/19.

Managing the effects of Brexit We held our hearing on 12 December 2019, prior to the EU withdrawal agreement being signed.

We were pleased to hear that the ministry is confident that New Zealand is in a very good position to manage the immediate effects of Brexit. In the past year, it has focused on ensuring that the regulatory framework can facilitate trade for New Zealand’s exporters into the United Kingdom. The ministry has negotiated a range of agreements with the United Kingdom across all parts of its trade. These will ensure that the flow of trade can continue in the immediate term.

We asked whether the ministry anticipates any disruptions for exporters into the EU while agreement is reached on apportioning any of the tariff rate quota to the United Kingdom. The ministry considers that New Zealand exporters would face difficulties at the border in the

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The ministry said that it expects some disruptions if the EU became the “27 plus one”. These would be disruptions that everyone would face because there would not be enough “physical bodies” at the border to manage the system.

The ministry has worked with several other agencies to provide a dedicated website that provides advice and assurances to exporters.4

Trade with the United States The ministry said it has continued to discuss the objective of strengthening New Zealand’s trade and economic relationship with the United States. The ministry believes that it is continuing to “make the case”, but does not expect an announcement “tomorrow”.

The ministry told us that E1 and E2 visas were consistently the top issue raised by New Zealand exporters and investors operating in the United States.5 Under the KIWI Act,6 New Zealanders can now apply for these visas. The ministry described the passing of the legislation as very significant.

Some of us have heard from people who have benefited from the visa. We suggested that the ministry should attempt to quantify its value to the New Zealand economy.

Charging a fee to export bottled water The ministry told us that the Ministry for the Environment is leading work on a proposed charge for exported bottled water. The Ministry of Foreign Affairs and Trade is closely involved in ensuring that any charge complies with New Zealand’s international obligations.

We proposed a scenario where exported water that is bottled in New Zealand would require a New Zealand-sanctioned trademark on the product. The exporter would be charged a fee for using this trademark. We asked whether this would breach trade rules.

The ministry indicated that it would need legal advice to determine whether trade rules would be breached. This is because the scenario deals with domestic regulation and how it intersects with trade agreements. The ministry emphasised that any trade needs to be non- discriminatory—that is, a foreign exporter cannot be asked to do something different than a domestic exporter.

3 The withdrawal agreement, which took effect on 1 February 2020, provides for a transition period until 31 December 2020. 4 The other agencies are New Zealand Trade and Enterprise, the Ministry for Primary Industries, and the Ministry of Business, Innovation and Employment. 5 E1 and E2 visas allow qualifying nationals to enter the United States multiple times over two years without having to apply for a new visa each time. 6 The Knowledgeable Innovators and Worthy Investors (KIWI) Act was passed by the United States Congress in 2018. 6

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Addressing certain matters in trade agreements Opportunities for indigenous communities We are interested in maximising opportunities for indigenous communities in trade agreements, noting the recent statement of regret from the British High Commissioner.7 The ministry explained that it requests a chapter on trade and indigenous cooperation when it negotiates trade agreements. This is based on New Zealand’s agreement with Chinese Taipei.

The ministry told us it has had mixed success in negotiations. It has successfully secured the chapter in the Chinese Taipei agreement and is negotiating with the Pacific Alliance to include one. While the ministry has not been successful with the EU, it continues to pursue the matter. The ministry said it would also be interested in talking with the United Kingdom about a chapter.

Visa opportunities for spouses or partners We are interested in how trade agreements can be used to advance human rights issues. We note that New Zealand’s trade agreements provide visa opportunities, but these do not extend to a person’s spouse or partner. We asked whether the ministry is considering addressing this in trade agreements, particularly in jurisdictions that may not recognise same-sex partners.

The ministry told us that it tries to get visas for spouses or partners when it negotiates agreements for staff who are employed as part of the New Zealand Government system. It is successful some of the time. However, the ministry said it will keep raising the matter because it is important to its staff.

Environmental protection clause in the EU free trade agreement We understand that negotiating an environmental protection clause in the EU free trade agreement has been difficult, and we sought an update. The ministry highlighted several areas that have been challenging. They are cooperation in relation to multilateral environmental agreements, enforcing chapters of the agreement, and the reform of fossil fuel subsidies.

The ministry told us that it would also like the EU to closely consider the agreement on climate change, trade, and sustainability.8 We heard that the challenge is that not all EU member states are interested.

Helping futureproof the Samoan health system We discussed several overlapping areas that are related to the commitment to partnership, which is an area of focus for the Pacific reset. They included Sustainable Development Goal

7 In October 2019, the British High Commissioner expressed regret for the deaths of nine Māori killed during the first encounters with the crew of Captain James Cook’s Endeavour. The statement was made on behalf of the British Government. 8 New Zealand, Costa Rica, Fiji, Iceland, and Norway proposed this agreement in September 2019.

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17, for which the ministry is responsible,9 the World Bank’s recent loan to reform the Samoan health system, and official development aid for drug procurement.

In December 2019, the World Bank announced that it will provide US$3.5 million in funding to support the response to the growing measles outbreak in Samoa. This is in addition to a $9.3 million grant that will support the strengthening of Samoa’s health system over the next five years.10 We asked whether the ministry believes it has a role in helping Samoa futureproof its health system to prevent this type of outbreak.

The ministry told us it would like to support the reform of the Samoan healthcare system and believes that significant intervention is required. Therefore, it would like to have meaningful involvement, rather than being asked to do things at the periphery.

Christchurch terror attacks We thanked the ministry for the significant role that it played in New Zealand’s response to the Christchurch terror attacks, both domestically and internationally.

The Minister’s work to build relationships We note that the Minister of Foreign Affairs was involved in work to build and support New Zealand’s relationship with Muslim nations following the terror attack. We heard that it was important that the international community understood how New Zealand and the Government responded to the events.

We heard that the Minister was able to do this directly with a range of countries that happened to be meeting in Jakarta, Indonesia in the week after the attack. The Minister then travelled to the Order of Islamic Cooperation meeting, which had been convened in Turkey to examine the events in New Zealand. The Secretary said the Minister was able to communicate how the nation had dealt with, and continued to deal with, the events.

Christchurch Call The Christchurch Call is a comprehensive action plan that contains commitments for Governments and tech companies. The ministry told us that, with the Prime Minister’s leadership, it has focused on two particular areas.

A number of partners from other countries and tech companies have developed a crisis response protocol. It would help countries and tech companies to respond urgently in future situations. YouTube hosted a workshop in Wellington in December 2019, with support from New Zealand and other countries. We heard that the workshop enabled the processes and approaches in the protocol to be thoroughly investigated.

The ministry has also worked extensively with tech companies on the relaunch of the global internet forum for counterterrorism (GIFCT). Although the organisation existed before the Christchurch attack, we heard that it was unable to play a useful role. This was because it

9 In 2015, UN members adopted the 2030 Agenda for Sustainable Development, which contains 17 sustainable development goals (SDGs). The goal of SDG 17 is to revitalise the global partnership for sustainable development. 10 This equates to Samoan tālā 34 million. 8

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The GIFCT will now have an advisory committee, which will sit alongside the tech companies. The GIFCT will also include government representatives and participation from civil society representatives. We were pleased to hear that the ministry is proud of what it has achieved.

Hosting the APEC forum We heard that the Government has allocated significant resourcing in the last two Budgets toward New Zealand’s hosting of the Asia–Pacific Economic Cooperation (APEC) forum. About $184 million has been assigned to the ministry’s responsibilities for hosting and operations, with an additional $100 million for security. The Secretary considers it has enough funding based on current planning. The Secretary said that the ministry would talk to its Ministers if the money seemed insufficient.

We asked whether the recent fire at the SkyCity Convention Centre had disrupted the ministry’s plans. The ministry told us that it had planned to have the event at the convention centre but no contract had been signed. The ministry has contingencies if the centre is unavailable. The Secretary said he is satisfied that the ministry will be able to deliver an excellent APEC forum.

Funding for additional staff We were pleased to hear that additional funding has enabled the ministry to employ an extra 50 staff. Of these, the ministry now has 14 more people working on Pacific development programmes. Other areas where the ministry has allocated additional resources include:

 supporting New Zealand exporters and the ministry’s new missions in Stockholm, Dublin, and Colombo  managing the health, safety, and welfare obligations that arose from changes to health and safety legislation  designing programmes that will ensure that the fit-outs of the ministry’s buildings can protect its staff and information. We also heard that the ministry has strengthened its diplomatic presence offshore. This is partly due to New Zealand now having a profile in the dark parts of the internet that it did not have before the Christchurch terror attacks.

Responses to OIA requests The Secretary told us that the ministry is responding to about 50 percent more Official Information Act (OIA) requests than it was two years ago. He attributed the volume of OIA requests and written questions to Parliament to the public having an interest in the international situation. The Secretary said he was unsure whether the volume reflected that information is not publicly available.

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Some of us consider that a lot of the requests could be addressed by having more information publicly available. The ministry said it has an ongoing commitment to improve the timeliness of its responses. It also has a programme of work to proactively release information, policy advice, and OIA responses.

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Appendix

Committee procedure We met on 12 December 2019 and 5 March 2020 to consider the annual review of the Ministry of Foreign Affairs and Trade. We heard evidence from the Ministry of Foreign Affairs and Trade and received advice from the Office of the Auditor-General.

Committee members Simon O’Connor (Chairperson) Hon Gerry Brownlee Paulo Garcia Golriz Ghahraman Hon Todd McClay Priyanca Radhakrishnan Hon Aupito William Sio Louisa Wall

Office of the Auditor-General (Briefing on the Ministry of Foreign Affairs and Trade).

Ministry of Foreign Affairs and Trade (Responses to written questions).

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Report of the Foreign Affairs, Defence and Trade Committee

February 2020

Contents Recommendation ...... 2 About the New Zealand Customs Service ...... 2 Financial performance ...... 2 Collecting GST on imported goods...... 3 Recruiting staff to intelligence roles ...... 3 Ensuring the integrity of Customs’ staff ...... 3 Customs’ intelligence about smugglers ...... 4 Identifying the contents of parcels at the mail centre ...... 4 Seizure of illicit drugs ...... 4 Responding to technology failures ...... 5 Addressing the gender pay gap ...... 6 Combating the sexual exploitation of children ...... 6 Supporting exporters leading up to Brexit ...... 7 Preparations for hosting APEC ...... 7 Decline in the public’s confidence ...... 7 Appendix ...... 8

Simon O’Connor Chairperson

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New Zealand Customs Service

Recommendation The Foreign Affairs, Defence and Trade Committee has conducted the annual review of the New Zealand Customs Service for 2018/19, and recommends that the House take note of its report.

About the New Zealand Customs Service The New Zealand Customs Service provides essential border services and infrastructure to protect New Zealand and advance its economy. Its three main functions are to:

 protect New Zealand’s border  promote and facilitate secure and efficient trade and travel to and from New Zealand  collect Crown revenue. In early 2019 Customs adopted a new strategy, Rautaki Mana Ārai, which aspires to eliminate border and revenue risk. The strategy has four areas of priority for Customs: protection, trade, travel, and revenue.

Bill Perry is the Acting Comptroller of Customs while the Comptroller, Christine Stevenson, is seconded to the Department of Corrections.

We thanked Customs for its work in protecting New Zealand’s borders and ensuring that visitors have a good first impression of New Zealand.

Financial performance In 2018/19, Customs’ total revenue was $201.3 million, a decrease from $205.9 million in 2017/18. Its total expenses were $205 million, resulting in a deficit of $3.688 million.1 This compares with a surplus of $10 million in 2017/18.

In 2018/19, Customs collected $15.6 billion in tax revenue—about 18 percent of New Zealand’s core tax revenue. It collected $14.4 billion in 2017/18.

The Auditor-General assessed Customs’ management control environment, and financial information and supporting systems and controls as “very good”, with no recommended improvements. He assessed Customs’ performance information and supporting systems and controls as “good”, with some improvements recommended. These related to setting targets for Customs’ long-term strategic indicators, so readers of its Statement of Intent could better understand how it is performing.

1 In 2018/19, Customs “other revenue” decreased as goods clearance was lower than expected. Personnel costs increased by almost $7 million due to increased passenger volumes. 2

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Collecting GST on imported goods In 2019, the New Zealand Listener reported that the value of some imported photographic equipment was being under-declared. This meant that GST was not being paid on the goods, which disadvantages local retailers. We asked what Customs is doing to prevent incorrect declarations, and whether more people are needed at the mail centre to search parcels.

The Acting Comptroller told us that Customs uses a combination of methods. It creates profiles, which are continually updated, for the countries and suppliers that may be shipping certain goods to New Zealand. Customs uses these to target areas of focus for staff.

The Acting Comptroller highlighted that obtaining more data is important for this targeting work. However, he added that data for the postal stream is poor because it is not exchanged across international borders. The World Customs Organization and the Universal Postal Union are investigating how to improve the situation. However, the Acting Comptroller expects that this is still “a long way off”. In the meantime, Customs works with the Ministry for Primary Industries (MPI) at the mail centre, using X-ray technology to detect items on the mail conveyor belt.

We note that Customs received additional funding several years ago for more staff. While this was primarily targeted at intercepting drugs, it has enabled Customs to move resources around the organisation more flexibly. Customs has also renegotiated a contract to include a flexible work pattern and has introduced a mobile app, Customs Online (COLIN). It enables staff to electronically enter the outcomes of examinations from customs-controlled areas, removing the need to return to their offices.

Recruiting staff to intelligence roles Customs referred to its 2017/18 annual review, where it discussed some difficulties in recruiting people to intelligence and investigations roles. This is challenging because people need to obtain secret or top secret security clearances, which require five years of checkable history in New Zealand. Some university graduates in New Zealand do not have five years of history that can be checked.

To address this, Customs is investigating recruiting staff from Five Eyes partner countries.2 It is also consulting overseas agencies that it has relationships with about any people who might want long-term secondments to New Zealand, or to immigrate.

Ensuring the integrity of Customs’ staff We asked how Customs ensures that its staff at airports and seaports are fit and proper people for their roles. We heard that the recruitment process involves a vetting system, with the level of security heightened or lowered depending on the role. Customs also requires a mandatory update of the security vetting process every five years.

2 Five Eyes is an intelligence alliance comprising Australia, Canada, New Zealand, the United Kingdom, and the United States.

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A person training to become a customs officer at an airport or seaport would be vetted by the Police. Customs would also use its own intelligence systems to verify certain factors, such as ensuring that a person had not been a smuggler.

Customs’ intelligence about smugglers The Acting Comptroller described a smuggler as a person who has tried to bring goods to New Zealand illegally or illicitly. Examples include being caught at an airport with undeclared goods or receiving goods by post, with the contents incorrectly declared.

When an item has been mislabelled, Customs said that the circumstances will dictate whether the sender or recipient is added to the smugglers list. Customs seizes any item that is incorrectly described and completes a process to review the seizure.

A recipient would be added to the smugglers list if Customs established that they had asked the sender to deliberately mislabel the parcel. However, Customs noted that overseas suppliers often incorrectly describe packages to minimise the likelihood of them being stolen from the postal system.

Identifying the contents of parcels at the mail centre New Zealand Post owns the International Mail Centre, where Customs, MPI, and Medsafe also work. The Acting Comptroller described the communication between the organisations as a “continual work in progress”. He said that Customs is working with New Zealand Post and MPI to identify how the groups can collaborate more.

We observed that couriers can track items from origin to delivery. In contrast, it appears that the agencies at the mail centre cannot do so, or do not always communicate with each other. The Acting Comptroller explained that the agencies do not get an “early look” at the contents of an arriving bag of freight. Although a sender declares the contents on a sticker on the parcel, this information is not shared with New Zealand Post. Customs or MPI only sees the declaration when one of its officers checks the parcel after it has been X-rayed and comes off the mail belt.

We asked whether technology is being developed that could identify whether the contents of a parcel match the description on the label. The Acting Comptroller said New Zealand Post is exploring how this could work, but it is still some time away.

Seizure of illicit drugs In 2018/19, Customs reported an increase in the volume of drugs seized at the border and by its overseas partners offshore.3 It seized 1,962.2 kilograms and 220.9 litres of illicit drugs at the border, and intercepted over $520 million worth of drugs offshore.

Customs told us that the increase is because it is doing things differently, rather than because more drugs are being sent. It said that it continually reviews the risk profiles it targets. The Police also help it to identify the areas that Customs should concentrate on.

3 The overseas partners are in the United States, Europe, Australia, and South America. 4

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Benefits of overseas posts Customs has liaison officers located in overseas posts who support its offshore work programme and help develop better relationships with its international partners. It will soon have 13 people posted overseas, compared with five people about five years ago. We heard that, as this number has increased, Customs now relies significantly on the exchange of trends and patterns from overseas.

In Budget 2018, Customs received additional funding for the “Source to shore – disrupting drugs networks offshore” initiative. Customs highlighted two examples of how this funding has enabled it to invest in more resources. Two positions, in Hong Kong and the United States, have now been made permanent. Previously, they were funded from the proceeds of crime funding, which is limited to two years.

We were told that the United States position is based at the National Targeting Center in Washington, DC. The centre has representatives from the Border Five countries,4 which enables data sharing. We were pleased to learn that, in one particular operation, the Customs representative was responsible for removing $400 million of harm from the system.

Statistics about illicit drugs entering New Zealand Customs told us that it does not have statistics about the total amount of illicit drugs and precursors that are entering New Zealand. However, it has statistics about what is seized at the border. Customs said that several work streams are under way to enable it to quantify the risk for New Zealand.

One example is the analysis of wastewater, which has produced three quarterly reports as at December 2019. Customs said that it still too early to assess the percentage of drugs being detected against the amount entering the country.

Responding to technology failures In 2018/19, 14.5 million international passengers travelled through New Zealand’s airports. Nearly 60 percent of these passengers were processed using eGates. We heard that passengers from 13 countries can now use eGates, with Japan and South Korea recently being introduced.

We are interested in whether Customs expects to become more reliant on technology and less reliant on staff. We asked about its ability to respond if technology such as eGates malfunctions. Customs explained that it takes a balanced approach to technology because it cannot be used in some instances. For example, some people, such as the elderly, infirm, or very young, may never be able to use eGates.

In the past two years, Customs has focused on strengthening its infrastructure. However, it acknowledged that systems sometimes fail. When this occurs, Customs has an escalation process which prioritises what needs to be restored first. Changing its contractual conditions has also given Customs more flexibility to redeploy its staff, such as from a cargo facility to an airport, in the event of a technology failure.

4 Australia, Canada, New Zealand, the United Kingdom, and the United States.

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Addressing the gender pay gap We recalled that we have previously been quite impressed with Customs’ strategy to address its gender pay gap. We asked for an update on this work.

As at December 2019, Customs had about 1,330 staff, of whom nearly 50 percent are women. It acknowledged that data for the gender pay gap is quite volatile and fluctuates as people enter and leave the organisation. For this reason, it needs to be considered over time.

In June 2018, Customs had a pay gap of 14.6 percent. By the end of October 2019, it had decreased to 13.1 percent. Customs believes it is witnessing a downward trend.

Customs believes that it has removed any “like-for-like pay differences”. It explained that these differences are not the cause of its pay gap. Rather, it is the smaller numbers of women in leadership roles and a large number of women in its lowest-paid bands. Customs is now focusing on creating leadership opportunities for women, and skills development.

In the past year, Customs has worked to remove the structural barriers that affect how people are paid. It has amended its parental leave policies and encouraged more flexible working arrangements.

Customs has also made several changes to its recruitment process. They include introducing:

 compulsory training about unconscious bias for anyone on a recruitment panel  a salary comparator tool that shows a hiring manager how a starting salary will affect the gender pay gap for the group, pay band, and organisation  a policy that requires a minimum of 50 percent women on shortlists for roles, with an exemption process for when this is not possible. We heard that Customs expects to have a better idea of the effect of the shortlisting policy at its next annual review. We look forward to receiving an update on progress.

Combating the sexual exploitation of children Budget 2019 provided funding of nearly $10.3 million over the next four years for a new policy initiative, “Combating the Sexual Exploitation of Children Across our Cyber Border”. We were concerned to hear from the Acting Comptroller that the sexual exploitation of children is a “growth industry”.

We heard that the Budget funding has enabled Customs to assign three more investigators. Customs works in a team with the New Zealand Police and the Department of Internal Affairs, with the workload shared among them.

In late 2019, Customs hosted a Border Five meeting, consisting of the leaders of border agencies from the five country partners.5 Objectionable offending was one of the topics discussed. Customs told us that some of New Zealand’s partners are doing more to address

5 The countries are Australia, Canada, New Zealand, the United Kingdom, and the United States. 6

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Supporting exporters leading up to Brexit Customs has been working to support exporters in the lead-up to the United Kingdom’s exit from the European Union. It appointed a Customs Counsellor to Britain, who has been based at New Zealand House in London since February 2019. The counsellor has been working with the Brussels-based counsellor to understand how Brexit will affect border control processes and intelligence targeting.

The Acting Comptroller described this early placement as beneficial to Customs. He said that Customs has been able to form relationships and will have “on-the-ground ability” to solve any problems that arise.

Preparations for hosting APEC New Zealand will be hosting the Asia Pacific Economic Cooperation (APEC) forum from December 2020 to November 2021. The Acting Comptroller acknowledged that this will be a big task. Customs has begun working internally on the leaders’ week and several meetings throughout the year that specifically focus on Customs. It is also discussing staffing arrangements with the Ministry of Foreign Affairs and Trade.

Given that extra work will be involved, we asked whether Customs has been given, or requested, extra funding. Customs told us that it is part of a collaborative bid.

Decline in the public’s confidence In 2018/19, 43.2 percent of the public were confident that Customs protects New Zealand from external threats. This compared with a target of 50 percent, and with a result of 51.5 percent in 2017/18. Customs told us that the timing of the survey contributed to the decline. The survey was conducted soon after two events—the Christchurch mosques attacks and a person who was on alert escaping the country using another person’s passport (this event was across the media at the time). Customs said that its trust and confidence ratings had previously remained “pretty stable” over a number of years.

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Appendix

Committee procedure We met on 5 December 2019 and 13 February 2020 to consider the annual review of the New Zealand Customs Service. We heard evidence from the New Zealand Customs Service and received advice from the Office of the Auditor-General.

Committee members Simon O’Connor (Chairperson) Hon Gerry Brownlee Paulo Garcia Golriz Ghahraman Hon Todd McClay Priyanca Radhakrishnan Hon Aupito William Sio Louisa Wall

Office of the Auditor-General (Briefing on the New Zealand Customs Service).

New Zealand Customs Service (Responses to written questions).

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2018/19 Annual review of the New Zealand Antarctic Institute

Foreign Affairs, Defence and Trade Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Financial performance and audit results ...... 2 Working relationship with the United States ...... 2 Reasons for the current budget deficit ...... 3 Current conditions at Scott Base ...... 4 Outside sponsorship a means of increasing revenue ...... 4 Relationship with the scientific community ...... 5 Appendix ...... 6

Simon O’Connor Chairperson

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New Zealand Antarctic Institute

Recommendation The Foreign Affairs, Defence and Trade Committee has conducted the annual review of the New Zealand Antarctic Institute for 2018/19, and recommends that the House take note of its report.

Introduction Antarctica New Zealand is the trading name of the New Zealand Antarctic Institute, a Crown entity established under the New Zealand Antarctic Institute Act 1996. Its aim is to ensure that Antarctica and the Southern Ocean are valued, protected, and understood.

Antarctica New Zealand is responsible for carrying out New Zealand’s activities in Antarctica and the Southern Ocean. This includes managing Scott Base, which is New Zealand’s Antarctic research station. It is also responsible for enhancing the quality of New Zealand’s scientific research in Antarctica. The institute is based in Christchurch.

Sir Brian Roche is the chairperson of the board and Sarah Williamson is the chief executive.

Financial performance and audit results Antarctica New Zealand receives 99 percent of its funding from the Crown, 85 percent of which comes from Vote Foreign Affairs and Trade. In 2018/19 its total revenue was $25.5 million, higher than its total revenue of $21.7 million the previous year. In 2018/19 Antarctica New Zealand’s total expenses were $26.5 million, resulting in a net deficit of $992,000. This compares with a $301,000 deficit in the 2017/18. We discuss the reasons for the deficit later in our report.

The Auditor-General assessed Antarctica New Zealand’s management control environment and financial information systems and controls as “very good” and had no recommendations for improvement. This is the same as the 2017/18 year. Its performance information and associated systems and controls were assessed as “good”, which was also the rating in 2017/18. The Auditor-General again recommended that Antarctica New Zealand improve the “logic flow” between its outputs, impacts, and outcomes, and its performance measures for service quality. We note that these recommendations were also made in 2016/17.

We consider it important for all organisations to explain to the public the connection between what they do (their outputs) and what they actually seek to achieve (their outcomes). We note this again and expect to see improvements in Antarctica New Zealand’s performance information and associated systems and controls at its next audit.

Working relationship with the United States New Zealand works closely with the United States in Antarctica and we asked about the state of that relationship. Antarctica New Zealand told us that the relationship “continues to

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2018/19 ANNUAL REVIEW OF THE NEW ZEALAND ANTARCTIC INSTITUTE be very strong on the ground”. The US is ahead of New Zealand with the redevelopment of its McMurdo Station. Antarctica New Zealand sees this as a chance to do “some quite active risk-management” around the practical lessons to be learned with its planned redevelopment of Scott Base. Antarctica New Zealand said it works quite closely with the US in regard to joint operations and logistics. For example, we heard that Antarctica New Zealand is considering partnering with a US cargo ship to help move freight around. Ross Island wind farm

The Ross Island wind farm provides renewable energy for both Scott Base and McMurdo Station. We were told that wind farm technology has advanced in recent years—one new turbine can potentially produce the same amount of power as three current turbines. However, the harshness of Antarctica’s unique environment also presents challenges. Antarctica New Zealand is working very closely with the US to assess feasibility and understand what is required from a new wind farm. The US uses a lot of the renewable wind farm energy, and Antarctica New Zealand is working with the US to ensure that any future plans it develops for the wind farm facilitates the development of a shared energy grid.

We were told that originally the wind farm technology was going to be depreciated over a 15 year period, but depreciation has been accelerated by reducing that period to 12 years, which is a reflection of the harshness of the environment.

Reasons for the current budget deficit Antarctica New Zealand had a deficit of just under $1 million in the year under review, and we asked how it planned to address this. It said that it has “a lot of demands” on its budget, which include operating the base and its programme. Antarctica New Zealand said its objective is to have an underlying budget that is as balanced as possible within these demands.

That said, Antarctica New Zealand told us it was “facing quite a few timing differences” in its financial accounts. For example, grants for the new Antarctic Science Platform were issued nearly a year later than expected. We were told that this was because the programme is new and took longer to set up than anticipated. However, this resulted in funds received from the Ministry of Business, Innovation and Employment for these grants being held over.

In addition, Antarctica New Zealand told us it had “some challenges” in relation to the Scott Base redevelopment project. It had anticipated that a portion of the work would be categorised as capital expenditure, and another proportion would be classified as operating expenditure. However, when Antarctica New Zealand verified the types of expenditure incurred some things were classified as operating expenditure but had been funded as capital expenditure. It told us this remained within budget, but was a “mismatch” in terms of the funding and meant these results were “out of kilter”.

Antarctica New Zealand told us that its board knows that it cannot sustain deficits over an extended period of time. It said that the board is “really confident” this is not a position it is going to be in. However, Antarctica New Zealand noted that the financial operating environment in relation to the Scott Base redevelopment is “a bit more volatile” than it would

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2018/19 ANNUAL REVIEW OF THE NEW ZEALAND ANTARCTIC INSTITUTE like. We acknowledge the unique environment and challenges this brings, but we hope to see these deficits reduce in coming years.

Current conditions at Scott Base In May 2019, Antarctica New Zealand prepared a detailed business case that was submitted to Cabinet for the redevelopment of Scott Base. This document identified that most of the buildings at Scott Base—which is a conglomeration of 11 different buildings—are in worse shape than previously thought; the assessment rated 10 of the buildings as being in poor condition. Antarctica New Zealand told us the current base will not last much longer than a few more years, and that base services are at the end of their usable life.

Given this, we asked about the work being done to maintain health and safety at the current base, which we discuss below.

Fire doors project We were told that a project to install fire doors between each of the 12 buildings is complete. This means that a person can be safe at one end of the building if the other end of that building is unsafe. Because of the extreme cold and harsh conditions, the ability to go outside and survive that environment if there is a fire is “relatively minimal”. This project’s completion means that the buildings are better able to keep people alive if there is a fire. Antarctica New Zealand’s goal is to meet whatever standards would need to be met in New Zealand. However, it admitted it sometimes has trouble achieving them because it is impractical in such harsh conditions. We were pleased to hear that Antarctica New Zealand worked with Fire and Emergency New Zealand to ensure its approach was sound and would produce the desired result.

Antarctica New Zealand explained that it faces a “delicate balance”. It needs to do everything possible to ensure the current base is a safe and healthy environment. However, it does not want to overcommit capital to the current base since it has a very short life remaining.

Fire training of new staff We heard that part of the induction training for new staff is an intensive, weeklong fire training course. Antarctica New Zealand said this is roughly the same training that volunteer firefighters receive in New Zealand over a longer period of time. This training allows staff to act as first responders should there be a fire. However, this is somewhat limited and the base would still need to seek assistance from McMurdo Station if the fire was bad enough. It said it is “extremely mindful” of the need to create the safest possible environment within Scott Base.

Outside sponsorship a means of increasing revenue We were told that Antarctica New Zealand was considering seeking outside funding partners as a way to raise revenue. We asked how it expected this would work. Antarctica New Zealand said that it had been asked by the Ministry of Foreign Affairs and Trade (MFAT) to explore the possibility of such sponsorships. We were later informed that the Minister has

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Antarctica New Zealand believes there are opportunities for companies or individuals to assist in this way as the profile and symbolism of Scott Base is high. We asked if this was a result of moral or scientific interest. It noted that it is often a bit of both, as a number of corporations are looking for ways to demonstrate a commitment to the environment and the Southern Ocean; some are also looking to tangibly contribute to finding solutions to the challenges faced by the region. It acknowledged that any kind of sponsorship needs to be done very carefully, and that it needs to be “very credible, very tangible”.

Relationship with the scientific community We asked how the scientific community was feeling in regards to the Scott Base redevelopment. We heard that there had been “full and active engagement” with the science community; it wants to make sure that the new base will be designed and built to manage their current and potential future scientific needs.

Antarctica New Zealand told us that the future operating model is very different from when the base was originally designed. Its presence there is to serve science but the science community outreach programme is always growing; it is now up to 1,500 kilometres and those working down there use the base to restore themselves as well as compile and send back their data.

We asked if there was a single document that sets out what the Government objectives are in Antarctica. We were told that there is one which is reviewed every 10 years. This is due to happen in 2020, and Antarctica New Zealand is working with MFAT to review that. We were told that there is also a strategy document, which is also being reviewed, regarding New Zealand’s diplomatic, scientific, and defence presence in Antarctica. We would like to be updated on these strategy documents as they are being reviewed.

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Appendix

Committee procedure We met on 13 February and 19 March 2020 to consider the annual review of the New Zealand Antarctic Institute. We heard evidence from the New Zealand Antarctic Institute and received advice from the Office of the Auditor-General.

Committee members Simon O’Connor (Chairperson) Hon Gerry Brownlee Paulo Garcia Golriz Ghahraman Hon Todd McClay Priyanca Radhakrishnan Hon Aupito William Sio Louisa Wall

New Zealand Antarctic Institute (Responses to written questions).

Office of the Auditor-General (Briefing on the New Zealand Antarctic Institute).

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2018/19 Annual review of Crown Asset Management Limited 2018/19 Annual review of the Government Superannuation Fund Authority 2018/19 Annual review of the Office of the Controller and Auditor-General 2018/19 Annual review of the Retirement Commissioner

Report of the Finance and Expenditure Committee

February 2020

The Finance and Expenditure Committee has conducted the annual reviews of Crown Asset Management Limited, the Government Superannuation Fund Authority, the Office of the Controller and Auditor-General, and the Retirement Commissioner for 2018/19.

We have no matters to bring to the attention of the House. We recommend that the House take note of this report.

Dr Deborah Russell Chairperson

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2018/19 Annual review of the Department of Internal Affairs

Report of the Governance and Administration Committee

March 2020

Contents Recommendation ...... 2 About the Department of Internal Affairs ...... 2 Financial performance ...... 2 Privacy breaches ...... 3 The department’s work with ethnic communities ...... 3 RealMe verified identity ...... 5 Preserving the nation’s memory ...... 5 Compliance with the Charities Act 2005 ...... 6 Promoting wellbeing as a purpose of local government ...... 7 Integrity of New Zealand passports ...... 7 Appendix ...... 8

Dr Jian Yang Chairperson

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Department of Internal Affairs

Recommendation The Governance and Administration Committee has conducted the annual review of the Department of Internal Affairs for 2018/19, and recommends that the House take note of its report.

About the Department of Internal Affairs The Department of Internal Affairs is a large government department with a wide range of functions. They include:

 providing services and support to people, communities, and government, including national identity services, Archives New Zealand, and the National Library of New Zealand  regulating activities across 13 regulatory systems, including passports and identity services, gambling, censorship, government recordkeeping, charities, and anti-money laundering  promoting the use of digital services and data to enable a more responsive, efficient, and inclusive government  working with ethnic communities to enable them to develop and maintain a positive sense of belonging to New Zealand  administering grant funding schemes and promoting trust and confidence in the charitable sector  supporting public and government inquiries  monitoring the performance of two Crown entities (Fire and Emergency New Zealand and the Office of Film and Literature Classification). Paul James is the chief executive of the department and the Government Chief Digital Officer.

Financial performance In 2018/19, the department’s total revenue was $487.3 million. Its total expenditure was $453.9 million, resulting in a surplus of $33.5 million. This compares with total revenue of $455 million and a surplus of $32.5 million in 2017/18.

The Auditor-General assessed the department’s financial information and supporting controls and systems as “very good”. He assessed the department’s management control environment, and performance information and supporting systems and controls as “good”, with some improvements recommended.

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Privacy breaches The chief executive described privacy breaches as an area of challenge during the year under review. He believes that digital breaches will become more common as more services move online but does not consider that this makes them more acceptable. The chief executive said that the department is working on reducing the likelihood and effect of breaches.

The department has a role of Government Chief Privacy Officer (GCPO), which aims to help improve the performance of the public sector. It does this by providing resources and materials to agencies. The GCPO also works with agencies, which complete annual self- assessments of their processes and capability in relation to privacy. From these assessments, the department identifies areas across the public sector that need to be improved and creates a work programme to address them.

The department’s work with ethnic communities The department explained that it has several areas of focus in its work with ethnic communities. They involve engaging and connecting ethnic communities with government, and determining how the department can work with them to help them achieve their goals.

Improving ethnic diversity on state sector boards The department manages the statutory appointment process for members of a range of boards, trusts, and committees. In 2018/19, it nominated 157 candidates from ethnic communities to 66 state sector boards. Eight of these candidates were appointed (about 5 percent of the nominees). Given this low success rate, we asked whether the department considers that its work to increase cultural and ethnic diversity on boards has been successful.

The chief executive told us that he considers that any diverse appointments to boards are successful. However, he recognises that the department has a lot more work to do. It is working with the Ministry for Women and the Ministry for Pacific Peoples, both of which have well-established systems for board appointments. The department is also talking to ethnic communities about building capability so that people have a better chance of being successfully appointed.

We asked whether the department believes that it might be selecting the wrong candidates, or is not influencing government sectors to appoint diverse candidates. The chief executive considers that it is a mixture of both, describing appointments as a complex process. He believes that the department needs to work with a broad range of potential candidates to find places that are easier to build governance experience and skills.

Ethnic diversity in the department’s work programme Some of us expressed concern that the department’s work programme appears to be aimed at Māori and Pasifika, while excluding Asian and MELAA communities.1 The chief executive told us that he does not believe that this is intentional. Rather, the department has a range of

1 MELAA refers to Middle Eastern, Latin American, and African ethnicities.

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2018/19 ANNUAL REVIEW OF THE DEPARTMENT OF INTERNAL AFFAIRS functions, with different areas of focus depending on the part of the business. Further, he believes that the department is more experienced in responding to the diversity around Māori and Pacific peoples than it is in Asian and MELAA populations.

We asked what plans the department has to ensure that it will be more mature dealing with other ethnic communities. We heard that this depends on the nature of the business. The department has translated RealMe into Chinese to make it easier to access. The Chief Archivist has also been supported to achieve a scholarship from the Leadership Development Centre. His work will investigate how to grow Asian leadership in the public sector.

The State Services Commission is the lead for ethnic participation in the public sector. The department has been talking with it about the ethnic gender pay gap and developing the workforce for the future.

Enhancing the Office of Ethnic Communities The Asian population was reported as over 700,000 in the 2018 Census. This was quite similar to the Māori population, and much larger than the Pacific population. We note that the Office of Ethnic Communities sits within the Department of Internal Affairs. We asked whether its status should be enhanced to ensure that it matches the size of the population.

The chief executive told us that the department regularly hears this question from communities. He said that the department has enhanced the Office internally by moving it from a third tier role to a second tier role. The Office’s director now reports directly to the department’s chief executive.

We heard that communities have also argued for a stand-alone ministry. The department said it has provided advice on how this could be done. However, the State Services Commission, rather than the department, would lead any such change.

Increase for the Ethnic Communities Development Fund We note that on 6 December 2019 the Minister for Ethnic Communities announced an increase in the Ethnic Communities Development Fund from $520,000 to $4.2 million annually. The chief executive explained that this funding came from an appropriation in Budget 2019.

Decisions about applications for the fund will now be made throughout the year, rather than once annually. We asked how people will know when they should apply, if there is no longer a deadline for applications. It could mean that all of the money was allocated at the start of the year. We were told that the department responded to feedback from communities. They reported feeling pressure to respond by the target date and the timing not always being suitable. The department said that it will need to monitor the change to determine whether it is working well.

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RealMe verified identity In 2018/19, customer satisfaction declined for the performance measure related to customer satisfaction with the RealMe application process.2 In 2018/19, the department achieved a total of 63 percent, against a target of 75 percent. This compares with a total of 67 percent in 2017/18. We asked about the reason for the decline and how the department intends to address it.

The chief executive acknowledged the decline and said that additional funding was obtained in Budget 2019 to continue with RealMe. Over the next six months the department will be working on improvements to ensure that the service is fit for the future. This includes updates that will improve the stability of the platform and accessibility for customers.

Verifying a RealMe account We are interested in the process for verifying a RealMe account. One of us recalled attempting to verify an account when RealMe was first introduced about seven years ago. This was unsuccessful because the local post office did not have the facility to do so.

The department said that it has invested time and effort into improving the service. Previously, a person had to visit a post office to verify their account. A person can now have their RealMe account verified from their home. This is done by taking a photo of themselves, which is tested by the department’s algorithms and software.

The department has several protections to ensure that a person is who they say they are. It is linking back to births, deaths, and marriages data, and using “liveness” testing. This involves asking people to make certain movement to ensure that they are not holding a photograph of another person.

The department recognises that some people would prefer a face-to-face option for verification. It has been working with Kiwibank and will work with other providers to ensure they can provide this service.

Moving RealMe to the cloud As part of the improvements, the department will also move RealMe to the online cloud. We asked about progress, noting that some people have cyber-security concerns about cloud- based storage of information. We heard that the Government Chief Digital Officer has a cloud-first policy for government agencies, which has been operating for several years. An agency would complete a risk assessment if it was considering moving to the cloud. The department said it is currently undertaking an assessment for RealMe.

Preserving the nation’s memory Budget 2019 contained funding of more than $88 million over four years for two initiatives to strengthen the contribution of Archives New Zealand and the National Library. We sought an update on the initiative for preserving the nation’s memory.

2 The measure is “Customer satisfaction with the process of applying for a RealMe verified identity assessed as ‘4’ or ‘5’”.

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The department told us that 60 percent of its physical storage facilities are not fit for purpose. They are very aged and the internal services are at the end of their useful lives. The internal services include the temperature controls needed to prevent records deteriorating. Additionally, the archive is at full capacity so Archives New Zealand has been unable to receive transfers of old government records since 2016.

The department received funding in the last two Budgets to develop a long-term plan. A new archives building will be built in Aitken Street, which will physically link to the National Library building.

Another facility outside Wellington is also planned, which will provide growth for the next 15 years of government record-keeping. The new facility will also enable the department to transfer the second copy of the National Library’s legal deposit.3 At present, both copies are held at one site in Wellington. However, after the 2016 Kaikōura earthquake, the department decided that the copies should be separated.

Using technology to support archiving Archives New Zealand has trialled cloud-based machine learning to automatically transcribe the content of handwritten 19th Century archives. This makes the content digitally searchable. The Chief Archivist said that, while the technology probably is the future of archiving, it is not an easy future.

The technology that Archives has experimented with uses machine learning, which involves a programme that is trained by humans to read and translate the handwriting. When enough training has been provided, the programme can recognise patterns. The Chief Archivist observed that the programme requires quite a lot of human intervention and computing power.

Compliance with the Charities Act 2005 The department’s Charities Services team works to regulate the charity sector, comprising some 30,000 charities. The work consists of:

 education, including a website with information to support charities to comply with their obligations  a registrations team that provides information to new charities and helps them become registered  an investigations team that undertakes inquiries into certain registered charities. We heard that 54 inquiries were carried out in 2018/19. The outcomes included deregistration by the independent charities registration board, disqualification of a charity and its officer being disqualified, and 10 referrals to other agencies. The department said that the information it receives is often outside its mandate. However, it has good relationships across the public sector to share information.

3 Two copies of every published document, newspaper, book, or recording made in New Zealand must be deposited with the National Library. 6

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We asked to what extent the department investigates large organisations that may be using the charitable structure to avoid paying tax. The department told us that it triages any complaint it receives or information that it identifies. The triage process is based on risk and serious wrongdoing. The department considers which issues are the most serious, and what will potentially cause damage or reduce public trust in the charitable sector.

We were told that the department also works closely with the Inland Revenue Department (IRD). The two organisations are in daily contact and the department has staff who previously worked for the IRD.

Fit for Future Charities project We note that the Fit for Future Charities project has been delayed by 25 months. This project is the ICT system that supports the department’s regulatory work. The department has decided that it needs to change the direction of the ICT system. The project will be closed in the 2019/20 financial year. This will be followed by a business case for another Fit for Futures Charities project to be initiated under a new name.

Promoting wellbeing as a purpose of local government The Local Government (Community Well-being) Amendment Act 2019 received Royal assent on 13 May 2019. It amended the Local Government Act 2002 to restore the promotion of social, economic, environmental, and cultural wellbeing to the purpose of local government. The department described councils as being “absolutely delighted” about the reinstatement.

We heard that the department is providing advice to the Minister of Local Government. The advice is about a process that would enable a more community-led approach to specifying local priorities. The department said it has been bringing communities together with local and central government and iwi and business interests to identify these priorities. The department will then work with councils to give effect to those priorities.

The department told us that it had not undertaken any cost analysis and had no plans to do so. This is because communities will decide the costs that they want to accept. Some of us consider that it would be beneficial for the department to analyse potential costs so communities can evaluate whether they want to pursue this work.

Integrity of New Zealand passports The Henley Passport Index ranks passports according to the number of destinations their holders can access without a prior visa. We note that the New Zealand passport, which had a high integrity rating, appears to be on a downward trend. In 2018/19, New Zealand ranked 9th for the performance measure “NZ passport is recognised as having high integrity”. This compares with 7th equal in 2017/18 and 5th equal in 2016/17.

The chief executive explained that the quality and integrity of the New Zealand passport has not changed. Instead, other countries now have international agreements for visa-free entry. The chief executive considers that New Zealand still holds a good position in the top 10 countries.

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Appendix

Committee procedure We met on 11 December 2019 and 11 March 2020 to consider the annual review of the Department of Internal Affairs. We heard evidence from the Department of Internal Affairs and received advice from the Office of the Auditor-General.

Committee members Dr Jian Yang (Chairperson) Ginny Andersen Kanwaljit Singh Bakshi Sarah Dowie Paul Eagle Hon Peeni Henare Willow-Jean Prime Lawrence Yule

Sarah Dowie replaced Hon Jacqui Dean as a member of the Governance and Administration Committee on 19 February 2020.

Office of the Auditor-General (Briefing on the Department of Internal Affairs).

Department of Internal Affairs (Responses to written questions).

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2018/19 Annual review of the Department of the Prime Minister and Cabinet

Report of the Governance and Administration

Committee

March 2020

Contents Recommendation ...... 2 About the Department of the Prime Minister and Cabinet ...... 2 Financial overview and audit results ...... 2 Child wellbeing ...... 3 Emergency preparedness ...... 3 Staff turnover and diversity...... 4 Appendix ...... 6

Dr Jian Yang Chairperson

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2018/19 ANNUAL REVIEW OF DPMC

Department of the Prime Minister and Cabinet

Recommendation The Governance and Administration Committee has conducted the annual review of the Department of the Prime Minister and Cabinet for 2018/19, and recommends that the House take note of its report.

About the Department of the Prime Minister and Cabinet The Department of the Prime Minister and Cabinet (DPMC) provides a range of services to the Prime Minister, the Governor-General, and members of Cabinet. Its services include:  policy advice  national security and intelligence coordination  secretariat and coordination services to Cabinet, its committees, and the Executive Council  support services to the Governor-General and maintenance of the official residences  leadership and oversight of the civil defence and emergency management system  monitoring and analysis of child poverty reduction data. In DPMC’s annual report for 2018/19, incoming chief executive Brook Barrington describes the department’s purpose as ensuring that New Zealanders live in a country that is ambitious, resilient, and well-governed. However, he says the environment in which the department pursues this purpose is anything but clear.

Particular challenges in the past year included responding to the terror attacks on Christchurch mosques in March 2019 and the volcanic eruption on Whakaari/White Island in December 2019.

Creation of the National Emergency Management Agency On 1 December 2019, the National Emergency Management Agency was established as a departmental agency. It replaced the previous Ministry of Civil Defence and Emergency Management, which was a business unit within DPMC. The new agency will continue to have shared access to DPMC services like human resources, finance, and IT, but it will have its own chief executive.

We note that a significant amount of work has gone into getting the new agency up and running.

Financial overview and audit results Total DPMC revenue for the 2018/19 financial year was $65.786 million and total expenses were $60.108 million, leaving a surplus of $5.678 million. The previous year’s surplus was $4.941 million. DPMC’s net assets as at 30 June 2019 were $8.965 million.

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The Auditor-General issued a standard audit report on DPMC’s financial statements and non-financial reporting. The Auditor-General assessed the department’s management control environment and its performance information and supporting systems and controls as “good”, and its financial information and associated systems and controls as “very good”. This shows an improvement from the previous year, following recommendations from the auditors about tightening up some processes.

The auditors again identified the lack of a mechanism to assess the risk of fraud in relation to the financial and performance information statements.

The Auditor-General recommended that DPMC continue to refine its performance framework, particularly in how it measures the achievement of its strategic intentions and the impact of the National Security Group’s work.

Child wellbeing The Child Poverty Reduction Act was passed in December 2019, requiring the Government of the day to set targets on a defined set of measures to reduce child poverty and to report on them annually. The Child Wellbeing and Poverty Reduction Group in DPMC continues to drive this work. A major milestone was the release of New Zealand’s first Child and Youth Wellbeing Strategy.

We asked DPMC about successes and failures in its child poverty reduction work. It seems that it is too early to know this, but the new legislation was cited as an important underpinning for that work, and interim targets have been set. DPMC looks forward to getting its first measure against those in early 2020 when the Government Statistician releases the first report on progress.

The most recent data available is from 2017/18. The Child Poverty Monitor report that year showed that around 250,000 children are living in poverty, measured against a range of factors. We heard that this national sample, which uses integrated data infrastructure, will enable the department to look more closely at particular regions. It will enable prototype programmes like free and healthy lunches in schools in areas where there are known challenges of food insecurity.

DPMC told us that the Child Poverty Report that is now included in Budget documentation allows it to estimate the impact of initiatives taken through the Budget to reduce child poverty. The best data at the moment estimates that impact as 50,000 to 70,000 fewer children in poverty. DPMC predicts that the Families Package, introduced in 2018, will be shown to have made some difference. Its impact will continue, with Best Start payments still being made through 2021.

Emergency preparedness Whakaari/White Island volcanic eruption

We acknowledge and are grateful for the hard work and dedication of agencies responding to the tragic volcanic eruption on Whakaari/White Island in December 2019, which resulted in significant loss of life.

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National Disaster Resilience Strategy The National Disaster Resilience Strategy came into effect in April 2019. It outlines the vision and 10-year goals for civil defence and emergency management, to make New Zealand a more resilient nation. DPMC told us that the strategy has three main pillars:

 the understanding of risk  response and recovery  building community cohesiveness and resilience. A “road map” will set out the work needed to achieve these outcomes. This road map was delayed because the 15 March Christchurch mosque attacks forced time lines to be pushed out, but DPMC hopes to complete the work in early 2020. The road map can be updated and work reprioritised if gaps are found or new priorities identified.

DPMC is required by the UN Sendai Framework for Disaster Risk Reduction to report globally on a number of measures, so progress will be tracked both domestically and internationally. We asked how New Zealand compares globally. We were told that this country has made significant progress in its scientific understanding of the risks it faces and the technology available.

Tsunami monitoring and detection DPMC told us that a comprehensive DART buoy system (Deep-ocean Assessment and Reporting of Tsunami), costing just over $42 million, is being deployed off the coast of New Zealand. There will be 12 buoys in the water—along the subduction zone off the East Coast, up towards the Pacific, and to the west of New Zealand—and three on land for maintenance purposes. Confirmation of a tsunami being generated will be quicker and the need for evacuation will be notified sooner, both nationwide and across the Pacific.

Staff turnover and diversity As at 30 June 2019, the National Security Group within DPMC had 10 fewer staff than the previous year. We asked how it is dealing with this high turnover rate and the need for diversity. DPMC acknowledged that its turnover is above the public sector average. It explained some reasons for this, including some staff not feeling connected to the department as they are located in other places, structural workforce changes, and a lack of career progression opportunities.

DPMC is investigating ways to retain staff, such as building a more coherent sense of being a single department, and making the department a more attractive place to work. It has launched a programme of seminars to make use of staff members’ specialist knowledge from both the public and private sectors. The seminar topics are of interest and benefit to other staff. They feel they are learning things useful to their career, such as about domestic and global responses to climate change.

DPMC is under-represented in Māori, Pasifika, and Asian staff. It sees a need to reach students in their last year of school to convince them to consider joining the public service. DPMC also wants to build strategic alliances with providers such as iwi. If possible, it wants to establish an exchange of staff to provide a mutually beneficial sharing of knowledge and 4

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We asked whether disability access is being addressed. We were told that, although physical accessibility is improving, there is much work to be done in improving access to services and information. We look forward to seeing developments in this area.

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Appendix

Committee procedure We met on 11 December 2019 and 11 March 2020 to consider the annual review of the Department of the Prime Minister and Cabinet. We heard evidence from the Department of the Prime Minister and Cabinet and received advice from the Office of the Auditor-General.

Committee members Dr Jian Yang (Chairperson) Ginny Andersen Kanwaljit Singh Bakshi Sarah Dowie Paul Eagle Hon Peeni Henare Willow-Jean Prime Lawrence Yule

Sarah Dowie replaced Hon Jacqui Dean as a member of the Governance and Administration Committee on 19 February 2020.

Advice and evidence received We received the following documents as advice and evidence for this annual review. They are available on the Parliament website, www.parliament.nz.

Office of the Auditor-General (Briefing on Department of the Prime Minister and Cabinet).

Department of the Prime Minister and Cabinet (responses to written questions).

221

2018/19 Annual review of the Financial Markets Authority

Report of the Economic Development, Science and Innovation Committee

March 2020

Contents Recommendation ...... 2 About the Financial Markets Authority ...... 2 Financial results ...... 2 Audit opinion ...... 3 Key performance indicators...... 3 Conduct and culture reviews of retail banks and life insurers ...... 3 Changes to licensing and monitoring of financial advice providers ...... 5 Review of the FMA’s funding and staffing levels ...... 5 The FMA’s customer engagement ...... 6 KiwiSaver fees and investment strategies ...... 6 Cryptocurrency...... 6 Information management ...... 7 Appendix ...... 8

Jonathan Young Chairperson

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Financial Markets Authority

Recommendation The Economic Development, Science and Innovation Committee has conducted the annual review of the Financial Markets Authority for 2018/19, and recommends that the House take note of its report.

About the Financial Markets Authority The Financial Markets Authority (FMA) is responsible for ensuring public confidence in New Zealand’s financial markets. It was established in 2011 as an independent Crown entity. It is a member of the New Zealand Council of Financial Regulators, along with the Reserve Bank, the Treasury, and the Ministry of Business, Innovation and Employment.

The FMA is a regulator of New Zealand’s capital markets and financial services:

 It assesses and monitors the compliance, conduct, and competency of market participants.  It investigates behaviour which breaches standards and carries out enforcement.  It oversees licensing and provides policy, guidance, and education services.  It can, at the request of the responsible Minister, inquire into and report on any matter relating to the financial markets, financial market participants, or other persons engaged in conduct relating to those markets. The FMA’s board is chaired by Mark Todd, who replaced Murray Jack in April 2019. Its chief executive is Rob Everett.

Financial results The FMA’s revenue was $39.072 million in 2018/19, up slightly from the previous year. Almost all its revenue comes from the Crown; it receives an operational grant of $36 million and has a litigation fund for enforcement activities. Its baseline funding was increased by almost $10 million in 2017/18 so it could carry out its expanding remit.

Expenditure was $39.244 million in 2018/19, compared with $35.457 million in the previous year. This resulted in a small deficit of $172,000.

Litigation fund expenditure was $2.978 million, which was above the budgeted $2 million. The FMA reports that it undertook several large litigation matters during 2018/19.1 In October 2019, the Government announced that the litigation fund would be increased by $4 million for 2019/20.

1 Financial Markets Authority, Annual Report 2018/19, page 51. 2

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Audit opinion The Auditor-General rated the FMA’s management control environment and its financial information systems and controls as “very good”.

The FMA’s performance information and supporting systems and controls were rated “good”. The auditor noted some improvement in the quality of year-end performance reporting since the previous audit. The auditor recommends that the FMA continue to improve the quality of its service performance measures, and the systems and controls used to capture the data necessary for reporting. We encourage the FMA to continue to make these improvements.

Key performance indicators The FMA’s “investor confidence rating” is an average of four measures that involve an assessment of the following:

 Stakeholders agree that the FMA’s actions help raise standards of market conduct and integrity.  Investors are confident in New Zealand’s financial markets.  Licensed market participants show how they achieve good customer outcomes.  Investors are confident in the quality of regulation of New Zealand’s financial markets. The FMA did not meet its targets for three of the four measures in 2018/19.2 As a result, the investor confidence rating was 57.75 percent. This is lower than the 2017/18 result of 64.3 percent. The 2018/19 target was 66 percent.

The FMA’s target for timeliness in managing misconduct cases was not achieved. This was mainly due to the component that aimed for the closure of cases within 39 days of receiving information. The FMA said in its annual report that staffing levels contributed to this, as some staff were assigned to other work on the conduct and culture reviews.

Conduct and culture reviews of retail banks and life insurers In our previous annual review, we discussed the two conduct and culture reviews (of retail banks and life insurers) that the FMA jointly undertook with the Reserve Bank of New Zealand. The review of banks was released in November 2018, and the review of life insurers in January 2019.

In its annual report, the FMA said that the review of banks did not find widespread issues with how banks treated their customers, although it identified weaknesses in governance and systems, including in relation to sales incentives.3

The FMA also said:

Our January 2019 report showed that life insurers’ processes and practices were materially worse than those in the banking sector. We identified instances

2 Financial Markets Authority, Annual Report 2018/19, pages 45 and 46. 3 Financial Markets Authority, Annual Report 2018/19, pages 8 and 9.

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of potential misconduct where customers were misled or sold inappropriate products, or were not treated in accordance with the terms of their policy.

The FMA said that banks’ work on the issues has been generally slow, and that life insurers have been too complacent.4

Following the reviews, the Government introduced the Financial Markets (Conduct of Institutions) Amendment Bill. The bill is currently before the Finance and Expenditure Committee. The bill proposes to give the FMA responsibility for monitoring and enforcing a new conduct licensing system for banks, insurers, and non-bank deposit takers such as credit unions.

Some of us noted the comment by the FMA that the conduct and culture reviews did not find widespread conduct issues in New Zealand. Therefore, while acknowledging a level of risk, some of us were concerned there may now be a disproportionate focus on the process requirements for the advice a bank or insurance company gives the customer, rather than on the outcome of the advice for the customer.

In response, the FMA said that the conduct and culture reviews were a relatively “quick dip test” into the sector. It is finding more evidence of minor mistreatment of customers by life insurers, which suggests there may be more for it to find. It agreed that there must be a proportionate response to the risk. It considers that, based on overseas examples, if the processes and governance settings in institutions are not right, it will lead to poor outcomes for customers.

We note that the FMA reports that all retail banks have committed to remove sales incentives to frontline staff and their managers. It considered that sales incentives increased the risk of bank staff making inappropriate sales to customers. We asked whether the FMA had recommended to the Government any broad regulation-making powers that could ban sales incentives. It said that it had recommended that “serious attention” needed to be given to incentive structures, but not how that might be reflected in legislation.

We discussed the role of sales incentives in business structures. The FMA acknowledged that businesses want to make sales, so they are likely to apply some kind of volume-based standard. Some of us suggested that the proposed new laws are creating uncertainty for businesses. The FMA said that some of the frontline sales teams it talked to did not think the goal of “treating customers right” was reflected in the sales incentive structures. It said that it will continue to discuss this with the industry, and considers it a debate worth having. Some of us suggested that the timeframe for proposed law changes may limit the time available to have this conversation. It acknowledged that a balance was needed: it does not want to unnecessarily limit access to affordable financial products.

We asked what the FMA’s role is in relation to insurance companies, noting the recent examples of insurance company failures in 2011. The FMA said that the solvency and ongoing soundness of insurance companies is the responsibility of the Reserve Bank. The Financial Markets (Conduct of Institutions) Amendment Bill would introduce some monitoring

4 Financial Markets Authority, Annual Report 2018/19, page 9. 4

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2018/19 ANNUAL REVIEW OF THE FINANCIAL MARKETS AUTHORITY of insurers’ conduct and treatment of customers, which would be the responsibility of the FMA. However, the FMA noted this would not usurp the prudential role of the Reserve Bank.

Changes to licensing and monitoring of financial advice providers The Financial Services Legislation Amendment Act 2019 comes into full effect in June 2020. The Act gives the FMA new responsibilities for the licensing and monitoring of financial advice providers. The FMA has been investing in application process systems for the new licensing.

We noted in our 2017/18 annual review that the legislation will create a significant amount of work for the FMA. We will continue to monitor the implementation of the new regime.

Review of the FMA’s funding and staffing levels During 2019, a review by PwC into the efficiency, effectiveness, baseline funding, and staffing of the FMA was commissioned by the Ministry of Business, Innovation and Employment. The review findings were released in January 2020.5

The review found that the FMA is a high-performing organisation, but that it does not have sufficient financial headroom or organisational capacity. Out of four options to remedy the situation, the review recommended an “enhanced funding” option. The Government has not yet made a decision on this; however, we heard that a Budget bid is being made.

The “enhanced funding” option would involve an increase in staffing levels. As at June 2019, the FMA had 212 employees, compared with 194 in June 2018. The review proposed a staff of 285 by 2022. As we discussed in our previous annual review, the FMA’s workforce is drawn from a very competitive and specialist market. FMA employees are in demand by financial services firms and other regulatory agencies. Voluntary turnover in staff was up to 22 percent in 2018/19, compared with 13.8 percent in the previous year.

The FMA noted that it is strongly encouraging private firms to build their own compliance capabilities, which places additional demand on recruitment. It said that, overall, the workforce capability of the sector is rising. The FMA acknowledged it is an “ongoing challenge” to retain staff once trained, especially as many of its recruits do not have regulatory experience. Given its goal of expanding its own capacity, staffing strategies will be an ongoing focus. We look forward to hearing about the success of these strategies during our next annual review.

We consider that the baseline review of the FMA is timely, as the expanding remit of the FMA and the competitive employment market are stretching the FMA’s capacity and outputs. Given the importance of good regulation, we will monitor this area with interest.

5 The review report can be found on the FMA website.

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The FMA’s customer engagement The FMA is expanding its view of its customer base. It considers that its customer base is no longer just investors, but all financial services customers.

Currently the FMA measures its customer engagement by: the number of presentations it makes to industry or businesses; an annual opt-in survey of its website visitors; and an annual survey of entities that participate in its relationship management programme.

The Auditor-General told us that the FMA is likely to need to make changes to the measures and activities for this appropriation to reflect its wider view of customers and good customer outcomes. We look forward to seeing the work the FMA does in this area.

KiwiSaver fees and investment strategies The FMA told us that KiwiSaver is one aspect of its work that affects many New Zealanders. It has started work on a “value for money” programme, which will assess whether KiwiSaver providers’ services match the fees charged and promises made.

We asked what involvement the FMA has in ensuring that KiwiSaver customers get the right information from providers about fund types and strategies. The FMA said that, in addition to the advice given by providers themselves, it is working with the Commission for Financial Capability and other agencies to provide materials so consumers can consider long-term retirement planning. This will be especially important as KiwiSaver balances grow over time. People who would not previously have sought financial advice will need to do so. The FMA noted that some of the providers do not aspire to provide financial advice, just the product.

We asked to what extent default providers are meeting their obligation to contact clients to discuss their investment strategy. The FMA said that, in the past, it had been frustrated that people were not making active decisions about what fund type they were in, and providers were not doing enough to encourage those decisions. However, in the last 12 months it has been pleased to see a reasonably significant shift. It remains concerned about the number of people in default funds who do not appear to have made an active decision to stay there. It acknowledged that some people do not act even when encouraged to make a decision. It suggested that it might be worth considering giving providers more levers for engagement.

We note that the Government is reviewing the arrangements for KiwiSaver default providers. We look forward to seeing the outcomes of this review.

We note that KiwiSaver fee levels are high compared to similar funds overseas, and wonder whether the market is sufficiently competitive. The FMA said the fee percentage levels being applied have not reduced significantly. The FMA noted some market-driven changes to fee levels, but acknowledged that the fees remain “stubbornly high”. The FMA noted that it does not have a role in setting the fee levels.

Cryptocurrency We asked whether the FMA could be doing more about the growth of cryptocurrency. The FMA said one of the challenges of crypto assets is that they are deliberately designed to operate in a non-regulated way.

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We were interested to hear that the FMA carried out an initiative through Facebook, running advertisements about Bitcoin and other well-known crypto assets. This enabled it to get data about the demographics of people engaging with such advertisements.

Some people are responding to online ads for get-rich-quick schemes, some of which include claims about crypto assets. The data from the initiative will help the FMA to target information material to people who would not normally seek guidance from a regulator’s website.

Information management We noted that there were some privacy breaches at the FMA during 2018/19.6 The FMA told us that it had responded by carrying out preventative work, with external assistance. The FMA noted that, with its work volumes increasing exponentially, more information will be received by the organisation, so managing its information appropriately is a major focus.

We noted that the FMA has spent a significant amount on IT contractors or consultants.7 We wondered whether more IT work should be brought in-house, given the increased volumes of work. The FMA said it engages consultants when work on IT projects is required. It has also been investing in data- and evidence-management systems for the court proceedings it gets involved in. These systems had produced high-quality work. It said some of the costs during 2018/19 were one-off payments, although there will be ongoing costs.

6 Financial Markets Authority (Responses to written questions), question 62. 7 Information about consultants can be found at: Financial Markets Authority (Responses to written questions), question 68 (and appendix).

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Appendix

Committee procedure We met between 12 February and 19 March 2020 to consider the annual review of the Financial Markets Authority. We heard evidence from the FMA and received advice from the Office of the Auditor-General.

Committee members Jonathan Young (Chairperson) Tamati Coffey Andrew Falloon Brett Hudson Gareth Hughes Melissa Lee Clayton Mitchell Dr Deborah Russell Stuart Smith Hon Poto Williams

Office of the Auditor-General (Briefing on the Financial Markets Authority).

Financial Markets Authority (Responses to written questions).

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2018/19 Annual review of Fire and Emergency New Zealand

Report of the Governance and Administration Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Results of the 2018/19 audit...... 2 Financial overview ...... 2 Investment of the surplus in fire service resources ...... 3 Organisational change ...... 3 Community spirit and involvement...... 3 First responder relationships ...... 4 Mental health support...... 4 Appendix ...... 5

Dr Jian Yang Chairperson

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Fire and Emergency New Zealand

Recommendation The Governance and Administration Committee has conducted the annual review of Fire and Emergency New Zealand for 2018/19, and recommends that the House take note of its report.

Introduction Fire and Emergency New Zealand (FENZ) was established in 2017 with the amalgamation of New Zealand’s urban and rural fire services into a single, integrated fire and emergency services organisation.

The main functions of FENZ are:

 promoting fire safety (including guidance on the safe use of fire as a land management tool) and firefighting  delivering fire prevention, response, and suppression services  protecting the safety of people and property endangered by incidents involving hazardous substances  rescuing trapped people as a result of transport accidents or other incidents  undertaking urban search and rescue. Additional functions include responding to medical emergencies; maritime incidents; weather events, natural hazard events, and disasters; and incidents where substances present a risk to people, property or the environment.

As of 30 June 2019, there were 1,810 career firefighters and officers, 11,801 volunteer firefighters, and 982 management and support staff. Chief executive Rhys Jones leads the executive leadership team, which is accountable to the board, chaired by Hon Paul Swain.

Results of the 2018/19 audit The Auditor-General assessed FENZ’s management control environment and its financial information and supporting systems and controls as “very good”, with no recommendations for improvement. He assessed FENZ’s performance information and supporting systems and controls, as “good”, recommending that the board and management continue to review the performance framework.

Financial overview In 2018/19, FENZ reported total revenue of $610.3 million, compared with $612.3 million in 2017/18. Its total expenditure was $576.3 million ($496.3 million in 2017/18), resulting in a surplus of $34 million ($115.9 million in 2017/18). FENZ has an asset base of about $1.28 billion. 2

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Investment of the surplus in fire service resources We were interested in the surplus that FENZ has seen over the last few years. FENZ is largely funded by a levy on contracts of insurance where property is insured against the risk of fire. For many years the levy was set at 7.6 cents per $100 sum insured. This levy increased to 10.6 cents in 2017 with the amalgamation of the New Zealand Fire Service and National Rural Fire Authority. Much of the surplus has been generated as a result of this increase.

We heard that FENZ has been using the surplus to invest in fire service resources. It has taken the opportunity, with the Government’s approval, to reinvest heavily in its people, fleet, equipment, and property. In 2018/19 it invested $101.5 million in a capital expenditure programme which undertook some much needed upgrades in technology, fleet, and rural fire stations. This expenditure also supports the significant and ongoing investment required in the Christchurch region after the Christchurch earthquakes, such as seismic upgrades to fire stations.

We were interested in FENZ’s investment in property, and asked whether it intends to partner with other emergency response agencies in any way. FENZ told us it is very interested in combined service facilities and focusing on supporting the communities it serves. It would like to see facilities for police and ambulance services combined with its own to create community emergency response hubs.

Organisational change This was the second year since FENZ’s establishment on 1 July 2017 under the Fire and Emergency New Zealand Act 2017. FENZ amalgamated 40 organisations: the New Zealand Fire Service, the National Rural Fire Authority, 12 enlarged rural fire districts and 26 rural fire authorities. There were three phases to the resulting organisational change: amalgamation, integration of the organisations from 2017 through until 2020; and then the creation of a unified organisation.

We asked whether FENZ felt confident that it would meet the deadline for a unified organisation. FENZ told us it was, but noted the importance of integrating the organisations over time. In the first year, FENZ kept the rural and urban fire services separate but under the same organisational umbrella, to allow the integration to happen slowly. It aims to achieve its goal of structural change by the end of 2020, and would then like to see a positive organisational culture created. It is focusing first on its own internal organisation, and then its relationships with external partners like the New Zealand Police, ambulance services, and the New Zealand Defence force.

Community spirit and involvement When the amalgamation of the rural and urban fire services was first announced, smaller and rural communities expressed concern around what it would mean for local fire services and the support offered to the community. We asked how the communities were feeling about the changes now. FENZ explained that the Minister at the time was very clear that the change was meant to be an amalgamation of organisations, not a takeover. He also wanted to make sure community engagement was maintained and enhanced. The Chair noted the

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FENZ told us it understands the significance of fire services’ involvement with communities and wants to grow and enhance the spirit that is already there. It has set up local advisory committees to ensure communities’ voices and interests are reflected in its national and local planning. The committees provide independent community-focused advice to the board to inform local and national emergency planning. As well as providing advice from a local perspective, they will help FENZ better understand risks and issues faced by communities.

First responder relationships We were interested in the relationship between FENZ and ambulance services. FENZ explained that there are gaps across the country where ambulance services are not provided and fire services are the only organised agency that can respond promptly. In some areas, it has become the norm for firefighters to respond first to medical emergencies, but this has taken a toll on those responding. FENZ is trying to support its people through this.

FENZ places a lot of importance on its relationship with services such as St John and Wellington Free Ambulance. FENZ has layers of brigades, some of which are designated as first responders where ambulance services are not available. Most other brigades are trained to be co-responders; they can work with ambulances under ambulance supervision to do certain tasks. Issues arise when an ambulance service is not available in an area where there is only a co-response brigade. FENZ is working with St John to better support each other in these situations. In areas where FENZ may be struggling to provide first responder services it is reaching out to local St John brigades asking for support, and vice versa.

Mental health support We are aware of the intensity of the job, and the pressure this places on firefighters and their families. We asked what support systems FENZ offers. FENZ said it recognises that a firefighter’s family is often their first point of support, which places a burden on the family. For this reason it offers psychological support to the families of firefighters as well as the firefighters themselves. An issue faced by FENZ is the mind-set of tough firefighters who do not want to ask for help. It wants its firefighters to be able to acknowledge the effects that their work has on them and understand that it is just as strong to acknowledge they have a problem and to ask for help. FENZ said it is working through this as an organisation and would like to see a culture shift so that employees are comfortable asking for and receiving adequate support.

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Appendix

Committee procedure We met on 12 February and 11 March 2020 to consider the annual review of Fire and Emergency New Zealand. We heard evidence from Fire and Emergency New Zealand and received advice from the Office of the Auditor-General.

Committee members Dr Jian Yang (Chairperson) Ginny Andersen Kanwaljit Singh Bakshi Sarah Dowie Paul Eagle Hon Peeni Henare Willow-Jean Prime Lawrence Yule

Sarah Dowie replaced Hon Jacqui Dean as a member of the Governance and Administration Committee on 19 February 2020.

Advice and evidence received We received the following documents as advice and evidence for this annual review. They are available on the Parliament website, www.parliament.nz

Office of the Auditor-General (Briefing on Fire and Emergency New Zealand).

Fire and Emergency New Zealand (Responses to written questions).

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2018/19 Annual review of the Government Communications Security Bureau

Report of the Intelligence and Security Committee

February 2020

The Intelligence and Security Committee has conducted the 2018/19 annual review of the performance and current operations of the Government Communications Security Bureau. The committee heard evidence in public from the Government Communications Security Bureau and received advice from the Office of the Auditor-General.

The committee recommends that the House take note of this report.

Rt Hon Jacinda Ardern Chairperson

235

2018/19 Annual review of the Guardians of New Zealand Superannuation

Report of the Finance and Expenditure Committee

March 2020

Contents Recommendation ...... 2 About the Guardians of New Zealand Superannuation ...... 2 Financial overview ...... 2 Audit results ...... 3 Willis Towers Watson review of the Guardians’ performance ...... 3 The Guardians are preparing for the Fund’s future growth ...... 3 COVID-19 disruption should not hamper the Guardians’ long-term outlook ...... 4 Investing within New Zealand ...... 4 Responsible investing ...... 6 Climate change is a long-term risk to the Guardians’ investment portfolio ...... 7 The Guardians will play a role in developing New Zealand’s venture capital market ...... 7 The Guardians face people capability and capacity challenges ...... 8 Appendix ...... 9

Dr Deborah Russell Chairperson

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Guardians of New Zealand Superannuation

Recommendation The Finance and Expenditure Committee has conducted the annual review of the Guardians of New Zealand Superannuation for 2018/19, and recommends that the House take note of its report.

About the Guardians of New Zealand Superannuation The Guardians of New Zealand Superannuation is an autonomous Crown entity responsible for managing the New Zealand Superannuation Fund. The Fund comprises a pool of assets on the Government’s balance sheet.

The purpose of the Fund is to reduce the tax burden of superannuation for future taxpayers. It was created as a way to partly pre-fund future retirement benefits to help smooth the cost of New Zealand Superannuation between today’s taxpayers and future generations.

The New Zealand Superannuation and Retirement Income Act 2001 requires the Guardians to manage the Fund on a prudent, commercial basis, consistent with:

 best-practice portfolio management  maximising returns without undue risk to the Fund as a whole  avoiding prejudice to New Zealand’s reputation as a responsible member of the world community. The board of the Guardians has seven members, and is chaired by Catherine Savage. Matt Whineray was appointed as the chief executive officer in July 2018. The entity employed 139 full-time-equivalent staff as of 30 June 2019.

Financial overview The Fund achieved a pre-tax return of 7 percent in 2018/19, returning a profit before tax of $2.819 billion. This was lower than the pre-tax profit of $4.382 billion in 2017/18. However, the Fund out-performed its reference portfolio benchmark1 by $261 million, or by 0.67 percent, in 2018/19.

As at 30 June 2019, the Fund’s net assets were $42.316 billion, compared with $39 billion the previous year. Since its inception in 2003, the Fund has seen actual returns of 10.15 percent, and has outperformed its reference portfolio benchmark by $8.3 billion (or by 1.43 percent). The 2019 annual report notes that “the Fund is well ahead of its performance benchmarks since inception”.

1 The Guardians use a “reference portfolio” to benchmark the Fund’s active investment. The reference portfolio is set at the Treasury bill rate plus 2.7 percent. The Treasury bill rate is the cost to the Government of contributing capital to the Fund, instead of using this capital to repay debt. 2

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Two-thirds of the Fund is managed passively, and the remainder is actively managed. Active investment is more costly, and the Guardians invest actively only when there are clear benefits.

The Government has contributed a total of $16.38 billion to the Fund. The global financial crisis of 2008 saw the Government suspend contributions the following year. They were restarted in 2017/18, when $500 million was contributed. The Government contributed $1 billion to the Fund in 2018/19, and is projected to contribute a further $3.6 billion over the next two years.

As a performance measure, the Fund uses the New Zealand Treasury bill rate. This measures the cost to the Government of contributing capital to the Fund, instead of using this capital to repay debt. Since the Fund’s inception it has outperformed the Treasury bill rate by 6.25 percent.

When the Fund reaches its expected peak in 2071, the Government’s capital withdrawals from the Fund, combined with the Fund’s tax contributions, are expected to cover 21 percent of the total net cost of New Zealand superannuation.

Audit results The Auditor-General issued a standard audit report on the Guardians. We were pleased to note that the Auditor-General assessed the Guardians’ management control environment, financial information and supporting systems and controls, and performance information and supporting systems and controls, as “very good”. There were no recommendations for improvement.

Willis Towers Watson review of the Guardians’ performance There is a statutory requirement for the Guardians to be subject to an independent performance review every five years.2 This is an opportunity to assure the Government, as well as the New Zealand public, that the Guardians are employing best practice in looking after the nation’s savings.

The latest review was carried out in 2019 by the global business advisory firm Willis Towers Watson. This review found that the Guardians are operating at “global best-practice levels”, and noted that its “investment model is very impressive”. The review highlighted the Guardians’ adoption of a high-risk profile for their active investments as a significant factor in this success.

The Guardians are preparing for the Fund’s future growth The Guardians have initiated a multi-year work programme on the “long-term target state” for the Fund. The Guardians want to have an understanding of what is required for them to remain fit for purpose, as the Fund continues to grow. The Guardians expect that the Fund will grow to $70 billion within seven years. They researched the effects that this larger scale will have on their active investment strategies. This work is ongoing, and the Guardians

2 Section 71 of the New Zealand Superannuation and Retirement Income Act 2001.

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2018/19 ANNUAL REVIEW OF THE GUARDIANS OF NEW ZEALAND SUPERANNUATION expect that it will help shape the refresh of their strategic plan, which will be carried out in April 2021.

COVID-19 disruption should not hamper the Guardians’ long- term outlook The annual report of the New Zealand Super Fund notes that throughout 2018/19 trade tensions between the United States and China were important drivers for investment markets. While tensions have eased somewhat, international trade is still being affected by friction at trade borders, along with regulatory distortions of international trade. This is expected to continue in 2020.

The outbreak of the coronavirus COVID-19 is a new risk to the Fund’s return performance. Financial markets in New Zealand and globally have been affected by the outbreak, and this will likely flow through to the Fund’s financial performance. The expectation is that returns will be lower in comparison with recent years.

However, we heard from the CEO that he is not alarmed about the effects on the Fund of short-term volatility in financial markets. The Fund exists to reduce the tax burden carried by future generations. This long-term purpose means that current contributions will not be realised until around 2050, when significant withdrawals from the Fund are expected to begin.

Consequently, the investment portfolio is orientated towards long-term growth investments. Volatility in the value of these investments can be expected from time to time. What is important to the Guardians is positive growth over a long period of time. Because of this, we heard that the Guardians are “well placed to weather the storm” that is the COVID-19 pandemic.

Investing within New Zealand The Fund is one of the largest institutional investors in New Zealand. Its domestic investments are valued at $6.3 billion, an increase from $2.4 billion in 2009. This increase has been driven by “letters of expectations” from Ministers, which have encouraged investment activity in New Zealand.

We heard from the CEO that he believes that the Guardians have a natural advantage when it comes to investing in New Zealand. The Fund is not subject to Overseas Investment Office restrictions, and has a good knowledge of possible assets and local co-investment partners.

We heard, however, that the lack of investment opportunities of suitable scale in New Zealand is an issue for the Guardians as they look for opportunities to invest locally. This is a point that the Guardians have emphasised previously. Although the Guardians have increased their total New Zealand investments, the proportion of the overall Fund that is invested in New Zealand has reduced from 21.3 to 14 percent. The Guardians expect this proportion to continue to decrease as the Fund grows, even if the Guardians continue to increase their New Zealand investments. In response to these challenges, the Guardians have established an “investment hub” to research and shape new investment opportunities of suitable scale in the New Zealand market.

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The Auckland light rail proposal One domestic investment opportunity of a suitable scale is the Guardians’ proposal to “fund, design, construct, own, and operate” Auckland’s light rail project. This is an urban development project aiming to provide public transport between Auckland’s CBD and Māngere. The Guardians will partner with the Canadian investor CDPQ Infra.3

As the proposal is currently being assessed by the Ministry of Transport, the Guardians are subject to confidentiality requirements. However, the CEO confirmed that they have made a detailed proposal that includes features such as the route, the number of stations, travel times along the route, and a breakdown of construction and operating costs. He also confirmed that their proposal is for “light rapid transit”, as opposed to other forms of public transport. The station and route alignment is designed to maximise ridership, which is typically a feature of light rail infrastructure.

We also heard from the CEO that recent stories in the media have exaggerated the cost of the project. The CEO also confirmed to us that they will be 50-50 partners with CDPQ Infra.

If the Guardians are selected as the preferred delivery partner for the project, their proposal will be subject to further detailed planning and consultation before construction can begin. As this could overlap with the timing of the General Election, some of us consider it appropriate that the Guardians consult with the Opposition regarding the light rail proposal. This is especially pertinent due to the size and scale of the project. The CEO told us they have considered consulting with the Opposition, but this would not be possible due to their confidentiality requirements.

The Guardians’ mandate is to make commercial investments. Any investment must meet their investment hurdle. In this case, their proposal is still subject to the approval of their board. We heard that the Guardians would still be able to walk away from the project if the investment case was not strong enough.

Collaborations with Māori entities We were pleased to note that the Guardians have collaborated with Māori entities for several projects. This includes investing in the construction sector by partnering with Ngāi Tahu to build housing in the special development area near Hobsonville.

The Guardians have also collaborated with local iwi who own the land on which the Guardians have forestry interests in Kaingaroa Timberlands. Local iwi wanted to receive more than just rental income for the land that they owned, so the Guardians sold them 2.5 percent of their share. The benefit for the Guardians is that it gives the owners of the land a vested interest in the maintenance of the forest.

Finally, we heard that the Guardians sponsored the creation of the Te Pūia Tāpapa Fund, which is a Māori collective investment fund. A group of iwi and other Māori financial entities have created this fund for investing locally within New Zealand. We heard from the CEO that

3 NZ Infra is a joint venture between the NZ Super Fund and CDPQ Infra, a wholly owned subsidiary of Canadian pension fund Caisse de dépôt et placement du Québec.

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2018/19 ANNUAL REVIEW OF THE GUARDIANS OF NEW ZEALAND SUPERANNUATION they have established a strong board and investment committee, and have looked at over 30 possible investments in 2019.

Investing in the prefabrication industry The Guardians are also looking for opportunities to invest in the nascent New Zealand prefabrication construction industry. Standardisation of housing components enables construction firms to lower the cost and quicken the pace of building houses. They said that the acute housing supply shortage ensures that demand for prefabrication will likely be strong, and at the kind of scale the Guardians are looking to invest in. This industry could therefore present an opportunity for strong returns on investment.

Responsible investing The Guardians are committed to investing in a responsible manner. They believe that responsible investing involves concern for the environment, along with social and governance factors. We heard that responsible investing is material to long-term returns, which fits with the Guardians long-term investment strategy. The Guardians are also directed by their mandate to invest the Fund in a manner that avoids prejudice to New Zealand’s reputation as a responsible member of the world community.

The Guardians provide leadership in responsible investing We heard that the Guardians have a formal arrangement with other Crown financial institutions to assist them with advice about responsible investment. This involves meeting regularly with these entities to discuss issues arising in their investment portfolios.

The Guardians also established the New Zealand Corporate Governance Forum, which sets guidelines around what investors should expect in terms of corporate governance. Both Crown and private sector fund managers are engaged in this forum.

The Guardians publish an exclusion list, and we heard that this is “read with interest” by fund managers, and others in the industry. Companies that are directly involved in the following activities are excluded from the Fund:

 the manufacture of cluster munitions  the manufacture or testing of nuclear explosive devices (NEDs)  the manufacture of anti-personnel mines  the manufacture of tobacco  the processing of whale meat  recreational cannabis  the manufacture of civilian automatic and semi-automatic firearms, magazines, or parts. The portfolio is monitored on an ongoing basis to ensure compliance with these exclusions.

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Collective responses to problems can help shape markets The Guardians are part of a group called the One Planet Sovereign Wealth Fund. This is a group of large sovereign wealth funds that help to provide leadership for institutional investors to be able to implement climate change responses in their portfolios.

The Guardians, along with other Crown financial institutions, are also collaborating with fund managers in various countries around the world following the Christchurch terror attacks. They are engaging with social media companies to attempt to address the problem of live streaming and dissemination of terrorist attacks on social media platforms. This work is ongoing, although the CEO did acknowledge to us the usefulness of the “Christchurch call” in assisting them with this work.

Climate change is a long-term risk to the Guardians’ investment portfolio The Guardians have continued with their climate change strategy for managing the Fund. This strategy is not part of the Guardians’ responsible investment criteria. Instead, the Guardians have identified the volatile price of carbon as an undue investment risk. The market price of investments in companies that are large emitters does not factor in climate change risk. Climate change is a long-term risk, and market prices are often set based on short-term value. As managers of a superannuation fund, the Guardians must consider the long-term risk to all of their investments.

The Guardians have responded to this by analysing their investment portfolio for exposure to climate change risk. This exposure is defined by carbon-emissions intensity; that is, how much carbon is emitted per dollar of sales. By divesting heavy carbon-emitting investments from their portfolio, the Guardians hope to achieve a 50 percent reduction in their exposure to companies that are large emitters of carbon.

As a result of this policy, the Guardians have divested from various companies that derive their income from oil, gas, and coal extraction. However, the Guardians have also divested from utility companies such as Genesis Energy. Although Genesis Energy generates much of its energy through renewable sources, it also operates the coal-fired Huntly Power Station.

Some of us expressed concern that divesting from companies such as Genesis Energy could be harmful to the New Zealand economy. The CEO stressed to us that by divesting from companies such as Genesis Energy, the Guardians are merely applying their mandate to maximise return without undue risk. We heard that this mandate does not include “managing the electricity industry supply”. The CEO told us that he believes there is no risk to the supply of energy to the wider economy by divesting from Genesis Energy.

The Guardians will play a role in developing New Zealand’s venture capital market In May 2019 the Government announced its intention to create a $300 million venture capital fund. The Elevate NZ Venture Capital Fund will be administered by the Guardians in collaboration with the New Zealand Venture Investment Fund (NZVIF). Of the $300 million

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2018/19 ANNUAL REVIEW OF THE GUARDIANS OF NEW ZEALAND SUPERANNUATION available to invest, $240 million will come from contributions that would have otherwise gone to the Super Fund. This venture capital fund will provide capital to fund managers who will in turn invest in New Zealand companies and assets. Although some fund managers may be based internationally, all subsequent investments will be made within the domestic economy.

The Elevate NZ Venture Capital Fund will support early-stage companies and help develop the early-stage capital ecosystem.

The NZVIF currently manages a venture capital fund worth $60 million. We heard that in recent years its programme of investing in the New Zealand venture capital market had stalled due to a lack of funding.

The CEO acknowledged the difficulty in finding suitable fund managers in New Zealand to invest with. We heard that a specific aim of this programme is to help develop the domestic fund management industry, along with providing funds for new ventures. The CEO stressed to us that they will only invest the full $300 million allocation if they are confident that they have enough suitable fund managers to invest with. He expects that they may only invest the full allocation of the venture capital fund once the market is more developed.

The Guardians have been collaborating with NZVIF, the Treasury, and the Ministry of Business, Innovation and Employment to develop the legislation, investment structure, and mandate parameters of the new fund. They will continue to do so.

The Guardians face people capability and capacity challenges We heard that the employment market for professionals in the investment sector is highly competitive. The Guardians seek staff with significant expertise and experience in investment management and operations. We heard that the job market in New Zealand for people with this experience is tight. The Guardians hope to attract ideal staff by offering an attractive mix of remuneration, as well as benefits such as ongoing learning and development, high levels of staff engagement, a strong workplace culture, and flexible work arrangements.

Staff salaries at the Guardians are not funded through parliamentary appropriation. Instead, they are paid for directly by the Fund. The Guardians also operate a performance pay scheme, which is in addition to an employee’s base salary. The scheme is designed to incentivise employees and create a culture of good performance, and we heard that such schemes are standard in the investment sector. All bonuses are paid at the discretion of the board.

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Appendix

Committee procedure We met on 4 and 18 March 2020 to consider the annual review of the Guardians of New Zealand Superannuation. We heard evidence from the Guardians and received advice from the Office of the Auditor-General.

Chris Bishop and Raymond Huo participated in our consideration of this item of business.

Office of the Auditor-General (Briefing on the Guardians of New Zealand Superannuation).

Guardians of New Zealand Superannuation (Responses to written questions).

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2018/19 Annual review of the Inland Revenue Department and Briefing on the progress of Inland Revenue Department's Business Transformation programme

Report of the Finance and Expenditure Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Financial overview and audit results ...... 2 Business transformation ...... 3 Staff engagement levels are low ...... 3 The IRD is experiencing a high volume of calls ...... 4 Compliance remains a core part of the IRD’s work ...... 4 The IRD is communicating to the public about how changes affect them ...... 5 The move to digital services ...... 5 The IRD is trying to improve the process for people with tax agents ...... 6 Collaboration ...... 6 Preparedness ...... 7 Our overview of the Business Transformation programme ...... 7 Appendix ...... 8

Dr Deborah Russell Chairperson

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Inland Revenue Department

Recommendation The Finance and Expenditure Committee has conducted the annual review of the Inland Revenue Department for 2018/19 and considered a briefing on the progress of Inland Revenue Department’s Business Transformation programme. The committee recommends that the House take note of its report.

Introduction The Inland Revenue Department (IRD) collects more than 80 percent of the Crown’s revenue—mainly through personal tax, company tax, and GST.

In 2018/19, it collected $79.5 billion in revenue, an increase of about $6.5 billion from 2017/18.

The services the IRD is responsible for include:

 informing the public about their entitlements and obligations  processing entitlements and obligations  managing debt and outstanding returns  undertaking taxpayer investigations  providing tax policy advice to the Government. The Commissioner and chief executive of the IRD is Naomi Ferguson. The IRD is accountable to the Minister of Revenue.

Financial overview and audit results Most of the IRD’s funding is through Vote Revenue (96.5 percent). In 2018/19 its total departmental revenue was $845.63 million, 2.5 percent less than in 2017/18. Its total departmental expenses for the year were $830.85 million, 3.6 percent more than in 2017/18. This resulted in a net surplus of $14.77 million in 2018/19, which was $50.39 million less than the previous year.

The Auditor-General assessed the IRD’s performance information and supporting systems and controls as “very good”. Its management control environment and financial information systems and controls were assessed as “good”. The Auditor-General recommended improvements to the IRD’s tax estimation process, the Student Loan Scheme valuation, and the criteria for accounting for costs as operating or capital. We hope to see the IRD act promptly on the Auditor-General’s recommendations.

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Business transformation The IRD is managing an ongoing Business Transformation programme to modernise the tax system. In 2016, we opened a briefing into this transformation to stay informed. At the same time as we spoke to the IRD about the annual review, we were also updated about the Business Transformation programme.

The available funding for transformation is $1,157.2 million for operating expenses (excluding depreciation and capital charges) and $679.0 million for capital. This covers the years 2014/15 to 2023/24 and includes post-implementation funding for 2022/23 and 2023/24. Currently the programme is below the projected budget. However, there is still a lot of work to be done at the end of the programme, and the organisation will need a sustainable level of investment from its baseline funding.

KPMG provides independent quality assurance for the transformation. There is also a Gateway review process run through the Treasury, and the Auditor-General is currently looking at the IRD’s work to measure and report the benefits derived from the Business Transformation programme. The feedback from external reviewers has been that the transformation is a well-run, well-managed, and well-governed programme, but that it also continues to have huge risk. The high-level summaries of those reviews have been shared with Ministers and are available on the IRD’s website.

To date, the business transformation has resulted in $27 million spent on redundancies. The transformation will result in ongoing redundancies—it estimates the total cost, including spending to date, at $55–75 million—but the IRD is using a mix of permanent and temporary staff to minimise redundancies. It said it has worked with others across government to make sure that they understand the skills that are becoming available, and has been encouraging those who will be made redundant to look at other opportunities.

Staff engagement levels are low We were concerned at the poor staff engagement level of 29 percent. The IRD indicated that when it runs smaller staff “pulse checks” in groups, engagement tends to be higher, and the number of staff leaving the department is under 10 percent at the moment.

The IRD attributes some of the poor engagement to the change created by the transformation. The size and shape of the organisation has changed, and organisational design work continues. With a change to a new system, staff have to manage the new system, the old system, and the transition. The engagement survey is an opportunity for staff to express how difficult the transition is.

Through the transformation, there has been a continued focus on training and upskilling staff. The IRD tries to be transparent with information about workforce numbers, and when engaging with the union. The IRD expects people will continue to find the transformation demanding.

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The IRD is experiencing a high volume of calls We are concerned about the number of calls to the IRD where people have to wait a long time or end up abandoning the call.

Following the release of the third stage of the transformation in April 2019, the IRD saw a 26 percent increase in calls. This was partly caused by customers who had never completed a personal tax summary now getting an auto-calculation. More than 868,000 New Zealanders were automatically issued with their tax refunds, and this resulted in phone calls to check that this was correct.

In response, the IRD increased the number of staff available to answer calls through that period. In April, May, and June it had around 1,000 staff answering calls, but the volume was still high. It will continue to staff across the department to manage volume while trying to direct people, including tax agents, online where they are able to find most information and to complete most transactions.

The IRD has also introduced an analytical capability called a data intelligence platform. This allows it to analyse text that staff put in to say why a person called. This means it can identify the top 10 reasons why people call, and proactively provide relevant information.

We were pleased to hear that the IRD understands the need to have a call centre available for complex cases as well as for people who lack access to the internet.

Compliance remains a core part of the IRD’s work Some of us are concerned that putting more resources into answering the phones may result in less effort towards tax compliance. We believe it is important that the IRD does the investigative and basic compliance work to ensure that the system is working. We would expect to see the transformation allow the IRD to spend less time on the phone, freeing up resources for other work such as compliance and enforcement. Of the tax investigation cases that were opened since 1 July 2016, 2,276 remained open as at 30 September 2019. We thought that this seemed a relatively small number given that not all of them would be active.

The IRD said it has to make judgement calls about how to best allocate resources towards compliance. Some of its focus in the past year has been on basic compliance, such as making sure that employers understood how to meet their PAYE obligations. It also proactively asks people to look at their tax positions and remedy any incorrect information which, if not resolved, could lead to a full audit.

The IRD does undertake full investigations and audits. In 2019 a family operating as “Thai House Express” was investigated, and five members of the family were sentenced to prison or home detention, or ordered to pay reparations, after a $2.3 million tax evasion case. These investigations are costly for the taxpayer, so other more cost-effective interventions are taken first. For example, thanks to the transformation, customers who make charitable

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2018/19 ANNUAL REVIEW OF THE INLAND REVENUE DEPARTMENT donations during the year can upload their receipts to their myIR account at any time. The IRD has stopped $21 million in incorrect donations credits going out.

Overall, the IRD said that the new systems and processes being implemented as part of the business transformation will shift its approach to compliance. It will improve voluntary compliance—helping customers get things right from the start—and enable non- compliance to be more readily detected.

The IRD is communicating to the public about how changes affect them In the 2018/19 year, $6.8 million was spent on public relations campaigns. The money was primarily spent on direct marketing and contact to 2.9 million individual customers affected by auto-calculation, and around 200,000 employers moving to payday reporting, to make sure they knew what they had to do and when. The IRD will continue to communicate how the changes will affect people.

We encouraged the IRD to consider how it communicates with student loan holders to ensure that its messaging is in plain English. We have heard about letters that would not be at all clear to the student. The IRD has assured us that it has taken this feedback on and tried to simplify the letters. It has been told that the information is now clearer and easier to follow.

The move to digital services Payday filing has been available since 1 April 2018 and became compulsory on 1 April 2019. It means that employers and payroll intermediaries send the IRD information on employees’ incomes every payday instead of monthly. The IRD has had over 3 million payday file returns made since the go-live, and 98 percent of employers are now payday filing digitally. This is a higher and faster take-up of digital services than it expected.

We voiced concern about how the move to digital services will affect those who are not able to file returns digitally. One example is employers who do not have access to the internet. The IRD said it has not analysed the data as to how the change has affected people who are rurally based versus urban based. However, it gave the example of its announcement in October that it would not continue to accept cheques, except in rare circumstances. Its decision was based on the fact that less than 5 percent of the population pays by cheque nowadays. Of those who do, 90 percent are clients of tax agents, who can file on their behalf. More than half of the cheques came from the urban centres of Auckland, Wellington, Christchurch, and Hamilton. The IRD suggested that this may indicate that some people may have a preference for non-digital interactions for reasons other than accessibility limitations.

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The IRD is trying to improve the process for people with tax agents We have heard concerns from tax agents and accountants about the IRD bypassing them and communicating directly with their clients. In some cases, the IRD has provided incorrect information to the client. The IRD acknowledged that a number of letters were sent to clients that should have gone directly to agents.

The IRD explained that the introduction of auto-calculation and payday filing has been the biggest change to the tax system in over 20 years. Given the nature of changes resulting from the business transformation, it believes some level of error is to be expected. It ran tests before the release, and will continue to use feedback to address issues quickly.

The IRD said it specifically looked into how the auto-calculation process worked for the clients of agents. It has refined the process for next year based on feedback. This will take out of the process around 180,000 customers who are the clients of tax agents.

One example we discussed was the IRD writing to a number of people about their PIE rate. In some cases, the assessment was incorrect, because it did not take into account all of the client’s income information. One of the things that the IRD emphasises to people is that its assessment is based on the information it has. The IRD is now making changes so that in the future the letters will go to the tax agent, who will have a better idea of the client’s information.

The IRD told us that, in some cases, arrangements with tax agents were set up some time ago. The client’s relationship with the agent might not match the totality of the client’s relationship with the IRD. Following the release of the changes, the IRD has worked with tax agents to understand when it is appropriate for its communications to still go to the client. One example is where a client is changing tax agents.

The IRD suggested that, if there is a specific issue related to letters to clients or tax agents, people should contact it directly.

Collaboration The Government wants the state sector to work more collaboratively together. We commend the IRD for its work in trying to put New Zealand customers and individual businesses at the heart of its design. To do this, the IRD is working with colleagues, particularly the Ministry of Business, Innovation and Employment (MBIE), the Department of Internal Affairs (DIA) and the Ministry of Social Development (MSD) to design services that match people’s needs and circumstances.

The IRD was one of the initial agencies to support the creation of the SmartStart app for new parents, managed by DIA. Services continue to be built around that app including Best Start, a weekly payment of $60 per child, which is available to eligible parents with a baby due on or after 1 July 2018, no matter what their household income is. Approximately 91 percent of customers are applying for Best Start through the

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SmartStart site. The IRD has worked with DIA to improve the content on the SmartStart website to make it clear that Best Start is a universal payment in the first year, and to simplify the wording of the application form so it is easier for people to apply.

The IRD also has staff co-located with MSD staff in a Christchurch office, working on opportunities to improve people’s experience when moving between MSD and the IRD while dealing with matters such as Working for Families and managing debt. We heard that it is challenging to collaborate while still focusing on delivering the core tax business.

We discussed whether there are enough incentives for state sector agencies to work collaboratively together. We note that one opportunity to address this will be in the Public Service Legislation Bill that was introduced to Parliament in November 2019, which aims to achieve a more adaptive and collaborative public service.

Preparedness The transformation has aimed to make the IRD more resilient. Its new system is showing a great ability to adapt quickly to pressure points. For example, in June 2019, the IRD was required to evacuate a Palmerston North call centre with around 200 staff as there was concern that the building had dropped below 33 percent of the new building code. The IRD had its staff up and running in other locations that same week, using laptops and mobile devices.

The IRD has a standard plan to prepare for a disaster, and regularly practises. The plan brings together a group of senior staff from across the department to immediately assess the issues, and decide what they need to say to customers and staff. Team leaders give the message to staff that if they are affected by the disaster, they should focus on sorting out their own life and other staff will pick up their work. The IRD ensures that people stay connected. For example, some staff who lost friends and family in the Christchurch shootings had a support provided to them immediately. In an emergency, the IRD suggests that clients call it if there is something urgent, but otherwise, focus on other priorities first.

Our overview of the Business Transformation programme Although our hearing covered some issues that have arisen during the transformation, we would expect some difficulties in a project of this size. We commend the IRD for how smooth the transformation has been, given the size and the complexity of the project.

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Appendix

Committee procedure We met on 20 November 2019 and 4 March 2020 to consider the annual review of the Inland Revenue Department and the Briefing on the progress of Inland Revenue Department’s Business Transformation programme.

We heard evidence from the Inland Revenue Department and received advice from the Office of the Auditor-General.

Committee members Dr Deborah Russell (Chairperson) Kiritapu Allan Andrew Bayly Rt Hon David Carter Tamati Coffey Hon Judith Collins Hon Paul Goldsmith Ian McKelvie Greg O’Connor Willow-Jean Prime (until 11 December 2019) David Seymour Jamie Strange (from 11 December 2019) Fletcher Tabuteau Dr Duncan Webb

Office of the Auditor-General (Briefing on the Inland Revenue Department).

Inland Revenue Department (Responses to written questions).

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2018/19 Annual review of the New Zealand Security Intelligence Service

Report of the Intelligence and Security Committee

February 2020

The Intelligence and Security Committee has conducted the 2018/19 annual review of the performance and current operations of the New Zealand Security Intelligence Service. The committee heard evidence in public from the New Zealand Security Intelligence Service and received advice from the Office of the Auditor-General.

The committee recommends that the House take note of this report.

Rt Hon Jacinda Ardern Chairperson

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2018/19 Annual review of the Office of the Clerk of the House of Representatives 2018/19 Annual review of the Parliamentary Service

Report of the Governance and Administration Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Office of the Clerk ...... 2 Parliamentary Service ...... 3 Financial performance ...... 3 Audit results ...... 3 Working together ...... 4 Restructuring of the Parliamentary Service ...... 4 Bullying and harassment at Parliament ...... 5 Staff turnover at Parliament ...... 5 Security on the parliamentary precinct and in members’ offices ...... 6 Strengthening Pacific parliaments ...... 6 Appendix ...... 8

Dr Jian Yang Chairperson

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2018/19 ANNUAL REVIEW OF THE OFFICE OF THE CLERK AND THE PARLIAMENTARY SERVICE

Office of the Clerk of the House of Representatives and the Parliamentary Service

Recommendation The Governance and Administration Committee has conducted the annual reviews of both the Office of the Clerk of the House of Representatives and the Parliamentary Service for 2018/19, and recommends that the House take note of its report.

Introduction The Office of the Clerk provides a secretariat to support the House of Representatives and its select committees. The Parliamentary Service provides members of Parliament with the services they need to engage effectively with their communities and together as a House of Representatives.

The Office employed 97 staff in 2018/19 (86 full-time equivalents). The Service employed 718 staff (672 full-time equivalents), of which 63.5 percent were members’ support staff. All Office of the Clerk staff are based in Wellington. Parliamentary Service staff are based in Wellington apart from the 262 out-of-Parliament staff, who are located around New Zealand according to members’ needs.

The Office and the Service combined their 2018/19 annual reports into one document and we received their oral evidence at one hearing. The Office’s Chief Executive, and Clerk of the House of Representatives, is David Wilson. The Chief Executive (previously called General Manager) of the Service is Rafael Gonzalez-Montero.

Office of the Clerk The Office of the Clerk provides services to members in their parliamentary roles, focusing on the debating chamber and select committees. In addition to providing secretariat services, the Office:

 provides specialist advice on parliamentary law and procedure  provides legal drafting services for members  broadcasts sittings of the House  keeps the record of members’ pecuniary interests  manages inter-parliamentary relations. The Office of the Clerk met all but one of its performance indicators in 2018/19. Performance was similar in 2017/18. The target it missed in 2018/19 was “100 percent of all procedural advice to presiding officers, committee chairs, and members is accurate, practical, and politically aware”. This target was not met on one occasion. In 2017/18, the missed target related to the accurate recording and publishing of resolutions and other material.

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Parliamentary Service The Parliamentary Service has two main roles: to provide administrative support to the House of Representatives and members of Parliament, and to administer the payment of members’ funding entitlements under the direction of the Speaker. The Service also provides:

 public tours and educational visits  library services  buildings maintenance  security services  information, communications, and technology (ICT) services. The Service was significantly restructured in 2018/19. The size of the leadership team was almost halved (from seven to four). There are now four main services areas: Customer Service and Parliamentary Engagement, Library Research and Information, Corporate Services, and Security.

The Parliamentary Service met all but three of its performance indicators in 2018/19:

 For the measure of the Speaker’s satisfaction with the provision of resources and services to his office, the Service scored 3 out of 5 (the target was 4). The score was lower than the previous year (3.3).  For members’ satisfaction with ICT services, the Service scored 3.55 out of 5, compared with 3.13 the previous year. The target was 3.8.  The goal of full (100 percent) safety and security of offices was not achieved. However, 98 percent of offices met the required standard compared with 56 percent in 2017/18.1

Financial performance For the Office, total revenue in 2018/19 was $21.082 million, compared with $20.388 million in 2017/18. Total expenses were $20.163 million, leading to a net surplus of $919,000. The net surplus in 2017/18 was $205,000.

The Parliamentary Service’s total revenue in 2018/19 was $62.450 million, compared with $61.320 million in 2017/18. Total expenses were $62.438 million, compared with $59.922 million in 2017/18.

Audit results The Auditor-General issued a standard audit report for the Office of the Clerk, which means he was satisfied that the information he audited fairly presented the Office’s activities and financial position. The auditor assessed the Office’s management control environment, financial information systems and controls, and performance information as “good”. He recommended some improvements.

1 The Service’s Annual Report explains that the remaining 2 percent of offices cannot meet the standard because of space constraints or members not supporting the requirements.

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The auditor has commented for the past two years that the Office has not reviewed or updated various policies and procedures for a considerable time. We were pleased to learn that the Office has started a process for doing this. The auditor intends to follow up on this issue in his next audit, and we hope to see at our next review that this work has been completed.

The Auditor-General also issued a standard report for the Parliamentary Service. We were pleased to learn that the auditor assessed the Service’s management control environment as “very good” and made no recommendations for improvement. He assessed its financial information systems and controls and its performance information systems and controls as “good”. He recommended some improvements in those two areas.

Specifically, the auditor made a recommendation about Parliamentary Service redundancy payments, which we discuss below.

Working together Both organisations were established in the 1980s. They say that changes in technology, the MMP (mixed-member proportional) representation environment, and a need for more public engagement have blurred the lines between their respective functions. Although they believe that they should remain separate organisations, they want to work together to strengthen Parliament, improve services, save money, and improve staff satisfaction.

The Parliamentary Agencies Delegations Legislation Act 2019 was passed in November 2019 to allow the two agencies to delegate functions and powers between each other’s staff.

For some time, the Parliamentary Service has provided finance, payroll, buildings, and IST services for both organisations. The Office of the Clerk has provided legal services for both. Recently, some corporate services teams have combined, and policy teams are located together. A highlight of 2018/19 was the merging of two separate teams to create a joint Parliamentary Engagement team, which is implementing the parliamentary engagement strategy.

Restructuring of the Parliamentary Service The Service was significantly restructured in 2019, including a reduction of executive leadership positions from seven to four. We heard that the Service has sought to move its culture to focus on providing better customer service. It has sought to increase its advisory services for members. For example, the Service will now help members dealing with landlords in out-of-Parliament premises.

The cost of the restructuring, including redundancy payments, was $550,000.

The auditor reported that he found inconsistent documentation to support the redundancy payments. He recommended that the Service make sure that there is a redundancy letter or decision document to support all redundancy payments. The Service told us that it addressed the issue by asking the Speaker to make some retrospective approvals, which he has done.

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We encourage the Parliamentary Service to ensure that correct payments documentation is kept in future.

Bullying and harassment at Parliament An independent review (the Francis review) into bullying and harassment at Parliament was completed in 2018/19.2 To follow up the review, a steering committee, led by Hon Anne Tolley, the Deputy Speaker, is developing a code of conduct which will set out the principles about behaviour in Parliament as a workplace. Both the Clerk and the Service’s Chief Executive are on the committee.

We were pleased to hear that the plan is to implement all 85 recommendations in the Francis review. We share the hopes of the Office and the Service that people will feel more able to speak up when there are problems and that issues can be addressed as they arise.

We were informed that 24 recommendations have been either completed or “a modified action has been taken to achieve the intended outcome or part outcome”. Thirty-five are in progress. Nineteen have yet to be acted on because of “dependencies or awaiting for resources to be assigned”. Five recommendations have been deferred to the next Parliament for consideration. These recommendations relate to members’ staff development and the setting up of shared cross-agency human resources functions. The other two recommendations are for implementation by the Department of Internal Affairs.

The Francis review recommended a follow-up review after three years (two years from now) to see how things have changed. The Office and the Service are planning how to measure any changes. These will include exit surveys, staff feedback as to whether they would recommend Parliament as a “great place to work”, and satisfaction by affected parties that employment matters are dealt with effectively and fairly.

We agree that it is important to measure such change, but we also expect to notice a change in the culture at Parliament before then. This should start happening with implementation of the code of conduct, and training becoming available for members on how to manage staff.

Staff turnover at Parliament We asked about staff turnover at the Parliamentary Service, which was 18.2 percent in the year under review, compared with 16 percent in 2017/18 and 9.4 percent in 2016/17. Office of the Clerk turnover was similarly high, at 22.7 percent, although this figure includes three staff who transferred to the Parliamentary Service. The average turnover in the public service was 12.1 percent.

We were told that employees’ attitudes have changed in recent years. Some only wish to work at Parliament for a couple of years before moving. We also heard that “some people consider this to be a difficult environment. So some people decide to go somewhere else”. This means that Parliament’s workforce is not as stable as other organisations.

2 The final report, Bullying and Harassment in the New Zealand Parliamentary Workplace, was published in May 2019.

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The Service also pointed out that turnover differs in different parts of the organisations. For example, turnover for members’ executive assistants is 22 percent. We were also warned that, because 2020 is an election year, staff turnover will be higher.

We learned that turnover for the Service’s corporate staff was heavily weighted in Human Resources staff. Many in that team resigned from their positions after the restructuring was proposed. The Service said that turnover has “greatly reduced” since July 2019.

The Service pointed out that a suggestion in the Francis report was to make better use of anonymised information from exit interviews. The organisations are trying to incorporate an exit interview for anyone who leaves the Office or the Service.

We are concerned at the high staff turnover and we hope to see it drop as more of the recommendations from the Francis review are implemented.

Security on the parliamentary precinct and in members’ offices The Parliamentary Service has improved safety and security both on the parliamentary precinct and at out-of-Parliament offices. We are glad that 98 percent of offices outside Parliament now meet minimum security standards, compared with only 56 percent in 2017/18.3 We look forward to seeing 100 percent of offices meeting security standards.

The Service listened to our comment that telephone landlines are an outdated security requirement, considering that our constituents need their representatives to be accessible. The Service agreed that security requirements have been quite rigid in the past. We heard that, in future, instead of dictating security requirements, the Service will provide members with a “suite of options” for the security of their offices outside Parliament.

We also heard about the Service’s Fixated Threat Assessment Centre (FTAC), which helps constituents who appear mentally unstable or unwell. In the past, the police would be brought in to take the unwell person away. We heard that this changed after an agreement was made in 2019 with the Ministry of Social Development. The police still get called, but instead of being removed, the constituent is provided with any assistance they might need. Statistics and members’ feedback suggest that the new approach has been successful, although it is still “early days”. We look forward to hearing more about the success of the FTAC.

Strengthening Pacific parliaments The Office of the Clerk sees the support of Pacific parliaments as a primary area of focus for its inter-parliamentary relations team. The Office recently entered into a memorandum of understanding with the Ministry of Foreign Affairs and Trade for a programme to support democracy in the Pacific. The programme, Tai a Kiwa, has included a visit from the Clerk of the Cook Islands Parliament. The Office also hosted the Pacific Parliamentary Forum in 2019. It is also running development programmes for Pacific members of Parliament and their staff.

3 As mentioned above, the other 2 percent of offices do not meet the standard because of space constraints or members not supporting the requirements. 6

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Each Australian parliament is paired with a Pacific parliament. In contrast, the Office works with all Pacific parliaments to varying degrees. We were pleased to hear that the Office works with its Australian counterparts to make sure that the information and support provided to Pacific parliaments is consistent, and not duplicated.

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Appendix

Committee procedure We met on 12 February and 11 March 2020 to consider the annual reviews of the Office of the Clerk and the Parliamentary Service. We heard evidence from the Office of the Clerk and the Parliamentary Service and received advice from the Office of the Auditor-General.

Committee members Dr Jian Yang (Chairperson) Ginny Andersen Kanwaljit Singh Bakshi Sarah Dowie Paul Eagle Hon Peeni Henare Willow-Jean Prime Lawrence Yule Sarah Dowie replaced Hon Jacqui Dean as a member of the Governance and Administration Committee on 19 February 2020.

Raymond Huo participated in some of this review.

Advice and evidence received We received the following documents as advice and evidence for this annual review. They are available on the Parliament website, www.parliament.nz.

Office of the Auditor-General (Briefing on the Office of the Clerk of the House of Representatives).

Office of the Auditor-General (Briefing on the Parliamentary Service).

Office of the Clerk of the House of Representatives (Responses to written questions).

Parliamentary Service (Responses to written questions).

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2018/19 Annual review of the Office of the Ombudsman

Report of the Governance and Administration Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Financial performance and audit results ...... 2 Monitoring managed care facilities ...... 2 Agencies’ compliance with the Official Information Act ...... 3 Work on resolving complaints and clearing the backlog ...... 4 Financial support to deal with increased responsibilities ...... 4 Appendix ...... 6

Dr Jian Yang Chairperson

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Office of the Ombudsman

Recommendation The Governance and Administration Committee has conducted the annual review of the Office of the Ombudsman for 2018/19, and recommends that the House take note of its report.

Introduction The Office of the Ombudsman is an independent authority that works to ensure New Zealanders are treated fairly when they interact with Government. The Office handles complaints, and investigates, reviews, and inspects public sector agencies’ administrative conduct and decision-making.

The Office of the Ombudsman is an Officer of Parliament, independent of the Government. The Chief Ombudsman is Judge Peter Boshier, who has been in the role since December 2015. As at 30 June 2019, the Office had 93 employees in Auckland, Christchurch, and Wellington.

Financial performance and audit results In 2018/19, the Office’s total revenue was $18.6 million, an increase of $1.9 million from $16.8 million in 2017/18. Total expenses also increased to $17.7 million from $16.2 million in 2017/18, and resulted in a surplus of just over $900,000.

The Auditor-General rated the Office’s management control environment as “very good”. It rated the Office’s financial information and supporting systems and controls, and its performance information and associated systems and controls as “good”. These were all the same results as the previous year.

Noting the Office’s expanded areas of responsibility (including monitoring privately run aged care facilities, and aspects of a new oversight regime for Oranga Tamariki—Ministry for Children), the Auditor-General recommends that the Office:

 ensure that systems and processes are in place to reliably report results for its new areas of responsibility  continue to review and develop its policies and procedures.

Monitoring managed care facilities Under the Optional Protocol to the Convention against Torture (OPCAT), the Ombudsman is required to inspect and report on the facilities and treatment of people who are detained. This includes prisons and metal health facilities. As of 2018 the Ombudsman’s inspection and monitoring role expanded to people detained in court facilities and privately run aged care facilities. We were told that the Ombudsman expects to formally begin formal

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2018/19 ANNUAL REVIEW OF THE OFFICE OF THE OMBUDSMAN inspections from July 2021; so far his staff have undertaken 15 orientation visits, with more planned in the future.

The Ombudsman told us that OPCAT-related inspections of facilities are labour intensive, with the Office sending eight or more people to a facility for a week or more. The Office undertook 40 visits in the last year, of which 22 were formal inspections, and 90 percent were unannounced. It made 288 recommendations, of which 92 percent have been fully or partly implemented.

Continued work in monitoring privately run aged care facilities People in privately run aged care facilities who are suffering from dementia can be detained by being either physically restrained or chemically restrained with drugs. The Ombudsman said he is obliged to ensure that the rights of people in this sort of care are protected, with reasonable access to light, stimulus, and quality of life. We asked what kind of medical advice he seeks to make sure he takes an informed approach to reasonable rights. He told us that he has received advice from psycho-geriatric professionals and that there are different approaches for different circumstances.

Provision of care when there is a conflict between a facility and the family doctor We explored how possible conflict between a facility’s on-site medical care and a family’s own GP is managed. The Ombudsman admitted this is one of the challenges in the aged care sector. He emphasised that he will continue to do his work “fearlessly” but wants to work with the sector and not be too forceful in his approach.

Agencies’ compliance with the Official Information Act At our hearing, the Ombudsman announced that he is revisiting an investigation into how 12 government agencies1 are progressing in their compliance with the Official Information Act 1982 (OIA). This follows an initial investigation in late 2015 by his predecessor, in response to concerns that some agencies were not complying with the OIA as well as they could or should.

The Ombudsman told us he is getting a lot of complaints from people frustrated by the slowness of OIA responses, and he wants to make sure agencies have good systems and practices that help them comply with OIA obligations. He said he will not be satisfied until public sector chief executives are achieving 100 percent OIA compliance, and it becomes part of departments’ core business.

The Ombudsman noted that in revisiting the 12 agencies he is not presuming any fault, but wants to see how the agencies are performing. He said that although these 12 were not chosen for non-compliance, some are not “up to scratch” and need to improve their responsiveness. The Ombudsman feels it is his duty to say so when there are unacceptable

1 They are: Accident Compensation Corporation, Department of Corrections, Ministry of Education, Ministry of Foreign Affairs and Trade, Ministry of Health, Ministry of Justice, Ministry of Social Development, Ministry of Transport, New Zealand Customs Service, New Zealand Defence Force, New Zealand Transport Agency, and State Services Commission.

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2018/19 ANNUAL REVIEW OF THE OFFICE OF THE OMBUDSMAN delays. For example, when he contacts Ministers, he said he expects quick and helpful responses but that is not always the case.

We look forward to the results of the Ombudsman’s investigation, and believe that timely and complete OIA compliance by departments is essential to transparency.

Dealing with pushback or non-compliance with recommendations We asked the Ombudsman what happens when an agency does not comply with his recommendations. We were told that in his four years in the role he has never had an agency absolutely refuse to release information under the OIA. He explained that his approach is to work through how he believes the law should be applied, and then propose this to both sides so they can reach a conclusion that is “appropriate, liveable, and the right one”. He said he is pleasantly surprised that his office has the credibility to get people to do what they are asked.

With regard to aged care facilities, he said they mostly agree with his recommendations, but it can sometimes take time. He likened the situation to the issue of banning “tie-down beds” at corrections facilities. After initial pushback, the Department of Corrections has recently announced that it has banned the practice. He expects this may also happen with the aged care sector. Because it is still a relatively new area of work for his office, he goes “gently and carefully” to start, but will not hesitate to speak up when there is a problem.

Work on resolving complaints and clearing the backlog The number of complaints received by the Ombudsman in 2018/19 increased by 418 or 3.6 percent, bucking the downward trend experienced since 2015/16. The biggest increases were in complaints about the Local Government Official Information and Meetings Act 1987 (up 65, or 22 percent), and the Protected Disclosure Act 2000 (up 31, or 88 percent).

Success in clearing the backlog of complaints We heard that all complaints are now less than two years old, with 72 percent cleared within three months. This is above the 70 percent standard but slightly below last year’s 75 percent. Overall, the Office is slightly below its 100 percent clearance target, with 97 percent of complaints cleared within 12 months. The Ombudsman told us he expects to have 100 percent clearance by February 2020.

We asked how the Office had managed to get on top of the complaints and start dealing with them in a much timelier manner. We heard it set tighter and clearer expectations of timing. It now gives people 10 working days to respond—or even 5 in the case of something urgent or involving Parliament—rather than the 30 working days in the past.

Financial support to deal with increased responsibilities We asked whether the Ombudsman was under financial pressure, given the Office’s growing role and responsibilities. The Ombudsman said that he is not under any financial pressure, but acknowledged that some things on the near horizon will require more funding. They include increasing the number of Assistant Ombudsmen to four, developing a structure to support the new and heavily resourced Māori side of the Office, and strengthening the

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2018/19 ANNUAL REVIEW OF THE OFFICE OF THE OMBUDSMAN corporate side. However, he is confident that the Treasury is aware of these needs. He told us he would also be making a budget bid to support the Office’s new Oranga Tamariki work.

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Appendix

Committee procedure We met on 11 December 2019 and 11 March 2020 to consider the annual review of the Office of the Ombudsman. We heard evidence from the Chief Ombudsman and received advice from the Office of the Auditor-General.

Committee members Dr Jian Yang Ginny Andersen Kanwaljit Singh Bakshi Sarah Dowie Paul Eagle Hon Peeni Henare Willow-Jean Prime Lawrence Yule Sarah Dowie replaced Hon Jacqui Dean as a member of the Governance and Administration Committee on 19 February 2020.

Office of the Auditor-General (Briefing on the Office of the Ombudsman).

Office of the Ombudsman (responses to written questions).

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2018/19 Annual review of the Reserve Bank of New Zealand

Report of the Finance and Expenditure Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Financial overview and audit results ...... 3 How the Reserve Bank engages with the financial sector and the wider public ...... 4 Staffing costs increase as the nature of the Reserve Bank’s supervisory role changes ...... 5 Successful recruiting can be challenging in a tight employment market ...... 5 Te ao Māori strategy ...... 6 The ICT project, the “Trade Valuation Solution”, was an expensive write-off ...... 6 The Future of Cash – Te Whakamahinga Moni Anamata ...... 7 The Reserve Bank’s business continuity plan passed its test ...... 7 Disclosure of information cannot be enforced in acquisitions of financial companies ...... 7 Appendix ...... 9

Deborah Russell Chairperson

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2018/19 ANNUAL REVIEW OF THE RESERVE BANK OF NEW ZEALAND

Reserve Bank of New Zealand

Recommendation The Finance and Expenditure Committee has conducted the annual review of the Reserve Bank of New Zealand for 2018/19, and recommends that the House take note of its report.

Introduction The Reserve Bank of New Zealand is the nation’s central bank. It is a Crown agency wholly owned by the Government. Its functions and duties are described in the Reserve Bank of New Zealand Act 1989, and it exercises its powers across the financial sector. The Reserve Bank acts as a “full service” central bank; it is responsible for setting monetary policy and for regulating the financial sector.

Changes to the Reserve Bank’s mandate Traditionally, the Reserve Bank’s primary function has been to formulate and implement monetary policy to achieve and maintain stability in the general level of prices. In November 2017 the Government announced that it would undertake a review of the Reserve Bank of New Zealand Act to create a modern monetary and financial policy framework. Phase one of this review concluded with the passage of the Reserve Bank of New Zealand (Monetary Policy) Amendment Act 2018. Since the passage of the Amendment Act, the Reserve Bank is required to consider maintaining maximum sustainable employment when formulating monetary policy.

The Reserve Bank has had to deepen its understanding of the labour market to support the newly established objective of supporting maximum sustainable employment. In our discussion with senior staff from the Reserve Bank, they acknowledged that this process is ongoing, as they are developing their understanding of the dynamics of maximum sustainable employment.

We heard from the Governor that the additional mandate to maintain maximum sustainable employment has not yet altered any official cash rate (OCR) decisions made since the mandate was introduced. However, the Governor acknowledged that the new mandate could change future decisions on the OCR, depending on the particular economic conditions at the time.

The Reserve Bank has embarked on phase two of the review of the Reserve Bank Act. This phase will address the Reserve Bank’s financial stability role. The phase two review may result in changes in a number of areas, with implications for the level of funding available to the Reserve Bank (see below under “Staffing costs increase as the nature of the Reserve Bank’s supervisory role changes”).

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Governance and accountability arrangements As well as a senior leadership team, the Reserve Bank has a board of directors, responsible for the continuing review of the performance of the Reserve Bank and the Governor. The board chair is Professor Neil Quigley.

The Reserve Bank exercises its authority through the Governor of the Reserve Bank. The current governor is Adrian Orr, who was appointed by the Minister of Finance, on the recommendation of the Board, for a five-year term in March 2018.

The Reserve Bank also consists of the Monetary Policy Committee, which has been responsible for formulating monetary policy since April 2019. The Monetary Policy Committee currently has seven members: four Reserve Bank staff including the Governor and Deputy Governor, and three external members, all appointed by the Minister of Finance on the recommendation of the Board.

Alongside its governing legislation, the Reserve Bank is subject to:

 the Policy Targets Agreement, a written contract between the Minister of Finance and the Governor detailing the monetary policy outcomes that the Reserve Bank is required to achieve  the Reserve Bank Funding Agreement, a five-yearly agreement between the Governor and the Minister of Finance that specifies how much of the Reserve Bank’s income can be retained to meet its operating costs  the Memorandum of Understanding with the Minister of Finance setting out the Reserve Bank’s macro-prudential responsibilities. The Reserve Bank also receives an annual letter from the Minister of Finance which sets out the Minister’s broad expectations of its relationship with the Reserve Bank and areas of particular interest for the year.

Financial overview and audit results The Reserve Bank receives no direct government funding. It earns income from its investments, which are funded by the issue of currency and from equity. The Funding Agreement with the Minister of Finance sets the maximum amount of the Reserve Bank’s income that may be used to meet operating expenses in each financial year.

The Reserve Bank’s total operating revenue in 2018/19 was $329 million. This was down from $532 million in 2017/18. This is a large decrease, and was caused primarily by a lower rate of return from investment revenue. Year-to-year volatility can be expected, however, largely because of the likelihood of foreign currency exchange rate changes.

Operating expenses increased by $10 million to $86 million. Half of this increase was due to an increase in staff expenses of 15.6 percent.

The Reserve Bank recorded a surplus of $243 million, compared with $456 million for the previous year. It paid the Government a dividend of $195 million. This was down from $430 million in 2017/18.

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The Auditor-General issued a standard audit report on the Reserve Bank. It assessed the Reserve Bank’s management control environment, and its financial information systems and controls as “very good”, with no recommendations for improvement.

How the Reserve Bank engages with the financial sector and the wider public We noted that one of the strategic priorities of the Reserve Bank is to enhance dialogue with stakeholders to promote understanding and trust. Both the Reserve Bank and the Governor have a high degree of statutory independence from the Government, whilst holding significant regulatory power over the financial sector. Therefore, it is important that both the Reserve Bank and the Governor are publicly scrutinised, and that any new policies are subject to healthy and open debate.

Some of us noted that there has been disapproval of the Governor’s willingness to engage with critics, and that he has demonstrated a sensitivity to robust criticism. The discussion surrounding the recently announced changes to bank capital requirements was particularly robust. In internal correspondence released by the Reserve Bank under the Official Information Act 1992, the Governor is critical of commentators, and of the public nature in which some commentators have voiced their concerns about the Reserve Bank’s proposals.

We heard from the Governor that he is willing to accept robust, open, and public criticism of the Reserve Bank, provided the debate is focused on policy issues, and not the personalities involved.

The Reserve Bank’s process of engagement has improved its policy proposals On 5 December 2019 the Reserve Bank announced that the banking sector will be required to significantly increase the amount of capital individual banks hold. This final announcement came after a two-year policy review by the Reserve Bank. We heard that during this review the Reserve Bank engaged extensively with the financial sector and the public. The Governor described the level of engagement as “unprecedented” in the Reserve Bank’s history.

We asked whether this consultation led to any changes to the final decision on capital requirements. We heard from the Deputy Governor that two major changes resulted from this consultation. First, the transition period was increased to seven years, up from the originally proposed five years. The Reserve Bank also changed its proposal so that part of the capital that banks will be required to hold can be made up of redeemable perpetual shares. Initially the Reserve Bank had proposed that the capital would have to be raised solely from equity.

These changes came as a direct result of the Reserve Bank’s information-gathering during the review of the capital requirements policy. The changes are expected to make it significantly easier for banks to comply with the new requirements.

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Staffing costs increase as the nature of the Reserve Bank’s supervisory role changes We highlighted that the Reserve Bank’s staffing costs over 2018/19 increased to $36 million, up from $31 million the year before. The Governor told us he expects staffing costs to continue to rise significantly, subject to the Minister’s approval in the upcoming Funding Agreement. We heard that the Reserve Bank is building its capability to move towards a more intensive supervisory model. The Reserve Bank expects that this will improve its understanding of the risks to financial stability, and increase its ability to prevent and manage these risks.

Traditionally, in exercising its supervisory function, the Reserve Bank has relied on a light regulatory environment where the directors of financial institutions take responsibility for their institution’s compliance. We heard that the Reserve Bank has recently conducted culture and conduct reviews of the financial sector. The reviews have found problems with how banks and insurance companies are complying with the Reserve Bank’s expectations and regulations.

More staff will be required if the Reserve Bank is to successfully adopt a more intensive supervisory model. The Reserve Bank took on 19 additional full-time-equivalent (FTE) staff over 2018/19, and increased its regulatory supervisory team by 10 FTE staff. We had previously heard from the Reserve Bank that it would need to increase its regulatory supervisory team by 15 FTE staff to satisfactorily fulfil its regulatory functions. In our meeting with the Reserve Bank, we heard that staffing levels could increase by 30 percent. The total, however, is still subject to discussions with the Minister.

We heard that the Reserve Bank’s staffing levels in supervisory roles have been some of the lowest, if not the lowest, in the OECD. The Reserve Bank currently has one FTE supervisor per major bank. The Bank expects that increased staffing levels will help it meet the expectation of its international stakeholders, such as the IMF.

We heard that the Reserve Bank is planning to increase its Auckland operations. It expects that this will also increase the Reserve Bank’s staffing needs. Many of the Reserve Bank’s stakeholders are based in Auckland. Consequently, the Reserve Bank has been spending more on travel so it can better engage with those stakeholders. More Auckland-based staff would reduce those travel costs.

Successful recruiting can be challenging in a tight employment market The Reserve Bank received approximately 1,300 applications in 2018/19 for roles that it advertised. We heard that the Reserve Bank’s recruitment practices ensure that it only recruits people who have proven strengths and capabilities that meet its requirements. The Reserve Bank has acknowledged that recruiting suitable staff in the current low- unemployment environment can be challenging. ICT professionals, or staff with regulatory or policy experience, are in high demand.

In light of these challenges, we heard that the Reserve Bank is committed to the development and training of existing staff to help it meet staffing and capability shortfalls.

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The Reserve Bank conducted surveys to determine how engaged its staff are in their roles, and what the staff participation rate is. We heard that the staff engagement score was 67 percent, which equalled the average from the wider business sector. The participation rate was 82 percent, compared with 72 percent in the wider business sector. The Reserve Bank has not established any wellbeing metrics, although work in this area is ongoing.

Te ao Māori strategy We were pleased to note that the Reserve Bank has a te ao Māori strategy. Part of this strategy has been to improve staff confidence in te reo Māori and tikanga. We also heard that adopting narratives from Māori culture has been a useful tool for helping to explain the Reserve Bank’s role and purpose to a broad range of people.

However, the more significant piece of work has been on developing the Reserve Bank’s understanding of the Māori economic ecosystem, and how the Reserve Bank’s work influences this ecosystem.

Members of the Reserve Bank have been travelling the country to build relationships with Māori businesses and organisations in order to understand better the challenges faced in the Māori economy. The ultimate aim is for this strategy to improve the Reserve Bank’s decision making, particularly around monetary policy. For example, we heard that the Reserve Bank hopes to learn from Māori as it continues to develop a better understanding of the dynamics of maximum sustainable employment.

However, we are concerned that there are some detractors of this strategy. The Governor noted that some people are uncomfortable operating with unfamiliar concepts, or in a different environment. The Governor believes that the best way to engage those detractors is to communicate to them the concrete advantages of this strategy.

The ICT project, the “Trade Valuation Solution”, was an expensive write-off In 2015 the Reserve Bank commissioned an ICT project, called the Trade Valuation Solution. The project was later abandoned in 2018, at a total cost to the Reserve Bank of $7 million.

The Reserve Bank, through the American company Numerics, was attempting to build unique software which would provide end-to-end valuation of financial trades. We heard from the Reserve Bank that the scope of the project was huge, and it soon became much more complex than anticipated. The Reserve Bank acknowledged to us that it did not do a successful proof of concept at the beginning of the project.

The Reserve Bank assured us that there are no ongoing costs from the project. It has now taken a different approach to meeting its original goal. It has developed its own databases, using components from the old system along with internally developed new components. We heard that the new approach is vastly reduced in scope.

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The Future of Cash – Te Whakamahinga Moni Anamata As the sole issuer of New Zealand’s currency, the Reserve Bank is tasked with ensuring the supply and integrity of banknotes and coins. Recently the Reserve Bank embarked on a multi-year programme, entitled the Future of Cash. The programme is forward looking, and through it the Reserve Bank aims to:

 gain a better understanding of how cash is used  review the cash system to improve its efficiency and resilience  consider the optimal arrangement for the Reserve Bank’s future vaulting of cash. The programme is the Reserve Bank’s response to a rapidly evolving payments landscape, where society and the economy are significantly less reliant on cash. Through this programme the Reserve Bank has learnt that although the public is less reliant on physical money, it still wants access to cash in the future. The review has found that people who are currently excluded from digital or financial worlds would be “severely negatively affected” should cash become difficult to get or use.

The Reserve Bank has found that, globally, the demand for cash remains strong, but day-today usage is declining. We heard that it has investigated the use of physical currency in the economy. It has found that it has a good understanding of what half the cash it distributes is used for. As for the other half, the Reserve Bank has drawn the conclusion that some, but not all, of that cash has inevitably filtered through to the black economy.

The Reserve Bank’s business continuity plan passed its test During 2018/19 the Reserve Bank had to relocate all staff from its head office at 2 The Terrace. The building was unavailable for eight months while asbestos remediation work was carried out.

We heard from the Reserve Bank that its business continuity plan was well tested during the relocation. The senior leadership of the Reserve Bank was pleased with how successful their staff and operations fared during this period. Although minor adjustments were made to the business continuity plan after the event, the Reserve Bank found that its existing planning was largely successful. We heard that there were no disruptions to business continuity, or to the services provided by the Reserve Bank.

We heard from the Reserve Bank that finding suitable office space would be the biggest challenge to business continuity in the event of an unplanned evacuation of 2 The Terrace. However, the Reserve Bank has a secondary office in Auckland, which is capable of operating all core Reserve Bank services.

The costs of the remediation work, the relocation, and the loss of rental income for 2 The Terrace added approximately $4 million to net operating expenses.

Disclosure of information cannot be enforced in acquisitions of financial companies The Reserve Bank has a prudential duty to oversee and approve all acquisitions of New Zealand financial institutions. We noted that the Reserve Bank is currently overseeing the

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2018/19 ANNUAL REVIEW OF THE RESERVE BANK OF NEW ZEALAND proposed purchase by Resolution Life of shareholding in AMP Life Ltd from AMP Ltd. When overseeing these transactions, the Reserve Bank must be satisfied that the change of ownership does not alter the insurer’s ongoing eligibility to retain its New Zealand licence.

We heard that this acquisition would not be subject to disclosure requirements. Although the Reserve Bank recognises that policyholders have a strong interest in this process, we heard that any disclosure obligations would fall on the company that is being sold. We are concerned that, without the Reserve Bank enforcing disclosure, the best interests of consumers are not being protected.

The Reserve Bank highlighted that this proposed sale would change who the shareholder of AMP Life Ltd is. However, there would not be a change for policyholders in who their insurer is. Therefore, this would not change the contractual entitlements of policyholders, nor would it affect a policyholder’s right to enforce their insurance contract. We heard that a transfer of policies to a new insurer would require the Reserve Bank to more directly consider the policyholders’ interests.

We heard that the Reserve Bank intends to provide a statement for policyholders and other interested members of the public regarding Resolution Life’s proposed purchase of shareholding in AMP Life Ltd. We look forward to this statement being released.

Some of us are concerned that there is a legislative hole, whereby transactions of this nature are not subject to usual market scrutiny, and there is no provision for any entity other than the Reserve Bank to review them.

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Appendix

Committee procedure We met on 19 February, 11 and 18 March 2020 to consider the annual review of the Reserve Bank of New Zealand. We heard evidence from the Reserve Bank and received advice from the Office of the Auditor-General.

Lawrence Yule participated in our consideration of this item of business.

Office of the Auditor-General (Briefing on the Reserve Bank of New Zealand).

Reserve Bank of New Zealand (Responses to written questions).

9 276

2018/19 Annual review of Southern Response Earthquake Services Limited

Report of the Governance and Administration

Committee

March 2020

Contents Recommendation ...... 2 Introduction ...... 2 Financial overview ...... 2 Class action against Southern Response ...... 3 Outstanding claims liability ...... 4 Transitional arrangements with the Earthquake Commission ...... 4 Canterbury Earthquake Insurance Tribunal ...... 5 Appendix ...... 6

Dr Jian Yang Chairperson

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2018/19 ANNUAL REVIEW OF SOUTHERN RESPONSE EARTHQUAKE SERVICES LIMITED

Southern Response Earthquake Services Limited

Recommendation The Governance and Administration Committee has conducted the annual review of Southern Response Earthquake Services Limited for 2018/19, and recommends that the House take note of its report.

Introduction Southern Response Earthquake Services is a Crown-owned company responsible for settling the claims of AMI policyholders for Canterbury earthquake damage that occurred before 5 April 2012. It is a limited liability company under the Companies Act 1993 and is subject to many of the provisions of the Crown Entities Act 2004. The Minister of Finance and the Minister Responsible for the Earthquake Commission are its shareholders.

Before 5 April 2012, Southern Response traded as AMI Insurance Limited and was New Zealand’s second-largest residential insurer. After the Canterbury earthquakes, AMI received an unprecedented number of claims. As a result, it accepted capital support from the Government to ensure that policyholders were protected and their claims met. AMI subsequently sold its non-earthquake-related business to IAG Holdings Limited. It retained its former earthquake claims management team and was renamed Southern Response Earthquake Services Limited.

Southern Response is governed by a board of directors, chaired by Alister James, who replaced Ross Butler in December 2018. The chief executive for the year under review was Anthony Honeybone.

Financial overview Southern Response’s financial statements comprise insurance liabilities and support from the Crown. As at 30 June 2019, the Crown had $751 million in paid-up shares, and Southern Response can access up to $234 million of additional capital under its Crown support deed—a total of $985 million.

As at 30 June 2019, the liabilities of Southern Response exceeded its assets by $154 million. The directors have concluded that the going-concern assumption is appropriate, given the funding available under the Crown support deed. The Auditor-General has assessed this as being adequately disclosed in the financial statements.

On 26 September 2018, the Minister of Finance agreed to indemnify Southern Response against the costs, if any, of settling a representative action against it. The deed of indemnity was amended on 28 June 2019 to include any present or future proceeding for a housing claim against Southern Response that is agreed as covered by both the company and the Crown.

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2018/19 ANNUAL REVIEW OF SOUTHERN RESPONSE EARTHQUAKE SERVICES LIMITED

Results of the 2018/19 audit The Auditor-General issued an unmodified audit opinion, with one “emphasis of matter” paragraph. It draws attention to the additional uncalled capital available to Southern Response and the indemnity to meet any costs from the representative proceeding filed against it in May 2018. The Auditor-General assessed Southern Response’s management control environment as “very good” with no recommendations for improvement. He assessed Southern Response’s financial information and supporting systems and controls, and its performance information and supporting systems and controls, as “good” and recommended some improvements. The Auditor-General recommended Southern Response review its project cost summary (PCS) report for accuracy and completeness. This is a key input to the insurance central estimate valuation model. Southern Response told the auditor it is confident with the accuracy of the data because only PCSs that have been subjected to management review are included in the valuation model. It believes a review of the data would be ineffective. Southern Response has communicated to staff the importance of updating the PCS whenever there is updated information on claims so that the insurance central estimate valuation model is using the most up-to-date data.

Class action against Southern Response A class action was filed against Southern Response in May 2018 by policyholders concerned about alleged underpayment. The plaintiffs, Brendan and Colleen Ross (Ross v Southern Response), are seeking to recover additional amounts not paid to them under their “buy another house” settlement. Under the “buy another house” settlement option, claimants are paid the value of a notional rebuild of their home on the same site. However, until a court decision in July 2015, this did not include certain ancillary costs, such as professional fees and project contingency sums.1 Southern Response considered these costs hypothetical unless they were actually incurred through a full rebuild. The plaintiffs are seeking to represent approximately 3,000 customers who settled through the “buy another house” option before October 2014.2

Southern Response told us that there are several potential outcomes from the Ross action, which is currently at procedure stage. The issue before the court at the moment is whether the action be allowed to proceed on an opt-in or opt-out basis. Southern Response indicated that it is not yet able to quantify its potential liability from the action. However, we understand that the Crown has agreed to indemnify Southern Response from any resulting costs, as well as the costs of possible future action against it. No allowance for the outcome of these proceedings has yet been made in the Crown’s financial statements, due to the range of possible outcomes.

Other litigation We note that Southern Response is separately appealing a High Court decision from August 2019 on Dodds v Southern Response. Like the Ross action, the plaintiffs in the Dodds case

1 The 2015 court decision was in Southern Response v Avonside, where the Supreme Court upheld a Court of Appeal decision from 2014 that these additional amounts needed to be included in notional rebuild estimates. 2 Ross v Southern Response Earthquake Services [2018] NZHC 3288.

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2018/19 ANNUAL REVIEW OF SOUTHERN RESPONSE EARTHQUAKE SERVICES LIMITED argue that Southern Response misled them when they settled their insurance claims for damage to their property caused by the Canterbury earthquake. Southern Response said that, by appealing the decision, it hopes to clarify whether it has a legal obligation to re-open claims it has already settled on a full and final basis.

We understand that the outcome of the Dodds case could have an impact on the Ross action because the substantive issues are the same. We will follow developments in both cases with interest.

Outstanding claims liability The Auditor-General concluded that the judgments made in determining Southern Response’s outstanding claims liability as at 30 June 2019 are reasonable. However, it noted that significant uncertainty remains about what the ultimate liability will be. The outstanding claims liability is expressed as a central estimate, with a risk margin applied net of reinsurance and other recoveries. It includes claims reported but not yet paid, claims incurred but not reported, claims incurred but not enough reported, and estimated claims handling costs.3 As at 30 June 2019, the outstanding claims liability was estimated to be $216.4 million, down $184 million from 2018. This does not include an allowance for any costs that may arise as a result of the Ross action or other litigation.

In 2018/19, Southern Response increased the risk margin on its outstanding claims liability from 20 percent to 25 percent. This is because it regards many of the remaining claims as complex, with some requiring additional legal or tribunal support to settle. Southern Response indicated there is also “significant uncertainty” around the estimated number of claims for damages incurred but not yet reported. These have become a larger component of Southern Response’s outstanding claims portfolio since our last annual review because many of its older claims have now been settled. Southern Response told us it is confident it has sufficient capital available through its Crown support deed to meet its outstanding claims liability.

Transitional arrangements with the Earthquake Commission In October 2019, the Minister of Finance announced that the remainder of Southern Response’s claims will be transferred to the Earthquake Commission (EQC) by the end of this year. This is because, with a reducing claims portfolio, the cost of continuing to process claims through Southern Response has begun to outweigh the benefits.4 Under the transfer arrangement, EQC will manage the progression of each claim while Southern Response, as a residual organisation, will retain ultimate responsibility for their settlement. We understand that this transition was to be completed by 21 December 2019, after which time Southern Response will operate with minimal staff responsible for residual legal, financial, and administrative functions.

Southern Response told us it has been working closely with EQC to ensure a smooth transition for its customers. Southern Response has contacted its customers to advise them of the change and how it might affect them, with many customers able to use their current

3 Southern Response, Annual Report 2019, p. 26. 4 https://www.beehive.govt.nz/release/southern-response-claims-move-eqc 4

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2018/19 ANNUAL REVIEW OF SOUTHERN RESPONSE EARTHQUAKE SERVICES LIMITED contact within Southern Response after the transition. We heard that staff from Southern Response have been co-located within EQC to share knowledge of each other’s systems and processes, and that former Southern Response employees have been contracted by EQC to provide continuity for customers.

We are interested in how this transition might affect customer satisfaction, and we will watch developments with interest.

Canterbury Earthquake Insurance Tribunal The Canterbury Earthquake Insurance Tribunal was established in June 2019 to resolve, in a fair, speedy, and flexible way, insurance disputes arising from the Canterbury earthquakes. Tribunal decisions are binding and enforceable but may be appealed to the High Court. At the time of our hearing, nine claims involving Southern Response were before the tribunal, and one settlement had been reached. Southern Response said it fully supports the tribunal process and recognises that different settlement pathways are useful for its customers. It said there is “no one answer” to getting an enduring settlement and the tribunal gives customers another option. We were pleased to learn the insurance tribunal is being utilised by Southern Response customers, and will follow its progress.

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Appendix

Committee procedure We met on 18 December 2019 and 11 March 2020 to consider the annual review of Southern Response Earthquake Services Limited. We heard evidence from Southern Response and received advice from the Office of the Auditor-General.

Committee members Dr Jian Yang (Chairperson) Ginny Andersen Kanwaljit Singh Bakshi Sarah Dowie Paul Eagle Hon Peeni Henare Willow-Jean Prime Lawrence Yule

Sarah Dowie replaced Hon Jacqui Dean as a member of the Governance and Administration Committee on 19 February 2020.

Hon Nicky Wagner and Stuart Smith participated in some of this review.

Office of the Auditor-General (Briefing on Southern Response Earthquake Services Limited).

Southern Response Earthquake Services Limited (Responses to written questions).

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2018/19 Annual review of the State Services Commission

Report of the Governance and Administration Committee

March 2020

Contents Recommendation ...... 2 About the State Services Commission ...... 2 Audit results and financial performance...... 2 Diversity and inclusion ...... 2 Protection of data ...... 3 Public Service Legislation Bill ...... 3 The public service in the regions ...... 4 Availability of key performance indicators ...... 4 Appendix ...... 5

Dr Jian Yang Chairperson

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State Services Commission

Recommendation The Governance and Administration Committee has conducted the annual review of the State Services Commission for 2018/19, and recommends that the House take note of its report.

About the State Services Commission The State Services Commission (SSC) provides leadership to and oversight of New Zealand’s state services. The commission has been repositioning itself to take a greater leadership role of the public service as a whole. It works with government agencies and also advises the Government on New Zealand’s public management system. The SSC is one of the three departments, along with the Treasury and the Department of the Prime Minister and Cabinet (DPMC) that constitute the Government’s “central agencies”.

The SSC has 137 employees. We heard from the State Services Commissioner, Peter Hughes, and the Deputy State Services Commissioner, Helene Quilter.

Audit results and financial performance The SSC is largely funded from Vote State Services. Total revenue in 2018/19 was $46.1 million, a 6.7 percent decrease from 2017/18’s $49.415 million. Total expenditure was $43.5 million, a 3.7 percent decrease from total revenue of $45.151 million in 2017/18. This resulted in a surplus of $2.6 million.

The Auditor-General issued a standard audit report. He rated the SSC’s management control environment and financial information and associated controls as “very good”. The SSC’s performance information and associated systems and controls were rated “good”. The auditor recommended ensuring it has appropriate measures for its outputs and strategic intentions, and appropriate documentation to support these measures.

Diversity and inclusion We heard that ethnic diversity of staff is one area where the SSC felt it is not yet meeting its goals. Almost 90 percent of the SSC’s staff identify as European.

Although there is good Pacific representation, this does not extend to the senior levels. The SSC ran a summer internship programme over 2019/20, and had four Pasifika interns, who intend to return as SSC employees after graduating. The SSC is not considering implementing a quota system for applicants, but it is looking at ways to encourage more diverse applicants. It notes that policy work is not seen as the most attractive field for young people, so it is working to incentivise more graduates to apply for these roles.

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The Commissioner expressed a desire for public agencies to represent the communities they serve. For example, if 50 percent of people who access a service are Māori, then 50 percent of staff at that agency should be Māori.

The commission told us that it works with the Office of Disability Issues, the Office of Ethnic Communities, and the Human Rights Commission to progress its work on diversity and inclusion. It also works with Statistics New Zealand to collate data about New Zealand’s public sector workforce.

The SSC told us that it believes its role is to lead the conversation on system-wide diversity and inclusion.

Work to reduce the gender pay gap The SSC told us about the work it has done to address the gender pay gap in the organisation, and across the public service. Inside the SSC, the gender pay gap has reduced to 10.2 percent at August 2019. However, due to the commission’s small size, this statistic can change quite easily.

Currently 53 percent of public sector chief executives are women, and women hold three of the highest paying roles (Chief Executives of Inland Revenue Department, The Treasury, and Oranga Tamariki – Ministry for Children), and the two largest roles in the public sector. We acknowledge that, as the leader of the public service, the SSC has an important role to play in changing gender pay standards throughout the public service.

Protection of data We noted that state sector agencies had experienced several breaches of data security in the last year. We were told that this is an ongoing concern, for the private sector as well as the public. The commission acknowledged that in the future, the majority of service delivery will be digital, emphasising the importance of having well-functioning ICT systems.

We heard that one option to manage this could be for the large departments to have their own technology departments, and for smaller departments to share services.

We are concerned about data and privacy breaches, and hope the commission will take the issue seriously.

Public Service Legislation Bill The Public Service Legislation Bill, currently being considered by this committee, proposes to reform the public service and aims to create a more connected service. The bill would deliver better outcomes and services for New Zealanders, create a modern and adaptable public service, and ensure the constitutional role of the public service in supporting New Zealand’s government.

The SSC told us that since the state sector reforms of 1988, the public service has been characterised as fragmented and has operated as isolated agencies. We were told that the chief executives of the Department of Corrections and the New Zealand Security Intelligence Service were leading a work programme across the public service to look at positive workplace behaviours, and improve working environments across the public sector.

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Family Violence and Sexual Violence Joint Venture The Family Violence and Sexual Violence Joint Venture is an example of the change that the Public Service Legislation Bill is aiming for. The joint venture sat across several Votes in Budget 2019, and is run by a board of chief executives, chaired by the State Services Commissioner. We were told that this model is the first of its kind in New Zealand, and creates a point of joint accountability and leadership.

We were told that the bill will allow for more, and easier, cross-system collaboration like this joint venture.

The public service in the regions We asked about the SSC’s approach in engaging with the regions. We heard that different departments had created different boundaries for the regions. This means there has been a great deal of inconsistency for communities in knowing how to engage with agencies. The SSC is looking to standardise these boundaries, and to have a senior person coordinating each area. It hopes that this will allow it to better understand these communities, and therefore better meet their needs.

We were also told that it was looking at flexible work options for public service staff. It is not essential that the entire public service be based in Wellington.

Availability of key performance indicators We noted that the SSC’s key performance indicators (KPIs) were not in its annual report, which made it more difficult to measure its performance. We were told that these KPIs could be found across several documents, and on the SSC’s website. There are hard data measures for goals like pay equity, and Māori and Pasifika staff. The SSC told us it does not believe it is standard practice for KPIs to be included in annual reports

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Appendix

Committee procedure We met on 12 February 2020 and 11 March 2020 to consider the annual review of the State Services Commission. We heard evidence from the State Services Commission and received advice from the Office of the Auditor-General.

Committee members Dr Jian Yang (Chairperson) Ginny Andersen Kanwaljit Singh Bakshi Sarah Dowie Paul Eagle Hon Peeni Henare Willow-Jean Prime Lawrence Yule

Sarah Dowie replaced Hon Jacqui Dean as a member of the Governance and Administration Committee on 19 February 2020.

Advice and evidence received We received the following documents as advice and evidence for this annual review. They are available on the Parliament website, www.parliament.nz.

Office of the Auditor-General (Briefing on the State Service Commission).

State Services Commission (Responses to written questions).

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Report of the Governance and Administration Committee

March 2020

Contents Recommendation ...... 2 About Statistics New Zealand ...... 2 Financial overview and audit results ...... 2 Reflecting on the 2018 Census ...... 3 Planning for the 2023 Census ...... 4 Data leadership ...... 5 Appendix ...... 6

Dr Jian Yang Chairperson

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Statistics New Zealand

Recommendation The Governance and Administration Committee has conducted the annual review of Statistics New Zealand for 2018/19, and recommends that the House take note of its report.

About Statistics New Zealand Statistics New Zealand (Stats NZ) is the official data agency for New Zealand. It produces the majority of official statistics, administers the Statistics Act 1975, and leads the Official Statistics System. Stats NZ employs 1,047 staff across Wellington, Auckland, and Christchurch.

Liz MacPherson was the Chief Government Statistician, Chief Data Steward, and chief executive of Stats NZ from 2013 until December 2019. Mark Sowden took on the position in January 2020.

Financial overview and audit results Both revenue and expenses were significantly lower in 2018/19 compared with the previous year. This is normal for the census cycle, as the higher figures for 2017/18 reflected the cost of carrying out the 2018 Census.

Total revenue for Stats NZ in 2018/19 was $177.5 million, a 10.4 percent decrease from $198.2 million the previous year. Expenses were $155 million, 21 percent below the previous year.

Stats NZ received the final insurance settlement ($29.3 million) from the loss of Statistics House due to the November 2016 Kaikōura earthquake. As a result, it recorded a surplus of $22.7 million for 2018/19, compared with a surplus of $1.2 million the previous year. The Minister of Finance has approved the retention of $22.5 million of this surplus, to be used for funding the fit-out of Stats NZ’s new Wellington accommodation and for replenishing the organisation’s cash reserves. The remainder will be returned to the Crown.

The Auditor-General assessed both the management control environment and the financial information and supporting systems and controls for Stats NZ as “very good”. The Auditor- General assessed the performance information and supporting systems and controls as “good”.

The auditor noted that some deficiencies identified in the 2017/18 audit had been partially resolved, and recommended that Stats NZ:

 develop performance measures relating to the quality of census responses, and include them in its performance framework

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 streamline its reporting to external readers in order to more clearly demonstrate progress towards its strategic intentions.

Reflecting on the 2018 Census The 2018 Census was conducted in March 2018. Due to a lower than expected response rate, Stats NZ spent the last year developing new methods to bridge the gaps in the data, using administrative data and 2013 Census data. As a result, the official census undercount was 1.4 percent less than Stats NZ’s estimate of the population; the undercount in 2013 was 2.4 percent.

The first data from the 2018 Census was released in September 2019, 18 months after the census took place. The first data from the 2013 Census was released 7 months after that census took place.

In the annual report, the chief executive acknowledged that it has been a difficult year for Stats NZ, with much of that due to the 2018 Census. She apologised for the fact that Stats NZ did not make it easy enough for everyone to take part in the census, and as a result the response rate was lower than expected. She said “it is critical to review our work, understand our errors and use these learnings to challenge ourselves to do better”.1

Independent review of the 2018 Census Murray Jack and Connie Graziadei released the findings of their independent review of the 2018 Census in August 2019.2 The review found that there were weaknesses in the governance and strategic leadership of the census programme that compromised the achievement of the census’ objectives. They issued 16 recommendations relating to the organisation of future censuses, and to Stats NZ more broadly. Stats NZ told us it has completed seven of the recommendations, is aiming to complete a further six in 2020, and will be implementing the remaining three through the delivery of the 2023 Census.

Independent External Data Quality Panel An independent External Data Quality Panel was assembled in August 2018 to provide an independent assessment of the methods Stats NZ was using to address the gaps in the data from the 2018 Census. The panel has released three reports, with its final report released in February 2020.3

We asked about the panel’s rating that the quality of ethnicity data from the 2018 Census was “moderate”, a downgrade from Stats NZ’s own rating of the quality as “high”. Stats NZ explained that the panel used different rating criteria to look at how ethnicity data would be able to work with other datasets.

The panel’s first report, released in September 2019, found that the comparability of data between censuses was severely disrupted. Stats NZ advised that while such disruptions do cause concern, they are relatively common. It explained that disruptions can happen when

1 Stats NZ Annual Report for the year ended 30 June 2019, p. 3. 2 Read the Report of the Independent Review of New Zealand’s 2018 Census. 3 The reports have been published on the Stats NZ website.

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2018/19 ANNUAL REVIEW OF STATISTICS NEW ZEALAND the data quality changes; however, it considers the 2018 Census data to be better than the 2013 data.

Stats NZ told us the External Data Quality Panel assessed the census data as meeting the accuracy requirements for the Representation Commission’s electoral boundary revisions, for both General and Māori electorates.

Increasing use of administrative data

Administrative data is data derived from government administrative records held by Stats NZ.4 Stats NZ had a goal to increase the use of administrative data in the 2018 Census; however, it had to rely on its use more heavily than planned. Stats NZ says the extensive use of administrative data for statistics is “a significant advance for population statistics”.

Some of us expressed concern about the privacy implications of using administrative data and the extent to which Stats NZ had consulted with New Zealanders about the use of such data. Stats NZ acknowledged that it did not have the ability to undertake consultation at the level it would have wanted. It disagreed that people’s privacy was breached and told us that it ensures the data is safeguarded.

Gaps in iwi Māori data

Māori and Pasifika participation in the 2018 Census was lower than for other populations, indicated by the higher use of administrative data required for the dataset—nearly 25 percent of the statistical data for Māori and Pacific populations is composed of administrative data, compared with 10 percent for the European ethnic group. Because of the lower participation rate and a lack of alternative data sources, Stats NZ did not have enough iwi affiliation data to release official statistical counts.

Stats NZ has acknowledged that this is a significant gap. It told us that it is working to improve the collection of iwi data. Stats NZ and the Data Iwi Leaders Group of the National Iwi Chairs Forum signed the Mana Ōrite Relationship Agreement in October 2019 to set out a plan for improving the collection and use of data to improve outcomes for iwi, hapū and whānau. Stats NZ has also established a permanent Census Community Engagement and Partnerships team to engage with Māori and Pasifika. We heard that Stats NZ is working with Te Mana Raraunga and the Data Iwi Leaders Group to design a Māori data governance approach.

Planning for the 2023 Census Stats NZ told us that it improved its process for the preparation of its business case for the 2023 Census, which was submitted to the Treasury in December 2019. It will give the Government options for the funding of the next census. Confirmation of the business case will be available following the announcement of Budget 2020, which will then enable decisions to be made about the parameters and timelines for the census.

Stats NZ noted that collection design is a big driver of census costs, so it has undertaken significant consultation in this area.

4 Read information about Stats NZ’s methods for adding administrative data to the 2018 Census data. 4

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Stats NZ told us that its business case includes recommendations to increase participation and accessibility for the 2023 Census. These include:

 a significant increase in the number of field staff available to support people completing the census  a focus on communicating the importance of the census  building trust by being transparent about its data practices  the creation of a dedicated work stream to ensure the census is accessible to all New Zealanders.

Data leadership Ngā Tūtohu Aotearoa – Indicators Aotearoa New Zealand In June 2019, Stats NZ released Ngā Tūtohu Aotearoa – Indicators Aotearoa New Zealand, a set of over 100 indicators that will be used to monitor New Zealand’s progress on social, economic, and environmental wellbeing. This will be the data source used to support the Treasury’s Living Standards Framework and Dashboard, as well as New Zealand’s international reporting requirements.

Integrated Data Infrastructure The Integrated Data Infrastructure (IDI) is a database of de-identified information about people and households collected by government agencies, Stats NZ surveys, and non- government organisations. The data in the IDI is increasingly being used for modelling work across government, as well as for research. As the uses of the IDI evolve, Stats NZ is reviewing its assessments of the implications for privacy and confidentiality.

Data Ventures Data Ventures, Stats NZ’s commercial arm, launched the Population Density pilot in July 2019. The product shows the movement of people using aggregated anonymised cellphone tower data, and can be used to model the number of people in an area for purposes such as emergency planning.

Stats NZ told us that Data Ventures has been endorsed by the Privacy Commissioner and the new Data Ethics Advisory Group. We noted that one telecommunications provider, 2degrees, had withdrawn from the project, citing privacy concerns, and another, Spark, was allowing customers to opt out. Stats NZ does not believe this will compromise the quality of the data, because it expects that only a relatively small number of people will opt out. It also noted that 2degrees is a small part of the market.

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Appendix

Committee procedure We met on 20 November 2019 and 11 March 2020 to consider the annual review of Statistics New Zealand. We heard evidence from Statistics New Zealand and received advice from the Office of the Auditor-General.

Committee members Dr Jian Yang (Chairperson) Ginny Andersen Kanwaljit Singh Bakshi Sarah Dowie Paul Eagle Hon Peeni Henare Willow-Jean Prime Lawrence Yule

Sarah Dowie replaced Hon Jacqui Dean as a member of the Governance and Administration Committee on 19 February 2020.

Office of the Auditor-General (Briefing on Statistics New Zealand).

Statistics New Zealand (Responses to written questions).