2015/16 Annual review of the Ministry of Business, Innovation and Employment

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1 2015/16 Annual review of the Ministry of Business, Innovation and Employment Report of the Commerce Committee Contents Recommendation 2 Introduction 2 Financial performance and audit opinion 2 Payroll errors 3 Unpaid wages under the Holidays Act 3 New Zealand Business Number 4 Research growth and development 4 Regional Growth Programme 4 The ministry s use of contractors 5 Business Growth Agenda 6 Immigration issues 6 Telecommunications 7 Appendix 8

2 Ministry of Business, Innovation and Employment Recommendation The Commerce Committee has conducted the annual review of the 2015/16 performance and current operations of the Ministry of Business, Innovation and Employment, and recommends that the House take note of its report. Introduction About the ministry The Ministry of Business, Innovation and Employment states that it aims to grow New Zealand for all. It works to increase real household incomes through more competitive businesses, increased job opportunities, and more affordable housing. The ministry co-leads work on the Government s Business Growth Agenda. Its responsibilities cover a wide range of areas, including immigration, communications, energy and resources, regional development, housing, building regulation, tourism, and government procurement. It is a very large agency, with more than 3,200 employees over 6 percent of the public service workforce. The chief executive is David Smol. Focus of our review As noted above, the ministry s work is wide-ranging. It administers three Votes (Vote Business, Science and Innovation; Vote Labour Market; and Vote Building and Housing). It works with 14 portfolio Ministers, and monitors or funds 27 Crown entities and companies. Our review focused on the activities of the ministry that broadly fall within the commerce subject area. Three other committees are reviewing entities in which the ministry has a policy or overview interest: Education and Science Committee: science and innovation Social Services Committee: social housing Transport and Industrial Relations Committee: accident compensation, and workplace safety. The Finance and Expenditure Committee allocated the annual reviews to subject select committees on this basis. In doing so, it recognised that this approach would better match the annual reviews with the votes that each committee considers during its Estimates scrutiny. Financial performance and audit opinion The ministry s total expenditure in 2015/16 was made up of departmental expenditure of $ million (up 6 percent from the previous year) and non-departmental expenditure of just over $3.288 billion. The ministry s departmental revenue was $ million. The ministry had a net surplus of $ million for 2015/16, compared with a surplus of 2

3 $ million the previous year. The increased net surplus was mostly due to increased immigration revenue. As well as its own spending, the ministry administers a large amount of non-departmental expenditure. This totalled just over $3.288 billion in 2015/16, up about 8.7 percent from about $3.025 billion in 2014/15. This money was administered, on behalf of Ministers, for services provided by Crown entities and research facilities. The Office of the Auditor-General (OAG) assessed and graded the ministry s performance information and associated systems and controls as good. We were pleased to see this progress from the 2014/15 grade of needs improvement. The OAG said the change reflects considerable work by the ministry to improve its performance reporting. However, we are concerned that the OAG continues to rate the ministry s management control environment and its financial information systems and controls as needing improvement. It has recommended that major improvements be made at the earliest reasonable opportunity. We hope to see progress in these areas by the time of our next review. Payroll errors The OAG s annual audit raised as a significant matter that the ministry has not been meeting the requirements of the Holidays Act This Act provides employees with minimum entitlements to annual holidays, public holidays, sick leave, and bereavement leave. The ministry s non-compliance has resulted in leave payments being miscalculated, particularly where employees hours fluctuate or they receive additional pay on top of normal hours. We heard that the ministry started a payroll remediation project in October 2015 to assess the size of the error in calculating holiday pay, and to repay those involved. A team of 11 people from various backgrounds is working on the project. We asked about the timeline for resolving the issues, as the Minister for Economic Development had told us that the ministry expected to have the problem resolved in late We were told that the ministry plans to complete the calculations for remediation by the end of 2016/17 or earlier. It would then make the necessary repayments, first to current staff, and then to former staff. The chief executive was confident that the ministry will have resolved its payroll issues by the time of our next annual review. We asked for an estimate of the liability. We were told that the ministry does not have an estimate because of the issue s complexity. It has a list of the employees potentially affected, but must go back and recalculate pay runs covering several years. Until this is done, it cannot work out the costs involved. The ministry told us it expects to manage the financial implications within its existing budget. Some of us expressed strong concern at the lack of information on the quantum of the payroll remediation, and whether the ministry could manage the financial implications within its existing budget. Unpaid wages under the Holidays Act We discussed non-compliance with the Holidays Act more generally. The ministry has a programme of work led by the Labour Inspectorate. The inspectorate supports employers to comply with the Holidays Act through government industry work streams, audits and investigations, and education and information. 3

4 The ministry said it is working with partners like the Council of Trade Unions and in-field Business New Zealand practitioners to identify issues so that it can give clear guidance to those responsible for paying staff. New Zealand Business Number The ministry has recently introduced the New Zealand Business Number (NZBN), a unique identifier used for all interactions with government. We were told that NZBNs have already been allocated to businesses that are incorporated. The ministry will be ready by the end of 2016 to start allocating NZBNs to smaller businesses that are sole traders, and will then start promoting the benefits of the NZBN to them. We note that there is some confusion about the various numbers in use: they include numbers for the Inland Revenue Department (IRD) and the Accident Compensation Corporation (ACC), as well as the NZBN. We asked how businesses, particularly small and medium-sized enterprises, would benefit from the NZBN. The ministry said it sees value for small businesses and sole traders to interact with government in a more straightforward way. It noted that ACC and IRD are updating their systems to use NZBNs, and it expects the NZBN to take precedence over time. As more government agencies adopt the NZBN, the ability to update information at all NZBN agencies by contacting just one agency will be a huge advantage to small businesses. We heard that the roll-out would take one to three years. The ministry expects the NZBN to be accepted by most agencies that deal with businesses by the end of the 2019 financial year. We plan to seek regular updates on how these targets are being met. Research growth and development We asked about the National Statement of Science Investment s target of having businesses spend 1 percent of GDP on research and development (R&D) by The ministry told us that this is a very challenging target, as New Zealand has been at the lower end of business R&D spending among OECD countries. In contrast, New Zealand is well placed among OECD countries for government R&D spending. We heard this is partly due to the nature of this economy, as New Zealand has a very large number of small and medium-sized enterprises. The larger firms tend to be clustered in the agriculture sector. We were pleased to hear that the ministry has seen quite significant increases in business R&D expenditure since it introduced the business growth grants that Callaghan Innovation delivers. The ministry expects results from the biannual business R&D survey in We look forward to seeing the results of this survey. Regional Growth Programme We sought more information about the ministry s Regional Growth Programme. The programme identifies potential growth opportunities in selected regions, and aims to increase jobs, income, and investment in regional New Zealand. The ministry is working with nine different regions. The action plan for the Southland region was launched in late Action plans are led by the region, with a deputy chief executive from a government agency assigned to each as a liaison point. We asked for an update on the Toi Moana Bay of Plenty Economic Action Plan. A key action is the Ōpōtiki Harbour Transformation Project, which aims to create a year-round navigable harbour entrance. It includes construction of a new commercial wharf to support 4

5 a range of industries, including processing facilities for a 3,800ha offshore marine farm. We heard that this farm and its processing plant would provide about 220 jobs in the region. The ministry told us it should know by mid-2017 whether the project will go ahead, as it is a significant commercial decision. We are interested in hearing more about this project s progress in the future. Regional economic activity tools The ministry told us about its new mobile application for smartphones, the New Zealand Regional Economic Activity App, which is free in the app store. It allows users to browse key figures and charts on 16 regional council areas and 66 territorial authority areas. It provides information about incomes, house values, rents, employment, migration, and GDP in any given region. The ministry said it makes the app as real time as possible by updating it as soon as new statistics become available. We asked how much had been spent on advertising the app. Since its launch in October 2015, a total of $5,982 has been spent on paid social media marketing via Twitter. The ministry s use of contractors We discussed at length the ministry s significant spending on contractors. We asked whether the ministry considers it acceptable or desirable to use contractors as extensively as it does. The ministry said it uses contractors when it needs a specialist skill or independent perspective, or when it faces a temporary peak in a certain area that does not require permanent employment. It added that in some areas, such as IT project management, it can be challenging to find high quality candidates. Often it uses people for fairly short-term work when immediate action is needed. The ministry told us that its work continues to increase as it has taken on several new functions, and has seen growth in third-party-funded activities in areas such as Immigration New Zealand, the Companies Office, and the Intellectual Property Office. Several of the new functions have involved investing in capability to get them started. The chief executive emphasised that the ministry continually seeks to improve its discipline about the use of contractors. Over time, he hopes to improve the ratio of employees to contractors. However, he added that if the ministry s work continues to grow, overall spending on contractors may increase, even as it reduces as a proportion of total spending. Tender process for contract work We pointed out that many contractors from certain employment agencies appeared to have been taken on without a tender process. We heard that these agencies had an External Recruitment Services contract, which covers the whole of government. Once agencies have these contracts, government departments are able to use them on an as-needed basis, without going through a tender each time. Cost of contractors We questioned the payment of more than $1 million to a consultant from PricewaterhouseCoopers for the organisational design and process creation of Immigration New Zealand s Vision 2015 programme. The ministry indicated that this was a major transformation programme involving expenditure of $136 million over four years, and the $2.3 million total cost of consultants for the programme should be viewed in this context. 5

6 We questioned why some contractors received over $400 an hour. The ministry told us this was a maximum hourly rate, usually involving a partner at a firm. However, the charge-out rate was usually less than this. Business Growth Agenda The Business Growth Agenda aims to build a stronger economy by creating conditions for firms to be more productive and internationally competitive. It has a goal for exports to reach 40 percent of GDP by Currently, exports make up less than 30 percent of GDP. We heard that the recent decline in dairy prices and the variable performance of some of New Zealand s trading partners has not helped in meeting the target. The ministry acknowledged that it is an aspirational target, as it would be hard to argue that it is on track to meet it by However, it will continue to work on opportunities for export growth. Immigration issues Immigration is the largest single part of the ministry s departmental expenditure (about 46 percent). The number of visa applications increased considerably in 2015/16. We were disappointed to note from the performance measures in the ministry s annual report that it failed to achieve several timeliness targets for its immigration services. The ministry said that it dealt with several major issues to do with student visas over the past year, and needed to take the time to reach sound decisions. Overall, it considers that its performance track record has been improving. International workers and students Some of us are concerned that many foreign students gain low-level diplomas from private tertiary education intitutions as a means of obtaining work permits, often for low-skilled jobs that are not on the skills shortage list. This has the effect of holding down wage rates, rather than lifting skill levels. Some of us suggest that Immigration New Zealand should do more to match migrants who come through tertiary institutions with shortages in highskilled areas such as the ICT industry, where 10,000 graduates are needed. The ministry acknowledged that, as in other countries, Immigration New Zealand packages international education with pathways into the labour market. It said there has been a focus on improving the match between migrants through the education pathway and the skills that the economy needs. For example, adjustments have been made to the points requirements under the skilled migrant category. The ministry has worked with the Ministry of Education on the tertiary education strategy, to help link institutions with employers needs. The Government has also funded the establishment of ICT graduate schools as a direct response to the need for expertise in this area. The ministry added that international education is a big growth area, both in New Zealand and internationally. Education-related travel was New Zealand s fifth biggest export in the year ending June 2016, bringing in $3.539 billion. 1 It sees it as positive for the economy if New Zealand offers good-quality courses, whether people return home afterwards or seek to stay. In the latter case, it was important to get the settings right for the transition into New Zealand s labour market. 1 New Zealand Trade and Enterprise, Statistics. 6

7 Balancing immigration and local employment to meet labour shortages The ministry has been leading work on a cross-agency initiative called the Sector Workforce Engagement Programme, which started in 2016 under the Business Growth Agenda. The programme works with businesses in several sectors in an effort to ensure that labour shortages are not simply met through immigration, but that local skills are also developed. The programme seeks to have employers give priority to domestic job seekers, including beneficiaries. We heard that labour shortages in the horticulture and hospitality industries are being met in several ways. One option is international students moving into jobs. Another is the working holiday scheme, which is particularly important for the hospitality industry. We heard that high tourist areas such as Queenstown will always rely on people on working holidays to supplement local labour. A third approach is the Recognised Seasonal Employer (RSE) scheme. This scheme is particularly important in the horticulture sector, where demand for labour is clearly seasonal. Employers with RSE status may bring groups of temporary workers from overseas to work for up to seven months of the year under this scheme. With bumper crops in the horticulture and viticulture industries in 2016, the RSE cap was increased by 1,000. The ministry said that the RSE scheme has encouraged horticulture investment and economic growth in areas such as Hawke s Bay. Employers report that RSE workers tend to have higher productivity than local labour. However, to address the high unemployment rate among youth and Māori in such regions, discussions under the Sector Workforce Engagement Programme have focused on encouraging businesses to develop the skills and productivity of young locals. The programme has resulted in a commitment from industry that 1,000 permanent jobs being created in the horticulture industry will go to locals. Telecommunications We asked what was delaying the rollout of part two of the Ultra-Fast Broadband initiative. We noted that expressions of interest were submitted in mid-2015, but there has been little news since then. The ministry said that commercial negotiations with prospective partners are advanced, but it could not say when they would be completed. This was a matter for Crown Fibre Holdings, which is leading the negotiations and would be seeking to get the best coverage for the best possible price. Review of the Telecommunications Act We asked for an update on the review of the Telecommunications Act, which has been under way for some time. The ministry told us that the review is progressing well. It has been working closely with industry and consumer groups, and several options papers have been circulated. The latest paper closed for submissions in September The ministry was unable to give a timeframe for the review s completion. We intend to follow this matter and seek regular updates. We asked whether the ministry was undertaking any work on the impact of multi-national content providers (such as Facebook and Google), on the revenue streams of telecommunications companies, and media organisations. The ministry was unable to confirm it was undertaking any analysis at the time of the hearing. 7

8 Appendix Committee procedure We met on 8 December 2016 and 9 March 2017 to consider the annual review of the Ministry of Business, Innovation and Employment. We heard evidence from the ministry and received advice from the Office of the Auditor-General. Committee members Melissa Lee (Chairperson) Kanwaljit Singh Bakshi Ria Bond Dr David Clark Clare Curran Kris Faafoi Brett Hudson Gareth Hughes Hon Peseta Sam Lotu-Iiga Simon O Connor Advice and evidence received The documents that we received as advice and evidence for this annual review are available on the Parliament website, They are listed below: Office of the Auditor-General, Briefing on Ministry of Business, Innovation and Employment, dated 8 December Ministry of Business, Innovation and Employment, Response to written question 33, dated 8 December Ministry of Business, Innovation and Employment, Supplements 1 11 to response to written question 33, dated 8 December Ministry of Business, Innovation and Employment, Responses to written questions 1 102, dated 8 December Ministry of Business, Innovation and Employment, Appendices to responses to written questions 1 102, dated 8 December Ministry of Business, Innovation and Employment, Responses to written questions , dated January

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