Released for publication by the Minister of State Services and Minister for Food Safety, Hon Annette King, 4 July 2007. See also:

Cabinet Minute - New Zealand Food Safety Authority: Establishment as a Public Service Department

Letter from NZFS Advisory Board to Minister for Food Safety, Annette King re separation

Terms of Reference for investigation

Report to the State Services Commission by Doug Martin of Martin Jenkins and Associates

Shared Services in the Public Sector - Cabinet Paper and Cabinet Minute

NZ Food Safety Authority to stand alone - media statement from Hon Jim Anderton

Media statement announcing acting chief executive for new department

Office of the Minister of State Services

Chair

Cabinet Policy Committee

Establishment of the New Zealand Food Safety Authority as a Public Service Department

Purpose

1 The purpose of this paper is to seek Cabinet's agreement to the separation of the New Zealand Food Safety Authority (NZFSA or the Authority) from the Ministry of Agriculture and Forestry (MAF) and its establishment as a new Public Service department.

2 This paper proposes that the New Zealand Food Safety Authority be established as a Public Service department on 1 July 2007 and outlines the legislative requirements to enact this decision.

3 This paper notes that the cost of establishing the New Zealand Food Safety Authority as a Public Service department is $2.95 million per annum, with one-off set up costs of $0.63 million. This paper recommends that these additional costs are fully funded by the Crown.

Background

4 I am seeking to restructure MAF by separating NZFSA from MAF, thereby creating a new Public Service department administering Food Safety. Cabinet [CAB Min (07) 6/3] invited me as the Minister of State Services to report further to the Cabinet Policy Committee, based on advice provided by the State Services Commissioner, on the detail of separating NZFSA from MAF, including the implications that such a restructure would have in legal, financial and human resource terms and the potential for shared services. I have now received this advice and this paper is my response to Cabinet's invitation.

5 The NZFSA was established on 1 July 2002 as a semi-autonomous body attached to MAF. Under this arrangement, the authorities and powers exercised by NZFSA were vested in the MAF Director-General who delegated comprehensively to NZFSA Executive Director. At the time that NZFSA was established, it was accepted that MAF was New Zealand's only credible 'name' in international trade. Now, however, NZFSA is operating as a highly reputable agency and no longer needs to be attached to MAF to ensure its credibility in international trade.

6 Furthermore, I believe the focus of NZFSA on public safety does not now sit comfortably with MAF's focus on producer regulation. Establishing NZFSA as a new Public Service department would give the Authority the responsibility for maintaining effective relationships with all of its partners and not prioritising relationships with MAF.

7 The first step in the State Services Commission's review was to assess the potential range of functions that should be encompassed by a standalone Food Safety Department. This advice was submitted to me on 30 March 2007 and noted that a new Food Safety Department should reflect the services and outputs of NZFSA as it currently operates, preserving the existing responsibilities, services, outputs and intersecting networks of both MAF and NZFSA. The Minister of Agriculture and I accepted the Commissioner's advice on the functions of a new department, the details of which are described below.

Functions of the new department

8 The functions that will transfer from MAF to NZFSA are those functions that are currently performed by NZFSA that relate to the administration of the Food Act 1981; the Animal Products Act 1999 (except in relation to live animals and germplasm); the Agricultural Compounds and Veterinary Medicines Act 1997 and the Wine Act 2004.

9 The outputs delivered by NZFSA will be administered under Vote: Food Safety. These outputs are directed at protecting and promoting public health and safety in relation to food and food-related products, and developing the economy by facilitating access to international markets for food and food-related products. The outputs are currently funded by Revenue Crown of $26.061 million and third party revenue of $59.891 million, primarily through cost recovery from the meat industry. NZFSA has approximately 460 full-time equivalent staff.

Implications of separating NZFSA from MAF

10 The second step in the Commission's review has been to provide advice to me on the detailed legal, financial and human resource implications of separating NZFSA from MAF. I am in receipt of this advice and overall there do not appear to be any significant issues preventing such a separation.

11 The proposed work programme for separating NZFSA from MAF is aimed at a 1 July 2007 start date for the new department. I am advised that it is preferable that a new department be established on this date for operational and financial reasons. This timeframe is tight and at best will not enable the Orders in Council to be gazetted 28 days before they come into force. As this is an administrative change it will have little effect on the public. Therefore a waiver of the 28 day gazetting period is sought so that the department can start on 1 July 2007.

12 It should be noted that a Cabinet decision not to fully fund the additional costs of MAF and NZFSA in the establishment of a new Public Service department would likely mean a later start date than 1 July 2007 because of the need to follow proper process in disestablishing a number of positions.

Report findings

Legal issues

13 There are some legislative requirements that will need to be addressed to establish a new department. The new department will need to be added to Schedule 1 of the State Sector Act 1988 by Order in Council. It will also need to be added to the Ombudsmen Act 1975 under section 32 of that Act.

14 Some consequential amendments to other Acts such as the Health Act 1956 and the Flags, Emblems and Names Protection Act 1981 will be required in due course. These could be included in a Statutes Amendment Bill at a later date.

15 Withheld under section 9(2)(h) of the Official Information Act.

16 Withheld under section 9(2)(h) of the Official Information Act.

Financial issues

17 The additional and on-going operating costs for both departments of establishing NZFSA as a Public Service department is $2.95 million per annum, with one-off set up costs of $0.63 million. These additional costs arise because of the non-divisible nature of 'whole of department' focussed corporate services in MAF. This means that any savings possible in MAF from reduced infrastructure fall short of the additional costs incurred by NZFSA in building necessary corporate capability.

18 These additional costs could be funded either fully by the Crown, through a combination of Crown funding and levies (already defined for this year and so it would not be possible to fully implement until 2008/09), or from existing baselines. The choice of funding option will affect the extent of the human resource impacts on both organisations and therefore the implementation pathway.

19 Option one would allow the separation to occur without any impacts on support service delivery in MAF or NZFSA or on levies on industry. It would also mean that the human resource impacts of the separation are minimal, thereby smoothing the implementation pathway.

20 Option two, partial cost recovery, cannot be implemented in the 2007/08 year because the cost recovery regulations have already been set for that year. However, the Crown could fully fund the additional costs in 2007/08, and move to partial cost recovery from 2008/09.

21 Option two would allow the separation to occur without any impacts on support service delivery in MAF or NZFSA, and smooth the implementation pathway. However, increasing levies to fund the separation may be negatively received by industry levy payers, some of whom have already expressed concerns about the impacts of the separation on the ease with which they will engage with government agencies, particularly on trade access issues.

22 A decision to fund the additional costs from baseline savings will complicate the implementation pathway and make a 1 July 2007 start-up date unlikely. In the event that the costs of the separation are not fully funded by the Crown, MAF has made a preliminary assessment that it will have a shortfall of $1.5 million and it would meet this cost by disestablishing 8.6 full time positions. Implementing the correct processes for affected employees will take longer than the time available between now and 1 July 2007. NZFSA has also indicated it will need to review the number of positions that it could create down from the proposed 15, currently seen as the minimum required number. Officials from both agencies have expressed concerns about the viability of their respective organisations as a result of this separation, if it is not fully funded by the Crown.

23 On a longer timeframe, Cabinet will also need to consider that a one-off capital injection of $1.2 million may be required to ensure that MAF's available capital funding is not disadvantaged by the proposed separation of balance sheets. Once NZFSA has been established as a separate department it would be prudent to review the working capital requirements of both NZFSA and MAF.

Shared services

24 The additional costs outlined above are considerably less than previous estimates because of the opportunity for shared services between NZFSA and MAF. Sharing services between the two organisations represents a saving of some $8m being the difference between the previously estimated cost of separating the agencies, of $11m and the cost of separating using a shared services model, of $2.94m. The model proposed in this paper may in the future offer direction in achieving further such savings for the Public Service as a whole.

25 MAF and NZFSA have substantially reached agreement on the services that they can share, separately provide, or jointly contract. In respect of shared services, the agencies will share some transactional services, for example payroll and accounts, and some tactical services, for example procurement. Both agencies agree that strategic services such as planning and communications, which describe and determine an organisation's direction, cannot be shared. Therefore NZFSA intends to purchase the following services from MAF corporate, for a proposed payment of $5.9 million per annum - contract management, procurement services, financial services, payroll and information management.

26 In order to secure a reasonable period of stability and certainty in the shared services relationship, particularly in areas where major investments are involved, MAF and NZFSA will put in place an over-arching shared services agreement for a term of five years, with a review clause after two to three years.

27 This shared services agreement, together with the supporting Service Level Agreements that will be negotiated, should ideally be in place by 1 July 2007, but if this proves not to be feasible, transitional arrangements will need to be put in place to ensure continuity of service.

28 The preferred governance model for shared services between the two organisations is a committee comprising the Chief Executives of MAF and NZFSA, supported by their respective corporate service directors, and serviced by a new, shared position of Manager, Shared Services.

Human resource issues

29 Assuming that the costs of the separation are fully funded, the human resource implications of separating NZFSA from MAF are minor.

30 The State Services Commissioner will need to appoint an Acting Chief Executive, who will assume the responsibilities of the Chief Executive of NZFSA from the date of the establishment of NZFSA as a Public Service department. The Commissioner will also commence the recruitment process for the new Chief Executive of the department.

31 In respect of employees who occupy positions that are responsible for the discharge of the functions that are being transferred from MAF to NZFSA, only one position in NZFSA will substantively change as a result of the separation, that of Director, Communications and Infrastructure. This will require a separate change process.

32 All other employees will be offered appointments by the Chief Executive to positions in the new department that are the same as their present positions on their current terms and conditions of employment. The legislative authority for this will be by way of an Order in Council under section 30C of the State Sector Act. Compensation will not be available to such employees because of the operation of section 30E of the State Sector Act.

33 There will be five surplus positions in MAF as a result of the separation. Two of these positions are currently vacant and the other two employees are likely to be offered positions in NZFSA on their existing terms and conditions of employment.

34 The fifth position that will become surplus is the Executive Director position at NZFSA. The current incumbent is scheduled to retire at the end of June 2007.

35 Fifteen new corporate service positions will be created in NZFSA, resulting in a net increase of twelve positions across both organisations. Included in these twelve additional positions is a newly created role to manage shared services across the two agencies. This number of staff is considered the minimum necessary to ensure that viable corporate support is created in NZFSA and remains in MAF. Whereas comparable organisations have a ratio of full time equivalent corporate staff to other full time equivalent staff of around 20%, after separation, both MAF and NZFSA would have corporate staff ratios of less than 10% each.

36 A consultation document is being prepared and will be distributed to affected staff immediately following Cabinet's decision.

Accountabilities and relationships

37 In terms of the future relationship between NZFSA and MAF, an over-arching relationship agreement will be drawn up, under which specific schedules will sit relating to particular areas of the relationship including policy advice, operational relationships, emergency response and the like. In the event that Cabinet decides to proceed with the separation, this agreement and accompanying schedules will need to be in place by 1 July 2007. It is important that the expectations expressed in the over-arching agreement and supporting schedules cascade down through both departments.

38 Inter-departmental relationships remain a concern for some stakeholders, in particular that their engagement with responsible government departments may be compromised by a lack of cooperation between departments on key issues of concern, particularly in international trade. This concern centred particularly on the relationship between NZFSA and MAF.

39 In response, the State Services Commissioner, in developing position descriptions and key accountabilities for the new Chief Executive of NZFSA and in reviewing these documents for the Chief Executive of MAF, will include, as a key area of accountability for both positions, the development of a mature and cooperative relationship between the two organisations and with the Ministry of Foreign Affairs and Trade (MFAT).

40 The possibility of ambiguities at the boundaries of the responsibilities of MAF and NZFSA during a major biosecurity, food safety or related threat raises the question of how the two agencies will respond to such threats. One response would be to invest one Chief Executive with responsibility for all major threats rather than replicate the responsibility in two agencies. Another would be to establish the National Response Centre framework in NZFSA to deal with food safety emergencies whilst retaining the framework in MAF to deal with biosecurity threats. In either event a mechanism will need to be developed to ensure that the swiftness of the required response is not delayed by uncertainties over which department should take the lead. ODESC is the appropriate forum to consider issues of this nature and the State Services Commissioner will consult with the Chair of ODESC on a review of the mechanisms for responding to biosecurity, food safety or related threats.

41 A recent performance review of NZFSA concluded that "the overall impression from considering the stakeholders' feedback and the formal performance reports is that NZFSA is an outstandingly competent regulator". NZFSA is operating as a highly credible and reputable agency and its brand is widely recognised and respected in international trade. Therefore, any new Public Service department administering food safety should continue to be known as the New Zealand Food Safety Authority.

Consultation

42 In analysing the implications of establishing a new Public Service department, officials from both MAF and NZFSA have made a valued and significant contribution to the advice provided to the Commissioner. This process was also informed by advice from Fonterra, the Meat Industry Association and MFAT.

43 MAF, NZFSA and the Treasury have been consulted in the compilation of this paper. The Department of the Prime Minister and Cabinet has been consulted regarding the proposed ODESC review of biosecurity, food safety or related threats.

44 The NZFSA concurs with this paper's recommendations to separate NZFSA from MAF and establish it as a new Public Service department administering food safety.

45 MAF and the Treasury believe that NZFSA should remain as a semi-autonomous body attached to MAF. Both organisations cite the 2006 State Services Commission's independent review of NZFSA which concluded that, in light of the key linkages and synergies between MAF and NZFSA in areas such as biosecurity, trade, and a 'farm to fork" approach to primary produce, NZFSA should remain attached to MAF.

46 In the event of a separation, MAF notes that considerable care will be needed to ensure that these synergies are maintained as fully as possible, and there are no gaps in critical areas such as emergency response.

47 Treasury considers that the disadvantages of the proposed change - a fiscal cost and increased risks through weakening linkages between NZFSA and MAF - outweigh the benefits. This is based on:

  • the identified benefits of the split are minor. In particular producer capture issues, identified as arguments for the split, have not eventuated in four years of operation of the present structure;
  • in 2006 the State Services Commission commissioned an independent report on the governance of NZFSA. This recommended that NZFSA remain as a semi-autonomous body. It identified that the risks and costs of a split outweighed the benefits. The report identified improvements in relationship practices that would help avoid the potential relationship issues that prompted consideration of a split. Furthermore, as part of this report NZFSA stakeholders were interviewed and none of them considered the theoretical concerns around producer capture had any basis in fact;
  • NZFSA and MAF having important linkages in the areas of international trade and response to biosecurity emergencies, and these being weakened by a split; and
  • there are financial costs to a split.

Financial implications

48 The additional cost of separating MAF and NZFSA and establishing NZFSA as a Public Service department is $2.95 million per annum, with one-off costs of $0.63 million.

49 Additional costs could be funded either fully by the Crown, by a combination of Crown funding and levies (not possible to fully implement until 2008/09), or from existing baselines. This paper recommends that the additional cost of a separation is fully funded by the Crown and that MAF and NZFSA report back to Cabinet on possible cost recovery options for future years by October 2007.

50 Separating MAF into two smaller organisations reduces the flexibility of each agency to manage their working capital requirements. Under a consolidated balance sheet, the variability of revenue receipts in one organisation can be offset against the revenue of the other. MAF is funded largely through Crown revenue, while NZFSA is funded largely through industry levies. In the past this has allowed MAF to manage the variability of levy revenue in NZFSA by managing the draw down of Crown funding in MAF. However they will not be able to do this in the future.

51 Therefore, in order to ensure that both MAF and NZFSA have sufficient working capital to meet operational requirements on 1 July 2007, following the separation of balance sheets:

  • MAF may require a one-off capital injection of $1.2 million to ensure that MAF's available capital funding is not disadvantaged by the proposed separation of balance sheets; and
  • NZFSA may require a one off capital injection of up to $7.5 million based on the approximately one and a half month delay in receipt of industry levies that the organisation will face at 1 July.

52 Both agencies will incur a capital charge (or interest payment) on working capital balances, which creates an incentive to repay surplus working capital.

53 It will not be possible to establish a separate entity in the Financial Management Information System for NZFSA by 1 July 2007, however the existing chart of accounts is sufficiently segregated to allow MAF and NZFSA to continue to operate with existing systems and bank accounts, while maintaining the ability to report separately at a later date once the necessary changes have been made.

Human rights

54 There are no human rights implications arising from this paper.

Legislative implications

55 The new department will need to be added to Schedule 1 of the State Sector Act 1988 by Order in Council. Sections 30A and 30E to 30G will apply. It will also need to be added to the Ombudsmen Act 1975 under section 32.

56 Consequential amendments will be required in due course to the Health Act 1956 and the Flags, Emblems and Names Protection Act 1981 and these could be included in a Statutes Amendment Bill.

57 Withheld under section 9(2)(h) of the Official Information Act.

58 Withheld under section 9(2)(h) of the Official Information Act.

59 To ensure an establishment date of 1 July 2007 for a new Public Service department administering food safety, which is desirable for both MAF and the new department, the 28 day Cabinet rule for notification of Orders in Council in the New Zealand Gazette will need to be waived. This is an administrative change that will have little effect on the public.

Regulatory impact and compliance cost statement

60 There are no regulatory impacts or compliance costs arising from this paper

Gender implications

61 There are no gender implications arising from this paper.

Publicity

62 Following Cabinet's decision, the Minister of Agriculture and I will jointly announce the establishment of a new Public Service Department administering food safety.

Recommendations

63 It is recommended that the Committee

1 EITHER [supported by the State Services Commission]

1.2 agree to establish a new Public Service department to administer food safety on 1 July 2007

1.3 agree that the Minister of State Services issue drafting instructions to the Parliamentary Counsel Office for Orders in Council under the State Sector Act 1988 and the Ombudsmen Act 1975 to be drawn up

1.4 agree that the functions that will transfer from the Ministry of Agriculture and Forestry to this new Public Service department administering food safety are those functions that are currently performed by the New Zealand Food Safety Authority

1.5 agree that this new Public Service department will be called the New Zealand Food Safety Authority

1.6 note the cost of establishing the New Zealand Food Safety Authority as a standalone department is estimated to be $2.95 million per annum, with one-off costs of $0.63 million

1.7 note that these costs are lower than earlier estimates by approximately $8m as a result of the Ministry of Agriculture and Forestry and the New Zealand Food Safety Authority using a shared services platform for major infrastructure such as contract management, procurement services, financial services, payroll and information management

1.8 note that the Shared Services Agreement will have a minimum term of five years, and that if either agency exits the shared services platform in the future, this will result in additional costs to the Crown

1.9 note that a one-off capital injection of $1.2 million may be required to ensure that the Ministry of Agriculture and Forestry's available capital funding is not disadvantaged by the proposed separation of balance sheets and indications are that a one-off capital injection of up to $7.5 million will be required for the establishment of the New Zealand Food Safety Authority

1.10 agree that the cost of establishing a new Public Service department to administer food safety should be fully funded from Revenue Crown in 2007/2008 and future years

1.11 direct the Ministry of Agriculture and Forestry, in consultation with the Treasury and the New Zealand Food Safety Authority, to provide the necessary technical adjustments giving effect to the establishment of a new Public Service department administering food safety to the Cabinet Policy Committee for its meeting on 13 June 2007

1.12 direct the Ministry of Agriculture and Forestry and the New Zealand Food Safety Authority to report back by October 2007 on cost recovery options for future years

1.13 agree that work to effect the establishment of a new Public Service department to administer food safety will commence immediately, under the direction of the State Services Commissioner as per the advice provided to me by the State Services Commissioner

1.14 note that as part of the implementation work programme the State Services Commissioner will consult with the Chair of ODESC about a review of the mechanism for responding to biosecurity, food and related threats

1.15 agree to waive the 28 day Cabinet rule for notification of Orders in Council in the New Zealand Gazette, as an establishment date of 1 July 2007 is desirable for both the Ministry of Agriculture and Forestry and a new Public Service department administering food safety and it will have little effect on the public

1.16 note that the key linkages and synergies between the Ministry of Agriculture and Forestry and the New Zealand Food Safety Authority in areas such as biosecurity, trade, emergency responses, and a 'farm to fork' approach to primary produce will need to be carefully managed taking into account also the responsibility of the Ministry of Foreign Affairs and Trade for delivering outputs to Government on New Zealand's foreign relations and trade

OR [supported by the Treasury]

1.17 agree that the New Zealand Food Safety Authority remain as a semi-autonomous body attached to the Ministry of Agriculture and Forestry.

Hon Annette King

Minister of State Services

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