Part 1: Introduction

1.1
In this Part, we:

• describe the role of the Inland Revenue Department (Inland Revenue);
• outline the Business Transformation programme (the programme) and how it is governed; and
• discuss what our audit looked at and did not look at.

1.2
The theme of our Office's work programme for 2014/15 is Governance and accountability. We chose this theme in recognition of recent significant changes in legislation and financial reporting standards affecting public sector accountability arrangements and because of the importance of governance in managing major projects and delivering successful outcomes.

1.3
Governance is the arrangements and practices that allow a public entity to set its direction and manage its operations to achieve expected outcomes and fulfil its accountability obligations. Good governance is about getting the right work done in the best way possible and sustainably.

1.4
This report sets out the findings of our audit of Inland Revenue's governance arrangements for the programme. We decided to look at the programme because significant public money is involved, and the programme is important to Inland Revenue being able to continue to fulfil its core work of collecting Crown revenue and implementing government initiatives. We intend to report further on aspects of the programme during the next few years.

The role of the Inland Revenue Department

1.5
Inland Revenue manages New Zealand's tax system. It also administers several government programmes, including KiwiSaver, Student Loans, Working for Families tax credits, Child Support, and Paid Parental Leave. In 2013/14, Inland Revenue collected $56.2 billion in tax revenue. This represents more than 80% of the Government's revenue. In 2013/14, Inland Revenue had operating expenses of about $700 million and about 5600 full-time equivalent employees. Inland Revenue also paid out $3.7 billion to people for such things as Child Support payments, tax credits, and Paid Parental Leave payments.

1.6
The tax collected by Inland Revenue helps pay for the public health system, education, and law and order. A tax system that works well supports a more competitive and productive economy and helps the Government achieve its fiscal, economic, and social objectives. A dysfunctional tax system could make Inland Revenue less able to effectively and efficiently collect and distribute money and hinder achievement of the Government's objectives.

What the Business Transformation programme is intended to achieve

1.7
In the early 1990s, Inland Revenue installed a revenue collection platform¹ called FIRST (Future Inland Revenue Systems and Technology). The platform was set up to administer the tax system. In more recent years, various government inititives (such as Child Support, Paid Parental Leave, Student Loans, Working for Families, and KiwiSaver) have been added to the platform. This has added layers of complexity and risk to Inland Revenue's business process and core technology infrastructure.

1.8
The platform is complex and expensive to maintain, and is difficult and expensive to amend. A recent modification to the platform to support changes in Child Support policy is an example of the expense and challenge involved in amending it.

1.9
In response to this situation, Inland Revenue began a significant transformation programme. The programme is a business-led, technology-enabled change initiative to set up the infrastructure and capability that will allow Inland Revenue to deliver a modern revenue system. The preferred option identified in Inland Revenue's programme business case is expected to cost between $1.3 billion and $1.9 billion in real terms² over 10 years. These estimates are subject to further analysis as part of the design workstream and are dependent on future investment decisions to be made by Ministers and by Cabinet.

1.10
The programme includes making changes to simplify and streamline Inland Revenue's business processes, policies, and customer services. It also involves upgrading Inland Revenue's technology system.

1.11
As described in Inland Revenue's programme business case, the main investment objectives of making these changes and upgrading the technology system are to deliver a modern revenue system by:

• improving agility so that policy changes can be made in a timely and cost-effective way;
• delivering more effective services to help ensure that customers comply better with the tax rules and help support social policies;
• improving productivity and reducing the cost of providing services;
• making the system easier for people to use;
• increasing the secure sharing of intelligence and information throughout government to improve delivery of services to New Zealanders and improve public sector performance; and
• minimising the risk of protracted system outages and intermittent systems failures.

1.12
In Figure 1, we provide an overview of the timing of the programme (and costs for the feasibility and mobilisation phases) from when Inland Revenue consider the programme started. This excludes any costs associated with developing the concept of the programme.

Figure 1
Overview of the programme's timing

1.13
Inland Revenue has spent about three-and-a-half years getting the programme to the design workstream part of Stage 1. This included preparing the concept, assessing the feasibility, and getting the organisation ready to start the design workstream. This work cost about $83 million between 2011/12 (when the programme officially started) and November 2014. It is too early in the programme to work out whether the spending to date represents value for money. This is because the programme has yet to deliver the benefits outlined in the business case. We note that other reviews consider that the work done has provided good foundations for the programme. We discuss costs and value for money further in paragraphs 4.24-4.29.

1.14
Figure 2 shows the different phases and stages of the programme. The programme is to be delivered in four stages over 8-10 years. The concept, feasibility and mobilisation phases involved work completed by Inland Revenue leading up to the start of Stage 1.

Figure 2
Phases and stages of the Business Transformation programme

Source: Inland Revenue.

* The Target Operating Model translates strategic intent of the transformation into operational capabilities required in the future state. These operational capabilities are organised in several layers that collectively cover stakeholders, channels, services, organisation, policy, people, processes, platforms, and technology.

† PAYE – Pay as you earn. If an individual's income is from salary, wages, benefits, or taxable pensions, their tax will be deducted automatically under the PAYE system.

§ GST – Goods and services tax is a tax on most goods and services in New Zealand, most imported goods, and certain imported services. GST is added to the price of taxable goods and services at a rate of 15%.

1.15
The programme is at Stage 1, focused on introducing secure digital services. Stage 1 objectives are to:

• advance channel strategy³ work, including redesigning Inland Revenue's website and continuing development of customer tools with customers;
• encourage customers to self-manage their tax obligations and use digital channels;
• improve collection of GST and PAYE information from business;
• introduce services required to streamline PAYE; and
• introduce integrated intelligence and interventions for PAYE.

1.16
The programme is now at the design workstream part of Stage 1. This workstream began in January 2015 and is expected to be completed by March 2016. During this workstream, Inland Revenue intends to deliver a design of the future revenue system, a detailed design for Stage 1 to allow Inland Revenue to start putting that stage into effect, and a greater understanding of the effect of the programme. Cabinet has approved $84 million for the design workstream.

Governance arrangements for the Business Transformation programme

1.17
Governance in the public sector is highly scrutinised because it involves public money, requires good quality record keeping, involves transparency of decision-making and information, and is subject to Government procurement policies.

1.18
The governance arrangements for the programme include a combination of governance groups that are focused only on the programme and governance groups that are responsible for governing Inland Revenue as a whole. We show the different governance groups and Inland Revenue's descriptions of them in Appendix 1 and the governance structure in Appendix 2.

What our audit looked at

1.19
In this report, we focus on whether the governance arrangements are helping to achieve the programme's intended outcomes. In particular, we looked at:

• the design of the governance arrangements (Part 2);
• how the governance arrangements were put into practice (Part 3);
• the effectiveness of the governance arrangements (Part 4); and
• lessons for other public entities (Part 5).

1.20
In designing our audit, we have prepared principles of good governance to assess the programme governance arrangements (see Figure 3). To prepare these principles, we drew on our previous reports such as Governance and Oversight of Large Information Technology Projects⁴, the Report of the Ministerial Inquiry into the Novopay Project, and other relevant literature. These principles are not exhaustive.

1.21
Although some aspects of the programme's governance are unique, other public sector programmes are likely to have similar governance considerations (see Part 5).

Figure 3
Principles of good governance

What we did not look at

1.22
Our audit did not look at the effectiveness of "the Corporate Centre" as a governance group. The Corporate Centre is a term used to describe public entities that have some oversight role of large government projects and programmes. The Corporate Centre includes the Treasury (investment assurance), the State Services Commission (capability assurance), the Government Chief Information Officer (information and communication technology assurance), and the Department of the Prime Minister and Cabinet (co-ordinating and supporting government priorities). The Corporate Centre also includes the public entities that have lead responsibilities throughout government for procurement (Ministry of Business, Innovation, and Employment), shared ICT capabilities (Department of Internal Affairs), and property (Ministry of Social Development).

1.23
Also, our audit did not look at:

• management of individual projects in the programme or the programme as a whole;
• the wider effectiveness of the programme monitoring and assurance framework operated by the Corporate Centre for all major government programmes; and
• policy decisions, including those about tax collection and the Corporate Centre's assurance arrangements.

How we carried out our audit

1.24
To carry out our audit, we

• interviewed about 30 Inland Revenue staff based in Wellington, including members of the governance groups and staff working in the programme;
• reviewed and analysed relevant documents;
• reviewed the findings of several reports on the programme, to the extent that these reports covered aspects of governance of the programme – these reports include independent quality assurance reports, a governance and management review, and a review by the Treasury;
• interviewed staff from professional services companies KPMG and Deloitte;
• spoke to staff from the Treasury; the Ministry of Business, Innovation and Employment; and the Office of the Government Chief Information Officer at the Department of Internal Affairs; and
• used all of this information to work out how governance of the programme has been designed and operated, and how effective governance arrangements have been so far.

1: A platform is an underlying computer system on which application programs can run.

2: This means that the cost has not been adjusted for inflation.

3: A channel strategy is a plan for guiding decisions about how Inland Revenue will deliver services to taxpayers.

4: Other reports that we drew on in drawing up the principles of good governance include Inquiry into the Mangawhai community wastewater scheme (2013) and Maintaining a future focus in governing Crown-owned companies (2014), available on our website, www.oag.govt.nz.

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