Submission on the Reform of Vocational Education proposals

Submission on the Reform of Vocational Education proposals

9 April 2019: The Minister of Education is consulting on proposals to reform the delivery of public vocational education in New Zealand. This is our submission on proposal 2.

1. Introduction

1.1
The Minister of Education (the Minister) is consulting on proposals to reform the delivery of public vocational education in New Zealand. Those proposals are to:

  1. refine the roles of education providers and industry training organisations (ITOs) and extend industry and employers’ leadership role across all vocational education through new skills bodies;
  2. create a New Zealand Institute of Skills and Technology (the new institute), bringing together the 16 existing public institutes of technology and polytechnics (ITPs) as a single entity; and
  3. create a unified vocational education funding system, removing barriers to collaboration and flexibility, ensuring a sustainable network of provision, and supporting the wider reforms.

1.2
We note that the proposals include a holistic review of vocational education and training provision, and that the Government is considering changes to the funding system. In our view, those elements are integral to a discussion on the future of the ITP sector. However, in this submission, our comments are focused on proposal 2.

1.3
We have previously reported on a lack of co-ordination and co-operation between ITPs. This has resulted in duplication, which does not represent value for money for the country. We have also commented on the financial consequences of individual institutions competing for a declining number of domestic students and the changing international student market. Some ITPs are operating successfully. However, in our view, the ITP sector does not collectively achieve the most efficient use of national resources or work in the national interest as required by the Education Act 1989.1

1.4
We agree with the Minister that the current operating model for our ITPs is in need of reform. However, the Auditor-General must have a neutral view on the proposed structural change to establish the new institute because it is not part of their mandate to question the policies of government or local authorities. Although the education case might be well argued, there is not enough detail in the proposals to assess whether significant structural change will improve the financial sustainability and governance of the ITP sector.

1.5
If the Government goes ahead with the new institute, our interest is in ensuring that it maintains accountability for the use of public money and public assets and that it is established in a way that minimises disruption for learners. There are significant transition risks that need to be planned for and managed well.

1.6
We are available to meet with you to discuss this submission in more detail, and we look forward to continued engagement as the proposals develop. If the proposed pre-establishment board is set up, we would be happy to support the board in its work within our mandate. This could include real-time assurance on developments, as we did with the Auckland Transition Agency.

The role of the Auditor-General in tertiary education

1.7
The Auditor-General is responsible for auditing all public tertiary education institutions, the Tertiary Education Commission, the Ministry of Education, the New Zealand Qualifications Authority, and Rural Education Activities Programmes (REAPs).2 The Auditor-General has no role in the accountability arrangements for ITOs.

1.8
The Auditor-General also has the discretion to carry out other work, including:

  • performance audits to consider matters of effectiveness and efficiency, probity, and waste; and
  • inquiries into any matter relating to a public organisation’s use of its resources.

1.9
In exercising these functions, the Auditor-General does not comment on policy matters.

2. General comments

2.1
In this section, we provide general comments on:

The proposed timetable for establishing the new institute

2.2
The new institute, if established, will be a significant public organisation. If it had existed in 2017, it would have had income of about $1.1 billion.3 It would have had about 290,000 learners,4 and spent $0.673 billion on staff. Its total assets would have been just over $2.6 billion, and it would have had total liabilities of just over $0.5 billion. However, it would have made a loss of $56 million for the year.

2.3
We understand that the losses incurred have resulted in the Crown having to provide financial support to some institutions, and are adding to the urgency for system reform. However, because of the scale of the proposal, we have some concerns about the timetable for that reform. The establishment of the new institute and the disestablishment of the 16 ITPs will be one of the largest changes to public organisations in recent times.

2.4
The Minister has signalled his intention to report to Cabinet in mid-2019 after this consultation closes and to form a pre-establishment board, presumably after Cabinet approval. This will leave about six months to manage the transition to a single organisation, including whatever legislative programme might be required. We note that some other major public organisation change projects benefited from having longer transition arrangements in place (see 2.15 to 2.21).

2.5
Other than establishing the new institute on 1 January 2020, the proposal does not include a timetable. Meeting the 1 January 2020 deadline might be technically possible, if:

  • any enabling legislation necessary can be passed in time; and
  • the scope of what can be achieved before day one of the new institute is carefully managed to minimise any potential disruption for staff and learners.

2.6
However, the transition programme itself might need to run for many years to achieve the degree of alignment the Minister seeks. It might require new investment to achieve operational efficiency and effective capital expenditure. A longer transition programme might reduce some of the risks we discuss later in this submission.

2.7
Even when creating a new organisation, it can still take time to get it established and running effectively. Our performance audit of the Canterbury Earthquake Recovery Authority (CERA) found that it took a long time for CERA to set up effective systems and controls. This meant that staff had to work in a challenging environment without the usual back-office support and controls that we expect in a public organisation. CERA’s management controls and performance information needed improvement right up to the time of its disestablishment.5

Limited information on the financial implications of the proposals

2.8
We expect that, when the Minister goes back to Cabinet in mid-2019, there will be greater detail about the financial implications of the proposals. We have not been able to form a view based on the current information.

2.9
From our experience of other restructures, we have observed a general tendency to underestimate the costs of change and overestimate the benefits and when they might begin to accrue.

2.10
For example, in 2015, we reported on our inquiry into Health Benefits Limited (HBL).6 HBL was created to achieve efficiency and reduce costs in district health board (DHB) procurement. One programme it ran – the Finance, Procurement and Supply Chain (FPSC) – was intended to create a single system that could replace 20 systems and different ways of operating. The FPSC programme took four years longer to complete than anticipated because the change effort and the challenges presented by the structure of the health sector had been underestimated. Even after the HBL Board approved a pared-down version of the FPSC programme, costs were forecast to rise from $92.1 million to $120 million by 2015.7

2.11
Another example was in a State Services Commission report on the financial implications of three 2010 government department mergers.8 The report noted that the savings targets were “high-level stretch targets” and that the costs were “estimates with considerable uncertainty over the actual impacts on redundancy, ICT and other costs”. In July 2011, the mergers were predicted to produce the overall savings sought over four years by reducing baseline budgets in future years. However, first-year savings were achieved in one merger only by finding savings that were not related to the transition. That merger also exceeded its first-year costs. Another merger achieved its first-year savings target by not spending on planned rebranding. For the three mergers, $7.5 million of capital expenditure was required that was not budgeted for.

The completeness of the proposal regarding ITPs’ provision of non-vocational education

2.12
ITPs currently receive about $574 million of government funding ($271 million for vocational education, $238 million for non-vocational education,9 and $65 million of other funding). However, ITPs generate about $526 million of “other income”.10 This means that the Government directly influences a little more than half of ITPs’ income through its funding mechanisms.

2.13
The Minister’s rationale for changes, and the anticipated non-financial benefits, are much more clearly articulated for vocational education than for non-vocational education. The Minister has reported that high fixed costs in ITPs had strongly incentivised a search for more students (through international students, out-of-region provision, and online delivery) to maintain financial viability. In our view, this “search for volume” occurred mostly in the ITPs’ provision of non-vocational education.

2.14
Other than some measures to reduce costs, it is not clear how non-vocational education delivery will become more sustainable. The technical discussion document on the unified funding system states that decisions have yet to be made about whether the reforms will cover funding for some aspects of non-vocational education.11 We would welcome more information on how the current funding system drivers will be changed to create a sustainable system.

How other public organisations have managed such a transition

2.15
Auckland Council was created on 1 November 2010 after the disestablishment of eight local councils. Although the legislative framework and the reorganisation process evolved over time, a single-purpose transition agency (the transition agency) was in place from May 2009.

2.16
The transition agency enabled people in the eight councils to carry out “business-as-usual” activities while the transition agency prepared for the new Council. Legislation enabled the appointment of a Chief Executive for the new Council in advance of it being legally established.

2.17
The transition agency made a considerable contribution to 14 Cabinet papers and to the legislative changes needed to enable the new Council. It noted that the Local Government (Auckland Law Reform) Bill generated “significant media and public comment, and its content changed considerably before it was passed into law, particularly at the select committee stage”.12

2.18
Another example was the merger of Archives New Zealand and the National Library of New Zealand with the Department of Internal Affairs (DIA) in 2010. DIA’s reflections on the process included that early identification of a “CE-designate” had meant that this person was able to “front foot” the merger across the three agencies involved. It also highlighted the importance of communication of consistent information and of engaging commitment, integrity, and professionalism.13

2.19
More recently, on 1 July 2017, 40 organisations merged to form Fire and Emergency New Zealand. The 40 organisations were the New Zealand Fire Service, the National Rural Fire Authority, 12 enlarged rural fire districts, and 26 rural fire authorities.

2.20
A significant amount of planning and preparation for this merger ensured that there was a smooth transition on day one. There were no significant issues or interruptions of the ability of any of the organisations to respond as required. This was a period of significant change for all the organisations affected and posed significant risks that were managed well overall. The organisation is now in a three-year integration phase, with the aim of unifying for a common purpose and shared set of principles by 2020.14

2.21
Other public sector examples from the past 10 years might provide valuable insights into how to manage transition well or provide lessons from transitions that did not go well. Three of the larger mergers created the Ministry for Business, Innovation and Employment, the Ministry for Primary Industries, and Oranga Tamariki. For Oranga Tamariki, a significant change programme was set up about a year before the date of transition, which allowed for business and service continuity on day one. In the ITP sector, the Bay of Plenty Polytechnic and Waiariki Institute of Technology merged to create Toi Ohomai Institute of Technology, and Christchurch Polytechnic Institute of Technology and Aoraki Polytechnic merged to become Ara Institute of Canterbury.

Support for, and autonomy of, the pre-establishment board

2.22
Because of the complexities of creating one organisation from 16 organisations, we would encourage early identification of the specialist support needs of the pre-establishment board, regardless of whether they are in a separate legal entity.15 In our view, it is important that the pre-establishment board is self-sufficient and that there is some distance between it and the Tertiary Education Commission, which will also be affected by these proposals. In our view, it is also important that the pre-establishment board puts in place a risk management framework at the earliest opportunity.

2.23
As well as employing a Chief Executive designate, early identification of a Chief Financial Officer would, in our view, be best practice. For other support roles, the pre-establishment board will need to balance the risk of diverting too many people from their current operational roles in ITPs with the benefits of drawing on their sector and organisational knowledge.

3. Risks and practicalities of disestablishing the existing institutes of technology and polytechnics

3.1
In this section, we highlight potential risks to formal accountability, reporting, and auditing arrangements when an ITP is disestablished. We discuss:

3.2
The Education Act 1989 sets out what happens if an ITP is disestablished, including its incorporation into another institution. The Crown Entities Act 2004 and the Public Finance Act 1989 set out special reporting arrangements for disestablished entities.

3.3
The disestablished council “continues in existence” for the purpose of complying, or facilitating compliance, with reporting requirements for any academic year of the institution.16 If one institution is incorporated into another, the council of the other institution, or the Secretary for Education, should help the disestablished council to comply with its reporting obligations.17

3.4
There are special reporting requirements for disestablished organisations. A disestablished organisation must provide a final report for the period commencing at the start of the financial year in which the organisation is disestablished and ending on its disestablishment date. The final report must be prepared as if it were an annual report and provided no later than three months after the disestablishment date.18

3.5
Because the final report is to be prepared as if were an annual report, our approach would be to audit the financial statements and the non-financial performance information as if it were an annual report. That would mean giving an audit opinion by 30 April 2020 if the disestablishment date is 31 December 2019. If our auditors are not provided with the information on time or the information contains inaccuracies, it would become increasingly difficult to follow-up on these matters if key staff of the institution have moved on. Timely reporting supports public accountability and late reporting diminishes it.

Timing of the disestablishment of the ITPs

3.6
If the new institute is established from 1 January 2020, the 16 existing ITPs would most likely have a disestablishment date of 31 December 2019. It makes sense that the disestablishment date coincides with the last day of the ITPs’ financial and academic year. To do otherwise would be problematic for many reasons, including the costs and capacity related to preparing and auditing a second set of financial statements, perhaps only a few months later. However, we consider that 31 December 2019 is an ambitious target for the reasons we highlighted earlier. In our view, current legislation does not provide any leeway for the accounting period to be extended in any event (for example, to cover, say, a 15-month period).

ITP decision-making between a Cabinet decision to disestablish and 31 December 2019

3.7
ITP councils will need to continue to make decisions until the disestablishment of their organisation. The Education Act sets out the powers of institutions and which of those powers cannot be exercised without the written consent of the Secretary for Education.19 Institutions can exercise some powers without consent, providing the value of the transaction is below a value set by the Minister (or in the case of a lease, less than 15 years).20

3.8
Some ITPs are intending to sell land or other assets as part of their current operational plans. Others have loans that are due to be repaid or refinanced on or near the proposed date of their disestablishment. There are also several development projects of facilities at varying stages of approval. The Government should consider how it will ensure that those decisions that have an enduring financial effect are in the best interests of any new arrangement.

3.9
For example, when Auckland Council was created, the Local Government (Auckland Council) Act 2009 set out the categories of decisions that had to be referred by the eight existing councils for confirmation. Those categories included decisions to:

  • purchase or dispose of assets;
  • enter into any contract (other than an employment agreement) where the consideration was equal to or more than $20,000 and the contract imposed any obligation on the existing local authority beyond 30 June 2011; and
  • borrow money for a period that extended beyond 30 June 2011.

Risks to accountability during disestablishment

3.10
In our inquiry into HBL, we found that progress was hampered by not having the full agreement and support of the decision-makers. Those were the people who would ultimately have to make the HBL programmes successful.

3.11
For ITPs, the Government will need to rely on the outgoing councils, their management teams, and staff at the institutions being disestablished to make the new arrangements work.

3.12
If councils and managers become increasingly involved in managing the effects of disestablishment, their focus on maintaining good internal financial controls can slip. In periods of uncertainty, it is not unusual for staff to leave or to become disengaged. Loss of key staff and goodwill can diminish previously effective safeguards. Basic good practice, such as maintaining separation of duties (for example, in payroll administration or procurement) can deteriorate. This creates the opportunity for fraud and misuse of public money, and misappropriation of assets, from outside and from within the institution.

Risks to the carrying values of assets (including land and buildings)

3.13
An ITP must carry out valuations with sufficient regularity to ensure that the carrying amount does not differ materially from what would be determined using fair value at the reporting date. Each of the ITPs could be using different assumptions and methods to arrive at their valuations.

3.14
We assume that, under the proposals, the Government will transfer all assets21 and all liabilities to the new institute.22 The risk is that those assets and liabilities could be misstated (for example, through loss of knowledge if responsible staff leave, asset registers and other records not being properly maintained, or even fraud, theft, or misappropriation leading up to the date of the merger) and those misstatements might come to light only when those who were accountable have moved on.

3.15
Value will not be created or destroyed by the transfer of assets to another organisation. However, we recommend that the new institute carry out a full revaluation of the assets at the date of transfer. Accurate asset registers at the existing ITPs will help in this process and will also mitigate the risk of assets being stranded or misappropriated.

3.16
Additionally, the physical condition of some buildings (for example, those affected by earthquake damage or asbestos) might actually transfer future liabilities to the new institute that might not be fully appreciated. The poor condition of a building, as it is understood, will be reflected in a reduction in the carrying value of the asset to reflect the costs of remediating the building. However, the disposal costs of that building, if it is decided that it is not worth repairing, are not currently recorded.

3.17
We note that the Minister does not intend to consider the size of the estate needed for the future operations of the new institute until later in 2020. Ensuring that there are accurate valuations and asset registers will be a good foundation for this work.

Past, present, and future contractual and financial commitments

3.18
As part of the transition process, we would expect the governing body and management of the new institute to understand the nature of its liabilities, not just absorb balances into its financial statements. Accurate contract registers, and well-documented financial agreements in the 16 existing ITPs will be important in establishing a solid understanding.

Subsidiaries and trusts

3.19
Many ITPs have subsidiaries and trusts, not all of which are required to report separately. Some of the subsidiaries involve non-public sector partners, and most of the trusts have a particular local area focus. There might be specific legal considerations (contained in agreements or founding documentation) in relation to any wind-up or transfer of ownership of these organisations. The transition arrangements should include consideration of these organisations on a case-by-case basis.

IT systems

3.20
Effective IT systems play an important part in maintaining effective financial controls and enabling organisations to meet their reporting obligations. We have already highlighted that risks to the control environment increase in times of uncertainty. Good systems, if maintained well, can mitigate some of these risks and help prevent fraud.

3.21
ITPs use many different IT systems. Several are legacy systems from earlier mergers. At the point when a decision is made to use a specific IT system for the new institute, the values of all the separate existing IT systems23 become “impaired” – that is, they lose some, if not all, of their value. In the case of HBL, it underestimated the impairment costs that were a consequence of the FPSC programme, and it also misjudged the ease of implementing a new system that would replace 20 existing systems.

3.22
We expect that the new institute will take some time to put in place common IT systems, and that, realistically, savings or improved operational effectiveness might take some time to accrue.

1: Education Act 1989, section 160.

2: REAPs provide, among other things, Adult and Community Education, usually not leading to qualifications, have low barriers to entry, and can provide pathways to future study.

3: A simple consolidation of ITPs’ revenue for 2017, which includes revenue from the Crown and from other sources, such as international students.

4: Comprising 123,000 domestic students and 18,000 international students in ITPs, and 149,000 learners in Industry Training Organisations (per Annex 2 to Cabinet Paper).

5: Office of the Auditor-General (2017), Canterbury Earthquake Recovery Authority: Assessing its effectiveness and efficiency, Wellington.

6: Office of the Auditor-General (2015), Inquiry into Health Benefits Limited, Wellington.

7: $92.1 million consisted of $87.9 million and $4.2 million budgeted to be spent on DHBs’ existing Oracle licensing costs.

8: In March 2010, Cabinet agreed to amalgamate Archives New Zealand and the National Library of New Zealand with the Department of Internal Affairs; the Foundation for Research, Science and Technology and the Ministry of Research, Science and Technology into a new Ministry of Science and Innovation; and the New Zealand Food Safety Authority with the Ministry of Agriculture and Fisheries. See State Services Commission (2010), July 2011 report on financial implications of State Services amalgamations agreed in March 2010 at www.ssc.govt.nz.

9: Non-vocational education includes foundation education, degrees and post-graduate qualifications, and te reo Māori, tikanga Māori, and English for speakers of other languages.

10: Other income includes international students and other students paying full student fees, childcare operations, student service levies, and student accommodation revenue.

11: Foundation education, te reo Māori, tikanga Māori, and English for speakers of other languages.

12: Commonly known as the Third Bill – see Part 3 at www.ata.govt.nz.

13: State Services Commission (2010), July 2011 report on financial implications of State Services amalgamations agreed in March 2010 at www.ssc.govt.nz.

14: FENZ Briefing to the Incoming Minister, pages 5-6.

15: Specialist support might include legal advisors, employment specialists, change managers, business and financial analysts, or property managers.

16: Education Act 1989, section 217(10).

17: Crown Entities Act 2004, section 150A.

18: Crown Entities Act 2004, section 150A; and Public Finance Act 1989, section 45J.

19: Education Act 1989, section 192(4).

20: Education Act 1989, section 192(5).

21: Education Act 1989, section 217(7). Where “any real or personal property that was held by a disestablished institution on trust vests in the Minister under subsection (6)(a), the Minister may appoint another institution to be the trustee of that property.”

22: Education Act 1989, section 217(6).

23: For example, a student management system, a payroll system, or a finance system.