Office of the Auditor-General Briefing to the Foreign Affairs, Defence and Trade Committee Vote Customs 2018/19 Year 14 June 2018
Assistance to the Committee The Foreign Affairs, Defence and Trade Committee is conducting an Estimates examination of Vote Customs for the 2018/19 financial year in accordance with Standing Order 338. The Controller and Auditor-General provides Parliament with assurance on the performance and accountability of public entities. The Office of the Auditor-General s assistance to select committees with their Estimates examinations is guided by the Code of Practice for the Provision of Assistance by the Auditor-General to Select Committees and Members of Parliament. To identify lines of enquiry in this briefing we have reviewed the following documents: the 2018/19 Estimates of Appropriations (Estimates); the current SOI for the administering department (New Zealand Customs Service (Customs or the Service)); the 2016/17 Annual Report of the administering department (Customs); the Four Year Plan (Customs); the Minister s response to the Standard Estimates Questionnaire (SEQ). We have also drawn from other sources, including information we have received as the statutory auditor of the administering department and of other entities in the sector. In some cases, we checked factual information with the department or other entities to ensure that our advice to the committee is accurate. We did not give the entities any contemplated or actual advice in this briefing. Contact for further explanation If the Committee would like further explanation or elaboration of any aspect of this report, please contact Helen Colebrook, Sector Manager, on (04) 917-1500 or email on Helen.Colebrook@oag.govt.nz at the Office of the Auditor-General. 2
The Key Issues Key issues on which the Committee may wish to focus for Vote Customs are listed below. We have suggested lines of enquiry around these in the following pages: Cross-border crime and drug smuggling initiatives (page 6). Increasing volume and complexity of work (page 7). Customs and Excise Act (page 7). Real time risk profiling tool (page 8). Third party funding (page 8). 3
Millions Overview of Vote Customs Customs is the department responsible for administering the Vote. The Minister responsible for the Vote is the Hon Meka Whaitiri. Budget 2018/19 contains two new initiatives, totalling $9.777 million for 2018/19: 1 Drug Smuggling Networks: Strategic Disruption proposes additional funding for 2018 and out-years ($54.173 million over 4 years 2 ) across several appropriations. The largest increase in appropriation, is in the clearance and enforcement services related to craft appropriation. This appropriation increases by 19% to $10.530 million, as a result of expense transfers and new funding to implement the Drug Smuggling Networks: Strategic Disruption budget initiative. 3 Exports: Reducing Overseas Customs Delays for New Zealand Exporters proposes one-off funding of $850,000 for 2018/19. There has been no change in the structure of the appropriations. Trend in the Vote The total annual and permanent appropriations sought for Vote Customs 2018/19 are $230.633 million, compared with estimated actual expenditure in 2017/18 of $219.293 million (5% increase). 4 Figure 1: Trend in Vote Customs ($million) 2013/14 to 2021/22 5 $300 $250 $200 188 192 194 198 219 231 231 238 240 $150 $100 $50 $0 2013/14 Actual 2014/15 Actual 2015/16 Actual 2016/17 Actual 2017/18 2018/19 Est Actual Vote 2019/20 Est 2020/21 Est 2021/22 Est 1 The Estimates of Appropriations 2018/19 External Sector B5, Vol 4, page 5, Table 1.1. 2 The Estimates of Appropriations 2018/19 External Sector B5, Vol 4, page 5, Table 1.1. 3 The increase in this appropriation is also due to a fiscally neutral transfer of $1.044 million from other appropriations. The Estimates of Appropriations 2018/19 External Sector B5. Vol 4, page 10. 4 The Estimates of Appropriations 2018/19 External Sector B5, Vol 4, page 6, Table 1.2. 5 Source of data Crown Financial Information System (CFIS). 4
Millions The changes in the total appropriation relate to additional operational funding for: Previous budget initiatives (Budgets 2015/16, 2016/17 and 2017/18). Expanded use of Smart Gates and extended risk screening of departing passengers. Higher volumes of passengers and goods. 6 Annual appropriations for departmental outputs have increased by $4.858 million compared to 2017/18. The change in the appropriation reflects: Increased passenger, and crew entry into NZ. Increased goods clearance volumes. Two new budget initiatives. A decrease of $4.740 million as a result of time-limited initiatives ending. Customs anticipates that Departmental Output Expenses are likely to continue to increase to $219.654 million by 2021/22, due to steadily increasing passenger and goods volumes. 7 Figure 2: Trend in capital expenditure ($million) 2013/14 to 2021/22 $25 23 Capital Expenditure $20 $15 17 19 15 19 13 13 13 $10 5 $5 $0 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 Departmental Capital Expenditure is proposed to increase to $19.340 million in 2018/19 (from $14.831 million in 2017/18). 8 This increase is due to planned investment in border management systems; the upgrade of core business systems and additional capital investment in mobile x-ray units, marine craft and vehicles to implement the new budget initiative: Drug Smuggling Networks: Strategic Disruption. 9 6 Vote Customs Standard Estimates Questionnaire, pages 1 and 3, and Estimates of Appropriations 2018/19 External Sector B5. Vol 4, page 7. 7 Vote Customs Standard Estimates Questionnaire, page 8. 8 Estimates of Appropriations 2018/19 External Sector B5. Vol 4, pages 6 and 7. 9 Estimates of Appropriations 2018/19 External Sector B5. Vol 4, page 8. Vote Customs Standard Estimates Questionnaire, page 2. 5
1 Cross-border crime and drug smuggling initiatives 1.1 The Minister s response to the Standard Estimates Questionnaire highlights increasing complexity in the nature of cross-border crime, and security risks, particularly relating to illicit drugs. 10 1.2 Customs has intercepted significant quantities of illicit drugs. Amongst the bigger interceptions, in 2017, Customs intercepted 160 litres of t-boc methamphetamine (which, once converted, would amount to 120 kg of methamphetamine) disguised as dishwashing liquid, and 32.3 kg of MDMA (Ecstacy). 1.3 Increasingly, Customs is working with international partners to disrupt supply chains offshore and intercept attempted export of drugs. In 2016/17, Customs partners overseas advised that they made 16 interceptions of illicit drugs destined for New Zealand. 11 1.4 Customs have indicated that implementing the new initiative Drug Smuggling Networks: Strategic Disruption will mean that it needs to increase overall staffing levels. In 2018/19, Customs plans to add 34 FTE to implement the initiative. 1.5 Budget 2018/19 proposes $6.185 operating expenditure in 2018/19 to disrupt drug smuggling networks. 12 The new initiative is proposed to be allocated across all appropriations. 1.6 A $2.742 million capital injection is proposed for 2018/19 ($3.906 million over 4 years) as part of the initiative. 13 1.7 The performance targets relating to protection from harm through interception have not significantly changed, despite the significant increase in investment. 14 1.8 The Committee may wish to ask: Please provide an update on changing patterns of cross-border crime and security risk. How does Customs plan to operationalise the initiative to address illicit drug importation? What new capabilities might need to be introduced? In light of the additional investment in disrupting drug smuggling, why have performance targets relating to the interception of harm and potential harm not changed? 10 Vote Customs Standard Estimates Questionnaire, page 1. 11 Customs NZ Annual Report 2016/17, page 14. 12 Estimates of Appropriations 2018/19 External Sector B5. Vol 4, page 10. 13 Estimates of Appropriations 2018/19 External Sector B5. Vol 4, page 25. 14 Estimates of Appropriations 2018/19 External Sector B5. Vol 4, page 12. See Clearance and Enforcement Services Related to Goods (Protection Intermediate Outcome: The New Zealand public is protected through the interception of harm and potential harm). 6
2 Increasing volume and complexity of work 2.1 Customs has highlighted the increasing complexity of their work due to the broadening range of source countries for passengers as a result of strong economic growth in Asia, and increasing direct flights to New Zealand. 15 This creates additional requirements on Customs staff who need to ensure that systems are understandable, and accessible to increasing numbers of passengers for whom English is a foreign language. 2.2 Other potential areas of growth, include anticipated increasing demand for clearance of goods as a result of increased trading due to new or enhanced free trade agreements, such as the Comprehensive and Progressive Trans Pacific Partnership Agreement (TPPA) and the proposed upgrade to the China Free Trade Agreement. 16 2.3 The Committee may wish to ask: Please provide an update on anticipated workload increase and the changing complexity of Customs operations. What strategic and operational activities will be prioritised in 2018/19 to address increasing complexity and increasing demand for services? What resources, and what new capabilities might Customs staff need to have to meet the needs of increasing numbers of travellers from Asian countries? What impact, in terms of increased demand from traders, does Customs anticipate from the CPTPP and the proposed China Free Trade Agreement Upgrade? 3 Customs and Excise Act 3.1 The Customs and Excise Act (the Act) comes into force on 1 October 2018. Customs has indicated that it plans to hire an additional 24 FTE to support implementation of the Act and regulations. 17 3.2 The Committee may wish to ask: What are the most significant operational changes that arise as a result of the Act? How will the additional resourcing be deployed? What new or different capabilities might be required as a result of the new legislation? Will those additional FTE be retained beyond implementation of the Act? 15 New Zealand Customs Service Four Year Plan Budget 2017, page 9. 16 New Zealand Customs Service Four Year Plan Budget 2017, page 8. 17 Vote Customs Standard Estimates Questionnaire, page 5. 7
4 Real time risk profiling tool 4.1 Originally the Joint Border Management System (JBMS) project plan included a real time risk profiling tool, but this part of the project was separated out from the JBMS project, with the intention that the tool should be developed internally by a joint agency team (Customs, Ministry of Primary Industries, Ministry of Building, Innovation and Employment). 4.2 The Minister has signalled in the Standard Estimates Questionnaire that Customs will need continual capital investment to maintain and develop systems over the next few years. 18 4.3 The Committee may wish to ask: Please provide an update on progress towards developing a real time risk profiling tool. What is the expenditure to date to develop the risk profiling tool, and how does this compare with the indicative costs in the original business case? Has the scope and/or functional features of the risk profiling tool changed, and if so, how? When will it be completed? 5 Third party funding 5.1 The Border Clearance Levy was introduced in 2016, and this funding has helped mitigate cost pressures relating to increasing numbers of passengers crossing the border. Customs are forecasting a surplus on the memorandum account of $13.8 million. 19 5.2 In its four-year plan, Customs indicated that its business planning is based on the assumption that volume-driven cost pressures relating to goods also will be met by third party funding. 20 Customs is reviewing cost recovery fees for goods, with a view to developing a funding mechanism akin to the Border Clearance Levy. 21 18 Vote Customs Standard Estimates Questionnaire, page 2. 19 Estimates of Appropriations 2018/19 External Sector B5. Vol 4, page 17. 20 New Zealand Customs Service Four Year Plan Budget 2017, page 2. 21 Vote Customs Standard Estimates Questionnaire, page 3. 8
5.3 The Committee may wish to ask: Please provide a detailed forecast for the memorandum account and outline the factors affecting revenue and expenses. How does Customs plan to reduce the surplus? The Committee notes the work being done to scope a potential levy on clearance of goods. When will the review of cost recovery fees for goods be complete? What next steps would be required to implement this, if approved? What assessment has Customs made of how this might alleviate cost and volume pressures? 9
Glossary The following information is sourced from the Estimates, and A Guide to Appropriations 22. Appropriation A parliamentary authorisation for the Crown or an Office of Parliament to incur expenses and capital expenditure, for a specified purpose. Appropriations are limited by their scope (limits on what the appropriation can be used for), amount (the maximum amount of expenditure allowed), and period (the timeframe over which the appropriation applies usually annual but in some cases multi-year or permanent). Non-departmental: Benefits or related expenses appropriations Authorises expenses to be incurred by the Crown (excluding departments) in transferring resources (generally to individuals for their personal benefit) for which the Crown receives nothing directly in return. Examples include Jobseeker Support and Emergency Benefit, Student Allowances and various scholarships and awards. Departmental: Capital expenditure appropriations Authorises capital expenditure to be incurred by a department to acquire or develop assets for use by the department. Departmental capital expenditure funded from a department s balance sheet (proceeds of the sale or disposal of any of its assets together with any working capital held) is authorised by a permanent legislative authority (PLA), under the PFA. The department can seek additional funding for capital expenditure (shown as capital injections in the Capital Injections Authorisations table in the Estimates for a Vote, and also in the Capital Injections and Movements in Departmental Net Assets table in the supporting information to the Estimates for a Vote). Capital injections to departments need to be authorised by Parliament in an Appropriation Act. Non-departmental: Authorises capital expenditure to be incurred by the Crown (excluding departments) to acquire or develop Crown assets, including the purchase of equity or making a loan to a person or organisation that is not a department. Examples include equity injections for Crown entities, and Residential Care Loans to older people. 22 Published by the Treasury in November 2013. 10
Capital Injections and Movements in Departmental Net Assets Appropriation Minister Responsible Minister Multi-year appropriation (MYA) A schedule showing the opening balance, projected movements, and closing balance of a department s net assets. Specifically, it includes the details of any retained surplus, capital injections, or withdrawals. The primary purpose is to show how capital injections relate to movements in departmental net assets. The Minister responsible for specific appropriations within a Vote. As several Ministers may be responsible for different appropriations within a single Vote, each appropriation has a tag (M1, M2 etc) identifying the Minister responsible for that line item. The Minister responsible for the financial performance of a department or Crown entity. The Speaker is the responsible Minister for an Office of Parliament, the Office of the Clerk and Parliamentary Service. An appropriation that allows expenses or capital expenditure to be incurred during a specified period that spans the whole or parts of more than one financial year, but no more than five financial years. The MYA component estimated for the relevant year is not in the annual and permanent appropriations table, but is shown in a separate table for total annual, permanent and multi-year appropriations. The total amounts shown in that table are consistent with the amounts shown in the summary of financial activity table [Table 1.2] for the Vote. Departmental: Output Expense appropriations Authorise expenses to be incurred by a department in providing a class or type of outputs (goods and services). Non-departmental: Authorises expenses to be incurred by the Crown (excluding departments) in purchasing a class or type of outputs (goods and services) from Crown entities or other third parties. Departmental: Other Expense appropriations Authorises expenses to be incurred by a department not related to producing outputs. An example is expenses incurred in writing off assets damaged or destroyed in earthquakes. Non-departmental: Authorises expenses to be incurred by the Crown (excluding departments) that are not output expenses, benefits, or borrowing expenses. An example is the cost of providing international development assistance. 11
Multi-category appropriation (MCA) Vote Authorises expenses or capital expenditure to be incurred on two or more categories of output expenses, other expenses or non-departmental capital expenditure, all of which must contribute to the same single overarching purpose. A grouping of one or more appropriations that are the responsibility of one or more Ministers and are administered by one department. 12