Cabinet Paper - Next Steps in the Land Transport Sector Review

Office of the Minister of State Services

Chair

Cabinet Policy Committee

Next Steps in the Land Transport Sector Review

Proposal

1 This paper outlines the key recommendations of the Next Steps in the Land Transport Sector Review (Next Steps), led by the State Services Commission.

2 Cabinet's agreement is sought to the review's recommendations on introducing a Government Policy Statement on land transport funding policy and priorities, extending the land transport planning cycle to a three-yearly basis, enhancing the role of the Ministry of Transport, and merging Land Transport New Zealand and Transit New Zealand.

3 Cabinet's approval is also sought for the Minister of Transport to commission further work and instruct officials to consult the land transport sector and local government prior to finalising other recommendations. These include the proposed regional interface with the new planning and funding system and that all Fuel Excise Duty, Road User Charges and Motor Vehicle Registration fees be hypothecated to the National Land Transport Fund.

Executive Summary

4 In late January 2007, the Ministers of Finance, State Services and Transport asked the State Services Commission to lead a multi-agency review of the land transport sector. The review was part of the Government's response to the findings in the report from the Ministerial Advisory Group on Roading Costs 2006 [EXG MIN (06) 4/3] and the Review of Value for Money in the Land Transport Sector [CAB MIN (07) 7/5].

5 While many improvements have been made in recent years, the Minister of Finance and I have had on-going concerns that the Government land transport sector is: not fully achieving value for money; not fully delivering on the New Zealand Transport Strategy; not fully delivering on the Government's wider agenda; not sufficiently responsive; and is creating ongoing fiscal risk for the Government.

6 The Next Steps report was submitted to Ministers on 30 April 2007. The report outlined officials' analysis of the machinery of government, governance and funding arrangements for the land transport sector and made a number of recommendations for improvement.

7 The Minister of Finance and I have considered this report and are supportive of its recommendations. As the sponsor of the review, I seek Cabinet's agreement to a number of the recommendations and approval for the Minister of Transport to commission further work and instruct officials to consult the land transport sector and local government prior to finalising the other recommendations.

8 The key Next Steps recommendations include that: a Government Policy Statement be issued by the Minister of Transport on a three-yearly basis setting out the government's funding policy and priorities for the next three to six years; the National Land Transport Programme becomes a three-yearly, as opposed to an annual, document; regional councils become responsible for prioritising all regional and local land transport funding proposals; only activities included in a Regional Land Transport Programme be eligible for funding through the National Land Transport Fund with certain exceptions; all Fuel Excise Duty, Road User Charges and Motor Vehicle Registration fees be hypothecated to the National Land Transport Fund; the role of the Ministry of Transport be enhanced by the addition of responsibility for some new functions; and Land Transport New Zealand and Transit New Zealand be merged.

9 Implementation will be crucial to the success of the proposed changes. It is proposed that the Ministry of Transport lead this implementation process with support from a multi-agency team.

Background

10 In late January 2007, the Minister of Finance and I asked the State Services Commission to lead the review of the land transport sector. The review was part of Government's response to the findings in the report from the Ministerial Advisory Group on Roading Costs 2006 [EXG MIN (06) 4/3] and involved the Ministry of Transport, Treasury and Department of Prime Minister and Cabinet.

11 The land transport sector has been reviewed a number of times in recent years. Many improvements have been made, but the Minister of Finance and I share an on-going concern that the sector is: not fully achieving value for money; not fully delivering on the New Zealand Transport Strategy; not fully delivering on the government's wider agenda e.g. economic transformation and sustainability; not sufficiently responsive; and is creating ongoing fiscal risk for the Government.

12 The Terms of Reference charged the review team to consider the machinery of government, governance and funding arrangements for the land transport sector, and make recommendations on what changes to investment planning, funding and structure would be needed to enhance agency responsiveness, performance, capability and value for money.

13 The scope covered the Ministry of Transport, the two Crown entities - Land Transport New Zealand and Transit New Zealand - and the Treasury, with regard to Rail. ONTRACK was considered outside the scope of the review pending passage of the Rail Network Bill.

Report Findings

14 The Next Steps report was submitted to Ministers on 30 April 2007. Next Steps identified a number of underlying causes of the issues identified in the Terms of Reference including:

• gaps in the interpretation of the New Zealand Transport Strategy objectives;
• the Ministry has yet to acquire sufficient capability to fulfil the leadership role envisaged by the Government Transport Sector Review in 2004;
• expenditure pressures that are not being addressed strategically;
• the roles of some government agencies remain unclear, and some functions are duplicated;
• inconsistent planning and funding policies distort incentives within the sector; and
• inefficient churn in planning and limited sector collaboration fails to align central, regional and local land transport plans.

Funding and Planning

15 Next Steps concluded that the most urgent issues to address related to land transport sector planning and funding. The main recommendations on planning and funding are that:

• a Government Policy Statement would be issued by the Minister of Transport on a three-yearly basis setting out the government's funding policy and priorities for the next three to six years;
• National Land Transport Programme would become a three-yearly, as opposed to an annual, document;
• regional councils, through arrangements such as Regional Land Transport Committees, would be responsible for prioritising regional and local land transport funding proposals, including State highway proposals, in Regional Land Transport Programmes on a three-yearly basis;
• Regional Land Transport Programmes would have to be consistent with the Government Policy Statement;
• further work be undertaken on the appropriate arrangements to undertake the role of prioritising all regional and local land transport funding proposals including consideration of Regional Land Transport Committees and their composition;
• only activities included in a Regional Land Transport Programme would be eligible for funding through the National Land Transport Fund, with the exclusion of nationally-led expenditure and other central expenditure such as Police funding;
• approval of individual activities would continue to be carried out on a statutorily independent basis by the agency responsible for developing the National Land Transport Programme, which would have to give effect to the Government Policy Statement;
• all Fuel Excise Duty, Road User Charges and Motor Vehicle Registration fees would be hypothecated to the National Land Transport Fund;
• Fuel Excise Duty, Road User Charge and Motor Vehicle Registration levels for each of the next three years would be set as part of the Government Policy Statement process;
• a separate transparent process would be put in place to provide clear accountability to Ministers in the event that Crown funding is used to fund specific land transport activities; and
• the role of the Ministry of Transport would be enhanced by the addition of responsibility for the new functions of providing advice on evaluation procedures and design standards, and monitoring and reviewing a selection of activities funded through the National Land Transport Programme.

16 These recommendations address agency responsiveness by providing the wider sector with additional guidance by setting out Government's funding and policy priorities for the next three to six years via a Government Policy Statement. The proposed clarification of roles and responsibilities for the central Government agencies should also result in improved communication and information sharing.

17 The sector's performance would be improved across the land transport sector through reduced duplication, reduced 'churn' by extending the planning cycle and improved collaboration and cooperation. It is also clear that the Ministry of Transport must boost its capability and fulfil its sector leadership role.

18 The recommendations would ensure that value for money becomes a more prominent consideration in the establishment of the National Land Transport Programme and its delivery. Priorities and the necessary trade offs would be clearer in an overarching context of cost effectiveness.

19 Next Steps went on to conclude that the proposed changes to the planning and funding system would address most of the issues currently facing the sector. The implementation of these measures would necessitate modifications to the configuration of the current roles, functions and nature of the government institutions in the sector.

Sector Structure

20 The Next Steps report noted that it was apparent from the outset of the review that the transport agencies needed to work more collaboratively and with a common purpose.

21 The subsequent question addressed was whether the planning and funding changes would go far enough, especially in terms of the signals sent to the sector about the required changes in expectations, behaviour and approach.

22 The review considered a number of structural options in detail. Two viable options emerged - the first retained the existing three agency model, but with changes to their roles and functions in keeping with the planning and funding recommendations. The other option merged the two Crown entities (Land Transport NZ and Transit NZ) to form one land transport agency.

23 Next Steps concluded that both options would be viable. However, on balance it recommended the more significant structural change to disestablish Land Transport NZ and Transit NZ as separate agencies and merge their new functions into a new statutory Crown entity (which would retain the statutorily independent functions currently held by Land Transport NZ).

24 The reasons for the Review's preference for a merger include the following:

• the benefits of integration would be greater than the benefits of retaining separately focused entities;
• one Crown entity would be required to consider all transport modes and activities and ensure that appropriate trade-offs are made;
• one Crown entity would be accountable to the Minister;
• one Crown entity would be required to focus on cost-effective delivery of its activities; and
• one Crown entity should facilitate more easily the transition, over time, to the fully implemented new planning and funding arrangements.

25 The factors considered against the merger included the possible loss of transparency, making it more difficult for the Ministry of Transport to carry out its role as the Minister's adviser; and a possible perception by some stakeholders of bias in favour of State highways in the funding allocation (despite measures to limit that possibility). In addition, a merger could be seen as coming too soon after the 2004 restructure, and therefore providing insufficient time for the more difficult, "soft wiring" behavioural changes to have become the norm. The review concluded that these factors could be managed.

26 The report emphasised that the success of the proposed changes to roles and responsibilities across the agencies will be influenced by the membership of the Crown entity board and its composition. For example, it may be appropriate to require the establishment of one or more board sub-committees.

27 Irrespective of other outcomes, the review considered that the Ministry must fulfil its envisaged sector leadership role and enhance its capability. In addition to the proposed changes to the land transport Crown entities, a number of key roles and responsibilities are recommended to transfer to the Ministry. To this end it would quickly need to boost its capability in key areas to negate any need for others to fill a vacuum.

28 A collaborative culture needs to be embedded throughout the Government land transport sector. The proposed new planning and funding arrangements and the proposed merger of the current two Crown entities to establish new institutional arrangements would contribute to this.

Taking the Report Forward

29 The recommendations in the Next Steps report were prepared over a three month period without the benefits of stakeholder input in terms of implementation practicalities. A number of details, including the legislative and fiscal implications, have not yet been fully developed.

30 As it is essential that implementation is successful, I seek approval to instruct officials to undertake consultation with key stakeholders, commission further work on a number of details and report back by 30 June 2007.

31 Some of the further work includes consideration of the alignment of the timeframes between the Government Policy Statement, National Land Transport Programmes, Regional Land Transport Strategies and Regional Land Transport Programmes; the merits of a phased introduction to the regional prioritisation process; the implications for Auckland; how consultation on the Road Safety Programme should take place; and the implications and implementation of full hypothecation of Fuel Excise Duty.

32 As implementation arrangements will need to remain active for at least the next 18 to 24 months, I recommend that an Implementation Steering Group be established promptly, led by the Chief Executive of the Ministry of Transport and supported by a multi-agency team. Regular reports on progress will need to be made to the Ministers of State Services, Finance and Transport.

Consultation

33 The Ministry of Transport, the Treasury and Department of the Prime Minister and Cabinet have been consulted in the preparation of this paper and support the recommendations of the Next Steps review.

Financial implications

34 No assessment has yet been made of the financial implications of the recommended package of measures. There are likely to be three resource and fiscal implications in implementing the proposed changes:

35 Costs of managing the implementation of process and structural changes are unique to each situation. As a point of reference, in 2004/05 the implementation of the Government Transport Sector Review cost around $1.3 million. Officials will report back on the likely funding required to implement the proposed changes following the proposed consultation.

36 There will be costs arising from the proposed structural changes. This will depend on the length of transition phase, accommodation implications and staffing. Officials will estimate these costs as part of developing a detailed implementation plan. In the medium term efficiency gains should be expected from the proposed merger and from the reduction in planning and consultation churn.

37 Full hypothecation of Fuel Excise Duty will impact on both debt and the operating balance. Currently the Crown is retaining around $600 million per annum of Fuel Excise Duty. However, the Crown has also committed to providing funding greater than this to land transport expenditure over the next two years with Crown funding continuing until 2016/17 in decreasing amounts. Committing to full hypothecation would see either a decreasing amount of funding being available for general government expenditure or an increase being required to the operating allowance with corresponding implications for debt and OBERAC.

38 Treasury has assumed the latter and modelled the fiscal impact of full hypothecation as resulting in gross sovereign issued debt as a percentage of GDP forecast being 2 percentage points higher than otherwise and OBERAC excluding NZSF investment returns forecast being 1.4% of GDP rather than 1.7%.

39 Officials also note that the existing planning and funding system is resulting in fiscal risks to the Crown, both from the revenue and State highway revenue guarantees and from the "funding gap" currently indicated in the National Land Transport Programme 10-year forecasts. The "funding gap" is the forecast difference between forecast expenditure and forecast revenue and this grows over time. Officials consider that pressure will be placed on the Government to fill this gap through further Crown appropriations. The proposed changes should remove most of these fiscal risks.

Human rights

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

Legislative implications

41 A number of the recommendations in the Next Steps report will require legislative change. Officials are working to map out the legislative implications in detail and will report back following the proposed consultation.

Regulatory impact and compliance cost statement

42 As noted above officials are still working through a number of the details of the proposed changes. Once these have been considered a regulatory impact and compliance cost statement will also be prepared.

Gender implications

43 There are no gender or disability implications arising from this paper.

Publicity

44 A communications process is being prepared, led by the Minister of Transport. It is recommended that the Ministers of Finance, State Services and Transport be authorised to jointly announce the Next Steps review findings at an appropriate time.

Recommendations

It is recommended that the POL: