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Improving Health and Safety in High Hazard Industries

Office of the Minister of Labour

Cabinet Economic Growth and Infrastructure Committee

Proposal

  1. The Department of Labour proposes establishing a High Hazards Unit to improve the focus, capacity and capability of its service delivery to provide assurance of good safety management by high hazard operators in the petroleum and extractives sectors.
  2. I seek approval to fund this increased activity of up to $1.5 million into outyears by using accumulated unallocated revenue collected for health and safety administration through the Health and Safety in Employment levy (the HSE levy).

Executive summary

  1. Two recent reviews of the regulatory regimes for petroleum and extractives have highlighted the need for the Department of Labour to have the appropriate resourcing and expertise, delivered in the most effective way, to ensure that New Zealand’s high hazard operators are managing health and safety and the risk of catastrophic failure at their sites.
  2. The Department is implementing a package of practical proposals to strengthen its approach to high hazard industries. The core proposal is a nationally-led High Hazards Unit, to increase the Department’s high hazard capacity and expertise, and improve the co-ordination, planning, and relationship management for the Department’s enforcement work within high hazard industries.
  3. I propose that this strengthening of the Department’s high hazard activity be funded from accumulated and unallocated HSE levy revenue in the HSE levy memorandum account. There is sufficient accumulated revenue in the account to fully meet the increase in appropriation, and no increase in the HSE levy rate for businesses is required.

Background

  1. High hazard industries, such as the petroleum sector (including onshore and offshore petroleum installations and petroleum pipelines) geothermal, and the extractives sector (mining, tunnelling and quarrying), have inherent and significant hazards even when managed by highly motivated and safety conscious operators, and the consequences of failure can be catastrophic.
  2. To manage these inherent hazards, regulations under the Health and Safety in Employment Act 1992 (the HSE Act) impose specific requirements on mining and petroleum exploration and extraction. These requirements are technically complex and must also be adapted to the particular safety aspects of the individual operation. The Department of Labour’s Labour Group is responsible for enforcing the HSE Act in all workplaces other than for ships and aircraft.[1]
  3. The Government’s Petroleum Action Plan aims to increase the environmentally responsible development of New Zealand’s petroleum resources.
  4. In 2010 the Ministry of Economic Development commissioned The Comparative Review of Health, Safety and Environmental Legislation for Offshore Petroleum Operations. The review found that New Zealand’s health and safety legislation was largely fit for purpose, but noted that, based on international comparisons, three inspectors would be considered appropriate to meet current regulatory demand. This demand would rise further with the expected increase in offshore petroleum activities under the Petroleum Action Plan.
  5. An operational review commissioned by the Department in 2011 - Review of the Department of Labour’s Interactions with Pike River Coal Limited - concluded that the Department’s interactions with Pike River Coal were generally sound and that the performance of the two mine inspectors at Pike River Coal was “commendable”. The report however highlighted a number of areas for improvement that should be considered by the Department. In particular, it recommended that general audits be incorporated into the inspectorate work plans and that a national reporting structure be adopted, led by a Chief Inspector of Mines. Further recommendations included strengthening the relationship with Australian regulators, improving the professional development of inspectors, and strengthening work with industry to develop codes and standards.
  6. The value of auditing mine safety was also reflected by the independent safety audit of operating underground coal mines undertaken by two Australian mining specialists in 2011.
  7. In March 2011 the Department began a review of its approach to high hazard industries. The main findings are:
    1. a fragmented approach to high hazard planning and coordination at present
    2. limited capacity and capability to deal effectively with high hazard industries
    3. limited information and knowledge about high hazard activities and operators
    4. missed opportunities to work with regulators, inspection bodies and operators.
  8. High hazard operations require a higher level of regulatory attention than general New Zealand workplaces. The risk of catastrophic failure means that an intensive proactive approach is needed, where the Department must scrutinise operator activity in real time and work with companies to anticipate and prevent incidents.
  9. To do this, the Department must employ specialised inspectors with specific technical and industry expertise, who can knowledgably assess the wide range of detailed information that operators are required to maintain and/or provide to the regulator[2], conduct regular assessments, and maintain familiarity with the operator’s site. The Department must also have the capacity, seniority and technical knowledge to work effectively at sector level on standards and codes of practice, which underpin health and safety in the industries. This resource is not easily obtainable at short notice and must be developed and maintained. 
  10. The Department’s Vote Labour baseline funding for HSE Act administration is approximately $41 million per year. The Crown recovers its costs of administering the HSE Act through the HSE levy on employers and self-employed persons.
  11. The HSE levy is set at a full cent rate, currently 5 cents per $100 of leviable earnings by all employees and self-employed. It is managed though a memorandum account established in 2007, allowing levy revenue to be smoothed across financial years. The memorandum account has a current surplus of $15.774 million. I review the levy rate annually.

Comment

  1. I intend to ensure that the Department is well placed to meet its regulatory responsibilities for high hazards and provide assurance to Government and the public that petroleum and extractives operators are safely managing the inherent risks at their sites. Industry leaders in both the extractives and petroleum sectors support the strengthening of the Department’s regulatory capacity and capability. The expected expansion in coal and petroleum exploration and extraction investment will increase the regulatory demand on the current inspectorate resource.
  2. The Department’s specialist resources for the high hazard extractives and petroleum sectors comprise two Senior Advisor High Hazards (Petroleum and Geothermal) (both positions will be vacant shortly, for which the Department will contract expertise in the short term), one Senior Advisor High Hazards (Extractives), and two mines inspectors (one position is vacant).
  3. The existing resource is stretched to cover responsive work in these industries. The petroleum inspectorate must also cover pipelines, geothermal installations, and new petroleum technologies such as the extraction of coal seam gas and underground coal gasification. As such, the Department’s effectiveness and credibility as a regulator in these high hazard areas is limited and because of this carries a regulatory risk.
  4. The inspectorate is currently located in regional offices, reporting at a local rather than national level, limiting the technical and professional support available. The existing positions need to be elevated within the Department’s structure and remuneration boosted, to recognise the expected level of professional and technical expertise required. Recruiting specialised staff from a small, internationally competitive industry is challenging. At current levels of funding the Department cannot compete with international or local industry remuneration levels to recruit and retain staff, as evidenced by the recent vacancies in extractives and petroleum.
  5. The expansion of the New Zealand petroleum industry will also require better co-ordination across many regulatory agencies, both locally and internationally. A shared regulatory response is crucial to manage risks from increased offshore petroleum exploration in the upcoming summer drilling seasons.

Establishing a High Hazards Unit in the Department of Labour

  1. The Department has developed a package of practical proposals to improve its approach to high hazard industries. These include: 
    • establishing a nationally-led High Hazards Unit to improve the leadership, planning, and relationship management for the Department’s inspection and enforcement work within high hazard industries
    • recruiting additional expertise and better utilising the Department’s general workplace inspection resources to improve enforcement capacity
    • implementing the other recommendations from the Review of the Department of Labour’s Interactions with Pike River Coal Limited, including:
      • general safety system audits of underground coal mines
      • leadership in developing mining codes and guidelines, in collaboration with the mining sector
      • developing internal operating systems, guidance material, processes, and practices tailored to the technical requirements of the extractives sector, thereby enhancing the Department’s responsive regulatory approach
    • enhancing engagement with the high hazards sector, including other regulators, industry bodies, operators, and employee organisations
    • entering a contractual arrangement with Australia’s National Offshore Petroleum Safety Authority (NOPSA) to improve the Department’s access to technical expertise, and
    • improving collection, use and sharing of high hazard information.
  2. The High Hazards Unit will report to the Labour Group’s General Manager, National Services and Support, a third tier role. The structural changes will be cost neutral.
  3. The Unit will comprise two sections – one focused on extractives and the other on petroleum and geothermal. Each section will be led by a Chief Inspector, a boosted position from the current Senior Advisor roles, and will have three regionally based inspectors. The inspectorate will be further supported by an administrative position, a business analyst to provide the necessary level of industry intelligence and monitoring for assurance purposes, and a dedicated standard setter to lead the development of high hazard industry-specific codes and guidance.
  4. The new Unit increases the number of high hazard positions by six. Establishing the Unit will also require changes to the reporting lines and job titles and descriptions of the existing high hazard positions. These must be market-based roles where the Department can match a world-price for this type of scarce resource in a highly competitive, international market.
  5. Through the High Hazards Unit, the Department will forge and maintain effective relationships at a strategic level with other regulators, operators and industry bodies, and third parties. The Unit will provide a focal point for improving co-ordination and leadership across the New Zealand regulators tasked with managing high hazard areas, such as the Ministry of Economic Development (mineral permitting), the Environmental Protection Authority (environmental management), and Maritime New Zealand (oil spill response).
  6. Given the technical complexity and small scale of these industries in New Zealand, the Department must work globally, particularly in offshore petroleum as a member of the International Regulators’ Forum, to ensure information exchange, benchmarking, and opportunities for international harmonisation. These contacts also provide enhanced opportunities for ongoing professional development.
  7. Expanded professional and technical services will include safety systems audits, petroleum safety case assessments through the liaison with NOPSA, and improved guidance, standards, and operational policy.
  8. The High Hazards Unit will provide the Department with the capability and capacity needed to address risk and to maintain a credible and effective regulatory presence. It will ensure the health and safety legislative framework is robustly applied, and that high hazard operators are managing health and safety and the risk of catastrophic failure at their sites. The High Hazards Unit will focus on the HSE regulatory frameworks for mining, petroleum production and geothermal issues initially. However, it will also work with the broader inspectorate on high hazard issues generally and on matters relating to hazardous substances.   
  9. I propose that this strengthening of the Department’s high hazard activity be funded from the accumulated unallocated HSE levy revenue in the HSE levy memorandum account. There is sufficient accumulated revenue in the account to fully meet the increase in appropriation, including into outyears. No increase in the HSE levy rate for businesses will be required.
  10. I propose that the increase begins on a pro-rata basis in the 2011/12 year to meet the immediate requirements on the Department for the upcoming summer offshore petroleum drilling season, and to provide higher levels of assurance for the extractives sector. Appendix 1 sets out further detail and costing.

Wider context

  1. The high hazard proposals focus on concrete operational improvements that can be made immediately within the current regulatory framework. Underlying policy settings will be reviewed separately, including in response to any recommendations from the Royal Commission on the Pike River Coal Mine Tragedy. The Department is undertaking a staged review of the Health and Safety in Employment (Petroleum Exploration and Extraction) Regulations 1999, with the intention that any recommendations be implemented before the next drilling season (by September 2012). This review is expected to focus on wellbore integrity[3], well control equipment[4] and ways in which consideration of safety cases might be enhanced.
  2. Through the Labour Group Change Programme, the Department is reviewing its wider operating model to improve future service delivery. The High Hazard Unit proposal is part of this work. I consider though that the improvements proposed here should be made immediately, to improve assurance in the high hazard sectors.
  3. The Royal Commission on Pike River may recommend the resource dedicated to extractives be increased further from the proposals in this paper. I shall consider any recommendations and the appropriate response once the Royal Commission has made its report.

Alternative options

  1. The alternative option is maintaining the status quo. In the 2011 Four Year Budget Plan for Vote Labour, budget was reprioritised within baselines to fund the creation of the second petroleum Senior Advisor position. Additional changes that could be made within baseline include grouping the existing high hazard positions together to strengthen co-ordination at a sector level. Further reprioritisation within the Department’s Vote Labour baseline is not possible without compromising existing levels of service delivery and risking service failure.
  2. Without the additional funding sought, the Department will not be able to employ and retain the expert staff necessary, increasing the potential for service delivery failure for high hazard sectors, particularly given the expected industry expansion.
  3. The Treasury has proposed reducing the required staffing and asking the Department of Labour to reprioritise internal resources to provide support functions to the High Hazard Unit.

Consultation

  1. The Treasury, the Department of Prime Minister and Cabinet, the Ministry for Economic Development, the Ministry for the Environment, the Ministry of Transport, the Environmental Protection Authority, Maritime New Zealand, and the Civil Aviation Authority have been consulted on this paper. The State Services Commission was informed.
  2. The Treasury supports hiring additional inspectors at the level recommended by the reviews referenced earlier in the paper.  However, The Treasury does not support funding for additional inspectors above this amount.  The Treasury also considers that costs of majority of the support staff could reasonably be met within Departmental baselines.
  3.  The Department and The Treasury have agreed a range of additional requirements. Tables 1 to 3 provide an overview of the differences between the Department of Labour’s funding proposal and The Treasury’s alternative approach.

Financial implications

  1. The High Hazards Unit proposed will require an increase of up to $1.5 million in the Vote Labour appropriation, beginning on a pro-rata basis from December 2011/12.
  2. I propose that this increase be met by using accumulated unallocated revenue in the HSE levy memorandum account. There is sufficient accumulated revenue in the memorandum account to fully recover the proposed increase in funding, without requiring an increase in the HSE levy rate. This funding approach applies the HSE levy revenue to the purpose for which it was collected, the administration of the HSE Act. 
  3. The forecast HSE levy memorandum account balances, based on a conservative assumption of static levy revenue, are outlined in Table 1 below. The levy is calculated on leviable earnings by all employees and self-employed. Unemployment rates are forecast to fall from 6.6% to 5% in early 2013, which suggests that the revenue collected could actually be expected to increase over time.
Table 1: HSE levy memorandum account forecast transactions and balances
$000 2011/12 2012/13 2013/14 2014/15
Opening Balance $15,774 $18,265 $21,252 $24,200
Forecast HSE levy revenue $43,656 $43,902 $43,902 $43,902
Revenue Crown Funded $2,720 $3,393 $3,270 $2,970
Less Forecast HSE expenditure $43,885 $44,308 $44,224 $43,736
Forecast Closing Balance Surplus/(Deficit) $18,265 $21,252 $24,200 $27,336
  1. The implications of the proposal for the memorandum account are set out in Table 2 below. There is sufficient unallocated money in the memorandum account to fund this expanded activity over outyears. The reprioritised funding consists of the current petroleum and extractives resource, which will be moved to the new High Hazards Unit.
Table 2: HSE levy memorandum account forecasts and funding sought – Department of Labour proposal
$000 2011/12 2012/13 2013/14 2014/15
Opening Balance $15,774 $17,408 $18,941 $20,384
Forecast HSE levy revenue $43,656 $43,902 $43,902 $43,902
Revenue Crown Funded $2,720 $3,393 $3,270 $2,970
Less Forecast HSE expenditure $43,885 $44,308 $44,224 $43,736
Proposed High Hazard Unit        
Total proposed expenditure $1,289 $2,194 $2,245 $2,305
Less reprioritised funding $432 $740 $740 $740
New funding sought $857 $1,454 $1,505 $1,565
Forecast Closing Balance Surplus/(Deficit) $17,408 $18,941 $20,384 $21,955
  1. As set out in the 2011 Four Year Budget Plan for Vote Labour, changes to existing high hazard service delivery need to be made in the context of financial pressures totalling 12.5% over the next four years. This limits the Department’s ability to implement any significant change by reprioritising within the existing baseline.
  2. The following tables show The Treasury’s alternative proposal for a reduced staffing level and internal reprioritisation for support staff.
Table 3: HSE levy memorandum account forecasts and funding sought – The Treasury proposal
$000 2011/12 2012/13 2013/14 2014/15
Opening Balance $15,774 $17,861 $20,085 $22,232
Forecast HSE levy revenue $43,656 $43,902 $43,902 $43,902
Revenue Crown Funded $2,720 $3,393 $3,270 $2,970
Less Forecast HSE expenditure $43,885 $44,308 $44,224 $43,736
Proposed High Hazard Unit        
Total proposed expenditure $946 $1,616 $1,657 $1,699
Less funding for Business Analyst
 and Admin Assistant		 $110 $113 $116 $120
Less reprioritised funding $432 $740 $740 $740
New funding sought $405 $763 $801 $839
Forecast Closing Balance Surplus/(Deficit) $17,861 $20,085 $22,232 $24,529
  1. The opportunity cost of this proposal is the potential to reduce the levy rate by one cent, given the current balance in the memorandum account. However the account would run into deficit after one year, necessitating a rise back to five cents in 2012/13.

Human rights

  1. There are no human rights implications from this proposal.

Legislative implications

  1. There are no legislative implications from this proposal.

Regulatory impact analysis

  1. There no regulatory impacts from this proposal.

Publicity

  1. I intend to issue a post-Cabinet press release on the establishment of the High Hazards Unit by the Department of Labour. Following Cabinet decisions, I also propose releasing this paper and the external Review of the Department of Labour’s Interactions with Pike River Coal Limited, subject to any deletions that would be justified if the information had been requested under the Official Information Act 1982. 

Recommendations

  1. I recommend that the Cabinet Economic Growth and Infrastructure Committee:
    1. approve the following changes to appropriations to provide for a High Hazards Unit in the Department of Labour, with a corresponding impact on the operating balance and debt either:
    2. (a)  (Department of Labour preference)
  $m – increase/(decrease)
Vote Labour
Minister of Labour		 2011/12 2012/13 2013/14 2014/15 2015/16& Outyears
Departmental Output Expense:
Services to Promote and Support Safe and Healthy People and Workplaces
(funded by revenue Crown)		 0.857 1.454 1.505 1.565 1.565
  $m – increase/(decrease)
Vote Labour
Minister of Labour		 2011/12 2012/13 2013/14 2014/15 2015/16& Outyears
Departmental Output Expense:
Services to Promote and Support Safe and Healthy People and Workplaces
(funded by revenue Crown)		 0.405 0.763 0.801 0.839 0.839
    1. agree that the proposed change to appropriations for 2011/12 be included in the 2011/12 Supplementary Estimates and that, in the interim, the increase be met from Imprest Supply
    2. agree that the following funding be set aside in contingency subject to a report back to the Ministers of Finance and Labour on the need for, and costs of, purchasing advisory services from the Australian offshore petroleum provider, NOPSA, and other professional services.
  $m – increase/(decrease)
Vote Labour
Minister of Labour		 2011/12 2012/13 2013/14 2014/15 2015/16& Outyears
  0.350 0.350 0.350 0.350 0.350
    1. direct the Department of Labour to report back by September 2013 on the expenditure and performance of the High Hazards Unit over the period.
    2. note that the increase in appropriation will be fully met, including in outyears, from accumulated unallocated revenue in the Health and Safety in Employment levy memorandum account, and no increase in the levy rate is required.
    3. note the proposed High Hazard Unit may need additional funding to expand in light of recommendations from the Royal Commission of Inquiry into the Pike River Tragedy and other pressing matters.

Hon Kate Wilkinson
Minister of Labour

...... / ...... / ......

Appendix 1: High Hazards Unit Proposal

Table 4: Proposed Operating Costs for High Hazards Unit ($000s)
  2011/12 2012/13 2013/14 2014/15 2015/16 & outyears
Personnel expenses 1,777 1,830 1,882 1,942 1,942
Staff development expenses 120 51 51 51 51
Professional and technical services* 0 0 0 0 0
Overheads (property, IT and operational expenses) 301 312 312 312 312
Total proposed expenditure 2,198 2,194 2,245 2,305 2,305
Pro-rata amount for 2011/12 1,289        
Less reprioritised funding 432 740 740 740 740
New funding sought 857 1,454 1,505 1,565 1,565

* Budget Contingency of $350k per year excluded

Footnotes

[1] Maritime New Zealand and the Civil Aviation Authority are the agencies designated to administer the HSE Act for ships and aircraft respectively.

[2] For petroleum these include safety cases, notification of well drilling events, certificates of fitness, verification schemes; for extractives these include certificates of competence, mine plans, event and accident notifications.

[3] Wellbore integrity is the first line of defence against a well blowout and includes the appropriate use of drilling fluids, the casing and cementing programme and testing

[4] Well control equipment includes equipment used for preventing well blowouts and systems for activating such blowout prevention equipment. This equipment is used to control a well in the event of a loss of well control.