EXECUTIVE SUMMARY

The State sector reforms carried out in New Zealand over the past eight years were heralded at their inception to be bold and unprecedented. This judgment has been vindicated by the transformation of public management through the ground breaking development and application of new methods of managerial accountability, including the shift from input to output appropriation, reliance on contracts, and monitoring of results.

This study was commissioned jointly by the State Services Commission and the Treasury to examine whether further improvements should be made in the management of the State sector. In carrying out this study it has become evident that the reforms have lived up to most of the lofty expectations held for them. The organisational cocoon of the old State sector has been broken open and structures reshaped through the application of the reforms' overriding principles. The State sector is more efficient, productive and responsive, and there generally has been significant improvement in the quality of services provided to New Zealanders. However, as with any leading edge technology, it may now be time to "debug" elements which have not worked as well as anticipated.

The reforms could be revitalised in three cluster areas: strategic management; the resource base; and accountability. Before reviewing these issues, the report considers the genesis of the reforms, the structure of the State sector and its organisational capacity.

Putting Ideas into Practice

In the mid 1980's economic and political conditions and exciting theories of public management converged to produce extensive changes in public organisations. Each of these factors was critical and unique; it is doubtful if bold reform could have been implemented if any had been absent. The creation of a framework for reform encompassed more explicit reliance on management tools as well as on the use of contracts. Other countries, before and since, have freed managers to manage within their public sectors, but none have demanded accountability through contract-like arrangements to the extent that New Zealand has. Managerial and contractual ideas are the sometimes converging, sometimes conflicting sets of principles which have shaped the New Zealand reforms.

The Structure of the State sector

New Zealand has a pantheon of departments and Ministers with an array of nondepartmental bodies. Some of the features of the governmental landscape predate the reforms, while others owe their existence to them. The report does not suggest major restructuring of the institutional arrangements, but it does suggest adjustments in some areas. Given the high accountability reporting burdens for small departments, the government should explore means of consolidating some departments or converting them into nondepartmental bodies while maintaining accountability for their performance. Central agencies should continue within their current spheres of responsibility but should be more clearly focused on vital government-wide tasks. There have been tremendous changes in the way the centre has delegated responsibility, but it would be naïve to argue that managerial freedom is incompatible with central direction. Finally, in examining Crown Entities, of which there are over 2,700, it is necessary to balance risk against independence. The Crown Entities spend approximately two thirds of the budgeted resources for the operation of government, but in spite of the considerable accountability requirements, Crown Entities' operations and finances are not as transparent as they should be.

Organisational Capacity

As important as the structural arrangements are, it is in how well departments are prepared for the tasks expected of them both now and in the future that the success of the New Zealand reforms depend. The report examines the roles of Responsible Ministers, Chief Executives and senior managers in terms of ownership. It argues that the purchase and ownership roles of the Responsible Minister pull the departments in opposite directions. The purchase role has dominated to this point, as demonstrated by the annual purchase agreement, and now it is important that the ownership role be given greater scope. This could be accomplished through a realignment of Ministerial portfolios and departmental jurisdiction; through more detailed specification of ownership interests in performance agreements; and, through examination of expenditure on critical aspects of organisational capacity. The recruitment, motivation and retention of talented Chief Executives is vital and is somewhat hampered by complex appointment and evaluation procedures. This process should be simplified and made more flexible. As well, it is vital that there be a continuing supply of trained and public-spirited managers. The report suggests that the feasibility of the senior executive service might be re-examined, as its original objectives remain as valid today as they were when it was first attempted.

Strategic Capacity

Having established the historical and organisational context, the report goes on to look at three areas that warrant special attention. The first of these is strategic capacity, or strategic management, which relates to a department's ability to respond to future changes in its environment. The original reforms emphasised annual actions and outputs to an extent which neglected medium and long term planning. In spite of some corrective innovations, including the Fiscal Responsibility Act 1994, New Zealand is still geared more to the short-term production of outputs than planning for the future. Some of the recommendations in this area include a greater reliance on, but not formalisation of, departmental strategic planning. These plans should bear the imprint of Responsible Ministers as well as have guidance from the central agencies. It is also recommended that a multi-year framework be applied to promote reallocation of resources based on shifting priorities and the Strategic Result Areas process. The adoption of MMP will in all likelihood diminish the government's ability to strategically plan for the long haul. It is recommended that the fiscal planning tools, prescribed by the Fiscal Responsibility Act, be used elsewhere in government policy and strategy. These are: a set of guidelines to influence but not restrict government policy; a medium-term perspective; and transparency in strategic policy. The current SRA/KRA (Strategic Result Areas/ Key Result Areas) arrangements are working well and form a good basis for further improvements in government's strategic capacity.

Resource Base

The resource base, or the ability to allocate resources efficiently in terms of the outputs to be produced, is examined in light of getting both the financial incentives right for managers and

getting the price right for the production of outputs. Financial reforms in New Zealand have been extensive, innovative and largely successful. However, although managers have accepted the basis for financial reform, there are a few recurring complaints and issues. Most of these revolve around financial incentives and the report suggests more financial flexibility in a number of areas. Pricing is tremendously difficult to get right in government because of fixed price budgeting necessitated in the absence of a market. The report recommends, in the absence of robust costing systems for some outputs, that it would not be inappropriate for the Vote calculation to be based more explicitly on the cost of authorised inputs. This approach is not optimal but could be used as an interim measure until more rigorous output costing systems are in place. The report also suggests that the capital charge, although prompting better departmental management of assets, might in time lead to the under-capitalisation of some departments, owing to some unintended incentives in the current arrangement. There is no evidence of a trend towards under-capitalisation but it is recommended that this be closely monitored. Greater financial flexibility is suggested in the wider use of Mode B net appropriations and an ability to carry over unused funds from fiscal year to year.

Accounting for Results

Accountability has not been an afterthought in New Zealand, as it has in other countries that have implemented reform. Instead it has been robustly designed as an integral feature of the reformed public service. The model of accountability is patterned on the relationship of buyers and sellers in commercial transactions. The linchpin of the New Zealand accountability regime is outputs, which is a strong common interest of both Ministers and managers. Ministers purchase outputs, while departments are paid a negotiated price to deliver those outputs. However, this accountability arrangement is most effective when the market is contestable and buyers and sellers can establish an arms-length relationship. This is not the case for the majority of government outputs, and there are significant transaction costs incurred in maintaining an accountability arrangement based on detailed ex ante specifications. Although specifying and reporting on outputs has improved over the years, the report suggests that a greater use of trend and comparative data in the Estimates would improve the ability to judge performance and lessen the increasing demands from Parliament for supplementary questions addressed to departments. Departmental Forecast Reports are deemed to partly duplicate information already available in the Estimates.

The focus on ex ante specification has sometimes led to a checklist mentality which is positive from the perspective of having managers take accountability seriously for tasks they are expected to complete. It is less desirable if it narrows responsibility to simple compliance with what is on the list, and prompts Chief Executives to disregard responsibility for items not specified. The report recommends that internal management controls should be examined for their effectiveness in order to provide confidence that applicable laws and requirements are fulfilled. The report goes on to discuss the substantial accountability costs of the New Zealand system which are likely less than the deadweight costs of the old public service controls, but which are probably higher than they need to be to ensure performance. Each year brings with it new elements of accountability specifications which, although sensible on their own, have a heavy cumulative impact. The author argues for a model of accountability which encompasses responsibility, based not solely on greater specification of results, but based as well on values, judgment and leadership. Many of these characteristics are now picked up in the protocols developed by departments and central agencies in 1994.

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