I. Introduction

During consideration of the Public Finance Bill in 1989, the Controller and Auditor-General advised Parliament that the legislation "will give effect to the most fundamental changes to financial management practices seen in New Zealand's history. These reforms are enormous, ambitious, and, in large part, unprecedented anywhere in the world". Half a dozen years later, this judgment has been vindicated by the extraordinary transformation of the State sector from centralised control of money, personnel, and other resources to devolved arrangements that give managers control of inputs, provide them with incentives to be productive, and hold them accountable for results. (In this report, the State sector includes the core departments and Crown entities; it does not include state-owned enterprises or local government.) In budgeting and financial management, employment and human resource management, modes of appropriation, use of internal contracts, and other tools of management, New Zealand has been more venturesome than any other country in discarding old practices and devising new ones. It has revolutionised public management without going through the protracted pilot testing and cautious implementation that have slowed innovation in some other countries. Measured by their bold objectives, conceptual basis, reliance on statutes, and speed of implementation, the New Zealand reforms have been truly remarkable.

In its emphasis on managerial discretion and accountability, New Zealand's approach resembles reforms introduced in Australia, the United Kingdom, Sweden, and several other OECD countries. But the more closely one examines New Zealand's progress, the more it becomes evident that it has ventured far beyond what has been tried elsewhere. The following are some of the major management innovations pioneered in the New Zealand State sector since the late 1980s.

  • Financial statements, the budget, and appropriations are on an accrual basis. Commercial accounting standards are applied to all public entities.
  • Departments prepare monthly financial reports, quarterly performance reports on their purchase agreements, half yearly reports on the chief executive's performance agreement, and an annual report on financial results and outputs. These reports and statements generally have been reliable and timely. The annual report is audited; in recent years, few have been qualified by the auditors. In addition to departmental reports, the government issues a combined financial statement.
  • Appropriations for operating expenses are made by output classes. The output classification is not a supplementary schedule but the main form of appropriation and the basis on which operating expenditure is controlled and accountability is maintained.
  • Departments (and certain other public entities) are headed by chief executives appointed under term contracts that set out conditions of employment. Public employees work under individual or collective employment contracts.
  • Managerial discretion is less constrained in New Zealand than in any other country that has reformed its State sector. Within budget limits and law managers are free to select the mix of inputs to be used in producing agreed outputs. They have flexibility in hiring and paying staff, obtaining office accommodation, purchasing supplies and services, and spending on other inputs.
  • Accountability for resources and results is maintained through contract-like arrangements within government. Performance agreements between Ministers and chief executives set forth standards and expectations for department heads; purchase agreements between Ministers and departments specify the outputs to be produced during the year.
  • A capital charge is levied on the value of each department's physical and financial assets, net of liabilities. Appropriations are struck to cover the cost of depreciation, thereby enabling departments to accumulate funds and repair or replace facilities without having to obtain a new appropriation of capital. Departments may request a capital contribution if cash in depreciation accounts is not sufficient to cover new investments.
  • Departments maintain their own bank accounts and are responsible for managing cash balances. They earn interest on these accounts; the rate earned depends on the extent to which actual cash balances are above or below the balances forecast for the period.

The government implemented these far-reaching reforms in less time and with less difficulty than had been anticipated in some quarters. With the passage of the State Sector Act in 1988, all permanent department heads became chief executives contracted for fixed terms. Within about eighteen months after enactment of the Public Finance Act in 1989, all departments had shifted from cash accounting and budgeting to an accrual basis. The transition to output-based appropriations also began during this period, and departments started preparing audited financial statements that complied with generally accepted accounting practice.

Despite these and other accomplishments, the objectives of reform were not completely met with implementation of the State Sector and Public Finance Acts. Transforming public management entails much more than changing organisational forms and appropriation formats. It takes more to hold managers accountable than to negotiate contracts and report on performance. The all-important factor in public sector reform is the behaviour of those in charge of government programmes and resources. Giving managers the freedom to manage does not mean that all will seize the opportunity and boldly revamp operations. Even when reforms have been implemented according to plan, there still has been need to fine-tune them in the light of subsequent experience and conditions. After the revolution, much work remains to be done.

Not every aspect of reform in New Zealand has worked out as expected. Although its reforms have been more comprehensive and rigorous than those introduced in other countries, they have been neither complete nor perfect; their effectiveness has depended on the manner in which they have been implemented as well as on underlying concepts and doctrines. This author has observed offices that have taken up the challenge and have thoroughly revamped their operations to improve performance, as well as offices that appear to be adrift and bereft of purpose. The difference between the high and low performing organisations is not just a matter of getting the right people for the job - although effective leadership does make a big difference - but also requires that missions and resources be properly aligned and that each organisation clearly knows what is expected of it.

Getting the alignment right is a continuing task of public management in New Zealand. In fact, innovation has not ceased with implementation of the original reforms. Important changes have been introduced outside the framework - but consistent with the purposes - of the State Sector and Public Finance Acts. These include purchase agreements that formalise understandings on the outputs to be supplied, the Fiscal Responsibility Act 1994 that requires the government to establish and disclose medium and long term economic and budgetary objectives, and the specification of strategic and key result areas that indicate the government's programme and spending priorities. In addition, the Treasury frequently has adjusted the form or content of the Estimates, and the State Services Commission (SSC) has frequently modified the standard terms of performance agreements and the criteria for assessing the performance of chief executives. As important as these adjustments have been, they are consonant with the original objectives of New Zealand's management reforms.

Both within government and among outside observers interviewed for this study, there is overwhelming consensus on the superiority of the reformed system and hardly any sentiment for dismantling the new arrangements and going back to centralised control. Discussions conducted with more than 100 chief executives, senior managers, and informed observers, as well as with a small number of Ministers and Members of Parliament, reveal broad agreement that the reforms have improved the efficiency and quality of public services by encouraging managerial initiative and rewarding success. Managers have a much clearer understanding of their role and responsibilities; more timely and complete data on the cost of doing business and on what they are accomplishing with public funds; greater awareness of the needs and interests of clients and customers; and expanded opportunity to change operating procedures, the use of resources, and working conditions. They welcome the flexibility to select the best mix of inputs and the option to negotiate individual employment contracts. Many like the explicit output measures that let them know what is expected and how well they are doing.

One does not have to search far for efficiency gains in the reformed State sector. Most departments have reduced staffing levels and operating budgets without lowering the volume or quality of public services. New Zealand managers are convinced that they are doing more with less - in some cases, with a lot less - and that they have been able to reduce costs because of their new flexibility in managing resources. In interviews, many proudly pointed to cost-saving initiatives: leasing less expensive but higher quality accommodation when they no longer were compelled to take the premises assigned to them by the government; acquiring state-of-the-art information technology (IT) systems and modern office furnishings when they were liberated from constraining procurement regulations; hiring temporary and part-time workers in response to seasonal or cyclical fluctuations in workloads; eliminating whole layers of managers and the controls they wielded; negotiating wage levels that reflect market conditions rather than government-wide civil service contracts. These and other cost savings have been made possible by the reforms. They could not have been achieved if managers were still bound by ex ante controls enforced by central agencies.

Managers also acknowledge that across-the-board spending cuts have spurred them to be more efficient by reducing the real cost of their operating budgets. While some resent these cuts, they recognise that without pressure on resources, good managers would have had greater difficulty taking the steps needed to improve operations.

Systematic studies of the unit costs of producing standard outputs (such as the cost of processing welfare applications or tax filings) show strong productivity gains in some agencies, modest gains in others, and no significant improvements in a few. A Treasury survey of four departments found that one had experienced a 10-20 percent decline (in nominal dollars) in average unit costs over a four-year period; two had accommodated substantial workload increases with only modest increases in operating budgets; and a fourth had no significant change in unit costs. This checkered pattern suggests that letting managers manage may not always be a sufficient condition for organisational improvement. Some managers will restlessly seek fresh opportunities to do things better; others will be content with the status quo.

In view of truly dramatic changes in the management of some departments, one might expect larger productivity advances than those reported in the Treasury study. In interviews, some managers estimated that the reforms had produced annual efficiency gains of 10 percent or more. Some of these gains may have been absorbed, however, by high transaction costs associated with negotiating agreements and monitoring compliance, as well as by the expenditures made to improve working conditions. Undoubtedly, also, some of the more innovative departments have invested in improving the quality of services.

In New Zealand, as in other countries, there tends to be a close connection between organisational reform and the quality of services. Improved service is the hallmark of a reformed organisation; one is not likely to occur without the other. When innovation takes hold and managers use their new authority to question how the organisation is run and services are provided, matters that had long been taken for granted - such as long waiting times, the lack of chairs and other amenities for those made to wait, the shuffling of clients from one queue or desk to another, confusing instructions, and even curt behaviour - become more noticeable and less acceptable. As staff become more sensitive to the way clients and customers are treated, they may restructure the way the office operates to make it more hospitable and user friendly. Typical changes include simplifying forms and instructions, shortening waiting periods, giving clients one-stop service, brightening the office's d├ęcor, and modernising the furnishings and equipment.

Managers interviewed for this study are convinced that services have been upgraded and that staff are more sensitive to the concerns of clients and to the quality of services provided them. These widely held perceptions could not be confirmed by the study because it concentrated on the centre of government and on the corporate offices of departments and other State entities. Only two days were allocated to field visits - both in the Auckland area - not enough to thoroughly investigate the extent to which service has been improved in local offices. Yet even these brief visits produced encouraging signs that the reforms launched in Wellington have spread to the regions. Evidence of improved services was observed in a number of departments - such as Customs, Inland Revenue, and Social Welfare. Undoubtedly, other departments also have upgraded the quality of services, but it was not possible to assess the full scope of improvement in the short period available for field research.

The New Zealand Income Support Service in the Department of Social Welfare exemplifies the dramatic improvement possible when managers give priority to the impact of services on customers. Shortly after entering the Auckland Income Support Service office, each client is greeted by a receptionist who inquires concerning the purpose of the visit and the services sought. The Service has a target that each client should be met within 10 minutes after arrival. There may be a further wait, depending on workload, until a client meets with the assigned case worker. Staff are readily identifiable by their uniforms, which are not unlike those worn by flight attendants and are affixed with name badges that inform clients of the person they are dealing with. The area in which a case worker and client meet is configured so that both can view the computer monitor on which information concerning the case is displayed. Clients are urged to review the information and to discuss their concerns with the case worker. The data file for each client establishes the basis on which performance information is compiled and reported. The division aims to settle each claim for assistance within one day, compared to the weeks it often took to decide cases before Income Support was reorganised. To facilitate quick turnaround of cases, the number of persons and steps involved in each case have been reduced. In complicated claims, the case worker takes the problem to a nearby supervisor who is authorised to make on-the-spot determinations.

This is a high performance organisation, but one that faces stresses that were not present before Income Support was oriented to high productivity and customer service. Employees who worked in it both before and after reform are proud of the gains in efficiency and service quality, as well as of the recognition their office has received for superior performance. They are not embarrassed by the fact that they work for an organisation whose mission is to dole out welfare payments. They see themselves as providing services similar to those performed by commercial insurance firms - processing claims, determining eligibility, and computing the size of payments. They also see themselves as public servants with an obligation to ensure that the funds are well spent. They welcome the improved working conditions, the clear objectives, and the opportunity to suggest ways of improving operations. These positive attitudes came through during a group discussion with about one dozen middle managers and case workers. They feel reasonably good about their jobs and the organisation in which they work.

Service improvements cost money. Substantial sums have been spent by the Department of Social Welfare on training workers, developing and installing performance monitoring systems, refurbishing offices, and recruiting skilled managers. Some of these investments have been financed out of efficiency savings and have been made possible by the broad discretion given managers in spending operating funds.

Field managers in the Income Support Service and in other reformed organisations have more control over daily operations and, in turn, are more accountable to departmental headquarters in Wellington. Each field office has its own operating budget that may be spent by local managers without obtaining external approval. But local managers must regularly file reports that enable headquarters to compare results to plans and to performance in other offices across the country. A steady stream of reports informs central managers on outputs, costs, variances from plans and budgets, and other indicators. These reports pertain to the period (month, week, or day) just ended, so that managers can take timely action when performance falls short of the mark.

Although the devolution formula - more managerial freedom and more accountability - seems to produce a more efficient and responsive organisation, it can make for a more stressful work place. When control was centralised, managers worked according to the rules and had little discretion over what they spent and did. Now they have to make choices, and what they do is closely monitored. In the past, the focus on inputs shielded them against blame for failing. Performance expectations were rarely spelled out in advance, so there were few benchmarks for assessing how well they did. Staff were paid according to Public Service scales of occupational classifications and collective agreements, and the amount available for personnel was separately itemised in the budget. Now managers must decide how much to spend on human resources versus other claims on operating funds, the mix of staff to be employed, and (for those working on individual contract) how much they are to be paid. In the past, there was little movement between Public Service and private jobs; now staff move more freely and frequently between public and private employment. Once, managers rarely were taken to task when clients were dissatisfied with services; now, customer ratings often are reported along with other performance measures. Many managers talk about having to work harder than in the past and longer than the standard work day. They feel the pressure of shrinking operating budgets and elevated performance expectations.

In sum, government departments in New Zealand are no longer the organisational cocoons many once were. They are not sheltered by special rules, stable career patterns, incremental budgets, and ambiguous performance standards. They increasingly resemble business organisations. Change is ongoing, there is continuing pressure to drive costs down and efficiency up, managers routinely monitor results against plans, and they are more responsive to external conditions and customer interests. There is more emphasis on teamwork and more pressure for conformity and group-think. Yet, at the same time, individuals are encouraged to approach their tasks with renewed vigour and creativity. All this can make for more productive organisations and more stressed employees.

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