Each department has a Responsible Minister who is custodian of the government's ownership interest. When more than one Minister purchases output from the department, the Responsible Minister is the one with the greatest stake in its performance. The Responsible Minister thus has both a purchase and ownership interest. Ownership can be measured in terms of an organisation's capacity to perform the tasks set for it. This encompasses both the production of current output and the performance of what might be expected of it in the future. Ownership also encompasses the government's collective interest, to which departments contribute.
From the outset, New Zealand reform has accepted that although management actions may entail considerable political risk, Ministers should not be drawn into the day-to-day operations of the departments. Their responsibility reaches to policy guidance, the provision of resources, monitoring performance, and enforcing accountability. Responsible Ministers steer departments by (1) participating in selecting chief executives and in overseeing their performance, (2) developing strategic objectives and policies; (3) negotiating annual agreements for the chief executive's performance, including the key result areas; (4) allocating appropriated funds for the purchase of outputs; and (5) taking responsibility for the overall capacity of the department.
The dual roles of Minister and chief executive sometimes make it difficult to define precisely where one's responsibility ends and the other's begins. This has been a concern since the start, but it becomes especially pertinent when there is serious deficiency in the department's performance. The conceptual distinctions drawn by the reform are amply clear on paper, but break down in practice. In design, the Minister is accountable to Parliament, and the chief executive is accountable to the Minister; the Minister is responsible for policy, the chief executive for operations; the Minister is accountable for outcomes, the chief executive for outputs. In practice, distinctions get blurred, for some operational shortcomings may result from policy mistakes, and some policy failures may derive from operational defects. Who is responsible, for example, when policies do not produce expected outcomes: the Minister who made the purchase decisions, or the chief executive who provided the policy advice and produced the services?
Fuzziness is inherent in an arrangement that assigns political risk to the Minister and managerial discretion to the chief executive. The solution recommended by the reforms - that the Minister should be a demanding evaluator of the chief executive's performance - does not resolve the dilemma, for the Minister's review cannot possibly consider all aspects of the department's performance. Perhaps the division of responsibility will be clarified over time by the evolution of departments into entities that truly have an arms length relationship from the Minister, as agencies have in Sweden. But as long as both the Minister and the chief executive have their hands on the rudder, one or both may be called to account, even when one has limited control over the other's actions. What should not be acceptable, however, are situations where the two sides point the finger of blame at one another and responsibility falls between the cracks.
In this fuzzy relationship, it would be appropriate to clarify, to the degree feasible, the Minister's responsibility as regards the department. Although the reforms recognise Ministers as both purchasers of departmental outputs and owners of the organisations, the former role predominates. The Minister's responsibility as purchaser is reflected in the prominence accorded the annual purchase agreement; no comparable document or process covers ownership. Annual performance agreements now have a standard annex that references the "Government's collective ownership interest," but this section does not have the same stature or detail as the purchase agreement.
The purchase and ownership roles pull the Responsible Minister in opposite directions. As purchaser, the Minister should be at arm's length from the department; as owner, the Minister must take a proprietary interest in the department. Ownership inevitably recedes in the face of the short-term influence garnered by allocating resources and contracting for the next year's outputs. A Gresham's Law is in effect: purchase drives out ownership.
It is important that ownership be given greater scope, even at the risk of making the Minister a somewhat less independent purchaser of outputs. Of course, Ministers should drive hard bargains to ensure that the government is getting value for money and that the services provided by the departments are those they contracted for. But Ministers must also be mindful of the organisational strength of their departments; they should be institution builders, and they should forbear from demanding so much by way of outputs and from pushing the purchase price down so far as to jeopardise the department's long-term capacity to perform. For example, a low purchase price or excessive work demands might deter the department from investing in the training of employees or in upgrading management control systems. When (as typically is the case) outputs are not truly contestable and there is no market or benchmark price for determining the adequacy of the department's budget, the Minister must take an interest in whether sufficient funds are available for training, systems improvements, and other determinants of departmental capacity.
Ministers should behave in this manner because as much as they can influence departments via purchase, they have the capacity to be vastly more influential by building the capacity of their departments and steering them in new directions. Ministers should see departments as their most valuable resource for accomplishing the purposes of government and for implementing their strategic vision. A Minister without effective control of organisational resources is like a general without an army, free to set out on any course but not likely to get very far. How the Minister exercises his/her ownership responsibilities will determine whether a department's plans are hollow statements or genuine objectives. A Minister is more effectively empowered by having a robust department than by having the option to contract for outside advice and other services. The ideal of contestability notwithstanding, Ministers obtain most of their outputs from the departments and Crown entities they own, and they will continue to do so for the foreseeable future.
Separated from departmental resources, most Ministers are weak policymakers, despite their nominal control of appropriated funds and their contracting powers. Most have only a few aides who assist on Cabinet and Parliamentary work and typically spend little time on departmental matters. A small, growing number of Ministers retain advisers to assist them in negotiating the annual purchase agreements. Some of these advisers serve their Minister year round on departmental matters. Some Ministers have gone outside their departments for policy advice and other outputs. Even with those outside resources, Ministers depend on departments to get the job done.
The elements of ownership.
Ownership is not represented by the capacity of the department to produce this (or the next) year's contracted outputs, but in the outputs that may be wanted in the future. In assessing ownership, the important questions relate to the future capacity of the department. Does it have the skills, resources and initiative to change as the market for its goods and services changes? Is it enhancing the morale and skills of its staff so that the department will have a cadre of motivated and capable workers? Does it have the strength and vision to look beyond the near term to the different organisation it may become in the future? Is it making the right investments in physical and human capital to prepare for the tasks it may face in the medium term and beyond?
These questions point to strategic and managerial dimensions of ownership that cannot be expressed solely in financial statements. However, the initial formulations of ownership concentrated on financial condition. Thus, a 1990 Treasury memo averred that the government's primary interest as owner is to achieve satisfactory financial performance. The memo barely mentioned other elements of ownership, such as management practices.
Financial condition is not a sufficient measure of the government's ownership interest. Even in business, ownership is not measured exclusively in terms of net financial worth. If it were, shares in public corporations would trade at book value. Often, however, they trade above book value, reflecting the value added by goodwill, management capacity, expected future performance, and other intangibles. Of course, no convenient metric such as share price is available for evaluating the government's stake in its departments. One might try to assess ownership in terms of a department's skill base, employee morale, managerial systems, and expected future outputs. But I am not confident that measuring ownership this way will be of much use. This type of assessment is difficult to make and does not often lead to corrective action.
A more promising approach might be to identify the elements of ownership and consider the resources needed for each. A significant step in this direction was taken by the Interdepartmental Working Group on Ownership. Its June 1995 report, aptly titled "Taking Care of Tomorrow, Today," takes a broad view of ownership. "The Government's purpose in owning departments is to achieve its social and economic objectives, in a manner reflecting the value and ethos of good government and the requirements of public accountability . . . ." (p. 2). The group distinguished four elements of ownership, two pertaining to an organisation's productive capacity, one to its strategic direction, and a fourth to its accountability. The four elements are: aligning the government's strategic objectives and those of its departments, and ensuring the congruence of goals within and between departments; ensuring the integrity of the Public Service, so that departments act in a legal and ethical manner; ensuring that departments can deliver on expected future demands; and ensuring their capacity to produce future outputs efficiently.
In my view, improvement is needed in at least two of these areas. I will argue in later chapters for strengthening managerial accountability and for reviewing the adequacy of departmental resources. These concerns lead me to suggest three possible steps to bolster the government's ownership interest: (1) a realignment of Ministerial portfolios and departmental jurisdictions; (2) more detailed specification of ownership issues in performance agreements; and (3) examination of expenditure on critical inputs.
My first suggestion is that the relationship between departments and Ministers should be simplified. At present, some departments "sell" their outputs to more than one Minister. One department has purchase agreements with half a dozen Ministers; others may have similar arrangements. Although chief executives indicate that multiple purchase relationships have not impaired managerial flexibility or made departmental operations unduly complex, these arrangements may weaken the Responsible Minister's interest as owner. It may be difficult for the Responsible Minister to take a strategic interest in a department or be concerned about its capacity when she/he has only a small stake in its output. In some cases, the Responsible Minister may be responsible in name only. To be truly responsible, the Minister must be able to shape the department's future direction. If this direction is determined by purchase relationships, the influence of the Responsible Minister may be weakened. Although it may be appropriate for some departments to maintain multiple purchase relationships, these should be fewer than are presently maintained. Achieving this objective may require that some departmental jurisdictions be redrawn or that the structure of Votes be realigned.
Second, the standard performance agreement incorporates the government's collective ownership interest through an annex to the agreement issued by the State Services Commissioner. This annex sets forth government-wide requirements for internal control, human resources management, financial management, and other practices. These "boilerplate" references may not be sufficiently targeted to spur corrective action or to enable SSC or the Responsible Minister to assess progress in remedying deficiencies. I regard it as sensible for the performance agreement to set forth the improvements or actions to be undertaken by the chief executive during the year. For example, if a department's Equal Employment Opportunity (EEO) process or management controls were judged to be deficient, the chief executive would have to agree on the specific actions to be taken. The Responsible Minister and the central agencies would then be able to hold the chief executive accountable for taking specific corrective actions.
Third, the Responsible Minister should be given certain information by the chief executive on the inputs used by the department. Clearly, Purchase Ministers have no legitimate interest in the inputs used to produce agreed outputs. Arguably, however, the Responsible Minister does have an interest in those inputs that affect the department's future capacity, such as expenditure on training and information systems. I offer this suggestion with some hesitation, because extending Ministerial interest to these inputs runs counter to the managerial logic of the reforms. Nevertheless, Responsible Ministers may be unable to independently assess their department's capacity without knowing how much is spent on certain critical inputs. Accordingly, the chief executive should inform the Minister on human resource development, including recruitment, staff turnover, morale, as well as other investments affecting the ownership interest.
The collective interest.
An important feature of ownership is the government's interest that departments act in ways that are congruent with its collective interest. In the five years since the 1991 Review of the State Sector Reforms (the Logan Report) aired this issue, significant steps have been taken to bolster the government's capacity for coherent action. These include the development of strategic and key result areas. Nevertheless, concern persists that chief executives are so beholden to Ministers, and managers to chief executives, that they are not sufficiently attentive to broader governmental interests.
This concern is not shared by the Ministers and chief executives interviewed for this report. Nor do I consider it a major problem. I believe that formal procedures and informal networks have made chief executives and their departments supportive of government objectives and priorities. These executives and senior managers generally see themselves as contributing to the government's strategic and operational interests, not only to those of their own department.
Collective responsibility is promoted by the Cabinet, which provides guidance on government-wide matters as well as on matters affecting individual departments. There is a continuing flow of information and advice within Cabinet and among departments and between departments and the central agencies. The government's capacity to allocate resources in accord with its priorities has been enhanced by the SRAs and KRAs. These "result" statements and indicators have encouraged a more integrated approach to policymaking and programme management and have become the backbone of the annual performance agreements. The three central agencies also promote policy consistency and integration, as discussed in the previous chapter.
Formal policy coordination is reinforced by networks that make for more cohesion and cross-fertilisation than is found in most countries. New Zealand's small size and Wellington's village atmosphere foster the rapid diffusion of information and ideas. News travels fast, and managers have a lively interest in what is happening elsewhere in government. New Zealand is not a country in which public managers work in isolation. Interdepartmental work is valued; chief executives and senior managers do not shirk this responsibility, nor do they regard it as unproductive or unrelated to their own departmental interests. In addition to the various task forces and working groups on which many serve, the chief executives meet regularly to discuss current issues.
In collective matters, as in all other aspects of public management, those authorised to act must be held accountable for what they do. When it occurs, disregard of the collective interest should weigh heavily in assessing the performance of chief executives. But there is as yet little basis for regarding this as a serious or widespread problem.