APPENDIX 9
Memorandum from Dr Graham Scott and Lynne
McKenzie
INTRODUCTION
1. This submission has been prepared by
Dr Graham Scott, former Secretary to the New Zealand Treasury
and Lynne McKenzie, consultant[4]
Dr Scott has been invited by the Clerk of the Treasury Sub-Committee
to provide information on the accountability arrangements in relation
to fiscal control and achieving value for money. A request was
made for the submission to consider the role in these accountability
arrangements of the Treasury and the role of the State Services
Commission's contracts with the chief executives of the core public
sector.
2. To develop this submission we reviewed
reports and interviewed chief executives and staff of the central
agencies[5]
and a selection of ministries and departments. [See Annex A]
3. This submission begins with a summary,
followed by an outline of the reasons for the accountability changes
made in the 1980s. It explains the roles of ministers, the Treasury,
and the State Services Commissioner. This is followed by a description
of the reforms to the accountability requirements and an assessment
of how the accountability system relates to achieving fiscal control
and value for money from government expenditure.
SUMMARY
Fiscal control
4. The public sector management system in
New Zealand has provided governments with the ability to tightly
manage expenditure, to the extent that it has been possible to
reduce government expenditure as a percentage of GDP, for governments
wishing to do this.
5. The Treasury has a strong role in fiscal
management, including advising on fiscal strategy, monthly monitoring
of the fiscal position, management of the budget process and advising
on spending proposals. The role of the State Services Commission
in fiscal control relates to its role in monitoring the performance
of chief executives. This monitoring incorporates detailed feedback
from the Treasury on financial performance. With respect to maintaining
fiscal discipline, the accountability framework, including the
various roles of the Treasury and the State Services Commission,
appears to work well.
Efficiency
6. Governments have created incentives for
efficiency by operating a combination of restrained funding, with
safety valves in the form of output pricing reviews and spending
proposals in the budget rounds. Reviews discussed later in this
submission suggest that efficiency levels have improved in many
areas of the public sector, however there are opportunities to
improve on understandings about current levels of efficiency,
setting expectations, and monitoring.
7. Responsibility for the efficiency of
departments and ministries rests with the chief executives under
the State Sector Act 1988. For ministries such as health and education
which fund government service providers, this responsibility extends
beyond their own operations to ensuring that funding levels are
close to the long run costs of efficient providers. Ministers
will be involved where there are issues as they are ultimately
accountable. They can also set expectations about reviewing and
improving efficiency through the purchase agreements and the annual
performance agreements with chief executives, but do not tend
to do so.
8. The central agencies have monitoring
roles shaped by their statutory powers, accountability documents
and the powers of the chief executives of departments and ministries.
The State Services Commissioner has responsibility for reviewing
the performance of departments and ministries and advising on
management systems, structures and organisations[6].
The Commissioner can investigate levels of efficiency and take
that into account when assessing the performance of chief executives.
9. There is a vacuum in setting expectations
about efficiency. While the State Services Commissioner has been
active in setting expectations for chief executives in areas such
as conduct and ethics, the Commissioner has not set expectations
in relation to efficiency. Two avenues exist for setting expectations.
There are two relationships and two agreements operating with
chief executives. One is the employment contract between the Commissioner
and the chief executive. The other is the annual performance agreement
between the minister and the chief executive. This covers the
expectations for the department or ministry.
10. The Treasury has a function as the government's
main adviser on financial and economic matters, but it has no
explicit statutory function or associated statutory powers to
monitor efficiency. Its accountability documents do however cover
some aspects of efficiency. A third agency, the Auditor-General,
has a role in carrying out effectiveness and efficiency studies
of ministries and departments. This mandate is being clarified
in the Public Audit Bill presently before the House of Representatives.
While these two agencies can to varying extents assess efficiency,
neither can formally set expectations for departments and ministries.
11. The assessment of efficiency occurs
in a number of places in the public service. There have been exercises
such as modelling hospital costs as a basis for funding services.
The government's purchaser of health services and the government's
hospitals carried out this work, with support from the Crown Company
Monitoring Unit located in the Treasury. Benchmarking exercises
have been part of output pricing reviews undertaken by the Treasury
and the State Services Commission to assess whether departments
require more funding. Some departments and ministries have initiated
their own benchmarking exercises. While this work can be very
valuable, a systematic approach to monitoring efficiency is lacking.
Effectiveness
12. The effectiveness of government interventions
should be judged in relation to the government's goals. The quality
of the goal setting is an important factor influencing how effective
services will be in contributing to government goals. The Fiscal
Responsibility Act 1994 requires governments to set fiscal goals
and broad strategic objectives. In addition, governments have
developed goals in economic and social areas. The quality of the
goal setting process and the expression of the goals has varied.
13. The public management system provides
governments with the systems and processes to link the work of
government agencies to the government's goals. This occurs principally
through the annual budget process and documents, in the annual
performance agreements and other accountability documents, and
in the monitoring and reporting processes. This aspect of the
reforms was a major element of the original design but it has
been slow to develop in contrast to other elements of the system.
Improvements are currently being suggested by the Treasury to
the processes of setting government goals, reporting on outcomes,
linking interventions to outcomes, expressing these linkages and
accountabilities in the accountability documents, and evaluating
interventions.
14. Another area where the government has
a powerful influence is in setting the requirements for policy
evaluation and encouraging or requiring the evaluation of interventions.
Expectations have varied between governments and between ministers.
The central agencies' roles in encouraging and assessing effectiveness
is influenced by the degree of evaluation governments and individual
ministers want.
15. The Treasury's role in assessing effectiveness
focuses on providing opinions on spending proposals and prioritisation
exercises, for example, it is involved with government agencies
in the current government's "value for money" exercise
to examine base spending to eliminate low priority spending and
free funds for higher priorities. The Treasury has also encouraged
departments and ministries to evaluate interventions.
16. The State Services Commission's role
in monitoring and encouraging effectiveness has been focused on
monitoring the requirement on chief executives to contribute to
the government's goals, in the performance agreement between chief
executives and ministers. Objective assessments of this and of
other aspects of effectiveness have not been strongly developed.
Capability
17. As a result of the influence of the
Hon. Simon Upton, the Minister of State Services during the 1996-99
term of government, the State Services Commission has stepped
up its work to monitor and encourage the development of capability
in the core public sector. The Commission is changing its management
structure, recruiting a different skill mix, developing new ways
of interacting with chief executives and ministers, and working
with the Treasury on improvements to the accountability documents
and monitoring methods. It is not clear yet what changes this
will engender.
Other influences on performance
18. This submission is focused on the roles
of the State Services Commissioner and the Treasury in influencing
fiscal control and value for money. The wider settings of the
public management system, such as output based budgeting, managerial
accountability for financial performance, financial monitoring,
and the separation of policy from operations, have operated to
encourage fiscal control, efficiency and effectiveness. Also the
functioning of the various parties in the system is critical,
such as the parliamentary select committees, the ministers, and
the public. It is important that these settings and the activities
of key parties creates the right incentives and generates adequate
information for assessments of performance to be made. Annex B
sets out roles in the public management system.
19. The public management system provides
ministers with a powerful tool for fiscal control, some levers
for encouraging efficiencies and an evolving ability to assess
the effectiveness of various government interventions. Achievements
on these three fronts are greatly influenced by the activities
of ministers in their roles as responsible, vote and shareholding
ministers.[7]
Some governments have chosen to aggressively manage the fiscal
position and to set goals for the public service to link their
work to. Some ministers have pressed their departments and ministries
for performance in delivering services, developing capability
and monitoring effectiveness. Others have not.
Comments
20. A question we have been asked to consider
is whether there are issues with the roles of the State Services
Commission and Treasury in relation to achieving fiscal control
and value for money. Fiscal control is monitored by the Treasury
which provides feedback to the State Services Commission for the
purpose of assessing the performance of chief executives. This
works very well.
21. The roles with respect to value for
money are more complicated. Both the Treasury and the State Services
Commission have roles in advising and monitoring the efficiency,
effectiveness and capability of ministries and departments. The
Treasury's activities focus on policy advice to government, assessment
of spending proposals and monitoring fiscal matters. The State
Services Commission has the role of monitoring efficiency, effectiveness
and capability in relation to the performance of chief executives.
There are gaps in this monitoring, including a lack of monitoring
of purchase agreements, a lack of a systematic approach to monitoring
efficiency and limited assessments of effectiveness.
22. There are three main sources for these
gaps. The first is the approach the State Services Commission
has chosen to take to its monitoring function. It could be more
active in monitoring purchase agreements, promoting and using
benchmarking information on efficiency and monitoring capability.
The second source lies in the way the agencies work together.
The Treasury has skills and knowledge to contribute to establishing
better approaches to assessing efficiency, effectiveness and capability.
The Treasury and States Services Commission could work more closely,
with the Treasury providing advice on assessment approaches and
assistance with assessments. The third source is the expectations
ministers place on departments and ministries. They have the power
and mechanisms to create incentives for departments and ministries
through the expectations they have about performance, such as
expectations that major interventions will be evaluated. They
could do more to strengthen the incentives influencing performance,
particularly the incentives for evaluation.
REASONS FOR
CHANGES TO
THE PUBLIC
SECTOR
23. A reforming Labour government elected
in 1984, was concerned about the inefficiencies and poor services
provided to the public. This resulted in the State Owned Enterprises
Act 1986, which set the framework for placing commercial activities
into corporate forms. A new set of incentives surrounded these
businesses, encouraging significant gains in efficiency and levels
of customer service. The following year, a group of four concerned
ministers and senior officials considered ways to improve the
effectiveness of government departments by initiating changes
to the management framework for the public sector. This led to
the State Sector Act 1988 and the Public Finance Act 1989. The
ministers were concerned about the cumbersome and rigid nature
of the civil service and the government's inability to control
how much money was spent and what it was spent on. They wanted
an emphasis on managerial authority, clear organisational objectives
and effective systems of accountability.
24. The reforms were stimulated by the economic
and fiscal conditions. A fiscal crisis in 1984 led to a search
for ways to reduce public spending. An attempt by ministers in
1985 and 1986 to scrutinise spending highlighted the poor information
base for decision making and perverse incentives for heads of
departments. Criticism of the prevailing arrangements included
concern that:
— The input based information system
was largely useless for making effective decisions.
— Incentives existed for managers to
protect and expand resources—for example heads of departments
were paid partly on the number of staff they employed.
— Ministers saw the budget as a game
where the winner extracted the greatest increase in resources.
— Input controls restricted managerial
discretion required to improve performance—they also provided
a place to lay blame for poor performance.
— Restrictive employment conditions
out of step with private sector conditions, favoured inside appointments
and made the public service unattractive.
— Public sector employment conditions
encouraged costly wage settlements.
— Agencies faced conflicting objectives,
which made it difficult to hold them accountable for the achievement
of any objectives, for example, commercial and non-commercial
functions were often placed together.
MAIN REFORMS
25. Employment conditions in the public
sector were brought into line with the private sector conditions,
removing cumbersome service wide gradings and dense rules on employment
conditions. Chief executives were moved to five-year contracts
and were given responsibility for the management of staff and
finances. Output based budgeting using accrual accounting was
adopted and inputs became the preserve of the chief executives.
Departments were restructured with commercial activities assigned
to State owned enterprises, followed by some privatisations. Conglomerate
departments were split into policy and delivery organisations.
The roles of the Treasury and the State Services Commission changed.
ROLES
26. The Treasury continued its role as the
government's principal economic and financial adviser but exchanged
its role of central cash management for a monitoring role. It
took on the role of producing the Crown financial statements on
an accrual basis, as well as managing an extensive process to
corporatise and privatise functions. The debt management function
was significantly upgraded and the budget process was refined.
The greatest change in role was for the State Services Commission,
which ceased implementing detailed bureaucratic controls over
public sector employment conditions. The following paragraphs
briefly set out the roles of ministers, the Treasury, the State
Services Commission and the chief executives of departments and
ministries.
Ministers
27. Ministers have three roles under the
law: vote ministers, responsible ministers and shareholding ministers.
Vote ministers are responsible to parliament for the appropriations
made to their votes. They have purchase agreements with departments
and ministries providing services to them under appropriations.
Responsible ministers are charged with caring for the "ownership
interests" in government entities, particularly the financial
performance[8].
They have performance agreements with chief executives setting
out what the department or ministry will achieve in the coming
year and in the medium term in some areas. These agreements cover
ownership matters but also refer to contributions to be made to
government goals. Often the vote and responsible minister are
the same minister but this is not the case where departments or
ministries provide services for several votes.
28. Shareholding ministers are usually the
Minister of Finance and one other, such as the Minister of State
Owned Enterprises. These ministers hold the shares in companies
owned by the Crown and have responsibilities prescribed by statute
relating to the ownership role, such as approving the scope of
business. The Public Finance Act 1989, the State Sector Act 1988,
the State Owned Enterprises Act 1986 and the Fiscal Responsibility
Act 1994 set out some of the powers of ministers.
Treasury
29. Treasury supports the Minister of Finance
and the Treasurer to carry out their functions[9].
In addition to powers associated with this work, the Treasury
has powers to require information and to issue instructions under
the Public Finance Act 1989 and the Fiscal Responsibility Act
1984. The Treasury states its three central roles as:[10]
— Providing advice to improve the economic
and fiscal framework for high levels of economic growth and improved
living standards.
— Monitoring and managing the financial
affairs of the Crown.
— Assessing and testing other agencies'
advice and proposals which have economic and fiscal impact.
30. This work includes:
— Advising on the annual budget and
preparing the budget documents.
— Reporting on expenditure proposals.
— Managing the public debt.
— Providing policy advice on issues
which have economic and fiscal implications.
— Providing strategic advice for ministers
and cabinet on the future shape and direction of the economy.
— Financial reporting including reports
on Crown assets, liabilities, revenue, expenditure, cashflows,
borrowings, contingent liabilities and commitments.
— Assisting government with reports
on fiscal policy intentions and results (eg fiscal strategy report
and economic and fiscal updates).
— Monitoring the ownership interests
in Crown owned companies and State owned enterprises (through
an independent unit formally part of the Treasury).
State Services Commissioner
31. The State Services Commission supports
the State Services Commissioner to carry out statutory functions.
The Commission describes its role as facilitating "the development
of a high performing and high value-for-money State sector capable
of delivering the policies of current and future New Zealand governments".
Its functions include:[11]
— Assisting the State Services Commissioner
in appointing public service chief executives and operating the
chief executive performance management systems.
— Providing assurance to the government
that the State sector has the capability in terms of its structure,
people and systems to deliver the government's strategic directions.
— Advising the government on a range of
organisational design, human resource, and management process
matters that are likely to improve the capability of the State
sector.
— Advising the government on the current
performance of the public service departments and agencies, and
recommending appropriate action.
— Promulgating and maintaining appropriate
values and standards of behaviour for the public service.
32. The roles of the State Services Commissioner
with respect to the chief executives of government departments
and ministries are set out in the State Sector Act 1988. The State
Services Commissioner appoints chief executives. The appointment
process involves the Commissioner recommending an appointment
to the Minister of State Services who refers it to the Governor-General
in Council. The Executive Council is the formal body by which
ministers collectively tender advice to the Sovereign's representative.
The Governor-General in Council can accept the Commissioner's
recommendation, in which case the Commissioner proceeds to make
the appointment, or decline the recommendation, and may direct
the Commissioner to appoint a named person. Such a direction must
be published in the Government Gazette. Declining a recommendation
is a very rare thing. The Commissioner negotiates the chief executive's
employment conditions, with the agreement of the Prime Minister
and Minister of State Services, and reviews the performance of
departments and ministries including the discharge of functions
by the chief executives. An annual performance agreement is concluded
between the responsible minister and a chief executive which is
managed and monitored for the minister by the State Services Commissioner.
33. As well as functions in relation to
appointing and monitoring chief executives, the State Services
Commissioner has roles in advising on "machinery of government"
matters such as the allocation of functions between departments.
The Commissioner also provides advice on management systems, structures
and organisations.
34. The State Services Commissioner has
no role in the appointment or performance management of the chief
executives of Crown entities or State owned enterprises, apart
from an advisory role on the salary level for chief executives
of some Crown entities.
Chief executives
35. The roles of chief executives of departments
and ministries are covered by the State Sector Act 1988. They
are responsible to relevant ministers for:
— Carrying out the functions and duties
of the department or ministry, which may be imposed by statute
or government policy.
— Tendering advice to ministers.
— The general conduct of the department
or ministry.
— The efficient, effective and economical
management of the activities of the department or ministry.
36. The State Sector Act requires chief
executives to act independently from ministers in matters relating
to decisions on individual employees.
37. The chief executives of Crown entities
and State owned enterprises generally obtain their powers by delegation
from their boards, which usually have powers set out in statute.
There are exceptions to this, for example some Crown entities
do not have boards but instead are corporations sole, such as
the Privacy Commissioner.
ELEMENTS OF
THE ACCOUNTABILITY
SYSTEM
38. The reformed accountability system of
1988 struck a new deal. Chief executives received managerial freedoms
in return for accountability for delivering results. The accountability
system was built around core elements:
— Roles were clarified including those
described above. Vote ministers became purchasers of services
on behalf of the government, rather than advocates for their departments
or ministries at the cabinet table. Some also held ownership responsibilities
for departments and ministries. Chief executives were responsible
for the performance of their departments or ministries, rather
than being administrators hampered by heavy central controls.
— Accountability requirements were
tailored to types of government entities. Three types of organisations
were differentiated: 1. Core government being the departments
and ministries; 2. State owned enterprises being commercial
businesses where the government had little or no purchase interest
and 3. Crown entities, an eclectic collection of organisations
that were neither core government agencies nor State owned enterprises.
— Clear ex ante specification of performance
was to occur at all levels including appropriations linked to
outputs, outputs linked to government goals, and chief executive
performance linked to the performance of their department or ministry.
For Crown entities, a Statement of Intent setting out expected
service and financial performance and a purchase agreement formed
the ex ante specification. For State owned enterprises, a Statement
of Corporate Intent covering the scope of business and expected
financial performance formed the ex ante specification.
— Improved information was to be generated
for decision making at all levels.
— Monitoring and reporting of performance
was a feature, including regular reporting and monitoring of finances
by the Treasury, monitoring of performance against the purchase
agreement by ministers or their agents, and monitoring of performance
by select committees based on annual audited reports to parliament
on service and financial performance.
— Performance management was to be
undertaken by the State Services Commissioner, under the State
Sector Act. The key tool for this has been the chief executive's
performance agreement with the minister, monitored by the Commissioner.
The Commissioner co-ordinates feedback from ministers, central
agencies, self reports from chief executives and other information
in the annual assessments of the chief executives of departments
and ministries. The management of the performance of chief executives
of State owned enterprises and Crown entities was assigned to
boards reporting to ministers in most cases.
39. This submission focuses on the role
of the State Services Commissioner and the Treasury, however,
the accountability arrangements involve many other parties. These
have been summarised in Annex B to provide a fuller picture.
ASSESSMENT OF
THE ACCOUNTABILITY
SYSTEM
40. We have been asked to comment on expenditure
control and value for money in the context of the State Services
Commission's role with chief executives and the role of the Treasury.
As the table in Annex B shows, this is one part of the accountability
system. While it is difficult to isolate the impact of the various
parts of the accountability system on results, some observations
can be made.
Fiscal control
41. With respect to expenditure control
for departments and ministries, there is now a history of over
a decade of tight fiscal management. The system provides strong
accountability and control for the core government sector. This
is supported by a study of government systems by the World Bank,
which found that New Zealand's public management reforms had brought
about gains in fiscal control[12].
Another study of central government expenditure trends since 1971
found that the historical trend of increasing central government
spending as a share of GDP was sharply reversed in the early 1990s.
The government was able to set and achieve demanding targets to
reduce government expenditure[13].
The government has been running a surplus on both a cash and an
accrual basis. Following the reforms, it moved from a severe fiscal
crisis, to attain a positive net worth in less than four years.
While the system helped politicians achieve their fiscal goals,
it requires political will and supporting policies to maintain
a favourable fiscal position.
42. The appropriations for output classes
are treated as an electric fence by the chief executive of department
and ministries. Breaches of appropriations are extremely rare.
A former senior manager of the budget in the Treasury commented
that a culture change took place following the passing of the
Public Finance Act 1989. Prior to the Act, ministries and departments
often came in about 2 per cent over budget, to show that they
were trying hard but just needed a little more money. Governments
can now be very confident that the amounts voted to ministries
and departments under the Appropriation Acts will be adhered to.
There can be less assurance in the expenditure by Crown entities,
however for the purposes of this submission, Crown entities are
not discussed as they are not part of the State Services Commissioner's
realm[14].
43. The chief executives interviewed indicated
that breaches of appropriations were considered to be very serious
matters. It was administratively difficult to get more money and
personally embarrassing for a chief executive to exceed their
budget, or to be found to have moved funds between appropriations.
A breach would have serious consequences for their reputations,
and could be expected to impact on their performance assessment
by the State Services Commissioner and if serious, their future
careers in the public service.
44. As well as remaining within appropriations,
departments and ministries have generally avoided attracting justified
criticism for their spending. There have been some instances of
expenditure by government agencies that have attracted adverse
political and public comment, such as spending on air travel,
payouts to departing chief executives, and failed implementations
of IT systems. Some of these issues arose outside the core public
sector and therefore did not involve organisations monitored by
the State Services Commissioner. The IT issue however does apply
to the core public sector as well as other agencies. Special reviews
have raised concerns about the management of these investments,
particularly the underestimation of the costs of projects, inadequate
scoping and tenders coming in higher than estimates[15].
A special process for approving and monitoring IT investments
has been established.
45. The financial systems in the departments
and ministries are considered sound. An Audit Office report in
1997-98 indicated general satisfaction with the financial and
service performance information and control systems. All 44 departments
received unqualified audit reports[16].
Reviews by consulting firms recorded satisfactory results for
the quality of monthly financial reporting, purchasing practices,
cash management, control policies for physical assets, and accuracy
of output class descriptions, although there were concerns about
information at a lower level including costing information for
management purposes[17].
46. The conclusions that can be drawn about
fiscal control are that the accountability system enables a government
to maintain tight fiscal control, sufficiently tight to reduce
government expenditure as a percentage of GDP, if that is a government's
aim. It is not possible to isolate the impact on fiscal control
of the role of the State Services Commissioner in managing and
assessing the performance of chief executives. The most powerful
influence on fiscal control is likely to be the actions of the
government and ministers. During the 1990s until the election
of a coalition government in 1996, the government managed its
fiscal position with little increase in spending. The 1996 National/NZ
First coalition government and the 1999 Alliance/Labour coalition
government both increased spending in the order of NZ$5 billion
to $6 billion across their three year terms. These were planned
increases, however it is the area of unplanned spending that places
the government at risk of delivering fiscal surprises.
47. There are some early indications that
unplanned increases in government expenditure may become a problem
in the term of the present government, due to the actions of some
ministers. The Minister of Health has recently advised a national
conference of the New Zealand Nurses' Organisation that the government
has increased funding by 6 per cent for public hospitals to meet
service expectations and "constructive wage settlements".
Wage settlements are coming in between 7 per cent and 12 per cent
indicating that it is likely that some hospitals will exceed their
budgets. The present government's interventions in wage and salary
settlements involves a change in roles, with ministers taking
an active interest in inputs, thereby affecting the accountability
on chief executive for managing costs[18].
This may lead to expenditure over budgeted levels.
Value for money-efficiency
48. The significant efficiency gains in State
owned enterprises have been well documented[19].
There have been few comprehensive studies of efficiency in Crown
entities, despite about one third of the government's budget being
spent by these organisations[20].
Neither of these types of institutions is affected by the role
of the State Services Commissioner as noted above. The Treasury
has an ownership monitoring role in the case of State owned enterprises
and Crown owned companies. Particular ministries have ownership
monitoring roles for Crown entities which are not companies, such
as the entities monitored by the Ministry of Health and the Ministry
of Education.
49. Efficiency gains in the departments
and ministries have been noted in a recent OECD report. "The
core public sector has been reduced substantially in terms of
both its share of expenditures and employment. Given that higher
levels of outputs have been produced with lower levels of inputs,
productivity has increased, costs have come under better control
due to accounting changes and many departments have attained departmental
surpluses".[21]
A World Bank study of a selection had brought about gains in efficiency.[22]
50. A review by Allan Schick in 1996 also
indicated efficiency gains. "In carrying out this study it
has become evident that the reforms have lived up to the most
lofty of the 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 Zealand. 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.[23]"
51. After reviewing several reports on departmental
efficiency, Petrie and Webber concluded that there is "a
wide consensus that the reforms have resulted in an improvement
in the efficiency of the core public sector. . ."[24]
There have however been no systematic studies of efficiency gains
across a wide selection of departments and ministries, so it is
not possible to quantify the level of gains.[25]
52. An area where the use of resources appears
to have improved is the use of capital. This has been encouraged
by the imposition of a capital charge. A 1993 Price Waterhouse
survey of ten departments concluded that "there are sufficient
examples of the way in which the charge has influenced behaviour
to state unequivocally that the concept has been successful"[26].
Careful investment approaches to capital developments are encouraged
by the practice of producing business cases which are scrutinised
by the Treasury and incorporated into the annual budgeting process.
53. While efficiency gains have been achieved
under the current practices, there are some opportunities to increase
the incentives and the information available to encourage further
gains. The first gap is that no central agency monitors delivery
on the purchase agreement, apart from the monitoring of chief
executives by the State Services Commissioner, which does not
involve systematic checking of delivery. The Treasury does not
see detailed purchase monitoring as its role. The law provides
some guidance on where this function lies by stating that a function
of the State Services Commissioner is to "review the performance
of each department".[27]
In some areas, there are ministries or departments monitoring
the purchase interest in departments, such as the Ministry of
Social Policy and the Department of Labour monitoring the Department
of Work and Income. There is uneven monitoring of the purchase
interest, with more attention to it when there are special monitoring
roles within a ministry and less when the only monitoring role
is held by the State Services Commissioner. This situation needs
examination.
54. Another area where gains may be made
is through the systematic monitoring of performance by a department
or ministry across time, by benchmarking against past performance
to assess changes in productivity. There could also be some systematic
benchmarking between comparable organisations. Some departments
and ministries, such as the Department if Labour, have chosen
to benchmark aspects of their operations, but this is not a widespread
practice.
55. Neither the Treasury nor the State Services
Commission undertakes benchmarking of departments and ministries.
While the Treasury's accountability document refers to its role
in assessing efficiency, this is concentrated on assessing spending
proposals and the potential for developing shared services. The
State Services Commissioner has a mandate under the State Sector
Act 1988 to review the performance of each department, but would
need to be careful not to cut across the responsibilities of chief
executives to manage their operations. The Commissioner could
place expectation about efficiency on chief executives using the
employment relationship, but there is some lack of clarity over
whether the Commissioner should do this or whether ministers should,
through the annual performance agreements with chief executives.
Apart from the avenue of the Commissioner's employment relationship
with chief executive, neither central agency can set expectations
about efficiency. Ministers however, clearly can.
Value for money-effectiveness
56. At the whole of the government level, the
annual budget provides an opportunity for ministers to assess
what outputs and other interventions can be financed in order
to meet the government's goals. This requires the government to
state its goals in a way which allows assessments to be made of
the linkage between outputs and other interventions to those goals.
The Controller and Auditor General has criticised the expression
of government outcomes as "generally high-level and vague".[28]
The 1999 Labour/Alliance coalition government has produced six
high level goals which would attract a similar criticism, although
the government is working on more detailed outcomes for some areas.
57. The linking of the work of departments
and ministries to government goals occurs in two ways. The first
is by stating the links between the outputs and the goals in the
budget documents. There is no ex post monitoring of this. The
second is the inclusion of statements of how departments and ministries
could contribute to the government's goals in each chief executive's
performance agreement and usually also the purchase agreement.
The State Services Commission monitors achievement, by discussion
with staff, reviews of information, self-report and any views
a minister or referees may have on the subject. The information
available on the contributions of departments and ministries to
the government goals varies in quality, with concerns that it
tends to be poor or mediocre.
58. The Treasury has become active in promoting
some potentially significant improvements to linking government
goals to the work of the government agencies. These involve proposals
for:
— Regular reporting on current states
of society (ie "outcomes"). There is currently no reporting
of outcomes.
— Inclusion of statements in the budget
documents of the purpose and logic behind all appropriations and
not just for outputs, to help assessments to be made of the case
for the intervention and how its effectiveness might be judged.
— Improvements to the accountability
documents to place the department and ministry outputs in the
context of outcomes (work undertaken in association with the State
Services Commission).
— Listing of major evaluations of effectiveness
being undertaken by departments and ministries in budget documents
(to allow an assessment of the scope of the evaluation work).
59. If adopted, these changes could improve
the ability of the government to better understand the impacts
of interventions and improve the quality of decision making about
the allocation of resources. The changes could also improve the
ability of parliament to assess what outcomes the government expects
from its spending, whether the outcomes are being achieved and
whether the spending effective.
60. Another level where assessments can
be made of effectiveness is at the level of particular policies
implemented by departments and ministries. There is a lack of
comprehensive policy advice underpinning recommendations to Cabinet,
particularly in relation to evaluating interventions.[29]
A few departments have been changing this situation by actively
evaluating policies, such as the Department of Labour which is
moving on from single policy evaluations to consider the impacts
of interacting policies. The Department of Labour is not typical
however and it is widely thought that there are considerable opportunities
to improve evaluation in the core public sector. For example,
in the health sector there have been vast amounts of work evaluating
pharmaceuticals at a micro-level, yet there is little information
to support decisions about spending on primary care compared to
secondary care services.
61. The Treasury's role in advising on effectiveness
is focused on providing policy advice and opinions on proposals
by departments and ministries for spending initiatives.
62. The State Services Commissioner assesses
the chief executives' performances, a part of which includes performance
in contributing to key government goals, but the information base
for doing this is limited by the lack of in depth information
on effectiveness. The State Services Commission has sought improvements
by advising ministers to include requirements in the chief executives'
performance agreements for information on the "intervention
logic" linking their outputs to government goals and requesting
them to state what information will be collected to assess this.
Neither the State Services Commission nor the Treasury is involved
in the in-depth analysis of various interventions, apart from
the Treasury's use of this information in its policy analysis.
63. What governments and ministers want
in the way of evaluations of effectiveness is the key to determining
what departments, ministries, and the central agencies will do.
Governments and ministers may not want some evaluations. One chief
executive remarked that a minister wanted to stop an evaluation
of a policy he did not like, which rubs up against the chief executive's
obligation to provide free and frank advice.[30]
64. Ministers have the ability to require
evaluations, either by direction or through the purchase and performance
agreements. Unlike the area of efficiency, where there is scope
for the central agencies to promote large scale studies, evaluation
tends to be focused closely on particular policies and to require
unique designs set up at the time the policy is implemented. Given
this, the main benefits the central agencies can provide are:
— Advising the government on ways to
improve systems, processes, policy advice and the accountability
documents to enhance the quality of information available on effectiveness.
The Treasury and the State Services Commission are currently promoting
developments in these areas.
— Testing and reviewing the quality
of policy advice.
65. Treasury provides the policy review,
while the State Services Commission has the formal role under
statute to review performance. This may not be an issue, as long
as the Treasury's advice on the quality of performance in the
policy area is incorporated into the assessments of chief executives.
Value for money-capability
66. Weakness in the assessment, monitoring, management,
and development of capability in the core public sector have become
a theme over the past few years. In 1999, the Minister of State
Services, the Hon Simon Upton, made it clear that he considered
more needed to be done to protect and develop capability and that
the approach of the State Services Commission in monitoring the
public sector needed to change.
"The new focus will see the Commission charged
with becoming a principal adviser to ministers on the health and
capability of core government departments. The changes will require
the Commission to upgrade significantly its ability to provide
forward-looking, pro-active advice on the ability of government
departments to deliver. They are designed to arm ministers with
the information they need to hold chief executives to account
for their stewardship of taxpayers' resources. In turn, ministers
will have to devote more attention to the `ownership' side of
their portfolios.
The severe fiscal crisis of the late 1980s properly
focused the attention of ministers on gaining control of public
expenditure—the so-called purchase side of the equation.
As a result, New Zealand politicians probably know more than any
other country about what they get for the money they spend and
how trade-offs between priorities are made. It has provided us
with an indispensable and formidable control over public expenditure.
But ministers have been much less well-informed about the health
of the ministries they deal with.
While ministers labour over purchase agreements,
knowledge about the ability of departments to deliver is left
almost entirely in the hands of chief executives. It is time that
ministers were put in a position to seek these assurances. What
parliament and the public needs is an assurance that government
departments will be able to deliver in the future and that proper
attention is being paid to non-financial matters such as skills,
information technology management and ethics.
Moving to a forward looking monitoring regime
will require a radical shift in the Commission's focus. Chief
executives have to be left to manage and any suggestion that the
Commission should be trying to second guess them would lead to
muddle and confused accountabilities. What we are seeking to do
is ensure that ministers, on behalf of the `owners' (the people
of New Zealand), can ask the sort of questions any concerned owner
would want to ask. Ministers can't do that if they don't have
high quality advice. The Commission has to provide it.
It is surely strange that, currently, there are
much more formal arrangements for monitoring the government's
ownership interest in State owned enterprises than we do for government
departments. Boards are appointed explicitly to monitor the Crown's
ownership interest in these companies. Recent announcements have
extended this approach to the governance of Crown entities. Government
departments are every bit as important as Crown entities and State
owned enterprises. Ensuring that they can deliver requires a fresh
focus from the SSC and from ministers. It is up to the Commission
to prove that it can develop a dynamic, up-to-date approach to
monitoring the quality of public sector management. Ministers
are ready and willing to play their part."
67. It was noted by the Minister that it
would take three years for the State Services Commission to assemble
the skills required. The Commission has recently taken four steps
towards improving the accountability arrangements. One is the
appointment of the first of what may become several new deputy
commissioners to work more closely with the chief executives.
It was difficult for the Commissioner alone to manage relationships
with 36 chief executives, all ministers and his own internal reports.
The first of the new deputy commissioners has indicated a keen
desire to move towards a more active engagement with departments
and ministers and his own internal reports. The first of the new
deputy commissioners has indicated a keen desire to move towards
a more active engagement with departments and ministries on directions
and issues. A support team of staff with management consulting
skills is being assembled. This should help the Commission move
away from monitoring approaches associated with the skills of
civil servants, some of whom lacked the backgrounds required to
monitor and interact at senior management levels. It is early
days and too soon to tell what these changes might achieve.
68. The second change in the State Services
Commission's work has been the development of the "Capability
Accountability and Performance Project". The Commission is
working closely with other monitoring agencies: the Treasury,
the Department of Prime Minister and Cabinet, and Te Puni Kokiri
(Ministry of Maori Development) to make improvements in the way
departments plan and report on their work, and in the way agencies
monitor that work. The project is currently in a pilot phase,
working with four departments and ministries: the Department of
Conservation, the Department of Corrections, the Department of
Labour, and the Ministry of Women's Affairs.
69. The project is remodelling the accountability
documents to set out longer term objectives and the organisational
capability to achieve them, as well as what will be done in the
next twelve months. This has the potential to stimulate improved
planning, management and monitoring processes. As well as the
documents should provide better information to parliament, the
government, ministers, managers, monitors and the public. The
information produced should be as relevant to the internal management
processes as it is to the external monitoring functions. In the
past information has been generated to satisfy the external reporting
requirements, with limited relevance to internal management requirements.[31]
70. The accountability documents involve
a three-year "Statement of Intent" supported by an annual
"Output Agreement". The Ministry of Women's Affairs
new Statement of Intent covers:[32]
— The purpose, vision, mission, values,
relevant government priorities and outcomes.
— Medium to longer term objectives.
— Plan for the coming year including
output objectives, ownership objectives, monitoring and reporting,
risk management, key financial statistics and strategies.
— Statement of responsibility and forecast
financial statements including summary of output classes.
71. The third change promoted by the State
Services Commission is the development of a co-ordinated approach
to monitoring. The central agencies are sharing monitoring information,
thereby improving the quality of their basis for monitoring. The
joint monitoring makes the monitoring process more efficient for
departments. Memorandum of understanding between the monitoring
agencies and each department are being developed. This has the
potential to lead to formal monitoring plans between the central
agencies and a consequent improvement in clarity of roles and
the quality of monitoring.
72. A fourth change involves combining retrospective
performance assessment with a more forward-looking assessment
of capability. The "Capability Accountability and Performance
Project" has been experimenting with the use of the European
Foundation for Quality Management's Business Excellence Model
as a tool for comprehensively reviewing organisations, as well
as considering other approaches. Reports on capability are being
provided to ministers to support them in their discussions with
chief executives. In what is intended to be a twice-yearly event,
the Commission meets with each minister to present its view of
the performance and capability of the department or ministry in
which the minister has an ownership interest. The departments
and ministries are consulted about these briefings, although they
represent a Commission view rather than a negotiated one. This
is being generally well received by ministers.
73. The scale of capability problems in
the core public sector is not very clear. If they are related
to budgets, departments and ministries have two safety valves-proposals
for increase in the annual budget cycle and an output pricing
review. Output pricing reviews are rarely sought. Capability issues
may not rest so much in the size of the resources, rather in the
ability to attract and retain people who can meet the challenges
of working on problems that increasingly demand more sophisticated
skills and approaches. In an environment where countries compete
for capital and people, governments need to be on the leading
edge of developments in economic and social policies. This often
means dealing with complex cross cutting issues, which require
particular skills and work practices.
Comments
74. This submission has considered the roles
of the State Services Commission and the Treasury in assisting
the government to achieve fiscal control and value for money.
The work of these two agencies is part of a wider public management
system which has powerful influence on fiscal and other results.
The role of ministers has been frequently raised in this submission.
They have a powerful influence on fiscal control and can do much
towards maintaining this. They can also do much towards reversing
this.
75. Our view is that there are no fundamental
problems with the broad settings of the public management system
in relation to the Treasury and the State Services Commission.
The issues lie in the detail of how the roles are fulfilled. There
are gaps in the accountability arrangements which the central
agencies can close. There are others only ministers can attend
to.
September 2000
4 This submission was supported financially by the
NZ Treasury however all views in this submission are those of
the authors. The authors' contact details are Graham Scott (NZ)
Ltd and Southern Cross International Ltd, PO Box 5264, Lambton
Quay, Wellington, New Zealand, Telephone 64-4-473-6090; Facsimile
64-4-473-6552; Email: <au0,2>graham@grahamscott.co.nz
mckweb@xtra.co.nz<xu. Back
5
Central agencies are the State Services Commission, the Treasury
and the Department of Prime Minister and Cabinet. Back
6
State Sector Act 1988, section 6. Back
7
Responsible ministers are assigned to each department and ministry
to attend to the ownership interests. A vote minister is responsible
for the appropriations assigned to them. Shareholding ministers
hold shares in State owned enterprises and Crown owned companies
and are responsible for fulfilling statutory duties. Back
8
A distinction has been made between "ownership" and
"purchase" interests. In an ownership role, a minister
is concerned about the maintenance and development of an organisation's
capability to deliver services. This includes the state of the
human, physical and intellectual capital. Responsible ministers
have an ownership role. A "purchase interest" relates
to the interest in the delivery of goods and services for the
money expended. Vote ministers have a purchase interest. A contractual
analogy has been used to say that ministers purchase goods and
services from government agencies. The analogy has its usefulness
in exposing competing interests when ministers take a short-term
interest in driving hard for service delivery at the expense of
long run capability. Back
9
The current Minister of Finance is also the Treasurer. Back
10
The Treasury, "Department Forecast Report to June 2001",
Wellington, page 12. Back
11
State Services Commission, "Annual Report to June 1999",
Wellington, page 21. Back
12
E Campos & S Pradham, "Budgetary Institutions and Expenditure
Outcomes", World Bank paper 1996. Back
13
J Brumby, P Edmonds & J Honeyfield, "Effects of Public
Sector Financial Management Reform (FMR) in New Zealand",
paper presented to Australasian Evaluation Society Conference,
30 August 1996. Back
14
There has been some history of expenditure above planned levels
for Crown entities in the health and education sectors, particularly
the public hospitals and polytechnics. With respect to the public
hospitals, the over expenditure from 1993-98 of $175 million to
$200 million on revenues of approximately $3 billion had many
causes including problems in setting prices, lack of information
on costs and services, management problems, poor incentives and
transition issues in a frequently reformed sector. The accountability
framework around Crown entities has been recognised as having
weaknesses, including a tendency by ministers, boards, managers
and select committees to ignore failures to produce conforming
Statements of Intent and to report adequately against them. The
government is working on ways to strengthen the accountability
framework for Crown entities and is due to introduce legislation
into the House this year. Back
15
State Services Commission, "Review of Monitoring Function
for Major Information Technology Projects in the Public Service",
Wellington, 1999. Back
16
The Public Finance Act 1989 has more agencies defined as departments
than the State Sector Act 1988 does. Not all 44 departments are
under the influence of the State Services Commissioner. For example
Police, Defence and the Parliamentary Services are not. Back
17
Reports conducted by consulting firms Coopers & Lybrand, Price
Waterhouse Coopers and KPMG, cited in Petrie and Webber, op cit,
p 12. Back
18
For example, a minister has recently set out his requirements
for the working conditions for fire fighters and restricted the
Fire Service Commission's ability to negotiate a settlement. Back
19
Across seven of the larger SOEs from 1988-92 revenue rose by 15.5
per cent to $5.9 billion, after tax profits rose from $262 million
to $1023 million and the dividend contribution to the State by
1991-92 was $700 million. NZ Institute of Economic Research studies
quoted in R Douglas, "Unfinished Business", Random House,
Auckland, 1993, p 181. See also B Spicer, D Emanuel, M Powell,
"Transforming Government Enterprises", Centre for Independent
Studies, Wellington, 1996. Back
20
An exception is the pricing work on public hospitals using data
envelopment analysis to plot a production frontier and provide
information on relative efficiency for various services. Back
21
OECD, "Measuring Public Sector Productivity". PUMA/SBO
(99) 6, paper prepared for the 20th annual meeting of senior budget
officials, Paris, 3-4 June 1999, quoted in M Petrie & D Webber,
"Review of Evidence on Broad Outcomes of Public Sector Management
Regime", report for the NZ Treasury, 1999. Note that public
service staff numbers fell from 67,600 in 1987 to 31,500 in 1992. Back
22
E Campos, & S Pradham, op cit. Back
23
Allan Schick, "The Spirit of Reform: Managing the New Zealand
State sector in a Time of Change", report for the NZ Treasury
and State Services Commission, 1996. Back
24
M Petrie & D Webber, op cit, p.28. Back
25
There have been studies of small numbers of departments, for example,
a 1996 study by J Brumby et al, op cit, considered average unit
cost series for core processes in four departments since 1989-90.
One department (Valuation) had a fall in average unit costs of
10-20 per cent in nominal terms from 1989-90 to 1994-95. Two other
departments (Income Support and Immigration Service) showed strongly
declining average unit costs with rising volumes. The Immigration
Service accommodated a 25+ per cent output increase over three
years within a 2 per cent increase in nominal expenditure. The
Income Support Service increased the volume of applications it
processed by 60 per cent over two years with barely any increase
in operating expenses. The fourth department (Justice) showed
no evidence of productivity gains before or after the reforms.
The sample size and the difficulty of isolating causes for changes
in productivity makes it impossible to draw generalisations from
these studies. Back
26
Price Waterhouse, "Capital Charging Regime for Government
Departments: Survey of Benefits and Current Issues", July
1993, cited in M Petrie & D Webber, "Review of Evidence
on Broad Outcomes of Public Sector Management Regime", report
for the NZ Treasury, 1999. Back
27
State Sector Act 1988, section 6. Back
28
Controller and Auditor General, "The Accountability of Executive
Government to Parliament: Third Report for 1999", Wellington,
1999. Back
29
State Services Commission, "Options for Encouraging More
Effective Evaluation of the Impacts of Policies on Desired Outcomes",
Wellington. 1998. Back
30
The tendering of advice is an obligation under the State Sector
Act 1988. The provision of "free and frank" advice was
a requirement in chief executive performance agreements until
recently. Back
31
State Services Commission, "Assessment of the State of the
Public Sector", Wellington, 1998. The report cites a Treasury
study which found that financial systems were geared to external
and not internal requirements. Back
32
This is a first attempt at a Statement of Intent and at this stage
has a one year rather than longer term focus. Back
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