Select Committee on Treasury Appendices to the Minutes of Evidence


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 monitoring.

    —  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.

    —  Environment.

    —  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>[email protected] [email protected]<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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