High-level choices in the social asset portfolio
Any government faces a set of high-level strategic choices that can be applied to different parts of the social asset portfolio.
The purpose of investment of capital in social assets is to deliver priority services as effectively and efficiently as possible. To achieve this, the Government needs to set high-level priorities, and agencies need to establish and update longer term demand projections and capital asset planning based on reasonable funding parameters. Finding better ways of revealing and comparing the value of different investments within and across agencies, so that best value investment decisions can then be made amongst competing priorities, is also essential.
This requires decision-making to be based on more rigorous and transparent choices around the optimal price, quantity and standard of services, with procurement choices based on whole-of-life value and recognising the full cost of capital. Investment decisions also need to be followed up with more systematic review to establish whether the Government's expectations were achieved, as well as more transparent performance objectives and reporting.
Within this general framework, investment in social assets will depend on a number of choices. Policy and operational decisions impact on the demand for public services, the extent of public provision and contestability of supply, and the operating model and productivity of public service delivery, which in turn affect the demand for assets, the efficiency of asset use and the quality of assets.
Objectives and priorities: Government's social objectives and policy priorities influence what services the Government will fund, and the extent to which assets are required in pursuit of those services. For example, the objective of providing reasonable access to healthcare for all New Zealanders and the decision to fund some health services means that some health assets are necessary (whether they are privately owned or government owned). Likewise, the objective of removing financial barriers to tertiary education through providing access to finance for study is the rationale behind student loan schemes. Governments have different objectives (goals), and make different policy choices about the best way of achieving those objectives (the means).
Demand levels: Within areas which the Government is committed to funding, policy settings affect the demand for assets. For example, increasing the minimum prison term for criminal convictions increases the demand for prison cells and increasing the leaving age for compulsory education increases the demand for schooling space.
Intensity of utilisation: Policy choices can affect the intensity of asset utilisation and subsequently affect overall demand levels. For example, choices around maximum class sizes and the appropriateness of double bunking in prisons affect asset utilisation and can either increase or decrease demand and the cost of services.
Asset quality: A choice exists as to the quality of assets provided. Typical considerations include:
- variations in the initial cost and ongoing maintenance costs incurred, and
- whether the marginal costs of increased asset quality generate sufficient marginal benefits to justify additional cost.
Decisions on quality are made both at the initial point of investment, and by agreement to particular policy or operational settings which guide ongoing investment, such as whether certain types of roads should be shingle or tarmac, or the level of heating and insulation provided in class rooms.
“Make or buy” and procurement options: The Government can achieve its policy objectives by providing services itself or by contracting with third parties to deliver services. A mixture of approaches is taken currently, but in many areas there is limited contestability of supply. For example:
- wholly or largely government provided - state schooling and student loans
- wholly provided by third parties - early childhood education and aged residential care, and
- mixed - hospital services (where some publicly-funded hospital services are provided by private hospitals) and state housing (where it owns the majority of houses but leases a small portion).
Owning assets reduces the availability of capital for other items on the balance sheet and the extent to which private sector asset management disciplines can be harnessed. However, where government chooses to fund services from third party providers, ongoing operating costs may be higher to reflect private providers' cost of capital - but this does not necessarily mean that government provision is more cost-effective or cheaper as the Crown's cost of capital also needs to be fully recognised.
