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Structuring government to meet objectives

The Crown is a large and complicated collection of organisations that serve many different purposes.[6] A key objective is to create institutional arrangements which maximise agency performance while aligning with government priorities. This has implications for agency autonomy.

Government organisations operate under different Acts according to their circumstances and have different governance structures. Government departments or ministries perform core government roles that generally require greater Ministerial involvement.[7] Crown entities, SOEs and MOM companies are legally separate from the core Crown and typically have more discretion in their operations.[8]

The performance of the balance sheet therefore reflects decisions made by a diverse range of entities. Ministers have differing degrees of control over Crown organisations, which has implications for balance sheet outcomes.

Cost centres and revenue centres

The characteristics of public sector organisations have implications for the way their performance is understood.

A cost centre is part of an organisation that does not produce direct profit but does add to the cost of running the organisation. It either adds value indirectly or fulfils another purpose that cannot be measured using only financial results. Private sector examples of cost centres include research and development departments, help desks and customer service/contact centres.

A revenue centre is accountable for revenues and costs, and hence profits. Profit centre management essentially means running a stand-alone business, and financial results are an important signal of good performance.

On these definitions, much of what the Crown delivers is done through cost centres. For example, the provision of health and education services are largely funded centrally, and those working in these areas are not expected to earn revenue from their operations.

A rule of thumb is that the closer proximity a function is to the core Crown the more likely it is that it will be delivered by a cost centre.

In turn, this means that measures other than financial results are needed to assess their performance. The requirement to have good non-financial performance information is echoed in the findings of this report. This is not just a public sector issue; it is a common problem in large corporations with internal cost centres.

Notes

  • [6]See Appendix one for a list of the entities included in the Crown balance sheet.
  • [7]Some departments have specific functions that must be performed independently of Ministers such as the IRD making decisions on individual cases.
  • [8]http://www.treasury.govt.nz/publications/guidance/publicfinance/pit2011
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