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Focus on Crown entities

The proposals outlined above need to be applied to the state sector as whole. However, there also needs to be a particular focus on Crown entity performance because Crown entities:

  • use more than half of the overall Crown operating expenditure, excluding benefit payments (health and education are the main sectors)
  • manage more than half of the physical assets (transport, housing, education and health are the main sectors), and
  • are responsible for the delivery of most services to the public, often representing the ‘face of government’ to the public.

Ministers can use three tools to boost Crown entity performance.

Figure 18: Levels of Crown entity appropriations
Figure 18: Levels of Crown entity appropriations.
Note: Vote appropriations exclude benefits and capital expenditure.
Source: The Treasury

Use the new Crown Entities Act

There are opportunities for Ministers to use the new Crown Entities Act to enhance performance. The Act focuses entities and their boards on achieving and reporting results, and enables Ministers’ participation in setting medium-term goals and direction. Ministers influence the flow of funds, what is purchased, and what performance information is provided.

Education sector review

The recent Education sector review provides an example of some of the issues faced in the Crown entity sector. The review focused on the Ministry of Education, Tertiary Education Commission (TEC) and New Zealand Qualifications Authority (NZQA), and found that there were significant problems at the centre of the education sector which adversely affected its performance. These included a need for:

  • improved strategic alignment across the three agencies
  • better relationship management
  • mandated sectoral leadership
  • improved capability in the three agencies, to jointly manage complex change, and
  • more clarity and shared understanding of the roles of the respective agencies.

The new Crown Entities Act in itself will not resolve these issues. It does, however, provide a framework to build from. It will be equally important to provide clear direction about the outcomes expected of the education sector, stronger monitoring of performance, improved governance by Ministers and boards, and stronger sector leadership by chief executives.

Strengthen monitoring

Crown entity monitoring arrangements and effort have varied greatly across the public sector in recent years. In some cases, those performing monitoring roles were isolated from Ministers and had little influence with senior managers. To serve Ministers well, monitoring agents and departments need a clear mandate and direction from Ministers.

Central agencies are working together to clarify monitoring expectations, to focus interactions between boards and Ministers on major results sought for the public, and to support good systems and processes for board appointment and training.

Ministers have discretion to focus their effort on major sectors, opportunities and risks. We think that there is a need to concentrate on key sectors such as education and health. Central agencies can:

  • help Ministers and their monitoring agents exert influence through new levers in the Crown Entities Act
  • promote a strong focus on results, as well as value for money, and
  • drive improved alignment and coordination among different agencies working in a sector.

Ministers’ reinforcement of these initiatives will increase the likelihood of their success. While the Treasury has a secondary role, we can support Responsible and Vote Ministers to manage the key relationships with boards and monitoring agents by ensuring the effective implementation of the Crown Entities Act, in improving monitoring capability and practices (including spreading good practice), and by supporting Ministers who commission major reviews.

State-owned enterprises

Key issues in the public sector revolve around rising fiscal pressures, little gain in services and policy surprises for Ministers. The state-owned enterprise (SOE) sector does not present nearly the same degree of challenge as the Crown entity sector. Six SOEs have recently been the subject of in-depth reviews, resulting in statements setting out shareholders’ expectations regarding strategy, scope of business, profitability, shareholder consultation, gearing, dividends and access to equity injections. The legislation and policy framework was reviewed over the last three years and found to be basically robust and appropriate for long-term ownership.

This overall picture notwithstanding, this does not comprise a case for state ownership in the case of the majority of the SOEs, particularly those that do not have monopoly characteristics. The international empirical literature is clear that, on average, commercial enterprises perform better in private ownership than in state ownership. Given pressures on the existing capital allocations, Ministers could consider whether some of the Crown’s investment in SOEs can be better utilised elsewhere.

Improve governance

The quality of governance of entities across the public sector is a key to performance. Ministers, along with central agencies, are involved in the selection and appointment of public sector leaders and so have a more direct mechanism to impact on future agency performance. Ensuring the right skill mix of boards is essential for the performance of SOEs and Crown entities.

Ministers should expect good support from their departments in determining who to appoint to boards. The implementation of the new Crown Entities Act provides an opportunity to strengthen Crown entity leadership by improving appointment and induction systems and processes for Crown entity boards. The current selection process for the directors of SOEs and Crown entity companies is robust. It is important that it is maintained.

Recommendation

  • Improve Crown entity performance by making use of the new Crown Entities Act, strengthening monitoring, and improving governance
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