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2  Explaining Key Concepts (continued)

Decision-making and Accountability

The Government decides:

  • its outcome priorities and which outputs it purchases to achieve them
  • the level of investment to be made in state sector organisations
  • what departments and Crown entities distribute or deliver on its behalf.

How does the financial management system help the Government discharge these responsibilities?

1  Resources are allocated to Ministers to purchase specified outputs

Chief executives in the state sector agree to produce certain outputs and have control over the resources required to produce those outputs. The chief executives therefore have a clear idea of what is expected of them and can be held responsible if agreed performance standards are not met.

A desirable social outcome is often accomplished by a mixture of outputs from several suppliers. Good or bad performance will encourage the Government, where options exist, to change the output mix and buy more from one provider and less from another. The government may seek outputs from more than one source. For example, the Minister of Social Development purchases services from a range of iwi- and community-based providers and from voluntary organisations.

Much of the policy advice received by Ministers represents information on the costs and benefits of output mix proposals to assist in specifying desired performance and making purchase decisions. Increasingly, this includes analysis of real prices for goods and services, and information linking expenditure to benefits (impacts) experienced by the community.

2  Accurate and complete financial reports are crucial to the system

Chief executives and managers require accurate and timely information to run their departments efficiently and effectively. In turn, the Government and the public need regular reports to allow departmental performance to be assessed. Reporting is examined in more detail in Chapter Eight.

Performance assessment requires performance measurement. Effective measurement systems ensure that relevant and reliable information is provided. As the delivery agency is usually in the best position to assess spending and results, the onus is on boards and chief executives to show prudent use of funds, efficiency and delivery against output agreements.

The Government can offer rewards and apply sanctions in its roles of purchaser and owner. Incentives built into the system are discussed in Chapters Five to Nine.

Working Across Agencies and Sectors

Many issues of seminal interest to the public can be dealt with by individual agencies or a single Vote. Others require action across government. There are many ways of providing funding and taking action across agencies and portfolios. Some common approaches include:

  • lead Ministers coordinating action across a sector (eg, Justice) or shaping infrastructure investment across the whole government
  • creating a Vote, output, pool or 'club fund' to resource cooperative, joint or competing initiatives across different groups
  • agency-to-agency transfers of funding for specific projects, eg, to develop more efficient and better integrated support services
  • seed funding (supporting start-up businesses/agencies)
  • joint working groups or delivery coordination mechanisms
  • evidence-informed approaches, where a lead agency synthesises the information and uses this to influence agencies' purchase decisions
  • chief executives or boards leading other agencies and focusing joint resources on common issues and opportunities (eg, road safety)
  • professional networks promoting professional standards, developing skills and providing leadership on important issues
  • central agency leadership, eg, Managing for Outcomes, sector reviews and recent work to increase the efficiency of 'back office' functions
  • agreeing priorities with the Prime Minister.

Occasionally, structural solutions are required.

Working in these ways, the state sector management system provides structures and funding processes that help people get on with the job.

Case Study: Users Pay 'Whole-of-Government' Procurement Costs

Buying cars, computers, etc through whole-of-government contracts saves agencies $165 million per year but costs $5.7 million. The proposal is clearly cost-beneficial but savings are kept by individual agencies. So why would Parliament appropriate extra funding to meet administration costs?

Administration costs are met by a 1.5% charge collected by commercial suppliers which, when returned to the Ministry of Economic Development, fully funds the Procurement Reform Agenda. This avoids any requirement for additional funding, and transfers costs to the agencies making the savings.

Percentage charges will fall as more goods and services are brought into the Reform Agenda (savings will rise but costs will stay the same or fall). Charges levied as a percentage of sales allow the Crown to confirm that aggregate purchasing expectations are met and to take action if they are not.

Agencies make savings. Monitoring occurs. The reform is fiscally neutral.

Conclusion

Performance specification, reporting and review underpin accountability. Resources are allocated, and reallocated over time, to mixes of outputs that are expected to deliver high impact (relative to their cost). Separation of purchase and ownership roles ensures effective outputs are purchased at reasonable cost, resources get used well, and Ministers and agencies develop more cost-effective ways of improving outcomes into the future.

The use of GAAP ensures forecasts and reports of financial performance are comprehensive, accurate and comprehensible.

The budget process is the mechanism the Government uses to lay out financial and non-financial performance expectations for the coming year. The next chapter outlines the budget cycle.

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