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The Imperative for Performance in the Public Sector

Delivered by John Whitehead, Secretary to the Treasury, on 10 September at Apec 2006 Viet Nam - Seminar on Public Sector Governance - New Zealand Seminars, Furama Hotel, Da Nang.

Speech

Thank you for that welcome and introduction.

It is a great honour to be here to share views on this most critical issue to our economies.

Securing an optimally-functioning public sector is an absolutely vital ingredient to unleashing the full potential of any economy, and for a healthy society.

My name is John Whitehead and I am the Secretary to the Treasury of New Zealand.

The Treasury is one of three central agencies responsible for coordinating and managing public sector performance in New Zealand and I am here to talk about the imperative for performance in the public sector.

In my address to you today I would like to provide you with background on both the Treasury and New Zealand; discuss why public sector performance matters; provide some reflections on the challenges inherent in setting, and then meeting, performance objectives and finally make some broad conclusions based on my experience as the Chief Executive of the New Zealand Treasury.

I hope that my talk will serve to highlight that it is not sufficient merely to set performance objectives in the public sector.

While setting performance objectives in the public sector is of course necessary, on-going public sector performance improvement also requires:

  • Strong political and community support to translate objectives into outcomes;
  • Senior management commitment;
  • Sound institutional and governance arrangements;
  • Having the right incentives in place to underpin success;
  • Having good quality information to underpin robust analysis and evaluation.

First, let me give you a little background about the New Zealand Treasury.

The Treasury is the government’s lead advisor on economic and fiscal policy.

We manage the public purse, advising on how governments can get the best quality and value out of public spending. We manage the government’s liabilities, monitor significant government-owned assets, coordinate and manage the budget process, publish regular economic and fiscal forecasts and are responsible for producing the government’s financial statements.

We also take a broad view on the economy, developing strategic advice for the government on its future shape and direction, including advice on maintaining a stable and sustainable macroeconomic environment.

Our experience tells us that a stable and sustainable macroeconomic environment enhances economic growth by reducing uncertainty, providing clearer price signals for firms and households, and enhancing the resilience of companies and the economy as a whole in the face of external or internal economic shocks.

Underpinning all of this work, of course, is our commitment to assist the government to achieve, and then to lock-in higher living standards for citizens.

I would like now to give you a little background about New Zealand.

Ours is one of the smaller APEC economies and it is also one of the more remote economies from the major markets of the world. Just reaching our closest neighbour, Australia, for example, involves about a three hour flight.

Nevertheless, we face the same pressures and advantages as any other open economy.

We benefit from a long legacy of robust governmental and institutional arrangements, including strong traditions of respect for the rule of law and low levels of corruption in the bureaucracy. In reforming our economy and public sector in the last two decades we have paid considerable attention to improving the quality of governance arrangements, building on these strengths.

Our system of government is transparent and subject to a high degree of scrutiny by Parliament, the media and by citizens.

I said I would reflect on why public sector performance matters.

No matter which way you choose to measure it, the public sector is a large part of our economy. Government expenditure and taxation excluding transfers is equivalent to one-third of GDP in New Zealand. However, I believe that lessons learned in New Zealand are just as relevant in economies that have relatively smaller public sectors than our own.

It is well accepted that the way in which the public sector conducts its business, and uses the resources available to it, have a very significant impact on a society’s overall economic performance.

Public sector infrastructure provision and regulation also have a big impact on private sector activity, also affecting the long-term performance of the economy.

In New Zealand, public sector agencies deliver many core services which impact on people’s lives, including those of many of the most vulnerable groups in society - through, for example, the delivery of social assistance benefits, child protection services and so forth.

Our public services are mainly funded through taxation. The absence of competition in many of the service sectors that are served by the public sector of course places an extra burden of “proof” that the public sector is delivering.

New Zealand in the mid-1980s was in the unenviable position where its relative economic position was deteriorating compared to the economies that we like to compare ourselves against.

The central government had a burgeoning deficit, we had increasing unemployment, high inflationary pressures and our credit rating was slipping. The inefficiency of the public sector was a significant part of the problem.

The government in the second half of the 1980s responded with wide-spread structural changes which affected both the private and public sectors. The key reforms of those times remain largely in place today.

The main objectives of reform were to enhance both the efficiency and accountability of the economy and the public sector. Significant controls and distortions in the economy were reduced.

In the public sector the basic principles adopted included establishing: clear managerial authority; clear organisational objectives; and, effective systems of accountability. Chief executives were given under the State Sector Act 1988 much more freedom to manage and, in return, were more accountable for delivering.

State trading enterprises were given clear commercial objectives under the State Owned Enterprises Act and expected to operate like private sector firms. Some were later sold.

Slide 1: Long term fiscal pressures
Slide 1: Long term fiscal pressures

I said I would reflect on setting, and then meeting, performance objectives.

We have got significant payoffs from our reforms. We can see this in the wider economy in indicators showing increased, and more sustainable, growth, much lower inflationary expectations and the unemployment rate has fallen very dramatically indeed over the past decade and is now amongst the lowest in the world.

From a Treasury point of view, one of the big payoffs has been the improvement in the Government’s financial position, notably the replacement of persistent annual government deficits with persistent surpluses. A deficit that was 5.1% of GDP in 1992 had become a surplus of 5.9% of GDP by 2005.

There has also been a tremendous improvement in the Government’s debt position, with the government’s net financial asset position recently moving into positive territory – perhaps for the first time since the New Zealand government was formed in the 1850s.

Being clear about performance objectives has been an important part of this achievement.

But they are only part of the story. Clear objectives have been supported by a series of mutually-reinforcing features of our financial management system, including strong ministerial direction, reporting performance, independent verification through our Auditor-General, and changes to our budget system (e.g. the presumption of fixed dollar budgets from year to year). Legislation was used to make key elements compulsory - the Fiscal Responsibility Act of 1994, later incorporated in the Public Finance Act, required governments to pursue policies in accordance with the principles of responsible fiscal management that included:

  • Achieving prudent levels of debt;
  • Maintaining prudent levels of debt by ensuring that on average and over time total operating expenses do not exceed total operating revenues; and
  • A reasonable degree of predictability about the level and stability of tax rates.

The Government is also required to produce independently audited financial statements in accordance with generally accepted accounting practice, to produce an annual fiscal strategy report and regularly to update its fiscal and economic forecasts.

The robust state of the Government’s finances has helped improve the resilience of our economy and provides a much sounder basis for coping with demographic changes in the future as New Zealand, like all societies, is confronted with the prospect of a significant ageing in the profile of our population as this century progresses.

Of course, as the Secretary to the Treasury the much healthier state of the Government’s finances is of crucial importance to me personally.

But I want to stress that we have got the benefits of better performance in many areas of government. I will illustrate this with some examples.

We got an immediate and dramatic pay-off from the reform of our state trading enterprises, which went from consuming taxpayers’ money to paying tax and a profit to the Government. They also achieved enormous productivity gains. Electricorp increased output per employee by 71% in the four years after becoming a company under the State-owned Enterprises Act.

Citizens also benefited from improved services. The time it took to have a new phone installed by Telecom went from 6-8 weeks to 48 hours in the five years after it ceased to be part of the old Post Office department and became a company.

In the core public service, our tax department, the Inland Revenue Department, like all government agencies, now fully recognises the importance of tracking the efficiency of their operations. The graph shows one area where they have achieved efficiency gains.

Slide 2: Cost of collection and customer to staff ratio
Slide 2: Cost of collection and customer to staff ratio

The cost of tax collection is a widely used measure of efficiency for tax administration which is why I have focused on this issue. In this graph, customer efficiency is the ratio of customers to staff.

The graph shows that:

  • The cost of collecting $100 of tax has reduced from $0.89 to $0.77 - a 13% decrease;
  • The number of customers per staff member has increased, which reflects an increase in productivity and efficiency.

Another example is our Companies Office which is a division of our Ministry of Economic Development. This small office is responsible for registering companies.

Using greater managerial freedom to apply new technology judiciously combined with clear performance expectations, it was able to reduce the cost of registering a company from $200 in 1995 to $70 in 1999. Its average turnover time for registering a company fell from two weeks to just thirty minutes. The benefits are still evident now – New Zealand has been identified as one of the easiest countries in the world to start up a new business from a compliance point of view.

Our experience tells us that performance objectives should be sufficiently general to allow management to manage yet at the same time provide sufficient guidance as to what is important to provide a clear expectation of the outcomes expected from a Chief Executive. An over specification of performance objectives can undermine the ability of a CEO to perform.

Performance objectives have proved to be an essential part of the devolution of authority from a centralised bureaucracy into our current management structure. Managerial autonomy in exchange for accountability for performance is an important aspect of our governance arrangements.

We have learned through our own experiences in New Zealand that it is important that performance expectations, and the process for setting them, be sufficiently transparent to ensure that all agencies are performing adequately, and that we know how resources are being used.

Shareholders in market-listed companies can judge performance relatively easily through things like the share price. Customers can make judgements about value based on price.

Most of the public sector, of course, does not have price signals and so it is intrinsically more difficult to assess added value.

A major problem faced by government-owned agencies is that there may be multiple objectives and ambiguity as to the value they have created or destroyed.

There are a range of issues typically experienced by agencies.

  • Policy changes by government may at times require substantive changes to be adopted by government-owned agencies within short timeframes.
  • It takes time to create robust systems, sometimes long periods of time.
  • Agencies also, it must be said, tend to be risk-averse and, as a consequence of this, they are inherently less inclined to innovate than private companies constantly required to respond to the latest market developments.
  • Agencies do not necessarily directly benefit themselves from innovations that they may have developed – benefits may accrue elsewhere.

Better management is all about setting objectives and then meeting or exceeding those objectives.

It is vital, before objectives are set, that there is clear agreement both within the organization and within government, on the results that are to be delivered.

It is critical that sufficient means to measure performance are in place so that the results can be transparently assessed.

These results must then be used to assist decision-makers in further improving ongoing, better outcomes.

Setting performance objectives and working towards achieving better outcomes for the public is an iterative process – a repetitive, never-completed process.

The objectives will change as stakeholders' expectations, and as political or economic factors, change.

Agencies need to learn by doing, including learning from errors.

An obvious measure of poor performance objectives is when an agency is working hard at producing some outcome that is not valued by their stakeholders – these can be the government, as owner, or people that use the goods and services of the agency - its “clients”.

Public sector agencies tend to have multiple stakeholders, each of whom has multiple objectives. An agency’s operation can therefore easily be captured by one of these objectives to the detriment of others. A balance is needed between the various demands and a constant focus on the “Big Picture”.

Slide 3: Road Deaths
Slide 3: Road Deaths

I want to illustrate the importance of clear performance objectives by talking about our experience with road safety. Since 1990, successive governments have had road safety strategies aimed to reduce the road toll.

These have provided a focus for transport agencies including the police, and a basis for deciding some resource allocation decisions. This has been very successful as you can see from the graph, where a rising trend has been reversed and the trend is now similar to comparable countries. We have also seen reductions in hospital bed stays due to traffic accidents. Independent evaluations have confirmed that these changes are due at least in part to the interventions by the Government.

Setting clear performance objectives has been an important part of this, but has been reinforced by other factors - a strong push for results from Ministers and the public, clear governance structures, a simple message, and buy-in from the relevant government agencies.

This success story also illustrates some of the potential pitfalls to be avoided with performance objectives. The clear focus on safety has been important, but the Government did become frustrated that some transport agencies were giving insufficient weight to other objectives like ensuring we dealt with problems of congestion. This frustration contributed to a review and rebalancing of the transport sector.

Continuing on the subject of setting and meeting performance objectives, it must be stressed that the best performance objectives are of limited value unless they are supported by government ministers and understood by the public.

It is important that ministers responsible for agencies remain fully engaged in agencies’ setting of their medium- to long-term goals.

Senior management’s commitment in support of agreed performance objectives tends to follow their stakeholder’s commitment. It is necessary for management’s authority to be behind any performance objective for it to be credible and effective.

Performance is underpinned by sound institutional and governance arrangements. These help set an overarching expectation of delivery of agreed objectives, which in turn creates the incentives for performance. We also need good quality data coupled with robust analysis to support these incentives.

Despite improvements in the performance of our economy and a substantial expansion in the delivery of social services over the past decade, New Zealand, like every other economy has to maintain a continuing focus on efficiency.

We cannot stand still.

A particular emphasis in the public sector in New Zealand at the moment is a commitment to ensure that the quite significant rise in real spending in education, health and other services in recent years is delivering an appropriate return in the form of better quality and quantity of services.

We also know from experience that economic growth and technological change help drive higher public expectations for further expanding social services.

And we know that the profile of our population is ageing, that is the average age of New Zealanders is set to rise quite significantly over the course of this century.

These demographic, technological and growth factors will in time require responses from the government to ensure that we continue to maintain our prudent fiscal targets and objectives as the century progresses and can afford the services that New Zealanders expect.

Slide 4: Long term fiscal pressures
Slide 4: Long term fiscal pressures

To illustrate the last point I want to discuss a graph derived from a recent Treasury report. As required by law, the Treasury in June published the first of what will be four-yearly Long-Term Fiscal Statements.

We are required to produce these long-term fiscal projections to improve the quality of public information and to understand the drivers of fiscal policy over the long-term.

This process will, we anticipate, assist governments to make fiscally sound decisions in the years ahead.

The slide shows one potential scenario for what could happen to Core Government spending, and our government’s operating position, were there to be no change at all to recent trends in growth in government spending combined with the effects of population ageing and technological change over the long-term.

Of course I do not expect this particular scenario to be realized. Its purpose is to highlight the challenges that we will face in the future; the importance of thinking about long-term fiscal objectives, and that decisions taken now can have a long-term impact - that small, measured steps, taken early, can have a large cumulative effect to ensure that this scenario is not what happens in the future.

There are also areas where we need to make progress to further improve the performance of the New Zealand public sector.

We continue to struggle to improve the “Whole-of-Government” approach – the co-ordination across two or more agencies whose responsibilities to deliver the right results requires collaboration, or pulling in the same direction.

We have also put a lot of effort into improving the governance arrangements of a number of government agencies that are not departments but are not State Owned Trading Enterprises either - what we call Crown entities in New Zealand.

These agencies deliver many important public services - from health services to schools - and account for more than 50% of the Government’s overall operating expenditure each year. These entities manage physical assets worth approximately NZ$38 billion – a significant matter in a country with a GDP of NZ$150 billion. Crown entities also manage a rapidly increasing portfolio of financial assets. The NZ Superannuation Fund, for example, which is managed by a Crown entity, is projected to grow to over NZ$100 billion by 2025.

It is important for the public that these agencies are doing the things the government expects, that they work effectively and make a real difference in the lives of New Zealanders. Ensuring that the public is getting the best value for money from these entities is one of the priority issues on the work agenda of the public service at the moment. We passed a Crown Entities Act in 2004, but we still have some way to go to be fully confident about their performance.

We also need to get better at improving the information we have on the effectiveness of government interventions and social services provision.

There is also a concern that in some areas we may have taken the apparatus of accountability too far, and that some reporting requirements are seen as little more than a compliance cost, instead of adding value.

Recent measures adopted by the current Government will assist in improving effectiveness and efficiency across the public sector.

The Government has, for example, identified three themes, or over-arching objectives, which help the public sector to prioritize their activities. These are: Economic transformation; Families, Young and Old; and National identity. Three agencies have been given the responsibility to coordinate the management of these themes across government.

The themes are also playing a significant part in how Ministers manage the annual budget process.

The Government also recently initiated a more in-depth review of the activities of particular agencies, including measuring those results against those agencies’ core priorities, and the resources they use. The Treasury, as you can imagine, is deeply involved in this work.

We have made some significant legislative changes intended to enhance performance, notably the introduction of an umbrella piece of legislation to establish the governance arrangements of Crown entities, a requirement that agencies report more information about results, and the introduction of the 40 year fiscal projections report I mentioned earlier.

The Government is asking more from central agencies in terms of assurance about the performance of the state sector. And the Treasury of course also constantly reviews its own strategies and activities. As Chief Executive, I want to know that the Treasury is best positioned to understand and anticipate critical issues that will affect our economy and society and to add value to what the Government is trying to achieve.

I have talked about the importance of performance objectives in the public sector along with lessons that have been learnt in New Zealand over the last 20 years or so.

I would like to reiterate that:

  • Setting performance objectives and working towards achieving better outcomes for the public takes time. You don’t get it perfectly right straight away, if ever!
  • Agencies need to learn as they go along, and be willing to learn from mistakes;
  • Your system needs to be able to cope with changes in political preferences, stakeholders' expectations, and in economic and social circumstances;
  • Setting performance objectives in the public sector is necessary, but not sufficient. It needs to be reinforced by other factors if you are going to perform better. These include:
  • Strong government and political support;
  • Senior management commitment;
  • Sound institutional and governance arrangements;
  • The right incentives; and
  • Good information and analysis including the ability to take a longer term view.

Thank you and I look forward to any questions that you may have.

[ENDS]

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