7  Financial management

In any effective public management system the financial management systems utilised need to easily provide for resources to be aligned with the strategic direction sought, whilst also ensuring that appropriate accountability processes are in place.

The tension between the freedom to manage and accountability principles tends to come into stark relief at this point. Particularly since the tension between the two arises from the core question of “where should decision rights sit”? Other issues also arise, however, particularly once the control systems and rituals and routines of the New Zealand public management system are tested against an agreed position on “decision-rights’.

Specifically, in looking to support a managing for outcomes environment it is important to ask whether: the financial flexibility currently available to chief executives is appropriate; whether the budget process could be amended to provide for more strategic engagement on the part of Ministers; and if the budgetary system can provide for the reallocation of resources to support outcomes.

7.1  Decision rights

Appropriations systems can be shaped in a variety of different ways to support the level of financial flexibility Ministers and Parliament determine is appropriate. The question that has prompted most debate over the last eighteen months is whether, in looking towards a managing for outcomes environment, the financial management system should now provide for outcomes-based appropriations.

Appropriations can be made at three levels – inputs, outputs and outcomes[9]. Recent work within Treasury has concluded that whilst outcomes-based appropriations would provide a significant level of management freedom, it would be difficult to provide for the other principles that underpin the New Zealand public management system – particularly clear specification of objectives and accountability (Treasury, 2003). Most importantly, it was considered that outcome based approaches would render appropriations ineffective in their primary role of acting as a constraint.

Further, officials considered that outcomes-based appropriations would be unreliable both as a control or an accounting mechanism, and would not be relevant in a performance-based accountability system. A pure outcomes-based appropriations model was perceived as less likely to generate the information critical for outcomes-focused management, particularly the information required to support reallocation of resources within and between Votes and portfolios.

This conclusion is consistent with the proposal in chapter three that decision rights for chief executives should sit at an inputs level, with some flexibility between Ministers and chief executives over how outputs are determined.

7.2  Can an outputs-based focus support managing for outcomes?

Some issues with the current outputs system do exist however. In moving to a managing for outcomes environment it is important that these issues be addressed so that chief executives and Ministers are aware about what mix of interventions will be most effective and efficient.

7.2.1  Appropriate cost allocation systems

Robust cost allocation systems are integral to the identification of an appropriate cost for outputs. In turn, transparency about the cost implications of different interventions will be necessary management information for those determining what intervention mix is most appropriate in seeking to achieve different outcomes.

The ability of the cost allocation systems within each agency will need to be determined over time, as managers look to identify the costs associated with different interventions. The Managing for Outcomes process potentially provides an avenue for agencies to consider whether they have appropriate cost allocation systems, for they will be unable to properly cost shifts in interventions or capability without adequate information. The Treasury would appear to have a role to play here also, in part by asking agencies to provide robust costings, but possibly more importantly by providing examples of good practice in different areas.

7.2.2  Output class aggregation and appropriations

Outputs are funded through appropriations targeted at specific output classes, organised and aggregated on the basis of a Cabinet minute. Proponents for increased financial flexibility argue that these principles need to be revisited and broadened, and that the principles are now generally honoured in the breach, rather than in reality.

Over 2002 and 2003 the Treasury considered whether more flexibility in the design of outputs classes, and/or the links between output classes and appropriations could be provided. The Public Finance (State Sector Management) Amendment Bill reflects a recommendation that output classes be retained, but that more financial flexibility could be provided by allowing appropriations to incorporate one or more output class – depending upon appropriations structures agreed with Ministers. As a result, chief executives may be able to move resources between output classes covered by one appropriation, and face very few constraints in doing so. This proposed change should provide significant additional flexibility for chief executives seeking to manage for outcomes.