2.3 Putting the theory into practice

The Treasury (1987:37-39) set out a transaction-cost and incentive-based theory of the limitations of state ownership. It motivated the benefits of private ownership by drawing attention to the agency problems associated with information acquisition and performance management under state ownership given the complex objectives of state entities and the absence of market monitoring and competition.

Under New Zealand's new model of public management, the distinction between public and private has been conceived of primarily in terms of ownership, and in defining commercial and non-commercial activity. Activities were deemed to be in the public sector if they were government-owned and if they could not viably be provided on a commercial basis; if not, they were in the private sector.[3]

To clarify the interests of the state, the Public Finance Act 1989 established the distinction between the government's purchase interests (quantity, quality and price, or cost, of the services produced) and ownership interests (the human, intellectual and other assets and liabilities available to the department for the production of current and future services) within departments (Scott, 2001:17).

New Zealand's public-sector reforms were designed, wherever possible, to eliminate multiple accountability relationships, based on the idea that agents should never be accountable to more than one principal. Dual accountability was thought to place agents in the invidious position of having to balance the often conflicting demands and expectations of their respective principals, and exacerbate the problems faced by principals with regard to contract specification, monitoring and enforcement. Though in practice there were rarely neat ways to resolve these agency issues, New Zealand's public-sector reforms did attempt to clarify and order agency relationships, and provide a thorough analysis of the allocation of monitoring and decision rights for public-sector managers and organisations (Scott, 2001:34). This meant that in designing public-sector organisations there was a preference for separation of responsibilities, particularly a separation of policy and operations, and a separation of funder, purchaser and provider.

Reflecting the focus on agency problems in the academic literature of the time, the public management regime was designed to increase accountability by facilitating the monitoring of performance information for each public-sector organisation. The creation of a large number of public-sector organisations each with relatively homogeneous internal functions was designed to simplify the collection and interpretation of information on performance. It was expected that central agencies (Department of Prime Minister and Cabinet, State Services Commission, and the Treasury) would use performance information to improve resource allocation and hold chief executives accountable for organisational performance.