6.2  A high-performing public sector (continued)

6.1.2  Public sector performance

At 0.3% a year, public sector productivity growth is about a fifth of economy-wide labour productivity growth. While the nature of public sector services is often used to explain the difference, there are other major relevant factors. Many (but not all) public sector organisations:

• Have no culture of, or commitment to, productivity and continuous improvement.
• Have had little encouragement, incentive or requirement to develop it. It has not typically been a government or ministerial priority, nor one for the Public Service leadership.
• Appear to lack the leadership, capability and experience to implement significant productivity and improvement programmes.
• Struggle to use consultants efficiently and effectively.

A major, often identified but not remedied flaw in the state-sector reforms of the 1980s is the high level of delegation and authority given to chief executives, without matching performance obligations or consequences for poor performance. Several initiatives have added little or no value - Managing for Outcomes, for example, was largely ineffective and there are no consistent measures or key performance indicators of improvement and productivity. The dominant approach is adding more process, which almost always adds complexity, cost, delay and frustration - but not value!

What is the basis for these views? A few of many are:

• The State Sector Standards Board’s (2002) reports identified a range of major issues in the Public Service and wider State Sector, none of which have been effectively addressed – e.g., quality of leadership, inadequate training, output that is not outcome-focussed, weak whole-of-government focus.
• The 2006 review of the Ministry of Health was a comprehensive indictment of the way it was led and operated – in silos, fragmented, process-oriented, risk averse, no strategic plan, etc (Gaudin and Wong 2006).
• The Formative Evaluation Team on Managing for Outcomes commented that: there was weak organisational capability to implement; outcome and performance measures were virtually non-existent; there was little evidence of risk management; and departments asserted linkages with others but there was little evidence of these. And the SSC commented that “collaboration occurs despite the system, not because of it” (Blackmore, Stevenson et al 2003).
• The Performance Improvement Framework (PIF) review of the Department of Conservation found that a lack of clear strategic leadership from the Executive Leadership Team was the key risk.
• The PIF review of the Ministry of Foreign Affairs and Trade concluded that talented staff perform well despite the system; change-management experience and management capacity is limited; there is little understanding of, or focus on, cost efficiency or value for money, and therefore an inability to rate the efficiency of most core business areas; and there is a need for better alignment of the organisation to its mission and purpose(State Services Commission, The Treasury et al 2010).
• McDonald (2007) describes various issues affecting performance and productivity.
• In late 2009, the Secretary of the Treasury, John Whitehead, challenged the Public Sector to move out of its comfort zone, increase productivity and do things more efficiently. In August, 2010, he stressed the need for improvement: the Public Sector still doesn’t tell a clear story on where money is spent and the value gained; there is a need for new thinking converted into action; the lag between identifying a problems and taking action is unacceptably slow; and if the Public Sector doesn’t change it will end up in a position where it cannot fulfil its duties[16].
• Ruth Herbert’s VUW MPP thesis (2008 Holmes prize) on the effectiveness of family violence policy stated that multi-agency collaboration was needed for 75% of actions, but was applied only in a third of instances.
• The Crown Ownership Monitoring Unit’s Report (2010) on commercial (priority) activity in the State Sector is only a snapshot, that should therefore be used with care. But the State Owned Enterprises they examined are required to operate as successful businesses and control almost $20 billion in value. Over the period 2006 – 2010: revenue increased 4.7% per year, earnings declined and net profit after tax fell 48% (and the average dividend yield was 2% compared with the NZX average of 4.5%).

Importantly, the public sector in general has not been particularly successful in developing the systems, processes and culture which enable successful improvement and productivity initiatives. This must now change and quickly since:

• Success will mean major benefits for the community and the economy, including an early lift in National Savings and a much greater Public Sector capability and capacity to deliver services in the years ahead.
• Without higher performance the outlook is grim. It is not now a “nice to have” option – it is vital.
• The Minister of Finance’s guidance to State Sector Chief Executives over the last 18 months has started, but no more, to establish a platform for improvement – and there is too much focus on process rather than outcomes.

Based on its global work, McKinsey suggests a potential for a 15% productivity improvement in government services over the next 10 years across various countries – by using new methods and learning from better practice in other countries and the private sector. There are also encouraging examples of what can be achieved in New Zealand (Arnum, Dohrmann et al 2009).

In mid-2010, in order to better understand the future role of government “in a more constrained fiscal and economic environment”, the Treasury took stock of projects which had the objective of improving state sector performance.

The project list is encouraging. It includes:

• Better Alignment of Expenditure Priorities
• Review of fiscal management
• Faster fiscal consolidation
• Investment Statement (better managing the Crown’s balance sheet and risks)
• Capital Asset Management
• Performance Improvement Framework
• Better Administrative and Support Services
• Review of Expenditure on Policy Advice
• CE’s Group on Government Business Reform and Cross Agency Initiatives
• Central Agencies Integrated Corporate Services Project
• Role, size, and shape of government.

The biggest challenge will be to get the necessary leadership and orientation within the public sector for effective action. The very real risk is a slow and protracted process, bogged down in detail, weakened by compromise and with little to show for itself after several years of effort. Whitehead's comments are relevant:

“A more focused, efficient and productive public service is a key element in the government's plan for growing the economy. . . . This isn't just about lifting our game, it's about challenging it. We cannot deal with a new environment – a completely new and challenging economic environment and the demands of 21^st century consumers – with old tools, approaches and mindsets. . . . It's about creating real value in the public sector and focusing on the right things – the things that make a difference for people – and finding new and better ways of delivering services.”

It is likely that the most effective approach in the short term (and short-term results are important) will be along the lines of setting a high-level target for each organization – say a minimum of 2% per year improvement for five years, with a brief, clearly defined measurement basis and significant penalties for failure. Services will need to be maintained unless they can be shown to be a waste of resources or are replaced by a better option.

The incentives for achievement (or penalties, for failing to achieve) need to reflect the seriousness of the situation and importance of success. They should be in the form of salary reductions for staff on $100,000 and higher – starting at 5% and ranging up to 30% for chief executives, which is analogous to the “at risk” component of the remuneration of a private sector chief/senior executive.

Government and national saving

Government sector saving is an important component of national saving, particularly as government has more direct policy control over it and the ability to determine outcomes over a short time period.

With significant productivity gains, the government has the option of either increasing government services or increasing government saving and thereby national saving.

Given the merit of a quick and significant increase in national saving to mitigate New Zealand's vulnerability, it would be logical to maximise government saving in the short term (as the area with the greatest opportunity for quick results) with a growing contribution from private saving complementing it in the medium term.

6.1.3 The Crown's balance sheet

Government saving is held in the Crown balance sheet. This includes all of the social, commercial and financial assets owned by the Crown, along with the liabilities owed by the Crown. It is a large portfolio with over $220 billion of total assets and $95 billion of net worth (assets minus liabilities). Furthermore, over the past 15 years, the social, commercial and financial portfolios have all grown strongly on the back of operating surpluses, commercial retained earnings and financial investment returns.

The 2010 Investment Statement of the Government of New Zealand, published recently, gives a good overview of the state of the Crown's balance sheet. It draws several conclusions that the SWG endorses. In particular, the large size of the portfolio means that effective management matters. Current management could be improved in several areas and the Crown's capital investment could be better aligned with the Government's objectives and priorities. This will improve the quality of government savings and, hence, national savings (New Zealand Government 2010).

The SWG also endorses the Government's investment intentions, summarised in the five themes of:

• Rebuilding resilience
• Reducing risk exposures
• Sharpening incentives to use existing capital well
• Introducing private sector capital and disciplines where appropriate
• Prioritising capital to its highest value use.

The role of government asset sales in the saving debate

Many people believe that the Government should divest itself of those assets it holds that would be run more efficiently by the private sector. There is a rationale for doing this from an economy-wide perspective with potential dynamic effects having a significant influence over time on both profitability of the assets and on productivity.

From a national debt angle, regardless of whether the assets are sold to New Zealanders or offshore investors, the sale proceeds would give the government the opportunity to pay off some of its debt. This would be an important signal to markets even if New Zealand's total liabilities are not reduced in the short term.

It may also be true – as many have argued – that domestic sales via share floats would help develop capital markets by giving savers a greater quantity and wider range of assets to invest in.