The Balance Between Public and Private

The Treasury has released a speech delivered by Peter Mersi, Deputy Secretary to the Treasury, on Tuesday 10 November 2009 at the IPS/IPANZ joint seminar series about Building The Public Sector For The 21st Century.


I'd like to start by talking about the economic and fiscal environment that we face, as this provides the backdrop for the substance of this presentation, namely how we think about the balance between private and public.

By way of introduction, you will be aware the Government’s finances are in deficit and forecast to remain so for the next decade, with Government debt levels expected to increase substantially over several years.

The implication of this fiscal situation – the elephant in the room that some people prefer to ignore – is that the Government's constrained resources will struggle to meet the public's needs and expectations for public services. As we consider how best to respond to this challenge, the question inevitably turns to the role that the private sector might play in helping to close this gap.

About a month ago, in a presentation earlier in this series of seminars, State Services Commissioner Iain Rennie set out 3 challenges for the public sector:

  1. managing through an extended period of fiscal restraint;
  2. managing community expectations around the delivery of public services; and
  3. improving its ability to recruit, retain and develop staff.

He also listed some broad priorities for action, including:

  1. improving efficiency and financial management;
  2. anticipating change in policy design, service delivery, and organisational effectiveness; and
  3. adapting to accommodate service delivery across boundaries, sectors, and agencies.

Iain highlighted the desirability of including academics, non-Government organisations and the private sector in the development of medium-term policy advice.

I intend to expand on those points today and must emphasise that when I talk about the private sector, I’m not only referring to traditional profit-motivated companies but the full range of organisations that operate in our economy and society, including not-for-profit organisations.

The Government has roles as funder, owner, service provider and regulator for many publicly provided goods and services, and the traditional view of public-private partnerships have often focused on private sector’s involvement in the first of these – the funding of public projects – for example through the construction of toll-roads and the like.

I'm more interested today in looking at the potential for the private sector's involvement in driving innovation in service delivery, and in support of the Government's service delivery, with the aim of increasing effectiveness and efficiency.

Before the world downturn hit in the last quarter of 2008, New Zealand was already in recession because of factors such as high interest rates, slowing net migration, and drought conditions. Indeed, NZ has now experienced the longest recession since 1970's.

At the time of the Budget, Treasury forecast annual average real GDP to fall 1.0% in 2009 (March year), with a further fall of 1.7% in 2010 before gradually recovering to 4.0% in 2013 (March years). This was expected to generate fiscal deficits of around 5% of GDP over each of the next 3 years, and we projected it would take 10 years before we returned a fiscal surplus.

There are now signs of economic stabilisation both internationally and locally, and we can expect stronger economic growth for the next 1 - 2 years compared to what we expected at the time of the Budget.

While we saw growth of 0.1% in the June 2009 quarter and so are technically out of recession, the recovery looks fragile and there are still risks to the outlook. Furthermore, although economic growth is expected to be a little stronger, we are not expecting to see any significant change in the recovery of Crown revenue or in the projected fiscal position over the several years.

Treasury has also been looking at the much longer term, that is over the next few decades.

We recently released projections for the Government's finances stretching out over the next 40 years. The report, called Challenges and Choices, contains some uncomfortable reading, as it shows that we can’t keep doing what we have always done without significantly increasing taxes or debt.

Specifically the report looks at the trends in Government expenditure and revenue over the past 20 years, and extrapolates forward based on existing policy settings and adjusting for demographic changes. This chart shows how the real (inflation-adjusted) spending power of 3 different sets of recipients changes over the period. The yellow line shows the position for beneficiaries. Because most working age benefits are inflation adjusted, the real spending power for these recipients remains unchanged. A beneficiary in the year 2050 would be able to buy the same bundle of goods and services as a similar beneficiary in 2013.

The purple line shows that, under current policy settings, those getting superannuation will be able to by 66% more goods and services by 2050 than they can today. This primarily reflects the fact that NZ Super is indexed to wages.

Finally, the dotted green line shows that the basket of publicly-funded goods and services provided across the whole population would increase 34% over the next 40 years if historic trends continue.

However, to meet these escalating costs would mean running deficits for each of the next 40 years, with net debt reaching 223% of GDP by 2050! This is clearly unsustainable.

So what would happen if we sought to keep net debt in 2050 to 20% of GDP consistent with the sustainable debt scenario set out in the most recent Fiscal Strategy Report?

Assuming NZ Superannuation and benefit policies remain unchanged, the basket of publiclyfunded services initially declines by around 10% by 2023, before returning to its 2013 level by 2050.

Now these are projections not forecasts. In reality, politicians won't follow a path to ruin, so we know that over the 40 years that these projections cover, politicians will change policy settings to alter Government’s income and expenditure.

How New Zealand collectively chooses to alter these settings – i.e. the choices made about how to respond to the current situation – will have a long-lasting impact on the next two or three generations.

The issue is not just how we choose to alter the nation's priorities but also when.

We are rapidly running out of time to change our approaches to taxation, and spending on education, health, justice, and welfare, and ensuring that older people have sufficient income. The sooner these choices are debated, understood and then acted upon, the better off we will be.

Delays in taking action may delay the pain so that my generation don't feel it, but it will make the pain much worse when it inevitably arrives and it will put that greater pain on to our children and grandchildren.

The public sector makes up approximately 30% of all activity in the New Zealand economy. The business of the Government is by far the largest "business" in New Zealand, which means it is also the largest single opportunity when it comes to lifting productivity, controlling costs and improving performance.

Again drawing from the Challenges and Choices report we published last month, this chart shows the same notional "basket of services". The green line shows that if the public sector could increase its productivity growth to 0.8% per year from the current baseline estimate of 0.3% (the yellow line), this would result in around 20% more public services per person after 40 years.

To me, those projections make a compelling case for the need to lift public sector productivity. We are in a world where taxpayers can no longer afford to pay for programmes and activities that don’t work or are too expensive for what they achieve

We therefore need to know the price, quantity and standards of the public services and activities we undertake. Departments and entities that know the financial structure of their activities will be able to make better decisions about changing them.

And there are plenty of opportunities for change.

There are opportunities for the private sector to partner with Government in meeting public needs and lifting productivity, most obviously for infrastructure, IT and in health care. These ideas have been in the public arena for a long time and their merits and drawbacks well debated.

But there are also less obvious areas where the balance between public and private may change over the next several years, especially in service delivery.

New Zealand has long been at the forefront of the provision of social and public services, with the introduction of invalids and unemployment benefits, state housing for low-income families, heavily subsidised or free healthcare and education, and no-fault accident = and injury cover.

At the end of the last century New Zealand's public service was also at the forefront of worldleading reform, with deregulation of protected Government monopoly services and industries, and the introduction of new accountability mechanisms.

Now, though, we seem to shy away from further reform or from publicly questioning whether the Government is always the most appropriate sector to deliver public services.

Musician, composer, and film director Frank Zappa provides a useful thought when he said: "A mind is like a parachute. It doesn't work if it is not open."

Can a public product or service that is well-specified be delivered by the private sector? I believe it can, and there are examples to support that belief. My original driving licence was issued by the Ministry of Transport, after I had passed the usual written and oral tests that were administered and scored by government employees. Some of those Government staff were intimidating men wearing uniforms. Nowadays, the provision of driver licensing services is outsourced to the private sector, with smiling staff from the Automobile Association making the whole process a lot nicer than it was previously.

More recently, registry services associated with the Fisheries Quota Management System have moved from the Ministry of Fisheries to an industry body called the Seafood Industry Council. The fishing industry, which pays the costs of the registry service, has seen its costs reduce from $8.6 million to $4.1 million, which nicely illustrates that making delivery of public services more effective and efficient can not only benefit the Government but also benefit those who receive public services.

These two examples illustrate that the provision of public services can not only be moved to the private sector, but there is also the opportunity to do them cheaper and better when the Government steps aside. There are many similar examples of successful non Government and NGO provision of services that were once considered solely the domain of the public sector.

While we need to stimulate debate about new areas in which the private sector may be better placed to deliver public goods or services, we also need to consider whether the private sector can deliver services to the Government sector which are currently provided "in-house", such as those corporate functions that are vital for organisations everywhere regardless of their public or private status.

Engaging with the private sector is not just about gaining access to their best practice. We shouldn't simply assume ideas can be transferred directly into the public sector. We must recognise that public services often have specific requirements and different drivers, such as transparency and audit requirements to ensure that taxpayers' funds are used appropriately.

Partnership is also about joint problem solving by generating new ideas and ways of doing things that neither sector is likely to come up with on their own.

Many private sector organisations currently providing services to the public sector, or on behalf of the public sector, have developed a very good understanding of Governmen'’s requirements and those of the clients being served.

We should be partnering with these organisations to help identify opportunities for improving performance on both sides.

There are some excellent examples in the health sector where this already happens, with mental health trusts, health promotion agencies and primary care organisations – those at the coal-face of dealing with people’s day to day healthcare issues – contributing directly to the development of policies and plans by the District Health Boards that also provide a significant proportion of these organisations’ funding in return for the provision of services to the people in the Boards' areas.

While Ministers have indicated they are open to accepting some risks as the public sector tries to innovate, this isn’t a chance to get into purely speculative activity and try just anything on a whim. Exploring new ideas and looking at options needs to be rooted in reality and I must stress the need for a sound business case before significant money is invested.

There are lessons for the public sector to learn from very good private sector models such as those in the venture capital and pharmaceutical industries, where entry into projects - and corresponding exit points - are systematically identified. The public sector has no shortage of on-ramps but it is not as good at identifying off-ramps as many private sector organisations.

The venture capital and pharmaceutical industries have a systematic approach to managing the significant risks that they take.

Politicians' appetite for risk taking by the public service will reflect the public’s risk appetite but the public sector can provide some degree of reassurance if it has a similarly systematic approach in place to manage the risks. To develop really valuable partnerships between the public and private sectors there are a few principles that need to be applied:

  • Any approach to achieving a successful public-private partnership must start with a robust business case that is based on good information.
  • A public-private partnership must ensure that best practice from both sectors are incorporated and shared.
  • Partnership must recognise that there are differences between public and private sectors and that each has its own quite legitimate issues that must be accounted for.
  • Transparency is essential, so that taxpayers can be assured that where private sector profits are made from the delivery of public services, these are seen as being legitimate.

An example of the importance of transparency and the importance of managing risks is shown in the recent experiences of contracting for medical laboratory testing in the Auckland region. Medical laboratory testing is a very sensitive and crucial service and was being provided in the Auckland region by a private sector contractor to the region's District Health Boards. The decision to change to another provider was driven by the desire to improve the effectiveness and efficiency of the service - but was not without risks. When some of those risks materialised, arrangements between the District Health Boards and the service provider ensured that as issues developed the Boards were kept appraised and had mechanisms in place to address the issues. There was not only an on-ramp into the new arrangement for laboratory testing, there were signposts along the way and a variety of exit ramps too. That particular journey isn't over yet, but some of the lessons it offers are already becoming apparent.

Every dollar invested in trying something new, or released by halting activities, belongs to taxpayers and needs not only to be used wisely, but to be seen to be used wisely. Private sector organisations that provide services to Government, or provide services to the public on behalf of the Government, should always keep that at the forefront of their thinking if they truly want to be a partner.

All around the world, the mega-trend nowadays is towards providing increasingly personalised service while also reducing the cost of service delivery. As online retailers learn their customers' shopping habits they interact on a more personalised level. For example, customers of Amazon or i-Tunes receive recommendations for books or music that, as often as not, they actually consider buying. And you can custom make an increasing number of goods and services by choosing from a vast range of options that directly alter the manufacturing or assembly process to produce what you actually want, rather than what the manufacturer hopes will sell.

This trend towards mass customisation is global and it is altering people's expectations about what they get and how they get it. People increasingly want service delivery that is personalised, easy to use and under their own control. And when they use a service, they want results fast. A common perception of services delivered by Governments is that they are impersonal, hard to use and slow. These perceptions are fuelled by what people experience when they receive or access public services. And the perceptions reflect the reality for many people that their interaction with the public service is not particularly innovative or enticing.

While the public sector is well practised at focusing on the underlying needs of citizens, our current level of focus on service delivery falls short of what can be achieved. By some counts there are more than 600 websites in the .govt.nz web domain and there are
numerous government 0800 numbers.

This duplication imposes a cost on the Government – i.e. taxpayers – and there's also frustration and a cost imposed on people who use these service delivery mechanisms – because they often have to provide the same information to multiple agencies or multiple times to the same agency. People's expectations about what they will receive from the public sector and the ways that they receive it will nearly always outstrip what the state can provide. Almost regardless of the issue or problem, there are people who believe the state has a role to play in fixing some aspect of their lives or the lives of others. But of course even in economic boom times the public sector can't provide everything, let alone now that public finances are severely constrained.

On the flip side of that coin, public sector agencies often have equally unrealistic expectations about how people receive public services, as illustrated by the number of government websites and free-phone numbers I mentioned earlier. Telecom New Zealand seems capable of having one website and only three or four phone numbers to service upwards of two million customers. Regardless of whether you love them or hate them, that shows a commitment to focussing on customer service.

You could argue that the public sector is different, that someone setting up a family court hearing, for example, needs different service than someone paying their rates or registering their car. To a degree that is true, but Telecom’s customers also vary - ranging from people who just want a chat through to online gamers seeking more broadband capacity and through to companies with offices all around the world who want to set up worldwide mobile roaming, data connections and customised billing.

In a presentation earlier in this seminar series, Richard Norman talked about a need for the public sector to move towards being more flexible. He said that the 21st century public sector needs to be more interconnected and responsive to innovation. The public sector's current level of connection and citizen focus is short of optimum. The public sector management system still doesn’t provide the right performance information to drive that focus and we don’t measure and assess in ways that allow us to easily test the value for money in public service provision.

This information is not readily to hand in some agencies because their focus has been on developing new and additional ways of engaging with people, often with a cost plus approach, rather than driving a deeper understanding of their operations. We need to take a big-picture view of what can be achieved with different approaches, and the underlying reasons for contact between citizens and public services.

It's appropriate to think about encouraging citizens to engage in the most cost-effective way. This may not always be the cheapest way and sometimes it won’t even be the most convenient way because there are instances where personal contact is required instead of an online or telephone service. The trick here is to design service delivery around customers’ needs and preferences and maximize the use of convenient, lower cost channels. Many public programmes, and the processes used to deliver them, have developed as extensions of whatever was already being done. This means there are opportunities to step back, look at the processes, and redesign them, thereby taking costs out of the system while at the same time providing a better service.

The Ministry of Economic Development's radio spectrum management system provides a good example of just how much can be achieved with Business Process Redesign. Back in 2000, the radio spectrum management system was not customer-focussed, used labour intensive and costly processes and relied on bureaucratic systems. After it identified these issues, MED examined its approach and then re-engineered its processes. MED implemented a public online system for licensing, certification and radio spectrum trading, an internal online system for case management and business tracking, and it invested in skills and equipment. It conducted customer surveys and got the private sector more involved in providing non-statutory activities such as technical engineering and certification, radio operator examinations and radio frequency interference investigations. The outcome of this was improved information flows between radio spectrum users and the system administrators, improved compliance rates and a $1.8 million saving in operating costs.

Of course, there are limits to the improvements we can achieve by incremental improvements. If we aspire to bigger goals that are beyond those limits, then we need to think even more creatively. To meet expectations for speed, ease of use, mass customisation and so on – expectations that have been lifted by people's experiences with global top performers like Amazon or Dell – the public sector is also going to need to make far greater use of technology.

During his presentation at the start of this seminar series, the Minister of Finance saw merit in exploring the idea of providing a single IT window into tax and income support provided by Inland Revenue and the Ministry for Social Development. We need to recognise that the idea of single-window delivery raises issues and concerns around privacy and security of personal data and information. At this stage, it's just an idea but it's certainly worth exploring further.

The current Government has been quite clear in stating that it expects innovation such as this. Innovation is just as important for us in the public sector as it is for the wider economy - because without innovation, we won’t deliver better, smarter public services within our current resourcing levels. It is true that innovation carries a risk of failure but there is an even greater risk now, thanks to our fiscal situation, from standing still. Innovation and the attendant risks are part and parcel of developing better policy and better services and we should take comfort in the Government's statements of support.

I'm keen to foster debate about the shape of our public services and I'm equally keen to push the debate to cover a wider range than the obvious areas for PPPs such as how civil engineering firms or infrastructure investors can best be involved with Government projects.

To address New Zealanders' public service needs over the next decade, we need to be open to ideas and expertise that go beyond the traditional boundaries of public private partnerships. We need to be open to challenge and change.

Thank you