HomeMy WebLinkAboutCOM 0500.001 1996-1998
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JOHN RAY ; - - Hilo Phone: (808) 961-8265
Councilman r; ;r Fax: (808) 969-3291
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r ~ J )
' J _ . ~J J YNai e6 Phone: (808) 885-5875
u~~rE.oF::H'.Sr~ Fax: (808) 885-7184
COUNTY COUNCIL CU"' " ' "I
County of Hawaii
Hawaii Counfy Building
25 Aupuni Street
Hilo, Hawaii 96720
September 29, 1997
MEMO TO: Chairman James Y. Arakaki, Chair
Hawaii County Council
FROM: John Ray, Chair ~
Committee on Human Services and Economic Development
RE: Comm. No. 500 and the Council's 1998 State Legislative Program
Please find attached a letter I wrote to HSAC President Rene Mansho regarding Civil Service
reform. I have asked our HSAC representatives to consider this for inclusion in the HSAC
legislative packet. I feel this issue is of major importance, not only for the efficient operation of
our institutions of government, but also for the economic viability of the state as a whole.
I hope that we can use this letter as a starting point for a dialogue which might lead us to
including Civil Service reform as one of our top legislative priorities. Thank you for your
consideration of this concern.
RAY/kle
xa So a ~
m~ x~. i_ i=
Ld 2ot PresertFed co~~~~.
OCT 1 1991
Drl. I`a6e___.__.....m~-
y,
40;a<V OF H,~~
)OI tN RAY ~A~Vl~;; Milo Phone: (BOS) 961-8265
Councilman Fa x: (808)969$291
,pf.b Waimea Phone: (808) 885-5875
ire oF~N~iI Fax: (808) 885-7184
COUNTY COUNCIL
Counfy of Flawaii
Hawaii Caunly Building
25 A upu ni 51 rr•r7
f liln, Hawaii 96710
September 2G, 1997
The Honorable Rcnc Mansho
530 S. King Slrcel
Honolulu, Hawaii 96813
Dear Ms. Mansho,
In light oClhc privaticalion issue which is plaguing the counties, it is apparent that the Civil Service laws
aced a major overhaul. During the Stale of Hawaii legislative workshop which was held this past
weekend, the suggestion to revamp the civil service laws was also made.
1 believe the time has come for sonic major chvlges; Alerefore, 1 would appreciate it very nmch if you
would place Ute topic of Civil Service reform on your HSAC agenda and consider it as part of your
legislative package. To expand on this concept, l would like to see: new labor laws based on employment
contracts which would result in higher performance uld productivity by employees; restructuring of the
salary system; removal oCcontpulsory union membership; and the establishment of five year perfonuancc-
based contracts for division heads.
This concept was introduced by Jim McLay, fonncr New Zealand Deputy Prime Minister altd forntcr
Mcmbcr of the Parliament from 1975-1987. He is now Principal of JK McLay Limited in Aucklvld and
Chairman of Macquarie New Zealand Lintilcd. He acts as consultant and adviser to a number of national
and multiatalional companies. He is an expert on Pacific Basin affairs, with extensive background,
cspcricncc and contacts in politics and business in the region. Under the public sector mmtagcnlcnl
rcfonns. New Zealand has earned international conuuaidation 1'or its consistent business environment.
[f you have any questions, please feel Gee to call me at 961-8265. I would be willing to help establish a
committee to pursue this concept further. For your information, we arc also arranging for Mr. McLay to
do a presentation in Hilo to enlighten our local residents.
Thank you for your time and consideration.
Sincerely,
. ~ '
John Ray 1 `
Human Services &
Economic Development Committee Chairman
cc: AI Smith
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Changing an Economy by Changing its Public Sector
Hon Jim McLay
Principal and Director, J.K. McLay Limited (Auckland, New Zealand)
Chairman, Macquarie New Zealand Limited (Wellington, New Zealand)
Paper for
State of Hawaii Department of Business, Economic Development & Tourism
Hawaii Economic Revitalisation Task Force Work Group
6 September 1997
J.K. McLay Limited
[.evel Two, 90 Symonds Street, Auckland 1, New Zealand.
P.O. Box 8885, Symonds Street, Auckland 1, New Zealand.
Telephone (64-9) 377-0633 Facsimile (64-9) 309-6220
G)
Hon JK (Jim) McLay, QSO
Jim McLay is a former New Zealand Deputy Prime Minister, Leader of the
Opposition, Attorney General and Minister of Justice. He was a Member of
Parliament (MP) from 1975 to 1987. On retirement from politics he received the
Queens Service Order (QSO) for public services.
He is now Principal of JK McLay Limited in Auckland and Chairman of Macquarie
New Zealand Limited, part of the Macquarie Bank (Australia) group. He is a
director of several other companies including publicly-listed Evergreen Forests
Limited; and is an alternate director of General Foods Corporation (NZ) Limited and
other companies in the Tip Top group.
He holds an LLb degree from the University of Auckland; and EMP from
Pennsylvania State University.
Jim McLay acts as consultant and adviser to a number of national and multi-national
companies. He is an expert on Pacific Basin affairs, with extensive background,
experience and contacts in politics and business in the region. He has been involved
in numerous international business transactions and is an accredited World Bank
consultant.
In addition to his corporate advisory work, his recent public policy roles include -
• Chairman, Roading Advisory Group, to advise Government on road funding
reform.
• Facilitator, inquiry into statutory standards for earthquake-prone buildings.
• Chairman, Wholesale Electricity Market Development Study (WEMS) and the
subsequent Wholesale Electricity Mazket Development Group (WEMDG).
• Independent adviser to Electricity Industry Committee.
• Joint Contract Agent to negotiate Electricity Mazket Service Provider contracts.
• Chairman, 1991 review of defence funding and financial management.
• Member, Ministerial Working Party to review Accident Compensation scheme.
• Member, "Eminent Persons Group" to advise on accident compensation issues.
• New Zealand Commissioner to International Whaling Commission.
Changing an Economy by Changing its
Public Sector
Paper by Hon Jim McLay for
State of Hawaii Department of Business, Economic Development & Tourism
Hawaii Economic Revitalisation Task Force Work Group
6 September 1997
This Paper discusses the public sector management reforms that have been undertaken in
New Zealand over the p we ve years an as een prepared by J K McLay Limited. The
Paper summarises -
• the reasons behind the reforms;
• the major issues addressed by the reforms;
• the principal aspects of the reforms; and
• and principal outcomes of the reform process.
The Paper does not go into each of these reforms in any detail. If there is interest in any
particular aspect of the reforms, these can then be reported on more fully. Also, although it is
made clear in the text that some quotations have been used from other sources, for ease of
reading formal references to these have been kept to a minimum.
The Paper is divided in five parts -
• General background to the reforms, including an outline of the problems that had to be
addressed (Part I).
• An outline of the major issues that had to be addressed in the reform process and the
overall philosophical approach that was adopted (Part II).
• A brief discussion of the major legislative provisions on which the reforms were based
(Part III).
• Amore detailed discussion of the establishment and operation of State Owned Enterprises.
(Part 1V).
• Some conclusion and comments (Part V).
J.K McLay Limited: Changing an Economy by Changing iLs Public Sector
?Ura. ,
Part I
Background
Overall reform process
To understand the changes that have taken place in the New Zealand public sector, it is
necessary to place those changes into the overall framework of economic and structural
reform that has taken place in New Zealand since the early 1980s.
New Zealand is a stable democratic country with Western culture and values. It is part of the
world's fastest growing economic region, the Pacific Basin. Its people enjoy a high standard of
living; and has swell-educated workforce. While its traditional wealth has been built on the
export of primary produce, it also has natural resources that support industries in
horticulture, fishing, forestry, energy, manufacturing and tourism. It is gaining an increasing
reputation for the export of services.l
The country has earned international commendation for its consistent business
environment; and has a sophisticated, Western style infrastructure.
New Zealand's constitutional structure
Constitution
New Zealand is a monarchy, with asingle-chamber democratically-elected Parliament.
Although comparatively "young" in terms of European settlement, it has one of the world's
oldest continuously functioning democracies, with the world's eighth oldest Parliaments (first
elected in 1854).
New Zealand does not have a formal written constitution; there is no single written
document containing supreme or fundamental laws. This reflects New Zealand's inherited
Westminster or British tradition. Instead, the New Zealand Constitution is contained in a
combination of -
• formal legal documents (particularly the Constitution Act 1986 (which succeeded an earlier
Constitution Act passed by the United Kingdom parliament in 1852); the Letters Patent
Constituting the Office of the Governor-General; and some provisions of the Electoral Act
1993 and the New Zealand Bill of Rights Act 1990);
New Zealand covers 268,000 squaze kilometres (similar in azea to the LRC or Japan); but only has a population of 3.6
million. From north to South it stretches about the same distance as from Seattle to Los Angeles. Auckland, the
lazgest city has approximately one million people and Wellington, the capital, approximately four hundred
thousand. The population is eighty percent European and thirteen percent Maori; the balance includes Pacific
Islanders, etc.
j,K. blcLay Limited: Changing an Economy by Changing iLs Public Sector Page 3
• decisions of the courts (which make up what is known as the common law); and
• recognised practices (sometimes described as "constitutional conventions").
Although New Zealand is fully independent, it has voluntarily accepted some limits on its
autonomy. It has, for example, signed treaties committing it to a range of agreements on such
issues as air travel, abolition of the death penalty, the terms of international trade and various
environmental standards.
Development of New Zealand's canstittition
The beginning of constitutional government in New Zealand is commonly said to be the
signing of the Treaty of Waitangi in 1840. In that year New Zealand became a British colony
and the Parliament in Westminster acquired the power to make laws that applied in New
Zealand.
Over the next century, New Zealand gradually developed into an independent sovereign
nation. This progression culminated in 1947 when New Zealand adopted the Statute of
Westminster 1931 (UK) and the New Zealand Parliament became the country's supreme
legislature.
Interestingly, the Australian Constitution provides for New Zealand to become an Australian
State, but New Zealand has never accepted this "offer". Nevertheless, the two countries have
close ties; for instance the Australia-New Zealand Closer Economic Relations Agreement
(CER) is an important recent development.
New Zealand Constitution Act 1986
The Constitution Act 1986 is the principal formal constitutional statement in New Zealand. It
recognises Queen Elizabeth as New Zealand's head of state with aGovernor-General as her
appointed Vice-Regal representative. The Governor-General is, effectively, the Head of State.
The provisions in the Act relating to the the Executive (the Government) emphasise its
Parliamentary character. Unlike some countries, only Members of Parliament can be
appointed as Cabinet Ministers.
Parliament -the Legislature -comprises the Sovereign and the House of Representatives.
Until 1951 New Zealand also had an Upper House, the Legislative Council. Each Parliament
has a term of three years, unless dissolved earlier.
The Governor-General has formal powers to summon, prorogue (discontinue) and dissolve
Parliament; but, by convention, only acts on these matters on the advice of the Prime
J.K. McLay Limited: Changing an Economy by Changing ics Public Sector +'83'-' ~
Minister. -
After each general election, Parliament must meet within six weeks of the date fixed for the
return of the Writs from the Chief Electoral Officer. These Writs name those who have been
elected.
Legislntt~re
The Constitution Act provides that Parliament has full power to make laws. A Bill passed by
the House becomes law when signed (assented) by the Sovereign or the Governor-General.
Basic constitutional principles about Parliamentary control of public finance are also re-
affirmed in the 1986 Act. The Crown may not levy taxes, raise loans or spend public money
without Parliamentary authority (ie, by Act of Parliament).
Since the 1996 election, Members of Parliament have been elected under with a new Mixed-
Member-Proportional (MMP) electoral systemz introduced as a result of two referenda held
in 1992 and 1993.
Judiciary
The provisions in the Constitution Act regarding the Judiciary are also based on long-
established, constitutional principles. To ensure their independence, Court of Appeal and
High Court Judges are protected against removal from office and reduction of salary.
Constitutional change
The laws and conventions that make up New Zealand's Constitution can change. For
instance -
• in 1983, the Letters Patrnt Constituting the Office of the Governor-General were rewritten
to reflect changes in the role of the Governor-Genera;
• the passage of the Official Information Act 1982 and the New Zealand Bill of Rights Act
1990 were both significant innovations; and
• in 1992 and 1993, the country voted, in two referenda, to change the way in which
Members of Parliament are elected. The new MMP system has had a substantial effect on
the way New Zealand governments are formed and operate.
Electoral Act 1993.
~ ;'.i4 :vtcLay Limited: Changing an Economy by Changig its Public Sector Page ~
New Zealand economic reforms in the 1980s and 1990s
Since the early 1980s, the New Zealand economy has undergone major and radical reform;
with the objectives of reducing inflation, increasing international competitiveness and
liberalising the economy.
The reforms reflected fundamental changes as to the appropriate role of Government -
• in many cases, ownership moved from public provision to private provision3;
• equity issues are now addressed by "user pays" rather than averaging4; and
• public and consumer safeguards are provided by competition rather than regulation.
General features of reform process
The major reforms have included -
• General deregulation of the economy, including, particularly removal of a wide range of
regulations in non-trade sectors, such as transport and energy.
• Removal of all price, wage and income controls.
• A radically overhauled tax system, with substantially reduced personal and corporate
raters and introduction of a Goods and Services Tax (GST)6 similar to Europe's VAT.
There is no capital gains tax. Dividend imputation prevents double tax on company
profits. Double taxation treaties operate with most countries. Virtually all tax deductible
expenditures were also eliminated.
• Floating the New Zealand dollar and removal of all foreign exchange controls.
• Financial management reform in all government departments, including the introduction
of accrual accounting.
• Removal of most subsidies to agriculture and industry.
For example, the former Post Office was corporatised into three State-Owned Enterprises providing
telecommunications (Telecom), battkittg (Postbank) and postage services. The first two have since been privatised.
With corporatisation, most chazges for government trading activities moved to a user pays basis. Many of these
charges had previously been averaged across all consumers of the particular services or activities of the
Government department in question.
The top personal and corporate rate is thirty three percent.
12.5 percent on virtually all goods and services.
J.K VicCay Limited: Changrng an Economy by Changing its Public Sector Cvge 6 ,
• Reduced tariffs.
• Removal of controls on foreign investment, except for certain sensitive areas, such as
coastal lands.
• New labour laws based on employment contracts; with remuneration now being much
more performance and productivity based; achieving very positive, competitive outcomes.
Employers and employees in both the private and public sectors have "the freedom to
choose with whom, and within what structures, they associate... contracts (are] for the
parties themselves to determine".$ They now have greater bargaining freedom, and
equal status is accorded individual and collective employment contracts. All requirements
for compulsory union membership have been removed.
• Complete independence of the central bank -the Reserve Bank of New Zealand -making
it the world's most independent central bank"9; with the bank having autonomy to
maintain price stability.
• Governance of schools was transferred to parent-elected boards, with funding was based on
a per capita formula.
• The bias toward state-owned housing for people qualifying for assistance was removed by
creating a uniform amount of assistance based on need, which could be spent for either
private or public housing.
• Welfare assistance for needy people was redesigned several times over the decade from
1984.
• Health care reform has been the most difficult area. There have been constant changes in
policy since 1984. The core of the system is a decentralized network of regional health
authorities whose task is to provide funding to government-owned and private providers
of medical services. There is anarms-length relationship between the funders of health
services and the providers, aimed at encouraging efficiency through competition and
disclosure of performance information.
The most important outcomes of these reforms has been a liberalised economy with -
• Substantially reduced personal and company taxation.
• Increased international competitiveness.
Employment Contracts Act 1991.
OECD Rcport 1993: p. 56
The Economist, 7 Nov 1992.
J.IG hicLay Limited: Changing an Economy by Changing us Public Sector Page ~
• A consistent business environment.
• Substantial GDP growth (as high as six percent per annum in 1990. The New Zealand
economy is now 18.5 percent larger, in real terms, than it evas in 1991.
• Reduced inflation (see below).
• By the Reserve Bank Act, the bank's Governor has statutory independence. Under a
contract with the Government, he must manage monetary policy, etc, to maintain the
underlying rate of inflation in the range of zero to two percenti~. As a result, New
Zealand's inflation is now lower than that of most of its trading partners, a significant
advantage for the country's exporters.
• New labour laws based on employment contracts, with dramatically increased
productivity.
• Contrary to the trend in most countries, foreign debt is being retired. Lower debt is critical
to the country's security against trade fluctuations and international shocks. Net public
debt is projected to reduce from 52 percent of GDP in 1992 to a much more prudent level in
1999 of 17.7 percent, roughly equal to the position New Zealand enjoyed in the late 1970s.
All foreign public debt will be retired by 1997.
• In January 1996, Standard and Poors upgraded New Zealand's credit rating to AA+ (higher
than that of Australia and Canada). Later in the same month, Moodys (who had already
placed New Zealand on a Positive Credit Watch) also upgraded its rating.
• By November 1995, the unemployment rate had dropped to 5. 91 percent (significantly
lower than Australia and third lowest in the OECD, with only the USA and Japan at lesser
levels); and is projected to drop further to 5.5 percent in 1996/97. Job growth in the New
Zealand economy has been three times faster than the OECD average.
• The Balance of Payments on Current Account improved strongly through to 1994 on the
back of growth in export volumes. Over the past year, the deficit has widen again as the
economy has expanded. Imports of capital goods, in particular, rose as investment grew by
nearly twenty percent. The Current Account deficit is currently at about 2.6 percent of
GDP, which is believed to be manageable.
• Previous declines in the New Zealand dollar have now stabilised; and its value has
appreciated slowly against most currencies in the last three or four years.
Underlying inflation measures price increases without the inclusion of government chazges or mortgage rates.
J.K. ~lciay Limited: C4anSu'!; yin Economy by Chang~.ng ,ts Public Sector Piggy y r
• The Government's budget shows a genuine fiscal surplus which enabled it to announce a
programme of tax reductions, debt reduction while also increasing spending on health,
education, welfare and family assistance.
• Government spending as a percentage of GDP has been reduced; with further reductions
projected.
• In 1994, Parliament passed the Fiscal Responsibility Act, a unique partner to the earlier
Reserve Bank and Public Finance Acts. This requires the Government to manage fiscal
policy prudently, to reduce debt and spend wisely. Lest those sound like pious principles
incapable of statutory enforcement, the Act imposes strong requirements for disclosure of
economic information, twice a year and once more before any general election. There will
no longer be any need for a ceremonial (and often disturbing) "opening of the books" after
an election!
• New Zealand has also introducedll national accounts drawn up on a GAAP principles,
the first and only country so to do. Statements of government liabilities and assets are
required to be published regularly. The most recent accounts show that, after a decade of
reform, the New Zealand Government has achieved a positive net worth. This is a very
important milestone. Previously, we simply did not know what assets and -more
importantly -what liabilities were held in the taxpayer's name, especially in government
corporations. Now, we do know; and have dealt with the long-standing shortfall.
Impact of changes
The impact of these sweeping changes has been profound. They have transformed the New
Zealand economy, its society and its way of life. In many respects, the reforms have given
New Zealanders a new confidence about their ability to meet the challenges of the future.
Authoritative commentators have spoken of a "transformation" of New Zealand society.
The reforms have touched almost every sector of the economy. There have been few
sanctuaries. Everyone has been affected. The productivity and competitiveness of new
Zealand's industries and services, in the public service in particular, have improved
remarkably.
International attention
The reforms have attracted international attention. A constant stream of visitors from
Europe, the Americas and Asia have visited New Zealand to study the changes and to
speculate how their countries might do likewisel2.
Public Finance Act 1989.
Five delegations visited from Japan in the second half of 1995, including one from the Diet.
j.K: Vichy Limited: Changing an Economy by Changing its Public Sector Page 9
They have come to see what the OECD has described as the most comprehensive reform
package of any country outside the Eastern Bloc. New Zealand has moved from being one of
the most regulated and controlled developed economies to one of the freest. The Heritage
Foundation13 has reported that only Hong Kong, Singapore and Bahrain have greater
economic freedom than New Zealand; placing it ahead of Switzerland, the Netherlands, the
US, the UK and Japan. The 1995 World Competitiveness Report rated New Zealand as the
eighth most globally competitive economy, sixth in the OECD (up from eighteenth in 1991).
The Economist14 has described New Zealand as having "probably the best monetary and
fiscal policy framework anywhere in the world".
Of the overall reforms, the WaII Street Journal has said -
this tiny faraway democracy began its break from Limp socialism. It was the
most ambitious assault of any Western nation on the system of entrenched
privileges that made an elite rick and resulted in reduced opportunities for
everyone else
Washington, DC.
7 October 1995.
J.K ~1cLay Limited: Cnang:nb an Economy by Chang~.ng ;ts Public hector ;;a~_ 10
' Part II '
Public sector management reform
Introduction
Reform of public sector management has been described as "a worldwide phenomenon,
particularly as governments grapple with rapid social, economic and technological change,
including the effects of globalisation".
Basic structure of the New Zealand public service
The reformed structure and institutional framework of the New Zealand public service has
several relevant features -
• As in most Westminster systems; New Zealand has a politically neutral public service,
accountable to the political executive and open on a competitive basis to suitably qualified
persons who are recruited and promoted on the basis of merit.
• The organisation, structure and functions of the public service are governed by legislation
(State Sector Act 1988 and Public Finance Act 1989).
• The central departments are those of the Prime Minister and Cabinet (excluding the Prime
Ministers private office), the Treasury, and the State Services Commission (SSC). In
addition, the New Zealand Defence Force, Police and parliamentary agencies are funded
directly from parliamentary appropriations, as are a number of Crown entities, including
various boards and authorities.
• The Treasury advises the Minister of Finance and the Cabinet on fiscal policy, financial
management, macro-economics, and regulatory policies that have a major influence on
economic performance. It also also advises on major social, trade and environmental
issues.
• The SSC is headed by a Commissioner and Deputy Commissioner, appointed by the
Governor General on the recommendation of the Prime Minister. The SSC is responsible
to the Minister of State Services for several functions, including policy advice on the
design and management of government organisations, personnel management, industrial
relations and training services. The SSC also provides policy advice on the development,
remuneration and conditions of employment of senior public servants, and on issues of
management and performance within the public service. This has involved the "review
of the efficiency, effectiveness, and economy of each department, including the discharge
by the Chief Executive of his or her functionsls "
~.K titcf~y Limited: Changing an Economy Sy Changing its Public =ec`or Page 11
The SSC also recommends to Ministers the appointment of departmental Chief Executives
who sign performance agreements with their Ministers that specify the targets they and
their departments are expected to meet.
• The major public service union is the Public Service Association (PSA). Since 1987 the
PSA has joined most of its private sector counterparts in one national "umbrella"
organisation, the New Zealand Council of Trade Unions (CTU).
Problems that led to the public sector management reforms
In common with most governmental models, New Zealand's pre-1984 public service
structure exhibited a number of problems that required resolution. For at least two decades
Government Departments had been grappling with the problem of greater management
accountability for the effective use of resources. Reforms were clearly required in -
• information procedures;
• corporate planning of departmental programs; and
• more explicit definition of the departmental mission.
Specific problems included -
• The respective responsibilities of Cabinet Ministers and their senior public servants
(particularly departmental heads) was often confused, with unclear delineation of
responsibilities and lines of communication.
• The system encouraged structures that -
- suppressed information;
- -encouraged the "concealment" of cross-subsidies;
- created conflicts of interest, with many departments having a number of
responsibilities, including policy development, advice and implementation, regulation
and/or the provision and/or delivery of service;
- weakened performance incentives because of an overall lack of focus.
State Sector Act 1988.
J.K Mclay Limited: Changuib ~ Economy by Ghanguig itr Pubiic Sector
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• Accounting systems -
- did not measure the use of resources;
- created incentives for poor use of resources;
- ignored and/or failed to proved adequate information on and management of the
Government's assets and liabilities.
• Control systems -
- destroyed incentives to perform;
- over-centralised decision-making
• Overall, there were few sanctions for poor performance.
This has been described as a "system for control, not for performance".
At the political level, there was increasing frustration at the weaknesses of the public service
in delivering policy outcomes and its cumbersome nature. In particular, the system of
incentives was perceived as unsatisfactory.
Departmental trading functions
For more than 140 years, New Zealand governments played a more active role in developing
and regulating the country than in many other Western economies.
The Government provided a wide range of goods and services and was instrumental in
establishing many leading industries through substantial ownership in the finance, energy,
transport, agriculture and telecommunications sectorslb. In the early 1980s, the resources
controlled by the public sector amounted to around twenty five percent of Gross Domestic
Product.
In addition, many Government Departments had trading functions. In most cases, these
"Departmental Businesses" had operated for many years, and presented numerous problems -
• resources were squandered;
By way of example: In the finance sector the Government owned the largest commercial and savings banks, the
lazgest motor vehicle insurer, and the largest farm mortgage and residential lending institutions and was also the
indirect owner of one of the largest merchant banks.
J.j!. ~ict..iy Limited: G'~angtng an Economy by Changing its Public Sector
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• there were confused col...lercial, social and political object,,~s;
• there were conflicts of interest over roles;
• there was no real accountability by politicians or their managers;
• no useful information was available on the performance of these "departmental
businesses";
• there was significant "crowding out" of other providers through subsidies and regulation;
and
• management incentives were to grow big, not to innovate.
Philosophy behind public sector management reforms
Any Government has an interest in the performance of its departments and agencies -
• as owner (it should expect a proper return on its investment); and
• as a purchaser of government goods and services (it should expect quality goods and
services at the best price).
Outcomes, outputs and inputs
Much of the reform process focussed on a clearer understanding of inputs as opposed to
departmental outcomes and outputs -
• Inputs represented the resources used by Government Departments to produce outputs,
being, in essence, the cash cost of items such as personnel, materials, supplies and services
and other operating expenses, together with capital expenditure, transfers and loans.
• Outcomes represent the benefits sought by the Government (both strategic and
operational benefits).
• Outputs represent the goods and services produced by Government Departments. These
are the goods and services (specified in terms of quantity, quality, cost and time) that
Ministers acquire from departments in order to achieve the desired outcomes. Outputs are
used to allocate resources and as a basis to measure performance. Producing an agreed
level and quality of outputs, within agreed timeframes and costs, is the responsibility of
the Chief Executive, and is reported annually
).K McLay Limited: Changing an Economy by Changing its Public Sector
Pave 14 e
In the past, Governments funded "inputs" to their departments. Now, as a result of these
reforms they purchase "outputs" from those departments; and measure these "outputs" in
terms of "outcomes". In other words -
Outputs Outcomes
Purchase Measure
Accounting concepts
Several important accounting concepts and features underlie the reforms -
• Government departments are required to operate in accordance with generally accepted
accounting principles.
• The Government's balance sheet is structured in a similar manner to those of the private
sector.
• Departments are charged for the use of capital.
• Cost accounting is now used in Government administration.
Essential elements of public sector reform
There were five essential elements of New Zealand's public sector reforms -
• Structural reorganisation of government institutions.
• Establishment of results-based management and financial frameworks.
• Establishment of State Owned Enterprises (SOEs).
• Privatisation of some of these SOEs.
• Reduced government spending and consequential reductions in departmental budgets.
More specifically, these have resulted in -
• Separation of ownership and purchase responsibilities.
• Decentralisation of decision making: For instance, Departmental CEOs were given greater
managerial discretion over inputs, including staffing, as a means of improving the
efficiency, adaptability and responsiveness of their departments. Senior managers were
J.K. Mcl~y Limited: Changing an Economy by Chang~.ng its ['ubfic jector Page 13
given greater control ov, resources (eg, discretion to adjus,..taffing levels).
• Commercialisation: For instance, In addition to the process of corporatising departmental
trading activities, government departments adopted operating guidelines based on
financial criteria with the objective of emulating a commercial management environment
in the provision of services, with cost-effectiveness and competition as the driving force.
All government agencies were required to "realise the full potential for profitable trading".
Specifically -
- where departmental functions were removed or reduced, funding was reduced
accordingly;
- departments were given strong incentives to raise revenues to fund activities;
- departments were required to recover costs from users;
- incentives were put in place to improve departmental asset management; and
- overall funding reductions were used where necessary to improve departmental
efficiency.
• Separation, into different agencies, of responsibility for provision of policy advice,
regulatory and funding activities on the one hand and, operational activity on the other.
This enabled the objectives of management to be specified a great deal more clearly than in
the past and also enable the performance of agencies to be more readily assessed.
Separation of policy advice from operational functions also means that those responsible
for operations "have as their prime objective running their operations as efficiently as
possible given the policy parameters established by the Government."17 This also avoids
what is sometimes described as "producer capture"; a tendency for policy advice to serve
specific interests (ie, being "captured") rather than the broader public interest.
For instance, in the environmental sector, the Forest Service and Department of Lands and
Survey both had a mixture of policy, regulatory, service delivery and commercial
functions. Three new departments now undertake these functions: the Ministries of the
Environment (policy advice) and Forestry (policy, regulatory and service delivery) and the
Department of Survey and Land Information (service delivery); and two new SOEs,
Forestry Corporation and Land Corporation, undertake the commercial operations.
• Separation between funding and provision of service: For instance, previously, Regional
Health Boards (which operated hospitals, etc) received what amounted to "block grants" to
fund their activities. These Boards have been corporatised as Crown Health Enterprises
Governmrnt Management: The Treasury's 1957 formal briefing to the incoming Government, p. 76.
J.K. McLay f invited: Changing an Economy by Changing i~ ['ublic Sector .'`ale 16 ~
(CHEs). Three separatt; Regional Health Authorities (RHAs) now purchase health services
from these CHEs and, where appropriate, from the private sector.
• Competition between service providers.
• Reallocation of functions between various government agencies to achieve better focus,
synergy and provision of information.
Overview
Overall, these reforms have been described as "innovative efforts to solve long-standing
dilemmas in public administration".
The impact has been substantial. In mid-1984 there were 53 departments and agencies with
approximately 86,000 staff in mid-1984 (an a further 40,000 in the Post Office!). By 31 December
1993, these figures had reduced to 35 departments and 34,000 full-time equivalent staff. By
1988 23,000 public servants had transferred to SOEs. Others were transferred to Crown entities.
However, many core public service jobs were eliminated altogether.
~ J,=G Mclay Limited: Changing an Economy by C1~ang•~g its Public Sector Pa e 1'
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Part III
Legislative basis of reforms
Introduction
New Zealand is one of only three countries (the other two are the United Kingdom and Israel)
that do not have a formal written constitution. Nonetheless, the country does have a
"Constitution" comprising a number of pieces of specific legislation (including the
Constitution Act and the Electoral Act) some of which include entrenched provisions18,
together with a number of less formal, but nonetheless clearly recognised, constitutional
conventions.
Virtually every government department and agency operated within the framework of its
own particular legislation, often also administering a large number of other statutes.
Inevitably, therefore, once the philosophical and structural framework had been agreed, most
of the reforms had to proceed on the basis of substantive legislation.
Legislative cornerstones
From a public sector management perspective, there have been five legislative cornerstones
to the reforms -
• Reserve Bank Act 1989
• Public Finance Act 1989
• State Sector Act 1988
• State Ctwned Enterprises Act 1986
• Fiscal Responsibility Act 1994
Reserve Bank Act 1989
The Reserve Bank Act was passed by in 1989 with the support of the then parliamentary
opposition (now government). The Act confers genuine independence on the bank and its
Governor. The Act specifies the bank's responsibilities, with a primary emphasis on price
stability.
The bank's Governor is appointed for five years under a contract with the Government, he
For instance, the Electoral Act entrenches the term and size of Parliament and the method of electing MPs.
J.K. Vic[.ay Limited: G~tan~ng an Economy by Cnang~.rg public Sxtor ;a~^ 19
R
must manage monetary p~,,cy, etc, to maintain the underlyir,o rate of inflation in the range of
zero to two percent. The present Governor was appointed by the previous government and
reappointed by its successor.
In the result, the Reserve Bank of New Zealand has been described as the "world's most
independent central bank."
Pu61ic Finance Act 1989
Transparency of public accounts is vital to a healthy economy. The Public Finance Act 1989
was therefore an essential element of the reforms, introducing a radically different system of
financial management and accountability. To achieve this the Act -
• defines departmental performance, essentially in terms of outputs;
• removed many administrative controls on government departments;
• makes departmental Chief Executives responsible for departmental financial management;
• established departmental and Crown reporting requirements; and
• redefines the financial appropriation process.
The Act introduced new methods of -
• clarifying the notion of performance;
• providing departmental performance agreements;
• departmental financial appropriation;
• measuring the effectiveness of departmental operations;
• departmental reporting; and
• Parliamentary scrutiny.
Clarifying the nation of performance
Previously, financial management and control focussed on the cash cost of inputs, such as
personnel, materials, supplies and services and other operating expenses; together with capital
expenditure, transfers and loans. Parliamentary appropriations funded these specific inputs;
supported by a complex system of centralised control.
~ J.J:. Vtc[.ay Limited: Cnanguig an Economy by Chinguug BLS ['ublic S~'ctor Page 19
This input-based system was replaced by one based on outcomes and outputs -
• Outcomes are "impacts on, or the consequences for, the community of the activities of
the Government"19. Ministers individually and the Cabinet collectively are responsible
for defining outcomes for which they are accountable to Parliament and the electorate.
• As noted in Part III, outputs are the goods and services (specified in terms of quantity,
quality, cost and time) that Ministers acquire from departments in order to achieve the
desired outcomes. Outputs are used to allocate resources and as a basis to measure
performance. Producing an agreed level and quality of outputs, within agreed timeframes
and costs, is the responsibility of the Chief Executive, and is reported annually.
These outputs and outcomes are the basis for the accountability of Chief Executives to their
Ministers.
It is important to distinguish between the government as a whole and individual
departments. Under the Act, the Crown is a distinct entity that regularly discloses its own
consolidated financial performance to Parliament and the electorate. This complements
departmental-level reporting. Thus, a Social Welfare Chief Executive is accountable for the
production of his/her department's outputs but not for the nature and cost of social welfare
benefits themselves; these are beyond his/her control, being part of the Crown's management
of the public purse.
Each year the Minister and his departmental Chief Executive negotiate the "outputs" that the
department will deliver based on the "outcomes" sought by the Government. These become
the basis of the department's Corporate Plan and of the financial Estimates which are included
in the Government's Budget.
In essence, Ministers now "buy" outputs, including policy advice, from a number of sources,
one of which may be their own department. Thus, a Minister's "interest" in his/her
department take two forms -
• a "purchase" interest; the Minister purchases agreed outputs and the Chief Executive of a
department supplies them; and
• an "ownership" interest; the Minister seeks the best possible return on the department's
resources while at the same time expecting that those resources are effectively safeguarded
and enhanced.
Thus, a significant change is that public servants are now accountable for the use of resources.
Public Finance Act.
J.K. McLay Limited: Changing an Economy by Changing its Public Sector Pate ?0
These two different ministerial interests (owner and purchaser) have required better
management of assets and improved financial information, including full specification of the
costs of departmental services. This need for better financial information led to adoption of
Generally Accepted Accounting Practice (GAAP), with accrual accounting replacing cash-based
systems.
Outputs are offered on a competitive or "contestable" basis by departments. This contestability
has two dimensions -
• ability to compare outputs among departments; and
• awareness of cost comparisons with producers of similar outputs in the private sector.
Ministers can purchase goods and services from different departments and from the private
sector in any manner that best matches the outcomes they seek. However, some outputs,
particularly policy advice, tend to be provided from within a particular department.
Policy advice requires responsiveness to Ministers in an environment of uncertainty, and it is
therefore more difficult to specify a performance measure than with other outputs. Thus,
particular "quality" standards for such advice have been developed by the SSC.
Performance agreements
The key accountability documents both for Chief Executives and departments are the
performance agreement between the Chief Executive and the Minister, the Estimates and the
Annual Report. Performance agreements address three broad issues -
• the key results areas related to the government's strategic concerns and requiring the
personal attention of the Chief Executive, with expected results expressed in verifiable
terms;
• detailed information on the outputs to be purchased; and
• information on departmental compliance with statutory responsibilities and with
government policies, and on the stewardship of public assets.
Appropriations
Previously, in common with most countries, New Zealand used aline-item approach to
appropriations. Single departmental votes were subdivided into programmes and, within
programmes, into categories of inputs.
• J.lc. ~tcL.ay Limited: Chang.ng.~n Economy 5y Changing iLS I'ubl~c ~:or I'age_1
This has now been changed to an appropriation s}~stem based on outputs Three types of
appropriation were established for -
• acquisition of classes of outputs from the department;
• injection of capital into the department; and
• payments on behalf of the Crown (involving acquisition of outputs from other public
sector bodies and from the private sector, as well as transfer payments).
Votes represent the annual appropriations for which each Minister is responsible. Each
department administers votes which may include all three types of appropriations.
The Estimates contain annual appropriations for each department and agency, including
statements of projected performance and projected financial statements. After-the-fact
performance information and financial statements are presented in departmental Annual
Reports.
The basis for appropriations was also changed. After a transitional period, all departments
(and the Crown itself) now produce full accrual-based financial statements, including a
balance sheet. The Government now accounts for the real cost of its use of resources. It also
provides managers with a more comprehensive picture of financial operations and with
better information for decision-making and for reporting results.
Amounts appropriated to departments are intended to cover the full costs of producing
outputs, including asset depreciation. Chief Executives thus receive funding to maintain the
asset base needed to provide outputs.
Usually, departments cannot transfer funds between appropriations without parliamentary
approval. However, the Act provides some limited flexibility, allowing Cabinet to authorise
the transfer of amounts from one class of output (each class constitutes a single appropriation)
to another, so long as the appropriation for any class is not increased by more than five
percent and the vote total is unchanged. A transfer can be made only once in any fiscal year.
Departmental operations
Treasury's central control of financial management was devolved to departments, although
departments continue to provide Treasury with information needed for its functions,
including budget preparation and financial reporting. Chief Executives are responsible for
financial management, financial performance, accounting systems, and asset and cash
management.
J.K Mciay Limited: Changing an Economy by Changing its Public Sector P3ae „ •
Extensive Treasury Instructions used to cover operational procedures, and that type of control
has been considerably lessened. Instructions now focus on financial management, accounting
and investment policies. Treasury has also issued concise guidelines in these areas.
Reporting
Outcome statements appear in the Estimates and departmental Annual Reports. Outcomes
are typically associated with individual Ministers, who are accountable for them.
The Act requires annual publication of audited departmental financial statements together
with consolidated financial statements of the New Zealand Government. Departmental
statements must also report on performance in non-financial terms, through statements of
objectives and service performance, enabling comparison with the outputs provided with the
objectives set at the beginning of the year. Departmental financial statements, contained in
Annual Reports, include statements of -
• financial position*;
• operations";
• cash flows*;
• objectives;
• service performance;
• commitments';
• contingent liabilities';
• unappropriated expenditure';
• accounting policies';
• others as necessary.
In addition, the usual Notes to the financial statements are required as are comparative
figures for previous years of all of the above.
The Financial Statements of the Government of New Zealand comprise all of the above
marked 'together with statements of -
• responsibility;
• j.K.,~1c[.~y Limited: Changtng an Economy by Chvt$'.n$ i~ Eubltc sector Page
• borrowing;
• emergency expenditure or expenses; and
• trust moneys.
The Audit Office now prepares an audit opinion including a view on the non-financial
information (eg, service performance) in departmental financial statements. These expanded
audit responsibilities have significantly broadened the scope and requirements of audit work.
Parliamentary scrutiny
The Act requires that the Estimates (Appropriation Bill) be introduced to Parliament early in
the fiscal year, thus allowing athree-part scrutiny process -
• review of the govemment's spending intentions in the Estimates;
• examination of departments' actual performance from Annual Reports; and
• examination of the performance of state-owned enterprises20 (this scrutiny has been
extended to Crown entities and Crown Research Institutes (see Part N).
Included in the incentives introduced by the reforms are -
• the capital charge applied against each department's capital base (to improve the
management of fixed assets); and
• the related cash management scheme, involving interest payments to departments (to
improve the management of working capital).
The government's aggregate cash position is centrally managed, but departments have their
own bank accounts and are responsible for managing working capital. They are subject to
interest rate rewards and penalties based on how effectively they perform, providing
incentives to improve cash flow planning and forecasting and must keep their cash
requirements in line with planned levels. Sanctions can be imposed for failing to achieve.
Capital charges are paid by departments to the Treasury, the amount being calculated by
applying a capital charge rate to a department's capital base (ie, the net amount of taxpayers'
funds recorded in the department's audited financial statements). Cost of capital recovery
reveals the full cost of producing outputs and encourages maximisation of departments'
Such reviews can involve two to three months of select committee inquiry,
J.K. VicLay Limited: Changing an Economy by Changing tts Public Sector Page 2~3 •
employment of capital. The capital charge clearly discloses the full cost of goods and services
produced by departments and provides the information and incentives needed for efficient
management of the Crown's investment in departments. The Treasury has reported that the
capital charge has already led to some capital rationalisation.
Improved asset management is also encouraged by the ability of departments to retain the
proceeds of asset sales. Departments have also extended the practice of charging users, begun
in the mid-1980s, thus discouraging waste.
State Sector Act 1988
The State Sector Act 1988 extensively amended earlier legislation governing the public
service. Under the old system -
• the public service was uniform and unified, with aservice-wide classification (grading)
system;
• there was a career service, offering employees a forty year tenure;
• public servants moved between departments and worked under a standard set of
conditions and pay rates;
• wage-fixing was based on a centrally negotiated "annual general adjustment" with service-
wide pay rates and scales applied to about 200 occupational classifications.
• although ostensibly based on merit, appointments and promotions were constrained by
management conventions, supported by an appeal authority (the number of years on the
job was a significant determinant of "merit", and this was generally' upheld on appeal);
• it was difficult for outsiders to be appointed to the public service unless they could
demonstrate "clearly more merit" than insiders; and
• the SSC exercised strong central control over the public service, with power over
everything from office accommodation to efficiency and economy reviews and ultimate
authority in personnel matters.
Under the Act, Chief Executives replaced departmental "permanent heads", the former
tenured officials in charge of departments, who were appointed by a committee of senior
officials, under the auspices of the SSC. Chief Executives are appointed for a fixed term, under
contract with the SSC (terms are limited to five years although, in practice, most
appointed/reappointed for three years).
Chief Executive appointments are approved by Cabinet on an SSC recommendation. Cabinet
• j.K, htc[~y Limited: Changtng an Economy by Changing iLS Public Sector
Page S
can decline a recommendation; and can also direct the SSC to appoint a named person, but
notice of such direction must be published in the official Gazette. The SSC can establish
panels to advise on potential appointees. Ministers can inform the SSC of the government's
requirements for each Chief Executive position.
The Act also clarified the roles and responsibilities of Ministers and their departmental Chief
Executives.
Consistent with the principle of ministerial responsibility, Ministers remain accountable to
Parliament. However, the role of Chief Executives has changed very significantly to achieve
greater responsiveness from senior public servants than was possible under the former
tenured arrangements.
The reforms created a relationship between Ministers and departmental heads that is
markedly different from other Westminster systems. Chief Executives now -
• enter into annual performance agreements with their Ministers on behalf of their
departments;
• in respect of their own positions, are also on five year performance-based contracts;
• can have part of their salary based on performance;
• have power to hire and fire staff and set salaries;
• are accorded responsibility in law for the effective and efficient operation of departments
Features of these agreements with Chief Executives include -
• identification of Key Results Areas; including commitments to strategic objectives linked
to the Government's strategy;
• defined output requirements or purchase agreements; and
• defined management requirements or ownership agreements.
Other features of the Act include -
• The SSC can undertake reviews "of the efficiency, effectiveness and economy of each
department, including the discharge by the Chief Executive of his or her functions." These
occur separately from the annual reviews of the performance of each Chief Executive.
J.K. McLay Limited: Changing an Economy by Chingmg itr Pubpc Sector CS;c'6 •
• The findings of the annual performance reviews of Chiet cxecutives are reported to their
Minister. It has been claimed that the SSC gives "considerabie weight" to the evaluations
of Ministers in undertaking these annual performance assessments. With Cabinet
agreement, the SSC can remove a Chief Executive "for just cause or excuse".
• Public service industrial relations are now subject to the same legislation as in the private
sector. The Labour Relations Act 1987 made the public service subject to the Arbitration
Commission to resolve disputes in the negotiation of agreements, and the Labour Court,
to interpret existing agreements. Under the subsequent Employment Contracts Act 1991,
these bodies were replaced by the Employment Tribunal and the Employment Court which
previously had jurisdiction only in the private sector.
• Under the Act, the SSC is nominated as the "employer party" for the negotiation of
conditions of employment, including remuneration. In 1992, the SSC delegated this
collective bargaining role to Chief Executives. Before Chief Executives negotiate with the
public sector unions they have prior consultations with the SSC, to provide a common
"background to the wage round".
• With some exceptions, Chief Executives have "all the rights, duties, and powers of an
employer" with respect to departmental employees. They appoint "such employees [as
they] think necessary for the efficient [operation of their department]"; and, subject to
agreed conditions of employment, may also remove employees "at any time".
• Chief Executives are also designated as the "employer party" in the case of personal
grievances, or in the case of disputes involving the rights of employees, although, in the
latter, they can be required to consult with the SSC.
• The Chief Executive is required to be a "good employer", including adherence to the merit
principle in all appointments and development of equal opportunities programmes. This
requirement to be a good employer has led departments to establish internal procedures
for appeal against personnel decisions. Such" appeals" are in the first instance to the Chief
Executive, who can establish an independent review panel. All decisions are ultimately
subject to review by the Employment Court on the same grounds as in the private sector.
• Occupational classes have been rationalised. For example, the Ministry of Foreign Affairs
and Trade has reduced the number of its classifications from sixteen to two; in 1993 the
Ministry of Agriculture and Fisheries had only four2l.
• State sector employees no longer have guaranteed tenure. Job security (if it exists, and
given satisfactory performance) now depends on the level of the position involved. At
senior levels employment contracts tend to be job-specific. At other levels contracts are
more general, allowing for significant changes in duties without jeopardising job security.
Report of State Services Commission 1993: p. 14
J.+:. Mclay Limited: Changing an Economy by Changing itr Public Sector Page 27
This reformed structure also requires more of Ministers. They must know what they want,
and must be able to articulate these requirements so that they can negotiate effective
performance agreements with their Chief Executives.
Departmental Chief Executives and senior managers
To improve public service efficiency, adaptability and responsiveness, the reforms gave
greater managerial discretion over inputs, including staffing. Senior managers now have
greater control over resources (eg, discretion to adjust staffing levels). Authority has been
delegated to managers at "the lowest level of competency" although the extent of this has
varied between departments.
In 1986, the SSC removed many of its controls over the day-to-day management of
departments, including salary-fixing, job classification, hiring and firing and other aspects of
personnel management. These moves deleted about ninety five percent of the two thousand
detailed instructions in the Public Service Manual which sets out conditions of employment;
this manual was later abolished.
Now, the duties22 of a Chief Executive are to -
• carry out the functions and duties of the department;
• tendering advice;
• the general conduct of the department; and
• the efficient, effective and economical management of the department's activities.
The Act also requires Chief Executives to "operate a personnel policy that complies with the
principle of being a good employer". This covers matters such as -
• working conditions;
• equal employment opportunity
• appointment on merit; and
• related matters.
Chief Executives are accountable to Ministers for the full range of departmental policies,
As defined in the State Sector Act 1988.
J.K. YIc[ay Limited: Changing an Eronomy by Changing iLS Public Sector Page ,g
priorities and the use of resources. Unless otherwise provided in the Act, they exercise "a11
the rights, duties and powers of an employer." As noted above, although the Act names the
SSC as the "employer party" for the purposes of negotiations with public service unions, in
1992 the SSC delegated this responsibility to Chief Executives.
State Owned Enterprises Act 1986
All State Owned Enterprises (SOEs) are constituted and operate under the State Owned
Enterprises Act 1986 which is discussed more fully in Part IV.
Fiscal Responsibility Act 1994
While legislatures in other countries have tried to grapple (usually unsuccessfully) with the
problem of budget deficits, New Zealand has addressed the problem directly through the Fiscal
Responsibility Act 1994.
This Act provides a fiscal framework that gives an incentive to pursue policies in the
country's long-term interests, rather than short-term political objectives. The Act does not
impose statutory targets, but creates incentives for policy-makers to act responsibly. It has
three major features -
• The Government is required to keep proper financial accounts. Like private-sector
companies, the New Zealand government now publishes independently audited
accounts, with a Balance Sheet of assets and liabilities, and an accrual-based Statement of
Income and Expenditure.
• The Government must work to explicit fiscal targets. The Act requires the Government to
set targets for a balanced budget and monitors total debt and public sector net worth. This
places the emphasis on avoiding wasteful expenditures that increase the deficit without
adding anything of value. The Act requires that the Government must -
- maintain a budget surplus until debt is reduced to "prudent" levels (defined as a ratio
of net debt to GDP below thirty percent in the short term and twenty percent in the long
term); and
- thereafter, the budget must stay in approximate balance over the economic cycle.
Even though it is presently running a budget surplus, the Government has committed
itself not to cut taxes until debt is reduced from forty three percent of GDP in 1994 to below
thirty percent; and, having achieved those targets, has since announced middle income tax
cuts taking effect, progressively, in 1996 and 1997.
• The Act requires much fuller disclosure of information to allow closer scrutiny of budget
I.K. ~tclay Lunited: Changing ~ economy by Chang~.ng :ts Publrc ~c;or Page .9
policy by Parliament an. .he public. The Government mu~_.lustify any departure from its
fiscal targets and explain how it intends to get back to those targets.
In short, the Fiscal Responsibility Act addresses what has been long-regarded as a fundamental
weakness of many democracies: the tendency for politicians to cut taxes and spend money to
gain favour with electors, despite that fact that such policies can impose long-term economic
damage. The Act makes politicians fully accountable for their economic management
decisions.
Regulatory environment?
Reference has been made to deregulation as an important feature of the process of public
sector management reform.
One of the first questions asked by many potential investors into New Zealand (particularly in
sectors such as energy and telecommunications which are traditionally highly regulated in
other countries) is "what is the regulatory environment?" There is sometimes a temptation
for New Zealanders to respond "there isn't one"; but that is an oversimplification. However,
generally, New Zealand does not operate costly and bureaucratic regulatory structures such as
those found in the US or UK; preferring instead to rely on competition (where it occurs) to
protect consumer interests.
Over the past decade, New Zealanders have acquired a keen aversion to Government
regulation. This is reflected in the light-handed regulatory arrangements (based on disclosure
and transparency) that apply to the natural monopolies (eg, electricity and gas transmission
and distribution); and the fact that, at least for the present, most competitive sectors (eg,
telecommunications and electricity generation and retail supply) are not regulated except
under the general competition rules of the Commerce Act23.
In this "regulatory structure" a clear distinction has been made between monopoly and
competitive activities; with the former usually subject to light-handed regulation and the
latter "controlled" only by competitive market forces.
In this respect, New Zealand is almost unique. Those who prefer the comfortable collusions
of regulated business environments will not necessarily enjoy the approach that has been
adopted; but, so far, no need for regulation (or, in the case of the natural monopolies, greater
regulation) has been demonstrated.
The Commerce Act 1986 is New Zealand's law dealing with anti-competitive practices/behaviour, etc.
J.K :~Ic[ay Limited: Changing an Economy by Ch~S~g its Public 5~ctor I'agt x~ u
In short: An important aspect of the new environmen~ is its strong pro-competition
emphasis. There is, basically, just one law, the Commerce Act, with a powerful and
independent Commerce Commission charged with enforcement. New entry to sectors is free
and unfettered by legislation or regulatory control. Such rules as exist are targeted to prevent
abuse of market power. Companies that conspire to prevent or manage competition face the
Iaw.24
Interestingly, under CER, anti-dumping provisions no longer apply. Since full free trade in goods was achieved in
1990, in each country, only competition is used to monitor abuse of market position through pricing activity.
~ )'K- Mt[.ay Lirruted: Chang-ins in Economy by Changu''g iLS Public dzRor Page 31
Part IV
Establishment of State-Owned Enterprises
Background
As noted earlier in this Paper -
• Previously, in many cases, government departments delivered services often provided in
other countries by private enterprise. These trading activities were seen as financial non-
performers because of poor management systems and a lack of clear objectives. Despite
their notional responsibility for these activities, Cabinet Ministers were unable to exercise
effective financial control using conventional methods of ministerial responsibility.
Information systems were inadequate; and have been described as "designed to help the
government ration the [allocation] of annual resources, not measure the value of what
(wasj produced".
• As a part of the overall economic and social reforms, virtually all government trading
activities -everything from telecommunications, postal services and railways, through to
coal mines and the Government Printing Office -were corporatised and reconstituted as
State-Owned Enterprises (or SOEs).
The essence of this part of the reform programme was to reorganise the public service by
separating commercial from non-commercial activities and establishing SOEs to carry out all
commercially oriented activities.
Initially, the government remained as the sole owner of these SOEs; but commercial directors
were appointed. The companies were required to function, in all respects, as a commercial
enterprise; achieving commercial rates of return, paying dividends to the Government and
paying taxes. The intention was to make the SOEs free of political control, other than by
formal directions that might be given to them (and tabled in Parliament).
Basis of corporatisation process
Implementation of this corporatisation policy had a number of features -
• The businesses were transformed into companies run by boards appointed from private
sector. Directors were given full responsibility for the affairs of the company.
• SOEs are incorporated under normal commercial law.
• SOEs were set up with a capital structure relevant to their industrial sectors, and were
j.K. McLay Limited: Changing an Fconomy by Changing i[s Public Sector Page 322
required to pay taxes and earn a competitive rate of return on equity.
• In each case, their principle objective is to be a successful business.
• SOEs were to be free of political control, other than by formal written direction25.
• In most cases, establishment of the SOE was accompanied by deregulation of the relevant
sector or market26,
• Similarly, in most cases, establishment of the SOE was accompanied by an end to subsidies
in the relevant sector (other than by a direct and transparent payment to the SOE to
provide a particular service).
• All non commercial functions previously undertaken by the relevant govemment trading
entity were separated from the new SOE.
• In short: All competitive advantages and disadvantages were removed. The objective was
to achieve "competitive neutrality".
• Managers were made accountable for agreed performance and are free to make all
management decisions. Incentives for management to perform well included "arm's
length" accountability to the political executive and Parliament.
• Balance sheets were based on those of equivalent entities in the private sector.
• All SOEs operate pursuant to a Statement of Corporate Intent (see below) setting out clear
objectives and expectations of results.
• The activities of all SOEs (as well as those of Crown Research Units and Crown Health
Enterprises) are monitored by the Crown Company Monitoring Advisory Unit.
• Funding arrangements for non-commercial activities were made transparent, with formal
agreements between the government and the SOE specifying the goods and services to be
subsidised. In fact, very few such arrangements have ben made between the Government
and its SOEs.
These directions must be tabled in Parliament.
For instance, electricity generation was corporatised into ECNZ in 1987; and, in 1988, generation was deregulated.
p f. McLay Limited: Changuig an Economy by Qianging its Public Sector Page 33
Subsequent privatisations
Some of these SOEs have since been privatised; including
• Telecom27
• Bank of New Zealand
• Air New Zealand
• Government Print
• Government Stores Board
• Rural Bank
• Post Bank
• Petrocorp
• Government Tourist Office
• Some forest cutting rights
• Ports (some only)
• Tourist Hote! Corporation
• Housing mortgage portfolio
• NZ Rail
• Power companies (some only)
• Government Computing Services
• Radio NZ
• Shipping Corporation
In which Bell Atlantic and Ameritech are now the major shareholders.
J.K. McLay Limited: Chan Ong an Economy by Changuig tts ['ublic Sector C'a~e 3-1 t
Privatisations (under way or possible) include -
• CoalCorp
• Some prisons
• Some power distribution companies
• Forestry Corporation
• Ports (some only)
• Airports (some only)
Also -
• some departments or agencies (eg, Government Life Insurance and Government Printing)
were privatised without first being reconstituted as an SOE; and
• crown research activities were subsequently corporatised in a special category of Crown
Research Institutes.
State Owned Enterprises Act 1996
As noted in Part III, all State Owned Enterprises (SOEs) are constituted and operate under the
State Owned Enterprises Act 1996 (SOE Act).
The purpose of the SOE Act is clearly laid out in its preamble -
An Act to promote improved performance in respect of Government trading
activities and, to this end, to -
(a) specify principles governing the operation of State enterprises; and
(b) authorise the formation of companies to carry on certain Government
activities and control the ownership thereof; and
(c) establish requirements about the accountability of State enterprises, and the
responsibility of Ministers.
r K. McLay Limited: Qtanging an Economy by Changuig ics PubLc Sector Page 35
Part I of the Act sets out these principles by stating that -
The principal objective of every State Enterprise shall be to operate as a
successful business, and, to this end, to be -
(a) as profitable and efficient as comparable businesses that are not owned by
the Crown; and
(b) a good employer; and
(c) an organisation that exhibits a sense of social responsibility by having
regard to the interests of the community in which it operates and by
endeavoring to accommodate or encourage these when able to do so.
Also, under the SOE Act -
• specified Ministers are shareholders in each SOE;
• all SOEs have a Board of Directors which is responsible to the shareholding Ministers; and
• each SOE Board is required to file an audited Annual Report with the Minister; in addition
a half yearly report is required.
Statement of Corporate Intent
Each year the SOEs board must also deliver to the Ministers a draft Statement of Corporate
Intent (SCI). The SCI is for a three period and covers -
• objectives of the group;
• nature and scope of activities to be undertaken;
• ratio of consolidated shareholders' funds to total assets;
• accounting policies;
• performance targets;
• details of information to be provided to Ministers;
• acquisition procedures;
J K. McLay Limited: Changing an Economy by Ganging itr Public Sector 1'a~a 36~
• a statement of principles adopted in determining the annual dividend together with an
estimate of the amount and proportion of annual tax paid earnings (from both capital and
revenue sources) that is intended to be distributed to the Crown;
• the type of information to be provided to the shareholding Ministers by the SOE during
the course of those financial years;
• procedures to be followed before the SOE subscribes for, purchases or otherwise acquires
shares in any company or other organisation;
• any activities for which the board seeks compensation (effectively, a transparent subsidy)
from the Crown; and
• such other matters as are agreed by the shareholding Minister and the Board.
Benefits of corporatisation
The two largest corporatisations were in respect of telecommunications (Telecom, which was
privatised in 1990) and electricity generation (ECNZ, which, to promote competition, has since
been split into two SOEs both remaining in public ownership).
The distribution of gains from these corporatisations included -
• Telecom (1988 - 1990) -
- Dividends: $443 million
- Taxes: $441 million
- Prices fell two percent in real terms.
[Note: Telecom was privatised in 1990.]
• Electricity: In the period between its establishment as an SOE in 1987 and 1992, ECNZ
improved its performance significantly, including -
- reducing real unit costs (cents per kilowatt hour excluding finance costs) by fourteen
percent;
- reducing real average wholesale electricity prices, also by fourteen percent;
- increasing productivity, as measured by gigawatt hours per employee, by ninety percent;
i Mc[ay Limited: Cllanguig an Economy by Changing iLS Public Sector Page 37
- achieving a 218 percent lift in nominal profit after tax to NZ$ 449 million in 1991/92;
- increasing station availability across all forty power stations to above international
standards; and
- bringing in, on time and within budget, several large capital expenditures such as the
inter-island DC link.
Since 1992, the company's performance has been obscured by the separation of Trans
Power, a change in balance date, balance sheet adjustments and substantial restructuring.
While the improvement has continued, it has been at a lower rate -
- productivity, as measured in gigawatt hours per employee, improved by twenty six
percent;
- profit after tax increased by 3% to NZ$ 386 million in 1994-95; and
- real average wholesale electricity prices (including transmission) have been held
constant.
Other outcomes of the corporatisation process have included -
• Improved customer service in all SOEs.
• NZ Post28 productivity improved by 120 percent; a $38 million loss was improved to a 343
million profit.
• Rail freight rates down fifty percent; with a $77 million loss improving to a $41 million
profit.29
• In its first year as an SOE, PostBank cut staff by thirty percent, reduced its retail outlets by
forty percent and turned a projected loss of NZ $50 million into a NZ $31 million profit.
• In six months, the new Forestry Corporation achieved a NZ $59 million turnaround;
returning a cash surplus of NZ $24 million, compared to a cash deficit of NZ $35 million in
the six months before corporatisation. In its first twelve months, employee numbers were
reduced from 7,000 to 2,600, without loss of output.
• In its first four years as an SOE, New Zealand Post reduced its staff by thirty percent. Since
corporatisation it has paid NZ $190 million to the Government in the form of tax and
NZ Post now acts as a consultant to South Africa Post.
NZ Rail was privatised in 1993.
J.K McLay Limited: Chan~nng an Economy by Changing its Public y~ctor p .fie ~
dividend payments.
Overall, the corporatisation process must be described as a financial success. Studies by the
New Zealand Institute of Economic Research NZIER) have shown that, in seven of the larger
SOEs, revenue rose by fifteen percent between 1988 and 1992, and after-tax profits quadrupled
from NZ X262 million to NZ $1.023 billion.
Financial gains were accompanied by significant staff reductions: from 1987 to 1992, staff
numbers in the same seven SOEs declined by 53 percent.
J.' McLay Limited: Changtng an Economy by Changtng us Public Sector Page 39
Part V
Comment and conclusions
Conceptual issues
There are a number of concepts and features that underlie these public sector management
reforms -
• Government departments are now required to operate in accordance with generally
accepted accounting principles.
• The Government's balance sheet is structured in a manner similar to those of the private
sector.
• Departments are charged for the use of capital.
• Cost accounting in Government administration.
Key elemexts of effective public sector management reform
The New Zealand experience strongly suggests that, in developing a programme of effective
public sector management reform there is a need to develop and/or maintain -
• a clear strategic vision;
• clear and specific objectives and business plans; ,
• resources allocated to meet objectives;
• incentives to produce results;.
• freedom to manage;
• enabling management systems;
• high quality information for management and accountability;
• effective communication; and
• values congruent with organisational mission.
j.K McLay Limited: Changing an Economy by Changing its Public Sector Page i0
Differences from other approaches to public sector management
In several key respects, the reforms adopt a different approach to public sector management
than is found in other countries -
• All Government Departments pay indirect taxes (GST).
• Departmental Chief Executives are responsible for salary negotiations with their staff; and
(within fiscal guidelines) have much greater freedom to achieve satisfactory outcomes.
• The focus on "outputs" leads to more detail in appropriation process whereas most
countries are seeking less information.
• Generally accepted accounting principles are used throughout the public sector.
• Accrual appropriation and ex-post reporting is also used.
• Imposition of capital charges.
1991 review
In 1991, the Cabinet State Sector Committee initiated a comprehensive review of the reforms
under a Steering Group chaired by a former Chief Executive of IBM New Zealand. Several
questions were posed -
• What were the reforms intended to achieve?
• What has happened so faz as a result of the reform programme?
• What benefits aze being realised and what ongoing costs are being incurred?
• What more needs to be done to realize the objectives of the reforms and minimize their
costs?
The Steering Group reported with a positive view of the reforms -
In our view, the legislative framework for the Public Service reforms is sound.
It has already had a significant and beneficial impact on the effectiveness and
efficiency with which the core service operates most people we spoke to or
heard from (viewed) the framework of the reforms as sound (with] substantial
benefits (being] realized. We were particularly impressed with the very positive
reaction from senior managers. Their view, supported 6y Ministers and other
obsesvers, is that performance has improved in most key areas as a result of the
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reforms.
The review identified problems of a transitional nature; but also some matters requiring
"explicit attention" that were essential to the success of the reforms -
• translation of collective strategies into organisational plans;
• accurate specification of required performance standards and measures be included in
agreements with Chief Executives;
• objective measurement and reward for performance; and
• creation of conditions for management of sufficient quality to ensure delivery of the
reforms' objectives.
Some transitional problems also posed a risk to the reforms. The review found confusion
about the roles and responsibilities of central agencies in facilitating reform in a number of
areas, such as "lack of clarity of roles and process in output specification". They observed -
It is not possible for the system to work unless central responsibilities and tasks
are well specified, the structures and skills are in place, accountability
mechanisms are working and the appropriate management philosophy is
created.