State sector and public finance reform

Changes seek to strengthen the hand of Ministers while reducing detailed reporting requirements.

Over the past 30 years the history of public sector management in New Zealand has involved a series of reviews, initiatives and changes to the underlying legislation.

Parliament is currently considering the latest set of changes in the form of the State Sector and Public Finance Reform Bill 2012. This, potentially very significant, Bill seeks to give legislative form and impetus to the recommendations of the Better Public Services Advisory Group Report of November 2012.

The objective of those recommendations was to provide a public service and state sector that is innovative, provides high quality services, manages change effectively and achieves value for money (SSC 2011a, p3).

As is more generally the case, the term “value for money”, ie how value should be understood and measured, is not explicitly defined. However, it is acknowledged that overall improving performance effectively means having “to do more and better with less” (ibid p5).

To this end the report of the Advisory Group also provided a series of recommendations that sought to overcome the siloed accountability arrangements of individual government organisations and facilitate a more flexible reporting system that is focused on the results achieved rather than the work undertaken or outputs produced.

The Bill therefore aims to: “enhance leadership within the State services, to provide greater cross-system governance, integration and collaboration, to improve financial flexibility, and to support the provision of better State services information to Parliament” (Parliament, 2012, p1).

What follows is a summary of the major changes proposed for the State Sector Act 1988, the Public Finance Act 1989 and the Crown Entities Act 2004.

Proposed changes to the State Sector Act 1988

The proposed changes to the State Sector Act 1988 aim to improve leadership, capability and coordination across the state sector as a whole. To this end the State Sector Commissioner’s responsibilities will be widened and powers increased in relation to the development and deployment of staff within the core public service and the broader State sector.

Also to give more authority to the Commissioner’s sector–wide role, he/she will be responsible for preparing draft Government Workforce Policy Orders on matters such as workforce strategy, pay and conditions. Once approved by Order in Council, such orders must be implemented by affected departments, given effect to by affected Crown Agents, and had regard to by Autonomous Crown Entities.

It follows that the relative autonomy in respect of human resources currently enjoyed by departmental and other state sector chief executives will, to some extent, be diminished.

Coordination across the sector is also emphasised in proposed changes to the statutory roles of state sector chief executives which require them to be responsive to the collective interests of government and formally acknowledges their stewardship role in relation to an agency’s assets and longer-term health and capability.

Arguably, these legislative changes would largely reflect existing practices. In and across the state sector senior public servants have in recent years worked to remove barriers and improve the coordination of their activities. Similarly, the requirement for chief executives to annually report on the health and capability of their departments was introduced by the 2004 amendments to the Public Finance Act 1989, although progress in this respect may have been frustrated by the fiscal pressures resulting from the global economic crisis. It is, however, unclear how statutory codification will, on its own, overcome the remaining problems in these areas.

Of potentially more significance is the proposal to create a new organisational form in the public service – a departmental agency. These organisations will be operationally autonomous but will sit within a “host” department that will be responsible for administering and reporting on the departmental agency’s appropriations. While the departmental agency’s chief executive will not be required to produce a separate set of financial statements, he/she will be responsible for the production of an annual report on the agency’s operational performance, its organisational health and capability, and progress against the relevant strategic intentions of its host department. To what extent this report will include, or be possible without, financial information is unclear.

Ultimately the objective of creating such agencies separate from their host departments may be to facilitate coordination and reduce the duplication of support services. However, the end result is ultimately a more complex, and potentially confused, set of accountability arrangements involving two ministers and two chief executives as well as central agency oversight.

Proposed changes to the Public Finance Act 1989

Proposed changes to the Public Finance Act 1989, while clarifying responsibilities, principally seek to provide increased flexibility to the ways in which funding is appropriated and managed and to simplify the related reporting requirements.

To this end, it is proposed to abolish multi-class output appropriations and the current (section 20) provisions for a department to incur output expenses against an appropriation administered by another department. Instead a new multi-component purpose-based appropriation (MPA) is to be established. This will allow different “categories” of expenditure (such as departmental output expenses, other expenses, and non-departmental capital expenses) to be combined in a single appropriation where they contribute to “a singular overarching purpose”.

Although administered by one department, expenditure against an MPA would be able to be made by another department.

Creation of the original appropriation will require the Minister of Finance’s approval and it must contain information in respect of each component as well as for the MPA as a whole. Flexibility would be further provided by giving the responsible Minister the ability to shift resources between the different components of an MPA without the need to gain further parliamentary approval.

Arguably, the creation of very large output class and multi-class output appropriations already reduces transparency and constrains Parliament’s ability to review and hold Minister’s accountable for public expenditure. The creation of MPA appropriations would potentially further reduce that ability.

Increased flexibility and some simplification are also proposed in respect of the performance information that is to be provided by departments and the new departmental agencies.

In an attempt to provide “more meaningful information to Parliament” (SSC 2012, p11), it is suggested that for individual departments the emphasis on reporting is to change to one that focuses on appropriations and the results that are achieved with them. This, of course, assumes that those results are readily identifiable
and measureable.

More specifically, departments would no longer be required to produce information on their future operating intentions at the start of each financial year. What is currently an annual Statement of Intent will be replaced by a document that at least every three years provides information on a department’s “strategic intentions” for at least the next four years. This would be tabled in parliament no later than, or in conjunction with, the annual report.

Less prescriptively than at present, the requirements for this information are simply that it should explain:

  • the strategic objectives the department intends to achieve or contribute to
  • how it will manage its function to that end
  • any other matters that may be relevant.

The requirement to set out “the main measures and standards that the department intends to use to assess and report on matters relating to the departments future performance” (current section 40 (d)) is to be removed. This includes the requirement, in the current section 40 (d) (iii), to provide information in respect of the cost-effectiveness of the interventions that the department delivers or administers.

At the time the proposed legislative changes were tabled, a briefing to Ministers suggested “understanding the cost-effectiveness of expenditure requires analysis rather than merely reporting against specific measures of cost-effectiveness” (SSC 2012, p16). However, it is difficult to understand why this analysis could not be performed and reported on, both in terms of an expectation and a subsequent result.

While departments, and departmental agencies, are to continue to prepare annual reports, departments would be able, where appropriate, to report information for a cluster or a sector in order to provide a more coherent view of a related pattern
of expenditure.

In terms of the detail of the performance information that must be provided in an annual report, the currently requirements prescribed for a statement of service performance (reflecting the detail of the current information on future operating intentions) are also to be removed. Rather an annual report is to simply contain information that allows an informed assessment of how well the department (or departmental agency) has:

  • progressed in relation to its strategic intentions
  • managed the organisation’s health and capability
  • managed the assets that the organisation controls.

This information is to be accompanied by statements of expenses and capital expenditure as well as forecast financial statements for the following year.

Similarly the requirement to provide information supporting the Estimates in respect of the “performance measures and forecast standards to be achieved for each class of outputs” (existing section 15 (1)(b)) is to be removed from the Act and replaced with a more general requirement to provide “a concise explanation of how performance against each appropriation will be assessed” (new section 15A (2)(a)).

A draft issues paper, produced by the Secretariat for State Sector Reform in 2011 (SSC, 2011b), defined the term “results” broadly and suggested that this encompasses “a spectrum including outputs, impacts
and outcomes”.

Whilst suggesting that outcomes/impacts are the more desirable focus, that paper acknowledges that some organisations can be held accountable for the achievement of results, some for contributing to the achievement of results, and some will only be able to be held accountable for the production of outputs. Whilst this recognition of the complexity of the public sector is to be applauded, neither that paper nor the subsequent proposed legislative changes provide any suggestion as to by whom and how these distinctions in accountability will be made.

Proposed changes to the Crown Entities Act 2004

The proposed changes to the Crown Entities Act 2004 will not apply to school boards of trustees or tertiary education institutions, but are otherwise wide ranging.

They reflect similar objectives to those sought for public service organisations in that Crown entity boards will be required to collaborate with other public entities, Ministerial powers are extended somewhat, and a less prescriptive (more flexible?) approach is taken in respect of planning and reporting information.

As is proposed for public service departments, longer-term planning for Crown entities would be simplified in that a statement of intent will only be required at least once every three years when it could be presented to parliament with the entity’s annual report in a single document.

The detailed information in respect of performance expectations that is currently included in an annual statement of intent would in future be published in a separate annual statement of performance expectations (S 149A). This statement will be provided to the responsible Minister, tabled in parliament and published on the entity’s website. It will also form the basis of comparative information contained in the entity’s annual report.

Also, in a similar manner to that proposed for public service departments, the proposed reporting requirements for Crown entities are less prescriptive than at present. Rather than specific measures and standards the annual statement of performance expectations would more simply be required to provide for each class of outputs a concise explanation of what it is intended to achieve and how the performance will be assessed (S 149C(2)). The actual performance information would then be provided in a statement of service performance as part of the entity’s annual report.

Whilst Ministers would no longer be able to require the production of an output plan, they would have the ability to require changes to the statement of intent and the annual statement of performance expectations. Ministers will also be given more specific powers to “set standards, terms and conditions in respect of any outputs or classes of outputs” (S 170).

The Minister of State Services and the Minister of Finance will also be given broader powers to issue whole of government directions to all or a selection of Crown entities. These directions will no longer be associated with just improving public services but, more specifically, could encompass securing economies or efficiencies, developing expertise and capability, ensuring business continuity, or managing risks to the government’s financial position.

The Minister of State Services would also be provided with a statutory power to require Crown entities to provide information that reflects on the sector’s overall capability and performance.

Summary

In summary the proposed changes seek to strengthen the guiding hand of Ministers and central agencies while, at the same time, reducing the detailed performance information required in the accountability documents.

However, in so doing they also leave confusion as to what type and detail of information will be appropriate in future. This suggests the need for somebody (Treasury, SSC, OAG, XRB?) to produce a more explicit set of standards and guidance in respect of public sector financial and non-financial performance information.

Ultimately public sector reform over the past three decades has embedded a culture that emphasises attribution and accountability rather than management, and reinforces the retention of resources in departmental silos (SSC 2011a, p12). Changes to that culture will not come about with the royal assent granted by a stroke of the Governor-General’s pen. However, it may be facilitated by more active and effective leadership on the part of Ministers and the central agencies.

It will also be heavily dependent on the contributions of accountants across the sector. >

June 2013 - Rodney Dormer CA