A BRIEF ASSESSMENT OF THE STATE SECTOR

25 The state sector is a means to an end - the achievement of the objectives sought by citizens (as expressed through the political/democratic process), and the delivery of services for citizens. The ultimate test of the system is how well it does these things. The system also needs to deal with the complexity of government reflecting the great variety of activities governments undertake, and the different and sometimes competing objectives and interests governments must attempt to reconcile.

26 The public management system must have a number of features that work well. Broadly, it has to:

• Help the government to set objectives and priorities, and decide what interventions are needed;
• Deliver services and other functions effectively and efficiently;
• Assess performance, adapt and innovate;
• Ensure there exists the capability (powers, systems and resources including people) to do these things.

27 This framework is used below to analyse the present state, ascertain gaps and set the new directions for the proposals. The system also needs to be robust enough to operate effectively in an environment of:

• Change, including external shocks;
• Globalisation, which may restrict government's freedom of action;
• Labour market fluidity - the state sector competes for skilled staff with the private sector, and internationally;
• Changing (and rising) consumer expectations;
• Diversity and demographic change - particularly the increasing proportion of Maori and Pacific Island people in the population;
• Knowledge and information becoming the primary basis of the economy;
• Governments internationally (and other institutions) face an erosion of trust;
• Resource limitations - the system is constrained by what the government is able or willing to spend;
• Technological change, particularly information technology.

Some strengths of the system

28 The New Zealand public management system has a number of important strengths. We have aimed to enhance the system in ways that build on this platform. Strengths include:

• The transparency required by the Public Finance Act and the Fiscal Responsibility Act provides two very important benefits in terms of priority setting. The Crown's financial position is clear to Ministers, the opposition and the public, and it is clear, in broad terms, what money is being spent on;
• The quality of client service has generally risen in the last 15-20 years and there are examples of outstanding service delivery. The expectations of citizens and of Government, however, have risen at the same time;
• The internalisation of some fundamental values - a commitment to democracy and the rule of law, and the low levels of corruption we tend to take for granted;
• The freedom to manage made possible by accountability on the basis of outputs allows managers the flexibility to use available resources to best produce the desired services and goods. It provides more scope for innovation, as long as other aspects of the system do not discourage this;
• The governance arrangements of public service departments and SOEs are clear and well understood;
• The system is flexible, as evidenced by the recently published "Guidelines for Contracting with Non Government Organisations for Services Sought by the Crown";
• There is evidence of improvements in efficiency and productivity;
• Some important aspects of financial performance are well managed and reported (e.g. debt management, accounting for physical assets);
• The financial accountability system provides better information and is cheaper to run than the previous system. We now have, for example, a much clearer idea of the financial position of both individual government agencies, and of the government as a whole;
• Accountability is taken seriously in the system. The system requires information about performance to be provided, and explicitly enables certain actors to review the performance of state sector agencies (e.g. the State Services Commissioner).

29 The New Zealand system also has a number of weaknesses, and addressing these weaknesses has been the main focus of this report. The following section identifies and discusses important weaknesses under each of the features of the system in paragraph 26.

Setting objectives and priorities, and deciding what interventions are needed

30 In our system the political process, mandated by democratic elections, identifies priorities. Cabinet has a central role as decision maker. The system responds to changes in government and political priorities. The Government sets out broad objectives in a variety of places, such as the coalition agreement, the speech from the throne, the Prime Minister's statement to the House, Key Government Goals to Guide Public Sector Policy and Performance, and budget related documents. These in turn reflect the priorities developed by political parties and articulated in their manifestos.

31 The system is not particularly good at assisting Ministers to articulate their common objectives and priorities, and the means to be employed to achieve those. A number of stakeholders and commentators, including chief executives and senior Maori emphasised the need for clarity on directions and expectations, particularly in relation to issues or intentions impacting across sectors or the whole of government. The clearer Ministers can be about what they want to achieve, and about how Cabinet collectively prioritises its goals, the more effectively departments and Crown Entities will be able to respond. Weaknesses include:

• The lack of a systematic approach to setting outcome goals and priorities and identifying the services and other interventions that will achieve the goals;
• Problems with policy advice, including the availability of information on practical service delivery and the effectiveness of government activities;
• Variable standards of planning by government agencies;
• Linking government objectives to resource allocation decisions. This has implications for Budget process and for the way Ministers collectively decide priorities.
• A tendency towards a short term focus;
• The difficulty of stopping doing things which are ineffective;
• The fragmentation of the State sector - the large number of agencies, portfolios and votes makes it more difficult to agree and actively pursue cross cutting objectives, and provide integrated service delivery;
• Varying requirements for information production by Central Agencies and other groups leading to costly compliance and unread reports.

Deliver services and other functions effectively

32 Most government agencies exist to provide services to or for citizens. These services are "outputs". Citizens value both the high level outcomes the services are contributing to, and the quality of the services themselves. Access can be as much or sometimes more an issue than quality.

33 The nature of the services provided by Government agencies varies enormously, and different services raise different management challenges, including the issue of which decisions should be made locally and which centrally. Some services are provided to individuals (e.g. benefit administration, passports), some to community groups or businesses (e.g. company registration), some to society as a whole (e.g. Police and Defence), some to the Government (eg policy advice). Some are provided in competitive markets (e.g. maps), some in monopoly situations (Fisheries Quota Management System), some involve coercion (e.g. tax collection). Some are regionally organised (e.g. health), some nationally.

34 There are number of impediments to better front line service, that are particularly problematic for services aimed at dealing with complex social problems and involving multiple agencies:

• Coordination problems that arise from the sheer number of state organizations, different levels of delegation and differing regional boundaries used by government agencies and local government;
• Interaction with government is not easy for citizens;
• Financial resources are divided into a large number of small pools creating opportunities for inappropriate double dipping as well as the risk of the genuinely needy missing out;
• Risk aversion due to the political cost of failure;
• Service delivery is not sufficiently valued - the emphasis in the system is on the top and policy advice rather than the frontline;
• Inappropriately specified or inflexible output requirements may distort or constrain service delivery;
• Many government agencies struggle to understand Maori needs and to deliver effectively for them; and
• Frequent structural change may make it difficult to maintain expertise, commitment and the relationships necessary for effective collaboration in some sectors.

Assess performance, adapt, and innovate

35 Our system needs to be able to assess performance in terms of overall objectives (outcomes), service delivery (outputs) and ownership. It needs to draw on knowledge about performance, together with other information and analysis to adapt and innovate.

36 The provision of audited information to Parliament about actual organisational performance, against expectations set at the beginning of the year is a powerful feature of our public management system, but this is an area where there is scope for improvement. Among the current problems in the system are;

• The lack of information about performance in outcomes terms, whether through evaluation of the link between outcomes and interventions, or reporting of indicators of the state of society;
• The system does not deal well with the government's non-financial interests as owner of organisations;
• There are concerns about the quality of monitoring of government agencies and about how the system identifies and deals with inadequate performance; and we need a better in depth review capacity;
• There are inherent features of the state sector that discourage innovation (e.g. high political cost if risky innovation fails). Nevertheless innovation does occur, and managers are given more freedom to innovate than was the case under a system of input controls. It is important that we give innovation more encouragement;
• The compliance costs the system imposes;
• The tendency for aspects of the system to reinforce coordination problems, by allowing or encouraging people to ignore wider government interests;
• A number of commentators have noted the uneven performance of our public management system. Some agencies have used the greater freedom available under the new system to enhance strategic alignment, outcome focus, capability and service delivery. Others have not. We do not consistently learn from what works well and what does not;
• Accountability for results for Maori is not well embedded into the system.

Have the capability to do these things

37 The public management system needs to offer the Government the capability to set objectives and priorities, decide what interventions are needed, deliver services effectively and efficiently, and assess performance, adapt and innovate. It also needs to effectively manage the responsibilities the Government has as an "owner". This includes people, values, authority, organisations, and systems.

38 There is a problem in terms of how well the system deals with non-financial and non-commercial aspects of the ownership interest, particularly capability.

39 This is apparent in the areas of senior management and staff development. There are not enough people with the mix of skills and experience required to provide effective leadership of the departments and agencies of the State sector. Current highly devolved arrangements for senior management development and career management are inadequate to produce the number of skilled leaders required. The large number of agencies in a country with a small population exacerbates these problems.

40 There are deficiencies in several areas of current employment, performance management, training and development, and career management systems, which may, if not corrected, undermine the capability of individual organisations and of the State sector as a whole (e.g. shortages of skilled staff such as policy analysts, evaluators, nurses).

41 The SSC and agencies themselves do not have sufficient tools to specify or assess organisation capability. It is not sufficiently clear where capability problems may exist.

42 State sector organisations need stronger capability to formulate sound policy that works for Maori, to deliver services effectively to Maori, and to maintain effective relationships with Maori. Although the public service has Maori employment rates higher than in the general labour force (17% public, 9% private) too few Maori fill influential positions.

43 The state sector has undergone significant restructuring, with most of the sector being affected in one way or another. Policy/operations splits and extensive use of Crown entities have become familiar features of the landscape. We now have a large number of agencies. Structural change has provided benefits in terms of sharper focus, and avoiding conflicting functions, but it has also created or exacerbated some problems:

• The narrow organisation of organisations can inhibit seeing whole of government connections;
• The large number of agencies has added to coordination problems, including dealing with cross-cutting issues;
• Getting enough high calibre people to govern and manage all these agencies;
• The critical mass of small agencies; and
• The high costs of re-structuring, financial and non-financial, and concerns about the capacity of the state sector to manage change effectively.

44 While there have been some enhancements of the governance and accountability regime that applies to Crown entities, they have been a known area of unfinished business, with uneven governance arrangements and, in some cases, unclear roles, responsibilities and relationships. Not enough emphasis is put upon whole of government interests.

45 The Advisory Group notes that during the 1990s, organisations in the public sector became increasingly detached and separate, less unified around core values and purpose. A number of commentators and stakeholders expressed concerns about the performance of Central Agencies in terms of adding value, monitoring the right things effectively, building capability and the ability to manage change. Central agencies have been reluctant to assert a strong leadership role over the sector as a whole, arguably slowing the sector's responsiveness to changing Ministerial concerns.