VIII. The Spirit of Reform
This report has focused on various concerns pertaining to the reform of public management in New Zealand. My aim in these concluding reflections is to step back from the elements of the system and to discuss whether the Government should consider reversing the process of reform that was launched almost a decade ago. My answer is an emphatic "No". Scrapping the reforms would be foolhardy because they have greatly improved the efficiency and quality of public services. Going back to the old ways should not be regarded as a viable option, for managers would once again be judged in terms of compliance with ex ante controls, not by their performance. The challenge facing New Zealand's State sector is to extend the reforms while remedying some of the shortcomings that have been identified.
The reformed State sector is testament to the power of ideas and the inventiveness of its architects. It is a singular accomplishment in the development of modern public administration, and it will influence the future course of management both in New Zealand and other countries. It is worth briefly reviewing the roll call of some of its pioneering accomplishments. New Zealand has been the first country to fully adopt cost based accounting and budgeting; the first to successfully implement techniques of output budgeting; the first to give managers full discretion in using inputs; the first to introduce strong incentives for the efficient use of capital; the first to require advance specification of the outputs to be purchased; the first to establish a comprehensive accountability regime.
Being first means that certain deficiencies will emerge as reform takes hold. One should think of the problems discussed in this report as akin to the "bugs" found in state-of-the-art technologies after they have been introduced. There is now a need to "debug" some of the reforms, but that is a far different matter than getting rid of them altogether. In fact, the bugs have emerged only because of the extraordinary leaps forward in transforming the New Zealand State sector. There would be no problem in costing outputs if the budget were not output-based; accountability would not be burdensome if accountability was not taken seriously; no one would have to worry about the incentive effects of the capital charge if capital were free. The list goes on and on. Every issue identified in this report sheds light on the enormous progress made in transforming the State sector.
Three clusters of concerns were identified in the opening chapter and discussed in the report. One pertained to the strategic capacity of Government entities, another to the costing of Public Services, and the third to the accountability system. Great strides have been made in addressing the first problem. Through the SRAs and KRAs, the medium (and longer) term perspective mandated by the Fiscal Responsibility Act, and increased planning, the strategic capacity of Government departments has been upgraded. What is most pleasing about this development is that it has been accomplished in ways that comport with the logic and practice of the New Zealand model. The SRAs and KRAs emphasise the ex ante specification of objectives, as do other elements of the New Zealand system, and the Fiscal Responsibility Act upholds the value of transparency in public policy. Undoubtedly, more work will be done in the years ahead in defining and applying outcome measures and in evaluating results. But advances in strategic capacity demonstrate the elasticity of the reforms and their openness to new ideas.
The costing of public services is a tougher issue because it requires fresh breakthroughs in public management, especially as regards cost accounting and analysis, and true contestability in public services. In this area, additional work has to be done in costing outputs, testing the practicality of Mode C appropriations, and relating the volume of outputs to the volume of resources. Unlike other elements of reform which have been introduced across the board, pilot testing may be appropriate in this area.
Taking accountability seriously is a genuine triumph of New Zealand public management. Other countries give lip service to holding managers accountable; New Zealand has robust mechanisms in place to enforce accountability. Paradoxically, however, basing accountability on the ex ante specification of performance can have unanticipated consequences, as when unspecified matters escape accountability. My sense is that this problem will not be remedied by even more detailed specification of performance. Rather the solution will have to come from embracing a "responsibility" model of accountability.
This model would not distinguish so sharply between producers and purchasers, between outputs and outcomes, and between the responsibilities of Ministers and chief executives. It would not split Government into seemingly airtight compartments and assign formally differentiated roles to each. In practice the boundaries between Ministerial and chief executive accountabilities are somewhat fuzzy. I do not believe that all of the intellectual argument of principal-agent theory, as powerful and enlightening as it is, is necessary to advance managerial reform in New Zealand, nor do I believe it advantageous to have a Government with a split personality. Pretending that the Minister is a fully independent purchaser doesn't make it so, though it may add to transaction costs.
A less prescriptive approach to reform would not mean reversing course. A managerial revolution built on ideas must ultimately be tested by experience. New Zealand has passed the test with flying colours. Public services are more accessible and responsive, more sensitive than in the past to the needs of citizens and clients, and much more efficient. A culture of performance has penetrated New Zealand public management. Chief executives and managers know and accept that they are judged on the performance of their organisations. They know that producing agreed outputs at budgeted cost is a critical and legitimate measure of how well they are performing. They accept that improving performance must be an ongoing objective, and that it is necessary that productivity gains in the state sector keep pace with developments in the market economy.
Many of these improvements are a matter of technical or operating efficiency - more outputs produced with fewer inputs. This alone would not be a minor achievement, for it is in the delivery of services that citizens interact with Government and form judgments on its performance. But as important as it is, efficiency in producing outputs is not the whole of public management. It also is essential that Government has the capacity to achieve its larger political and strategic objectives. More than twenty years ago, the Nobel Prize economist Kenneth Arrow wrote in The Limits of Organisation (1974) "the prime need in organisational design is increasing capacity to handle a large agenda.... Shortrun efficiency and even flexibility within a narrow framework of alternatives may be less important in the long run than a wide compass of potential activities."
The next steps in New Zealand State sector reform will have to address this larger agenda. They will have to move from management issues to policy objectives, to fostering outcomes, such as social cohesion, that have been enunciated by the Government and are embraced by New Zealanders. They will have to do for outcomes what has been accomplished for outputs. The task ahead is much more difficult than what has been accomplished thus far, but the rewards of success will be even greater.