New Zealand's State Sector Reform: A Decade of Change

1 NEW ZEALAND IN PERSPECTIVE

Introduction

New Zealand is a small but nevertheless notable part of the global community. For all its youth and physical isolation, tucked away in the south-western Pacific Ocean, it has left a number of remarkable social and political landmarks - it was the first country to have universal adult suffrage, and it was for many years seen as a shining example of a working welfare state. More recently it has been viewed more as an example of a successful market economy.

This introductory chapter gives a short overview of New Zealand's history, which should give some understanding of the make-up of our community and the forces that have helped to shape our economy and society. Such an understanding is necessary for any analysis of the Decade of Change.

Looking over our shoulder - early New Zealand history

The indigenous people of New Zealand - the tangata whenua - are the Maori, who arrived here from Hawaiki (east Polynesia) between 800 AD and 1300 AD. The great voyaging canoes that brought the Maori people to Aotearoa ('the Land of the Long White Cloud') arrived in various locations throughout the two major islands. Once settled, the tribes began trading with each other and occasionally warring over territory. This continued uninterrupted until arrival of the European explorers in the mid 17th century. The first of these to sight New Zealand was the Dutch mariner Abel Tasman, who landed only briefly - but literally put New Zealand on the map. The next arrival was the British navigator James Cook in 1769 whose voyages opened up the country to the rest of the world.

Arrival of commercial sealers and whalers in the late 18th century, mainly in the south of the South Island, brought the first wave of prolonged European settlement. The various ports of call established by these and other traders became the focus for settlement by new arrivals to the fledgling nation. The immigrant population, their technology, animals and plants - and their weapons, liquor, tobacco and exotic diseases such as influenza and diphtheria - had enormous impacts on the established Maori economy and society, particularly in terms of resource availability and physical wellbeing. From the 1850s a long decline began in the Maori population which, by the turn of the century had more than halved, and which did not recover until the 1950s. In 1840, however, the non-Maori population in New Zealand stood at only about 1000.

It was at this time that a formal agreement was reached between the chiefs of many of the Maori tribes and the British Government. The Treaty of Waitangi, which has come to be regarded as the founding document of the nation of New Zealand, was drawn up and signed by Captain William Hobson on behalf of Queen Victoria, and local Maori chiefs at Waitangi on February 6, 1840. The English language version of the Treaty guaranteed to the Maori people the possession of their lands, forests and fisheries, the authority - 'Rangatiratanga' - of the chiefs, and the rights and privileges of British subjects, while giving the Crown the sole right to purchase land, and sovereignty over the nation. There is however continuing debate about the English and Maori versions of the Treaty, and about how some provisions - especially those dealing with resources, with Rangatiratanga, and with sovereignty - should be interpreted in contemporary circumstances.

By the 1850s the immigrant population had swelled to 32,500 and there was a clamour for self-government. The British Constitution Act of 1852 created a bi-cameral New Zealand Parliament, and a provincial system of local government. This semi-autonomous structure caused difficulties, particularly when the southern regions, flourishing through booming primary production and gold-mining, were supporting the northern regions which were caught in the grip of land wars between the settlers and the tangata whenua.

The beginnings of 'God's Own Country'

Ample pasture and the availability of cheap stock, particularly sheep, from neighbouring Australian colonies shaped a predominantly agricultural economy from the very early stages. The promise of gold had drawn many settlers to New Zealand but it was farming and its subsidiary servicing industries that provided the more dependable long-term occupations as time went by.

The first programme of public borrowing, which was instituted following a slump in world commodity prices in the early 1870s, was justified by the Colonial Treasurer as being necessary to finance the new colony's growth. £20 million was borrowed over a decade, primarily from the British government.

This occurred alongside an increase in the size of the civil service and a flurry of activity on the public works front. Utilities such as railways, roads, bridges and telegraph lines were all expanded during the 1870s. By this time the settler population had increased to 490,000 and was becoming more and more reliant on Britain for both purchase of exports and the supply of capital. Wool had, by this stage, overtaken gold as New Zealand's largest export earner.

A significant development for New Zealand was the beginning of frozen meat exports to Britain from Dunedin in 1882. Thus began a modest diversification of exports to include such commodities as butter, cheese, timber and coal, all predominantly sold to the United Kingdom. Through this period the Maori population was overtaken and then overwhelmed by the flow of new immigrants, to the stage where they were soon only 7% of the total population. Their lands steadily shrank back to mainly rugged bush-clad country in the more remote locations.

The political structure matured. The provincial governments were abolished and central government became responsible for all major decisions relating to the development and management of the country. The electoral system had been altered in 1879 to allow for universal male suffrage, as opposed to the previous system of property-owner voting. This extended in 1893 to universal suffrage, with New Zealand women being the first in the world to have the right to vote (although they were not able to stand for Parliament until 1919).

Government policies in the late 19th century encouraged further agricultural activity and led to a great increase in export earnings from that sector. The subsequent demand for improved infrastructure provoked a further rash of public borrowing and a cycle of policies that produced a nation increasingly dependent on its agricultural sector.

The dawning of the 20th Century

By the end of the 19th century the Crown owned the railways, roads, and, importantly, twelve government departments. This expansion of public sector activity was followed by a widening social role for the government. A system of free education was established for five- to fifteen-year-olds which was fully operational by the early 1890s, and old age pensions were introduced in 1898 to assist the growing population of elderly people who were considered to be impoverished. By the turn of the century the civil service had further expanded to encompass provision of health services and establishment and maintenance of power stations, amongst other activities.

New Zealand contributed significantly, both in terms of military personnel and food and other products, to the Imperial war effort between 1914 and 1918.

By 1930 New Zealand was known as Britain's farm - supplying "The Mother Country" with meat, dairy products and wool. Approximately 80% of what New Zealand exported over the period from the late 19th century until after World War II was expressly for British markets - and 50% of New Zealand's imports came by return from British manufacturers.

New Zealand's economy and society suffered in the same ways as those of most other Western countries in the great World Depression of the early 1930s. But when the international economy recovered, New Zealand's single-minded production and export of goods to its assured British markets resumed, and was accompanied, from the mid 1930's, by a programme of sweeping social reforms that established a comprehensive "welfare state". This combination of a guaranteed market for all the wool, meat and butter and cheese we could produce together with a welfare system that assured care "from the cradle to the grave" allowed a society to develop that had relatively few concerns about the world beyond the country's shores.

World War II caused a hiatus in growth, as 150,000 of the nation's finest went off to fight battles far from home. This enforced change in demographics drew large numbers of women into the workforce and also saw an increase in self-sufficiency, as businesses sprang up to meet needs that had previously been met by imports. The Maori war effort was substantial, leading to pressures for a larger role and greater autonomy in the post-War economy.

The wide range of political and economic changes brought about by the War led to the Statute of Westminster in 1947, which removed Britain's ability to make laws governing New Zealand and allowed the country to be fully independent for the first time.

Over the next three decades New Zealand quickly recovered and then consolidated its economy. Prosperity became an apparently permanent state of being for the well-insulated country, increasingly regarded by its citizens as "God's own country". The economy was still focused on the agricultural sector - 90% of exports were meat, dairy products and wool, and these enjoyed preferential access to the British market.

This reliance on a small range of products and a single major market caused substantial shocks to flow through the economy and society, first when world wool prices plummeted in the late 1960s, and then when Britain joined the European Economic Community, radically restricting access to our previously taken-for-granted markets.

By the early 1970s a measure of economic prosperity had returned with prices for agricultural products on a world-wide high. The country ranked 10th in the world for GDP per capita. However, the oil price crises of the mid 1970s brought fresh heavy shocks, and New Zealand's terms of trade fell by nearly half in a year. As the Government struggled to stabilise the economy, inflation rose into double figures and what had been a healthy trade surplus became a billion dollar deficit within two years. The Government responded with an array of policies to maintain employment levels and control consumer prices through subsidies and regulations, and to make New Zealand less dependent on imported energy sources. An extremely generous retirement superannuation scheme was also introduced. These initiatives were funded through high taxation and substantial borrowing overseas. In spite of these measures inflation remained high, unemployment increased, and real GDP per capita growth all but ceased. Debt servicing costs began to absorb a significant proportion of the Government's expenditure. By the early 1980s the OECD index placed New Zealand's standard of living 20th out of 24 countries.

As each set of policies ran into difficulties or faltered the Government responded with further controls and regulations, leading eventually to a comprehensive "wage and price freeze". These measures gave it almost total command of an economy which had become all but stagnant. New Zealand's economy was regarded by external commentators as one of the most extensively regulated in the world.

1984 - The view from the precipice

By 1984 the annual budget deficit was $3 billion and public overseas debt was above the $8 billion mark. The Government elected that year faced a number of crises. Most seriously, the country was bordering on bankruptcy and it appeared that the only solution was swift and radical reform of both the economy and the State. The economy was the first priority and the Government embarked on a programme of sweeping liberalisation which encompassed:

• devaluing, and subsequently floating the NZ dollar and abolishing controls over foreign exchange dealings
• introducing a broadly-based consumption tax (Goods and Services Tax, initially at 10% and later increased to 12.5%) and reducing some previously punitive income and sales tax rates
• abolishing the whole range of agricultural and consumer subsidies, and of import licences and export incentives, and
• applying a surcharge to the superannuation scheme, where well-off superannuitants were in effect required to pay their pensions back to the Government.

Attention then turned to the state of the State. In order to support the programmes and policies run by various Governments over the last hundred years, the Public Service had grown to account for 12% of GDP and 20% of gross investment - and was providing an extremely low return on that investment. The Government owned a wide range of departments and trading enterprises, from a winery to both merchant and retail banks and commercial forests, and including telecommunications, railway, electricity generation and marketing, and postal monopolies.

Many of these trading enterprises were transformed by the Government into 'state-owned enterprises', with the dual aims of reducing the Crown's financial liabilities and achieving efficient, client-responsive and profitable operations. This began an unprecedented analysis of 'the role of the State' in New Zealand's economy and society, which has radically reshaped the functions and form of the State sector.

The following chapters outline various aspects of New Zealand's State sector reform process, including their 'spirit' - the philosophy and intentions behind them - the practical and transitional issues encountered, the results and outcomes that have been achieved, and the problems and challenges which remain to be tackled

2 GOVERNMENT IN BUSINESS - THE STATE OWNED ENTERPRISES ACT 1986

Introduction

Successive New Zealand governments have been owners of many businesses. The areas covered have included airlines, railways, shipping, telecommunications, postal services, banking, radio and television, printing and publishing, tourism and travel, electricity production and marketing, forestry, timber production and marketing, coal mining, farming, heavy construction and several more.

There were two periods of heavy growth and development of publicly owned trading organisations. The first was in the early part of this century, when the Government decided to supply the country with badly needed infrastructure and utilities - roads, railways, telegraph systems, port facilities, electricity generation plants and supply systems, and so on, and to provide support for developing industries. This was the "pioneering stage" of New Zealand's development.

The second stage occurred in the third quarter of the century, up until the mid 1980s, as the Government sought to establish major domestic industries in an effort to broaden the base of New Zealand's economy beyond its traditional dependence on the agricultural sector. New Zealand Steel, Tasman Pulp & Paper and Petrocorp, were examples of very substantial enterprises in which the Government was deeply involved, in partnership with private sector companies. This could be termed New Zealand's "industrial expansion stage".

By the mid 1980's, however, the New Zealand economy was growing at a rate significantly below the OECD average, and was weighed down by a State sector that was absorbing 20% of gross investment and 12% of Gross Domestic Product. As an illustration, 10% of national income in 1986 was spent on the Post Office, the Lands and Survey Department, the New Zealand Forest Service and the Ministry of Energy, with the post-tax return on investment being negligible. It became clear that State owned and operated monopolies trading in tightly regulated markets were simply not going to provide the impetus needed to establish a vigorous and expanding economy.

The principles of the new legislation

Changes to the Government's commercial role were signalled in the Economic Statement given to Parliament by the Minister of Finance in 1985 discussing, amongst other things, efficiency in the State sector. An excerpt from the Minister's speech outlines the environment which preceded introduction of the market oriented State owned enterprises legislation.

"There is scope for improving efficiency in the public sector. This will increase our ability to reduce the government deficit, lower taxes, and provide income support and social services for those least able to help themselves. In the case of trading operations inefficiency can represent a tax on their customers. The essence of the problem is that the public sector needs to be adapted to meet the management needs of a modern economy. The present environment can be frustrating not only for those who have to deal with public sector organisations but also for those who have to work in them."

The Minister went on to say that:

"The management of State owned enterprises... will improve accountability to Parliament and to the community. It will also provide a rational basis for implementing those of the Government's social objectives that have previously been tangled up in trading operations."

A new approach to State enterprises - corporatisation, deregulation and privatisation

The Government's initial approach to reform of the State sector was based on the three concepts of corporatisation (or commercialisation), deregulation, and privatisation.

Corporatisation began when the State Owned Enterprises Act 1986 came into effect on 1 April 1987. The principles of the Act closely followed those outlined by the Minister of Finance in the Economic Statement. For example - the principal objective of every State enterprise shall be to operate as a successful business and to this end, to be:

• as profitable and efficient as comparable businesses that are not owned by the Crown;
• a good employer;
• an organisation that exhibits a sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so.

Furthermore, managers were to be allowed to control inputs, while pricing and marketing would be matters for the board of each State owned enterprise, which would be made up predominantly of people with relevant commercial experience and skills. State owned enterprises would pay tax, and pay dividends to the Government as shareholder, as returns on the Crown's investments. Where the Government required "social good" outputs from enterprises these would be supplied under contract, in a normal supplier/customer transaction.

Deregulation of various industries began prior to 1986, with the financial, broadcasting and transport sectors being amongst the first to feel the effects of free market economic policies. State dominated industries that were later deregulated included electricity generation and distribution, most postal services and the telecommunications sector.

Privatisation was based on redefined 'role of the State' and fiscal principles. In the Budget Statement of 1988 the Minister of Finance put forth a number of reasons why the Government should decrease its asset holdings - Ministers were not in the best position to make essentially commercial decisions; privatisation would decrease the demand for Government capital for development purposes and the subsidisation of inefficient operations; and unencumbered by commercial responsibilities the Government would be able to focus on economic and social priorities.

Criteria for asset sales included whether or not the Government would gain more in the longer term from privatisation than it would by retaining ownership, and whether the sale of a particular business would impede or enhance achievement of the Government's social goals.

Between 1988 and 1993 the Government obtained $13 billion from the sale of assets in New Zealand.

The machinery of State Owned Enterprises

Shares in the enterprises are issued to and are held by the Ministers of Finance and State Owned Enterprises. The principal form of accountability to the Government is each SOE's Statement of Corporate Intent. Each board produces a draft Statement for the shareholding Ministers no later than a month before the beginning of the enterprise's financial year.

The Statement of Corporate Intent contains much the same corporate data as is provided to investors in listed companies. For the next financial year and the two years thereafter, the following information must be outlined:

• the objectives of the enterprise
• the nature and scope of the activities to be undertaken;
• the ratio of consolidated shareholders' funds to total assets;
• a description of the accounting policies used;
• performance targets and other measures by which performance of the enterprise may be judged in relation to its objectives;
• a statement of principles adopted in determining the annual dividend together with an estimate of the amount or proportion of annual tax paid earnings that is intended to be distributed to the Crown;
• the kind of information to be provided to the shareholding Ministers by the State enterprise during the course of those financial years, including the information to be included in each half-yearly report; and
• any activities for which the board seeks compensation from the Crown (whether or not the Crown has agreed to provide such compensation).

In order to assist it to carry out its 'ownership' and 'shareholder' responsibilities in relation to the diverse range of SOEs, the Government established the 'SOE Unit', later to become the Crown Company Monitoring Advisory Unit. CCMAU provides ownership monitoring advice to both the Minister of State Owned Enterprises and other Ministers responsible for Crown Companies. Other forms of Crown company, such as Crown Health Enterprises and Crown Research Institutes are also monitored by the Advisory Unit.

State Owned Enterprises - 01 March 1998

Airways Corporation of New Zealand Ltd

Contact Energy Limited

Crown Forestry Management Ltd

Electricity Corporation of New Zealand Ltd

Government Property Services Ltd

Land Corporation Ltd

Meteorological Service of New Zealand Ltd

New Zealand Railways Corporation Ltd

New Zealand Post Limited

Solid Energy New Zealand Limited

Television New Zealand Limited

Terralink New Zealand Limited

Timberlands West Coast Limited

Transpower New Zealand Limited

Vehicle Testing New Zealand Limited

The Post Office example - Telecom, New Zealand Post and Postbank

Up to 1987 the main functions of the New Zealand Post Office were the receipt, processing and delivery of mail, ownership and management of the telephone system and regulation of telecommunications, and operation of a retail banking network.

The organisation embodied nearly all of the structural and systemic flaws of the traditional State sector - its functions were diverse and in some case unrelated (eg postal services and banking); some of its functions conflicted (eg telecommunications policy advice v telecommunications regulation v telecommunications operations v telecommunications marketing). Its postal and telecommunications operations were protected monopolies. Commercial policies and prices were determined by the Government on the basis of a wide range of social, economic and political considerations which tended to overwhelm commercial factors. Production systems were highly labour-intensive, with little in the way of incentives to improve efficiency or the quality of service to users. And ultimately, the Government was responsible for funding increasingly substantial capital development commitments - particularly in telecommunications, and bore all the risks associated with the Post Office's very diverse activities. In purely commercial terms, the Government received very little in return for its considerable investments in the New Zealand Post Office.

The decision was accordingly taken to separate the Post Office into its three main businesses - postal services, telecommunications and banking - and to set each of these up as State owned enterprises. Residual policy advice and regulatory functions were transferred to the appropriate core Public Service departments.

Telecom, inheritor of the telecommunications business, had a monopoly in the supply of all telephone connections (corporate and private), facsimile lines and provision of local calls and national and international toll calls. Subsequent deregulation of the telecommunications industry encouraged competition, prices to consumers have reduced in some areas, service standards have markedly improved (supply of a new telephone connection is down from six weeks to two days or less) and the range of services available has increased.

Telecom has since been completely privatised, and is partly owned by American companies Ameritech and Bell Atlantic. While there was criticism of a national asset being sold to overseas interests, those interests were limited to a 49.9% equity stake in Telecom, for which $4.25 billion was paid. Shares in the rest of Telecom were offered to the public in one of the biggest and best publicised floats in the history of the New Zealand sharemarket. The Crown has received substantial income from the private company, with the September 1995 half year financial statement listing $167.4 million tax paid.

New Zealand Post, the SOE retaining New Zealand's legal obligations in international mail delivery, has become a highly successful business organisation. Soon after corporatisation NZ Post reduced its staff numbers by 30% and closed 40% of retail outlets - despite some market resistance. A measure of its corporate success is the recent lowering of domestic letter charges from a standard 45¢ to 40¢. New Zealand Post's 1994 Annual Report declares 1993/94 tax paid at $33 million; the Government received $84 million in tax and dividends from the SOE.

The third branch of the old Post Office to be corporatised was Postbank. It too has subsequently been fully privatised and it is now owned by the ANZ Banking Group. Postbank also provides the Crown with revenue through taxation - a significant change from the past.

Summary

The redefinition of the State's role in business has been amongst the most successful, in economic and commercial terms, and the most controversial, in terms of its social and political impacts, of all of New Zealand's broad programme of reform since 1984.

There is no doubt that these policies have been very beneficial in economic terms. Where the Government was previously exposed to substantial and ever-expanding financial liabilities it now receives significant returns from its former businesses. In most cases competition has improved the quality of services very significantly.

Corporatisation, deregulation and privatisation have, however, also had very substantial social impacts. Thousands of jobs have been lost as the former State businesses have adjusted to the demands of competition. Communities that once depended on a single major industry - forestry, timber production, coal-mining, heavy construction (eg hydro-electricity development) - have been hard-hit. Rural communities in particular felt the losses of local Post Offices, which were often their main link to the wide range of services once provided by the Government.

As time has gone by new industries and opportunities have emerged to replace the former State businesses in many areas - or people have relocated to places where there are more or better opportunities. There have undoubtedly been some unfortunate effects - particularly through the enormous reduction in the supply of low-skilled and semi-skilled jobs, and consequently high levels of unemployment.

'Corporatisation' has done as much as anything to underline the need, in the modern world, for people to have productive skills and qualifications, and this has placed considerable pressures on an education and training system that has itself been undergoing radical reform. It has also placed very great pressures on those sectors of the community that have traditionally supplied low- and semi-skilled workers, and have accordingly placed only moderate value on the acquisition of skills and qualifications through the formal education system. The period of adjustment in these communities is likely to be quite long.

3 MANAGEMENT OF THE STATE - THE STATE SECTOR ACT 1988

Introduction

Having altered, through the 'corporatisation' processes, the structure and nature of the core Public Service - by extracting or abolishing the most significant commercial departments and activities - the Government's focus turned to the efficiency and effectiveness of Public Service management and performance.

Before the legislation - centralised control

Prior to introduction of the State Sector Act the Public Service was a single entity - all employees, regardless of which department they were working for, were part of 'the Public Service' and were employed by the State Services Commission. The Commission appointed the departmental 'permanent heads', and controlled the pay, conditions and promotions of all staff, as well as accommodation, organisational structures, and office systems - including computing services. The Public Service was a 'career service', with incentives to encourage and reward long service.

The appointment and promotion systems were examples of this, generally recognising seniority - as well as competence - and favouring serving officers over all but the most outstanding external applicants. There were elaborate appeal and review systems to ensure that appointments and promotions followed the letter of the law. The Public Service became accustomed to prolonged, arduous bureaucratic processes that seemed sometimes to be designed not to reward productive behaviour.

The spirit of the legislation

The State Sector Act 1988 was designed to introduce into the Public Service many of the positive features and incentives of the private sector. The key principle was that managers, if they were permitted to make all input decisions - pay, appointments, organisational structures, production systems, etc - would respond by accepting personal accountability for producing substantially higher quality outputs - the goods and services provided for the Government and other users. Specification would be critical - both suppliers and purchasers would need to be certain about the quality, quantity, timing and price of the goods and services to be traded.

The Public Service was also to be opened up to all comers - with the particular object of transplanting into departments the energy, imagination and commitment evident in much of the private sector managerial corps. All vacancies - from the heads of departments to office clerks - were to be advertised.

The Act accordingly made the heads of departments 'chief executives', employed by the State Services Commissioner under fixed term contracts. These chief executives became fully responsible for running their departments - employing the staff, determining pay and conditions (under delegation from the Commissioner and within general parameters set by the Government), determining the most appropriate structural arrangements, and determining the most efficient production systems - including numbers of employees.

The Act also set up a triangular relationship between each departmental Minister, the chief executive as head of the department, and the State Services Commissioner as the chief executive's employer. This arrangement recognised the practical need for chief executives to be responsible to their Ministers for the conduct of departments and for giving effect to the Government's programmes, but very importantly to also retain and reinforce the principles of an apolitical and professional Public Service.

Each chief executive became responsible to the appropriate Minister for:

• The carrying out of the functions and duties of the Department (including those imposed by Act or by the policies of the Government); and
• The tendering of advice to the appropriate Minister and other Ministers of the Crown; and
• The general conduct of the Department; and
• The efficient, effective, and economical management of the activities of the Department.

Each chief executive has a personal 'Performance Agreement' with the appropriate Minister as well as a 'Purchase Agreement' which specifies the outputs to be supplied by the department to the Minister. Each chief executive also has a distinct employment relationship with the State Services Commissioner, specified in an employment contract. The Commissioner is responsible for assessing the performance of the chief executive, and implicitly for guiding the chief executive in improving and enhancing personal efficiency and effectiveness.

While the focus of this chapter is on the Act as it applies to the Public Service, various parts of it apply to the wider 'State sector', which is -

"... all instruments of the Crown in respect of the Government of New Zealand, whether Departments, corporations, agencies or other instruments and includes the Education service and the Health service but does not include the Governor-General or any member of the Executive Council or any Minister of the Crown or any member of Parliament or any corporation listed in the First Schedule of the State Owned Enterprises Act or any university, polytechnic or college of education."

The Act covers human resource management and general management practice, including requiring State services employers to be 'good employers', to promote equal employment opportunities and efficiency in the organisations that make up the Service, and to ensure that employees are imbued with the spirit of service to the community.

Good Employer Principles

• good and safe working condition
• an equal employment opportunity programme
• the impartial selection of suitably qualified persons for appointment
• recognition of
  • opportunities for the enhancement of the abilities of individual employees
  • recognition of the aims and aspirations and the cultural differences of ethnic or minority groups
  • recognition of the employment requirements of women
  • recognition of the employment requirements of persons with disabilities

The Act also defines the appointment and functions of the State Services Commissioner and departmental chief executives, and delegation of functions by Ministers, the State Services Commissioner and chief executives.

The functions of the State Services Commissioner

Although the Act does not specify it, the Commissioner is, by virtue of the functions of the position, the head of the Public Service. The principal functions of the Commissioner are:

(a) To review the machinery of government including -

(i) The allocation of functions to and between Departments; and

(ii) The desirability of or need for the creation of new Departments and the amalgamation or abolition of existing Departments; and

(iii) The co-ordination of the activities of Departments

(b) To review the performance of each Department, including the discharge by the chief executive of his or her functions

(c) To appoint chief executives of Departments and to negotiate their conditions of employment

(d) To provide and maintain in association with chief executives a senior executive service for the Public Service

(e) To negotiate conditions of employment of employees in the Public Service

(f) To promote and develop personnel policies and standards of personnel administration for the Public Service

(g) To promote, develop, and monitor equal employment opportunities policies and programmes for the Public Service

(h) To furnish advice on the training and career development of staff

(i) To exercise such other functions with respect to the administration and management of the Public Service as the Prime Minister from time to time directs (not being functions conferred by this Act or any other Act on a chief executive other than the Commissioner).

The appointment and governance of chief executives

The appointment and governance of chief executives are amongst the most important functions of the State Services Commissioner. The efficiency and effectiveness of each department and of the Public Service as a whole depends heavily on the Commissioner's ability to recruit experienced, well-qualified and able chief executives, and to create governance conditions which ensure their best possible performance. The governance of chief executives encompasses recruitment, induction, remuneration and contract management, performance assessment and improvement, and end-of-term contract renewal or exit.

The appointment process is prescribed in some detail in the Act. In the normal course of events the process will lead to the Commissioner's recommended appointee being accepted by the Government, but should that not be the case provisions exist to enable the Government to make its own appointment - although the fact that it is a 'political appointment' is required to be officially notified. So far these provisions have not been used by the Government.

Chief executives are appointed for an initial term of up to five years with reappointments, where continuation is considered the best option, for up to a further three years. Since the first appointments were made in 1988 15 chief executives have completed their initial terms and been re-appointed, nine have been appointed to other chief executive positions part-way through their terms, and eight have retired or resigned, either to take new career opportunities outside the Public Service, or for personal or other reasons.

'Collective interests'

One of the concerns about devolved management on the scale of the State Sector Act was that it would risk an end to the concept of a unified Public Service. Chief executives took to their new independence with such relish that it seemed for a time that these concerns might be well-founded. As time has gone by, however, an equilibrium has been restored. Government remains after all a single business and departments and their chief executives clearly do need to work co-operatively in policy development, advice to the Government, and delivery of services - and need to share responsibility too, for 'collective interest' matters such as senior management development, human resource policies generally, and maintenance of ethical and professional standards. A unified Public Service continues to exist, although on a devolved and strategically co-ordinated rather than a centrally-regulated basis.

Summary

The State Sector Act has radically altered the way the Public Service looks and operates. The change to fixed term contracts for chief executives has been mirrored in employment arrangements throughout departments - particularly since the Employment Contracts Act 1991 - and there is now a pronounced emphasis on performance. Chief executives know specifically what they are expected to deliver through their performance agreements and purchase agreements, and tune and drive their departments to perform accordingly. Performance expectations are specified and actual performance is formally assessed at individual levels throughout most departments.

This has led to considerably more structural change in departments - and turnover of personnel, especially at senior levels - than was the case before 1984. Incoming chief executives tend to want to reshape their organisations to meet their own preferences and priorities, and some make further refinements and re-tunings as time goes by. A number of departments have been through several restructurings in the last eight years, each of which has generated transaction costs . These sorts of structural modifications do appear to be an integral part of the new environment.

Chief executives and managers have undoubtedly relished the freedom and opportunities that the new environment has given them. Numerous decisions that were once webbed in bureaucracy - to employ staff, change establishments, buy motor vehicles, rent accommodation, for example - have now become more or less routine. New processes, systems and approaches have been introduced, and people with ideas and energy are encouraged and rewarded. The Public Service has shaken off the dull, stodgy uniformity of the past, and many departments now have much more of the appearance and style - and 'client orientation' - of the private sector.

While impressions about the effectiveness of the reforms embodied in the State Sector Act are overwhelmingly positive, there are some concerns. The level of organisational change referred to above, while acknowledged to be part of the new environment, does undoubtedly have its costs, not the least in terms of institutional experience and knowledge, and continuity - traditional strengths of the Public Service.

High quality private sector managers have not been attracted into the Public Service in anything like the numbers that must originally have been expected. One factor is quite clearly remuneration - the Public Service has lagged well behind the private sector - but behind that the fact seems to be that the some very fundamental differences remain between the essential functions of senior management in the two sectors.

4 STRATEGIC MANAGEMENT IN THE STATE SECTOR

Introduction

One of the major shortcomings of New Zealand's previous public management system was the lack of clarity and certainty that existed about the Government's overall strategic objectives, about the way these inter-related, and about the ways in which they impacted on the operations and business of State sector agencies. Budget statements had become the principal vehicle for presenting and explaining the Government's overall programme and strategic aims, generally with a very short-term - one year - focus.

There was, in other words, inadequate strategic co-ordination and management of the business of the State.

When the new system was designed it was accordingly proposed that its centrepiece would be an annual 'Outcome Statement' issued by the Government. These outcomes, to be produced after dialogue between Ministers, would summarise the high-level and long-term results the Government would be seeking to achieve through its programme. Departments would relate their business - their outputs - to one or more outcomes.

For various reasons it proved impossible for the Government to produce an outcome statement of the kind that had been envisaged in the first few years of operation under the new system. In these circumstances departments found it necessary to fill the gap by making their own estimations of what the outcomes were likely to be in their areas of activity. Not unnaturally, these versions of 'outcome statements' tended to be very general, sometimes reflecting departmental preferences, and there was an unsatisfactory degree of co-ordination and comprehensiveness across the board. Most importantly though, they lacked the authority and collective Ministerial commitment that would have been implicit in a Governmental 'outcome statement'.

The corner was turned in 1993, when the Government produced a document entitled Path to 2010 which, along with its companion document The Next Three Years, outlined the Government's strategic vision for New Zealand in the medium term. These were followed by publication of Strategic Result Areas for the Public Sector, 1994 -1997. This set out nine strategic result areas (see box) with some detail as to where particular emphasis would be placed in each case.

This provided the basis for development of a comprehensive and co-ordinated strategic management system.

Strategic Result Areas

At the apex of New Zealand's strategic management model, the strategic result areas (SRAs) shape the priorities of the agencies of government. They must inform and take account of the fiscal and other constraints of the Economic and Fiscal Update (see chapter 5). They are formulated through a process of dialogue and analysis by Ministers. Each SRA may have an impact on more than one department, with a number of agencies contributing to the achievement of a particular result area.

Strategic Result Areas for the Public Sector 1994 - 1997

1 Maintaining and accelerating economic growth

2 Enterprise and innovation

3 External linkages

4 Education and training

5 Community security

6 Social assistance

7 Health and disability services

8 Treaty claims settlement

9 Protecting and enhancing the environment

As an example, the details of the 'Education and Training' Strategic Result Area are shown below. The SRA has significant implications for several departments - the Ministry of Education, Education Review Office, Department of Labour, Ministry of Youth Affairs, Ministry of Women's Affairs and Ministry of Maori Development, as well as the three central agencies - the State Services Commission, the Treasury and the Department of the Prime Minister and Cabinet. All of these agencies will also be involved in the achievement of a number of other SRAs as well.

4 Education and Training

Progress towards higher and more appropriate skill development to support the achievement of stronger employment and income growth.

Particular emphasis will be placed on:

i Development of programmes and a curriculum that will enable an increasing proportion of children to receive effective early childhood care and education, particularly those at risk.

ii Completion of a redesigned compulsory curriculum which focuses on generic skills, sets learning objectives and monitors the performance of students; monitoring the performance of

providers and provider institutions.

iii Further implementation of the National Qualifications Framework to enable students to build recognised qualifications; and integration of all post-core education and training in a seamless continuum of learning opportunity.

iv Ensuring that more New Zealanders have access to education and training, particularly through Skill New Zealand; development and implementation of systems that will enable full participation in workplace and post school education and training which leads to recognised qualifications.

v Improved systems for the effective delivery of resources to students and providers to enable the flexible provision of educational services to the community and, in particular, to target groups within it.

The advantages of this approach to strategic management are that the Government's priorities and objectives are explicit to the principal parties - Ministers and departments - and also to citizens, as the strategic result areas are public information. This clarity establishes strong incentives for co-ordination and co-operation between agencies.'

From SRA to KRA - achieving alignment

The essence of strategy is to be purposeful and selective, to focus on results and to frame objectives in terms which allow those responsible for their achievement considerable discretion by way of innovative and intelligent adaptation in the face of uncertainty. The Government's SRAs are complemented by departmental key result areas (KRAs). KRAs provide the means by which departments expose the 'critical few' targets which they wish to achieve over a 2 - 3 year period. Measurable milestones associated with each KRA allow Ministers and others to track progress towards those targets. KRAs might have a direct or indirect link to an SRA, or they might focus on an important aspect of organisational capability. KRAs should be few in number - generally not more than six. The requirements to expose KRAs to critical scrutiny by central agencies and other departments with related interests, and to obtain the Minister's endorsement of the selection, ensure that chief executives direct organisational effort and resources towards those few priorities which offer the greatest potential return to the Government. Moreover, chief executives have a direct stake in the strategic performance of their department through the incorporation of the KRAs in their performance agreement with the Minister.

Underpinning the convergence of SRAs and KRAs - aligning administrative priorities with political intent - is a largely informal strategic conversation between Ministers, chief executives and central agencies. That conversation, which is more or less continuous, allows important information to wash through the strategising process thereby sharpening the focus of all parties on both the Government's priorities and the risks to delivery on those.

For example, the KRAs agreed this year between the Minister of State Services and the State Services Commissioner, as chief executive of the State Services Commission, include:

• The Commissioner will provide leadership in the maintenance of an apolitical and effective Public Service with a high standard of ethical and professional behaviour during, and after, the transition to a Proportional Representation environment;
• The Commissioner will ensure that the system for employing chief executives and managing their performance supports Government's strategic objectives for the Public Service;
• The Commissioner will ensure the Government is provided with relevant advice on the implementation of its strategies (Particular emphasis will be given to the management of the Government's major machinery of government decisions, and
• The Commissioner will review the resource capability of the State Services Commission to ensure the organisation's capacity to perform its agreed role...

Assessing performance - completing the strategic management loop

The performance of the department - and through it the performance of the chief executive - are assessed by the State Services Commissioner, in consultation with the relevant Minister or Ministers and any other relevant parties. These parties may include the chief executives of the other central agencies, and representatives of organisations - in the State, private and community sectors - which have worked closely with the department. Assessments normally take place at the end of the term of the Performance Agreement - generally an annual document.

The information obtained from this process feeds back into both each chief executive's next Performance Agreement, and into the Ministerial dialogue which shapes the next series of strategic result areas.

Summary

The new strategic management system is fundamentally straightforward - Ministers decide and specify the Government's priorities, the Public Service distils these into achievable objectives for each chief executive and department, Ministers and chief executives conclude formal contracts to cover these, performance against these agreements is assessed, and the information obtained feeds back into the loop to improve the quality of the next cycle.

The deceptively simple formal strategic mechanism is wrapped in an informal process of conversation, monitoring, adjustment and evaluation. The informal process cannot readily be described or specified, but it is critical to fostering the motivations, incentives, attitudes and relationships necessary for strategic management of government in a small and relatively intimate society such as New Zealand's.

Effective performance of the system is, however, dependent on all steps being carried out comprehensively and conscientiously. Strong commitment and high quality inputs are essential at each stage - from Ministers, central agencies, chief executives and the State Services Commissioner. The main challenges in the next stage of development of the system lie in refining and consolidating these processes.

5 A REVOLUTION IN FINANCIAL MANAGEMENT - THE PUBLIC FINANCE ACT 1989

The old system - Cash Accounting

Until 1989 the New Zealand Government financial management system operated on a cash basis. Little or no consideration was given to multi-year items such as depreciation or accrued expenses, and each financial year stood on its own, disconnected from the financial activities (including capital investment) of previous years or of any following years.

Departmental Budgets were constructed on the basis of inputs - the costs of production, rather than on outputs - the quality and value of departmental products. This central control of inputs substantially limited the capacity of Public Service managers to actually manage - to command their resources. If the budget for an item ran out two-thirds the way through the year - even for perfectly good reasons - it would be extremely difficult to obtain authority to transfer funds from another underspent item to provide an additional resource. Clearly, no business operating in the commercial world could afford to restrict its flexibility in such ways.

The cash accounting system in fact allowed departments to operate in an environment that bore little relationship to the realities of business operations. The incentives became somewhat perverse - to acquire as large a budget as possible, and to make sure it was spent by the end of the year. The reward would generally be the same budget the next year. Underspending would risk a reduced budget.

From the Government's point of view adjustments for the purposes of fiscal management could readily be made through manipulation of inputs - reducing overall staff numbers for example, or increasing funds available for building construction to boost economic activity.

The system had numerous shortcomings, not the least being that concepts of performance and accountability were sketchy. What was 'good performance' - spending all of the departmental allocation? Was that what managers were ultimately accountable for?

The new legislation

The new system introduced through the Public Finance Act is based on three important principles:

• Parliamentary scrutiny - The Government receives its authority to spend from Parliament, which must be satisfied with the justification advanced for money to be appropriated, and that money is spent responsibly, for the purposes for which it is provided.
• Accountability - Departments have to report to Ministers, and Ministers to Parliament, to show that they have acted within their authorities.
• Improved managerial performance - Departments and other Government agencies need incentives to encourage good financial management practices, and prudent but enterprising use of resources.

The long title of the Public Finance Act describes the spirit and intent of the legislation:

"An Act to amend the law governing the use of public financial resources and to that end to-

(a) Provide a framework for Parliamentary scrutiny of the Government's management of the Crown's assets and liabilities, including expenditure proposals; and

(b) Establish lines of responsibility for the use of public financial resources; and

(c) Establish financial management incentives to encourage effective and efficient use of financial resources in departments and Crown entities; and

(d) Specify the minimum financial reporting obligations of the Crown, departments and Crown entities; and

(e) Safeguard public assets by providing statutory authority and control for the raising of loans, issuing of securities, giving of guarantees, operation of bank accounts, and investment of funds."

Key features of the reformed system

The new system has introduced the concepts of Ministers as purchasers, and departments and other agencies as suppliers. Ministers purchase outputs in order to achieve the Government's desired outcomes. As an example, Ministers will purchase a range of policy advice outputs from the Ministry of Transport and other departments, and a range of regulatory outputs from Transit New Zealand and other agencies, in order to achieve the Government's desired outcomes relating to a safe and efficient land transport system. Each purchaser and supplier will know what the desired outcome is, exactly what they are contracting to purchase or supply and, as all of the arrangements are transparent, how their roles and responsibilities relate to those of the other parties. The suppliers will also know that at the end of the term of the contract their performance will be rigorously assessed, and the information obtained from this will be used in developing the next sequence of contracts. The positive incentives in these arrangements are powerful - they resemble, in effect, the arrangements and incentives of the commercial marketplace.

Outputs have become the basis of appropriation by Parliament and reporting back to Parliament.

Purchase Agreements

The goods and services to be supplied by a department to a Minister are set out in a purchase agreement. These agreements specify the quality, quantity, price and timeliness of each output to be supplied. The arrangement allows a Minister to make considered and deliberate decisions as to what he or she wishes to purchase each year, and, where there is scope for competition, to select the best supplier. Questions of quality and price will clearly be very important in these considerations. The sorts of information included in purchase agreements is shown below.

Items in Purchase Agreement

• term of agreement
• description of outputs
• cost of outputs
• performance measures and standards
• procedures for assessing performance
• reporting requirements
• rewards and sanctions
• procedures for amendment of the agreement
• procedures for resolving disputes

As part of the support services it provides for its Minister a department may administer purchase agreements with other non-departmental suppliers.

The new accounting

Departments now report the full cost of their activities in producing outputs and conducting their business. This includes depreciation on assets owned, and investments required to ensure they can operate effectively over the longer term. Managers now have much more freedom to command the resources under their control - they can buy and sell assets, property and equipment, recruit and develop the staff they need, and move money about within outputs. They work out their own cash requirements, and run their own bank accounts.

Summary

The new financial management system has had three very significant benefits:

• It has complemented and consolidated the changes made by the State Sector Act, which made Public Service managers directly responsible to their Ministers for the conduct of their departments
• It has substantially increased the volume and quality of relevant information available about departmental operations, particularly about the true costs of producing and supplying individual outputs, and about the overall financial worth of the State sector
• It has substantially enhanced accountability, with the roles and responsibilities of Ministers and chief executives clearly defined, particularly in relation to the purchase and supply of outputs.

The reforms have shifted the focus of financial management away from detailed control of costs of production, and much more squarely onto the value of the goods and services supplied - and hence, achievement of the Government's desired outcomes.

6 LEGISLATING FOR STABILITY - THE FISCAL RESPONSIBILITY ACT 1994

Introduction

The Fiscal Responsibility Act legislates reporting requirements by the Minister of Finance to Parliament in respect of fiscal management. The long title of the Act refers to improving "the conduct of fiscal policy by specifying principles of responsible fiscal management and by strengthening the reporting requirements of the Crown".

The Act is the last piece in a suite of legislation - the State Owned Enterprises Act, the State Sector Act, the Public Finance Act, and the Reserve Bank Act are antecedents - designed to re-define the role and responsibilities of the State, and establish an environment facilitating responsible and business-like longer-term public management.

The Principles of Responsible Fiscal Management

Five principles guide the Government:

• Reduction of total Crown debt to prudent levels - to provide a buffer against factors that may impact on the level of debt in the future. To achieve this, Government must keep total operating expenses of the Crown in each financial year less than its total operating revenue until these are achieved.
• Maintaining prudent levels of debt once these have been achieved - by ensuring that total operating expenses do not exceed total operating revenue. There is some leeway allowed for here, as the levels are expected to be maintained on average through time.
• Achieving and maintaining levels of Crown net worth - so as to provide a buffer against factors that may impact adversely on the Crown's net worth in the future.
• Managing prudently the fiscal risks facing the Crown.
• Pursuing consistent policies - with a reasonable degree of predictability about the level and stability of tax rates for future years.

These arrangements developed from the background of New Zealand's recent economic history, when debt levels rose significantly as the Government fought to maintain income and employment levels and to broaden the base of the economy in the aftermath of Britain's entry to the European Community, and the shocks of the international oil crises. The fairly frequent adjustments and switches in policy settings that characterised that phase contributed to what became a somewhat unpredictable and unstable operating environment - both for the State sector and the business sector. The central purpose of the Fiscal Responsibility Act is to establish a stable operating environment.

The key elements in this are predictability and transparency. Departures from the principles are allowed for but the Minister of Finance must, in accordance with the Act, specify why the Government is departing from them, how the Government will return to the principles and the likely period of time that the principles will be departed from.

With the best of intentions

Having outlined what it is the Government is expected to base its fiscal management upon, the Act details the increased reporting requirements that are the responsibility of the Government. Several statements and reports are tabled in Parliament or published on a regular basis. Two of these - the Budget Policy Statement and the Fiscal Strategy Report - relate to the long term intentions of Government, while the remainder are designed generally to disclose and verify as much information as possible about the state of the economy and the progress of the Government's strategies. The other documents are various economic and fiscal updates.

The Budget Policy Statement

The Minister of Finance must, at least three months before the start of each financial year, publish a Budget Policy Statement. The Policy Statement contains the Government's long-term objectives for fiscal policy and focuses on the Crown's total operating expenses and revenue, the balance between the two, and levels of the Crown's total debt and net worth. The Statement must show how these long-term objectives accord with the principles of responsible fiscal management. The Statement should outline, both for the upcoming financial year and the following two years, the broad strategic priorities the Government will follow in preparing its Budget. The Policy Statement should also explain the Government's intentions regarding operating expenses, net worth and so on, and indicate whether these meet the principles of responsible fiscal management. Again, there is room for departing from the principles, but any such departures must be fully explained and plans for return to the principles must be included in the statement.

The Fiscal Strategy Report

Published at the same time as the Budget, the Fiscal Strategy Report is designed to ensure that the Budget is consistent with the Budget Policy Statement. Any departures must be explained and the Policy Statement amended.

The report also contains progress outlooks that include projections of trends in Crown revenue, expenses, the balance between them, net debt and net worth. Progress towards the longer-term fiscal strategy and objectives set out in the Budget Policy Statement is also set out in the report.

These two documents establish a long term perspective in the Crown's financial management and planning together with a high degree of transparency - they are by design public documents.

Economic and Fiscal Updates

Several updates are required, including -

• An Economic and Fiscal Update for the next three years - to be prepared by the Treasury and published in December each year.
• An Economic and Fiscal Update for the next three years - to be prepared by the Treasury and published three months before a general election.
• An annual Fiscal Update - for that year, including forecast estimated actual financial statements for the Crown, to be prepared by the Treasury and tabled in Parliament towards the end of each year.

All Government decisions that may have a material effect on the fiscal and economic situation must be incorporated into economic and fiscal updates. If any decision cannot be quantified the reasons are disclosed in the statement of specific fiscal risks of the Crown. If the Minister of Finance determines that including a specific decision in an economic and fiscal update would prejudice the country's economic interests or its security, or compromise the Crown in any negotiations, litigation or commercial activity, or result in material loss of value to the Crown, then the information does not have to be published. An example of grounds for such non-disclosure might be the intention to sell a Crown asset - listing expected revenue from the sale in the forecasts might prejudice the best possible price.

As the economic and fiscal updates are prepared by the Treasury on behalf of the Minister of Finance, a statement of responsibility signed by both the Minister and the Secretary to the Treasury comes with every update. The Minister is obliged to pass all policy decisions with material economic or fiscal implications to the Secretary. The Secretary must state that the Treasury has used its best professional judgment on the basis of the economic and fiscal information available, and from that judgment has supplied an economic and fiscal update incorporating the fiscal and economic implications of the policies of the Government.

Other updates required are a half year update and a current year fiscal update.

Timing of Statements

December - Half year economic and fiscal update published

The half year economic and fiscal update is published in December of each financial year unless a pre-election update has been published. The current year fiscal update contains forecast estimated Crown financial statements and a statement of all underlying significant assumptions and therefore is not as comprehensive as other reports.

Summary

The suite of reports and statements that is now examined and debated in Parliament and is open to public scrutiny provides an unprecedented level of information about the Government's fiscal performance and plans.

Even though the Fiscal Responsibility Act has been in operation for only a short time it is already contributing to a more predictable and stable operating environment than existed through the 1970s and much of the 1980s. Its value will be fully tested as New Zealand moves into government under proportional representation.

7 HUMAN RESOURCE MANAGEMENT IN THE PUBLIC SERVICE

Introduction

The State Sector Act significantly altered traditional approaches to human resource management in the Public Service. Subsequent industrial relations reforms, most notably the Employment Contracts Act 1991, have brought further quite radical changes.

Industrial Relations & Personnel Practices before Reform

The State Services Commission was until 1988 the employer of all public servants, and made and supervised all important determinations as to pay, conditions of employment and discipline. The major Public Service union, the Public Service Association, and the State Services Commission negotiated terms and conditions and related employment matters in respect of every one of thousands of employees, grouped in scores of 'occupational classes'. The system was extremely centralised, and was tightly controlled by these two main parties.

Personnel policies were developed and promulgated to cover almost every conceivable circumstance. Safeguards were provided for employees - against non-appointment and non-promotion, for example - through various appeal and review mechanisms. Policies were codified in official manuals - The Public Service Manual of Instructions, the Manual of Occupational Classes, and the Accommodation Manual. A substantial Public Service personnel management industry developed.

New era industrial relations

The very significant change embodied in the State Sector Act from a centralised to a decentralised Public Service had some important industrial relations implications. Service-wide bargaining ended as individual chief executives became employers. The chief executives themselves, and their most senior managers, had been placed on fixed-term contracts - a significant departure from past arrangements.

Chief executives began to take over from the Commission practical responsibility for industrial relations and personnel management. Significantly, however, the Commission retained some important functions - particularly in respect to the determination of pay and conditions in departments. Chief executives carry out these functions under delegated authority from the State Services Commissioner, who continues to have legal responsibility for conditions of employment, and who sets and monitors bargaining guidelines. This recognises the need to keep a measure of moderation in pay rates in particular - any employer has the capacity to unwittingly destabilise New Zealand's quite small labour market through excessively 'trend-setting' settlements.

The State Services Commissioner has similar interests and responsibilities in relation to the health and education sectors. In the latter sector the Commissioner has retained, instead of delegating his functions.

The Employment Contracts Act 1991

Prior to this Act union membership was compulsory in most of the private sector and parts of the State sector. As well as making union membership voluntary the Act places every employee's conditions of employment in an employment contract with their employer - either on an individual or a collective basis. The Act applies to both the State and private sectors. Significant numbers of public servants are, after five years' operation of the Act, employed under individual contracts - including all the staff of several smaller departments. Collective contracts continue to be preferred where there are large groups of employees engaged in similar work, although any employee and employer can agree to negotiate an individual contract at any time.

Employment contracts can have anything in them that is lawful and that the parties agree to include, but they must incorporate a number of particular provisions and protections - such as effective personal grievance and dispute resolution procedures, and an expiry date.

Individual contracts have admitted flexibility and originality into a previously somewhat sterile employment environment - parties have been able to agree on various forms of rewards for good performance and improved productivity, and previously improbable arrangements - such as bargaining for additional leave instead of pay adjustments - have become perfectly acceptable.

At the individual level, the employment contract stands beside an employee's statement of accountabilities (or similar document) - an agreement negotiated between employee and manager specifying the tasks and products the employee is responsible for delivering, including, so far as practicable, details as to quality, quantity, costs and timeliness. The principles are very much the same as those applying to purchase agreements at organisation level.

Training, development and performance management

Responsibilities for training and development have also been decentralised, although the State Sector Act made the State Services Commissioner and departmental chief executives co-operatively responsible for developing a Senior Executive Service - the second tier of senior public servants.

As time has gone by the arrangements set out in the State Sector Act for a Senior Executive Service have proved unsuitable in practical terms to meet the needs of the decentralised Public Service, and a revised approach has been developed and approved by the Government. Rather than establishing an elite senior manager corps it has been agreed to focus on 'management development' more generally, and to achieve this a Management Development Centre has been set up under the collective control of chief executives. The Centre is designed to cater for the needs of public sector managers, its objective being to increase the size and quality of the senior management pool across the Public Service.

A Public Sector Training Organisation (PSTO) has also been set up under the Government's industry training organisation policy initiative. PSTO identifies the key generic skills needed in public sector occupations and industries and co-ordinates sector- wide training.

Ultimately, however, training and development are matters between managers and their staff. It is clearly very much in a manager's interests to see that his or her staff are as well-equipped as possible to perform the duties required of them - just as it is in an employee's interests to improve and extend their competencies, in order both to perform well in their current position, and for longer-term career development purposes.

Performance assessment and management

Just as it does in relation to chief executive and departmental performance, a system of regular and rigorous individual assessment completes the performance management loop - identifying strengths and weaknesses and indicating areas where remedial or developmental attention is needed.

Regular performance review - in terms of the employment contract and the individual's statement of accountabilities - is therefore an integral part of every employer - employee relationship.

Summary

The shift that has taken place in a short time away from a centralised, tightly regulated, highly bureaucratic human resource management tradition could hardly have been more profound. Public Service managers now have very much the same latitude - and accountability - in personnel business as their private sector counterparts. They can decide what sort of staff they need, and in what numbers, they can select them and engage them, and they can negotiate terms and conditions of employment. They can do whatever is necessary to train and develop their staff, they can reward them, and if need be they can sanction them.

The purpose of these changes in Public Service human resource management has been to substantially improve the quality of individual performance - just as other changes have been designed to improve organisational performance.

Perhaps the greatest impact has been on the function of management itself. Experience has shown that not all successful managers of the old tradition can operate as effectively in the new environment - the competencies required are quite different. The liberalisations are relatively easily to cope with - it is the new, very specific accountability for high performance that is proving most challenging.

8 THE SHAPE OF THE STATE

Introduction

Until 1984 the State sector comprised:

• some 36 departments in the core Public Service
• a number of non-core departments including the Post Office and the Police
• various Government corporations including Broadcasting and Railways
• the Education and Health services
• and more than 400 smaller Government-funded agencies (QANGOS).

Now, after more than ten years of intensive reform, it comprises:

• a core Public Service with a similar number of departments but with less than half the overall staff strength - reduced from 88,000 in 1984 to less than 35,000 in 1995
• a variety of State Owned Enterprises, Crown companies and Crown Research Institutes
• substantially different education and health sectors
• and, still, some 400 other 'Crown entities'.

The changes have been enormous - no part of the State sector has been unaffected - and some, such as Health, Maori Affairs, parts of Education and parts of Agriculture & Fisheries, have been through more than one change episode.

The object of change

The overall purpose of all this reform activity has been to significantly improve the performance of the State sector, first by removing from it any functions that the Government considered to no longer be the business of the State or that could clearly be better performed elsewhere, particularly in the private sector, and then by ensuring the agencies responsible for the remaining functions were structured to deliver their services as efficiently and effectively as possible.

The changing Public Service

The core Public Service began to change quite early in the Government's overall reform programme, when the State Owned Enterprises were set up. Some of the major old departments, including the large - by New Zealand's standards - Ministry of Works and Development, Forest Service, and Ministry of Energy, were broken up and transformed into new SOEs, with their residual policy and regulatory functions transferring to new and generally much smaller core Public Service departments. Corporatisation progressively extracted from the core Public Service all remaining commercial activities of significance - the Government Tourist Bureau and the Government Printing Office being amongst the last to go.

Other reform initiatives were at the same time beginning to alter the shape of the Public Service even further. In the remaining core departments, policy and service delivery activities were being separated to reduce or eliminate conflicts between these functions - the view being that providing services on one hand and providing policy advice relating to those services on the other, are activities intrinsically at odds - the performance of one cannot help but compromise performance of the other .

Restructuring in the environmental sector was an early example. The environmental policy and management functions of the former Forest Service, Department of Lands and Survey, and Wildlife Division of the Department of Internal Affairs were replaced by three new agencies. A Ministry for the Environment was set up to focus on policy development, a Department of Conservation was established to manage New Zealand's quite substantial conservation estate, and a Department of Survey and Land Information was created to manage the Crown's core responsibilities in those area. These arrangements were designed to give each agency a very clear and unambiguous operational focus.

Similar changes were subsequently made in other areas, most recently Justice, where a single multi-function department has been broken into separate operational agencies - the Department for Courts and the Department of Corrections - together with a Ministry of Justice focused on policy.

Restructuring in the Transport area - also previously dominated by a large, multi-function department - took a different path. After the Traffic Safety Service (an operational enforcement arm) had been transferred to the Police, a small Ministry of Transport was set up as the focus for policy and co-ordination, with various operations in land and marine transport and in aviation becoming the responsibilities of a tier of non-core sectoral agencies operating under appointed boards.

The Science sector restructuring took a very similar line, with science and research units being extracted from several departments - the old Department of Scientific and Industrial Research, the Forest Research Institute of the Forest Service, and others - and reformed into new non-core Public Service 'Crown Research Institutes', with a small Ministry of Research, Science and Technology responsible for policy and co-ordination as part of the core Public Service.

In the meantime a number of small sectoral policy agencies had been set up - the Ministry of Women's Affairs, the Ministry of Youth Affairs, the Ministry of Pacific Island Affairs, and later, the Ministry of Cultural Affairs. These were intended to ensure the Government would receive highly-focused policy inputs relating to important sectors of the community. Previously these responsibilities had been buried within one or several of the larger agencies.

The new Public Service

The core Public Service that has emerged from the reforms comprises 39 departments, generally - the exceptions being the Department of Social Welfare and the Inland Revenue Department - much smaller than their counterparts in the old Public Service. The smallest department, the Ministry of Cultural Affairs, has only twelve staff, and there are eleven departments with fewer than one hundred.

Crown Entities

The Government moved to bring the myriad QANGOs into the financial management system through the Public Finance Amendment Act 1992. 'Crown entities' as they now became are characteristically set up under legislation, and nearly all are controlled by statutory boards of directors appointed by the Crown. These boards hire a chief executive, who has operational control over the entity.

Crown entities perform a very wide range of functions on behalf of the Crown. They include, for example, the New Zealand Symphony Orchestra, the Hillary Commission for Sport, Fitness and Leisure, the Privacy Commissioner, Regional Health Authorities, Crown Health Enterprises, School Boards of Trustees and Crown Research Institutes.

The Health Sector

In 1991 the Government outlined plans for reform in the Health sector. The partly-elected and partly-appointed Area Health Boards, previously responsible for most service delivery in the public health system, were abolished. In their place four Regional Health Authorities (RHAs) were set up as purchasers on the Government's behalf of health and disability support services, while former public hospitals were converted into Crown Health Enterprises (CHEs), to compete with other health service providers.

The Department of Health has become the Ministry of Health, with a focus on policy advice and co-ordination.

The Education Sector

The Education sector reforms begun in 1988 led to abolition of the ten district Education Boards which previously ran all State primary schools, and were employers of teachers and other school staff. In their place individual Boards of Trustees became responsible for the management of each school and became employers of their teachers and staff. Secondary schools had been governed in much this way for many years.

The old multi-function Department of Education was replaced by a policy-focused Ministry of Education, while 'inspection' functions in the sector became the responsibility of a new Education Review Office, both departments of the core Public Service.

Crown Entity reporting requirements

All Crown entities must prepare a set of financial statements as outlined in the Public Finance Act and in accordance with generally accepted accounting practices. These accounts must include a statement of the financial position of the Crown entity at balance date, an operating statement reflecting the revenue and expenses of the Crown entity and a statement of cash flows, both for the financial year.

If the entity is listed as part of the Fifth Schedule of the Act then it is required to prepare a statement of objectives specifying the classes of outputs to be produced by the Crown entity during the financial year, as determined at the outset of the year. It must also prepare a statement of service performance reporting the classes of outputs produced by the Crown entity during the year as compared with those outlined in the statement of objectives.

The Sixth Schedule of the Act lists the Crown entities required to prepare a statement of intent and present it to the Responsible Minister for the upcoming financial year and the two years thereafter. The contents of the statement of intent include the objectives of the Crown entity, the nature and scope of the activities to be undertaken, the performance targets by which performance will be measured and, where appropriate, the ratio of consolidated shareholders funds to total assets and the method adopted to determine the distribution of profits to the Crown. The ex post document is the Annual Report, which contains information including a comparison against the statement of intent in terms of financial performance. All of the above reports are to be tabled in Parliament less than a week after they have been returned to the Responsible Minister by the auditors.

School Boards of Trustees are treated somewhat differently. For example the Minister of Education must table in Parliament an Annual Report containing the following information:

• performance of the schools' sector in the supply of outputs;
• management performance in the sector including the quality of the management systems and practices in use; and
• effectiveness of the schools in terms of educational achievement.

Crown Research Institutes prepare their Annual Reports and other financial statements under the auspices of the Crown Research Institutes Act 1992. Statements of corporate intent are the CRI equivalent of statements of intent completed under the Sixth Schedule of the Public Finance Act and contain similar information. Three months after the end of the financial year the board of each CRI must deliver various reports to the shareholding Ministers. These include a report of the operations of the CRI over the year, audited consolidated financial statements including profit and loss, an auditor's report and the dividend that could be paid to the Crown. They must also issue a half-yearly report to the shareholding Minister, with the information to be included decided upon in the statement of corporate intent.

Conclusion

The State sector is significantly changed. The Public Service is now appreciably more focused on policy advice and on what continue to be seen as the core regulatory and related functions of the Government -border control, criminal justice, revenue collection and social welfare, for example. A new tier of Crown entities performs many of the functions previously carried out by Public Service departments - in the transport and science sectors for example, while new arrangements in health and education are introducing concepts of 'purchase and supply' into previously heavily demand-driven sectors.

This new shape is sometimes referred to as 'the three-tier State sector' - the first tier being the departments of the Public Service, delivering policy advice and the remaining core functions of the State; the second tier being the numerous Crown companies; and the third tier being private sector and community sector organisations delivering services under contract to agencies in the first and second tiers. Little is static in this new State sector - another contrast with the traditional arrangements - and changes and refinements are being made or considered continuously.

9 THE PUBLIC SERVICE AND ETHICS

Introduction

Any discussion about ethics in the Public Service is fraught with contentious issues - the apolitical nature of the Service, conflicts of interest, whistleblowing, and appropriate conduct in the sensitive zone between political interests and bureaucratic responsibilities are a few examples.

The reforms that have created New Zealand's now very much performance-orientated and very open State sector have sharpened the need for the Public Service to be and to be seen to be beyond reproach. Indeed, the nature and scale of the changes initially raised questions for some observers as to whether the traditional ethical concepts had at least partly gone by the board. There was a very clear need to reaffirm - and perhaps in some areas also reformulate - the ethical basis of the Public Service.

Ethical issues facing the Public Service are complex and wide-ranging

There are factors unique to the Public Service that require public servants to make decisions about ethical matters on a regular basis. The requirement for political neutrality is a particular example of the importance of perception. While senior public servants must give unstinting support to and demonstrate public unity with their Ministers they must at the same time provide thoroughly impartial advice to the Government. Furthermore, it is clearly not a public servant's role to comment publicly on the efficacy or appropriateness of policy decisions made by the Government.

The duty to provide free and frank advice raises some ethical dilemmas. There is a need, while maintaining the confidence of the present portfolio Minister, to not jeopardise the prospects for a similar sound working relationship with other Ministers in the future. Officials need to balance short and long-term considerations and the wider public interest, and aim for the broadest possible view of any given situation. The bottom line is that Ministers make and bear responsibility for policy decisions, while officials bear responsibility for the advice they provide to them.

Another ethical issue arises in the area of post employment conditions. Because of the nature of their work senior public servants acquire information and expertise that can have considerable commercial value. How they use or exploit that information and expertise when they are no longer a part of the Public Service is obviously very important - both for them, and for the integrity of the Public Service. The general view is that former public servants should not be restricted in their future employment activities, although this judgement can differ depending on the circumstances.

Public comment by former public servants needs to be circumspect. The duties and business of serving officials, and of the Public Service as an institution, are not always assisted by privileged external public commentary, especially where this is not in harmony with current policy settings and circumstances.

These examples illustrate the complexity and range of ethical perspectives. Three factors which shape the uniqueness of the Public Service are particularly relevant in any consideration of ethical questions -

• the crucial linking role of the Public Service in the democratic system of government
• the inescapably political context of much of the work that it must perform in a politically impartial manner, and
• the high degree of trust reposed in it and all who hold office within its ranks.

Guidance about Ethics

The State Services Commission is the central agency responsible for administering the State Sector Act 1988. The Act includes provisions relating to the "minimum standards of integrity and conduct that are to apply in the Public Service". The Commission published a Public Service Code of Conduct in 1990.

The purpose of the Code of Conduct is to offer guidance on the standards of behaviour required of public servants and to form the basis for any codes that may be established by chief executives to suit the particular operational requirements and circumstances of their own departments.

The Three Principles of the Code of Conduct

First Principle - employees should fulfill their lawful obligations to Government with professionalism and integrity;

Second Principle - employees should perform their official duties honestly, faithfully and efficiently, respecting the rights of the public and their colleagues;

Third Principle - employees should not bring their employer into disrepute through their private activities.

Following on from publication of the Code of Conduct the State Services Commission produced a set of essays entitled Public Service and Public Servants: Administrative Practice in a Time of Change. That initiative was taken at a time when many of the significant reforms to the Public Service were still bedding down. The essays were intended as contributions to a wide and continuing debate about ethics within the senior Public Service

In 1995 the State Services Commission completed a substantial project which had been begun in 1991, and which had called on the wisdom and experience of many people, to produce a comprehensive set of guidance and reference material for the Public Service. This publication, the Public Service Principles, Conventions and Practice guidance series, is now available to all public servants. It forms a common basis for understanding what constitutes appropriate conduct in various circumstances, and expresses expectations about Public Service ethical values and standards.

Summary

The New Zealand Public Service has always maintained high standards of ethical conduct. The reforms that began in the mid 1980s called into question some of the traditional expectations and standards of the Service, but the comprehensive studies and reviews carried out subsequently have strongly re-affirmed them.

As the public continues to demand greater responsiveness, value for money and professionalism from their Public Service the demand for the highest possible standards in public administration will become even stronger. Public Service Principles, Conventions and Practice goes a long way towards ensuring that these values and standards are well understood, and easily accessible to all who embark on careers in the Public Service.

10 THE RIGHT TO KNOW - THE OFFICIAL INFORMATION ACT 1982 AND THE PRIVACY ACT 1993

Introduction

The Official Information Act and the Privacy Act provide mechanisms which allow the public to have access both to data held concerning themselves as individuals, and to information relating to the processes of government. The Official Information Act in particular has had a substantial impact on the operations of the Public Service, liberalising attitudes towards the treatment and use of information - which is, after all, one of the main products of many departments.

The Official Information Act 1982

This Act was introduced to involve the public of New Zealand in the processes of government, and was founded on the premise that well-informed people make well-informed decisions. An excerpt from the long title of the Act reads as follows:

"An Act to make official information more freely available, to provide for proper access by each person to official information relating to that person, to protect official information to the extent consistent with the public interest and the preservation of personal privacy...."

Section four sets out very clearly the three purposes of the Act - to:

• increase .... the availability of official information to the people of New Zealand in order to:
• enable their more effective participation in the making and administration of laws and policies and
• to promote the accountability of Ministers of the Crown and officials and thereby to enhance respect for the law and to promote good government of New Zealand;
• provide for proper access by each person to official information relating to that person; and
• protect official information to the extent consistent with the public interest and the preservation of personal privacy.

The legislation's coverage is limited to information held by government agencies, Ministers of the Crown when acting in their official capacity, and various organisations listed either in the First Schedule of the Act or the Ombudsman's Act - for example the Higher Salaries Commission. It applies to the State sector only.

Any individual person, company, or corporate or unincorporated body can make a request for information under the Act. It is well used by political parties, sectoral interest groups and lobbyists, as well as ordinary citizens. Journalists have also mined the Act constructively when investigating public-interest topics.

When an official information request can be refused

There are two sections that relate to withholding official information, the main points of these being listed in the box below. Anyone whose request for release of information is denied can appeal to the Office of the Ombudsman for judgement regarding the decision. As time and experience have accumulated since the introduction of the Act, the arguments that can and cannot stand up when put before the Ombudsman have become well defined. A department or organisation must have a watertight case for non-disclosure.

Constitutional conventions and the effective conduct of public affairs are the most frequent justifications for non-disclosure. The section concerning constitutional conventions involves protection of the confidentiality of communications by or with the Sovereign or her representative, the convention of collective and individual Ministerial responsibility, the political neutrality of officials and the confidentiality of advice tendered by either Ministers of the Crown or officials. Maintenance of the effective conduct of public affairs concerns the free and frank expression of opinions by or between or to Ministers of the Crown or officers and employees of any department or organisation and the protection of such Ministers, officers and employees from improper pressure or harassment.

Confidentiality of Ministerial and official advice is a common basis for withholding information. It is clearly essential that policy development takes place in an environment in which advice and information can be freely and frankly exchanged, and this would obviously be jeopardised if potentially controversial advice was likely to be made public before the issue had been decided. Most of this sort of information does, nevertheless, become discoverable under the Act once it has ceased to be current.

A Selection of Reasons for Non-Disclosure

Conclusive Reasons

• if the release would prejudice the security or defence of New Zealand or the international relations of the Government of New Zealand;
• if the release would prejudice the maintenance of the law;
• if the release would seriously damage the economy of New Zealand by disclosing prematurely decisions to change or continue Government economic or financial policies relating to exchange rates or taxation for example.

Other Reasons

• to protect the privacy of natural persons, alive or dead;
• to avoid prejudice to measures protecting the health or safety of members of the public;
• to maintain the constitutional conventions for the time being;
• to maintain the effective conduct of public affairs; and to maintain legal professional privilege.

Privacy Act 1993

The principles of the Privacy Act relate to how and why information is collected, information sources, correction and storage of personal information and the limits on disclosure and usage of that information. The Privacy Act has removed personal information from the domain of the Official Information Act.

The Privacy Act concerns only personal information about an individual - a natural person as opposed to an organisation. Such information may be held by either public or private sector organisations. The Act affects information such as personnel files, job applications, curriculum vitae and so on.

When completing any documentation of a personal nature, a statement that the information provided will not be released under the provisions of the Act, or that permission to release the information is required by the person concerned has become part of the document. The Privacy Act has affected the State sector most substantially in the employment arena.

Summary

New Zealand has what is probably one of the most open systems of government in the world. Citizens are entitled to know about and to safeguard information relating to themselves. They are also able to discover information about all but the most sensitive government processes, and they have review mechanisms available if they are at first rebuffed. Very importantly , the Public Service has responded positively to the liberal environment established by the Official Information Act over the last fifteen years with a general predisposition to make information available, rather than to conceal it or protect it from public scrutiny. One of the benefits of this open regime is that it has made officials conscious that their deliberations and decisions are always soon likely to be in the public domain - with consequentially beneficial impacts on the quality of such work. The rapid growth of the Internet, and other such low-cost information networks, presages a further phase in the expression of open government.

11 FRESH CHALLENGES - THE MOVE TO PROPORTIONAL REPRESENTATION

Introduction

The elections held in November 1993 had two purposes - to elect a government for the next three-year term under New Zealand's customary 'First Past the Post' system, and also to decide whether future Parliamentary elections should take place under the same system, or under a new 'Mixed Member Proportional' system, based closely on arrangements in Germany. Voters opted by a fairly narrow margin for the proportional representation system, and the first election under these arrangements is to be held this year.

The new electoral system is expected to make the single-party majority governments to which New Zealand has become accustomed much less likely in the future. A new era of minority and coalition governments is expected to present some significant challenges for the State sector, and especially for the Public Service.

Issues for Public Servants Under MMP

Parliament, the Executive and the Public Service interact in an environment governed by a set of ever evolving conventions. MMP is not likely to change the nature of these fundamental conventions, but their application and the behaviours and expectations under them may well alter. For example, one such convention is that the Public Service faithfully and unstintingly serves the government of the day. The convention will continue to apply, of course, but the probability that governments will be composed of Ministers from more than one party is bound to change some behaviours and expectations at operational levels. Senior public servants who interact with Ministers regularly are those most likely to be affected by the move to MMP.

The immediate challenge for the Public Service has been to divine all of the implications that are presented by the new environment, to devise practical and constitutionally sound responses to each of these, and to undertake a comprehensive educational programme to prepare the State sector for a smooth transition.

The State Services Commission, working with the Department of the Prime Minister and Cabinet, the Treasury, the Crown Law Office, the Department of Justice and other relevant agencies, produced in 1995 the publication Working Under Proportional Representation - A Reference for the Public Service. This quite comprehensive study of New Zealand's system of government, and the implications for it of the new electoral system, has been well received. Further training and educational programmes will be continuing through the year.

Conclusion

The transition to government under proportional representation is the latest in a series of very substantial challenges for New Zealand's State sector. It follows radical changes since the mid 1980s to the functions and structure of the State sector - including wholesale corporatisation and decentralisation; introduction of entirely new systems for strategic management and co-ordination, and for financial management; and sweeping changes to human resource management systems and practices. The reforms have already achieved, or begun to achieve many of their original aims. They have, inevitably, presented a steady stream of practical problems for public administrators, and will continue to do so.

Very importantly, the reforms have also created a State sector which is particularly suited to meet the challenges of government under the new electoral system. The State sector has, over the last ten years, become considerably more responsive to its wider environment - indeed, that was one of the principal aims. Most importantly, though, the State sector - and the Public Service in particular - has learned to respond positively to the challenges of change, and this should inspire confidence about its capacities to meet the challenges of government under the new electoral system.

1 NEW ZEALAND IN PERSPECTIVE

Introduction

New Zealand is a small but nevertheless notable part of the global community. For all its youth and physical isolation, tucked away in the south-western Pacific Ocean, it has left a number of remarkable social and political landmarks - it was the first country to have universal adult suffrage, and it was for many years seen as a shining example of a working welfare state. More recently it has been viewed more as an example of a successful market economy.

This introductory chapter gives a short overview of New Zealand's history, which should give some understanding of the make-up of our community and the forces that have helped to shape our economy and society. Such an understanding is necessary for any analysis of the Decade of Change.

Looking over our shoulder - early New Zealand history

The indigenous people of New Zealand - the tangata whenua - are the Maori, who arrived here from Hawaiki (east Polynesia) between 800 AD and 1300 AD. The great voyaging canoes that brought the Maori people to Aotearoa ('the Land of the Long White Cloud') arrived in various locations throughout the two major islands. Once settled, the tribes began trading with each other and occasionally warring over territory. This continued uninterrupted until arrival of the European explorers in the mid 17th century. The first of these to sight New Zealand was the Dutch mariner Abel Tasman, who landed only briefly - but literally put New Zealand on the map. The next arrival was the British navigator James Cook in 1769 whose voyages opened up the country to the rest of the world.

Arrival of commercial sealers and whalers in the late 18th century, mainly in the south of the South Island, brought the first wave of prolonged European settlement. The various ports of call established by these and other traders became the focus for settlement by new arrivals to the fledgling nation. The immigrant population, their technology, animals and plants - and their weapons, liquor, tobacco and exotic diseases such as influenza and diphtheria - had enormous impacts on the established Maori economy and society, particularly in terms of resource availability and physical wellbeing. From the 1850s a long decline began in the Maori population which, by the turn of the century had more than halved, and which did not recover until the 1950s. In 1840, however, the non-Maori population in New Zealand stood at only about 1000.

It was at this time that a formal agreement was reached between the chiefs of many of the Maori tribes and the British Government. The Treaty of Waitangi, which has come to be regarded as the founding document of the nation of New Zealand, was drawn up and signed by Captain William Hobson on behalf of Queen Victoria, and local Maori chiefs at Waitangi on February 6, 1840. The English language version of the Treaty guaranteed to the Maori people the possession of their lands, forests and fisheries, the authority - 'Rangatiratanga' - of the chiefs, and the rights and privileges of British subjects, while giving the Crown the sole right to purchase land, and sovereignty over the nation. There is however continuing debate about the English and Maori versions of the Treaty, and about how some provisions - especially those dealing with resources, with Rangatiratanga, and with sovereignty - should be interpreted in contemporary circumstances.

By the 1850s the immigrant population had swelled to 32,500 and there was a clamour for self-government. The British Constitution Act of 1852 created a bi-cameral New Zealand Parliament, and a provincial system of local government. This semi-autonomous structure caused difficulties, particularly when the southern regions, flourishing through booming primary production and gold-mining, were supporting the northern regions which were caught in the grip of land wars between the settlers and the tangata whenua.

The beginnings of 'God's Own Country'

Ample pasture and the availability of cheap stock, particularly sheep, from neighbouring Australian colonies shaped a predominantly agricultural economy from the very early stages. The promise of gold had drawn many settlers to New Zealand but it was farming and its subsidiary servicing industries that provided the more dependable long-term occupations as time went by.

The first programme of public borrowing, which was instituted following a slump in world commodity prices in the early 1870s, was justified by the Colonial Treasurer as being necessary to finance the new colony's growth. £20 million was borrowed over a decade, primarily from the British government.

This occurred alongside an increase in the size of the civil service and a flurry of activity on the public works front. Utilities such as railways, roads, bridges and telegraph lines were all expanded during the 1870s. By this time the settler population had increased to 490,000 and was becoming more and more reliant on Britain for both purchase of exports and the supply of capital. Wool had, by this stage, overtaken gold as New Zealand's largest export earner.

A significant development for New Zealand was the beginning of frozen meat exports to Britain from Dunedin in 1882. Thus began a modest diversification of exports to include such commodities as butter, cheese, timber and coal, all predominantly sold to the United Kingdom. Through this period the Maori population was overtaken and then overwhelmed by the flow of new immigrants, to the stage where they were soon only 7% of the total population. Their lands steadily shrank back to mainly rugged bush-clad country in the more remote locations.

The political structure matured. The provincial governments were abolished and central government became responsible for all major decisions relating to the development and management of the country. The electoral system had been altered in 1879 to allow for universal male suffrage, as opposed to the previous system of property-owner voting. This extended in 1893 to universal suffrage, with New Zealand women being the first in the world to have the right to vote (although they were not able to stand for Parliament until 1919).

Government policies in the late 19th century encouraged further agricultural activity and led to a great increase in export earnings from that sector. The subsequent demand for improved infrastructure provoked a further rash of public borrowing and a cycle of policies that produced a nation increasingly dependent on its agricultural sector.

The dawning of the 20th Century

By the end of the 19th century the Crown owned the railways, roads, and, importantly, twelve government departments. This expansion of public sector activity was followed by a widening social role for the government. A system of free education was established for five- to fifteen-year-olds which was fully operational by the early 1890s, and old age pensions were introduced in 1898 to assist the growing population of elderly people who were considered to be impoverished. By the turn of the century the civil service had further expanded to encompass provision of health services and establishment and maintenance of power stations, amongst other activities.

New Zealand contributed significantly, both in terms of military personnel and food and other products, to the Imperial war effort between 1914 and 1918.

By 1930 New Zealand was known as Britain's farm - supplying "The Mother Country" with meat, dairy products and wool. Approximately 80% of what New Zealand exported over the period from the late 19th century until after World War II was expressly for British markets - and 50% of New Zealand's imports came by return from British manufacturers.

New Zealand's economy and society suffered in the same ways as those of most other Western countries in the great World Depression of the early 1930s. But when the international economy recovered, New Zealand's single-minded production and export of goods to its assured British markets resumed, and was accompanied, from the mid 1930's, by a programme of sweeping social reforms that established a comprehensive "welfare state". This combination of a guaranteed market for all the wool, meat and butter and cheese we could produce together with a welfare system that assured care "from the cradle to the grave" allowed a society to develop that had relatively few concerns about the world beyond the country's shores.

World War II caused a hiatus in growth, as 150,000 of the nation's finest went off to fight battles far from home. This enforced change in demographics drew large numbers of women into the workforce and also saw an increase in self-sufficiency, as businesses sprang up to meet needs that had previously been met by imports. The Maori war effort was substantial, leading to pressures for a larger role and greater autonomy in the post-War economy.

The wide range of political and economic changes brought about by the War led to the Statute of Westminster in 1947, which removed Britain's ability to make laws governing New Zealand and allowed the country to be fully independent for the first time.

Over the next three decades New Zealand quickly recovered and then consolidated its economy. Prosperity became an apparently permanent state of being for the well-insulated country, increasingly regarded by its citizens as "God's own country". The economy was still focused on the agricultural sector - 90% of exports were meat, dairy products and wool, and these enjoyed preferential access to the British market.

This reliance on a small range of products and a single major market caused substantial shocks to flow through the economy and society, first when world wool prices plummeted in the late 1960s, and then when Britain joined the European Economic Community, radically restricting access to our previously taken-for-granted markets.

By the early 1970s a measure of economic prosperity had returned with prices for agricultural products on a world-wide high. The country ranked 10th in the world for GDP per capita. However, the oil price crises of the mid 1970s brought fresh heavy shocks, and New Zealand's terms of trade fell by nearly half in a year. As the Government struggled to stabilise the economy, inflation rose into double figures and what had been a healthy trade surplus became a billion dollar deficit within two years. The Government responded with an array of policies to maintain employment levels and control consumer prices through subsidies and regulations, and to make New Zealand less dependent on imported energy sources. An extremely generous retirement superannuation scheme was also introduced. These initiatives were funded through high taxation and substantial borrowing overseas. In spite of these measures inflation remained high, unemployment increased, and real GDP per capita growth all but ceased. Debt servicing costs began to absorb a significant proportion of the Government's expenditure. By the early 1980s the OECD index placed New Zealand's standard of living 20th out of 24 countries.

As each set of policies ran into difficulties or faltered the Government responded with further controls and regulations, leading eventually to a comprehensive "wage and price freeze". These measures gave it almost total command of an economy which had become all but stagnant. New Zealand's economy was regarded by external commentators as one of the most extensively regulated in the world.

1984 - The view from the precipice

By 1984 the annual budget deficit was $3 billion and public overseas debt was above the $8 billion mark. The Government elected that year faced a number of crises. Most seriously, the country was bordering on bankruptcy and it appeared that the only solution was swift and radical reform of both the economy and the State. The economy was the first priority and the Government embarked on a programme of sweeping liberalisation which encompassed:

• devaluing, and subsequently floating the NZ dollar and abolishing controls over foreign exchange dealings
• introducing a broadly-based consumption tax (Goods and Services Tax, initially at 10% and later increased to 12.5%) and reducing some previously punitive income and sales tax rates
• abolishing the whole range of agricultural and consumer subsidies, and of import licences and export incentives, and
• applying a surcharge to the superannuation scheme, where well-off superannuitants were in effect required to pay their pensions back to the Government.

Attention then turned to the state of the State. In order to support the programmes and policies run by various Governments over the last hundred years, the Public Service had grown to account for 12% of GDP and 20% of gross investment - and was providing an extremely low return on that investment. The Government owned a wide range of departments and trading enterprises, from a winery to both merchant and retail banks and commercial forests, and including telecommunications, railway, electricity generation and marketing, and postal monopolies.

Many of these trading enterprises were transformed by the Government into 'state-owned enterprises', with the dual aims of reducing the Crown's financial liabilities and achieving efficient, client-responsive and profitable operations. This began an unprecedented analysis of 'the role of the State' in New Zealand's economy and society, which has radically reshaped the functions and form of the State sector.

The following chapters outline various aspects of New Zealand's State sector reform process, including their 'spirit' - the philosophy and intentions behind them - the practical and transitional issues encountered, the results and outcomes that have been achieved, and the problems and challenges which remain to be tackled

2 GOVERNMENT IN BUSINESS - THE STATE OWNED ENTERPRISES ACT 1986

Introduction

Successive New Zealand governments have been owners of many businesses. The areas covered have included airlines, railways, shipping, telecommunications, postal services, banking, radio and television, printing and publishing, tourism and travel, electricity production and marketing, forestry, timber production and marketing, coal mining, farming, heavy construction and several more.

There were two periods of heavy growth and development of publicly owned trading organisations. The first was in the early part of this century, when the Government decided to supply the country with badly needed infrastructure and utilities - roads, railways, telegraph systems, port facilities, electricity generation plants and supply systems, and so on, and to provide support for developing industries. This was the "pioneering stage" of New Zealand's development.

The second stage occurred in the third quarter of the century, up until the mid 1980s, as the Government sought to establish major domestic industries in an effort to broaden the base of New Zealand's economy beyond its traditional dependence on the agricultural sector. New Zealand Steel, Tasman Pulp & Paper and Petrocorp, were examples of very substantial enterprises in which the Government was deeply involved, in partnership with private sector companies. This could be termed New Zealand's "industrial expansion stage".

By the mid 1980's, however, the New Zealand economy was growing at a rate significantly below the OECD average, and was weighed down by a State sector that was absorbing 20% of gross investment and 12% of Gross Domestic Product. As an illustration, 10% of national income in 1986 was spent on the Post Office, the Lands and Survey Department, the New Zealand Forest Service and the Ministry of Energy, with the post-tax return on investment being negligible. It became clear that State owned and operated monopolies trading in tightly regulated markets were simply not going to provide the impetus needed to establish a vigorous and expanding economy.

The principles of the new legislation

Changes to the Government's commercial role were signalled in the Economic Statement given to Parliament by the Minister of Finance in 1985 discussing, amongst other things, efficiency in the State sector. An excerpt from the Minister's speech outlines the environment which preceded introduction of the market oriented State owned enterprises legislation.

"There is scope for improving efficiency in the public sector. This will increase our ability to reduce the government deficit, lower taxes, and provide income support and social services for those least able to help themselves. In the case of trading operations inefficiency can represent a tax on their customers. The essence of the problem is that the public sector needs to be adapted to meet the management needs of a modern economy. The present environment can be frustrating not only for those who have to deal with public sector organisations but also for those who have to work in them."

The Minister went on to say that:

"The management of State owned enterprises... will improve accountability to Parliament and to the community. It will also provide a rational basis for implementing those of the Government's social objectives that have previously been tangled up in trading operations."

A new approach to State enterprises - corporatisation, deregulation and privatisation

The Government's initial approach to reform of the State sector was based on the three concepts of corporatisation (or commercialisation), deregulation, and privatisation.

Corporatisation began when the State Owned Enterprises Act 1986 came into effect on 1 April 1987. The principles of the Act closely followed those outlined by the Minister of Finance in the Economic Statement. For example - the principal objective of every State enterprise shall be to operate as a successful business and to this end, to be:

• as profitable and efficient as comparable businesses that are not owned by the Crown;
• a good employer;
• an organisation that exhibits a sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so.

Furthermore, managers were to be allowed to control inputs, while pricing and marketing would be matters for the board of each State owned enterprise, which would be made up predominantly of people with relevant commercial experience and skills. State owned enterprises would pay tax, and pay dividends to the Government as shareholder, as returns on the Crown's investments. Where the Government required "social good" outputs from enterprises these would be supplied under contract, in a normal supplier/customer transaction.

Deregulation of various industries began prior to 1986, with the financial, broadcasting and transport sectors being amongst the first to feel the effects of free market economic policies. State dominated industries that were later deregulated included electricity generation and distribution, most postal services and the telecommunications sector.

Privatisation was based on redefined 'role of the State' and fiscal principles. In the Budget Statement of 1988 the Minister of Finance put forth a number of reasons why the Government should decrease its asset holdings - Ministers were not in the best position to make essentially commercial decisions; privatisation would decrease the demand for Government capital for development purposes and the subsidisation of inefficient operations; and unencumbered by commercial responsibilities the Government would be able to focus on economic and social priorities.

Criteria for asset sales included whether or not the Government would gain more in the longer term from privatisation than it would by retaining ownership, and whether the sale of a particular business would impede or enhance achievement of the Government's social goals.

Between 1988 and 1993 the Government obtained $13 billion from the sale of assets in New Zealand.

The machinery of State Owned Enterprises

Shares in the enterprises are issued to and are held by the Ministers of Finance and State Owned Enterprises. The principal form of accountability to the Government is each SOE's Statement of Corporate Intent. Each board produces a draft Statement for the shareholding Ministers no later than a month before the beginning of the enterprise's financial year.

The Statement of Corporate Intent contains much the same corporate data as is provided to investors in listed companies. For the next financial year and the two years thereafter, the following information must be outlined:

• the objectives of the enterprise
• the nature and scope of the activities to be undertaken;
• the ratio of consolidated shareholders' funds to total assets;
• a description of the accounting policies used;
• performance targets and other measures by which performance of the enterprise may be judged in relation to its objectives;
• a statement of principles adopted in determining the annual dividend together with an estimate of the amount or proportion of annual tax paid earnings that is intended to be distributed to the Crown;
• the kind of information to be provided to the shareholding Ministers by the State enterprise during the course of those financial years, including the information to be included in each half-yearly report; and
• any activities for which the board seeks compensation from the Crown (whether or not the Crown has agreed to provide such compensation).

In order to assist it to carry out its 'ownership' and 'shareholder' responsibilities in relation to the diverse range of SOEs, the Government established the 'SOE Unit', later to become the Crown Company Monitoring Advisory Unit. CCMAU provides ownership monitoring advice to both the Minister of State Owned Enterprises and other Ministers responsible for Crown Companies. Other forms of Crown company, such as Crown Health Enterprises and Crown Research Institutes are also monitored by the Advisory Unit.

State Owned Enterprises - 01 March 1998

Airways Corporation of New Zealand Ltd

Contact Energy Limited

Crown Forestry Management Ltd

Electricity Corporation of New Zealand Ltd

Government Property Services Ltd

Land Corporation Ltd

Meteorological Service of New Zealand Ltd

New Zealand Railways Corporation Ltd

New Zealand Post Limited

Solid Energy New Zealand Limited

Television New Zealand Limited

Terralink New Zealand Limited

Timberlands West Coast Limited

Transpower New Zealand Limited

Vehicle Testing New Zealand Limited

The Post Office example - Telecom, New Zealand Post and Postbank

Up to 1987 the main functions of the New Zealand Post Office were the receipt, processing and delivery of mail, ownership and management of the telephone system and regulation of telecommunications, and operation of a retail banking network.

The organisation embodied nearly all of the structural and systemic flaws of the traditional State sector - its functions were diverse and in some case unrelated (eg postal services and banking); some of its functions conflicted (eg telecommunications policy advice v telecommunications regulation v telecommunications operations v telecommunications marketing). Its postal and telecommunications operations were protected monopolies. Commercial policies and prices were determined by the Government on the basis of a wide range of social, economic and political considerations which tended to overwhelm commercial factors. Production systems were highly labour-intensive, with little in the way of incentives to improve efficiency or the quality of service to users. And ultimately, the Government was responsible for funding increasingly substantial capital development commitments - particularly in telecommunications, and bore all the risks associated with the Post Office's very diverse activities. In purely commercial terms, the Government received very little in return for its considerable investments in the New Zealand Post Office.

The decision was accordingly taken to separate the Post Office into its three main businesses - postal services, telecommunications and banking - and to set each of these up as State owned enterprises. Residual policy advice and regulatory functions were transferred to the appropriate core Public Service departments.

Telecom, inheritor of the telecommunications business, had a monopoly in the supply of all telephone connections (corporate and private), facsimile lines and provision of local calls and national and international toll calls. Subsequent deregulation of the telecommunications industry encouraged competition, prices to consumers have reduced in some areas, service standards have markedly improved (supply of a new telephone connection is down from six weeks to two days or less) and the range of services available has increased.

Telecom has since been completely privatised, and is partly owned by American companies Ameritech and Bell Atlantic. While there was criticism of a national asset being sold to overseas interests, those interests were limited to a 49.9% equity stake in Telecom, for which $4.25 billion was paid. Shares in the rest of Telecom were offered to the public in one of the biggest and best publicised floats in the history of the New Zealand sharemarket. The Crown has received substantial income from the private company, with the September 1995 half year financial statement listing $167.4 million tax paid.

New Zealand Post, the SOE retaining New Zealand's legal obligations in international mail delivery, has become a highly successful business organisation. Soon after corporatisation NZ Post reduced its staff numbers by 30% and closed 40% of retail outlets - despite some market resistance. A measure of its corporate success is the recent lowering of domestic letter charges from a standard 45¢ to 40¢. New Zealand Post's 1994 Annual Report declares 1993/94 tax paid at $33 million; the Government received $84 million in tax and dividends from the SOE.

The third branch of the old Post Office to be corporatised was Postbank. It too has subsequently been fully privatised and it is now owned by the ANZ Banking Group. Postbank also provides the Crown with revenue through taxation - a significant change from the past.

Summary

The redefinition of the State's role in business has been amongst the most successful, in economic and commercial terms, and the most controversial, in terms of its social and political impacts, of all of New Zealand's broad programme of reform since 1984.

There is no doubt that these policies have been very beneficial in economic terms. Where the Government was previously exposed to substantial and ever-expanding financial liabilities it now receives significant returns from its former businesses. In most cases competition has improved the quality of services very significantly.

Corporatisation, deregulation and privatisation have, however, also had very substantial social impacts. Thousands of jobs have been lost as the former State businesses have adjusted to the demands of competition. Communities that once depended on a single major industry - forestry, timber production, coal-mining, heavy construction (eg hydro-electricity development) - have been hard-hit. Rural communities in particular felt the losses of local Post Offices, which were often their main link to the wide range of services once provided by the Government.

As time has gone by new industries and opportunities have emerged to replace the former State businesses in many areas - or people have relocated to places where there are more or better opportunities. There have undoubtedly been some unfortunate effects - particularly through the enormous reduction in the supply of low-skilled and semi-skilled jobs, and consequently high levels of unemployment.

'Corporatisation' has done as much as anything to underline the need, in the modern world, for people to have productive skills and qualifications, and this has placed considerable pressures on an education and training system that has itself been undergoing radical reform. It has also placed very great pressures on those sectors of the community that have traditionally supplied low- and semi-skilled workers, and have accordingly placed only moderate value on the acquisition of skills and qualifications through the formal education system. The period of adjustment in these communities is likely to be quite long.

3 MANAGEMENT OF THE STATE - THE STATE SECTOR ACT 1988

Introduction

Having altered, through the 'corporatisation' processes, the structure and nature of the core Public Service - by extracting or abolishing the most significant commercial departments and activities - the Government's focus turned to the efficiency and effectiveness of Public Service management and performance.

Before the legislation - centralised control

Prior to introduction of the State Sector Act the Public Service was a single entity - all employees, regardless of which department they were working for, were part of 'the Public Service' and were employed by the State Services Commission. The Commission appointed the departmental 'permanent heads', and controlled the pay, conditions and promotions of all staff, as well as accommodation, organisational structures, and office systems - including computing services. The Public Service was a 'career service', with incentives to encourage and reward long service.

The appointment and promotion systems were examples of this, generally recognising seniority - as well as competence - and favouring serving officers over all but the most outstanding external applicants. There were elaborate appeal and review systems to ensure that appointments and promotions followed the letter of the law. The Public Service became accustomed to prolonged, arduous bureaucratic processes that seemed sometimes to be designed not to reward productive behaviour.

The spirit of the legislation

The State Sector Act 1988 was designed to introduce into the Public Service many of the positive features and incentives of the private sector. The key principle was that managers, if they were permitted to make all input decisions - pay, appointments, organisational structures, production systems, etc - would respond by accepting personal accountability for producing substantially higher quality outputs - the goods and services provided for the Government and other users. Specification would be critical - both suppliers and purchasers would need to be certain about the quality, quantity, timing and price of the goods and services to be traded.

The Public Service was also to be opened up to all comers - with the particular object of transplanting into departments the energy, imagination and commitment evident in much of the private sector managerial corps. All vacancies - from the heads of departments to office clerks - were to be advertised.

The Act accordingly made the heads of departments 'chief executives', employed by the State Services Commissioner under fixed term contracts. These chief executives became fully responsible for running their departments - employing the staff, determining pay and conditions (under delegation from the Commissioner and within general parameters set by the Government), determining the most appropriate structural arrangements, and determining the most efficient production systems - including numbers of employees.

The Act also set up a triangular relationship between each departmental Minister, the chief executive as head of the department, and the State Services Commissioner as the chief executive's employer. This arrangement recognised the practical need for chief executives to be responsible to their Ministers for the conduct of departments and for giving effect to the Government's programmes, but very importantly to also retain and reinforce the principles of an apolitical and professional Public Service.

Each chief executive became responsible to the appropriate Minister for:

• The carrying out of the functions and duties of the Department (including those imposed by Act or by the policies of the Government); and
• The tendering of advice to the appropriate Minister and other Ministers of the Crown; and
• The general conduct of the Department; and
• The efficient, effective, and economical management of the activities of the Department.

Each chief executive has a personal 'Performance Agreement' with the appropriate Minister as well as a 'Purchase Agreement' which specifies the outputs to be supplied by the department to the Minister. Each chief executive also has a distinct employment relationship with the State Services Commissioner, specified in an employment contract. The Commissioner is responsible for assessing the performance of the chief executive, and implicitly for guiding the chief executive in improving and enhancing personal efficiency and effectiveness.

While the focus of this chapter is on the Act as it applies to the Public Service, various parts of it apply to the wider 'State sector', which is -

"... all instruments of the Crown in respect of the Government of New Zealand, whether Departments, corporations, agencies or other instruments and includes the Education service and the Health service but does not include the Governor-General or any member of the Executive Council or any Minister of the Crown or any member of Parliament or any corporation listed in the First Schedule of the State Owned Enterprises Act or any university, polytechnic or college of education."

The Act covers human resource management and general management practice, including requiring State services employers to be 'good employers', to promote equal employment opportunities and efficiency in the organisations that make up the Service, and to ensure that employees are imbued with the spirit of service to the community.

Good Employer Principles

• good and safe working condition
• an equal employment opportunity programme
• the impartial selection of suitably qualified persons for appointment
• recognition of
  • the aims and aspirations of the Maori people
  • the employment requirements of the Maori people
  • the need for greater involvement of the Maori people in the Public Service
• opportunities for the enhancement of the abilities of individual employees
• recognition of the aims and aspirations and the cultural differences of ethnic or minority groups
• recognition of the employment requirements of women
• recognition of the employment requirements of persons with disabilities

The Act also defines the appointment and functions of the State Services Commissioner and departmental chief executives, and delegation of functions by Ministers, the State Services Commissioner and chief executives.

The functions of the State Services Commissioner

Although the Act does not specify it, the Commissioner is, by virtue of the functions of the position, the head of the Public Service. The principal functions of the Commissioner are:

(a) To review the machinery of government including -

(i) The allocation of functions to and between Departments; and

(ii) The desirability of or need for the creation of new Departments and the amalgamation or abolition of existing Departments; and

(iii) The co-ordination of the activities of Departments

(b) To review the performance of each Department, including the discharge by the chief executive of his or her functions

(c) To appoint chief executives of Departments and to negotiate their conditions of employment

(d) To provide and maintain in association with chief executives a senior executive service for the Public Service

(e) To negotiate conditions of employment of employees in the Public Service

(f) To promote and develop personnel policies and standards of personnel administration for the Public Service

(g) To promote, develop, and monitor equal employment opportunities policies and programmes for the Public Service

(h) To furnish advice on the training and career development of staff

(i) To exercise such other functions with respect to the administration and management of the Public Service as the Prime Minister from time to time directs (not being functions conferred by this Act or any other Act on a chief executive other than the Commissioner).

The appointment and governance of chief executives

The appointment and governance of chief executives are amongst the most important functions of the State Services Commissioner. The efficiency and effectiveness of each department and of the Public Service as a whole depends heavily on the Commissioner's ability to recruit experienced, well-qualified and able chief executives, and to create governance conditions which ensure their best possible performance. The governance of chief executives encompasses recruitment, induction, remuneration and contract management, performance assessment and improvement, and end-of-term contract renewal or exit.

The appointment process is prescribed in some detail in the Act. In the normal course of events the process will lead to the Commissioner's recommended appointee being accepted by the Government, but should that not be the case provisions exist to enable the Government to make its own appointment - although the fact that it is a 'political appointment' is required to be officially notified. So far these provisions have not been used by the Government.

Chief executives are appointed for an initial term of up to five years with reappointments, where continuation is considered the best option, for up to a further three years. Since the first appointments were made in 1988 15 chief executives have completed their initial terms and been re-appointed, nine have been appointed to other chief executive positions part-way through their terms, and eight have retired or resigned, either to take new career opportunities outside the Public Service, or for personal or other reasons.

'Collective interests'

One of the concerns about devolved management on the scale of the State Sector Act was that it would risk an end to the concept of a unified Public Service. Chief executives took to their new independence with such relish that it seemed for a time that these concerns might be well-founded. As time has gone by, however, an equilibrium has been restored. Government remains after all a single business and departments and their chief executives clearly do need to work co-operatively in policy development, advice to the Government, and delivery of services - and need to share responsibility too, for 'collective interest' matters such as senior management development, human resource policies generally, and maintenance of ethical and professional standards. A unified Public Service continues to exist, although on a devolved and strategically co-ordinated rather than a centrally-regulated basis.

Summary

The State Sector Act has radically altered the way the Public Service looks and operates. The change to fixed term contracts for chief executives has been mirrored in employment arrangements throughout departments - particularly since the Employment Contracts Act 1991 - and there is now a pronounced emphasis on performance. Chief executives know specifically what they are expected to deliver through their performance agreements and purchase agreements, and tune and drive their departments to perform accordingly. Performance expectations are specified and actual performance is formally assessed at individual levels throughout most departments.

This has led to considerably more structural change in departments - and turnover of personnel, especially at senior levels - than was the case before 1984. Incoming chief executives tend to want to reshape their organisations to meet their own preferences and priorities, and some make further refinements and re-tunings as time goes by. A number of departments have been through several restructurings in the last eight years, each of which has generated transaction costs . These sorts of structural modifications do appear to be an integral part of the new environment.

Chief executives and managers have undoubtedly relished the freedom and opportunities that the new environment has given them. Numerous decisions that were once webbed in bureaucracy - to employ staff, change establishments, buy motor vehicles, rent accommodation, for example - have now become more or less routine. New processes, systems and approaches have been introduced, and people with ideas and energy are encouraged and rewarded. The Public Service has shaken off the dull, stodgy uniformity of the past, and many departments now have much more of the appearance and style - and 'client orientation' - of the private sector.

While impressions about the effectiveness of the reforms embodied in the State Sector Act are overwhelmingly positive, there are some concerns. The level of organisational change referred to above, while acknowledged to be part of the new environment, does undoubtedly have its costs, not the least in terms of institutional experience and knowledge, and continuity - traditional strengths of the Public Service.

High quality private sector managers have not been attracted into the Public Service in anything like the numbers that must originally have been expected. One factor is quite clearly remuneration - the Public Service has lagged well behind the private sector - but behind that the fact seems to be that the some very fundamental differences remain between the essential functions of senior management in the two sectors.

4 STRATEGIC MANAGEMENT IN THE STATE SECTOR

Introduction

One of the major shortcomings of New Zealand's previous public management system was the lack of clarity and certainty that existed about the Government's overall strategic objectives, about the way these inter-related, and about the ways in which they impacted on the operations and business of State sector agencies. Budget statements had become the principal vehicle for presenting and explaining the Government's overall programme and strategic aims, generally with a very short-term - one year - focus.

There was, in other words, inadequate strategic co-ordination and management of the business of the State.

When the new system was designed it was accordingly proposed that its centrepiece would be an annual 'Outcome Statement' issued by the Government. These outcomes, to be produced after dialogue between Ministers, would summarise the high-level and long-term results the Government would be seeking to achieve through its programme. Departments would relate their business - their outputs - to one or more outcomes.

For various reasons it proved impossible for the Government to produce an outcome statement of the kind that had been envisaged in the first few years of operation under the new system. In these circumstances departments found it necessary to fill the gap by making their own estimations of what the outcomes were likely to be in their areas of activity. Not unnaturally, these versions of 'outcome statements' tended to be very general, sometimes reflecting departmental preferences, and there was an unsatisfactory degree of co-ordination and comprehensiveness across the board. Most importantly though, they lacked the authority and collective Ministerial commitment that would have been implicit in a Governmental 'outcome statement'.

The corner was turned in 1993, when the Government produced a document entitled Path to 2010 which, along with its companion document The Next Three Years, outlined the Government's strategic vision for New Zealand in the medium term. These were followed by publication of Strategic Result Areas for the Public Sector, 1994 -1997. This set out nine strategic result areas (see box) with some detail as to where particular emphasis would be placed in each case.

This provided the basis for development of a comprehensive and co-ordinated strategic management system.

Strategic Result Areas

At the apex of New Zealand's strategic management model, the strategic result areas (SRAs) shape the priorities of the agencies of government. They must inform and take account of the fiscal and other constraints of the Economic and Fiscal Update (see chapter 5). They are formulated through a process of dialogue and analysis by Ministers. Each SRA may have an impact on more than one department, with a number of agencies contributing to the achievement of a particular result area.

Strategic Result Areas for the Public Sector 1994 - 1997

1 Maintaining and accelerating economic growth

2 Enterprise and innovation

3 External linkages

4 Education and training

5 Community security

6 Social assistance

7 Health and disability services

8 Treaty claims settlement

9 Protecting and enhancing the environment

As an example, the details of the 'Education and Training' Strategic Result Area are shown below. The SRA has significant implications for several departments - the Ministry of Education, Education Review Office, Department of Labour, Ministry of Youth Affairs, Ministry of Women's Affairs and Ministry of Maori Development, as well as the three central agencies - the State Services Commission, the Treasury and the Department of the Prime Minister and Cabinet. All of these agencies will also be involved in the achievement of a number of other SRAs as well.

4 Education and Training

Progress towards higher and more appropriate skill development to support the achievement of stronger employment and income growth.

Particular emphasis will be placed on:

i Development of programmes and a curriculum that will enable an increasing proportion of children to receive effective early childhood care and education, particularly those at risk.

ii Completion of a redesigned compulsory curriculum which focuses on generic skills, sets learning objectives and monitors the performance of students; monitoring the performance of

providers and provider institutions.

iii Further implementation of the National Qualifications Framework to enable students to build recognised qualifications; and integration of all post-core education and training in a seamless continuum of learning opportunity.

iv Ensuring that more New Zealanders have access to education and training, particularly through Skill New Zealand; development and implementation of systems that will enable full participation in workplace and post school education and training which leads to recognised qualifications.

v Improved systems for the effective delivery of resources to students and providers to enable the flexible provision of educational services to the community and, in particular, to target groups within it.

The advantages of this approach to strategic management are that the Government's priorities and objectives are explicit to the principal parties - Ministers and departments - and also to citizens, as the strategic result areas are public information. This clarity establishes strong incentives for co-ordination and co-operation between agencies.'

From SRA to KRA - achieving alignment

The essence of strategy is to be purposeful and selective, to focus on results and to frame objectives in terms which allow those responsible for their achievement considerable discretion by way of innovative and intelligent adaptation in the face of uncertainty. The Government's SRAs are complemented by departmental key result areas (KRAs). KRAs provide the means by which departments expose the 'critical few' targets which they wish to achieve over a 2 - 3 year period. Measurable milestones associated with each KRA allow Ministers and others to track progress towards those targets. KRAs might have a direct or indirect link to an SRA, or they might focus on an important aspect of organisational capability. KRAs should be few in number - generally not more than six. The requirements to expose KRAs to critical scrutiny by central agencies and other departments with related interests, and to obtain the Minister's endorsement of the selection, ensure that chief executives direct organisational effort and resources towards those few priorities which offer the greatest potential return to the Government. Moreover, chief executives have a direct stake in the strategic performance of their department through the incorporation of the KRAs in their performance agreement with the Minister.

Underpinning the convergence of SRAs and KRAs - aligning administrative priorities with political intent - is a largely informal strategic conversation between Ministers, chief executives and central agencies. That conversation, which is more or less continuous, allows important information to wash through the strategising process thereby sharpening the focus of all parties on both the Government's priorities and the risks to delivery on those.

For example, the KRAs agreed this year between the Minister of State Services and the State Services Commissioner, as chief executive of the State Services Commission, include:

• The Commissioner will provide leadership in the maintenance of an apolitical and effective Public Service with a high standard of ethical and professional behaviour during, and after, the transition to a Proportional Representation environment;
• The Commissioner will ensure that the system for employing chief executives and managing their performance supports Government's strategic objectives for the Public Service;
• The Commissioner will ensure the Government is provided with relevant advice on the implementation of its strategies (Particular emphasis will be given to the management of the Government's major machinery of government decisions, and
• The Commissioner will review the resource capability of the State Services Commission to ensure the organisation's capacity to perform its agreed role...

Assessing performance - completing the strategic management loop

The performance of the department - and through it the performance of the chief executive - are assessed by the State Services Commissioner, in consultation with the relevant Minister or Ministers and any other relevant parties. These parties may include the chief executives of the other central agencies, and representatives of organisations - in the State, private and community sectors - which have worked closely with the department. Assessments normally take place at the end of the term of the Performance Agreement - generally an annual document.

The information obtained from this process feeds back into both each chief executive's next Performance Agreement, and into the Ministerial dialogue which shapes the next series of strategic result areas.

Summary

The new strategic management system is fundamentally straightforward - Ministers decide and specify the Government's priorities, the Public Service distils these into achievable objectives for each chief executive and department, Ministers and chief executives conclude formal contracts to cover these, performance against these agreements is assessed, and the information obtained feeds back into the loop to improve the quality of the next cycle.

The deceptively simple formal strategic mechanism is wrapped in an informal process of conversation, monitoring, adjustment and evaluation. The informal process cannot readily be described or specified, but it is critical to fostering the motivations, incentives, attitudes and relationships necessary for strategic management of government in a small and relatively intimate society such as New Zealand's.

Effective performance of the system is, however, dependent on all steps being carried out comprehensively and conscientiously. Strong commitment and high quality inputs are essential at each stage - from Ministers, central agencies, chief executives and the State Services Commissioner. The main challenges in the next stage of development of the system lie in refining and consolidating these processes.

5 A REVOLUTION IN FINANCIAL MANAGEMENT - THE PUBLIC FINANCE ACT 1989

The old system - Cash Accounting

Until 1989 the New Zealand Government financial management system operated on a cash basis. Little or no consideration was given to multi-year items such as depreciation or accrued expenses, and each financial year stood on its own, disconnected from the financial activities (including capital investment) of previous years or of any following years.

Departmental Budgets were constructed on the basis of inputs - the costs of production, rather than on outputs - the quality and value of departmental products. This central control of inputs substantially limited the capacity of Public Service managers to actually manage - to command their resources. If the budget for an item ran out two-thirds the way through the year - even for perfectly good reasons - it would be extremely difficult to obtain authority to transfer funds from another underspent item to provide an additional resource. Clearly, no business operating in the commercial world could afford to restrict its flexibility in such ways.

The cash accounting system in fact allowed departments to operate in an environment that bore little relationship to the realities of business operations. The incentives became somewhat perverse - to acquire as large a budget as possible, and to make sure it was spent by the end of the year. The reward would generally be the same budget the next year. Underspending would risk a reduced budget.

From the Government's point of view adjustments for the purposes of fiscal management could readily be made through manipulation of inputs - reducing overall staff numbers for example, or increasing funds available for building construction to boost economic activity.

The system had numerous shortcomings, not the least being that concepts of performance and accountability were sketchy. What was 'good performance' - spending all of the departmental allocation? Was that what managers were ultimately accountable for?

The new legislation

The new system introduced through the Public Finance Act is based on three important principles:

• Parliamentary scrutiny - The Government receives its authority to spend from Parliament, which must be satisfied with the justification advanced for money to be appropriated, and that money is spent responsibly, for the purposes for which it is provided.
• Accountability - Departments have to report to Ministers, and Ministers to Parliament, to show that they have acted within their authorities.
• Improved managerial performance - Departments and other Government agencies need incentives to encourage good financial management practices, and prudent but enterprising use of resources.

The long title of the Public Finance Act describes the spirit and intent of the legislation:

"An Act to amend the law governing the use of public financial resources and to that end to-

(a) Provide a framework for Parliamentary scrutiny of the Government's management of the Crown's assets and liabilities, including expenditure proposals; and

(b) Establish lines of responsibility for the use of public financial resources; and

(c) Establish financial management incentives to encourage effective and efficient use of financial resources in departments and Crown entities; and

(d) Specify the minimum financial reporting obligations of the Crown, departments and Crown entities; and

(e) Safeguard public assets by providing statutory authority and control for the raising of loans, issuing of securities, giving of guarantees, operation of bank accounts, and investment of funds."

Key features of the reformed system

The new system has introduced the concepts of Ministers as purchasers, and departments and other agencies as suppliers. Ministers purchase outputs in order to achieve the Government's desired outcomes. As an example, Ministers will purchase a range of policy advice outputs from the Ministry of Transport and other departments, and a range of regulatory outputs from Transit New Zealand and other agencies, in order to achieve the Government's desired outcomes relating to a safe and efficient land transport system. Each purchaser and supplier will know what the desired outcome is, exactly what they are contracting to purchase or supply and, as all of the arrangements are transparent, how their roles and responsibilities relate to those of the other parties. The suppliers will also know that at the end of the term of the contract their performance will be rigorously assessed, and the information obtained from this will be used in developing the next sequence of contracts. The positive incentives in these arrangements are powerful - they resemble, in effect, the arrangements and incentives of the commercial marketplace.

Outputs have become the basis of appropriation by Parliament and reporting back to Parliament.

Purchase Agreements

The goods and services to be supplied by a department to a Minister are set out in a purchase agreement. These agreements specify the quality, quantity, price and timeliness of each output to be supplied. The arrangement allows a Minister to make considered and deliberate decisions as to what he or she wishes to purchase each year, and, where there is scope for competition, to select the best supplier. Questions of quality and price will clearly be very important in these considerations. The sorts of information included in purchase agreements is shown below.

Items in Purchase Agreement

• term of agreement
• description of outputs
• cost of outputs
• performance measures and standards
• procedures for assessing performance
• reporting requirements
• rewards and sanctions
• procedures for amendment of the agreement
• procedures for resolving disputes

As part of the support services it provides for its Minister a department may administer purchase agreements with other non-departmental suppliers.

The new accounting

Departments now report the full cost of their activities in producing outputs and conducting their business. This includes depreciation on assets owned, and investments required to ensure they can operate effectively over the longer term. Managers now have much more freedom to command the resources under their control - they can buy and sell assets, property and equipment, recruit and develop the staff they need, and move money about within outputs. They work out their own cash requirements, and run their own bank accounts.

Summary

The new financial management system has had three very significant benefits:

• It has complemented and consolidated the changes made by the State Sector Act, which made Public Service managers directly responsible to their Ministers for the conduct of their departments
• It has substantially increased the volume and quality of relevant information available about departmental operations, particularly about the true costs of producing and supplying individual outputs, and about the overall financial worth of the State sector
• It has substantially enhanced accountability, with the roles and responsibilities of Ministers and chief executives clearly defined, particularly in relation to the purchase and supply of outputs.

The reforms have shifted the focus of financial management away from detailed control of costs of production, and much more squarely onto the value of the goods and services supplied - and hence, achievement of the Government's desired outcomes.

6 LEGISLATING FOR STABILITY - THE FISCAL RESPONSIBILITY ACT 1994

Introduction

The Fiscal Responsibility Act legislates reporting requirements by the Minister of Finance to Parliament in respect of fiscal management. The long title of the Act refers to improving "the conduct of fiscal policy by specifying principles of responsible fiscal management and by strengthening the reporting requirements of the Crown".

The Act is the last piece in a suite of legislation - the State Owned Enterprises Act, the State Sector Act, the Public Finance Act, and the Reserve Bank Act are antecedents - designed to re-define the role and responsibilities of the State, and establish an environment facilitating responsible and business-like longer-term public management.

The Principles of Responsible Fiscal Management

Five principles guide the Government:

• Reduction of total Crown debt to prudent levels - to provide a buffer against factors that may impact on the level of debt in the future. To achieve this, Government must keep total operating expenses of the Crown in each financial year less than its total operating revenue until these are achieved.
• Maintaining prudent levels of debt once these have been achieved - by ensuring that total operating expenses do not exceed total operating revenue. There is some leeway allowed for here, as the levels are expected to be maintained on average through time.
• Achieving and maintaining levels of Crown net worth - so as to provide a buffer against factors that may impact adversely on the Crown's net worth in the future.
• Managing prudently the fiscal risks facing the Crown.
• Pursuing consistent policies - with a reasonable degree of predictability about the level and stability of tax rates for future years.

These arrangements developed from the background of New Zealand's recent economic history, when debt levels rose significantly as the Government fought to maintain income and employment levels and to broaden the base of the economy in the aftermath of Britain's entry to the European Community, and the shocks of the international oil crises. The fairly frequent adjustments and switches in policy settings that characterised that phase contributed to what became a somewhat unpredictable and unstable operating environment - both for the State sector and the business sector. The central purpose of the Fiscal Responsibility Act is to establish a stable operating environment.

The key elements in this are predictability and transparency. Departures from the principles are allowed for but the Minister of Finance must, in accordance with the Act, specify why the Government is departing from them, how the Government will return to the principles and the likely period of time that the principles will be departed from.

With the best of intentions

Having outlined what it is the Government is expected to base its fiscal management upon, the Act details the increased reporting requirements that are the responsibility of the Government. Several statements and reports are tabled in Parliament or published on a regular basis. Two of these - the Budget Policy Statement and the Fiscal Strategy Report - relate to the long term intentions of Government, while the remainder are designed generally to disclose and verify as much information as possible about the state of the economy and the progress of the Government's strategies. The other documents are various economic and fiscal updates.

The Budget Policy Statement

The Minister of Finance must, at least three months before the start of each financial year, publish a Budget Policy Statement. The Policy Statement contains the Government's long-term objectives for fiscal policy and focuses on the Crown's total operating expenses and revenue, the balance between the two, and levels of the Crown's total debt and net worth. The Statement must show how these long-term objectives accord with the principles of responsible fiscal management. The Statement should outline, both for the upcoming financial year and the following two years, the broad strategic priorities the Government will follow in preparing its Budget. The Policy Statement should also explain the Government's intentions regarding operating expenses, net worth and so on, and indicate whether these meet the principles of responsible fiscal management. Again, there is room for departing from the principles, but any such departures must be fully explained and plans for return to the principles must be included in the statement.

The Fiscal Strategy Report

Published at the same time as the Budget, the Fiscal Strategy Report is designed to ensure that the Budget is consistent with the Budget Policy Statement. Any departures must be explained and the Policy Statement amended.

The report also contains progress outlooks that include projections of trends in Crown revenue, expenses, the balance between them, net debt and net worth. Progress towards the longer-term fiscal strategy and objectives set out in the Budget Policy Statement is also set out in the report.

These two documents establish a long term perspective in the Crown's financial management and planning together with a high degree of transparency - they are by design public documents.

Economic and Fiscal Updates

Several updates are required, including -

• An Economic and Fiscal Update for the next three years - to be prepared by the Treasury and published in December each year.
• An Economic and Fiscal Update for the next three years - to be prepared by the Treasury and published three months before a general election.
• An annual Fiscal Update - for that year, including forecast estimated actual financial statements for the Crown, to be prepared by the Treasury and tabled in Parliament towards the end of each year.

All Government decisions that may have a material effect on the fiscal and economic situation must be incorporated into economic and fiscal updates. If any decision cannot be quantified the reasons are disclosed in the statement of specific fiscal risks of the Crown. If the Minister of Finance determines that including a specific decision in an economic and fiscal update would prejudice the country's economic interests or its security, or compromise the Crown in any negotiations, litigation or commercial activity, or result in material loss of value to the Crown, then the information does not have to be published. An example of grounds for such non-disclosure might be the intention to sell a Crown asset - listing expected revenue from the sale in the forecasts might prejudice the best possible price.

As the economic and fiscal updates are prepared by the Treasury on behalf of the Minister of Finance, a statement of responsibility signed by both the Minister and the Secretary to the Treasury comes with every update. The Minister is obliged to pass all policy decisions with material economic or fiscal implications to the Secretary. The Secretary must state that the Treasury has used its best professional judgment on the basis of the economic and fiscal information available, and from that judgment has supplied an economic and fiscal update incorporating the fiscal and economic implications of the policies of the Government.

Other updates required are a half year update and a current year fiscal update.

Timing of Statements

December - Half year economic and fiscal update published

The half year economic and fiscal update is published in December of each financial year unless a pre-election update has been published. The current year fiscal update contains forecast estimated Crown financial statements and a statement of all underlying significant assumptions and therefore is not as comprehensive as other reports.

Summary

The suite of reports and statements that is now examined and debated in Parliament and is open to public scrutiny provides an unprecedented level of information about the Government's fiscal performance and plans.

Even though the Fiscal Responsibility Act has been in operation for only a short time it is already contributing to a more predictable and stable operating environment than existed through the 1970s and much of the 1980s. Its value will be fully tested as New Zealand moves into government under proportional representation.

7 HUMAN RESOURCE MANAGEMENT IN THE PUBLIC SERVICE

Introduction

The State Sector Act significantly altered traditional approaches to human resource management in the Public Service. Subsequent industrial relations reforms, most notably the Employment Contracts Act 1991, have brought further quite radical changes.

Industrial Relations & Personnel Practices before Reform

The State Services Commission was until 1988 the employer of all public servants, and made and supervised all important determinations as to pay, conditions of employment and discipline. The major Public Service union, the Public Service Association, and the State Services Commission negotiated terms and conditions and related employment matters in respect of every one of thousands of employees, grouped in scores of 'occupational classes'. The system was extremely centralised, and was tightly controlled by these two main parties.

Personnel policies were developed and promulgated to cover almost every conceivable circumstance. Safeguards were provided for employees - against non-appointment and non-promotion, for example - through various appeal and review mechanisms. Policies were codified in official manuals - The Public Service Manual of Instructions, the Manual of Occupational Classes, and the Accommodation Manual. A substantial Public Service personnel management industry developed.

New era industrial relations

The very significant change embodied in the State Sector Act from a centralised to a decentralised Public Service had some important industrial relations implications. Service-wide bargaining ended as individual chief executives became employers. The chief executives themselves, and their most senior managers, had been placed on fixed-term contracts - a significant departure from past arrangements.

Chief executives began to take over from the Commission practical responsibility for industrial relations and personnel management. Significantly, however, the Commission retained some important functions - particularly in respect to the determination of pay and conditions in departments. Chief executives carry out these functions under delegated authority from the State Services Commissioner, who continues to have legal responsibility for conditions of employment, and who sets and monitors bargaining guidelines. This recognises the need to keep a measure of moderation in pay rates in particular - any employer has the capacity to unwittingly destabilise New Zealand's quite small labour market through excessively 'trend-setting' settlements.

The State Services Commissioner has similar interests and responsibilities in relation to the health and education sectors. In the latter sector the Commissioner has retained, instead of delegating his functions.

The Employment Contracts Act 1991

Prior to this Act union membership was compulsory in most of the private sector and parts of the State sector. As well as making union membership voluntary the Act places every employee's conditions of employment in an employment contract with their employer - either on an individual or a collective basis. The Act applies to both the State and private sectors. Significant numbers of public servants are, after five years' operation of the Act, employed under individual contracts - including all the staff of several smaller departments. Collective contracts continue to be preferred where there are large groups of employees engaged in similar work, although any employee and employer can agree to negotiate an individual contract at any time.

Employment contracts can have anything in them that is lawful and that the parties agree to include, but they must incorporate a number of particular provisions and protections - such as effective personal grievance and dispute resolution procedures, and an expiry date.

Individual contracts have admitted flexibility and originality into a previously somewhat sterile employment environment - parties have been able to agree on various forms of rewards for good performance and improved productivity, and previously improbable arrangements - such as bargaining for additional leave instead of pay adjustments - have become perfectly acceptable.

At the individual level, the employment contract stands beside an employee's statement of accountabilities (or similar document) - an agreement negotiated between employee and manager specifying the tasks and products the employee is responsible for delivering, including, so far as practicable, details as to quality, quantity, costs and timeliness. The principles are very much the same as those applying to purchase agreements at organisation level.

Training, development and performance management

Responsibilities for training and development have also been decentralised, although the State Sector Act made the State Services Commissioner and departmental chief executives co-operatively responsible for developing a Senior Executive Service - the second tier of senior public servants.

As time has gone by the arrangements set out in the State Sector Act for a Senior Executive Service have proved unsuitable in practical terms to meet the needs of the decentralised Public Service, and a revised approach has been developed and approved by the Government. Rather than establishing an elite senior manager corps it has been agreed to focus on 'management development' more generally, and to achieve this a Management Development Centre has been set up under the collective control of chief executives. The Centre is designed to cater for the needs of public sector managers, its objective being to increase the size and quality of the senior management pool across the Public Service.

A Public Sector Training Organisation (PSTO) has also been set up under the Government's industry training organisation policy initiative. PSTO identifies the key generic skills needed in public sector occupations and industries and co-ordinates sector- wide training.

Ultimately, however, training and development are matters between managers and their staff. It is clearly very much in a manager's interests to see that his or her staff are as well-equipped as possible to perform the duties required of them - just as it is in an employee's interests to improve and extend their competencies, in order both to perform well in their current position, and for longer-term career development purposes.

Performance assessment and management

Just as it does in relation to chief executive and departmental performance, a system of regular and rigorous individual assessment completes the performance management loop - identifying strengths and weaknesses and indicating areas where remedial or developmental attention is needed.

Regular performance review - in terms of the employment contract and the individual's statement of accountabilities - is therefore an integral part of every employer - employee relationship.

Summary

The shift that has taken place in a short time away from a centralised, tightly regulated, highly bureaucratic human resource management tradition could hardly have been more profound. Public Service managers now have very much the same latitude - and accountability - in personnel business as their private sector counterparts. They can decide what sort of staff they need, and in what numbers, they can select them and engage them, and they can negotiate terms and conditions of employment. They can do whatever is necessary to train and develop their staff, they can reward them, and if need be they can sanction them.

The purpose of these changes in Public Service human resource management has been to substantially improve the quality of individual performance - just as other changes have been designed to improve organisational performance.

Perhaps the greatest impact has been on the function of management itself. Experience has shown that not all successful managers of the old tradition can operate as effectively in the new environment - the competencies required are quite different. The liberalisations are relatively easily to cope with - it is the new, very specific accountability for high performance that is proving most challenging.

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8 THE SHAPE OF THE STATE

Introduction

Until 1984 the State sector comprised:

• some 36 departments in the core Public Service
• a number of non-core departments including the Post Office and the Police
• various Government corporations including Broadcasting and Railways
• the Education and Health services
• and more than 400 smaller Government-funded agencies (QANGOS).

Now, after more than ten years of intensive reform, it comprises:

• a core Public Service with a similar number of departments but with less than half the overall staff strength - reduced from 88,000 in 1984 to less than 35,000 in 1995
• a variety of State Owned Enterprises, Crown companies and Crown Research Institutes
• substantially different education and health sectors
• and, still, some 400 other 'Crown entities'.

The changes have been enormous - no part of the State sector has been unaffected - and some, such as Health, Maori Affairs, parts of Education and parts of Agriculture & Fisheries, have been through more than one change episode.

The object of change

The overall purpose of all this reform activity has been to significantly improve the performance of the State sector, first by removing from it any functions that the Government considered to no longer be the business of the State or that could clearly be better performed elsewhere, particularly in the private sector, and then by ensuring the agencies responsible for the remaining functions were structured to deliver their services as efficiently and effectively as possible.

The changing Public Service

The core Public Service began to change quite early in the Government's overall reform programme, when the State Owned Enterprises were set up. Some of the major old departments, including the large - by New Zealand's standards - Ministry of Works and Development, Forest Service, and Ministry of Energy, were broken up and transformed into new SOEs, with their residual policy and regulatory functions transferring to new and generally much smaller core Public Service departments. Corporatisation progressively extracted from the core Public Service all remaining commercial activities of significance - the Government Tourist Bureau and the Government Printing Office being amongst the last to go.

Other reform initiatives were at the same time beginning to alter the shape of the Public Service even further. In the remaining core departments, policy and service delivery activities were being separated to reduce or eliminate conflicts between these functions - the view being that providing services on one hand and providing policy advice relating to those services on the other, are activities intrinsically at odds - the performance of one cannot help but compromise performance of the other .

Restructuring in the environmental sector was an early example. The environmental policy and management functions of the former Forest Service, Department of Lands and Survey, and Wildlife Division of the Department of Internal Affairs were replaced by three new agencies. A Ministry for the Environment was set up to focus on policy development, a Department of Conservation was established to manage New Zealand's quite substantial conservation estate, and a Department of Survey and Land Information was created to manage the Crown's core responsibilities in those area. These arrangements were designed to give each agency a very clear and unambiguous operational focus.

Similar changes were subsequently made in other areas, most recently Justice, where a single multi-function department has been broken into separate operational agencies - the Department for Courts and the Department of Corrections - together with a Ministry of Justice focused on policy.

Restructuring in the Transport area - also previously dominated by a large, multi-function department - took a different path. After the Traffic Safety Service (an operational enforcement arm) had been transferred to the Police, a small Ministry of Transport was set up as the focus for policy and co-ordination, with various operations in land and marine transport and in aviation becoming the responsibilities of a tier of non-core sectoral agencies operating under appointed boards.

The Science sector restructuring took a very similar line, with science and research units being extracted from several departments - the old Department of Scientific and Industrial Research, the Forest Research Institute of the Forest Service, and others - and reformed into new non-core Public Service 'Crown Research Institutes', with a small Ministry of Research, Science and Technology responsible for policy and co-ordination as part of the core Public Service.

In the meantime a number of small sectoral policy agencies had been set up - the Ministry of Women's Affairs, the Ministry of Youth Affairs, the Ministry of Pacific Island Affairs, and later, the Ministry of Cultural Affairs. These were intended to ensure the Government would receive highly-focused policy inputs relating to important sectors of the community. Previously these responsibilities had been buried within one or several of the larger agencies.

The new Public Service

The core Public Service that has emerged from the reforms comprises 39 departments, generally - the exceptions being the Department of Social Welfare and the Inland Revenue Department - much smaller than their counterparts in the old Public Service. The smallest department, the Ministry of Cultural Affairs, has only twelve staff, and there are eleven departments with fewer than one hundred.

Crown Entities

The Government moved to bring the myriad QANGOs into the financial management system through the Public Finance Amendment Act 1992. 'Crown entities' as they now became are characteristically set up under legislation, and nearly all are controlled by statutory boards of directors appointed by the Crown. These boards hire a chief executive, who has operational control over the entity.

Crown entities perform a very wide range of functions on behalf of the Crown. They include, for example, the New Zealand Symphony Orchestra, the Hillary Commission for Sport, Fitness and Leisure, the Privacy Commissioner, Regional Health Authorities, Crown Health Enterprises, School Boards of Trustees and Crown Research Institutes.

The Health Sector

In 1991 the Government outlined plans for reform in the Health sector. The partly-elected and partly-appointed Area Health Boards, previously responsible for most service delivery in the public health system, were abolished. In their place four Regional Health Authorities (RHAs) were set up as purchasers on the Government's behalf of health and disability support services, while former public hospitals were converted into Crown Health Enterprises (CHEs), to compete with other health service providers.

The Department of Health has become the Ministry of Health, with a focus on policy advice and co-ordination.

The Education Sector

The Education sector reforms begun in 1988 led to abolition of the ten district Education Boards which previously ran all State primary schools, and were employers of teachers and other school staff. In their place individual Boards of Trustees became responsible for the management of each school and became employers of their teachers and staff. Secondary schools had been governed in much this way for many years.

The old multi-function Department of Education was replaced by a policy-focused Ministry of Education, while 'inspection' functions in the sector became the responsibility of a new Education Review Office, both departments of the core Public Service.

Crown Entity reporting requirements

All Crown entities must prepare a set of financial statements as outlined in the Public Finance Act and in accordance with generally accepted accounting practices. These accounts must include a statement of the financial position of the Crown entity at balance date, an operating statement reflecting the revenue and expenses of the Crown entity and a statement of cash flows, both for the financial year.

If the entity is listed as part of the Fifth Schedule of the Act then it is required to prepare a statement of objectives specifying the classes of outputs to be produced by the Crown entity during the financial year, as determined at the outset of the year. It must also prepare a statement of service performance reporting the classes of outputs produced by the Crown entity during the year as compared with those outlined in the statement of objectives.

The Sixth Schedule of the Act lists the Crown entities required to prepare a statement of intent and present it to the Responsible Minister for the upcoming financial year and the two years thereafter. The contents of the statement of intent include the objectives of the Crown entity, the nature and scope of the activities to be undertaken, the performance targets by which performance will be measured and, where appropriate, the ratio of consolidated shareholders funds to total assets and the method adopted to determine the distribution of profits to the Crown. The ex post document is the Annual Report, which contains information including a comparison against the statement of intent in terms of financial performance. All of the above reports are to be tabled in Parliament less than a week after they have been returned to the Responsible Minister by the auditors.

School Boards of Trustees are treated somewhat differently. For example the Minister of Education must table in Parliament an Annual Report containing the following information:

• performance of the schools' sector in the supply of outputs;
• management performance in the sector including the quality of the management systems and practices in use; and
• effectiveness of the schools in terms of educational achievement.

Crown Research Institutes prepare their Annual Reports and other financial statements under the auspices of the Crown Research Institutes Act 1992. Statements of corporate intent are the CRI equivalent of statements of intent completed under the Sixth Schedule of the Public Finance Act and contain similar information. Three months after the end of the financial year the board of each CRI must deliver various reports to the shareholding Ministers. These include a report of the operations of the CRI over the year, audited consolidated financial statements including profit and loss, an auditor's report and the dividend that could be paid to the Crown. They must also issue a half-yearly report to the shareholding Minister, with the information to be included decided upon in the statement of corporate intent.

Conclusion

The State sector is significantly changed. The Public Service is now appreciably more focused on policy advice and on what continue to be seen as the core regulatory and related functions of the Government -border control, criminal justice, revenue collection and social welfare, for example. A new tier of Crown entities performs many of the functions previously carried out by Public Service departments - in the transport and science sectors for example, while new arrangements in health and education are introducing concepts of 'purchase and supply' into previously heavily demand-driven sectors.

This new shape is sometimes referred to as 'the three-tier State sector' - the first tier being the departments of the Public Service, delivering policy advice and the remaining core functions of the State; the second tier being the numerous Crown companies; and the third tier being private sector and community sector organisations delivering services under contract to agencies in the first and second tiers. Little is static in this new State sector - another contrast with the traditional arrangements - and changes and refinements are being made or considered continuously.

9 THE PUBLIC SERVICE AND ETHICS

Introduction

Any discussion about ethics in the Public Service is fraught with contentious issues - the apolitical nature of the Service, conflicts of interest, whistleblowing, and appropriate conduct in the sensitive zone between political interests and bureaucratic responsibilities are a few examples.

The reforms that have created New Zealand's now very much performance-orientated and very open State sector have sharpened the need for the Public Service to be and to be seen to be beyond reproach. Indeed, the nature and scale of the changes initially raised questions for some observers as to whether the traditional ethical concepts had at least partly gone by the board. There was a very clear need to reaffirm - and perhaps in some areas also reformulate - the ethical basis of the Public Service.

Ethical issues facing the Public Service are complex and wide-ranging

There are factors unique to the Public Service that require public servants to make decisions about ethical matters on a regular basis. The requirement for political neutrality is a particular example of the importance of perception. While senior public servants must give unstinting support to and demonstrate public unity with their Ministers they must at the same time provide thoroughly impartial advice to the Government. Furthermore, it is clearly not a public servant's role to comment publicly on the efficacy or appropriateness of policy decisions made by the Government.

The duty to provide free and frank advice raises some ethical dilemmas. There is a need, while maintaining the confidence of the present portfolio Minister, to not jeopardise the prospects for a similar sound working relationship with other Ministers in the future. Officials need to balance short and long-term considerations and the wider public interest, and aim for the broadest possible view of any given situation. The bottom line is that Ministers make and bear responsibility for policy decisions, while officials bear responsibility for the advice they provide to them.

Another ethical issue arises in the area of post employment conditions. Because of the nature of their work senior public servants acquire information and expertise that can have considerable commercial value. How they use or exploit that information and expertise when they are no longer a part of the Public Service is obviously very important - both for them, and for the integrity of the Public Service. The general view is that former public servants should not be restricted in their future employment activities, although this judgement can differ depending on the circumstances.

Public comment by former public servants needs to be circumspect. The duties and business of serving officials, and of the Public Service as an institution, are not always assisted by privileged external public commentary, especially where this is not in harmony with current policy settings and circumstances.

These examples illustrate the complexity and range of ethical perspectives. Three factors which shape the uniqueness of the Public Service are particularly relevant in any consideration of ethical questions -

• the crucial linking role of the Public Service in the democratic system of government
• the inescapably political context of much of the work that it must perform in a politically impartial manner, and
• the high degree of trust reposed in it and all who hold office within its ranks.

Guidance about Ethics

The State Services Commission is the central agency responsible for administering the State Sector Act 1988. The Act includes provisions relating to the "minimum standards of integrity and conduct that are to apply in the Public Service". The Commission published a Public Service Code of Conduct in 1990.

The purpose of the Code of Conduct is to offer guidance on the standards of behaviour required of public servants and to form the basis for any codes that may be established by chief executives to suit the particular operational requirements and circumstances of their own departments.

The Three Principles of the Code of Conduct

First Principle - employees should fulfill their lawful obligations to Government with professionalism and integrity;

Second Principle - employees should perform their official duties honestly, faithfully and efficiently, respecting the rights of the public and their colleagues;

Third Principle - employees should not bring their employer into disrepute through their private activities.

Following on from publication of the Code of Conduct the State Services Commission produced a set of essays entitled Public Service and Public Servants: Administrative Practice in a Time of Change. That initiative was taken at a time when many of the significant reforms to the Public Service were still bedding down. The essays were intended as contributions to a wide and continuing debate about ethics within the senior Public Service

In 1995 the State Services Commission completed a substantial project which had been begun in 1991, and which had called on the wisdom and experience of many people, to produce a comprehensive set of guidance and reference material for the Public Service. This publication, the Public Service Principles, Conventions and Practice guidance series, is now available to all public servants. It forms a common basis for understanding what constitutes appropriate conduct in various circumstances, and expresses expectations about Public Service ethical values and standards.

Summary

The New Zealand Public Service has always maintained high standards of ethical conduct. The reforms that began in the mid 1980s called into question some of the traditional expectations and standards of the Service, but the comprehensive studies and reviews carried out subsequently have strongly re-affirmed them.

As the public continues to demand greater responsiveness, value for money and professionalism from their Public Service the demand for the highest possible standards in public administration will become even stronger. Public Service Principles, Conventions and Practice goes a long way towards ensuring that these values and standards are well understood, and easily accessible to all who embark on careers in the Public Service.

10 THE RIGHT TO KNOW - THE OFFICIAL INFORMATION ACT 1982 AND THE PRIVACY ACT 1993

Introduction

The Official Information Act and the Privacy Act provide mechanisms which allow the public to have access both to data held concerning themselves as individuals, and to information relating to the processes of government. The Official Information Act in particular has had a substantial impact on the operations of the Public Service, liberalising attitudes towards the treatment and use of information - which is, after all, one of the main products of many departments.

The Official Information Act 1982

This Act was introduced to involve the public of New Zealand in the processes of government, and was founded on the premise that well-informed people make well-informed decisions. An excerpt from the long title of the Act reads as follows:

"An Act to make official information more freely available, to provide for proper access by each person to official information relating to that person, to protect official information to the extent consistent with the public interest and the preservation of personal privacy...."

Section four sets out very clearly the three purposes of the Act - to:

• increase .... the availability of official information to the people of New Zealand in order to:
• enable their more effective participation in the making and administration of laws and policies and
• to promote the accountability of Ministers of the Crown and officials and thereby to enhance respect for the law and to promote good government of New Zealand;
• provide for proper access by each person to official information relating to that person; and
• protect official information to the extent consistent with the public interest and the preservation of personal privacy.

The legislation's coverage is limited to information held by government agencies, Ministers of the Crown when acting in their official capacity, and various organisations listed either in the First Schedule of the Act or the Ombudsman's Act - for example the Higher Salaries Commission. It applies to the State sector only.

Any individual person, company, or corporate or unincorporated body can make a request for information under the Act. It is well used by political parties, sectoral interest groups and lobbyists, as well as ordinary citizens. Journalists have also mined the Act constructively when investigating public-interest topics.

When an official information request can be refused

There are two sections that relate to withholding official information, the main points of these being listed in the box below. Anyone whose request for release of information is denied can appeal to the Office of the Ombudsman for judgement regarding the decision. As time and experience have accumulated since the introduction of the Act, the arguments that can and cannot stand up when put before the Ombudsman have become well defined. A department or organisation must have a watertight case for non-disclosure.

Constitutional conventions and the effective conduct of public affairs are the most frequent justifications for non-disclosure. The section concerning constitutional conventions involves protection of the confidentiality of communications by or with the Sovereign or her representative, the convention of collective and individual Ministerial responsibility, the political neutrality of officials and the confidentiality of advice tendered by either Ministers of the Crown or officials. Maintenance of the effective conduct of public affairs concerns the free and frank expression of opinions by or between or to Ministers of the Crown or officers and employees of any department or organisation and the protection of such Ministers, officers and employees from improper pressure or harassment.

Confidentiality of Ministerial and official advice is a common basis for withholding information. It is clearly essential that policy development takes place in an environment in which advice and information can be freely and frankly exchanged, and this would obviously be jeopardised if potentially controversial advice was likely to be made public before the issue had been decided. Most of this sort of information does, nevertheless, become discoverable under the Act once it has ceased to be current.

A Selection of Reasons for Non-Disclosure

Conclusive Reasons

• if the release would prejudice the security or defence of New Zealand or the international relations of the Government of New Zealand;
• if the release would prejudice the maintenance of the law;
• if the release would seriously damage the economy of New Zealand by disclosing prematurely decisions to change or continue Government economic or financial policies relating to exchange rates or taxation for example.

Other Reasons

• to protect the privacy of natural persons, alive or dead;
• to avoid prejudice to measures protecting the health or safety of members of the public;
• to maintain the constitutional conventions for the time being;
• to maintain the effective conduct of public affairs; and to maintain legal professional privilege.

Privacy Act 1993

The principles of the Privacy Act relate to how and why information is collected, information sources, correction and storage of personal information and the limits on disclosure and usage of that information. The Privacy Act has removed personal information from the domain of the Official Information Act.

The Privacy Act concerns only personal information about an individual - a natural person as opposed to an organisation. Such information may be held by either public or private sector organisations. The Act affects information such as personnel files, job applications, curriculum vitae and so on.

When completing any documentation of a personal nature, a statement that the information provided will not be released under the provisions of the Act, or that permission to release the information is required by the person concerned has become part of the document. The Privacy Act has affected the State sector most substantially in the employment arena.

Summary

New Zealand has what is probably one of the most open systems of government in the world. Citizens are entitled to know about and to safeguard information relating to themselves. They are also able to discover information about all but the most sensitive government processes, and they have review mechanisms available if they are at first rebuffed. Very importantly , the Public Service has responded positively to the liberal environment established by the Official Information Act over the last fifteen years with a general predisposition to make information available, rather than to conceal it or protect it from public scrutiny. One of the benefits of this open regime is that it has made officials conscious that their deliberations and decisions are always soon likely to be in the public domain - with consequentially beneficial impacts on the quality of such work. The rapid growth of the Internet, and other such low-cost information networks, presages a further phase in the expression of open government.

11 FRESH CHALLENGES - THE MOVE TO PROPORTIONAL REPRESENTATION

Introduction

The elections held in November 1993 had two purposes - to elect a government for the next three-year term under New Zealand's customary 'First Past the Post' system, and also to decide whether future Parliamentary elections should take place under the same system, or under a new 'Mixed Member Proportional' system, based closely on arrangements in Germany. Voters opted by a fairly narrow margin for the proportional representation system, and the first election under these arrangements is to be held this year.

The new electoral system is expected to make the single-party majority governments to which New Zealand has become accustomed much less likely in the future. A new era of minority and coalition governments is expected to present some significant challenges for the State sector, and especially for the Public Service.

Issues for Public Servants Under MMP

Parliament, the Executive and the Public Service interact in an environment governed by a set of ever evolving conventions. MMP is not likely to change the nature of these fundamental conventions, but their application and the behaviours and expectations under them may well alter. For example, one such convention is that the Public Service faithfully and unstintingly serves the government of the day. The convention will continue to apply, of course, but the probability that governments will be composed of Ministers from more than one party is bound to change some behaviours and expectations at operational levels. Senior public servants who interact with Ministers regularly are those most likely to be affected by the move to MMP.

The immediate challenge for the Public Service has been to divine all of the implications that are presented by the new environment, to devise practical and constitutionally sound responses to each of these, and to undertake a comprehensive educational programme to prepare the State sector for a smooth transition.

The State Services Commission, working with the Department of the Prime Minister and Cabinet, the Treasury, the Crown Law Office, the Department of Justice and other relevant agencies, produced in 1995 the publication Working Under Proportional Representation - A Reference for the Public Service. This quite comprehensive study of New Zealand's system of government, and the implications for it of the new electoral system, has been well received. Further training and educational programmes will be continuing through the year.

Conclusion

The transition to government under proportional representation is the latest in a series of very substantial challenges for New Zealand's State sector. It follows radical changes since the mid 1980s to the functions and structure of the State sector - including wholesale corporatisation and decentralisation; introduction of entirely new systems for strategic management and co-ordination, and for financial management; and sweeping changes to human resource management systems and practices. The reforms have already achieved, or begun to achieve many of their original aims. They have, inevitably, presented a steady stream of practical problems for public administrators, and will continue to do so.

Very importantly, the reforms have also created a State sector which is particularly suited to meet the challenges of government under the new electoral system. The State sector has, over the last ten years, become considerably more responsive to its wider environment - indeed, that was one of the principal aims. Most importantly, though, the State sector - and the Public Service in particular - has learned to respond positively to the challenges of change, and this should inspire confidence about its capacities to meet the challenges of government under the new electoral system.