The public sector is the part of economic and administrative life that
deals with the delivery of goods and services by and for the
government, whether national, regional local/municipal. The way in
which the public sector conducts its business, and uses the resources
available to it, have a very significant impact on a society’s overall
economic performance.

The public sector is a large part of New
Zealand’s economy. Government expenditure and taxation excluding
transfers is equivalent to one-third of GDP in New Zealand.

New Zealand in the mid-1980s was in the unenviable position of its
relative economic position deteriorating compared to other comparative
economies.Central government had a large and growing deficit,
unemployment was increasing, New Zealand’s credit rating was slipping
and there were high inflationary pressures. The inefficiency of the
public sector was a significant part of the problem.

The
government in the late1980s responded with wide-spread structural
changes, the reforms of which remain largely in place today. The main
objectives of reform were to enhance both the efficiency and
accountability of the economy and the public sector.  In the public
sector the basic principles adopted included establishing; clear
managerial authority, clear organisational objectives and effective
systems of accountability. Chief executives were given under the State
Sector Act 1988 much more freedom to manage and, in return, were more
accountable for delivering.

Below is a slide taken from the Treasury website showing the benefits of the reforms on New Zealand’s Operating Balance.
 
Professor
Schick found that public sector reforms in New Zealand had greatly
improved the efficiency and quality of public services. He pointed to
tangible improvements in service delivery for the public but noted the
need for continuing improvements in the following key areas:

•
The accountability system: The accountability model should encompass
responsibility, based not solely on greater specification of results,
but also on values, judgment and leadership.
• Strategic capacity:
Government’s capacity to make medium-term and long- term strategic
decisions, and to align resources with strategic goals, should be
strengthened
• Costing of public services: Additional work has to be
done in cost accounting and analysis, and achieving true contestability
in public services.

This paper explores the notions that the
Statement of Intent system (also an important part of the
Accountability System ) and adherence to the Public Finance Act 1989
(PFA) and its amendment the Public Finance Amendment Act 2004
contribute to efficiency and quality (effectiveness) of public
services.

Statement of Intent

The
Statement of Intent is the document currently used to present this
information and provide a way for departments to explain to a wider
audience what they intend to do and why. They also provide a base
against which the department’s actual performance can later be
assessed. To ensure it captures all important dimensions of a
department’s performance, a Statement of Intent must look at issues
beyond the forthcoming financial year, and include a range of financial
and non-financial performance goals and standards.

The information presented in a Statement of Intent should reflect the key
decisions
made by a department through its internal planning processes, taking 
account of the department’s functions, operating environment and all
relevant  Government decisions. Departmental Statements of Intent are
presented to the House of Representatives and published on Budget day
(section 39 PFA).

The process of developing a Statement of
Intent   involves discussions between a department, its Responsible
Minister, and the other Ministers and agencies with whom the department
needs to collaborate. It should lead to understanding and buy-in to the
department’s plans, and ensure that the Government’s interests and
priorities are appropriately incorporated into those plans.

The information required on a department’s future operating intentions falls into two broad categories:
1.
A longer-term set of information, covering at least three financial
years into the future, that provides a succinct, strategically-oriented
description and explanation of what the department is trying to
achieve, how it intends to achieve this, how it will measure the
progress made, the challenges it will face and the implications all
this has for the capability needs of the department (section 40), and
2.
An annual set of information, for the first financial year only, that
provides more detailed performance information in the form of forecast
financial statements and statements of forecast service performance,
against which the department must report and be formally audited at the
end of that financial year (section 41).

The information
provided by a department under section 40 of the Act should explain the
thinking behind the key elements of a department’s plans for the next
three years (or longer) and must include:
• The nature and scope of the department’s functions and intended operations
•  The specific  impacts, outcomes or objectives that the department seeks to achieve or to contribute to through its operations
•
How the department intends to perform its functions and conduct its
operations to achieve those impacts, outcomes or objectives
• How the department intends to effectively manage those functions and operations within a changeable operating environment, and
•
The main measures and standards that the department intends to use to
assess and report on matters relating to the department’ future
performance; including:
- The impacts, outcomes or objectives
achieved or contributed to by the department (including possible
unintended impacts or negative outcomes
- The cost-effectiveness of the interventions that the department delivers or administers, and
- The department’s organisational health and capability to perform its functions and conduct its operations effectively

The annual information for the first financial year required by section 41 of the
Act includes:
• 
Forecast financial statements prepared in accordance with generally
accepted  accounting practice (GAAP), together with comparatives for
the previous financial year (both budget and estimated actual)
• A
Statement of all significant assumptions, and a statement of forecast
service performance prepared in accordance with GAAP that describes and
specifies  performance measures for each class of outputs the
department proposes to supply

The information on future
operating intentions must also include a statement signed by the chief
executive, and countersigned by the department’s chief financial
officer that the information provided is the responsibility of the
chief executive and is consistent with all existing and proposed
appropriations (section 42).

To ensure the department’s plans
are appropriately aligned with the Government’s expectations of the
departments, the information must also be accompanied by a statement
signed by the department’s Responsible Minister, stating that the
information provided is consistent with the policies and performance
expectations of the Government (section 39).

Recent measures
adopted by the current Government will assist in improving
effectiveness and efficiency across the public sector.

The
Government has, for example, identified three themes, or over-arching
objectives, which help the public sector to prioritize their
activities. These are:
Economic transformation; Families, Young and
Old; and National Identity. The themes are also playing a significant
part in how Ministers manage the annual budget process.

The Public Finance Act 1989 and Public Finance Amendment Act 2004

Efficiency
in the Public Sector is predicated on following the legislative
requirements governing use of public financial resources – the main
vehicle being the Public Finance Act 1989 and its amendment, the Public
Finance Amendment Act 2004.

Parliament is the supreme law-making authority and ultimately provides authority for all governmental activity.

The Public Finance Act (PFA) exists to govern the use of public financial resources, including:
• Establishing lines of responsibility for effective and efficient management and use of public Financial resources
•
Specifying the minimum Financial and non-Financial reporting
obligations of Ministers, departments,  Offices of Parliament and
certain other agencies

The PFA is not the only Act that establishes requirements for the use of public resources:
•
The State Sector Act 1988 sets out general administrative and oversight
arrangements for (mainly) core government public services designed to
maintain appropriate standards of integrity and conduct and support
efficient and responsible management within the state sector
• The
Public Audit Act 2001 provides for the Controller and Auditor-General
(the Auditor-General) to be an officer of Parliament and sets out the
law relating to the audit of public sector organisations. (The
Auditor-General provides independent assurance to Parliament and the
public that public sector organisations are operating and accounting
for their performance in accordance with Parliament’s intentions.)
•
The Crown Entities Act 2004 reformed the law relating to Crown entities
to provide a consistent framework for the establishment, governance,
and operation of Crown entities and to clarify accountability
relationships between Crown entities, their board members, their
responsible Ministers on behalf of the Crown, and the House of
Representatives.
• The State-Owned Enterprises Act 1986 (SOE Act)
outlines the principles governing the operation of state enterprises
and establishes requirements for the accountability of state
enterprises and the responsibility of Ministers.

Since the late
1980s, New Zealand’s public sector reforms and management system has
focussed on promoting public sector performance. This performance
management approach emphasises clear objectives and clear lines of
responsibility, greater freedom to manage, and a corresponding
expectation of greater accountability for results. Such a system
requires good measures of performance that interested external parties
can trust. In the areas of financial reporting, budgeting and budget
controls, the Public Finance Act attempts to meet these objectives by
requiring the Government and all public sector entities to prepare
financial information that:
• Uses accrual accounting concepts and statements
•
Is in accordance with financial reporting standards approved by an
independent standard setter, and in the case of annual financial
statements, is audited by an independent auditor

Accrual Accounting

The
New Zealand Government adopted the accrual basis of accounting because
it provides a more comprehensive set of information than cash
accounting and it supports their commitment to provide comprehensive
and transparent financial reports.

Because the accrual basis
recognises expenses when they are incurred rather than when they are
paid there are limited incentives to shift payments between periods
inappropriately. An accrual budgeting system focuses on costs to be
incurred rather than funds to be obligated or spent. Accrual budgets
provide a more comprehensive financial picture of proposed activities
and the impact of those proposals on the operating costs of individual
entities.

Parliamentary authority for budget (appropriations) is
also expressed in accrual terms. Accrual appropriations mean that
Parliament’s control is effectively exerted when the use of public
money or resources is committed as expenses are recognised at the point
at which an obligation is incurred, which is usually prior to when the
flow of cash occurs. Authorisation of total expenses ensures that the
total level of Government activity is transparent to Parliament. Any
incentive to favour activities with non-cash costs is avoided.

Independent accounting standards

Not
withstanding the special characteristics of Government, the Government
applies the same financial reporting standards as applied by other
reporting entities in New Zealand. This means that public sector
financial statements can be more readily understood by a wide range of
people and allows the Government to recruit accountants from the
private sector and enhances the ability of accountants to move from one
sector to the other.

The Government uses independently
established rules for financial reporting in order to give users of
reports a high level of confidence in the relevance and reliability of
the information.

The PFA requires that the financial statements
(and financial forecasts) of the Government and each individual
department are prepared in accordance with generally accepted
accounting practice (GAAP) in New Zealand. GAAP is an objective and
independent set of rules that governs the recognition and measurement
of financial elements such as assets, liabilities, revenues and
expenses.

For example, GAAP requires that expenses and revenue
be shown separately except in the limited circumstances where GAAP
permits offsets. The financial reporting standards that are the core of
GAAP in New Zealand are approved by the Accounting Standards Review
Board (ASRB) an independent body established by the Government. The
ASRB approves standards for application by both the public and private
sectors.

The Public Finance Amendment Act

The
Public Finance Amendment Act 2004 was the first major change to New
Zealand’s public sector management system in over a decade.  It grew
out of a desire to improve performance and integration across New
Zealand’s public sector and reflects the notions that an efficient
effective and innovative state sector is critical to achieving higher
living standards for New Zealanders and   that maintaining the level of
trust New Zealanders have in the integrity of the Government’s
Financial systems is fundamental to our democracy.

The changes
which were made to the Public Finance Act have, of course, resulted  in
a number of changes to the Financial and administrative procedures that
are required to be followed by government departments, Crown entities
and other public institutions.

Section 38 of Public Finance
Amendment Act 2004 provides that Departments must provide information
on future operating intentions.

Section  40, paragraph (d) 
provides that this information must set out and explain for the period
to which it relates –the main measures and standards that the
department intends to use to assess and report on matters relating to
the department’s future performance, including, with-out limitation the
cost-effectiveness of the interventions that the department delivers or
administers:

The legislation does not specify a standard for the
quality of the cost-effectiveness information but external agencies and
Government auditors expect departments to adopt measures and standards
that will enable it to justify its expenditure and to answer the
question:

“…Is value for money being provided?”

Treasury,
State Services Commission and Audit envisage (at least in the longer
term) an analysis of the cost effectiveness of the interventions that
are delivered against the cost-effectiveness of other possible
interventions.

How can Cost-effectiveness (value for money) be assessed?

Cost-effectiveness
analysis (CEA) is a form of economic analysis that compares the
relative expenditure (costs) and outcomes (effects) of two or more
courses of action.

Cost Effectiveness Analysis (CEA) is similar
to CBA (Cost Benefit Analysis) except that it does not attempt to place
a value on the major benefits of the intervention.  
• CEA compares the costs of alternative ways of producing the same or similar outputs/benefits.  
• It is used to find the option that meets a predefined objective at a minimum cost.  
• It provides measures of the relative effectiveness of alternative interventions in achieving a given objective.  
• The unit of measurement is usually non-monetary.

“….CEA
is a technique for comparing the relative value of various strategies.
In its most common form, a new strategy is compared with current
practice (the "low-cost alternative") in the calculation of the
cost-effectiveness ratio:
 
The result might be considered as the
"price" of the additional outcome purchased by switching from current
practice to the new strategy (e.g., $10,000 per life year). If the
price is low enough, the new strategy is considered "cost-effective."

It
is important to carefully consider exactly what that statement means.
If a strategy is dubbed "cost-effective" and the term is used as its
creators intended, it means that the new strategy is good value. Note
that:
• Being cost-effective does not mean that the strategy saves money!
• Just because a strategy saves money doesn't mean that it is cost-effective!  
•
The very notion of cost-effective requires a value judgment—what you
think is a good price for an additional outcome, someone else may not!

Below is an example CEA.
A CEA Examining Three Strategies
Strategy    Cost    Marginal Cost    Effectiveness    Marginal Effectiveness    CE Ratio
Nothing    $0    -    0 years    -    
Simple    $10,000    $10,000    5 years    5 years    $2,000/yr
Complex    $100,000    $90,000    6 years    1 years    $90,000 yr

A Department’s Drive for Efficiency – what DOC is doing
Current developments

Changes
to our planning system built off the operational activity and spatial
data work under NHMS and led by Elaine Wright will give us the cost
elements of the equation for alternative interventions (our outputs). 
This work breaks outputs into generic “activities” that have related
budgets and costs.

Our next SOI sets out a framework for this work that we now need to develop further and implement.

What
we are missing is EFFECT part of the equation – this is where DOC’s
Research Development & Improvement division are perhaps the best
placed to lead and help us define this aspect – the proposal is that
effect can best be identified by tracking and evaluating change in
indicators as a result of the outputs we deliver.  To enable us to do
this we probably need to adopt a more rigorous approach of relating
outputs to outcomes as a first step.

Other Related Work
Work underway in the species prioritisation project also gives us access to a parallel approach to this issue e.g.

Where
CE = the cost effectiveness of each prescription;
(a) is calculated as the product of (B) the biodiversity benefit;
(S) = the probability of success; and
(C) = the cost of the prescription

Activity
Based Costing (ABC) – this related work looks at cost-drivers, the
efficiency of our output delivery and uses a similar activity approach
to costing our work.

SOI 07/08
The Department will:
• Continue with the activity-based costing model for benchmarking of trends leading to efficiency and effectiveness gains
• Refine and balance budgets for the next three years based on
long-term financial plans
•
The Department has completed initial development of an approach to
assessing and reporting on the cost-effectiveness of the interventions
it delivers. It will be piloting the first phase of this development
for the Natural Heritage Output Class in the 07/08 year. This phase
involves gathering data on the planned costs of the range of
interventions undertaken in the Natural Heritage Output Class. In the
next phase it is planned to consider the approach to relating the range
of interventions delivered in the field to changes in intermediate
outcome indicators. This is a long-term project under way in the
Department and will take a number of iterations over several years to
fully develop the process and supporting systems.

References
• The Schick Report: (1996) The spirit of reform: Managing the New Zealand State Sector in a time of change  
• Treasury Website
The
Imperative for Performance in the Public Sector - Speech by John
Whitehead at APEC 2006 Viet Nam Public Sector Governance Seminar (10
September 2006)
A Guide to the Public Finance Act (August 2005)
• Primer on Cost-Effectiveness Analysis" Effective Clinical Practice, September/October 2000. 5:253-255.
• Wikipedia, the free encyclopedia