The New Zealand Experience
- 1. Historical Background
- New Zealand can trace the origin of its present system of government to the Treaty of
Waitangi, in 1840. This treaty provided the first formal basis for the involvement of the
British Crown in the government of New Zealand. The initial focus of that government
was to put in place some system to oversee the European settlements in New Zealand.
- In 1852 the New Zealand Constitution Act was passed. This established a system of
provincial government and provided the framework for New Zealand's first elected
parliament. It introduced a ministerial form of government modelled on the
Westminster system. In 1876 the provincial governments were abolished and replaced
with one central government.
- In those early days, private sector investment was scarce and fragmented. As a result,
the main thrust of government initiatives was to develop the physical and commercial
infrastructure to support the country. Example of this government activity were the
establishment of transport systems, public works programs, and commercial activities
such as the Post Office Savings Bank and the Government Life Insurance Office.
These initiatives then expanded into the social services sector with the creation of a
welfare state from 1935.
- New Zealand's experience of Government from the late 19th Century, therefore, was
that of a dominant central government. There was widespread acceptance of the
attitude that New Zealand's need to develop quickly placed on government an
overriding role to intervene in order to bring about outcomes which were seen as
unlikely without government intervention.
- 2. New Zealand Before Public Sector Reform
- By 1984 the central government (especially the executive) was all-powerful. Unlike
other Western democracies, there no balance of power from alternative centres of
influence, such as an upper house, a strong legislative branch or judiciary with clear
constitutional mandate. Within the central government there was heavy reliance on
government departments and wholly owned corporations rather than independent
institutions. Moreover, local government was weak.
- In the economy, the government's control was effected through:
- * a wide range of government-owned trading activities, such as hotels, railways,
insurance companies, banking, electricity, air travel, forestry and telecommunications;
- * widespread government involvement in the private sector through a network of
supports and restrictions including subsidies, protection for domestic manufacturing,
import and export licensing, and tight controls over financial markets.
- * In social services, government involvement was substantial both in policy making and
in delivery. Both were highly centralised and standardised. Central government was
particularly active in housing, health, education and the welfare system. Local
government involvement was comparatively limited.
- In 1984, the New Zealand economy was not healthy. Population growth was marginal or
negative. Economic growth was stagnant. Unemployment was growing. New Zealand's
relative productivity had fallen, from the second highest per capita GDP in the OECD
to the second lowest within two decades. Added to this was an increasing demand for
state welfare services, such as housing, health, education and social welfare. The cost
of delivering these welfare services was escalating and the government persistently ran
deficits.
- The public sector developed many practices and procedures to support an increasingly
bureaucratic structure.
- * Heads of government departments had permanent tenure. Positions were retained
regardless of performance or ability. Promotion was based principally on seniority.
Heads of department could not be removed except in cases of corruption or misconduct.
- * Staff were employed by a central employing body. The industrial relations regime was
significantly at variance with the private sector. There were complex and rigid rules
relating to the employment and transfer of staff.
- * Financial control of all government departments was exercised by Treasury. A
system based on cash constraints and detailed input controls was in place. Delegation
allowed department officials to approve individual payments up to certain amounts only.
On the other hand, few controls existed over the overall level of departmental
expenditure. Accountability was largely seen in terms of compliance with rules aimed at
limiting discretion, preventing corruption, avoiding mistakes and minimising political
embarrassment. Information that may have been useful in measuring performance was
neither demanded, primarily because it would be put to little use, nor was it available in
a meaningful format.
- * Financial management was designed to assist in monitoring compliance with legal and
administrative requirements. It was not effective in ensuring that the purpose of
government activities were being achieved, or departments were producing their
outputs efficiently.
- * Cash accounting was used. This provided incentives to spend budget allocations for
fear of incurring future reductions.
- * A system of remuneration was in place which rewarded expansion of bureaucratic
activity.
- Previous governments tried a wage and price freeze, interventionist controls such as a
sinking lid policy and across the board expenditure cuts, all without success. Each
government failed to address the underlying structural problems. In short, the social
role of government dominated any fiscal or financial role. New Zealand's foreign debt
grew alarmingly and the currency steadily weakened. New Zealand's economic
situation had grown critical.
- 3. The Reform Process
- The process of public sector reform was quickly and efficiently initiated by the newly
elected Labour Government in 1984, under the capable direction of then Minister of
Finance, Roger Douglas. He was knighted by HM the Queen in recognition of his
success in implementing this reform.
- The effect of the reforms was profound. The old public sector was split into two parts,
separating public enterprises and the trading arms of Government, previously buried
within departments, from core public sector activities.
- * Public Enterprises
- Public enterprises were reformed in stages. The first stage was undertaken through the
State-Owned Enterprises Act 1986. Major trading activities of the government were
identified. Nine State-Owned Enterprises (SOEs) were created. The effect was to
provide greater transparency of costs and benefits through a change in the
administrative environment. Establishment Boards consisting of experienced
professionals with extensive commercial experience were created. These
Establishment Boards transformed the bureaucracies into commercial enterprises,
negotiated the SOEs' capital structures with government, recommended appointments
to the permanent boards of directors and played a role in the appointment of
commercial management.
- Managers were given the principal objective of running SOEs as successful business
enterprises. They had responsibility for decisions on the use of assets, pricing and
marketing of their goods and services, within specific performance objectives, financing
their activities and running them to achieve pre-agreed performance objectives.
- SOEs were required to finance expenditure from market sources, not subsidised
government loans or grants. They were also required to pay tax and dividends to
government.
- With a new administrative structure in place, the second stage of the privatization
process was instigated. Government sought to enhance efficiency by greater
competition through deregulation. Deregulation of the SOEs was linked to their internal
restructuring and pricing policies.
- Deregulation paved the way to the third and final stage of the public enterprise reform -
privatization. To date 16 public enterprises have passed through all three phases to full
privatization, including Postbank, Telecom, Government Printing Office, Rural Bank,
Natural Gas Corporation, Petroleum Corporation, Shipping Corporation, and Air New
Zealand. Other public enterprises are still completing the process. Still others will not
pass through all three stages, but will remain as corporatized State Owned Enterprises.
- * Core Public Sector Activities
- The removal of public enterprises from government left a more clearly defined core
public sector. This core public sector faced radical changes from two pieces of
legislation: The State Sector Act 1988 and the Public Finance Act 1989. These Acts
instituted the two major reform processes of Financial Management Reform and Cash
Management Reform. Members of our team were central to these reform processes,
as well.
- Financial Management Reform redefined the relationship between government
departments and the Crown as one at arms length and on commercial terms. It
provided:
- * Contracts were made between Ministers of the Crown and the chief executives of the
various departments. These contracts described the outputs the department supplied
(for example, policy advice, defence, justice, the running social programs, etc.) and the
price to be paid by the Crown to each department for those outputs.
- * Chief executives were given greater discretion in the management of their
departments.
- * A distinction was made between departmental outputs (goods and services produced)
and resulting outcomes (success in achieving social goals). Chief executives of the
departments were made accountable for outputs while Ministers were made
accountable for outcomes.
- In support of Financial Management Reform all departments were required to install
accrual accounting systems. The implementation and supervision of this process in all
government departments was done by Mr Andrew Weeks, a member of our team.
- Cash Management Reform made all departments responsible for payments and
receipts of monies, transaction banking, cash forecasting and working capital
management. The process involved the selection of one private sector banker for the
government, and the opening of individual bank accounts for government organisations.
The annual savings from Cash Management Reform alone are estimated at over
US$20 million. Member firms and specialists in our team provided technical support to
both the Treasury and all other Government departments in respect of the development
and implementation of
- these reforms.
- 4. Present Circumstances
- Significant progress has been made in the reform of the public sector in New Zealand.
Most of the government's trading activities have been either corporatized or privatized.
The remaining core public sector has completed the initial introduction of financial
management reforms. Accrual based accounting is firmly in place. Government
departments are gradually improving reporting standards. Clear specification of
outputs and outcomes have been agreed and communicated. With the various pieces of
legislation now firmly in place, the public sector is consolidating the effects of the
changes that have occurred since 1984.
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