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.