Friday, November 17, 2006

Changes in Public Administration - the New Zealand Model

This post continues my discussion on changes in public administration that I began to provide background and reference material for the Confessions of a Policy Adviser series.

In doing so, I had been going to talk about the NSW Government's Ten Year Plan as an example of current approaches to public administration. However, because the Plan is a NSW variant of what I call the New Zealand model, it seems sensible to talk about this first. In addition, the death of Milton Friedman (here, here, here, life also here, here), a key intellectual figure in the change process, makes it seem somehow appropriate.

I am sorry the post is so long. There just seemed to be a lot to say.

In my first main post, Changes in Public Administration - Notes, I began by looking at the rise of the welfare state at the end of the Second World War, then looked at the economic impact of the oil shocks during the seventies. This created global stagflation among developed countries (recession combined with inflation) that Governments struggled to deal with using previously successful policy instruments. Part of Friedman's influence lay in the fact that he pointed to some of the reasons for failure. The fact of global stagflation, the end of over twenty years of sustained growth, is a core reason why the seventies were such a tip decade in the change process.

I then went on to briefly discuss the development of the quality movement, standards based approaches and the associated rise in interest in measurement. In the following post, Publish or Perish - where did the this phrase come from?, I looked at the development of citation indexes as an example of the growing interest in, even obsession with, measurement.

The Rise of Thatcherism

The failure of previous policy approaches to address the problems of stagflation, continuing high interest rates and persistently high unemployment led to a search for new policy approaches.
In the Australian Treasury, for example, the persistent cry during the second half of the seventies was the need to "get the economic fundamentals right." Without this, we could do nothing else.

The revolution that was beginning to sweep away the old system of public administration including the welfare state is sometimes called Thatcherism.

Margaret Thatcher (and here) became Prime Minister of Great Britain in 1979, the first of a series of "conservative" (I have put conservative in inverted commas because the outcomes were far from conservative) world leaders including Ronald Reagan (1980) and Brian Mulroney in Canada (1984). Influenced by the ideas of Milton Friedman and a strong believer in free market forces, she began a process of winding back government involvement in the economy, of corporatisation and sale of Government business activities, of tight monetary and fiscal policy intended to destroy inflation.

The New Zealand Model: Introduction

While the overall change process is sometimes called Thatcherism, the purest expression of the overall approach - often called Rogernomics after the New Zealand Labour Party Finance Minister Roger Douglas -was to come in New Zealand. For a period, New Zealand was to become a major influence in global public administration, with New Zealand consultants fanning out to spead tha approach around the world.

New Zealand was an economic basket case when Labour came to power. Using ideas developed in the New Zealand Treasury Department, Douglas set out about a series of dramatic reforms. My concern here is not with the details of the reforms, but with the underlying model.

The Wikipedia article cited above suggests that a" major criticism of Rogernomics is that the reforms were undertaken without a detailed philosophical basis so it could be argued that the reforms were not fully completed."

It is true that the reforms were not fully completed, but I disagree that they lacked a detailed philosophical basis.

In my view, the New Zealand model was by far the most clearly articulated reform model in the world. Further, while it did incorporate elements of what came to be known as neoconservative views, the model itself could be applied within a variety of idea sets.

Structure of the New Zealand Model

The most interesting thing about the New Zealand model was the way in which it drew together so many of the new elements in global thinking.

To start with things that applied across the whole structure:
  1. Accountability. Accountability was central. Government and ministers were responsible for overall policies and programs and were accountable to Parliament. CEOs of ministries and agencies were responsible to their minister. And so on.
  2. Objectives. There should be clear and as much as possible measurable objectives. This applied to Government and ministers as well as those working for Government. If Government and ministers did not have clearly defined objectives, then how could agencies and CEOs have clearly defined objectives?
  3. Inputs, outputs and outcomes. A clear distinction needed to be made between inputs, outputs and outcomes. Inputs were the resources required to deliver individual activities, outputs represented the immediate deliverables from those activities, outcomes the results from outputs. Government was concerned with outcomes. So a clear relationship needed to be established between inputs, outputs and outcomes.
  4. Program approach. Because most outcomes (reduced crime, for example) required outputs from a variety of areas, there needed to be a program approach that integrated policies and programs across agencies. This was also required to accommodate the fact that while Government was responsible for outcomes, most minsters and agencies were really responsible for outputs that in combination determined outcomes.
  5. Standards Based. Consistent with the emphasis on measurable objectives and outcomes, standards based approaches were central across all of Government and beyond. Where appropriate, Government mandated standards. However, the process to be followed in achieving those standards was a matter for those responsible for delivery.
  6. Clear definition of roles. Government wore different hats that needed to be clearly defined. Government provided services to people that linked in turn to different needs and outcomes. In providing those services, Government purchased outputs from both public agencies and the private sector. Where Government acquired services from its own agencies, it was both an owner and a purchaser. As an owner it needed to get a return on the capital invested. As a purchaser, it wanted the best value for its money.
  7. Service purchase contracts. Where the agency was providing services to Government, the Government entered into an agreement with that agency to purchase an agreed package of services for an agreed period. In short hand terms, this came to be known as the purchaser/provider model.
  8. Agency independence. Consistent with standards based approaches, agencies had operational freedom to achieve their objectives, subject to achievement of financial performance targets (the ownership role) and any service delivery requirements as laid down in their service delivery contracts (Government as purchaser role). Previous central requirements such personnel administration or procurement were abolished. Agencies had control of their own funds including retention of interest on cash and of profits subject to any agreed dividend requirements.
  9. Accrual accounting. Government agencies at all levels needed to report to Government on their operations in terms of Government's role as owner (profit & loss statement, balance sheet, cash flows) and as service provider (cost, value for money). To assist this, accrual accounting was made mandatory. In turn, this allowed for the creation of a total Government balance sheet listing all assets and liabilities.
  10. Market focused. A key part of the model was the attempt to use market disciplines to encourage efficiency.

In applying the model all Government ministries and agencies were broken into three groups depending on their customers and market positions.

  1. Contestable markets: Agencies supplying good or services to external markets for a market determined price were turned into state owned enterprises and ultimately sold.
  2. External service provision, no market: Agencies supplying services, regulation of aviation for example, remained in Government ownership but became stand-alone entities and charged for their service so as to recover costs plus a return on capital. This was meant to be fully transparent to those being charged. In practice some element of subsidisation might still be required because of externalities. In this event, the subsidy in fact represented a Government purchase from the agency.
  3. Government as customer. Where the Government was the sole purchaser, then the ministry or agency became a service provider with a single customer. In theory, this separation allowed Government to consider alternative purchases, introducing a degree of potential competition. For example, New Zealand might choose to outsource defence in whole or part to Australia, paying Australia for the service. Or buy economic advice from sources other than the New Zealand Treasury.

I said that the model could be applied in a variety of systems. The starting point here is Government values and objectives. This then determines the cascade effect through the whole Government system.

As a simple example, you might choose not to sell state owned enterprises because you classified them as strategically or socially significant. In that event, you might need to pay the enterprise an extra amount as a subsidy. This would be identified and treated as a purchase of a service linked to the strategic or social objective.

Application of the Model in Practice - Introduction

I know New Zealand very well and love the place. Dad was born in there, I still have family there, and have visited it many times over the year. Given this background as well as my professional interests, I was absolutely fascinated with the reform process.

Roger Douglas knew that fundamental change - and it was fundamental - required fast and sustained action to drive things through. I was aware of the process while I was still working for the Commonwealth Public Service, but it was not until I set up my own consulting operation that I became directly involved.

In 1989 we decided to start selling services into New Zealand. This led me to make a number of marketing trips to New Zealand over 1989 and 1990.

Given that Government relations, Government policy advice and program evaluation were core business, from my first marketing trip I started to work my way through New Zealand ministries and agencies attempting to understand the New Zealand scene. In turn, this led us to set up what we called the Public Sector Reform Project to look at the revolution in public administration in New Zealand and then compare it to Australia at national level and in selected states. We also wanted to look at it at a Government wide level and then at its application in specific portfolios.

Application of the Model in Practice - New Zealand Scene

By the time of my first marketing visit in 1989, the revolution was four years old. There was an air of pervasive gloom in the general community.

Taxi drivers lectured me on the evils of a deregulated taxi industry, on the way in which competition had driven down both their income and the standard of service. Yet after visiting a number of agencies I was impressed by the coherence of vision and language. I started to become very positive about New Zealand's future, although I could also see some of problems starting to emerge in terms of the application of the model. These became clearer on subsequent trips.

I saw problems at two levels.

At national level, the Government and ministers were struggling to articulate the objectives, program structures and associated performance standards required to make the system work. There was a major clash between the day to day pressures associated with the Parliamentary system and the need to articulate longer term objectives.

There was also a major clash between the fundamental stance of the Government - deregulation and let the market flower - and the alternative more proactive stance.

This clash was encapsulated in the 1991 Porter Project report. Inspired by the ideas of and part authored by Michael Porter, the book was an incisive analysis on the causes of New Zealand's economic problems. However, its suggestions as to solutions were noticeably weak. It is very hard to define a pro-active development role for Government when your starting premise has ruled such a role out!

At agency level, agencies were struggling to introduce the new approach. This was partly due to technical problems, partly to interest conflicts.

The New Zealand Ministry of Defence and the New Zealand Defence Forces can be taken as an example of technical problems. They had to attach a value for balance sheet purposes to New Zealand's various military assets and then work out a depreciation schedule. One effect was to push the accounts into deficit because the New Zealand Government was not prepared to contribute enough money to defence.

The New Zealand Qualifications Authority can be taken as an example of interest conflicts.

The Authority defined a national competence based qualifications structure from primary through to the highest formal qualification. Consistent with standards based approaches, it should not matter how you acquired the necessary knowledge and skills. The only requirements were definition of the standard on one side, the test procedure on the other.

This posed a fundamental challenge to New Zealand's Higher Education system in that it meant that people could acquire a higher qualification independent of them or any other university. So the universities opposed this element of the changes.

Application of the Model in Practice - transmission to Australia

There are close links between Australia and New Zealand, and the New Zealand experiment had a significant Australian impact, although the transmission mechanisms were not always clear because so much contact was informal. In addition, because New Zealand itself was part of a broader global movement, it can be hard to distinguish between New Zealand and broader global impacts.

The NSW Greiner Government (elected 1988) is perhaps the clearest example of Australian impact. The Griener Government introduced many of the New Zealand approaches holus bolus. As a simple mechanical example, ministers were meant to agree their performance objectives with the Premier. Then the various departmental CEO's had to agree their performance objectives with the Premier's Department.

Again, as in the New Zealand case, we can see the way the application of the model was driven by the Government's ideological stance.

The Greiner Government saw itself as a market driven reform Government sweeping away the detritus of the past along the lines already pioneered in the UK and New Zealand. Mr Greiner himself defined the role of the Government in terms of economic and management efficiency. The role of Government was good management in financial terms and in the delivery of services.

That's fine, but it in fact left the Government in the same position as the New Zealand Government when it came to defining peak objectives.

On one side you had major changes intended to improve delivery efficiency as well as state economic performance, on the other a Government unable to articulate broader objectives beyond reform itself because the Government's role had been defined in such a way as to limit the scope of what could be done.

The Greiner Government fell in 1991. But the subsequent NSW Labor Party Governments in fact continued its basic thrust. As we shall see in the next post, this comes through clearly in the structure and content of the NSW Ten Year Plan itself.

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