Fixing the state (or not)

Colin James on the state services for Management Magazine July 2005

Government is not a simple business. How then do you go about the business of government? That question underlies much of the froth that will bubble around the coming election.
It is a defining question in our system. The National side sees the state as at best a necessary evil and unproductive. The Labour side sees it as an instrument for improving society and revving the economy.

When it comes to rhetoric for this election National reckons there is fat to be trimmed and rendered down into tax cuts. So does ACT and, in a minor key, New Zealand First. Labour and the Greens reckon National’s trimming will cut flesh and so hurt middle New Zealand.

Both sides agree the state sector has grown a lot since 1999 when Labour started leading governments. National calls that waste — hip-hop tours and spurious tertiary education courses. Labour says it is has been rebuilding social and other services (including the armed forces) to a level the public demands and to ensure they can function effectively: the health system needs nurses and needs them well paid if people’s expectations are to be met.

These differences have deep implications for how the state sector is managed and its managers trained. The business of government has changed significantly in quality and quantity since 1999 and might well change again with a change of lead party in the Beehive.

What exactly are we talking about? The public service, or core, is the 35 government departments and ministries whose chief executives report directly to ministers — the cabinet is their “board”.

That is only one-third of the state sector, which officially includes also public hospitals, schools, the defence and police forces, the Reserve Bank and a welter of Crown entities but excludes tertiary education bodies and state-owned enterprises (SOEs), which are known as the “wider state sector”. Defence and police have special status; in the rest chief executives report to boards who report to the ministers.

Crown entities include: Crown entity companies such as Television New Zealand and the Crown research institutes; independent Crown entities (ICEs) such as the Commerce Commission, the Children’s Commissioner and the Human Rights Commission; autonomous Crown entities (ACEs) such as the Arts Council, the Teachers Council and the Public Trust, which must “have regard to” government policies and whose board members can be removed if the minister thinks that is justified; and Crown agents, which must “give effect to government policy” and whose board members can be removed at will and so are little more than government departments.

Total state sector staff is 190,000,13% of all employees and up 14% on 1999. The wage and salary bill has been growing by 8% a year, the Treasury said in a report to the cabinet in January. It is this expansion which John Key has targeted for $1 billion of savings to help fund his promised tax cuts.

Go back a step to the 1980s reforms. Private sector management principles, precepts and practices were imported wholesale into the public sector. This was the “new public management”.

The result was more flexibility and responsibility for managers who were turned into executives with fixed-term contracts and performance agreements instead of lifelong tenure, a focus on “clients”, separation of policy, regulation and service functions, accrual accounting and measurement of performance against “outputs” (what state servants do) instead of inputs (how many paper clips they buy). Power suits replaced cardigans.

There were gains in efficiency, financial management and clarity of purpose.

But there was also “silo-isation” — the loss of coordinated policy and action as departments and agencies turned into “silos”, each pursuing their separate and distinct remits and no longer seamlessly connected as one “service”. Institutional knowledge was lost as departments were wrenched apart, restructured and reshaped. Some departments, for example, the Ministry of Justice, lost critical mass. Others, such as the Ministry of Youth Affairs, never gained it. Policy wonks were divorced from the coalface and the coalface agencies built up their own competing policy sections.

And the limitations of private sector training, management principles and techniques became apparent. Higher efficiency was not enough in itself; the acid test was effectiveness, which too much staff cutting and separation of functions could undermine. Doing the business of government has specific needs which are not met by routine private sector training agencies. (See box.)

So from the mid-1990s onwards, under National-led governments and then Labour-led governments, attempts were made to look beyond “outputs” to “outcomes”, to coordinate action across departments and to fill the gaps private sector management techniques did not address.

“Outcomes” are intended as goals for “outputs”. Do an agency’s outputs make progress (measured by performance indicators, a concept borrowed from the private sector) towards desired outcomes? Doing 100,000 immunisations or holding 25 hui for small business might fulfil departmental contracts but do they actually improve health status or wealth creation?

Defining “outcomes” has proved easier to conceive than do. Most are not much more than grander outputs. In any case, the acid test of an “outcome” is the minister’s re-election, which makes it a moveable feast.

Some progress has been made since the late-1990s in getting departments to work together, at least at the local level: one mechanism is to appoint lead agencies for some activities; one-stop shops (including Heartland Services, managed by the Ministry of Social Development) have been set up; computer networking is being improved (and likewise internet accessibility for citizens doing business with government agencies); and legislative changes last year have increased funding flexibility for multi-agency activity.

New training and research entities have been developed:

* A specialist Leadership Development Centre was grown out of an earlier training programmes in 2003 to identify and develop promising state servants for senior posts. This in part responded to complaints by former State Services Commissioner Michael Wintringham of a dearth of top-quality people for chief executive positions. Wintringham hired a number of chief executives from offshore, particularly Australia, a practice the present commissioner, Mark Prebble, has continued.

* Victoria University’s School of Government, which teaches a number of state sector management and policy degree courses (paralleling the private sector-focused MBAs), was redeveloped and linked with Australian universities into a trans-Tasman virtual Australia-New Zealand School of Government (ANZSOG) to widen the pool of teaching sources.

* Victoria University’s Institute of Policy Studies, which specialises in researching public fundamental policy issues to provide a base for state sector policy analysts’ thinking, was recast and incorporated into the School of Government.

Why go to this trouble and expense when there are private sector training agencies? “There is a core of similar characteristics in public and private management, but there are differences, says Professor Gary Hawke, head of the School of Government. “Those differences are big enough to say that public management is different from private management.” A top department head puts it this way: “You cannot go and get a Secretary to the Cabinet or a China analyst off the street.”

Some would add (see box) a “public service ethos”, a sense of over-arching and long-term responsibility to the public.

The result is that it is rare to bring someone in from the private sector direct into a peak state sector post, especially in the core public service. But plenty do come in at lower levels — a few even as high as deputy — which gives time to learn the ropes. In fact, the State Services Commission says, around 9 per cent of all state sector staff move in from or out to the private sector each year.

So there is cross-fertilisation. Imports from the private sector can be particularly useful as change-agents. But the big efficiency and refocusing drive of the late 1980s is long past — and in any case, the incoming Helen Clark government in 1999 was suspicious of private sector principles — some of its most prominent ministers had been unwilling fellow-travellers in the radically reforming 1980s cabinet.

There were even suspicious of the Treasury alumni ensconced in a number of top departmental posts. That included Prebble, then head of the Department of Prime Minister and Cabinet, but he has since won accolades from Clark.

As a result, the new cabinet was determined to return the public service to more direct ministerial control and to reintegrate functions the 1980s reformers had separated. The courts are back in the Justice Ministry and the benefit agency lumped in with the Ministry of Social Policy to form the Ministry of Social Development (MSD), with a much expanded policy contingent, designed to contest policy with the Treasury. Special education and building regulation have been brought back from Crown status to departmental status. Contracting out, especially of hospital operations, has been cut back and the work brought in-house.

But this has turned out not to be a systematic recasting of the state sector. Though departments and parts of departments are still being reorganised and restructured — most notably the Labour Department — this is being driven by management priorities, not ideological politics.

The Child, Youth and Family Services is still not back in MSD and the small “social ministries”, such as Youth Affairs and Women’s Affairs, are still on the loose despite early thoughts of bringing them under MSD’s wing — Shenagh Gleisner has been expanding Women’s Affairs’ capacity. The most that seems likely is for bigger departments to provide some corporate and IT services for small agencies.

And, far from reintegrating Crown entities, the Clark governments have created new ones, most notably the Tertiary Education Commission and the Families Commission. Crown entities have a special political value: board appointments are useful rewards for party hacks — not good for governance but justified as smoke detectors of nascent political brushfires in the undergrowth of the entity’s decisions and business.

Legislation regularising Crown entity governance passed last year was largely in line with plans hatched under National — though one important change has been to bring the state sector (but not the “wider state sector”) under Prebble’s mandate for staff conduct and employment matters. Previously, his mandate covered only the public sector.

This followed a report by a standards board Clark appointed in 2000 to restate state servants’ duties to ministers and so tighten control. (It also set out some expectations of ministers.)

The Clark ministers were not only suspicious and control-minded. They were policy wonks themselves and so were less interested in state servants’ “free and frank advice”.

This generated tension, most evident in the flamboyant departure of Work and Income’s Christine Rankin, whose private-sector-like change-agent approach was thought out-of-step. Politically-appointed advisers proliferated in ministers’ offices. Top bureaucrats were excluded cabinet committee meetings and so could not contest impracticalities or get at the nuances of ministerial decisions. That made implementation more problematic. Worse, they were then often expected to defend new programmes in public or take the rap if things went awry. It was an edgy time.

Since then the relationship has settled and in March Prebble issued guidelines for the wider state sector he now heads, requiring state services agencies to “work closely together” and he set six “development goals”: to be an employer of choice; to hire top people and keep upskilling them (“excellent state servants”); to use networks and internet technologies to improve services and access; to “manage for outcomes” through coordination; to work together to ensure people get to the right agency and get the right services; and to build trust.

Where does this lead us, at least in theory? To a more complex concept than simple “efficiency”: more outputs per dollar. The state must also be “effective”: it must make real changes in the population’s health and education status, environmental sustainability, national pride and so on.

It is in pursuit of this objective that the Clark governments have increased state sector numbers and pay. They have cast this in terms of a need to restore “capacity” for good policy analysis and service delivery.

That means higher pay — most spectacularly for nurses — and better working conditions.

Clark governments have brought the unions, particularly the Public Service Association, explicitly into partnership for workplace management. “Work-life balance” is now being introduced, there is a generous new superannuation scheme. These are explicitly intended as pointers for private sector employers to emulate.

But along with the generosity there has also been waste and muddle: NCEA, the waananga, hip-hop tours, immigration rules — a lengthening list. Michael Cullen as good as conceded that when in the Budget he announced reviews of “major areas of expenditure” to get better cost-effectiveness and spending control. High on the agenda is the troubled EFTS-driven tertiary education sector.

Waste and muddle have given National a wide opening on which to campaign: a state sector it can paint as building ever-bigger empires with slipshod monitoring and policy-making.

John Key has said he will cut $1 billion out of state sector spending by firing “bureaucrats”. Given that Don Brash has promised more nurses, teachers and police and to divert another $600 million (taken from petrol tax for general spending) to road building, Key will have to cut operational staff as well as “pen-pushers”.

He is unfazed by that prospect: he will do ground-up “baseline” reviews of all government activity and simply chop out whole programmes that don’t measure up.

Will he when it comes to the crunch? In the past this sort of talk has usually biodegraded into sinking lids or hiring bans which have over time damage capacity. The Cave Creek tragedy resulted from a make-do mentality which in part stemmed from under-resourcing.

Cullen predictably claims Key’s cuts will reduce productivity. At this point we enter the realm of election rhetoric. But would a third-term Clark government continue to fatten the state sector?

No, says Cullen, who said new spending after fiscal 2006-07 would decline. He makes these points:

* The “capacity reviews”, which beefed some departments that were below critical mass, are nearly completed.

* The catchup in wages and salaries is now largely completed.

* The demographic drivers of higher school populations are now easing, though there may be some increases in tertiary education takeup as the economy cools.

* There is still a big challenge to slow the relentless technology-and-demographics-driven above-inflation rise in health spending.

* But there are no “big packages” such as Working for Families to come through.

It sounds soothing. But the big issue is quality and value for money. If Labour wants to prove its case that the state sector is an instrument for improving society and revving the economy, it will need to do better in its third term than its second. The case is still unproven.

And if Brash and Key get their way with an election win it will remain unproven. The role and management of the state sector is right at the heart of this election.


How managing the state service is different

Much of what works in the private sector also works in the state sector and so private sector management principles have brought important improvements in the past 15 years. But, say state servants and close observers, there are critical differences which require specialised training and management techniques.

* The government is large and diverse. A manager in one agency must keep in mind the objectives of others, which may be quite different and even in opposition (the Security Intelligence Service and the Privacy Commission, for example). A private sector manager does not face such “ambiguities”.

* State sector objectives can seldom be defined as clearly as in the private sector. The political bosses, who ultimately must placate voters, change their priorities or are themselves replaced, sometimes abruptly, as voters change their minds.

* In the private sector success is largely measured by the accounts. In the state sector success is measured by other criteria, some of them intangible.

* Private sector managers operate in private. State sector managers must expect publicity, Professor Gary Hawke, head of the Victoria University School of Government, says: “There is public interest in what you are doing.”

State managers operate in a fishbowl, watched hungrily by opposition politicians, the media, lobby groups and aggrieved citizens. Mistakes and regulatory failures are cruelly exposed: hence the uproar over the Waananga o Aotearoa rorts. So are risks which misfire: witness the deadly effect of the “hip-hop tour” on the “social entrepreneurs” scheme which tried to draw on non-government initiative to enhance social and economic development.

* A company that goes bad or loses the trust of its customers or the public can close. The state cannot close. It must go on doing the business. So it must maintain trust. “If we get untrustworthy, we have a failed state,” says State Services Commissioner Mark Prebble.

This adds up to a “public service ethos” which transcends governments but also carries out governments’ wishes. While there are part-parallels in notions of corporate social responsibility, that is optional. The public service ethos is not if trust is to be maintained.