Public sector developments
A sustainable public sector
Following Budget 2011, we queried whether the Government’s “more for less” approach would lead to better overall value from the public sector. A year later the Government is largely continuing on the same path, with across-the-board reductions or caps, on the basis that Chief Executives can make this work.
The Government’s 2012-13 core Crown expenditure is forecast to be $73.3 billion, a small increase from the previous year. However total net new Government spending is just $26.5 million over the next four years – near enough to the Government’s “zero Budget” marketing. Effectiveness of the public sector has been achieved by moving funds to higher priority areas such as education, but the real prize is still a public sector that delivers greater sustainable value.
Cutting Costs Only One Answer
Despite the noise, back office costs are small beer. In FY11 the sector achieved a real saving of only 1% of back-office costs (which are $1.7 billion in total), or 0.03% of total Crown spending. Greater savings will be achieved as recent initiatives (e.g. procurement reform) bear fruit, but even Treasury’s most optimistic scenario delivers less than a 1% overall efficiency gain.
And making any sort of significant dollar savings from back office costs is completely unrealistic. It would require transformational improvements in almost all agencies, the cost of which is not reflected in the savings. Furthermore, it assumes that the lowest back-office costs in the sector reflect admirable efficiency, whereas often they reflect unsustainable under-investment.
A modern, flexible, value-driven public sector needs strong supporting functions – these may be somewhat smaller in headcount terms, but they will not be much cheaper. We would like to see the continuation of cross-government initiatives such as infrastructure-as-a-service and HR improvement, but with a greater focus on maturity than cost. The front office has much greater opportunities for cost saving. As noted above, core Crown expenditure for 2012-13 is estimated to be $73.3 billion, and even leaving aside the political decisions to be made about spending on transfer payments and subsidies (such as KiwiSaver grants) we see significant opportunities to reduce cost including:
- Stronger cross-Government capabilities in areas as diverse as ICT, policy and face-to-face service delivery in our communities
- Smarter use (and disposal) of capital assets
- Simplified policy and legislation
- More flexible sourcing and distribution of resources across the country
Delivering Value Offers Greater Gains
True financial sustainability does not come simply from reducing cost – as any business person knows, you must also be able to deliver value to your customers. In the public sector, the main source of value is societal outcomes such as healthier people and lower crime rates. Delivering good outcomes will ultimately reduce public sector costs and improve the overall base of the economy, making it easier to bear those costs. Efficient service delivery alone will not produce this virtuous circle.
Even the potential front office cost savings are dwarfed by the benefits we would get from better outcomes. For example, 2004 research showed that while the Justice sector cost $1.6 billion (net) to operate, the rest of the economy suffered $7.5 billion from the costs of crime.
Naturally it is not easy to deliver better outcomes, but the main challenges relate to the way we currently work and are therefore under our control. In our view, the three key challenges we face are:
- Structural inflexibility, such as inefficient physical assets and complex systems and processes. Even when a better operating model is identified, implementation can be costly, lengthy and risky.
- Low change capability, making successful change more difficult. Agencies under pressure have no capacity to identify and implement meaningful change. The largest reductions in back office spending have been in finance and HR – two functions crucial to successful change.
- Political resistance. In many areas Ministers simply rule out genuine cost-reduction proposals, or demand additional services. This is their prerogative, but it leaves CEs fighting with one arm tied behind their back. Superficial public debate exacerbates this.
- Invest in new operating models, including more cross-Government capabilities. This requires real time, money and acceptance by all of us that change inevitably causes disruption.
- Robust decision support. Executive teams should ruthlessly focus on the biggest opportunities and demand high quality analysis so they can confidently make decisions. We must place a high value on expertise both within and outside the public sector.
- Make difficult choices. From Ministers down we need to honestly debate trade-offs even in sensitive areas and make the best choice for NZ Inc. Topics like the number of police officers can’t be off-limits.
We applaud the focus of the Better Public Services initiative on results, leadership and structural change. But for it to have any real impact, the responses above must become our standard way of behaving. A crucial test of our collective commitment will be the setting of targets supporting the Prime Minister’s 10 selected results. In addition to the previously announced target of having 85 per cent of 18-year-olds achieving NCEA Level 2 or equivalent qualification in five years, the Budget has confirmed two more measurable targets:
- Reducing prisoner reoffending by 25 per cent by 2017;
- Increasing the rate of participation in early childhood education to 98% by 2016 (it is 94.7% currently)
We have in front of us an exciting opportunity to once again lead the world in delivering public services. Alternatively, we could cut away any chance of a truly sustainable public sector.
Budget 2012 Analysis
- Introduction - between a rock and a hard place
- Budget at a Glance
- The Nation’s Bank Account
- Mixed ownership model
- Public sector developments
- Tax reform tinkering