• Simon Upton
State Services

To look at what the future holds for public management we need to take stock of where we are now. Our achievements over the last ten years have gained international attention, but they are by no means perfect. The big social and economic questions still remain and Professor Schick's insights into our management system are a reminder that more needs to be done. I certainly don't want to cast a negative light on what has been achieved to date, but I hope you will forgive me for indulging in something of a "reality check" on our mode of public management.

The future will see the boundaries of the public service pulled in all directions. Contracting in some areas and stretching in others. The sorts of boundaries I want to explore today are concerned with; a receding fiscal boundary arising from demographic pressures that will further stretch social spending; theoretical boundaries that are quite different from the boundaries of the public management system in practice; and an urgent need to tighten the boundaries of our strategic management system.

As I see it the challenges can be broken down into three interrelated concerns around - our system of fiscal management, operational management and strategy management. First we need to assure the sustainability of core government in New Zealand within the current fiscal and budgetary framework - especially given emerging fiscal pressures arising from projected demographic changes; Secondly we need to acknowledge the divergence between the theory and reality of public sector management and to expose the assumptions and myths of the model that are not borne out in practice; Thirdly, in light of the above factors, we have to acknowledge the need to be selective about those areas of policy engagement in which the government claims to be able to influence outcomes; and make a good job of doing so.

I am increasingly persuaded that the status quo is simply not sustainable into the future. To continue to assume public service capability, to assume that the ownership interest is being safeguarded, and to assume a mature incentives regime is less than prudent risk management. I think the risks are systematic in nature and our solution must embrace all levels of public management systems and processes.

The overarching challenge lies at the feet of both Ministers and officials. I would be the first to accept that Ministers need to up their game, but a more enduring response must come from within the public service. I think you need critically to evaluate the public service's long run interest in fiscal, operational and strategic terms. More importantly you need to integrate these strands to carve out a successful role for core government in the future. Regardless of one's philosophical view about the role of government, any operational or policy claims for the state must be tempered by the presiding economic reality.

Recent events in eastern Europe and Asia suggest that after 15 years of drinking deep at the well of theory, our generation is witnessing the re-ascendency of economic pragmatism over grand theory in defining a sustainable role for the state.

The heady cocktail of philosophies and technological revolution that gave us deregulation and globalisation is succumbing to the messy debris of political reaction at the level of the nation state, and a raft of new collective action problems caused by the inadequacy of institutions and rules at the global level. Whatever role for government we choose, it needs to be sustainable in every sense of the word

. To be sustainable in economic and fiscal terms we need to be cognizant of the demands that government places on the economy. One cannot contemplate increasing public expenditure without acknowledging that this may require higher levels of taxation relative to our major trading partners. This in turn has the potential to undermine our competitive position and jeopardize economic growth. There will always be a role for "core government" that incorporates generally accepted functions of a nation state.

While we could debate the composition and boundaries of the core state ad nauseum, I don't think this is necessary to understand the fiscal reality that is facing core government in the future. These fiscal pressures on the horizon are combined with dangerous assumptions about the existence of core government capability, and the potential for continuing to extract across the board productivity gains.

But in the absence of any knowledge about what core government capability really means, and without an understanding of what realistic productivity expectations are, we risk continuing to squeeze core government expenditure to meet the increasing demands of social spending. Resorting to ad hoc across the board cuts in core government is not a lasting solution.

Neither is continuing to assume public service capability. Given the looming fiscal pressures on the horizon the question before us is one of sustainability. Commentators have in the past been quick to point to rising total government expenditure and its impact on tax levels in the economy. The oft cited claims are that government is growing bigger and is increasingly crowding out the private sector. These commentators will point to central government expenditure rising from 24.9% of GDP in 1972 to 42% in 1991. While this trend has been halted and put into reverse in recent years the argument still lingers.

What most commentators fail to appreciate however, is the distinction between those aspects of government expenditure that are inherently "core government" - activities generally associated with a nation state such as foreign affairs, a justice system and basic regulation of the economy. This is separate from outlays that can be broadly categorised as consumption expenditure such as transfer payments, superannuation, health and education. It is not core government that is growing. In fact the opposite is true.

Recent data shows real reductions in core government expenditure of around 2.5% per annum between 1993 and 1997. Historical data shows that expenditure on core government, as a share of total government expenditure, has been declining from a high of 35% in 1975/76 to 22% in 1993/94. Over this same period social welfare spending's share of the pie has risen from 23 to 36% of total government expenditure. Modelling work that the SSC commissioned from NZIER indicates that with existing social policy settings and long run fiscal objectives designed to reduce debt levels to 15 % of GDP and tax/GDP rates of less than 30%, Governments next century will find themselves in a tight bind. With policy settings left alone, the modelling to 2051 indicates: Superannuation expenditure rising from 4.8 % of GDP in 2001 to 10.6 % in 2051; Health expenses rising from 6.5 % of GDP in 2001 to 11.3% of GDP in 2051; As a consequence, tax revenue will need to rise above the long run target to compensate. Moving from 32% of GDP in 2001 to 37.9% of GDP by 2051; Core government expenditure will also be squeezed as a percentage of total government expenditure, from 20% in 2001 through to 9% by 2051.

The fiscal implications are driven by demographic factors associated with an ageing population. The demographic projections indicate that the ratio of elderly to working age will double from 20% to 40% by the 2040s and labour force participation rates will fall from 66% to 56% of the labour force in 2051. The simple observations of the modelling are that under current social and fiscal policy settings, core government expenditure is getting smaller, both as a percentage of GDP and total expenditure.

An increasing portion of that pie is being consumed by social spending. Even with the most optimistic of growth rates, governments will not be able to avoid the dilemma of balancing the overarching fiscal strategy with the current social policy settings, and the maintenance of core government capability. Clearly something has to give. The risk is that core government capability could be sacrificed, unknowingly to meet short run fiscal needs. The issue has never been tackled head on before, mainly because we don't yet know what "capability" actually means and how to measure it. Nor for that matter do we know the real level of productivity gains within the public sector. Without the benefit of this analysis and knowledge, Ministers are likely to continue to squeeze core government expenditure and will continue to assume that productivity gains can be extracted unilaterally from departments on an ongoing basis.

Without this knowledge the phrase "reprioritise within baselines" will continue to displace more critical thinking about the role of Government and the implications for core government capability. Ministers can only fulfill their stewardship role insofar as the facts are presented to them.

With fiscal pressures on the horizon it is the responsibility of the public service itself to make a coherent case for core capability. We risk an unsustainable status quo, but I am pleased that the State Services Commission has begun to investigate the capability question more thoroughly, and is looking to develop tools to manage capability better, while also giving the government some assurance about its existence.

The sooner that vague assumptions about capability and productivity gains are replaced by a free and frank appraisal of public sector capability the sooner we will be able to assure future generations of continued public service capability. This is the first of my challenges to the public service for the next century. To my mind, maintaining the long run capability of the core public service is undoubtedly a defining characteristic of fiscal responsibility.

The Fiscal Responsibility Act says among other things, that responsible fiscal management is about the prudent management of fiscal risks and the maintenance of net worth at levels that provides a buffer against future adverse events. The implications for the future are obvious if we shortchange the next generation by running down the core state because of unsustainable outlays on consumption. Investing in, and maintaining the competency of core government constitutes both prudent risk management (in policy, fiscal and economic terms) and the capacity to respond in the wake of future adverse events. I think that Public Service capability is a key cornerstone of fiscal responsibility and it should be reflected in the Government's fiscal strategy.

I accept that this means facing the unsustainability of some of our social outlays. The Government's recent decisions in respect of superannuation are a courageous and principled acknowledgment of this fact. That's the only direct political statement I shall make today and perhaps I should explain it: I'm appalled by the shallow, populist analysis that has, almost universally, greeted the decision to restrict future increases in superannuation to increases in inflation. The fact is that, admittedly 8 years late, and by a roundabout route, the Government has finally implemented its 1990 election manifesto policy.

That policy was to return to a universal, taxpayer-funded scheme and to maintain the value of that payment in real terms (in other words, by linking it to changes in the CPI). The removal of the surcharge was designed to eliminate any alleged disincentive for private savings.

The CPI link was designed to protect the living standards of retirees but not to increase them since that would, with an aging population, have implied a hugely expensive burden on a relatively smaller workforce 20 - 30 years from now. In short, the deal was that if a younger working generation wanted more in retirement than those retiring today, it would have to save the extra. It was, and is, a painless and gradual formula for asking baby boomers to provide a greater share of their own superannuation whilst guaranteeing to today's retirees the living standards they have earned through their working lives.

It is, incidentally, still far and away the most generous scheme of its type in the world. The only difference with our 1990 policy is that it is softer - it still specifies a floor of 60% of the average wage when our 1990 policy left that question open on the basis that we couldn't honestly commit future taxpayers and future parliaments 20 years or more from now.

The mock outrage from left and right, and the tabloid treatment of the issue by even sophisticated commentators shows how impoverished public debate on this subject is despite last year's referendum and nearly 15 years of controversy. Why do I rail, somewhat intemperately, about this to you? In part, because I wrote that 1990 election policy (that was promptly de-railed by the fiscal crisis of 1991). And in part because securing the core public sector will be dependent upon a mature realisation that we can't have our cake and eat it too.

As a New Zealander and a taxpayer, I want first class services from the essential core of government that is, I believe, a relatively unchanging constant in any nation state. Support for this idea has come recently from the somewhat unlikely quarter of Douglas Myers commenting on police resourcing. I would simply observe that the core state won't be affordable if the electoral auction surrounding social consumption expenditure isn't tamed. Needless to say, its not enough just to fix fiscal pressures elsewhere.

The case for maintaining the capability of the core state sector also involves being able to make a clear assessment of the capability needed to deliver core services and say something authoritative about the level of productivity that can reasonably be achieved.

That leads me to the observation that fiscal sustainability of the public service also needs to be reflected in our mode of public management that has evolved over the last 10 years. Academics and practitioners have long espoused the underlying principles of our public management system and its virtues of transparency and efficiency. The theories and principles of the model are one thing, the reality, I believe, is another.

As I see it there are two models of public administration in New Zealand, a theoretical construct that is widely touted internationally and a somewhat less well explored version that exists in reality. We have been attracted by the strength of the ideas that are embodied in the state sector reforms. We may have been captured by the theory, without appreciating that the practice of public management is not as neatly defined in practice. We need to safeguard against a perspective that asks - "It works in practice but will it work in theory?"

That is not a criticism of the ideas. Rather, it is a reflection of the complexity of the environment we work in. For example, poorly aligned systems and structures can be a constraint but not all problems are simple matters of systems and structures. What can be more critical to success is energetic leadership, and a strong relationship between a Minister and his or her chief executive.

If both command a shared vision and commitment to the task at hand, the shortcomings of systems and structures can be overcome. On the other hand, it is less clear to me that even the best systems and structures, on their own, can be successful without a strong and productive relationship between political and administrative leaders. Systems and structures are one aspect of the many dynamics required for successfully translating strategic objectives into action.

The exact recipe for success is different in every case and we should not look for answers in the same textbook every time. We have developed some useful management concepts to draw on for guidance. The purchase and ownership distinction is an example. However, you will not find any references in the State Sector Act or the Public Finance Act to purchase and ownership, yet these concepts are undoubtedly at the core of our management model. But we should ensure that these concepts are used to guide rather than determine management solutions. At times I wonder if we have we become overly preoccupied with the notions of purchase and ownership?

Especially where it seems to have led us to place a disproportionate emphasis on short term 'purchase' matters over long run ownership interests. The concepts can provide a useful way to think about government interventions, but they become less relevant when we apply them to the activities of core government - activities which by their very nature are matters of long run purchase and where the boundaries of what is purchase and what is ownership are blurred. For core government services, decisions around price, quality and quantity are made around the margin, where the objective is to secure long run provision in the face of varying, but continued demand.

Given the nature of the Crown's long run interest in certain purchases, which are not easily made contestable, the concept of "ownership" is almost exclusively the domain of core government. As Schick commented, our emphasis on the purchase interest has tended to overshadow broader long run ownership interests. Unless balanced, a strong purchase interest also brings with it a short term focus and a risk that our responsibilities for maintaining the ownership interest in core government are being crowded out. Without evidence to the contrary, I am not sure, that we are undertaking "responsible contracting".

I'm not sure that the theory accords with practice and that the prices we set are really an accurate reflection our long run interest. The output pricing review has arisen as a response to these concerns and while the methodology is still under development, this is still very much a case of the ambulance at the bottom of the cliff rather than a more systematic and proactive approach to the managing the ownership interest.

The theory also relies heavily upon Ministers playing their role as principals in a contractual regime comparable to a marketplace. We are expected to be energetic and well informed purchasers, monitoring output delivery and bringing particular sanctions and pressures to bear as required. The reality is far from a market model. It is characterised more by monopoly supply, compliant demand, arbitrary prices, and asymmetry of information. Some of the more obvious assumptions of the model that do not fit with reality include: The view that alternative suppliers exist for the delivery of core government services.

The simple reality is, that Ministers do not stop purchasing from one department and actively look to purchase the same services from another. The view that departments and Ministers religiously adjust quantity and quality dimensions in their purchase agreement in response to changing resource levels and changing third party demand; The view that cash will not be disbursed to the department if output targets are not met and that purchase agreements are sufficiently specified to allow this anyway; The assumption that there are still incentives for chief executives to generate and disclose productivity gains where these are simply returned to the Crown through the current surplus management regime.

The assumption that at any point in time, departmental capability exists to deliver on priorities for the government of the day. The gross assumption that departments can always continue to reprioritise within baselines without affecting organisational capability and the equally absurd assumption that productivity gains can be extracted centrally through across the board budget cuts. Ministers are at the head of the management system.

We are expected to provide the leadership and decisions to ensure that Ministerial expectations can be translated into action by the public sector. But has anyone actually ever asked how well Ministers perform their role? It is a bold leap of faith to assume that Ministers cheerfully fulfill all of the requirements of the current public management system. In the same way that the incentives regime facing chief executives is more assumption than practice, I suspect that the case for Ministers is generally the same.

The expectations of Ministers are not clearly specified anywhere - there is no Training manual about what it is to be a purchase or ownership Minister. Nor do Ministers face any direct performance monitoring on this aspect of their job. With a limit of 24 hours in a day Ministers cannot possibly delve into all matters in any detail and I think this tendency continues to hamper our progress.

Not all of us will feverishly negotiate and specify purchase agreements, but I sense that any effort being placed into purchase agreements dwarfs that being applied to the consideration of the ownership interest. In any case, our preoccupation and love of specifying things cannot be fulfilled in the ownership sense, as there are no departmental ownership agreements for us to joyously scribe.

In the same way that I think Ministers need to examine their role, the public service also has to acknowledge the divergence between the theory and reality of public sector management. It also needs to go further, and address the systemic gaps that exist from a longer run ownership and capability perspective - this is my second challenge for the public service. These challenges are not new, but come on top of my predecessor's call last year to examine the role of outcomes in government.

Last year's conference was concerned with "Lifting the game: from outputs to outcomes." I agree with the sentiment but I have to ask, what is different today, one year on? I think the challenge of outcomes is still before us, but I believe the initiatives that the Prime Minister and I have been developing in recent months I believe, provide a foothold on the problem. What is different one year on, is a renewed and sharper focus by Ministers on outcomes that are meaningful and can be readily translated into operational goals; stronger accountability for outcomes and cross portfolio approaches to problem-solving and the provision of clear leadership for outcomes. But there is still a significant amount of work to be done.

Governments cannot possibly solve all of the problems in our society. Governments can only influence a small subset of outcomes, and within those areas, our resource constraints mean that we can only meaningfully address a limited range of problems. Similiar to my earlier point about assuming departmental capability, we should also be honest about the capability of government as a whole, to deliver on the big social and economic questions. As I see it, the process of setting strategic priorities for government must be examined at two levels - At a political level, identifying what outcomes are attainable and can be meaningfully influenced by government intervention; " Of all the potential activities, What should the public sector do and what are the priorities?"; and secondly At an operational level what is the current capability of the public sector machine to deliver on the objectives and realise its potential to influence these outcomes. ie " What can the public sector do? Ultimately if any government wants traction on a strategic goal it needs to coordinate a coherent, well researched and well resourced initiative.

This requires governments to be selective in the goals to be pursued. The trap governments have got themselves into since the 1960s is to yield to the infinite political demands made of them in the absence of a broad all embracing set of high level objectives. My own view is that the current SRAs are so broad and encompass so many activities that they cease to be useful. We must avoid SRAs that lack substance and are all "motherhood and apple pie" rather than providing a strategic focus for government.

It is a somewhat ironic and self-defeating exercise to attempt to be strategic and focus on key priorities while at the same time also trying to embrace as much content as possible to appease the widest range of interests. In a similar vein, officials have also sought to establish as many links as possible between their activities and the specified SRAs.

I sense that there is little empirical research or evaluation information to support the assertions of linkages between outputs and outcomes, and therefore little information with which to assess the effectiveness of different interventions. No agency likes to think that its activities are not strategic and therefore perceived not to be important.

However, the consequence of this behaviour is that strategic priorities that are too broad to be useful. However difficult it may be, Ministers need the free and frank advice to understand the limitations of government's capability to solve society's problems, and certainly advice on its inability to solve all of these problems at the same time.

Like any large organisation, executive government is faced with the same constraints of bounded rationality and span of control issues. To be strategic governments need to choose their goals selectively and Ministers need to be able to give focus to them. This means that some activities of government will not be strategic at a given point in time. Smaller agencies of government especially, need to focus on one or two key areas rather than trying to contribute to a whole raft of SRAs for which their contribution risks being diluted and perhaps less effective.

A more critical and disciplined approach to defining the key strategic priorities for government is needed to avoid outcomes that are so broad as to be meaningless and so bold as not being able to be influenced by government. The determination of sharper and more focused strategic outcomes has to be led by Ministers but that is not to say that it is a simple top down approach.

The best strategy is often formed by the synthesis of top down vision and bottom up analysis. This is where I think you all have a far greater role to play - in the engine room, generating the strategic analysis and knowledge necessary to inform decisions made by the crew on the bridge. Sharply defined outcomes should also assist you in generating it. The comparative advantage of Ministers should reside in an ability to set the strategic direction of government, not in the day to day management issues.

In one sense Cabinet Ministers should operate as a Board of directors - at a strategic level. Despite the best intentions of the public management model however, the reality is that Ministers find themselves constantly battling the tedium of administration. At times we also find ourselves acting at the level of a policy analyst in trying to untangle arguments between different departments.

To be fair some of this is sometimes brought about by Ministers themselves. But some responsibility also rests with departments. We also find our time dominated by the needs of multitudinous layers of the current accountability system. The value of the documents and processes being generated needs to be tested. The value of DFRs is a case in point. The sense I have is that there is a lot of churn and duplication and therefore cost.

I fear that compliance has become the measure of success rather than the quality of the outcomes being attained. If our focus on outcomes were to be successful, Ministers would have a far greater demand for this level of analysis. If Minister's priorities are well articulated in the manner discussed, then the public service needs to come on board with high quality strategic policy analysis and evaluation that establishes, firstly; whether the outcomes are achievable; and secondly; what the most effective mix of interventions are and how the collective resources of the government can be marshalled to address the problem.

Substantive empirical research and fresh ideas are needed. Theoretical frameworks about agency theory, institutions and incentives are only a small part of any solution. I must confess that at times the perception is that we have tended to take our solutions from out of the box rather than embarking upon more critical thinking. A funder/provider split with contestable contracting for example, is not the blueprint solution for every problem in government. The motto, have theory, will travel, is no longer good enough. As a result of generating this knowledge or as a response to exogenous shocks, government priorities may well change.

The Public service's response should be both dynamic and organic in nature with changes in direction being quickly and easily assimilated into the business of government. This does not necessarily imply a need to embark upon structural change or a long drawn out machinery of government solution. I think we have tended to overuse the structural option.

These sorts of changes tend to be costly in financial terms and risks losses in morale, productivity and capability on each occasion. Continuous structural change is not sustainable. Maintaining a cycle of restructuring only accentuates a myopic focus on short term solutions. That said, there will always be structural change in the public sector where it is sensible, but it should be undertaken as part of the on-going evolution of the public sector.

My own views are that we need more flexible non-structural solutions to managing changes in the government's strategic priorities. I am therefore encouraged by the programme for the rest of the conference that addresses the issues of networked organisations, cooperative arrangements, knowledge sharing and knowledge management. If we are going to make an impact on the big outcomes being sought then it is highly unlikely that any single agency will have the capability to influence the outcome on its own. While we have already established some cross portfolio coordinating mechanisms like the KRAs and various informal Ministerial groups such as the 'G5' Group of Ministers looking at benefit reform. I think we can go further.

The Prime Minister has initiated the first move by establishing Ministerial teams with an emphasis on cross-portfolio issues based around strategic areas concerned with economic strategy, enterprise and innovation, social responsibilities and strengthening families, justice and security for example. The establishment of cross-sectoral portfolios such as Food, Fibre, Biosecurity and Border Control is also aimed at getting a more cohesive and integrated approach to our strategic priorities. To drive sharper, more focused SRAs four key ingredients are needed at both a ministerial and public service level.

One I have mentioned earlier is public service capability. The others are - strong leadership of the SRA, (in effect an SRA champion), clear accountability for delivering on the SRA and the substantive integration of the SRA into budget decisionmaking and process. These things cannot be achieved overnight and these elements will evolve in time. But a start has been made, Ministers are interested and energised - the challenges for the public service are fairly obvious - Take greater responsibility for focusing on outcomes and making traction on well defined outcome indicators that can be measured directly or by way of proxy; Accept that being strategic means being selective and that the accountability system cannot be swamped by a myriad of claimed linkages between departmental activities and SRAs.

This does not mean that the existing range of functions performed by government become unimportant. What these new strategic priorities are about are particular points of leverage, where the Government believes it can significantly alter outcomes for the better. Be critical about what capability exists within the Public service to solve the complex problems. Be realistic about the interventions that the government can employ to influence outcomes; Increase your contribution to strategy setting in government through high quality analysis that is informed by empirical research rather than textbook solutions; Work together to get stronger co-ordination and more flexible responses to emerging problems, thereby avoiding the temptation of Ministers to seek this through structural change. There is nothing special in these tasks, and I suspect that you have all heard them before.

The real challenge is to turn the ideas into practice. On this front I think the Prime Minister's recent cross-portfolio initiatives and attention to SRAs present an exciting opportunity for the public service. While no one can deny the tremendous progress made in public service efficiency over the last 10 years the challenge does not stop there. I don't think the status quo will serve us in the future.

We need to look hard at some of the assumptions underlying our management practices. It seems to me that the starting point is to begin answering some of the hard questions such as - What are the outcomes that can be realistically influenced by government? and what are the best interventions to make demonstrable progress? What realistic level of productivity gains should be expected from the public service? What does long run capability actually mean for my organisation? and what is the nature of the long run demand for services? What does long run ownership mean in terms of fiscal, operational and strategic management practices? As long as we continue to "assume" the theoretical model these questions will remain.

What is more they present a risk to understanding and maintaining the capability of core government in the face of recent fiscal projections. There will always be a core government sector or public service. Its size and composition may well change at the margin. But, "core government" remains the best example of what it means to be in something for the long run. Core government and "ownership" are synonymous terms.

It is therefore crucial that this concept is systematically incorporated into our fiscal, operational and strategic management models - in both practice and theory.