Graham Scott
Chair, Health Funding Authority

Introduction

There is something in the atmosphere of this conference that is very different from any other public management conference I've spoken at - and I've spoken at about three or four. I think the insightful strategic thinking that has gone on in the course of the day is very refreshing. At a time when we are at a flat spot in the evolution of the State in New Zealand, something in the thinking is changing.

Much of the day has been spent discussing policy. My invitation is to talk about public management and wrap in a few comments on earlier speakers that are relevant to the topic. I have worked over 22 years on public policy problems and in public institutions - recently in Asia more so than in New Zealand (with the exception of health). I've learned repeatedly the crucial importance of good management to the success of governments and I am going to focus on that.

However, I am sure that with some of the comments that have been made in the course of the day, especially Leslie Young's presentation, you'll be expecting me to make a few comments in response.

Leslie talked about Scotland, Ireland and Australia, and they do provide powerful icons of alternative approaches to development, although I don't understand his logic. An alternative stylised view, that there is not time to elaborate, is that the Scots invented liberal political economy, followed its influences around the world to their great benefit until bad economic policies developed in London consigned them to be a backward region of the United Kingdom. I would also warn him that his comments about Scottish culture run some risk for him of being dissected with a claymore in a city where over 30,000 tickets for the Edinburgh Tattoo were sold in a few hours.

Australia provides a more immediately relevant reference. The comment was made this morning about joining the Australian Commonwealth. Deepening our relationships with Australia is highly desirable and highly necessary. Modern government is immensely complex and getting harder. The investments that are necessary in policy analysis are really huge. We are falling behind and we should share the effort with Australia. Take just one example - deciding which drugs to subsidise. I see this in Pharmac where it is really impractical for New Zealand ever to do the research itself that is necessary to support decisions about drug subsidies. We must work closely with other organisations and other countries to do it.

You had a reference this morning to the World Development report on the knowledge economy that was used to support the idea of such an economy being a new development strategy. But I would remind you of the previous World Development report which was on government and how critical good governance and good public management is to development.

The Role of the State and Public Sector Reform

The notion that New Zealand has had fifteen years of relentless "free market" reform glosses over an untidy reality.

We have had two periods of radical policy announcements to reform the role of the state - the mid-1980s and 1991-92. In between these two periods there have been consolidations, policy modifications, policy reversals, changes in leadership at various levels and a return to more familiar pragmatism driven by political resistance to some of the changes. Both bursts of reform were in the context of serious fiscal crisis. A temporary, but very severe crisis in monetary policy accompanied the first period. Unlike the monetary policy crisis the fiscal crisis was not temporary but structural and rooted in the role that the state had adopted and its policy choices over a long period.

Both periods of reform were also driven by a push for greater efficiency in public and private sector resource use. As regards the public sector both were driven by evidence and belief that the Government was probably doing more harm than good in the management of a very large collection of public enterprises, which initially produced something like 12 percent of the gross national product. Both reform initiatives sought ways to create new policies and institutions for social service delivery and income support. Some policies were very well designed and implemented and others were not. Policies were sometimes poorly framed, sometimes poorly implemented, sometimes not implemented at all, sometimes under-funded, and the institutions created were sometimes badly managed.

The flat tax proposal was never implemented nor was capital gain tax. Most of the recommendations of the Royal Commission on Social Policy went unheeded. Most of the social policy in the so-called 'Mother of all Budgets' was never implemented as announced.

However, the goals for fiscal policy and financial sector stability, which is easy to downplay today, were actually achieved. These two periods had been very difficult economic times and governments had acted boldly to address them. Subsequently, the economy has become, for a while at least, less vulnerable to shocks. The Asian crisis is a test of this in a way. It hurt our export volumes, but not a lot else. The governments of Asia have mostly had their economies and their governments in turmoil because of this event.

Government reform in New Zealand did achieve efficiency improvements in formerly government-run businesses.

Public sector reform did actually achieve much of what the politicians who put them in place expected them to do in terms of contributing to fiscal policy correction, shifting the priorities of government expenditure and greater efficiency. But new agendas have taken over.

Social policy reforms were and remain problematic. The breakdown between Roger Douglas and David Lange set the scene for a long struggle about the nature of the State in social policy and I believe this debate still remains unresolved.

Almost every one I worked with over this period believed that social and economic policy must be thoroughly integrated, although they meant different things by this. Concepts of social capital and cultural capital have spluttered into life without much impact so far. In fact, ideological clashes, errors in policy and implementation, plus influences that have driven our politics have made economic and social policy integration an ill-defined and elusive goal.

It is interesting to go back and look at the simple development strategy outlined in the 1992 Budget strategy to see which of these things were done and how well. The record is patchy. The strategy contained the following things.

First, there was stable and credible macro economic policy, meaning stability in tax rates, stability in the deficit, and stability in the price level. Broadly, that was achieved.

Second, there was enterprise and innovation. People will remember the Porter report, the first enthusiasms of the Trade Development board and the NZIER study of islands of excellence. But mostly these have left rather faint footprints. In 1999 we're still struggling with the politics of reform of really eccentric patterns of regulation around our major agricultural export industries. The electricity industry is slowly and unsteadily being sorted out a decade late. We don't get very good marks there.

Third, there was fair and affordable social policy, which I have already touched on. That has really driven the agenda of Government in the intervening years, but I believe we still have a long way to go.

Then, lastly, there was the question of human capital development, which was to be the platform of a different kind of economy. There was talk about many things that are now labelled 'the knowledge economy'. What have we done about that? The main policy conclusion from Leslie Young is to get greedy, clever people in or at the edge of innovative, internationally rated education and research institutions. I would see a broader range of things that we need for a knowledge economy. But, to focus on the problem he raised, we plainly are not solving it. The Government still won't let go of the universities. It is giving instructions to them about which courses are to subsidise which other courses and so on. Many are bogged down in internal politics, high transaction costs and perverse incentives around the very people who we say we will depend on considerably for helping us craft a new kind of economy. Strangely, the people who work in the universities seem tolerant of the situation and even like it, which is odd given the position our universities are in the international ratings and the strategic risk presented by growing international trade in tertiary educational services supported by new technologies.

Public sector management

I have learned over the years that usually a policy problem has a public management problem somewhere not far behind it . If the management problem isn't dealt with the policy problem isn't going to be fixed either.

In 1993 and in 1997 I spoke at similar conferences as this. I've found it interesting to look back at the issues that were emerging in those conferences. In 1993 Roger Blakeley and I presented a paper. In this we talked about moving from the phase of restructuring, which we thought we had got most of the benefits from, to thinking more about the role of the professional manager in the government.

The debate was still running at the time over whether there was an inherent conflict between being a professional manager and having the old public service values. We said that a professional manager in the public sector needed those old values and commitments, but also had new skills that were needed and that were not in evidence in the public sector under the old regime. What have we done about building these new skills? We have not done nearly as well as people at that conference would have hoped in putting in place the mechanisms and systems, philosophies and policies that would enable us to grow and strengthen the cadre of top management in the public sector.

At the 1997 conference Jenny Shipley had just become the Minister of State Services. She said some quite inspiring and interesting things at the conference about being concerned more about service to the people and less about reform for its own sake.

There was talk at that 1997 conference about moving from a first generation to a second generation of issues. In that second generation were some things that have become quite hot since. We said then that we had not dealt with the operating principles of Crown entities and they were an accident waiting to happen. We talked about better specification of performance. We talked about trying to get rid of the monitoring industry and focus back on specifying performance in ways that would really help promote better performance in service delivery. We talked about going back to the original thrust towards outcome-based public management and thinking more about the results that we were producing, rather than the things we were producing. We talked about managing complex networks.

It had become clear by 1997 that the old intellectual tools of agency theory that had proved quite powerful in thinking about restructuring State-owned enterprises weren't going to help us. More sophisticated analysis would be needed. The old tools of analysis would not be adequate when we looked at areas of public sector service delivery where groups of people who were not related through a vertical line of authority, would have to develop horizontal relationships. These people would have to come together and focus on the citizen as receiver of those services, looking at it all through their eyes. Some very exciting things were starting to happen at that time - the Strengthening Families initiative, and so on. There was a lot of energy around this and some success. But here we are some years later still looking at that issue of complex networks, still thinking about it, still experimenting. There has been progress in the policy of strengthening families but it has been slow.

Central to the second generation of issues was the widespread acknowledgement at that 1997 conference that we had neglected the question of the so-called ownership issues. We were running down the capacity of the State to deliver services and something had to be done about it. Two years later the Minister of State Services has just made some pretty exciting announcements about that. But that is an old agenda and it goes way back and has been neglected.

We talked about strategy. We talked about how it was going to be that a Government could get from a set of reasonably well managed individual delivery systems to operate as a whole complex networked organism that could move strategically, craft new ideas and strategies and implement them.

Regrettably public management has become a political issue because of some simple but very public blunders. Perhaps the issue is filling a space that was left empty in the debates within an election campaign. There is danger as well as opportunity in this. Some of the criticism is legitimate, some of it is embarrassing, some of it is driven by populist nonsense and buck-passing by individuals seeking to blame the system for their own mistakes. There has been a spate of recent and largely welcome initiatives to deal with some of these questions. There are also some inferior ideas around.

Against a background of drift on a lot of issues in public management and stop-start progress on others, we should acknowledge that steady progress has been made in a lot of things. Our public sector management is not bad. At its best it is the best anywhere. It is often presented as bad, but it isn't. New Zealand can be quite proud of the quality of a lot of what is done in our public organisations. It is just that it could be a lot better. I think we should look at where we are critically but also with optimism and a degree of pride. We must figure out where we are and how we got here, before we can move forward. Let me go into more detail on some of these issues and tell you where I think we are today.

Some of the weaknesses are dangerous and they have been left unattended for too long. However, we need to remember that ten years of change has addressed a lot of inherited problems from a vulnerable, unresponsive and inefficient public sector, which we were told this morning was the political manifestation of a last attempt to re-colonise this society.

Managing for outcomes

The Holy Grail of outcome-based management remains elusive. It is only well advanced in isolated places. We see it in Pharmac; we see it in Occupational Safety and Health. There are probably a dozen places. I doubt there is any really well managed public organisation that doesn't have a case study of outcome-based management. But a huge effort is needed to do the policy analysis that links the final results we're looking for in our communities with the actions that we take. Then we can go back and figure out the best way to take those actions - or indeed if we should be taking them at all, or someone else should be taking them.

Capability and the ownership interest

The ownership interest has been badly neglected. It was 50 percent of the performance requirement and for many years seemed to be forgotten. We have had an unbalanced emphasis on management by specification and threat. If you make a mistake they tighten the noose around you. We have had pinch and tuck budgeting for many years now. Basically the Government stuck doggedly to its fiscal targets by squeezing everything down in an environment where there was no mandate, or they chose not to make substantial change in the role of the Government itself. The ankle biting monitoring industry that I warned of at the time I was still Secretary to the Treasury, more than ten years ago, has happened. We were worried about it then and it is here now. There is a lack of clarity of focus in setting performance goals and monitoring them. It is easier to do checklist monitoring. It does not have to be like this.

Getting performance specification right is fundamentally important. I know there is a lot of criticism about the way that it is being done. Just because it is being done in an unbalanced way doesn't mean we forget about it and do something else, such as sinking lids or efficiency dividends on administrative costs across the board. We simply have to get it right. I don't know how you can hold people accountable without writing down the specifications of what they are expected to do in some motivating but finally verifiable form. These are people who have been given authority over the use of resources and more freedom from input controls than any Public Service in the world.

We have ended up with a compliance industry that piles detailed and often contradictory requirements on public agencies. I know this from the regional health authorities where we commonly saw contradictory requirements placed on us by various Government agencies. They didn't take it upon themselves to tease out the inconsistencies in these requirements. In these circumstances chief executives go back to their Ministers to find out what really matters and then they drive their organisations towards that. In the meantime, the compliance monitors go on writing reports about how well or not they are meeting other objectives that are no longer driving these organisations. Budgets often don't reliably match the costs of the outputs.

The institutions of accountability have been far too fragmented. In many cases priorities haven't been properly set and they are not resolved. If you're running a Crown entity it often feels as if unresolved policy problems in Parliament or Cabinet or between the Minister of Finance and other Ministers simply get dropped in your bucket to resolve as best you can. You are told to figure out how to launch new services out of a budget that the minister has already fully committed.

It is crucial to deal with these and other criticisms, such as the ones Alan Schick made, and get performance specifications right. Experience in health shows that this requires a lot of attention to getting secure relationships between the players that feed into a single coherent performance specification that all the parties buy into. We should go on debating what you really want an organisation to do, even if that takes time and effort, rather than send it forth with an incoherent and demotivating performance specification. I am very pleased to hear that the notion of the strategic business plan is being seen as the device to do this. It has been very helpful in the Health Funding Authority to get all the relevant parties signed up around one central management document from which the other accountability documents are derived.

Executive remuneration

Executive salaries have been a hot topic. In my view, the very flexibility that the system has offered has made it possible for us to put some chief executives in charge of organisations, who are capable of managing awesome challenges. Some make mistakes. Money is not everything, but it matters. It would be an error to go back to a top-down, centrally controlled, politically pragmatic remuneration system run by the Higher Salaries Commission. The recruitment problems would worsen. The performance management system should be tuned up rather than cutting salaries to the lowest common denominator of political acceptability.

Crown entities

The Crown entity issue needs attention. The problems in two or three of them are not symptomatic of the lot even though there are holes in the framework. At the time that the Public Finance Act was introduced the holes were not an oversight but a reflection of difficulty in resolving their accountability relationships. If the generally accepted accounting principles required by the Act were applied, then the producer boards might have been required to be declared as Crown entities and be consolidated into the Crown accounts. This was because the Crown was the financier of last resort to some, de facto at least. This plainly didn't make a lot of sense and didn't reflect the political relationship between Parliament and those organisations. Subsequent revisions of the Act filled some of the holes but the job was never completed.

The Tourism Development Board case does not teaches us much. It is a pity that it has been the trigger for reconsidering Crown entities. A lot of the behaviours that were reported around the Tourism Development Board were things which in my experience other Crown entities and ministers wouldn't do. If Ministers and others are determined to behave like that there is no reasonable management system that would stop them. The Tourism Development Board incident was a well sign-posted bear trap into which people walked.

I am not sure the Fire Service tells us much either. It appears to be at its core an old-fashioned labour dispute. We would need to study it closely to know what messages, if any, that it has for Crown entities generally.

The New Zealand Symphony Orchestra is, or was, a more instructive example. Some of you may know that I was invited by the Government to do a study of it. Although it is tiny, it seems to me to illustrate major systemic weaknesses in the Crown entity approach and it is still in a muddle. What happened there was that the instruments of accountability were in serious conflict. The organisation was committed by law and by tradition to deliver a set of services that it didn't have a hope of delivering within its budget. Ministers, the Ministry and the board all had different ideas about what it should be doing and there was no mechanism for resolving them. This was a systemic problem. This is the illustration that should really be used and sorted out within the current review of Crown entities. If we don't resolve it we will be the first country in the world with a 40-person symphony orchestra sponsored by Ronald McDonald. I am in favour of major private sponsorship of the orchestra but it does not seem to be possible to get the amount needed for a decent orchestra. The government must either support it or abandon it. Slow strangulation and misalignment of the interests of the board, management and the government was the worst of all possibilities.

There has been much said here today about the difficulty that we have had in crafting public institutions which find efficient and effective ways of supporting and developing unique aspects of the culture of this country. I am as interested as other speakers in how this country countervails, absorbs, shapes, resists or exploits global influences on its culture. I am not as certain as others may be on what the government should do about it though. From the perspective of my presentation today, I am looking at cultural issues through the lens of public management. The government must shape its policy around well managed institutions. I don't think our track record so far is that brilliant. Regardless of what you think about whether the taxpayer should pay for the NZSO, the facts are that it was nearly destroyed by a dysfunctional public management framework.

Managing Complex Relationships

We have much to learn about managing networks of public organisations and even more to learn about mixed networks of public and private organisations.

The group of officials who developed the support for the Government's Bright Futures announcements seem to have put together a virtual Ministry in action, which the people I've spoken to said worked very well. In Health there is going to be a major decentralisation away from a highly centralised organisation, the Health Funding Authority. The HFA came about because of an accident of political history and it is inevitable that over the coming years there will be a further attempt at decentralisation of health policy to people and communities. But we'll never go back to doing it in such a way that makes it impossible for the central government to make assurances to the citizens about practical things. These include how long you will wait for elective surgery, how far you will be from a provider of secondary care, and what primary care will be available to you as an explicit standard of care.

We should be looking for a network of organisations in which the centre of government will have to be a major player, but it should no longer seek to dominate the health sector and stifle its development. Central government will have to influence it through regulation, through funding, through policy, through building networks into communities, and so on. The early stages of that are in place.

Some of the new initiatives in primary care are promising. We're still a long way from having a community based health care programme and the whole approach of trying to resist the awesome pressure from the Government hospital sector on resources will always be a challenge. I don't think this should ever be delegated to community organisations as they'll get buried by it.

In the Treaty area I think there are some very interesting and worthwhile things happening in terms of developing formal relationships with iwi to engage them in strategic planning and service definition and in monitoring performance. At some point the ideological arguments about delegation of purchasing will be resolved and we'll see what happens there. But that framework could be used for that purpose if some government chooses to.

This quest for successful complex networks is not going to be easy. I imagine most of you will find yourselves one way or another as a node in a network that you do not control, with other people working up other vertical lines of accountability. I am a bit of a stickler for getting the basics of public management right in order to support such networks. It is my belief, based on a lot of experience, that a group of people who aren't working under the same line management cannot come together, size up a situation and act quickly to resolve it, unless they are clear about certain things. They need to be clear about their roles, clear about their budgets and know what freedom and discretion they have. They must be trusted to honour its values, its culture and its policies in their dealings with other people. Effective networks can never happen under a centralised bureaucratic system.

The development of private and community providers, citizen demands and the kind of thing that Marilyn Waring was talking about earlier, all point to very powerful drivers towards decentralisation and power shifts away from the centre of government. Being able to implement policies of service commitment on a universal basis will present enormous challenges to major public organisations in terms of how the State participates in what are going to be much more complex forms of service delivery and regulation.

Strategic management

Government strategic management needs a lot more development. I think the KRAs are largely waffle, although the best of them are good. Simon Murdoch, head of the DPMC, criticised them heavily some years ago. We didn't do an awful lot about it. They're an incomplete planning cycle and there are better proposals around. Again, I don't want to be unduly critical because I think the initiative of putting them in place was great. It is just the follow-up in completing the system they were meant to be part of wasn't done.

Policy advisory capability

Amongst the concerns that I have over capability generally I am particularly concerned about policy advisory capacity. High quality and uncompromised policy advice emerges consistently only in places where a culture that supports it has been embedded. It is very difficult to start new policy organisations and have them achieve that solidness in short order. We have longstanding organisations that have never achieved it.

There is too much infection from serving Ministers with what they want to hear and answering the wrong questions. There is a lack of critical mass in a lot of policy shops around the government. I do not mean just the number of people, as I have seen very effective small policy shops. It is more about intellectual depth and credibility over time. More needs to be done to ensure that all organisations with policy advisory responsibilities achieve this state. The central agencies need to set standards for the quality of policy advice that are used as benchmarks across the government. Numerous studies and reports have been prepared on this but problems of low standards persist in some parts of the government. We should revisit an idea that was put to the Government in 1987. This was to have a collection of policy organisations reflecting different professional backgrounds, different disciplines and contributions, being required to work together. They would give comprehensive advice to the Government that traded off different professional perspectives including the management perspective. This might promote better integrated advice and set higher standards of quality.

But the kind of country that is being talked about from so many different perspectives here today is going to demand more rigour and innovation than we see today in too much policy development.

Ministers, political parties and MPs

I'd like to make a few points about Ministers, political parties and MPs before wrapping up.

Having a seat in the Cabinet doesn't make anyone an expert in designing public management systems. But sometimes it seems as if it is taken as a licence to do that. The Minister of State Services needs a stronger role in arguing about management questions in other portfolios from the basis of solid advice and should be the owner of the public management system in Cabinet. What Simon Upton is arguing for is right on the button.

The present administration's reorganisation of Ministers into teams and the gatekeeping role of a group of Ministers going back to the Bolger administration, have been very productive initiatives and should be preserved and developed. I hope that they are not a casualty of the next election if the government changes because they were a very good idea.

The processes by which Ministers develop strategic policy goals still seem rough and inadequate. The first Coalition Agreement is probably best forgotten as a practice run, but MMP does give parties quasi-constitutional status. Their processes of making policy are largely inadequate and the process for supporting that and supporting the development of agreement needs to be thought about more boldly than they have so far.

Select Committee review of organisational performance is usually but not always pathetic and it is unlikely to improve. It is only any good where particular individuals on a committee take an interest in it, do their homework, and have some sort of expert knowledge or advisers around them enabling them to ask the right questions. Perhaps a Parliamentary Office of Budget and Management might help, possibly but not necessarily attached to the Audit Office.

I am rather attracted to ideas that I see in some of the developing countries I work in where non-government organisations establish themselves to do a lot of the monitoring and do it very effectively. For example, in South Africa there is very effective non-government organisation monitoring of fiscal policy.

Bad habits

• We have some bad habits that we should that we should get rid of.
• We have organisationally neurotic compulsions to keep doing things that once worked until we overdo them.
• We reach for structural solutions to problems that aren't amenable to structural solutions.
• We don't finish off what we start and leave obvious pieces of institution-building unattended to.
• We're not boldly and thoroughly attending to systematic weaknesses staring us in the face until they trigger a crisis. Then we leap back to the first bad habit.
• We can become rule bound, stodgy and risk averse.
• We waste human capital and demotivate people from joining the Public Service.
• We overload generally successful institutions until they stumble. We under-invest in long-term capability in all its dimensions.
• We don't evaluate performance carefully and sometimes jump to conclusions.
• We go on expecting high performance from new institutions the day they are created when mature managers all know it takes years to create a fine public institution.
• Sometimes we rest on our laurels and are happy with what we have achieved instead of being anxious and innovative to move forward.

Conclusion

In conclusion, I think our track record in improving public management in this country has been pretty good, by international standards anyway. We know that we can be at the forefront of best international practice in particular areas when particular ministers and public servants choose to be there. We have done it from time to time.

It is quite realistic for us to aspire to have the best public management for a small country anywhere in the world. There are emerging principles of good practice internationally. New Zealand has not headed off down some wildly radical path, as some would suggest. New Zealand and Australian public management systems have converged. Asian countries are converging also towards systems based on some of the same principles under the pressure of financial crises, demographic change, power shifts and economical and political change. We can get to and stay permanently up with best practice internationally and lead in a few areas as we have done over a period of years now. To do so we should consolidate and simplify what we have achieved and learned, embed it in a new legislative framework, and support the current initiatives especially in the ownership and capability areas. And we should drop our bad habits

I have dwelt on a lot of technical and in some ways old stuff about public management. I have done it partly in response to what I have sensed in the presentations today. New agendas are emerging and perceptions are shifting - something is in the wind. We need however to be reminded that really good government is hard work, although generally we know how to do it. We have some organisations with an unselfconscious culture of service, commitment to the citizen, that are truly accountable, employ superior human resources, have management systems that empower people and release the energies of these institutions. We know how to do this, unlike so many governments in other parts of the world. We should just get on and do it and I know we can.

To borrow Bill's little greeting - Kia ora, begorrah, and thank you.