Monday, 20 November 2006

Good governance in the public sector

Speech notes for address to the Institute of Internal Auditors 2006 Conference

Good morning and thank you for the opportunity to talk about an issue this government has certainly championed - good governance in the public sector.

A few hypothetical examples are sufficient to illustrate that good governance is not only about process; it is about the means that enable us to achieve better ends.

 Imagine a society where the fruits of investment are sometimes arbitrarily taken by force without recourse to law or any mandate.

.…investment in that society is going to be rare and low quality because profit becomes impossible.

 Imagine a society where decision-making is ad hoc and unpredictable; where no one really knows how resources are allocated.

...then scarce resources would be predictably misallocated - a blindfolded dart thrower will not hit many bulls-eyes.

 And imagine a society where decisions are made secretly and decision-makers are beholden to elites or vested interests.

...life for most of the population in that society is going to be hard because few decisions are going to be made for their benefit.

We don't need to imagine these societies - we can look around the world and without too much difficulty find examples of all of them.

So it's not surprising that good governance has become a focus around the world in recent years.

There have been high profile examples of corruption and corporate collapse in the private sector, such as Enron and Arthur Anderson.

These failures sparked caused debates globally about the quality of governance.

In the public sector the topic is probably receiving even more attention.

The World Bank for example is directly linking the quality of governance to its efforts to reduce global poverty.

To quote the World Bank directly,

"Policy makers and academics agree that good governance matters for economic development....High-quality institutions have the power, over the long run, to raise per capita incomes and promote growth in all parts of the world."

The World Bank grades the quality of governance on six criteria.

Its survey released in September showed New Zealand in the top group of countries on every indicator.

The countries with the best governance are those with the highest incomes, the best life expectancy and the highest standard of living.

It is not that a high standard of living allows us to afford the luxury of good governance; it is precisely the other way around.

Good governance buys good outcomes.

We can tick off some of the World Bank's measures easily: We are as democratic and as free from political violence as any nation.

But even well-governed countries look to improve public sector governance to help lift our performance and it's worth rehearsing the categories that make a difference:

 The rule of law, respect for contracts, independent police and judicial systems and freedom from corruption are fundamentals.

 Governments need to be capable of formulating and implementing sound policies that provide for the development of the whole society.

 The World Bank emphasises governance that is not captured by elites and private interests.

 The quality of public services, the independence and quality of our civil servants and the quality of our policy-making processes are vital tools.

We score among the world's leading nations on all measures.

New Zealand's state sector reforms of the eighties made familiar tools out of performance measurement, accountability, transparency, responsiveness, and risk management.

The starting point for all of it is a clear statement of the things we expect our organisations to do.

This is perhaps not as straightforward a question as it sometimes is in the private sector.

Public agencies usually don't have a profit motive.

They need to know what performance is expected of them before we can manage and assure their performance.

Organisational functions may be explicitly specified, but the goals and the means to achieve them are often more difficult, both to define and to measure.

To do this well, public sector organisations need to develop good processes to set their direction, plan, deliver policy and review.

Their processes reflect the government’s priorities.

This government’s three main priorities are:
 Transforming New Zealand into a high-value, knowledge based economy;
 Building our national identity; and
 Securing the well-being of families young and old.

My role as finance minister is to ensure we maximise our public resources in achieving our goals and that we manage our resources prudently.

Good governance is essential to getting the most wallop for our dollar and to ensuring we maximise the number of dollars we have to spend.

Prudent fiscal management is a key reason our economic performance has outstripped the average of developed countries over the last six years.

It has allowed us to eliminate our net debt, begin to put aside something for the future through the New Zealand Superannuation Fund and Kiwisaver and make significant infrastructure investments.

We would not have made those gains if we had lurched away from prudent fiscal management. And if we continue to be careful our returns will accumulate.

Then we will be able to increase the returns to all New Zealanders, through both the tax system and through further improvements to public services.

Prudent public sector governance requires us to make choices transparently.

For example, we cannot spend money twice or even three times: Cash that pays for better services cannot also be returned to the taxpayer.

Cash that we invest for our retirement cannot be squandered now.

If we want to do all three - save, improve our services and look to put more cash in families' pockets - we need to ensure we manage our finances steadily.

We all have our views about the best mix of policy.

Good public sector governance both makes transparent the options and helps us make the best choices to reach the goals we want.

We want more value for money from our public services.

That calls for rising productivity through innovation.

The principles of economic transformation are therefore as relevant in the public sector as in the rest of the economy.

One example where we are finding more room to lift our performance, for example, is in getting the whole of government working together, especially on more complex problems.

For all the improvements in public sector accountability and transparency that state sector reforms brought, the autonomy of departments also created an incentive to manage by silos.

There are great opportunities if agencies can collaborate.

Problems that fall through gaps, or conflicting responses from different agencies, are signs the public sector can perform better.

We want public sector agencies to be alert to these risks and opportunities.

We want them to bring a whole-of-government perspective.

Ministers are disappointed at how long it can take some organisations to respond and start working effectively together in some complex and important policy areas.

Public sector organisations have different governance arrangements than the private sector because they have different performance challenges.

There are useful governance lessons the public sector can learn from private sector practice.

But it cannot copy private sector corporate governance practices without thinking about the circumstances in which they will be applied.

One example is the performance of Crown entities.

The government passed an Act in 2004 to tidy up the whole area.

Crown entities include an enormous range of services, ranging from hospitals to the Lotteries Commission to Television New Zealand.

Together they represent over half the government's operating expenses, a significant proportion of our fixed assets and many regulatory functions.

As we found out the hard way - through a series of public issues - there were widely varying models of Crown entity governance.

They needed to be made more consistent ...and the new act brought in a distinctive set of governance arrangements.

Internal auditors, of course, have a responsibility in the application of these rules within organisations.

The new rules differ from governance arrangements in companies.

For example, Crown entities are required to be responsive to whole-of-government initiatives.

Doctrines of ultra vires were modified.

Board members on statutory Crown entities had their obligations codified for the first time.

The duties reflect some important differences from those of company directors: They recognise that we have Crown entities because we want them to serve a wider public interest.

They are not concerned solely with the best interests of the entity itself.

So in addition to duties owed by individual board members, the Act created collective duties that boards owe to the responsible Minister.

For example, they have a duty to perform in a way that's consistent with the spirit of service to the public.

Individuals and entire boards can be fired for breaching the duty.

The demands of good governance are only going to increase.

I can give you one example where demands on boards have recently grown significantly:

The government has announced a change to SOE policy.

We are inviting SOEs to consider expanding the scope of their business. They are invited to look at adjacent products, markets and technologies. It's part and parcel of our economic transformation agenda.

We need to grow more successful New Zealand businesses and we need our most successful to grow and contribute more to our productive economy.

Our SOEs are some of our most successful businesses. They have proven management talent and governance capability, as well as the scale to enter international markets.

The new policy is not a general licence to start new businesses in any sector. The government still expects publicly-owned businesses to focus on their strengths and capabilities. The change will require the highest standards of governance. While boards will need the ability to assess new business streams, they will have to be careful not to lose focus on their core activity.

Their risk management will need to be outstanding. The government will want to see proposals funded from the business’ own balance sheet.

So the demands for financial management will be higher still. But we know it can be done, as we have seen from NZ Post's successful expansion into banking, and Meridian's profitable investment in Australian energy.

The government took this initiative because we need to turn on all the taps in transforming our economy. And in making the change, we have to recognise that only high standards of governance and accountability can make it possible.

So good governance is a crucial part of making our economy work better and deliver more for the public.

Good governance also lies at the heart of our democracy. Transparency, public consultation and accountability help us to make better decisions.

They improve the responsiveness of our institutions to public needs and they make our society more stable. Open, transparent, accountable, innovative and responsive governance is not a given.

It's a challenge we have accepted in New Zealand, to our benefit.

And it is one we will need to continue to pay attention to as we continue to improve our public services. Thank you.

ENDS

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