Part 7: Planning and managing for better public sector performance

Central government: Results of the 2004-05 audits.

7.1
The Managing for Outcomes (MfO) initiative was agreed by the Government in December 2001. This new initiative sought to improve how government departments planned, managed, and reported on their activities. MfO has been progressively implemented across the public service since 2002-03. All public service departments and Offices of Parliament are now part of the MfO initiative. A similar initiative, called Managing for Results (MfR), is being implemented in the Crown entities sector from 2006-07.

7.2
MfO is designed to bring about significant improvements in the performance of the New Zealand public service. The Auditor-General’s statutory mandate includes consideration of the performance of public entities. The Auditor-General therefore has a strong interest in ensuring that the MfO initiative is effective in meeting its objectives.

7.3
This Part describes what the MfO initiative is, and the basis of the Auditor-General’s interest in MfO. We outline what we know about MfO’s effectiveness to date in bringing about improvements in departmental planning processes as reflected in statements of intent (SOI), and where further work may be warranted. We will be considering what work we might undertake in relation to MfO to enhance Parliament’s and the public’s understanding about the effectiveness of MfO as an important public sector management initiative.

What is managing for outcomes and managing for results?

Departments – Managing for Outcomes

7.4
MfO seeks to encourage a more strategic and outcome-based approach to departmental planning, management, and reporting. Ultimately, MfO is about Government initiatives achieving better results for New Zealanders.

7.5
MfO encompasses the full management cycle of setting direction, planning, implementing and delivering, and monitoring the impact or result of initiatives to inform future direction and plans. The aim is to ensure that departments’ limited resources are deployed for the optimal public benefit. It also concerns departments developing their capability for the effective and efficient delivery of services. Departments tailor the components of the MfO process to their particular purpose, needs, and functions.

How is MfO co-ordinated?

7.6
In agreeing to the MfO initiative, the Government established a co-ordination and leadership role for the State Services Commission (SSC), the Treasury, the Department of the Prime Minister and Cabinet and Te Puni Kōkiri.

7.7
To implement MfO in the public service, these agencies initially formed an MfO Steering Group that met regularly and published both MfO and SOI guidance for departments. This guidance is accessible through both the Treasury and SSC websites.1 Over the course of the last 4 years, this guidance has been revised and extended to take account of lessons learned along the way. Overseas experience has also been drawn on. More recently, the leadership and co-ordination of MfO has occurred through regular liaison between central agencies, particularly the Treasury and the SSC.

Statements of intent (SOI)

7.8
At the time MfO was implemented, Cabinet decided all departments were to prepare SOIs. Before then, departments were required to prepare a Departmental Forecast Report that had a strong focus on outputs. SOIs on the other hand require a strategic focus on outcomes promoted through MfO.

7.9
The requirement to prepare an SOI is now a legislative requirement in the 2004 amendment to the Public Finance Act 1989. All departments are to state their operating intentions at the beginning of the financial period and report against those intentions at the end of the period. Each department must prepare an SOI setting out its operating intentions and performance expectations for the ensuing financial year,2while taking a medium-term (3-5 year) approach. The SOI should provide a summary of a department’s intentions as derived from its MfO thinking.

7.10
Broadly speaking, SOIs describe:

  • the nature and scope of the department’s functions;
  • what the department is trying to achieve and why – and how it will go about doing this; and
  • the main measures and standards (financial and non-financial) that the department intends to use to assess progress.

7.11
The SOI is a public document that is presented to Parliament on Budget Day each year, along with the Estimates of Appropriations. Each SOI is signed by both the Chief Executive and Responsible Minister.3

7.12
The latest departmental SOI guidance issued by the SSC and the Treasury states that SOIs should set out both the key elements of a department’s plans and the thinking behind that planning.4 It notes that “…by its nature, the SOI provides a public window on a department’s efforts…”.5

7.13
The SSC and the Treasury state that MfO is about “much more than the production of a document for Parliament”. They also state that MfO helps facilitate departments’ reporting on their results, thereby promoting transparency to Parliament and the public.6

7.14
We consider the SOI to be an important accountability document. When the implementation of MfO began, we formally advised the SSC, the Treasury, and all public service chief executives of our interest in both the MfO process itself and the quality of content of SOIs. In providing feedback to departments on draft SOIs, our comments reflect our expectation that SOIs should adhere to the guidance provided by the Treasury and the SSC.

Crown entities – Managing for Results

7.15
A similar focus on results-focused planning and management has been introduced in the Crown entities sector – the Managing for Results (MfR) initiative – through the Crown Entities Act 2004 (the CEA).7 The SSC and the Treasury are performing a key leadership role with MfR. They have issued both MfR and SOI guidance for Crown entities.

7.16
The implementation of MfR begins with the 2006-07 SOIs of Crown entities.8 The Crown entities sector is not as homogenous as the public service. Crown entities vary considerably in both size and complexity of business. There are 5 categories of Crown entity and for 3 of those categories the CEA contains different planning and reporting provisions.9

7.17
Based on our experience as the auditor of all classes of Crown entities, we anticipate a varying degree of ease with which the sector as a whole will come to terms with the reporting requirements of the CEA. Some Crown entities produce SOIs that meet most (if not all) of the requirements set down in the CEA. For other Crown entities, the new legislation will require a different approach to planning and reporting.

7.18
The Office of the Auditor-General is working closely with the Treasury and the SSC as they consider what further guidance might be useful for the Crown entities sector. Similarly, the appointed auditors of Crown entities are working constructively with Crown entities and their monitoring departments10 as they start to prepare their first SOIs under the new regime.

What is the Auditor-General’s interest in Managing for Outcomes?

7.19
The Auditor-General provides assurance to Parliament and New Zealand taxpayers and ratepayers that public resources are being applied for the public benefit by public entities.

7.20
The Auditor-General seeks to ensure, through the audit opinion or the entity’s statements of account, that Parliament and other audiences are provided with:

  • good quality information about the performance of public entities; and
  • a fair representation of that performance.

7.21
SOIs set out critical forecast financial and service performance information that departments report against in their annual reports. In order for a public entity to demonstrate that it is applying public resources for the public benefit, it needs to state what outcomes it is trying to achieve (and, importantly, why), how its activities will contribute to those outcomes, and how it will measure those contributions. This should be set out in departmental SOIs. It is against this statement that departments are held to account in their annual reports, which contain the audited financial statements that Parliament scrutinises through its financial review examinations.

7.22
Although the Auditor-General does not have a statutory audit role in relation to departmental SOIs, the SSC and Treasury’s guidance for departments notes that “it is good practice to ask [the] auditor to review the SOI”.11 This, in part, reflects the Auditor-General’s statutory role in auditing the statement of service performance as part of the annual audit of departments’ financial statements, and advising select committees as part of the Estimates of Appropriations process. Departmental SOIs form part of the accountability information presented to select committees for scrutiny.

Has Managing for Outcomes been effective in improving departmental statements of intent?

7.23
MfO has the potential to improve the quality of departmental planning, management, and reporting. The results of this improved process should be fully reflected in a department’s SOI.

7.24
In our view, there have been some incremental improvements in the quality of some SOIs since the implementation of MfO in 2002-03. However, there is still room for improvement.

7.25
An evaluation of departmental SOIs completed in September 200412 found that government departments had done “a great deal of work in developing their SOIs” under MfO.13 Some of the specific findings of the evaluation that are of relevance to this Part were that:

  • On a scale from “developed” (high) to “basic” (low), only one of the 35 SOIs reviewed was rated as developed. Twenty-two were rated from moderate to just below developed. Ten were rated from fair to just below moderate. Three were rated somewhere between basic and fair.
  • Of the 34 departments whose SOIs were reviewed to assess the level of improvement between 2003 and 2004, one had shown major improvement, 8 substantial improvement, 15 some improvement, and 10 between little improvement and just below some improvement.14
  • Departments’ identification of their capability needs and their environmental scans featured relatively strongly in their SOIs. These 2 areas scored highly in the evaluation.
  • Departments could better articulate the output “trade-offs” they were making in their SOIs. Even though the evaluators acknowledged that alternative output analysis “is hard to include in an SOI because it is about the process of planning”,15 there is scope for the strategy behind the output choices to be properly outlined in the SOI.
  • Departments’ SOI commentaries on attribution (that is, the extent to which their outputs are contributing to the desired outcomes) needed to improve, as did departments’ use of evaluation, research, and monitoring.

7.26
After reviewing the draft SOIs for 2005-06, we convened a meeting of the appointed auditors of all government departments. The purpose of the meeting was to share views on the overall quality of 2005-06 departmental SOIs, and identify any consistent themes as to how SOIs could be improved.

7.27
Generally speaking, we consider that the quality of 2005-06 SOIs across the public service was variable. Again, we have noted only incremental change since 2004-05 in the overall quality of SOIs. We identify 3 particular areas where we consider that more substantial improvement needs to be made:

  • There is a lot of scope for departments to better articulate in their SOIs the logic and evidence that links the key outputs they produce to the outcomes they are working towards.
  • Departments could be more comprehensive in their identification of the risks that face their organisation, and provide more detail on how they are actively managing those risks. Some departments have told us that Parliamentarians’ and the public’s appetite for risk is set so low that this provides no incentive for departments to fully disclose the risks.
  • Departments should seek to continually refine their output and outcome indicators. When SOIs were first introduced, we did not expect departments to include outcome reporting in their statements of service performance at the initial stages. However, we continue to see a distinct separation of outcome and output reporting in annual reports (with the audited financial statements almost exclusively containing output reporting). We expect the gradual introduction of some outcome reporting into departments’ audited financial statements.

7.28
We recognise that the development of SOIs is an iterative process. However, we consider that the pace of change needs to be accelerated. It is important that the Treasury and the SSC pursue their co-ordination and leadership role in harmony and with the energy necessary to ensure that departments and Crown entities engage fully with the underlying intent of MfO and MfR.

Conclusions

7.29
MfO underpins departments’ planning, management, and reporting for how they use the public resources they receive to fulfil their functions. A critical public accountability document is the SOI. The Auditor-General has a significant interest in both MfO and the SOI.

7.30
There was an independent evaluation in 2003 to assess the extent and quality of selected departments’ uptake of the MfO initiative. However, there has not been an overall evaluation to assess whether MfO is achieving its objectives. We have noted some incremental improvements in the quality of departmental planning and the quality of departments’ core planning document with the introduction of the MfO initiative. Generally speaking, the SOI provides a better quality and range of planning information than its predecessor, the Departmental Forecast Report.

7.31
We encourage departments to take a continuous improvement approach to the ongoing development of their MfO processes and SOIs. This is particularly so given that we are yet to see a demonstrable improvement in the quality of departmental performance reporting, which we might naturally expect as a positive flow-on effect from the quality of planning that MfO promotes.

7.32
We expect that Crown entities will look to their monitoring departments, as well as to the MfR and SOI guidance issued by the Treasury and the SSC, for support and guidance as they produce their results-oriented SOIs for the 2006-07 financial year. We consider that high quality departmental MfO processes and SOIs have the potential to act as a positive benchmark for Crown entities to try to meet as they respond to the enhanced planning requirements set out in the CEA.

7.33
It may be that further oversight mechanisms need to be put in place, or further steps need to be taken by the Treasury and the SSC, to provide the momentum that we consider is required to ensure that departments continuously improve the quality of their MfO processes and SOIs.

7.34
We are considering what further work we can undertake to provide assurance to Parliament as to the effectiveness of the MfO initiative, and what, if any, lessons may be learned for the implementation of the MfR initiative in the Crown entities sector. In the meantime, as far as is consistent with our audit independence, we will continue to work with the Treasury, the SSC, and those public entities producing SOIs (both departments and Crown entities) to try to enhance the quality of SOIs as a core public accountability document.

1: See http://www.ssc.govt.nz/display/document.asp?navid=253 and http://www.treasury.govt.nz/publicsector/.

2: Section 39 of the Public Finance Act 1989.

3: Sections 39(2)(b)(i) and 42 of the Public Finance Act 1989.

4: Guidance and Requirements for Departments: Preparing the Statement of Intent, State Services Commission and the Treasury, December 2005, page 3.

5: Ibid, page 6.

6: Ibid, page 5.

7: Before the Public Finance Amendment Act 2004 and the Crown Entities Act 2000, the expression “outcome” was used synonymously with “results”. The language of the 2 Acts has been expanded to include 3 related concepts of“outcomes”, “impacts”, and “objectives. “Results” is used to include all 3 concepts.

8: This provision of the CEA does not apply to tertiary education institutions or school Boards of Trustees.

9: Statutory Crown entities, Crown entity companies, and Crown entity subsidiaries.

10: Monitoring departments provide support to a Minister in carrying out their role and responsibilities in relation to Crown entities. For example, the Ministry of Education is the monitoring department for the New Zealand Qualifications Authority, the Tertiary Education Commission, and other education sector Crown entities.

11: Guidance and Requirements for Departments: Preparing the Statement of Intent, State Services Commission and the Treasury, December 2005, page 17.

12: Evaluation of New Zealand Government Departments’ 2003 and 2004 Statements of Intent (SOIs), Dr Paul Duignan, Pat Duignan, and Sally Munro, September 2004.

13: Ibid, page 7.

14: Ibid, page 7.

15: Ibid, page 11.

16: Departmental Uptake of the Managing for Outcomes Initiative, Economics and Strategy Group for the interdepartmental Managing for Outcomes Steering Group, August 2003, Wellington, New Zealand, ISBN 0-478-24436-3.

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