Part 4: Main sector issues and our interests

Public entities in the social sector: Our audit work.

The Government has set an objective of improved service delivery, greater efficiency, and innovation as part of its Better Public Services programme. It has launched several significant policy initiatives. This Part describes some of the main issues and significant changes social sector entities are facing, and outlines why we take a particular interest in how change is managed and how initiatives are being implemented.

This Part covers:

  • the Better Public Services programme – efficiency savings and result areas;
  • welfare reform;
  • vulnerable children;
  • third-party contracting;
  • social housing; and
  • our interest in changes in the social sector.

Our role is not to assess the merit of policy changes but to observe how changes are implemented and their effect on the areas within the mandate of the Auditor-General. As well as annual audits, we can carry out performance audit work to look at whether changes result in greater efficiency, enhanced effectiveness, and, ultimately, greater value for money. We also look at whether there are waste or probity issues.

Better Public Services programme

Efficiency savings

We noted in Part 2 the Government's expectation that public entities contribute to the Better Public Services programme. This includes the continued search for improvements and efficiencies.

Budget 2012 required MSD to deliver efficiency savings in a range of departmental appropriations. These savings amount to $20.5 million in 2013/14 ($15.9 million in 2012/13). This will increase to $24.8 million in coming years (compared to the 2011/12 baseline). MSD's 2013 four-year plan identifies a shortfall of $296.9 million from 2013/14 to 2016/17. Salary pressures ($147 million) and the "efficiency dividend" (expected savings of $95.2 million) are the main components. MSD has identified savings totalling $231.5 million through its Value for Money programme during the same time period, leaving a gap of $65.4 million. MSD has started a programme of business transformation and simplification.

Achieving efficiency gains is also an important objective for Housing New Zealand. Housing New Zealand achieved a net operating surplus of $178 million ($120 million after tax) in 2012/13. This translates into a return on equity of 1.4%, which is above the stipulated 1.2% but below its target of 1.6%, based on an operating surplus of $185 million.

Result areas

The Government has initiated several significant changes to social services and how they are delivered that are relevant to Better Public Services result areas – see paragraphs 4.8-4.15 and 4.16-4.19). Figure 9 shows that MSD is the co-ordination lead for four of the Better Public Services result areas and contributes to four others. Taken together, these result areas constitute a significant work programme for MSD, with other agencies in support.

Figure 9
Better Public Services result areas

MSD co-ordination lead MSD contribution to work programme
Result 1: Reduce the number of people who have been on a working-age benefit for more than 12 months Result 5: Increase the proportion of 18-year-olds with NCEA level 2 or equivalent qualification
Result 2: Increase participation in early childhood education Result 7: Reduce the rates of total crime, violent crime and youth crime
Result 3: Increase infant immunisation rates and reduce the incidence of rheumatic fever Result 8: Reduce reoffending
Result 4: Reduce the number of assaults on children Result 10: New Zealanders can complete their transactions with the Government easily in a digital environment

Source: Ministry of Social Development, Annual Report 2012/13, pages 4-5.

Welfare reform

The Government is comprehensively reforming New Zealand's welfare system. The reform's objectives are to encourage and support independence, support people to realise their work potential, and manage the long-term cost of the benefit system while providing a safety net for those who need it.

The introduction of an investment approach is central to the reforms. This approach is intended to direct services where they will have the greatest effect on reducing long-term benefit dependence. Under the new service delivery model, MSD decides how to invest and prioritise resources by assessing individuals' risk of long-term welfare dependence and their ability to work or prepare for work.

Decisions are based on an actuarial valuation of the projected future costs of beneficiaries (their "lifetime liability" to age 65), together with an evaluation of their "work-readiness". Interventions for different groups are tailored, ranging from generic (web-based) job-search support to intensive one-to-one case management support for those facing greater barriers to work.

A Multi-Category Appropriation (MCA) structure was agreed by Cabinet in September 2013. The MCA will support MSD in implementing the investment approach to welfare reform by providing increased financial flexibility to target interventions to where they will make the biggest difference to client outcomes. In practice, this means that funding can be moved around the different categories of appropriations that make up the MCA.

It is good practice for entities to try to measure the costs and benefits of significant initiatives, to track results and evaluate whether interventions are working or not, and use the insights to reassess or improve their approach to implementation. MSD has commissioned actuarial assessments to measure annual changes to the projected cost of the welfare system. These assessments compare the future cost of the benefit system to a 2011 baseline and are designed to track changes in total, and in specific groups', liabilities.

The latest actuarial assessment of the benefit system for 30 June 2012 highlighted that the system's total current liability increased from $78.1 billion in 2011 to $86.8 billion in 2012, although the reduction of beneficiary numbers contributed to reduced liabilities by $3.0 million. The overall increase is explained by changes to the discount rate,8 accounting for a rise of $13.4 billion. 

The reforms were introduced in three stages. First, as well as a "Youth Payment and Young Parent Payment" introduced in August 2012, Youth Services were announced in August 2012.9 Secondly, changes to work expectations for sole parents on benefits, intended to encourage and support more people into work, came into force in October 2012. The third stage changed benefit categories, expectations on beneficiaries, and how MSD manages its clients. This stage became operational on 15 July 2013, when three new benefit types replaced the existing categories after the Social Security (Benefit Categories and Work Focus) Amendment Bill passed. The new benefit types are the:

  • Jobseeker Support and Emergency Benefit (appropriation of $1.773 billion for 2013/14), which covers those actively seeking and available for work;
  • Sole Parent Support ($1.288 billion), focused on sole parents with children aged under 14 years; and
  • Supported Living Payment ($1.392 billion), targeted at people significantly restricted by sickness, injury, or disability.

Benefit rates remained the same when the changes to benefit categories took effect on 15 July 2013, but the reforms potentially affect a large number of New Zealanders. As of 30 September 2013, 304,000 New Zealanders were receiving a benefit.

Vulnerable children

Another Better Public Services priority result area is vulnerable children. At the centre of this work area is a Children's Action Plan that the Minister for Social Development released under the umbrella of the White Paper for Vulnerable Children in 2012. The Children's Action Plan outlines a range of initiatives to support and protect vulnerable children.

Initiatives under the Children's Action Plan have target dates ranging from 2013 to 2017. Budget 2013 funding was earmarked to set up the Children's Action Plan directorate to oversee implementation. Initiatives include preparing a Children's Workforce Action Plan, writing a cross-agency care strategy, and designing predictive risk tools and the Child Protect Line. Two children's teams have been set up in demonstration sites in Whangarei and Rotorua, with others to follow throughout the country. Multiple agencies will contribute to the teams.

We discussed in Part 2 the changes to governance and accountability arrangements in the social sector – in particular, the shift towards relevant chief executives sharing accountability for progress on "children's work". The children's work is a significant programme with implications well beyond MSD. It affects governance and accountabilities, funding (possibly Vote structures), and how agencies operate together. There are significant risks in terms of controls, at least during the transition stage of implementation.

We will watch with interest how governance and shared accountability work in practice, and whether they result in more effective collaboration between agencies. We will also consider how we can appropriately and meaningfully cover shared sector work in our future audits.

Third-party contracting: Investment in Services for Outcomes

In 2012/13, MSD contracted with about 2000 organisations. Total funding channelled through third-party providers was about $570 million.

The way that MSD buys social services and contracts with service providers is changing significantly under the Investment in Services for Outcomes (ISO) initiative. ISO is targeted at increasing the focus on outcomes. It is expected to lead to a streamlined approach to contracting. MSD has been moving towards an outcomes-focused approach to contracting for some time, and intends to develop an Outcomes Measurement Framework. A phased approach to outcomes-based contracting will be rolled out by December 2014. MSD has a capability investment programme to support providers.

We are interested in understanding the effect of the ISO programme on service delivery, particularly given the large amount of funding involved. We are also interested in understanding MSD's approach to procurement and contract management.

Social housing

Under its Social Housing Reform Programme, the Government has initiated significant changes to social housing since 2010. Key changes include the introduction of reviewable tenancies for new tenants and refreshing eligibility criteria in 2011. A 2013 Budget announcement stated that reviewable tenancies will be introduced for existing tenants and that the housing assessment function will be transferred to MSD in 2014.

MSD will take over responsibility for assessing and reviewing housing need, administering the income-related rent subsidy, and managing the waiting list for social housing. Housing New Zealand has been asked to focus on housing those most in need from the waiting list and managing state rentals and tenancies. We will be interested in examining the effectiveness of the transfer of functions to MSD, and whether it results in improved services.

Asset management and investment planning

Housing New Zealand's housing stock constitutes one of the Crown's largest assets. Maintaining sound financial oversight and stewardship of the Crown's asset is one of Housing New Zealand's objectives.

Housing New Zealand has prepared an asset management strategy to guide its decision-making. The strategy is supported by a demand forecasting model and sets out Housing New Zealand's approach to managing the state housing portfolio in the next 10 years. The objective is a portfolio aligned with demand and that achieves both social and broader performance, including financial, outcomes. Adjustments to the configuration of Housing New Zealand's property stock are intended to ensure that the right types of properties are in the right locations to meet demand. There will be more houses in big cities, with Housing New Zealand planning to build more than half of its 2000 new houses in the next two years in Auckland, where there is strong demand for affordable and social housing.

Housing New Zealand also has a strong focus on property condition and maintenance. Significant changes have been implemented to the business model, systems, and processes that apply to Housing New Zealand's maintenance expenditure.

Canterbury rebuild

The Canterbury rebuild, one of the Government's four priorities for this term, also poses challenges for Housing New Zealand. The earthquakes damaged more than 95% of the over 600010 Housing New Zealand properties in Canterbury in some way. Recovering its property portfolio is a priority for Housing New Zealand, which aims to build 700 new homes and complete a major programme of repairs to about 5000 properties by December 2015.

Housing New Zealand has started a major 10-year reconfiguration of its portfolio in Canterbury. The total budget for the 10-year recovery and investment plan is $1.2 billion. The programme is designed to reconfigure Housing New Zealand's assets in Canterbury, working within existing and proposed local authority residential zones. It also serves as a pilot for Housing New Zealand's asset management elsewhere in New Zealand.

Our interest in changes in the social sector

The issues outlined in this Part all represent significant change to either what and how services are delivered or by whom. In some instances – for example, the transfer of the social housing function – the issues involve structural change. In others, such as welfare reform, they involve changes to how service delivery is organised (that is, changes to the business model). The work on vulnerable children transforms how departments work together.

Change should deliver benefits. We expect entities to specify the expected benefits of change, put in place systems to capture benchmark data, specify costs, and measure and report on realised benefits. For example, the Minister for Social Development announced $188.6 million in extra investment for welfare reform in Budget 2013 but also highlighted expectations that welfare reform would deliver savings of between $1.0 billion and $1.6 billion.

As welfare reform progresses, supported by subsequent actuarial valuations of the system, we expect MSD to measure, report on, and account for realised savings. This will allow for an assessment of how real and projected costs and results compare, allow Parliament to understand how much has been invested in change, and whether that change has resulted in the expected benefits.

We are also interested in these issues because times of change pose greater risks. We expect agencies to effectively maintain management and financial controls throughout periods of change. This can be no easy task during changes to staff, to systems, and to processes. With decision-making, we are interested in what due diligence was done before change was initiated. For example, has there been good information to guide decision-making, based on quality data?

As initiatives are implemented, we will want to see evidence that appropriate project management and support is in place to support the change process. We will also want to see that there are effective processes to mitigate control risks.

Public entities have other challenges that, if not managed well, can affect their effectiveness. Entities need to maintain clarity about their purpose throughout the period of change, manage the effect of changes on staff and systems, maintain capability, and manage risks of the loss of institutional knowledge and capability. Maintaining "business as usual" is critical. For example, the public will expect the standard of service delivery to be unaffected. However, a focus on change can mean that some services are not delivered as expected.

Monitoring entities' reporting on their performance is one way we will check whether business as usual has suffered. For example, performance reporting indicates that, in 2012/13, MSD generally met its agreed outputs for core business areas despite changes in a number of areas amounting to a very significant work programme for MSD. MSD reported meeting 128 out of 136 performance standards. Three of the standards missed relate to one output expense, Vocational Skills Training.

8: The discount rate describes the value of money over time (that is, how much money would need to be saved now to pay a future liability, assuming that amount would earn interest). Interest rates are the key determinant and can increase the projected liability even if today's value remains constant or decreases.

9: MSD describes these as "wrap-around services that provide an intensive and individualised service to support at-risk young people (16-17 year olds) to complete education, training or work-based learning".

10: Housing New Zealand housing stock before the earthquakes began on 4 September 2010.

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