Part 1: The operating environment for central government

Central government: Results of the 2014/15 audits.

This Part describes the operating environment for central government agencies in 2014/15. It provides some context for this report – in particular, for our audit of the financial statements of the Government of New Zealand (the Government's financial statements).

The Government's financial statements consolidate the many and varied organisations associated with central government.1 We audit each of these organisations each year, which informs our work on the Government's financial statements. We need to understand the operating environment for these different organisations because the Government's priorities and expectations drive how organisations plan, prioritise, operate, spend, and report funding allocated through the Budget process and approved by Parliament.

Government priorities

The Government's four priorities are as follows:

  • responsibly managing the Government's finances;
  • building a more productive and competitive economy;
  • delivering better public services within tight financial constraints; and
  • supporting the rebuilding of Christchurch.

The two priorities most relevant to our audit of the Government's financial statements are the management of the Government's finances and the rebuilding of Christchurch. With the total cost of rebuilding estimated at $40 billion in 2014, and the Government's contribution forecast to be $16 billion, the continuing effect of Christchurch in the Government's financial statements continues to be a focus for our audit.

Focus on financial management

The Government set a target of returning to surplus in 2014/15, measured by the total Crown operating balance before gains and losses (OBEGAL). On 14 October 2015, the Government announced that it had achieved an operating surplus for 2014/15 of $414 million.

Knowing that the Government's financial statements fairly reflect the Government's financial performance and position allows Parliament to consider and debate the Government's financial performance and direction.

The expectations of tight fiscal management have affected how departments manage. Many agencies have faced demand, wage, and price pressures when their funding is static or declining because appropriations are capped. This has driven many to search for greater efficiencies.

Public sector transformation

The Government's agenda for public sector change continued in 2014/15. First launched in March 2012, the Better Public Services programme has a strong focus on results. The Government set 10 specific and measurable targets in 2012. In February 2015, it extended or reset the original targets for reducing long-term welfare dependence, boosting skills and employment, and reducing crime.

However, the results focus is only one component of a broader agenda for public sector reform. The Government expects the public sector to improve service delivery and transform the way it operates. In 2014, the State Services Commission outlined four guiding principles for reform, which highlight the aspiration of a citizen-centric and results-focused public sector and emphasise the importance of leadership and stewardship.

The expectation is for public agencies to work together more effectively. Stewardship obligations mean that government department chief executives are expected to contribute to the collective leadership of state services and deliver results in the medium term, making sure that organisations respond to New Zealanders' future needs.

Ministers have also been clear that they expect the public sector to make better use of data and create greater value from data that the Government holds. Greater focus on analysis and insights available within cross-agency data and work to expand Statistics New Zealand's Integrated Data Infrastructure have been part of the central agencies' work programme.

Change at system level – leadership from the centre

The State Services Commission, the Treasury, and the Department of the Prime Minister and Cabinet are exercising leadership as the "corporate centre" to oversee and improve state sector performance. The State Services Commission continued to use its Performance Improvement Framework (PIF) programme to analyse performance challenges at an agency and system level. In 2014/15, it completed 12 full PIF reviews, compared with six full PIF reviews in the previous year. Another initiative to lift state sector performance was the establishment of a new senior role in Auckland, responsible for leadership of state services there and improved engagement between central government and Auckland.

Each year, government departments have to prepare four-year plans. The purpose of the plans is to set out a medium-term view of the sector the departments work with or are responsible for, and set out how the departments will move closer to achieving their longer-term vision. This reflects chief executives' stewardship obligation. We are examining selected four-year plans as part of our 2015/16 work on investment and asset management. Other initiatives to improve performance include the Treasury's work to improve the State sector's strategic financial management capability through setting up the Office of the Government Accountant.

The Treasury carries out an annual Benchmarking Administrative and Support Service (BASS) analysis. It provides information on the cost, efficiency, and effectiveness of administrative and support services in the State sector. The State Services Commission also monitors the size of the public sector. As at 31 December 2014, there were 36,107 full-time equivalent positions in core government administration, below the cap of 36,475 in place since 2012.

Also, the Ministry of Business, Innovation and Employment, Department of Internal Affairs, and Ministry of Social Development have continued to progress their respective functional leadership roles for procurement, information and communications technology (ICT), and property management. The objective of functional leadership is to improve the effectiveness of common business functions and reduce their overall costs.

There has also been an increased focus on investment and asset management from a system perspective. In 2014, the Treasury published the 2014 Investment Statement, a blueprint for improving the effectiveness and efficiency of the Crown's balance sheet. In August 2015, it released the Thirty Year New Zealand Infrastructure Plan 2015, which includes actions to achieve better use of existing infrastructure and the better allocation of new investment.

In 2014/15, the Treasury led the development of Investment Management and Asset Performance in the State Services, a Cabinet Office Circular that sets out Cabinet's expectations for managing investments and both physical and intangible assets. A group of Ministers (Investment Ministers) has been designated to give effect to the objectives of the investment system, with the Treasury assigned the lead role for the Government's investment management system.

The Government Investment Strategy was released in August 2015. It outlines the principles that the Government wants to apply to the selection, decision making, and management of the Government's investment portfolio.

Change at agency and sector level

The Government's expectations for public sector transformation are reflected in a significant number of change initiatives at an agency level. Several large organisations have implemented, or are in the process of implementing, significant change programmes. For example:

  • The Inland Revenue Department (Inland Revenue) is implementing a Business Transformation programme. The programme has progressed well through the year and has moved into a detailed design stage. We carried out a performance audit in 2014/15 of the governance of the programme. We found that, overall, the governance arrangements for the programme to date had been broadly fit for purpose.
  • The Ministry of Business, Innovation and Employment began a "High Performing MBIE" programme to improve its operations. Changes to the Ministry's business structure were announced in May 2015.
  • The Ministry of Social Development is progressing a Simplification Programme to modernise transactional services to the benefit of both the Ministry (through efficiency savings) and service users. The Ministry is also supporting an Expert Advisory Panel, tasked with making recommendations to modernise the Child, Youth and Family division. The changes are expected to have a significant effect on Child, Youth and Family's work programme and operations.
  • The Ministry of Justice is implementing a court modernisation programme, which is expected to provide modern, accessible, and people-centred justice services.
  • AgResearch Limited has continued with its Future Footprint project. The project aims to ensure that the right infrastructure and staff are located at the most appropriate locations in New Zealand to deliver improved scientific support to the agricultural sector.
  • Health Benefits Limited was preparing for the transfer of its shared services programme. The Government confirmed on 2 June 2015 that Health Benefits Limited would be wound up on 30 June and a new company owned by district health boards would be set up to implement the shared-services programme previously led by Health Benefits Limited. In October 2015, we issued a report on the costs and benefits of aspects of Health Benefits Limited's work in the health sector.
  • Also, reflecting a different phase of efforts to rebuild Christchurch, the Canterbury Earthquake Recovery Authority (CERA) became a departmental agency (from 1 February 2015), hosted by the Department of the Prime Minister and Cabinet.

Our audit of the Government's financial statements does not cover these changes unless they significantly affect assumptions about the assets or liabilities of the Crown. However, because change increases the risk of internal controls not operating effectively, our annual audits consider the effect of significant change programmes on the control environment.

There are also some significant strategy reviews. The New Zealand Health Strategy is being reviewed and updated. This strategy will set the vision for, and could significantly change, the health sector during the next three to five years. Exercising its sector leadership, the Ministry of Transport also completed three strategy projects (Transport and Economics, Future Demand, and Future Funding).

The Government has indicated that it will expand its social investment approach, first used in the 2012/13 welfare reform, to the justice sector and social housing. Also, public sector agencies are exploring and implementing different models for service delivery to meet the Government's expectations of an innovative approach to delivery. Examples include:

  • The Ministry of Health is leading cross-government work to pilot social bonds in New Zealand. Social bonds see private and not-for-profit organisations enter into partnerships to fund and deliver services to improve social outcomes.
  • The Department of Corrections is implementing a public-private partnership for designing, building, financing, operating, and maintaining a new prison, the Auckland South Corrections Facility.
  • The Ministry of Social Development is changing how it purchases social services for vulnerable people, based on its Community Investment Strategy. The Strategy is intended to be a more results-focused and evidence-based approach.

The Government could change its approach to providing social services further as it considers a response to the wide-ranging recommendations in the Productivity Commission's report on social service contracting.

Changes in institutional arrangements – implications for reporting

Requirements for public sector planning and reporting, and the accountabilities of chief executives, changed with the 2013 amendments to the Public Finance Act 1989, the State Sector Act 1988, and the Crown Entities Act 2004. Among other goals, the amendments were designed to lead to more meaningful reporting on what has been achieved with funding from appropriations and facilitate more collaboration between agencies. For example, the amendments to the Public Finance Act provide greater flexibility by allowing end-of-year reporting to be grouped by sector or topic.

Performance reporting is an integral part of our parliamentary accountability system and helps demonstrate effectiveness, efficiency, and value for money in the public sector. Our annual audits of central government entities examine information about service performance. However, this is reported on an entity basis, not in the Government's financial statements.

1: Including government departments, State-owned enterprises, Crown entities (including schools, Crown research institutes, and district health boards), mixed-ownership model companies, Offices of Parliament, Fish and Game Councils, the New Zealand Superannuation Fund, and the Reserve Bank of New Zealand.