Part 1: The operating environment for central government

Observations from our central government work in 2022/23.

1.1
In this Part, we describe the environment in which central government agencies are operating, including:

Recovery from a pandemic alongside inflationary and efficiency pressures

1.2
Covid-19 restrictions were relaxed in early 2022, allowing for increased mobility in and out of New Zealand during 2022/23. The immediate response to Covid-19 became a less prominent part of the public sector's work from the second half of 2022. However, the effects of Covid-19 were still evident through deferred work and backlogs in some sectors, and effects on staffing, costs, and supply chains.

1.3
Inflationary pressures on salaries and other costs have continued to affect the public sector. In August 2023, the Minister of Finance directed many public organisations to cut baseline costs and reduce spending on contractors and consultants. In the lead-up to the 2023 election, the size of the public sector and the value for money it is delivering were much discussed. The challenge in the current operating context will be maintaining service delivery levels and quality while reducing the cost of providing those services.

1.4
There continues to be an insufficient amount of cost and efficiency measures in Government agency reporting. Having a good understanding of value for money and other cost and efficiency measures allows a more focused discussion on cost-reduction options and any trade-offs they might entail. We discuss performance reporting and its importance for public accountability in more detail in Part 2 of this report.

1.5
Parts of the public sector are experiencing significant change. In particular, the reforms to the health and tertiary sectors and proposed changes to water services require careful management to achieve their intentions. For example, the Pae Ora (Healthy Futures) Act 2022 changed the health sector by consolidating a variety of health organisations, including the 20 district health boards. Achieving the goals of the reforms, as well as implementing any decisions made by the incoming Government, will continue to be a key challenge for the public sector.

North Island weather events

1.6
In early 2023, weather events (including Auckland flooding and Cyclone Gabrielle) caused significant damage and disruption across six regions of the North Island. The rebuild and recovery effort will be significant, not least because the events affected a wide geographical area and placed stresses on many communities that were already experiencing economic and other pressures.

1.7
After the weather events, central and local government agencies responded by setting up new work programmes under new governance structures and distributing funding to businesses and communities. Immediate funding decisions included money for urgent infrastructure repairs, assisting with temporary accommodation, and providing business and community support.

1.8
Such responses rely on the public sector's capability to rapidly shift resources to adapt and respond to unexpected events. They are pressured times for public servants in both central and local government, who work extremely hard responding to these events under difficult circumstances.

1.9
High levels of co-operation and co-ordination are required between central and local government to support regions' recovery from the weather events. For councils, the weather events have added further uncertainty to an operating environment influenced by several concurrent policy reform programmes (resource management reform, water management, and the Future for Local Government review). There will be challenges ahead in working out how cyclone damage will be repaired and paid for, as well as determining what level of resilience can be achieved in the future. Resourcing will be a particular barrier for smaller councils.

1.10
The Treasury has forecast about $9 billion of cyclone-related rebuild and recovery investment activity between 2023 and 2026 (with a further $1 billion after this) in both the public and private sectors. About $5 billion of this relates to local and central government infrastructure.

1.11
The Treasury is monitoring and tracking central government cyclone-related spending. This is an encouraging initiative that supports accountability for this significant amount of government spending.

1.12
In recent years, we have emphasised the importance of transparency and integrity in public spending decisions, particularly in response to crises.1 Recent events have seen significant expenditure using approaches such as high-trust funding arrangements, policies prepared at speed, and urgent procurement processes. These have been necessary steps, but they have come with risks to probity and can raise questions about integrity and value for money.

Climate change and its effects on planning and investing in infrastructure

1.13
The state of infrastructure in New Zealand is affected by a range of factors, including population pressures and increasing construction costs. Some sectors are experiencing an infrastructure deficit. The effects of the recent weather events have yet again highlighted the need to factor climate resilience into infrastructure planning and management.

1.14
The public sector shapes the systems and policies needed to help communities adapt to climate change in the short term, and to mitigate its effects in the longer term. Many public organisations are already responsible for meeting commitments under the Government's National Adaptation Plan and the Emissions Reduction Plan. The changes required by these plans will be wide-reaching, including adapting legislative and decision-making frameworks, co-ordination within and across levels of government, and funding mechanisms to enable adaptation to climate risks.

Responding to challenges through new governance arrangements and ways of working

1.15
Many of the challenges that New Zealand faces require public organisations to innovate and work together. In December 2022, the first State of the Public Service report noted that further change is needed in the way the public service operates to be able to work in more people-centred and collaborative ways. We agree with this.

1.16
In 2020, the Public Service Act introduced new structures and ways of working to help the public service adapt and work more effectively, such as inter-departmental ventures and joint operational arrangements. The Act also allows for interdepartmental executive boards "that support joined-up planning and budgeting and/or policy alignment on complex cross-cutting issues".2

1.17
As these systems evolve, we will keep a focus on transparent and meaningful reporting of the resources allocated to this work, whether substantive changes are evident in the way the public service is operating, and, ultimately, what has been achieved.

1.18
During 2022/23, we reported that adopting these new ways of working can be difficult, even where there is consensus that change is needed. There is a tension between the need to act with urgency and the need to take time to build trust and relationships.

1.19
We reviewed Te Puna Aonui, the interdepartmental executive board established to simplify government agency collaboration to eliminate family violence and sexual violence. We found that realising the potential of Te Puna Aonui by establishing new ways for agencies to work together effectively with tangata whenua and community partners was critical to success, but difficult to execute.

1.20
Some interdepartmental executive boards have reported on their progress in 2023, whether separately (such as Te Puna Aonui) or appended to a single public organisation's annual report (such as the Border Executive Board). We look forward to seeing what effect these boards have. When organisational structures change, the accountability system and reporting requirements also need to adapt to ensure that there is appropriate accountability for spending and for progress in improving outcomes.

1.21
Many central government entities are responsible for system leadership, often without having control over the system they lead. For example, the Ministry of Housing and Urban Development leads the housing and urban development system but does not control, and cannot direct, others in the system, such as councils and property developers.

1.22
A lead agency needs to build and maintain effective relationships to support the system's strategic direction. In our view, it should also understand the current and likely future performance of the system to inform its policy choices. Other components of effective system leadership include a shared strategy and action plan, sound governance arrangements, and regular reporting on performance to identify corrective actions and to support accountability and transparency.

1.23
As well as the governance and leadership methods outlined above, public organisations use a range of methods to manage cross-government programmes and report on spending. One way of doing this is through tracking spending by initiative (such as cyclone recovery funding, climate emergency response funding, and Covid-19 response and recovery funding initiatives). Tracking and publishing funding for cross-government initiatives allows for increased transparency and a better understanding of how funding is used.

1.24
Communicating progress towards complex, cross-government goals can be difficult, but it is essential for Parliament and the public to understand what has been allocated and spent and what is being achieved.

Our completion of annual audits

1.25
The public audit system is critical for supporting the scrutiny of government spending and performance. Annual audits help ensure that public organisations report reliable and relevant information to Parliament and the public about how they have used public money and how well they have performed.

1.26
In 2022/23, the Covid-19 pandemic continued to affect the nature and timing of our annual audits. The first half of 2022/23 was particularly difficult, with audits affected by the global auditor shortage and other Covid-19 effects, including staff illness and shortages both for audit service providers and public organisations.

1.27
Given these challenges, we prioritised the audits most important to New Zealand's public accountability system – such as the financial statements of the Government, government departments, and Financial Markets Conduct reporting entities, such as Auckland Council.

1.28
We have now substantively addressed deferred audits and have largely returned audit completion rates to pre-pandemic levels.

Changes to the way Parliament scrutinises public organisations

1.29
A key part of Parliament's role is scrutinising the performance of the Executive. As part of this scrutiny, select committees conduct annual reviews of public sector performance, examine the Estimates of Appropriations, and conduct inquiries into issues or concerns.

1.30
The way select committees scrutinise the performance of the public sector is set to change during 2023/24. The Standing Orders Committee has recommended changes to parliamentary processes that will strengthen the ability of Parliament to undertake effective scrutiny of the Government.

1.31
We welcome these changes and look forward to supporting select committees with insights and observations from our audits and other work.

1: Our article Getting it right: Supporting integrity in emergency procurement suggests improvements public organisations can make to maintain high standards of integrity when carrying out emergency procurements. Managing public funding in an emergency response or recovery is a short article to help public sector staff ensure robust and transparent decision-making even when fast action is required. See oag.parliament.nz/reports.

2: See the fact sheet Organisations of the Public Service on the website of Te Kawa Mataaho at publicservice.govt.nz.