Part 3: Challenges facing the public sector, and our response
Delivering effective and efficient public services in a fiscally constrained environment
Since the global recession, reduced public revenue and increased levels of national debt have become part of our broader environment. At the same time, the recovery and rebuilding of Christchurch, our second-largest city, will require an extraordinary amount of human endeavour and financial support as the implications of the disaster work their way through the lives of individuals, and through New Zealand's business and financial institutions.
Public debt is expected to continue to rise, reducing the net worth of the Government. Maintaining a financial buffer over time is necessary for the Government to absorb future shocks to the wider economy, such as those arising from the recent recession and the Canterbury earthquakes. Demographic change is permanent and the ageing population will place increasing pressure on government spending. This means Governments have to make choices and trade-offs to manage the long-term fiscal challenge.
The public sector is a significant part of the economy. Therefore, any improvement in public sector performance would have an effect on economic growth and reduce stress on fiscal policy. The overall level of government spending is being constrained to enable a return to surplus as soon as possible, and to rebalance the economy through greater growth in the wider trading economy compared to the public sector.
Infrastructure and asset management
Good management of the Government's physical and financial assets will be beneficial to the long-term fiscal position and the performance of the economy. Raising the standard of infrastructure and asset management is a key part of the Government's economic growth agenda. The Organisation for Economic Co-operation and Development has noted that investment in infrastructure seems to boost long-term economic output more than any other kind of physical investment. In addition, the World Economic Forum has identified New Zealand's inadequate investment in infrastructure as a particular problem, second only to inadequate access to finance as a barrier to doing business.
Our State sector manages more than $220 billion worth of assets, which are forecast to grow by $30 billion in the next five years. Around half of these assets are physical assets, on which the Government spends about $6 billion a year. In addition, it will invest $7.5 billion in new capital infrastructure spending during the next four years.
Local government is expected to spend $30 billion in the next 10 years, mainly on infrastructure.
Fundamental shift for public sector
The Government wants a fundamental shift in the way the public sector goes about its business. This amounts to embedding a focus on effectiveness, efficiency, and innovation as a priority, and developing an expectation that achieving value for money in the public sector is business as usual and not an exception or a one-off objective. The Government has been looking at improving public sector productivity by doing the same tasks in new ways, learning from the private sector and overseas experience.
A range of initiatives designed to improve the efficiency of public expenditure is under way. This includes structural changes to public sector agencies (including merging some agencies), preparing and implementing alternative approaches to delivering services (such as providing single points of entry), as well as making greater use of the private sector and the not-for-profit sector, such as using public-private partnerships.
Local government: Productivity, efficiency, and governance
Local government must also operate within this constrained economic environment. The challenge for local authorities is to balance demand for sustained first-world levels of service with affordability. To do this, local authorities are looking at their modes of service delivery and assessing what influences their costs. This includes seeking productivity and efficiency gains through shared services, such as the proposed Local Government Funding Agency, as well as smaller localised initiatives.
Auckland is recognised as being important to New Zealand's economic development, and there is much for the Government and the new Auckland Council to do to help Auckland achieve its potential and its contribution to the national economy.
Auckland Council is a new model of local government for New Zealand. The Auckland reform has increased the profile, powers, and influence of the Mayor and Chief Executive of Auckland Council. It will change how local government interacts with some central government entities – for example, the Ministry of Transport. Auckland's share of the national population and its growth rate are both unusually high in international terms. For the Government's economic development ambitions to be achieved, the Auckland reforms need to result in better governance of Auckland's local government arrangements, better service delivery to the public, and better alignment between central and local government planning and funding.
Our proposed response
Changes in structure, financing, and services will create risks for public entities, and the Auditor-General needs to understand and take account of those risks in providing assurance as the auditor of the public sector. The implications of the changes that are being considered could be considerable. An increase in contracting out, use of shared services, and use of more high-trust forms of contracting will place greater emphasis on the need for us to carefully consider the nature and extent of our audit work.
It is important that effectiveness does not become a casualty of the drive for efficiency. The continuity and effectiveness of service delivery to the public during change is imperative, as is ensuring that procurement and contracting out meet public expectations of good management of public money, probity, and fairness. We will need to keep up with the changes in the public sector so that we can provide relevant and timely guidance and advice to our auditors and update our good practice guidance for public entities and auditors as necessary.
In times of fiscal restraint, central agencies need to work to ensure that government programmes and initiatives are understood and get maximum leverage. We will look to strengthen our engagement with central agencies so that our work, while retaining its independence, provides useful insight about risks, assurance about progress in managing the risks, and advice on how to get cost-effective results.
Local authorities are now required to publish an explicit financial strategy of how they will deliver sustainable levels of service. The strategy must be published in each local authority's long-term plan for 2012–22. Our role in auditing long-term plans, and providing assurance that the plans are reasonable, will be carried out in 2011/12 – before local authorities implement their plans on 1 July 2012.
We propose to respond to these challenges in the context of our annual audits and the Auditor-General's other reporting powers under the Public Audit Act 2001 by carrying out work that will:
- raise awareness of risks that can arise from change and how to manage them;
- encourage better use of information to support good decision-making;
- give insight into local government;
- provide good analysis and reporting of information about the transport sector; and
- add value through our annual audits, inquiries, and performance audits.
Raise awareness of risks that can arise from change and how to manage them
We plan to focus on work that supports awareness of the risks that might undermine efficiency initiatives and adversely affect service results, and to provide assurance that key risks are being managed. We want to understand the effects of the Government's change and improvement programme on the capability and capacity of public entities. This will include understanding whether the change initiatives are being well governed and managed, so that entities deliver effective and efficient services during the medium term.
We intend to carry out development work through our annual audits and our other work as follows:
- The increased interest in, and the emergence of, the first large-scale public-private partnership will allow us to identify and report on the use of better practice in establishing and co-ordinating project partnerships and, in the longer term, on contract management, service delivery, and realisation of benefits.
- The public sector's enhanced focus on asset and financial management will be complemented by our annual audit work, which we will be strengthening to enhance our analysis of asset management and financial results in key public entities and sectors.
Encourage better use of information to support good decision-making
One of the keys to meeting the challenge of delivering effective and efficient public services in a fiscally constrained environment is to get better information about performance and then use that information to make better decisions and hold people accountable. Using good performance information underpins many of the initiatives under way to raise State sector performance. It is important that service performance information is useful and used, and that there are significant benefits for agencies, Ministers, and Parliament in making this a reality. As public entities look for ways to cut costs, it is more important than ever that they have the information necessary to inform those decisions.
Through our annual audit interaction with public entities about their financial and performance statements, we are working to support the use of performance information to assess and enquire into effectiveness and efficiency. We are also liaising with government departments, Crown entities, and local authorities to help them improve their performance information and to use this information, alongside their financial information, to consider effectiveness and efficiency, and to better understand and manage their key financial and performance drivers.
Provide insight into local government
The amalgamation of eight local authorities into one council in Auckland on 1 November 2010 was a complex exercise with implications for the whole country and local government in particular. We have made good progress on our audit approach to the local government reform in Auckland. We will build on this in 2011/12, including formalising the changes that follow the reform and embedding the changed practices in decision-making and service delivery. We plan to review those changes through our annual audit work and report our findings to Parliament.
Local government in the Canterbury region has been severely affected by the earthquakes on 4 September 2010 and 22 February 2011. The full nature of the government response is being developed and will have far-reaching medium and long-term effects on local and central government and, in particular, how they work together to deal with the recovery. We plan to ensure that we carry out our role in these arrangements appropriately, including providing any insights to local government and Parliament.
In 2011/12, we will carry out the triennial audit of 78 local authorities' long-term plans under amendments made to the Local Government Act 2002 in 2010. The long-term plans give local communities an important opportunity to understand their local authorities' medium-term service intentions and fiscal strategies. Our main focus will be to provide assurance that the main long-term planning issues that a community needs to consider have been highlighted, and that the supporting information is reasonable for decision-making, community participation, and future accountability.
Provide good analysis and reporting of information about the transport sector
We have large amounts of data and knowledge that we can use much better to inform our audit work and to share with others. We plan to get the best from what we know and improve our understanding and reporting. In February 2011, we started an initiative to improve the way we share knowledge within our own organisation. This initiative consolidates and expands on our previous work, which focused on helping us to better understand and use our knowledge about individual public entities, various sectors, and the public sector as a whole. This new initiative will extend our ability to be flexible, agile, and adaptive. We will work on two pilot projects in 2011/12, in the transport and tertiary education sectors, focusing on better analysis and reporting of sector information. The transport sector pilot is already under way.
In recent years, our transport work has focused more on specific public entities and issues. For example, we have previously examined the maintenance and renewal of the rail and state highway networks, aspects of maritime and aviation safety, regulation of the taxi industry, and truck crashes. Our annual audits in the transport sector, including local government transport-related assets, have examined the valuations of major assets, contract management, procurement, and service performance information.
Many important topics and issues in transport affect both central and local government. Issues such as the need for integrated planning, complex and high-value funding mechanisms, regulatory frameworks, asset management, and procurement are all features of the transport sector that affect and are managed by both central and local government.
We will take a cross-sector approach to our transport-related work to better identify and address issues in a way that maximises the relevance and value of the work we do. We expect this approach to help us identify two or three key issues that we will address through multi-year work using the full range of our audit interventions, from research and development to performance audit and annual audit work, to examine and report on these issues. Potential topics are transport infrastructure and services in Auckland, and integrated transport and land use planning.
Figure 1 summarises the studies we propose to carry out in 2011/12 as part of our four main responses to the challenges facing the public sector.
Proposed studies in 2011/12 in response to challenges facing the public sector
|Our response||Our study topic|
|Raise awareness of risks that can arise from change and how to manage them||
|Encourage better use of information to support good decision-making||
|Provide insight into local government||
|Provide good analysis and reporting of information about the transport sector||
Add value through our annual audits, inquiries, and performance audits
Our auditing and assurance work is our core business and the foundation for our ability to have a positive influence on public sector performance. Alongside annual audits, our performance audits, inquiries, and special studies allow us to review in depth how public entities use resources and to suggest opportunities to improve performance where we have considered specific matters.
We plan to maintain the underlying quality of all our financial and performance audits and inquiries, and focus on how to add value to the organisations that we audit. We will also focus on improving our reporting and our supporting communications and relationships, and on improving our own effectiveness and efficiency.
The Auditor-General is the auditor of almost 4000 public entities. Of these, 3500 are small public entities, including 2500 schools. The cost to us of carrying out annual audit work is funded mainly by audit fees paid by the public entities.
In the last couple of years, the Ministry of Economic Development's review of the Financial Reporting Framework has seen progress toward a more differentiated general purpose financial reporting model. We consider that there would now be benefit in exploring the opportunities for a more differentiated model of accountability for smaller public entities that could result in reduced audit and compliance costs where appropriate.page top