State sector tightens its belt: KPMG 

A number of other sectors have secured spending increases from the Budget:

• Justice – receives $147m in new operating expenditure targeted to the courts and corrections sector;
• KiwiRail – receives $750m for investment into the rail network, in addition to $500m already tagged to purchase new electric commuter trains for Auckland;
• Whanau Ora – receives $134m over four years, with the first 20 providers to be selected from next month;
• Social services – receive $92m  for non-government organisations to deliver extra services;
• Defence – receives $35m for new operating costs and equipment;
• Tourism – receives $30m for additional promotion in the lead up to Rugby World Cup 2011; and
• Housing – the Housing Innovation Fund receives $20m.

Other than these areas, the main story of the Budget for the state sector is not in the Budget documents. The majority of departments and Crown entities will be managing within an appropriation that has changed little in the last two years. Indeed the vast majority of departments did not seek an increase in funding – only 30 Budget bids were received from the entire state sector. This represents a stunning turnaround from previous behaviours and suggests that the Government’s message about the new fiscal reality has sunk in across the state sector.

The real story of the Budget for departments and Crown entities is how they are going to continue to deliver back office cost savings while examining ways in which they can deliver better, smarter and cheaper public services.

KPMG Insight

Public services face major challenges from social, economic and technological changes and from changes in public attitudes and expectations.  These pressures will inevitably clash with expectations from some that public services will remain as they are.  The current fiscal situation has served to highlight the need to refresh thinking about the direction of the public sector and of any future public sector reform. 

Let’s be clear.  If the public sector was a business, you probably wouldn’t organise it and run it the way it is.  But it’s not a business: it does things that allow businesses to operate, and it delivers things that are wanted or needed that businesses can’t or won’t deliver themselves (or in ways businesses can’t or won’t deliver).

Of course, there are things that the public sector can learn from business and the Not-for-Profit sector. There are also things that the public sector currently does that can’t be done by business or other organisations, however,  not everything that works in business or elsewhere will work in the public sector.

The private sector and others have also faced similar pressures for change in recent years.  Different business models have emerged for different types of services and products.  Where these are relevant to the public sector, we should consider their application to the delivery of public services.

The Government wants to ensure that priority public services are protected into the future.  To protect these services we need to think about how best to configure the public sector, what it does & how it does things.

While a professional public service with a strong desire to serve the public is critical – not everything it does is critical.  The opportunity cost of spending scarce resources in particular areas as opposed to others is not generally acknowledged.

What we’ve seen

The last two years’ Budgets have seen some $4b of “reprioritisation”.  To some degree this represents the easier savings: forecasts that were overly optimistic, budgeted-for price increases that didn’t occur, vacancies provided for but not filled.  It’s clear from the tone of the Government (and from the Budget forecasts themselves) that fiscal restraint is likely to remain a fixed feature of the public sector landscape for the foreseeable/forecastable future.

The opportunity

Through its emphasis on the “responsibility model” the Government has presented an opportunity for the public service to build on its achievements, refresh its thinking and refocus delivery of effective services to the public. 

So far the emphasis has been on the so-called back office and on pruning back commodity, lower value (or perhaps less-valued) services.  Given the magnitude of the challenge facing many agencies and sectors this will be insufficient.

To meet the expectations we think the focus needs to shift now towards the front line. The real opportunity lies in re-evaluating how front line services can best be delivered, and by whom. 

In KPMG’s view, where the state sector is clearly in the best position to provide efficient and effective services, enduring change and the optimisation of service delivery is best achieved by working in partnership with front line people.  Bottom-up approaches that harness the public sector ethos, passion and knowledge are far more likely to generate change that is both effective and sustained. In other jurisdictions KPMG has delivered and is delivering enduring change of this type. In KPMG’s view there is a significant opportunity to apply the lessons learned from this approach to drive sustained improvement in New Zealand’s public services.

There will also be areas where the private sector or Not-for-Profit sector may be in a better position to deliver innovative or more efficient and effective public services. We are already seeing a range of new contracting approaches being used across government such as Whanau Ora, high trust contracts, and public-private partnerships.  We expect to see more demand from Ministers for fresh thinking and action on service models in the next year. 

The keys to success for the state sector in this environment will be:

• Deep understanding of the costs and cost drivers of their organisations;
• Knowledge of the price, quality and standards of public services, and the interactions between them;
• Ability to identify and appropriately manage associated risks;
• Openness to a broad range of alternative approaches, and the analytical ability to decide between them; and
• The humility to ask for help in executing these changes.