Public Services Management: Bringing mandarins to market: New Zealand has left others in the dust with its radical reforms in the public sector

NEW ZEALAND is best known for its mountains and its meat and dairy farming. But the country deserves to be equally famous for the courage of its public services reforms, which have preceded and exceeded even those of Britain.

The public management overhaul in New Zealand was initiated by its Labour government in 1984 and supported by the National Party opposition, which carried it further after winning back power in 1990. Many of the changes, although radical, are no more than the new orthodoxy. The Labour government privatised large chunks of the state sector, from Air New Zealand and the Telecom Corporation to the Bank of New Zealand. The National Party government has since required local authorities to put contracts to tender and has encouraged them to sell assets. Employment contracts are comparable to those of the private sector.

It is in the heart of government that the change is starkest, with the old class of civil service mandarin replaced by executives who manage independently. Government now enters into contracts with departments for specified outputs. The divide between purchaser and provider has been taken right to the top of government.

Both major parties believe that accountability has been enhanced. The government's role as purchaser can be assisted by requiring departments, quangos and the private sector to bid against each other for public contracts.

Graham Mather, author of the book Making Good Government Seem Easy, which studied the New Zealand reforms, is enthusiastic: 'The key difference is that New Zealand has gone much further down the road. In Britain, the next step agencies are the most fundamental change to the civil service this century. But it didn't frighten the horses.'

New Zealand's reforms were bitterly opposed by most of the old mandarin class, which argued that the introduction of fixed-term contracts and a willingness to replace departmental executives would politicise the service and enable government to appoint their own people. The opposite has been the case, Mr Mather found.

'There is a more formal and transparent process than here (in Britain),' he argued. 'Therefore it is less easy for ministers to say we don't want so and so if they come out top. We asked the permanent secretaries if their fears had been borne out - and they said they hadn't been.'

New Zealand's mandarin class had to be challenged if public services were to be made effective, the government believed. The pay of permanent secretaries was partly determined by the number of staff they employed, encouraging them to have too many. The only civil servants ever fired were those committing criminal acts.

Today a more aggressive executive class has emerged to head departments. And many departments are led by women. Executives have freedom to decide on wages, accommodation and other operational matters. The executive is on performance related pay, with bonuses of up to 20 per cent available, and all senior staff are on fixed-term contracts of no more than five years. Contracts of poor performers are not renewed. Departments are rewarded for underspending, and few ever exceed their budgets.

The contractual relationship is extended to cover the Reserve Bank, which has operational independence while being accountable to parliament.

State-owned enterprises still exist, but report to their own minister - again emphasising the separation of purchaser and provider. Consequently hospitals, as healthcare providers, report to the minister for state-owned enterprises, while healthcare purchasers report to the minister of health. State owned enterprises borrow independently (the debt is not counted against the public sector borrowing requirement) and are required to achieve returns on capital.

Michael Soljak, formerly with New Zealand's health ministry and now director of strategy and health gain at the Ealing, Hammersmith and Hounslow Health Agency in London, contends that the clearer lines of responsibility and accountability in New Zealand have led to better decision making.

'It has moved away from a cash limited system with no clear annual planning cycle - where you tend to plan at the margins, where priorities are resolved by extending deadlines - to where the public sector works like a private sector management consultancy, where specific projects are commissioned and tracked,' he said.

'It has resulted in a different way of day-to-day working. Instead of a large range of issues dealt with shallowly, fewer things are tackled (but) in depth, and time-frames adhered to. It has improved accountability and ensured that people have the resources they need to do the job. The environment has become less stressful for staff.'

New Zealanders believe that as a young nation they are both more pragmatic and more willing to be radical than the British, and that is reflected in the reforms. For example, without any emotional history attached to a particular hospital, they are more willing to close one that is inefficient.

Many in the country say fundamental change was forced on them by the long and disastrous National Party government of Sir Robert Muldoon, which left the country with an inflation rate and trading and budget deficits that were unsustainable. The country's farmers actually volunteered to give up their subsidies.

The politician who first unleashed the reforms, Sir Roger Douglas, former Labour finance minister, argues in his recently published book, Unfinished Business, that more fundamental reform is needed. He wants to see welfare payments shifted from the middle classes to the genuinely poor, and people able to buy in education, healthcare and pensions in the marketplace. Sir Roger believes an integrated tax and benefit system would improve efficiency and end the poverty trap.

Sir Roger and former treasury boss Graham Scott, co-instigator of the reforms, will speak in May at a dinner hosted by the European Policy Forum, Mr Mather's conservative think-tank.

(Photograph omitted)