The New Zealand public sector is characterised by a wide diversity of organisational forms of public enterprise conducting activities of a commercial nature. Essentially these may be classified under the following categories:
Recent years have witnessed large scale 'corporatisation' of activities of government. The rapid reform of central government has meant that the majority of governmental trading activity has been transferred from government departments to companies (State-owned enterprises). The State Owned Enterprises Act 1986 transferred nine trading activities from a departmental organisational form to a corporate company organisational form. This effectively released those operations from the perceived constraints and deficiencies attached to operating as a government department. However, there continues to be a number of departments which, while primarily of a policy and advisory nature, undertake activities for which they charge afee. Examples include commissioned scientific work, provision of statistics, land management advice, tourism and trade promotion.
These cost-recovery activities are provided with a form of commercial incentive through the setting of revenue targets. In some cases, a revolving fund is used. In this case, trading activities are operated outside the Public Account and expenditure is funded from the revenue generated by the entity.
Continuing reforms in central government, particularly the proposed movement towards an accrual based appropriation system linked to outputs (achievements) rather than inputs (expenditure types), will continue to have a considerable impact upon the remaining central government core activities and is likely to lead to even further clarification of objectives.
When the Labour government came to power in 1984, the government owned a number of public enterprises including banking, airline, shipping and hotel businesses.
Since then, a further 14 State-owned enterprises have been established by transferring activities from departmental form to a limited liability company organisational form. While governed by a new piece of umbrella legislation (the State Owned Enterprises Act 1986), these organisations operate in a very similar way to private sector companies. The new enterprises are involved in such businesses as forestry, farming, post and communications, broadcasting and property development. Steps are being taken to privatise a large number of these trading companies.
Although the State-owned enterprises have a high public profile, the bulk of other organisations in the sector are statutory boards, i.e. organisations established by an Act of Parliament to implement government policy. These include insurance mutuals, producer boards and 'quangos' (quasi autonomous non-government organisations). Established to achieve a single objective, some undertake trading operations while others are concerned with social policy.
While it is difficult to determine the exact size of the New Zealand state trading sector, it is equivalent to approximately 15% of the gross domestic product. It makes a relatively small contribution to overall government revenue (7.0 percent) but also has a relatively small core budgetary expenditure impact (1.2 percent).
Local government in New Zealand comprises territorial government and special purpose authorities. The form, structure and functions of local government entities are being reviewed. At present, a process of amalgamation and corporatisation of trading activities is being developed. While the study of public enterprises reflected in this work has not extended to local government activities per se, it is, however, relevant to note that local government in New Zealand operates some commercial entities of a significant size and nature which, in other countries, are operated by the state.
Many such authorities have developed overtime with both commercialand social objectives. In the last two or three years, there has been a move to separate these responsibilities, particularly in the management of port operations. Similar changes are occurring with airports and power supply authorities. The non-commercial functions will continue to stay with the local authority.
Specific purpose local authorities have been established over time to conduct particular activities. Examples are airports authorities, drainage boards, education authorities, catchment boards, electric power boards, harbour boards, hospital boards, liquor licensing trusts and a large number of very small domain, cemetery and scenic boards. These locally elected boards are primarily responsible for the activities of their organisation.
Local government trading activity is currently undergoing considerable reform and has given rise to the identification of 'LATAs' (Local Authority Trading Activities). Activities such as electrical supply, buses, airports and abattoirs are all classified as LATAs. A LATA is defined as any good or service provided by a local authority where the benefits from its provision are largely captured by identifiable users. Accordingly, direct charges can be made to offset the cost of producing the goods or services.
The current reform process is addressing the ways in which LATA can be made more effective and efficient. Among issues being considered are: organisational forms, funding policies and accountability at the local level. Different solutions are being developed for different activities.
In the case of harbour boards, the approach taken has been to establish limited liability companies (port companies) and transfer all commercial/trading activities of the harbour board to them. The share capital of these port companies is presently held by the harbour board. These companies then operate in a manner similar to the private sector with profit orientated objectives.
Most trading activities are required to be financially self sufficient through user charges. In some cases, a degree of cross subsidisation occurs and in others there is a small amount of support from local or national taxes.
In the case of hospital boards, catchment boards and drainage boards, the majority of funding is from taxation and/or levies.
The pressures for reform in local government are similar to those impacting central government reform in New Zealand. Many of the strategies devised for central government are also being proposed for local government.
These reforms are likely to result in significant change in the structure of trading activity in local government in New Zealand over the next 3 or 4 years. Changes are expected to occur not only in management structures and objectives, but also in accountability mechanisms.
Generally speaking, ministries and departments have both policy formulation and policy implementation responsibilities. In some cases, the implementation is achieved through a trading operation.
The current reforms have identified ways to improve efficiency and effectiveness, and reduce the budget deficit, within the central government sector. Much work has gone into the identification of new and more appropriate accountability structures.
As part of a 'user pays' policy, restrictions on charging for departmental services have been lifted and all departments are expected to recover the costs of services performed wherever possible. The clear implication is that all trading or quasi trading activities are required to break even.
Except for those departments operating on a revolving fund (an administrative mechanism whereby some departments retain revenue earned and operate on a commercial basis), all revenues earned including those from the trading activities continue to be paid directly into the Public Account (the government's central bank account). Similarly, all expenditure is made from that account.
Therefore departments do not currently have the ability to retain cash funds for future activities.
The reform process has resulted in the majority of state trading activity being removed from the core departmental sector and placed in a corporate commercial environment. Those trading activities which remain are mainly fee charging/ cost recovery activities rather than commercial trading operations.
Any trading or quasi trading activities remaining within the core departmental sector are subject to the funding control and accountability mechanisms applicable to that sector. Generally speaking, such activities operate as a division of a government department and are organised and managed along those lines.
With a clearer expression of objectives and improved managerial performance, the trading arms of government departments are now able to act in a fully commercial manner.
Semi-autonomous departments have a form of dual identity. On the one hand they are established under their own acts as Departments of State with a responsible Minister, and on the other hand the Chief Executive is constituted a corporation sole for the purpose of transacting the business of the department. An example is the State Insurance Office.
The departments have their own bank accounts outside the Public Account and are fully self funding from their business income. Nevertheless, there is a nominal appropriation (usually for the Chief Executive's salary) for each department allowing for examination and debate in the Parliament.
This area of the public sector includes a wide range of organisations differing in structure, funding, accountability and parliamentary control.
Organisational Structure and Funding - Companies
Government-owned companies have a legal form identical to private sector companies and are subject to the provisions of the Companies Act 1955. That Act specifies reporting requirements and confers rights and obligations on shareholders, directors and management. For government-owned companies, the nominated shareholders are Ministers of the Crown.
Government-owned companies can be established under their own legislation, e.g. the Shipping Corporation of New Zealand Act 1973 and the Development Finance Corporation of New Zealand Act 1986, and/or under the State Owned Enterprises Act 1986.
A principal reason given for the use of the company form of public enterprise is the degree of discretion and autonomy it provides for the management of the company. As shareholder, the Minister is responsible for establishing the general direction of the company rather than overseeing the day to day activity. Further, Parliament does not normally appropriate funds other than for infrequent capital funding or loans financing. Thus the level of parliamentary scrutiny over the day to day operations of a company tends to be much less than for a government department.
State Corporations
State corporations are established under individual enabling Acts. Two of these corporations, viz. the New Zealand Railways and the Tourist Hotel Corporation, are also subject to the State Owned Enterprises Act.
Capital funds are normally provided by the government, either by way of equity capital (which is not divided into shares) or loan capital or both. An exception to this is the Accident Compensation Corporation which has no capital.
Organisationally, corporations are structured in a similar way to companies in that they have a governing board and a responsible Minister. By comparison, however, the Acts establishing corporations make possible a more immediate and direct involvement by the Minister in the affairs of the corporation. In most cases, there is a nominal annual appropriation for each corporation, to provide the Parliament with an opportunity to examine and debate its operations.
Quangos
Quasi Autonomous Non-Governmental Organisations (Quangos) are established to carry out government policy. Unlike companies, corporations and semi-autonomous departments (whose function is primarily trading), quangos often have 'non-trading' objectives. However, a few have the primary objective of making a profit through trading; an example is the New Zealand Lotteries Commission.
All are created by or under individual statutes and have a governing board often representing various groups. In most cases, the Boards are serviced by an executive staff. A Minister is responsible for Parliament for the activities of a quango.
The quangos themselves, however, operate with a considerable degree of autonomy. They are not normally subject to the financial or personnel controls and procedures applicable to government departments, and operate as distinct legal entities.
Insurance Mutuals
A number of public sector organisations are effectively owned by those who contribute funds directly to them. Although recognisable in terms of the general forms of ownership already described (e.g. the Government Life Insurance Corporation is a corporation and the National Provident Fund is a quango) they are also categorised by their 'mutual' status. In other words, although they were initially established, funded and controlled by the State, these organisations have now reached the stage of their evolution where the balance of interest is predominantly in favour of the contributors. In most respects, the organisations are indistinguishable from the mutual insurance and savings organisations operating in the private sector which return any 'profits' to their policy holders or contributors.
Producer Boards
Producer boards are created by legislation which provides them with monopoly rights to market or control production and/or prices of primary produce. They are akin to grower co-operatives and are administered by a board supported by executive staff. The board usually comprises representatives from various industry interest groups and the government.
The boards operate autonomously. Appropriation of funds by the Parliament is not normally required, although in the past government policy has been implemented through the agency of the boards. Originally, ministerial involvement was required to approve borrowings and to set prices, but such approvals are no longer required.
The requirement for a token appropriation for semi-autonomous departments provides greater opportunity for parliamentary scrutiny of these entities. In effect, the Chief Executive of the department, as distinct from the Minister, is directly accountable to Parliament. At present, the accountability requirements extend only to the presentation of an annual report and financial statements audited by the Audit Office.
The accountability requirements for companies, corporations and statutory boards are, in most cases, detailed in the legislation under which they have been created. However, the State Owned Enterprises Act details the accountability regime for government-owned companies and corporations. Of significant interest is the Statement of Corporate Intent. This is fundamental to the process of accountability established by the Act. It provides an opportunity for the shareholding ministers and the enterprise management to agree in advance the scope of operations for each year and the basis on which they will be held accountable at the year end.
Specifically, it requires agreement between the shareholding ministers and management on such important matters as:
In addition to the Statement of Corporate Intent, the State Owned Enterprises Act requires an enterprise to produce - within 3 months of balance date - an annual report including financial statements audited by the Audit Office (the Supreme Audit Institution of New Zealand). The financial statements must detail the dividend payable to the government for the financial year to which the report relates. The board has an additional responsibility to provide the shareholding ministers with a half yearly report of its operations during that period.
The Minister responsible for the enterprise has a statutory duty to table in the Parliament, the annual report and financial statements within 12 days of receiving them. In addition, he has a right to request from time to time from the enterprise management any information he requires relating to the affairs of the enterprise.
The accountability requirements for quangos are also detailed in the legislation under which they were created. Generally speaking they are required to provide to the Parliament an annual report and financial statements audited by the SAI. There may, however, be additional reporting requirements imposed on particular organisations to adequately control their activities.
The nature of parliamentary accountability of mutuals depends on the ownership form applicable to each. In the case of the Government Life Insurance Corporation for example, it is restricted to an annual reporting obligation because the primary accountability is to the policy holder and Parliament's interest is related only to a statutory financial guarantee.
As the prime accountability of producer boards is to growers, the extent to which Parliament should influence activity is difficult to determine. Parliament does, however, have an interest insofar as the government has provided financial support by way of a loan or guarantee, or the boards have statutory monopoly powers. Current legislation requires producer boards to provide an annual report and financial statements audited by the SAI for tabling in the House.
Parliamentary control over the activity of companies, corporations, and statutory boards is exercised through Ministers.
Parliamentary Select Committees - a significant element of parliamentary control - are established under Standing Orders of the House and their jurisdiction is determined by ministerial portfolio. They have widely drawn terms of reference and considerable powers with which to perform the following functions:
It is through examination by Select Committees that effective parliamentary
scrutiny occurs. This is particularly significant in regard to most companies and corporations which have 'shareholding' ministers and require no appropriation of moneys from Parliament. In order to balance the transfer of authority from Parliament to the Executive that occurs when no appropriation is made, Select Committees examine the operations of those organisations.
The responsibilities of the Audit Office (SAI) are defined in legislation (Public Finance Act 1977). This identifies three essential components:
The Act provides for the SAI to report to Parliament at any time on any matter it so wishes. The Act also identifies the central and local government sectors for which the SAI is responsible.
These statutory responsibilities have been reflected in the national management planning process adopted by the SAI. As part of this, it has been recognised that reporting should occur at several different levels: Parliament/ local government, board or elected member level, executive staff level. In this way different needs can be met.
The rapid reform of the New Zealand public sector has resulted in a questioning of the role of the SAI and the accountability relationships of State-owned enterprises. In particular, there has been a view expressed that organisations which are established according to the private sector model should be allowed to choose their own auditor and not fall within the jurisdiction of the SAI. Such a view has been strongly contested by the SAI on the basis that it not only undermines the constitutional responsibility of the SAI, but also the constitutional rights of Parliament as a whole.
There has been a tendency for the role of the SAI as external auditor to be set aside by the administrative process "of establishing a subsidiary body, and by appointing a commercial auditor to audit the subsidiary, associate or joint venture, thus severely restricting the SAI's ability to adequately fulfil its obligations to Parliament.
The SAI operates on a self funding basis by charging fees for its services and meeting its operating expenses therefrom.
Approximately 85% of audit effort is applied to the conduct of the financial attest audit. In conducting this work, the generally accepted accounting and auditing practices and standards recognised by the New Zealand Society of Accountants are adopted.
The achievement of the non-financial responsibilities of the SAI has been a focus for much management attention since 1977. The present philosophy is to achieve all parts of the mandate through conducting 'integrated audits' i.e. one where the objective of the audit is to consider each of the three components of the statutory audit mandate and report the results thereof for each client each year.
The achievement of the integrated audit approach is to be completed by 1991 when it is anticipated that approximately 75-80% of audit effort will be financial work and 20-25% value for money and control work.
All audit reports to Parliament are discussed with relevant Select Committees who are encouraged to pursue matters raised in those reports, although there is no requirement for them to have regard to such reports.
The SAI provides significant support to the Select Committees of Parliament. It provides them with an annual review of the operations of each department at the time of the expenditure examination by those Committees. In addition, the SAI makes submissions to Select Committees on all relevant legislation. From time to time the SAI also attends in an advisory capacity to assist Select Committees in consideration of matters at hand or investigations in progress.
The SAI has contracted accounting firms to conduct audits on its behalf for a number of years. The majority of the contracts are for the audit of small clients. However, the audits of approximately 20 major clients, including some State-owned enterprises and corporations, are subject to contract arrangements. The SAI maintains a close involvement with the audits, approving audit strategies, reviewing work conducted, signing the audit opinion, attending all major meetings with the client, and approving all reports.
The SAI has had a mixed experience with contract arrangements. In some cases, the contract auditor has been timid in approach and has shown inadequate knowledge of the public sector. A continuation of the arrangements will require a greater number of experienced SAI staff to become involved to monitor, control and liaise with the contracting firms.
A number of ongoing implications has become evident. New, more efficient organisations have increased the demand to meet tight audit deadlines. In some cases, organisations are producing half-yearly financial statements which require auditing. Many State-owned enterprises are seeking their own capital funding and are therefore issuing prospectuses which require auditing. These changes have significant resource and performance implications for the SAI and in many cases have increased the risk profile of the client base.
The questioning of the role of the SAI as the external auditor of public enterprises will have significant implications if it should lead to a diminution of that role in favour of a greater use of private sector audit firms.
While changing the form of public ownership will inevitably change accountability relationships, it does not alter the principle of parliamentary accountability.
Accountability for collection and expenditure of public funds is of two kinds, as illustrated in Figure 1:
Figure 1
Ministers must account for the use of funds and resources and for all activities performed by an entity under ministerial control. This requires an adequate flow of information to the Minister (accountability to the Minister) so that the Minister can account to Parliament (accountability of the Minister).
As taxpayers are the ultimate owners of a public sector organisation, that organisation must be held accountable to the effective owners through their elected representatives in the Parliament. Therefore, Parliament must receive an adequate flow of information from either the Minister responsible or the organisation itself (accountability to Parliament), and Parliament must remain accountable to the taxpayers for its actions (accountability of Parliament) in holding Ministers and organisations to account.
Departments, companies, corporations, statutory boards and local bodies within the public sector, have varying degrees of autonomy from both the executive government and Parliament which change the accountability relationships.
With greater autonomy comes improved operational efficiencies, but greater autonomy also brings a greater potential for operations to fall outside the boundaries agreed to by Parliament - see Figure 2. Accordingly, there is a greater responsibility for Parliament to ensure that an organisation remains properly accountable to it.
Figure 2
It is the right and responsibility of the 'shareholder' to appoint the auditor. As the auditor appointed by Parliament, the SAI has a special responsibility to assist Parliament in the scrutiny of publicly-owned organisations. Further, it provides independent assurance to Parliament on the validity of information provided.
The SAI also reports on its own initiative, any matters considered necessary to bring to attention of Parliament. The ability to report on all areas of the public sector is vital if an appropriate level of scrutiny is to be maintained.
In this context it is the responsibility of Parliament to agree to the boundaries within which the Executive operates. It is the SAI's role to assist Parliament to monitor the performance of the Executive within these boundaries. The SAI, acting as Parliament's watchdog, is thus a key link in the accountability chain.
In the face of so much change in the public sector to date, the role of the SAI in New Zealand has remained intact. With the exception of two banking.institutions-owned by the government which have never been audited by the SAI, the SAI is the appointed auditor for all government-owned and local government organisations.