III. Structure of the State Sector

One of the signal contributions of the New Zealand reforms has been to remind us that institutional arrangements can make a big difference in the performance of politicians and public officials and in the effectiveness of the organisations they control or work for. Institutions matter because they influence the incentives and behaviour of Ministers and managers. Institutional arrangements establish the contractual relationships between principals and agents and determine what managers may do and are accountable for.

New Zealand's organisational structure has features that are found in most countries. There is a pantheon of Ministers, each responsible for one or more departments. Each department is headed by a chief executive and has its own sphere of responsibility, for which appropriations are provided. Several central agencies regulate or coordinate the business of government. There also is an array of nondepartmental bodies, which are funded by the government's budget to carry out assigned responsibilities.

A closer look at New Zealand's governmental landscape reveals distinctive features, some predating the reforms, others added by them. New Zealand has a large number of small departments and a small number of (relative to its overall size) large departments. It has many fewer Ministers than departments; some are responsible for more than one department. Some departments are funded out of more than one Minister's portfolio. In each such case, one Minister - generally the one with the largest stake - is assigned responsibility for the department. The Responsible Minister has two roles: one as a purchaser of its output, the other as the "owner" of the organisation. As purchaser, a Minister may opt to obtain output from the department or from alternative suppliers, such as Crown entities or nongovernmental contractors. The many Crown entities differ in their organisational structure and relationships to Ministers and departments. In the aggregate, they are the end-spenders of approximately one-third of total public expenses.

These institutional arrangements give rise to several issues considered in this chapter. One pertains to the role of the central agencies and another to the structure of departments and Crown entities. (SOEs are outside the scope of this report and are not considered here.) Having reviewed these arrangements, I do not see a need for any basic restructuring of New Zealand government. Ministers should continue to have responsibility in their respective domains; the resources and management of government should continue to be entrusted to departments. Despite reform, there remains a need for strong central agencies. Crown entities generally provide governmental services that can be more effectively delivered outside departmental structures. Nevertheless, I argue for certain adjustments in each of these organisational areas. Central agencies should be more clearly focused on vital, government-wide tasks; departments should have the capacity to fulfill their accountability requirements; and the activities and finances of Crown entities should be more transparent and more readily subject to Ministerial responsibility.

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