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Productivity Commission’s report a timely reminder

Published in The National Business Review (Auckland), 24 August 2018

Imagine a management consultancy asked for help with a large company’s performance. At the end the inquiry concludes the company does not measure whether its processes are efficient.

To make matters worse, this company does not reward productivity improvements. Neither does it encourage innovation in its processes.

A company that does not properly measure its own performance rarely aims for improvement and does not innovate enough. After such a damning report from a consultancy, you would expect management to be in for a grilling by nervous shareholders. Many column inches would be dedicated to this failing company, and in the end heads would roll.

At least that is how such a report would normally be received in the private sector.

But replace ‘company’ with ‘state sector’ and ‘consultancy’ with ‘Productivity Commission,’ and barely anyone takes notice.

If you are one of the rare people who noticed the Productivity Commission’s two inquiry reports on measuring state sector productivity and improving state sector productivity, you probably did not hear about it in the news.

Let’s admit it; there are more appealing things to do than think about state sector productivity. Some people might prefer to go to the gym, prepare their tax return or see the dentist instead. Of all the topics under the sun, public sector productivity is not the sexiest one.

But just because it is a specialist niche topic does not mean it is not important. It certainly is when you consider that about two-fifths of our total GDP are occupied by government – and practically the whole economy is affected by regulation. And this is why the Productivity Commission’s new reports are worth much more attention than they received.

The commission reveals some worrying developments. Overall, labour productivity in the state sector has barely improved in the past 20 years. It is well behind the private sector and the economy overall.

Zooming into specific sectors, in the education and training sector productivity has decreased between 1996 and 2017: Labour productivity is down 1.7% and capital productivity down 2.7%.

Given the importance of education in our increasingly service-based economy, the money we are putting into the education sector should be producing better results. But while per-student funding increased 25% between 2003 and 2016, student achievement appears to decline in international tests.

Expenditure on police and prisons has tripled since 1996. While the crime rate did fall from 1996 through 2014, it has flattened since then.

Of the tertiary education and health sectors, the commission notes central government funding structures do not encourage innovation, with many district health boards even saying there is a disincentive to move to lower-cost alternatives.

It also notes that we seem to rely on simply employing more people to increase output rather than developing a more efficient system.

At a basic level, productivity can be measured in defined and standardised inputs and outputs. That we need the commission’s second report outlining how to measure state sector productivity is a cause for concern. In an ideal world, we would have systems to track it. Alas, we do not live in an ideal world.

Many state sectors have not even measured productivity in any form, instead naïvely assuming that their inputs equal their outputs. Ministers do not ask for enough information about productivity.

We focus too much on inputs into the state sector to measure performance and determine budgets. If we measured outputs instead (and awarded budgetary incentives based on performance and results) a more innovative and efficient culture would develop. It is not rocket science.

And it is possible to do better as the report also documents. It praises good practice in policy review and data use at Inland Revenue, the Ministry of Business and Statistics New Zealand.

A good illustration of how innovation can yield better results comes from the Department of Conservation and its takahē breeding programme. It has reduced the cost of hand-rearing chicks by one-fifth, now producing 35 chicks instead of eight each year, all with the same budget. Left unexamined is whether the private sector could do even better. Banks Peninsula enviropreneur Roger Beattie’s experience with weka demonstrates the limitations of relying on the state sector.

Other departments’ attitudes to productivity make you scratch your head. Reportedly, there are agencies that seriously believe that measuring efficiency will distract them from their other tasks of innovation and improving outcomes. As if you could do one without the other.

As taxpayers, we should be demanding our money is efficiently used. Given the increases in funding for state sector departments over the past 20 years, it is appalling to see that overall productivity has barely improved. Education should not be delivering declining PISA results that still cost more.

For any government, throwing money at problems is a convenient ‘solution’ to most problems. Spending more is visible, it demonstrates commitment and it allows easy comparisons with past administrations or political rivals. But, as the Productivity Commission reminds us, it is not the money spent that politicians should brag about but the results they achieve.

Achieving greater state sector productivity would then give us more choices. We could be satisfied with the results we have and achieve them with less resource. Or we could maintain input and increase output.

Analysing and improving state sector productivity may not be sexy topics. But few issues could be more important for New Zealand’s long-term economic performance. We must thank the Productivity Commission for this timely reminder.

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