The recent decision in New Zealand to use purchase advisers to impose budget cuts should come as no surprise. Neither should anyone be surprised at the identity of some of those purchase advisers – they are reviving an extreme system that, as Treasury advisers, they introduced more than 20 years ago when Roger Douglas was Minister of Finance. It is a system of “virtual government” that operates under the motto of “privatise, contract and negotiate” and is designed to reduce the Government’s role to that of a contractor - a purchaser – of public services from private organisations.

From the beginning, the theoretical idea was that Ministers would not head a functioning department, but rather the Ministers would purchase “outputs” from service providers. The implementation of this system required thinking of all activities performed by departments as “outputs”, and devising contractual methods to purchase these outputs. As Graham Scott, then Secretary to the Treasury but today, one of the Government’s paid purchase advisers, explained in his book, “Public Management in New Zealand: Lessons and Challenges”: “When the system was first established, departments were encouraged by central agencies to imagine that their department did not exist, and they were assigned a budget to acquire the same services through contracts”.

From the beginning, it was known that ministers were unlikely to have the skills required to act as purchasers of contracted out services. But this was a system of virtual government after all, and that problem was easily solved – contract out the contracting out process. The process devised in the early 1990s envisaged exactly that. It called for employment of independent purchase adviser. The cost of each adviser would be charged against the vote about which advice is sought, and the adviser would be accountable to the vote minister.

Surely the independent purchase advisers’ advice is objective? It might be thought that efficient government departments would not be affected by such a contracted out contracting out regime. But this regime was not about efficiency – it was about creating an extreme system of contracting out to businesses – in other words, privatisation. Privatisation was not popular with the voting public, but efficiency was both vote catching and popular.

The Mythical Level Playing Field

In the early stages, the idea was that a level playing field would be created, and that this level playing field would support valid cost comparisons between private providers and remaining public sector providers – i.e. Government departments. In other words, if they were efficient they would survive. Gradually, the objective of valid cost comparisons morphed into one that sought to remove any advantages Government departments might have over private sector contractors, but without mentioning the many disadvantages.

The costing requirements introduced to allow seemingly objective comparisons were intended to foster alternatives to public sector provision. The combined effect of many of the requirements imposed in the public sector was to create biases that made public sector costs appear high. The level playing field was becoming tilted, with the public sector playing uphill. When decisions rely on the numbers produced, and yet the numbers are biased towards making a particular decision, it is disingenuous to call the decision process “objective.”

These developments were part of a regime in which comparative prices were expected to determine Ministers' resource allocation decisions without the need for direct ministerial intervention to force private sector involvement as had occurred in the United Kingdom. In other words, ministers could leave it all to their independent purchase advisers to rely on the biased numbers for their objective decisions. So here we are, back to the future envisaged under Rogernomics – reviving an extreme contracting out model of government. This system’s designers might not have moved on from that future, but events over the intervening years have raised numerous questions about the very idea of such an extreme contracting model.

Revival Of Extreme “Virtual Government” Model

Typically, the view of those pursuing extreme contracting out solutions is that private sector services will always be superior to those provided by government; and that the services will be well managed automatically without the need for government oversight. As the US experience of military contractors in Iraq has demonstrated, such faith in the superiority of business contractors may be naïve; accountability is not straightforward; and the shameful behaviour of contractors may reflect badly on the attitudes of the whole country. In the United States, one observation about contracting out is that its advocates hold a rosy view of the merits of contracting out, and seem unaware of the dangers. It is not enough simply to assume that businesses can be trusted to do the job better.

In New Zealand, numerous questions should be asked about the revival of this extreme “virtual government” model. Who will be responsible for ensuring the contracted out services are performed adequately? Are departmental chief executives to be held responsible? If so, that suggests a conflict of interests because the purchase advisers report to the vote Ministers. What monitoring processes will be in place to ensure the contracted services are performed adequately, and have those processes been adequately costed? Or are they conveniently ignored? And always, at the heart of debate about the role of government is the question of what services should always be provided by government or, alternatively, should never be contracted out? This is a political question and it is one that deserves debate.

Sue Newberry is Associate Professor of Accounting at the University of Sydney. Alan Robb is Adjunct Professor of Saint Mary’s University, Canada. This article was published in the Press , 20/5/09, under the title “Governing By Contract”.