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New Zealand: Public Financial System - From Transactions to Strategy
Source: futuregov.asia
Source Date: Thursday, December 20, 2012
Country: New Zealand
Created: Dec 25, 2012

Fergus Welsh, as New Zealand Treasury’s Chief Accountant and Chief Financial Officer, is leading the development and implementation of strategies for improving financial resource management across the public sector in his country. Apart from the normal day-to-day financial processes and controls, he is also responsible for providing strategic financial advice to the chief executive at the Treasury, preparing the regular monthly and annual financial statements of the New Zealand Government and oversight of a specialist team at Treasury responsible for raising productivity levels across the public sector. “The Government expects the Treasury to deliver its services in an efficient and cost-effective way, whilst also building up our capability to respond to changing demands as these occur.”

A test of Resilience
The global financial crisis has put pressure on global economies, New Zealand is no different in this regard. Added to this for New Zealand has been the impact of the Canterbury earthquakes. The focus is now on returning the Government’s books to surplus in 2014/15 while simultaneously strengthening the Crown’s balance sheet of investments and liabilities. The destructive earthquakes that occurred in Canterbury in September 2010 and February 2011 and the subsequent earthquakes, created NZ$ 20 billion (US$16.2 billion) in estimated damages and NZ$ 15 billion (US$12.2 billion) estimated impact on Gross Domestic Product (GDP) growth for over five years. Given that the economic activity in the Canterbury region is normally expected to generate around 15 per cent of New Zealand’s national income Welsh says its impact will continue to be felt for some time to come. This, combined with the Government’s response, means that its fiscal position has also been significantly affected.

“To achieve a return to surplus requires a continued focus on strong financial management and being clear about priorities and resource trade-offs, not just in the short term but also with a clear focus on the medium and longer term ,” he remarks, adding that it is important that public sector organisations – at all levels – make sure that they have the reserves that would enable them to respond efficiently to such unexpected events. “The Government is committed to rebuilding the Crown’s fiscal position to ensure New Zealand is well placed to deal with any future unexpected shocks. It is being clear about priorities whilst also deciding upon sustainable long-term plans.” Welsh adds that during the earthquakes last year, which occurred during the fiscal year ended 30 June 2011, the Government’s overall deficit was about NZ$ 18.4 billion (US$15 billion) and more than NZ$ 9.1 billion (US$7.4 billion) of that amount was a result of issues relating to the earthquake. The total net cost to the Crown is now estimated to be NZ$13.5 billion (US$ 11 billion) between 2011 and 2016.

“The focus is now on returning to surplus and strengthening the Crown’s financial position. Agencies in the wider New Zealand public sector are operating in an environment where demands for the maintenance of high levels of service and delivery of Government outcomes are challenged by increasing fiscal constraints and budgetary pressures around current or future budget baselines. Last year, we made significant effort in trying to get good information as soon as possible to measure the impact of the earthquakes, and give assurance and certainty to rating agencies that we understood the impact of the earthquake and how we were responding to its impact.”

Challenges of a CFO
According to Welsh, CFOs are being required to increasingly play more of a role in leading the development of business transformation programmes across the organisation so they can more effectively assist the Government to respond to fiscal challenges. One of the challenges of being a CFO is not only about making sure that accounting books are balanced and the correct accounting treatments are instituted, but also taking a greater leadership role in their agency’s strategic and business planning processes, and to assist their agencyto better understand and manage their own particular financial pressures and issues. CFOs have a greater responsibility to develop financial strategies and actions that will enable an agency to continue to finance its strategic priorities in the medium to long term. “In New Zealand, it is not mandatory for CFOs of state departments and ministries to be in second tier positions or be part of the formal leadership team of their entities. However, it is vitally important that the CFO is actively involved in, and able to bring influence to bear on, all material business decisions whenever and wherever they are taken, and this occurs within agencies.”

Welsh explains that this requires CFOs to establish effective working relationships within the organisation and building a broader understanding of how the finance function can add value; including advising on delivering more efficient and effective front-line services. “We are continuously exploring ways for finance teams to build up their capability, and to plan and provide strategic advice more efficiently. To be able to do this without incurring additional costs on an organisation requires finance teams to reduce the level of effort and cost on transactional activities through process improvement and standardisation, automation, and leveraging knowledge and scale across government. This will allow more resource to be applied to something more value added, and then from there, CFOs can free up time and strengthen their team’s capability to drive sound financial advice on key issues that affect the organisation. In addition, we are also looking for new ways to do business differently, and on a business transformation standpoint, we’d like to make sure that when we do have those opportunities we are realising the benefits from any investments that we made,” he remarks.

Measuring performance
To measure performance and to improve organisational efficiency, Welsh says there is a need for robust performance measurement indicators to help decision-makers make effective choices about what they want to achieve, how they will get there, and also monitor whether they are progressing toward their desired outcomes. “I believe effective financial and non-financial performance information is a key part in measuring performance, especially in terms of making sure that we are looking at good financial and non-financial information to help teams in the organisation arrives at well-informed decisions and investment appraisal, which will enable them to prioritise and move resources around in a timely way, as well as reward performance. What we are looking for is an effective performance management system and the tools within it, that focus on ensuring that public servants understand what is expected of them, and what individual contribution they make to achieving the objectives of their public sector agency and the wider objectives of the Government, as well as ensuring that there are genuine and effective consequences for both the good behaviours we want to encourage and the less desirable behaviours we want to eliminate.”

“Performance management systems are a lot more mature as there is a clear expectation from staff and it is more aligned to the organisation’s management system. As a result, the performance of the organisation sort of trickles down to the staff who are committed to deliver agency objectives,” Welsh says. Welsh cited that the three central agencies that are currently running a process called a performance improvement framework, which aims to measure and positively influence the performance of agencies and provide consistent framework to compare them. He says the framework has consistent metrics which looks at performance across a number of disciplines such as the relationships with external partners, if its activities are aligned with government priorities, the organisational approach to developing staff, and the finance and resource management as one way to measure performance. All elements of these reviews are important to a CFO, particularly as the role of CFO is to help shape and interpret / operationalise the core business of any organisation, ensure it is efficient and effective, and that resources are being directed to the highest priorities.

Balancing two paradigms
The CFO role has seen changes in paradigms since the last decade. At present, there are two paradigms that are needed to be strategically balanced. The first type of paradigm is providing the core financial accounting, treasury, and transactional work that CFOs have responsibility for. The second type is the more strategic part, and one that involves business partnerships and decision support work that most CFOs own that would help their organisation to grow. Striking a balance between the two paradigms is a challenge for most CFOs, however according to Welsh technology can play a critical part for a CFO to play the part of both a scorekeeper of financial data and a strategist. “Technology has a hand in easing the burden of traditional financial roles through process simplification and standardisation and automation,” says Welsh. “If you utilise financial management system technology right, and it meets the business needs then I think that it can actually reduce the transactional costs of the business. In many finance functions transactional activities are the bulk of staff effort and cost, and can result in insufficient attention to the finance department’s more strategic role. By making effective investment decisions around technology the end state is ‘better finance services for less’: while there is increase in high value business partnering activities, there will be a net reduction in the cost of the Finance function overall” he adds.

Welsh notes it is also important for a CFO, as well as the senior management team, to identify what the finance team can do for them and how they can go about meeting these goals. “It’s about building a roadmap and getting them to understand some of the investment decisions that have been made, particularly on the Financial Management Information Systems (FMIS).” In order to maximise the potential of the FMIS, Welsh explains that one of the first things to be clear about is what the finance team can provide to the organisation and what sort of information the organisation needs and how FMIS technology would enable them to make good business decisions. “It’s not just about upgrading your current FMIS and knowing your vendor’s development path for the system. It’s about identifying the tangible and intangible benefits that we as decision-makers can derive from investing in this system,” he says. Apart from reducing transactional activities, Welsh adds that another benefit derived from the FMIS is the increased integrity of the financial information due to less reliance on spreadsheets, which he says always has a higher risk of running errors.
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