Productivity measurement rethink in NSW to be led by Treasury

By David Donaldson

July 22, 2015

Government agencies need to improve their tracking and reporting of productivity to help improve performance — and the New South Wales Treasury is going to help them do so by improving the guidance provided to agencies on performance and outcomes.

Tony Whitfield
Tony Whitfield

Productivity, commonly defined as the amount of output per unit of input, is currently not being tracked and reported to the full capability of government agencies, according to a report tabled by NSW acting auditor-general Tony Whitfield:

“Despite its importance, productivity trends in the public sector are not well understood or reported to parliament. All of the agencies examined had an understanding and reported on input, output and quality indicators that could be used to track their productivity.”

The recommendations contained in Identifying productivity in the public sector, though specifically targeted towards the agencies reviewed, will no doubt be relevant to many public sector bodies:

  1. set productivity and efficiency objectives;
  2. set a framework which outlines metrics and methodologies to track productivity trends;
  3. report on productivity trends to Parliament;
  4. if not already doing so, report efficiency trends to Parliament where practicable, as required by the Annual Reports (Departments) Regulation 2010.

The report examined six activities across five agencies: primary and secondary school education (the Department of Education and Communities), acute inpatient care (NSW Health), CityRail (Transport for NSW), all activity in the NSW Police Force, and the NSW Local Court (the Department of Justice).

One activity exhibited a decreasing productivity trend (secondary school education) and three activities (acute inpatient care, the NSW Local Court and the NSW Police Force) exhibited improving productivity trends. Productivity trends could not be identified in two of the activities examined (primary school education and CityRail).

Treasury guidance

Arguing that agencies “did not have clear guidance or direction about how this information could be used to track productivity”, the report suggested Treasury, which in the past has provided guidance on economic performance measurement for government sector agencies and has administrative carriage of the wages policy, “provide guidance to NSW Government agencies on how to report on productivity and efficiency”.

Treasury’s response stated that it is leading the Financial Management Transformation (FMT) program, “which is modernising the financial management framework that supports the NSW public sector. This includes increasing transparency and strengthening agencies’ emphasis on performance and outcomes.” It continued:

“FMT is working with the sector on a range of policy reforms, including the implementation of ‘Program-based Budgeting and Reporting’. This policy will shift focus onto performance and results, and will include guidelines on the construction of key performance indicators, including those relating to productivity and efficiency. The policy will be accompanied by enhanced performance reporting requirements, to improve transparency.

“Treasury will work with key stakeholders, the Department of Premier and Cabinet and Public Service Commission, to ensure that guidance is provided to NSW government agencies on how to measure productivity and efficiency.”

The audit report noted that despite shortfalls in the area of productivity, agencies had a better understanding of, and better reporting for, efficiency — though it noted “not all agencies met their legislative requirement to report on qualitative and quantitative measures and indicators of efficiency performance where practicable.”

Keeping a lid on costs

Discussing the 2007 and 2011 government policies requiring agencies to limit employee expense growth to 2.5% per year, Whitfield’s report states:

“The 2011 wages policy was more effective at suppressing employee expenses growth than the 2007 wages policy. This was likely due to a more rigorous approval process and a greater onus on agencies to demonstrate and achieve wage offsets.”

While, of the six activities assessed, only one managed to keep cost increases below 2.5% in the 2008–09 to 2010–11 period, three of six achieved this goal in the 2010–11 to 2012–13 period. Employee expenses for primary and secondary school education
and acute inpatient care continued to grow at more than 2.5% per year in the latter period. The report noted that a likely reason for the over-target cost increases was an increase in the provision of services.

Objectives other than productivity and efficiency

Notably, the Department of Education and Communities showed some discomfort with the audit office’s productivity-focused approach. The department “disagrees” with the “translation into the productivity measures suggested by the Audit Office” and the “conceptual validity” of the proposal, notes the report.

The audit office’s measurement of productivity within the department was based on National Assessment Program — Literacy and Numeracy (NAPLAN) results, which the department advised “may be incomplete, inconsistent and ill-suited for productivity analysis.”

The department also rejected the office’s recommendation to “assess and report on the return of additional investments in education such as smaller class sizes”, stating: “The Class Size Reduction program was comprehensively evaluated when it was implemented 2004-07 and we do not propose to undertake a further evaluation.”

Although it acknowledged the limits of productivity measures, the audit office defended the importance of using narrow productivity measurements as a performance yardstick, stating:

“The Department of Education and Communities suggested that productivity should not only identify inputs and outcomes, but also consider goals of excellence and equity in contributing to a strong, equitable and just society.

“These goals are captured under the 2008 Melbourne Declaration on Educational Goals for Young Australians. In the declaration, all Australian education ministers agreed to two overarching goals for schooling in Australia:

  1. Promote equity and excellence;
  2. Support all young Australians to become successful learners, confident and creative individuals, and active and informed citizens.

“These goals, however, have no specific measures or targets that could be used to calculate productivity or efficiency.

“We acknowledge that schools provide a range of outputs, which include measureable things such as numeracy and literacy, but also less measureable things such as life-skills training, a sense of community, and the basis for a civilised and caring society. While these considerations are important, these are not the focus of a productivity analysis.

“Public sector productivity — the main focus of this report — is a single, deliberately limited measure, focusing solely on how many outputs are produced for a given level of inputs. It needs to be carefully separated from concepts such as value for money which is a broader concept than productivity and determines whether societal outcomes are being achieved in a cost-effective manner.”

The challenge of measuring productivity in the public sector

Although the report argues all the agencies had the capacity to measure productivity, it also acknowledged the difficulty of deciding what counts as productivity within the public sector, highlighting two key drawbacks in using physical productivity measures in the public sector:

“The first is that diverse outputs and inputs cannot be aggregated in any useful way so the outputs under analysis will be far narrower than what could otherwise be assessed using prices. For our purposes, the output chosen is that which best represents an agency’s core activity. Inputs have been chosen as those required to deliver those outputs.

“The second is that physical productivity measures do not reflect factors such as consumer preferences or quality of the output. Public sector productivity measures, therefore, need to be augmented to take account of these factors to provide a more mature and balanced assessment.”

The diagram below shows the differing “maturity levels” for productivity measures, with a tally of inputs and outputs reflecting a “simple” measure, while a method accounting for consumer preferences/service quality represents a more advanced way of measuring productivity.audit office productivity

Developing a productivity framework in Health

The report adds that NSW Health “is exploring better ways to communicate its productivity and has developed a framework for explaining productivity in health. The framework aims to develop a common understanding of productivity and efficiency in the health sector across stakeholder groups.”

The framework was developed by NSW Health in collaboration with the Australian Health Ministers’ Advisory Council. Key aspects of the framework include:

  • identifying technical, dynamic, allocative and distributive efficiency factors as drivers of productivity;
  • distinguishing between outputs and measures of those outputs. For example, a surgery (process) may replace a hip (output), but also leads to important outcomes such as improved mobility and return to work. These outcome considerations usually do not enter the production function but are key within a health context;
  • considering the triple bottom line in healthcare: quality, effectiveness and value for money.
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