- Introduction
- Restructuring A Government Regulatory Business
- The Business of MAF Qual
- Corporatisation and Separation Issues
- Conclusions: The Decision
Chapter 8: The Corporatisation of MAF Qual: The Quality Management Group in MAF
Introduction
This chapter reviews the issues and processes involved when considering whether or not to remove government from the running of a commercial business.
Restructuring A Government Regulatory Business
An integral part of the reform process in New Zealand has been aimed at removing government from the running of commercial businesses.
As a part of this process MAF Quality Management (MAF Qual) was scrutinised to determine whether the activities currently then performed by a government department could be corporatised and possibly at a later stage, to be fully privatised. This case study sets out the main issues covered in an analysis of whether to corporatise MAF Qual.
There had already been a number of successful corporatisations of other government departments. For example, the Post Office had been corporatised with increases in earnings from $2 million in 1987 to $53 million in 1990. The Electricity Department was corporatised forming Electricorp with earnings rising from $780 million in 1987 to $1,030 million by 1990. State Coal was converted into Coal Corporation, and earnings rose from minus $9 million in 1987 to $23 million in 1990. This evidence led the government to assess the benefits and costs of corporatising MAF Qual. MAF Qual is a more complex business than the three just mentioned, in that it involves both mandatory and discretionary services within one organisation. In other words, it involves government services which are required by law and services that could be provided by any private organisation.
The Business of MAF Qual
The main functions of MAF Qual are to provide inspection and certification to international standards for the major food businesses. It also provides disease control and emergency response to exotic diseases. At the time the analysis was carried out, MAF Qual was in a transition from being an inspection agency, to that of providing Quality Assurance Services. This change in approach was very important to the analysis because it signalled a major change in culture for the organisation, as well as major changes in the way it performs the functions required by government.
MAF Qual was divided into six operating divisions:
- Services provided animal disease control, export certification, quality assurance and animal welfare services to farmers and exporters;
- Dairy Division provided quality services to the New Zealand dairy and food industries;
- Animal Health Laboratories provided animal health information to the Chief Veterinary Officer;
- Meat Services Group provided certification, inspection and quality assurance to the meat industry;
- Plant Services Group provided quality assurance and agricultural protection services to the horticultural and arable industries and to government;
- Border Services Group provided biological border protection services.
As well as the core business of each service group, all MAF Qual personnel were expected to participate in emergency disease and pest response for both plant and animal diseases.
Corporatisation and Separation Issues
A key issue was to attempt to determine whether the splitting of the mandatory and discretionary services would result in a more efficient and cost effective service in terms of the national good. Over time, MAF Qual had increasingly moved from solely providing mandatory services to providing discretionary services.
The mandatory services included inspection and certification for food production destined for overseas markets. New Zealand's clients in these markets required a government certificate to guarantee food hygiene standards and specifications. Some of the mandatory services were only able to be carried out by a government department because of statutory requirements. However, some other mandatory services were of the type where government could contract them out to a private organisation. The terms contestable and non-contestable are used. A non-contestable service is such that it is required to carry it out by a government agency. Contestable services are those where there is not a legal requirement for a government agency to carry it out.
Public choice theory states that the government should only intervene in the market where there is the possibility of market failure or where there are externalities or costs by the government failing to take some intervention. The theory states that where these conditions are not met, competition in the provision of those services will result in efficiency gains. Thus it would be in the interest of the government to allow firms to compete for those services to reduce costs and improve the service.
Under a deregulated environment, the government would set the environment, or state the rules under which the various firms can compete. It is then over to the industry to provide those services in a freely competitive market. In this way, the market would be the allocator of resources rather than the bureaucracy. Under this system, individual firms would provide for the auditing and delivery of Quality Assurance Services to the government. The government would ensure that the rules were set such that it could be assured that it's standards and the standards of it's overseas customers would be met.
An important consideration was an analysis of whether risks would increase or decrease if mandatory and discretionary services were separated off. Under the provision of quality services by MAF Qual a close inter-twining between policy, auditing, and delivery of services had developed. This was seen to be unsatisfactory because the one organisation was the setter of the rules, the auditor of those rules and also the provider of the services to meet the rules. Often this meant that the lines of control were very tangled and it was difficult to determine where the accountability lay to ensure that responsibilities were met. The separation of policy, auditing and delivery of services would provide for transparency as it would be clear as to which organisation had responsibility for which area.
Under MAF Qual as a department, there was risk that the whole system would not perform because responsibilities were clearly defined. On the other hand, if delivery was separated from policy and audit, then it would be clear as to which organisation had which responsibility. Under this situation, it was argued that risks could increase because the State would no longer have the direct control over those resources to ensure that the delivery of the service was undertaken. This was particularly important in areas such as emergency disease response for foot and mouth and fruitfly. Here it was considered that a private firm may fail at a critical time, when under the State system resources could be directed to undertake the tasks.
The objective of the deregulating MAF Qual was to use competition to increase contestability and competition, and therefore improve efficiency. The one case where this argument falls down is where natural monopolies occur. If there is a natural monopoly for the service in a certain area, then it is possible that if a service was privatised, then the organisation could capture monopoly rents. This implies that the service provider could charge more than would be required to achieve normal profits, and therefore increase the cost to the government for the service. As a national coverage was required for a some services, this implied a natural monopoly. Such services were not considered to be candidates for separation because although they may be discretionary and contestable, it was unlikely that there could be competition.
An important consideration in determining whether parts of MAF Qual's discretionary services could be separated off was the need to retain an integrated service for some functions. The Emergency Disease and Pest Response Service required an integrated field and laboratory service with a "standing army" of trained people to act under orders. It was considered that it would be very difficult to provide the comprehensive range of services if MAF Qual was broken up into separate private organisations. In this area, it is crucial that coordinated action is taken immediately to ensure that an exotic disease does not become established and uncontrollable. It was contended that if a number of separate private firms were contracted to provide the overall service then the risks that a failure would occur would be much higher than under a centrally managed organisation.
A key feature of MAF Qual's service was the use of personnel for discretionary functions when they were not needed for their mandatory jobs. This permits the average cost of the mandatory services to be lowered. It was contended that, if the discretionary services were split off, then the cost to government of the mandatory service would increase.
MAF Qual management was moving to train its people in quality assurance. This meant that staff would be able to work in different areas. This would improve the efficiency, flexibility and effectiveness of MAF Qual, and if the organisation was split up, these benefits would be lost.
MAF Qual management argued that the provision of integrated services meant that a cohesive set of standards was provided across all the areas it worked. It was considered that if the services were broken up, then it was possible that information would not be available when required.
The move from an inspection culture to a quality assurance culture was being pursued very strongly by MAF Qual through the use of electronic information network systems. The objective was to provide a "plough to plate" quality assurance system where accountability for any one part was made transparent to the provider of that part of the service. MAF Qual believes that the development of this information network has significant benefits to farming. It would mean that farmers could be rewarded for quality and penalised for poor quality. This would be done through the identification of individual animals or individual consignments of crops back to an individual farm property. Any quality faults, or superior quality, would be reflected in the price for that particular product. Under current systems, particularly in the meat industry, such feedback is not possible.
By adopting quality assurance principles and undertaking both discretionary and mandatory services, a new culture was developing within MAF Qual. A partnership approach to setting industry standards along with quality assurance criteria was becoming more and more prevalent. This, contrasted with the old inspection or policing role encouraged mandatory services. This new culture was seen to be in the interests of New Zealand as a whole, because it meant co-operation with industry in improving the quality of New Zealand produce rather than industry simply meeting minimum standards.
Conclusions: The Decision
When all these arguments were considered, together with the efficiency gains expected from the separation of discretionary from mandatory services, the cost benefit analysis showed that corporatisation of MAF Qual and the separation of discretionary services was marginally more efficient than retaining MAF Qual as a whole. However, when government considered the separation it was not efficiency that was the final determinant of whether corporatisation should proceed. The factor which in the end prevailed, was the reluctance of New Zealand's major trading partners to accept the idea that the new system adopted by New Zealand was equivalent to the systems adopted in their own countries. Equivalence of service is a major issue in the area of quality standards. Many countries are not ready to accept that there are alternatives to the provision of State Certification carried out by State employees. The New Zealand system would have meant that the State would have set the standards to be met, but private organisations would ensure that the services were delivered. The State would have audited these services to ensure that the standards were met.
The situation at present is that MAF Qual continues to operate as a government department. The single change that has occurred, and would have occurred anyway, was that the regulation setting and auditing roles have been separated from the delivery role. The setting of standards, policies and rules is now carried out by a National Regulatory Authority within MAF. The delivery of services remains with MAF Qual itself, who no longer provide policy and auditing services.
Contact for Enquiries
Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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