New Zealand is somewhat unusual in having a statutory requirement in the Public Finance Act for cost-effectiveness measures to be included in departmental external accountability documents (Statements of Intent and Annual Reports).  The statute does so in a way that is simultaneously prescriptive and permissive, which creates immediate uncertainty.  This paper was written based on a research project commissioned by Ministry of Agriculture and Forestry (MAF) in response to that uncertainty.

The paper reports the results of a review of the cost-effectiveness measures being reported by departments in New Zealand in Statements of Intent and Annual Reports. We found that none of the forty two departments (broadly defined) had good cost-effectiveness measures.  We assessed seven departments (fewer than 17 percent) as being on the path to having good cost-effectiveness measures in place.  More than half of the departments (59 percent), including two of the four “central agencies”, either did not use the term “cost-effectiveness” at all nor did so in passing only.  We also found that many departments had reflected the Government’s focus on value for money by equating cost-effectiveness with value for money, and / or with efficiency

The starting point for the research project was to develop a definition of cost effectiveness.  We started with a  scan of the literature on cost-effectiveness, but what became apparent was that it is not a clearly defined technical term and the focus in the literature shifts very quickly onto cost-effectiveness analysis. Our review of selected other jurisdictions found few examples of legislative requirements for or guidance relating to cost-effectiveness measures, and no provision for cost-effectiveness measurement similar to New Zealand’s. As economic theory provides only limited guidance, and practice in New Zealand and other jurisdictions provided little by way of good practice in cost-effectiveness measures, we needed to take a different tack. We define cost-effectiveness by reference to the New Zealand public management system and the specific legislative requirement for cost-effectiveness measures.  This approach involved starting with the notion that the essence of cost-effectiveness is the relationship between the level of resources used to achieve a predetermined outcome.  We explored this notion in the context of the general public sector management framework and New Zealand’s statutory requirements. Based on this analysis the paper develops suggested attributes of good performance measures.