Maurice Williamson - Report of the Y2K Task Force

Appendices

The Case for Government Action

Private Sector

Public Sector

Current economic environment

Government's objective

Strategic response

4.0 The Case for Government Action

4.1 The terms of reference for the Task Force state that the roles of the Government in relation to the Year 2000 problem are to:

raise overall awareness of the issue;
ensure that all public sector organisations are managing compliance;
ensure that major infrastructural businesses are aware of the issue and encourage them to deal with it; and
reassure major trading partners.

4.2 In addition, the terms of reference require us, among other things, to:

recommend options to the Government for addressing Year 2000 compliance in the wider public sector; and
recommend options for encouraging compliance in the private sector.

4.3 We interpret these elements of our terms of reference as an acknowledgment that there may well be a case for the Government to take an active leadership role in regard to Year 2000 problems, regardless of where in the economy they occur.

4.4 In taking this pragmatic view we note a further element of our terms of reference, namely the assumption that private sector businesses have strong incentives to provide their own solutions to their Year 2000 problems. We acknowledge this assumption, and note its connection with the Government's broader objective of creating an effective enterprise economy. When considering various policy options, we have considered their possible effects on current incentive structures in both the private and public sectors.

Private Sector 4.5 Recognising the importance of the existing incentives on private business, we note that, while some recommended leadership actions are open only to the Government, those organisations which represent the members of specific sectors have their own parts to play in encouraging and assisting the sectors they represent. The Government's role in these cases may be no more than promoting such leadership

4.6 In considering any more direct actions it might take, the Government must take care not to undermine the effectiveness of the existing incentives on private businesses. The desire to maintain a strong enterprise economy tends to limit the extent to which it is prudent for the Government to intervene in the private sector. Some careful balancing may be necessary.

4.7 In some cases, no such encouragement will be necessary. We note here the co-operative efforts of the commercial banks under the aegis of the New Zealand Bankers' Association which provide a good example of a group of businesses developing an effective sector-wide programme to address their Year 2000 problems.

4.8 The banking sector's Year 2000 programme includes:

a single sector-wide project plan;
reporting against agreed milestones for each bank;
extensive information-sharing;
shared testing of systems; and
joint approaches to critical suppliers.

4.9 Our assessment is that the success of this programme depends on:

the interdependency of the banks - no single bank can operate effectively unless it is linked to the jointly-operated payment clearing system;
the transparency of the information flows between the banks;
the strong leadership provided by chief executives;
the desire by all banks to minimise mutually damaging disruption; and
the ability of sector members to sanction non-performers effectively.

4.10 Unfortunately, this model of co-operation from the banking sector is unlikely to transfer to other key infrastructure sectors without considerable support from outside the sector itself. The Government, or some other agency, may need to provide this impetus in sectors where an appreciation of the nature, extent and impact of Year 2000 problems appears to be deficient, or where, for whatever reason, the members of the sector have been slow to act.

4.11 The essential issue is: how much should the Government rely on the influence of the market in the private sector and current accountability arrangements in the wider public sector as a means of addressing the Year 2000 problem?

4.12 While the market will eventually respond to problems, in this case the problem is significant and time is pressing. Also, our assessment of readiness has identified a tendency for organisations to underestimate the scale of potential problems and the time needed to resolve them.

4.13 We consider that the likely time lag between the market's response to this problem and eventual adjustment presents too great a risk in these circumstances. By and large, markets respond to an actual event. In our view, action needs to be taken before a possible event takes place in order to prevent that possibility from turning into a reality.

4.14 Some other agent must, therefore, complement the market in stimulating action. This agent has to be the Government.

Public Sector 4.15 We believe that the current incentives in the wider public sector provide insufficient encouragement for public sector organisations to resolve their Year 2000 problems.

4.16 We are mindful that the different governance arrangements in the various component organisations of the wider public sector reflect a considered view about what is appropriate to those organisations. However, after considering the importance of some of these organisations to New Zealand and our assessment of their progress, we believe that the Government should immediately extend to the wider public sector the enhanced accountability requirements recently imposed on departmental chief executives.

The current economic environment 4.17 It could be argued that the discipline of the market in the private sector and that of accountability in the public sector, encourage both sectors to focus on the short term economic environment, to the detriment of a longer term strategy to deal with their Year 2000 problems.

4.18 In the private sector, chief executives are dealing with a major business risk - a recession. This drives attention towards the immediate issues of competition and profitability. Their risk-reward analysis encourages them to address the immediate problem of survival. Only after the immediate issues have been dealt with comes the Year 2000 problem.

4.19 In the public sector, a similar environment applies. Chief executives are focusing now more than ever on producing more outputs for less. The current accountability system rewards the delivery of outputs at minimum price and places less emphasis on the longer-term ownership interests of maintaining capability. This factor, coupled with a lack of understanding of the potential risks of the Year 2000, means that public sector chief executives are in danger of responding too late and with too few resources.

4.20 Market forces are also preventing the provision of skilled staff to address Year 2000 problems. Some suppliers of such staff, applying risk-reward analysis, have concluded that the cost of acquiring additional staff, or holding on to those they have, together with the legal risks of working with clients whose commitment is too little and too late, have decided to focus only on selected and (mostly) current clients.

4.21 This means an external influence or catalyst is needed to encourage organisations to address the Year 2000 problem adequately within the time available, and allocate the required number of skilled resources.

4.22 This situation is unique. Its deadline is immovable, and it applies across all organisations. The only way we can get it right or plan to manage the consequences, is to work and plan together.

The Government's objective 4.23 We have concluded that there is a pragmatic case for the Government to take an active role in regard to Year 2000 problems, regardless of where in the economy they occur. It is important to place these actions within the context of the Government's wider social and economic objectives. These objectives are articulated in its 9 Strategic Result Areas (SRAs). Progress towards achieving the SRAs may be compromised unless the Year 2000 problem is well-handled.

4.24 The 9 SRAs are:

ensuring a stable and secure economic policy climate conducive to strong economic growth and development;
reinforcing a successful enterprise economy;
enhancing New Zealand's international influence and position as a successful open and secure trading nation;
progressing towards becoming a more highly knowledgeable and skilled nation;
enhancing the ability of individuals, families and communities to actively participate in New Zealand's economic, social and cultural development;
enhancing community safety for individuals, families and communities;
improving overall health status;
negotiating and implementing fair and affordable settlements to well founded grievances arising under the Treaty of Waitangi; and
protecting and enhancing New Zealand's environment.

4.25 The Government's general interest in the Year 2000 problem translates, in part, into a desire to see that key infrastructure services continue to operate as usual. This is particularly so for those key services that directly affect the health and safety of New Zealanders - for example, health, electricity, water supply and sewage disposal services

4.26 Because many key infrastructure services are provided by public sector organisations, including local authorities, the Government's interest translates into a desire to see that these organisations continue to operate effectively. But the interest of the Government to see "business-as-usual" maintained goes wider than this. It also includes a desire that even minor and temporary disruptions do not occur. We have concluded from our inquiries and deliberations that it is not possible to address and fix all Year 2000 problems in all organisations. Clearly, there is some risk that "business-as-usual" will not be maintained. But there is a strong interest on the Government's part that this risk and its potential impact be minimised.

4.27 Our broad task is to provide options to the Government aimed at protecting the health and safety of individual citizens and at preserving the essential components of our social and economic infrastructure at the lowest possible cost. From that starting point and using our analysis of the current state of readiness and our consideration of the role of the Government, we developed a strategic response based on 4 needs.

A strategic response 4.28 The first is the need to promote full understanding of the problem. Our assessment of readiness clearly identifies a need for a range of organisations - large and small, public and private and many associated with essential elements of our social and economic infrastructure - to be aware of the problem and to understand its seriousness and relevance to them and the wider community.

4.29 The second is the need to achieve action towards compliance or contingency planning. Awareness without action is pointless. The Government has a role to help achieve action and compliance through a range of activities, including facilitating access to technical assistance.

4.30 Third, there is the need to manage risk. There are significant risks for the nation and for the Government if organisations do not initiate action in time, or if those actions do not work.

4.31 Finally, there is a need to monitor progress. Any organisation needs assurance that systems have been tested, that any faults have been identified and fixed and systems checked again to ensure everything will perform as intended. The Government needs that same level of assurance that its wider objective will be achieved. It can only gain this level of assurance through regular monitoring. The process of awareness followed by action is not linear, it is circular. Awareness followed by action may well lead to more awareness and more action if initial action is insufficient. Monitoring will sustain and encourage this process.

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4.0 The Case for Government Action
	4.1	The terms of reference for the Task Force state that the roles of the Government in relation to the Year 2000 problem are to: raise overall awareness of the issue; ensure that all public sector organisations are managing compliance; ensure that major infrastructural businesses are aware of the issue and encourage them to deal with it; and reassure major trading partners.
	4.2	In addition, the terms of reference require us, among other things, to: recommend options to the Government for addressing Year 2000 compliance in the wider public sector; and recommend options for encouraging compliance in the private sector.
	4.3	We interpret these elements of our terms of reference as an acknowledgment that there may well be a case for the Government to take an active leadership role in regard to Year 2000 problems, regardless of where in the economy they occur.
	4.4	In taking this pragmatic view we note a further element of our terms of reference, namely the assumption that private sector businesses have strong incentives to provide their own solutions to their Year 2000 problems. We acknowledge this assumption, and note its connection with the Government's broader objective of creating an effective enterprise economy. When considering various policy options, we have considered their possible effects on current incentive structures in both the private and public sectors.
Private Sector	4.5	Recognising the importance of the existing incentives on private business, we note that, while some recommended leadership actions are open only to the Government, those organisations which represent the members of specific sectors have their own parts to play in encouraging and assisting the sectors they represent. The Government's role in these cases may be no more than promoting such leadership
	4.6	In considering any more direct actions it might take, the Government must take care not to undermine the effectiveness of the existing incentives on private businesses. The desire to maintain a strong enterprise economy tends to limit the extent to which it is prudent for the Government to intervene in the private sector. Some careful balancing may be necessary.
	4.7	In some cases, no such encouragement will be necessary. We note here the co-operative efforts of the commercial banks under the aegis of the New Zealand Bankers' Association which provide a good example of a group of businesses developing an effective sector-wide programme to address their Year 2000 problems.
	4.8	The banking sector's Year 2000 programme includes: a single sector-wide project plan; reporting against agreed milestones for each bank; extensive information-sharing; shared testing of systems; and joint approaches to critical suppliers.
	4.9	Our assessment is that the success of this programme depends on: the interdependency of the banks - no single bank can operate effectively unless it is linked to the jointly-operated payment clearing system; the transparency of the information flows between the banks; the strong leadership provided by chief executives; the desire by all banks to minimise mutually damaging disruption; and the ability of sector members to sanction non-performers effectively.
	4.10	Unfortunately, this model of co-operation from the banking sector is unlikely to transfer to other key infrastructure sectors without considerable support from outside the sector itself. The Government, or some other agency, may need to provide this impetus in sectors where an appreciation of the nature, extent and impact of Year 2000 problems appears to be deficient, or where, for whatever reason, the members of the sector have been slow to act.
	4.11	The essential issue is: how much should the Government rely on the influence of the market in the private sector and current accountability arrangements in the wider public sector as a means of addressing the Year 2000 problem?
	4.12	While the market will eventually respond to problems, in this case the problem is significant and time is pressing. Also, our assessment of readiness has identified a tendency for organisations to underestimate the scale of potential problems and the time needed to resolve them.
	4.13	We consider that the likely time lag between the market's response to this problem and eventual adjustment presents too great a risk in these circumstances. By and large, markets respond to an actual event. In our view, action needs to be taken before a possible event takes place in order to prevent that possibility from turning into a reality.
	4.14	Some other agent must, therefore, complement the market in stimulating action. This agent has to be the Government.
Public Sector	4.15	We believe that the current incentives in the wider public sector provide insufficient encouragement for public sector organisations to resolve their Year 2000 problems.
	4.16	We are mindful that the different governance arrangements in the various component organisations of the wider public sector reflect a considered view about what is appropriate to those organisations. However, after considering the importance of some of these organisations to New Zealand and our assessment of their progress, we believe that the Government should immediately extend to the wider public sector the enhanced accountability requirements recently imposed on departmental chief executives.
The current economic environment	4.17	It could be argued that the discipline of the market in the private sector and that of accountability in the public sector, encourage both sectors to focus on the short term economic environment, to the detriment of a longer term strategy to deal with their Year 2000 problems.
	4.18	In the private sector, chief executives are dealing with a major business risk - a recession. This drives attention towards the immediate issues of competition and profitability. Their risk-reward analysis encourages them to address the immediate problem of survival. Only after the immediate issues have been dealt with comes the Year 2000 problem.
	4.19	In the public sector, a similar environment applies. Chief executives are focusing now more than ever on producing more outputs for less. The current accountability system rewards the delivery of outputs at minimum price and places less emphasis on the longer-term ownership interests of maintaining capability. This factor, coupled with a lack of understanding of the potential risks of the Year 2000, means that public sector chief executives are in danger of responding too late and with too few resources.
	4.20	Market forces are also preventing the provision of skilled staff to address Year 2000 problems. Some suppliers of such staff, applying risk-reward analysis, have concluded that the cost of acquiring additional staff, or holding on to those they have, together with the legal risks of working with clients whose commitment is too little and too late, have decided to focus only on selected and (mostly) current clients.
	4.21	This means an external influence or catalyst is needed to encourage organisations to address the Year 2000 problem adequately within the time available, and allocate the required number of skilled resources.
	4.22	This situation is unique. Its deadline is immovable, and it applies across all organisations. The only way we can get it right or plan to manage the consequences, is to work and plan together.
The Government's objective	4.23	We have concluded that there is a pragmatic case for the Government to take an active role in regard to Year 2000 problems, regardless of where in the economy they occur. It is important to place these actions within the context of the Government's wider social and economic objectives. These objectives are articulated in its 9 Strategic Result Areas (SRAs). Progress towards achieving the SRAs may be compromised unless the Year 2000 problem is well-handled.
	4.24	The 9 SRAs are: ensuring a stable and secure economic policy climate conducive to strong economic growth and development; reinforcing a successful enterprise economy; enhancing New Zealand's international influence and position as a successful open and secure trading nation; progressing towards becoming a more highly knowledgeable and skilled nation; enhancing the ability of individuals, families and communities to actively participate in New Zealand's economic, social and cultural development; enhancing community safety for individuals, families and communities; improving overall health status; negotiating and implementing fair and affordable settlements to well founded grievances arising under the Treaty of Waitangi; and protecting and enhancing New Zealand's environment.
	4.25	The Government's general interest in the Year 2000 problem translates, in part, into a desire to see that key infrastructure services continue to operate as usual. This is particularly so for those key services that directly affect the health and safety of New Zealanders - for example, health, electricity, water supply and sewage disposal services
	4.26	Because many key infrastructure services are provided by public sector organisations, including local authorities, the Government's interest translates into a desire to see that these organisations continue to operate effectively. But the interest of the Government to see "business-as-usual" maintained goes wider than this. It also includes a desire that even minor and temporary disruptions do not occur. We have concluded from our inquiries and deliberations that it is not possible to address and fix all Year 2000 problems in all organisations. Clearly, there is some risk that "business-as-usual" will not be maintained. But there is a strong interest on the Government's part that this risk and its potential impact be minimised.
	4.27	Our broad task is to provide options to the Government aimed at protecting the health and safety of individual citizens and at preserving the essential components of our social and economic infrastructure at the lowest possible cost. From that starting point and using our analysis of the current state of readiness and our consideration of the role of the Government, we developed a strategic response based on 4 needs.
A strategic response	4.28	The first is the need to promote full understanding of the problem. Our assessment of readiness clearly identifies a need for a range of organisations - large and small, public and private and many associated with essential elements of our social and economic infrastructure - to be aware of the problem and to understand its seriousness and relevance to them and the wider community.
	4.29	The second is the need to achieve action towards compliance or contingency planning. Awareness without action is pointless. The Government has a role to help achieve action and compliance through a range of activities, including facilitating access to technical assistance.
	4.30	Third, there is the need to manage risk. There are significant risks for the nation and for the Government if organisations do not initiate action in time, or if those actions do not work.
	4.31	Finally, there is a need to monitor progress. Any organisation needs assurance that systems have been tested, that any faults have been identified and fixed and systems checked again to ensure everything will perform as intended. The Government needs that same level of assurance that its wider objective will be achieved. It can only gain this level of assurance through regular monitoring. The process of awareness followed by action is not linear, it is circular. Awareness followed by action may well lead to more awareness and more action if initial action is insufficient. Monitoring will sustain and encourage this process.