Download our submission here.
The McKell Institute’s submission to the Joint Committee on Corporations and Financial Services’ Inquiry into Ethics and Professional Accountability in the Audit, Assurance and Consultancy Industry details just how consultants became so entrenched in government, why we should care about it, and, most importantly, what we can do about it.
From the Coalition’s victory in 2013 and until their defeat in 2022, the total value of contracts going to six of Australia’s largest consulting firms ballooned by 545 per cent from $264.5 million to $1.706 billion.
For what was previously core public service work — what the Department of Finance call ‘management advisory services’ — the increase was 1118 per cent over a similar period.
Value of ‘management advisory services’ contracts awarded at six major consulting firms: 2013-14 – 2022-23 (inflation-adjusted 2022-23 dollars)
The exponential increase in contract value over this period can be traced back to the arbitrary staffing cap imposed in 2015-16 on the Australian Public Service (‘APS’).
When the Abbott Government announced the staffing cap, you might have expected less work would have been done as a result. But this wasn’t the case. Instead, much of the basic business of public administration was simply outsourced to the private sector.
Core APS work had, in effect, been privatised by stealth.
In fact, the 2021-22 Commonwealth audit of employment found that in addition to the 144,271 official public servants, there existed 53,911 external staff in the ‘shadow’ APS.
The decade of Coalition Government saw Australia develop one of the highest dependencies on consultants in the developed world: we have the world’s 13th largest economy, but the 4th largest consulting industry.
Excessive outsourcing undermines government accountability
Consultants, and consultancies, can play an important role in helping organisations, including governments, navigate complex problems.
It is natural that these organisations, too, would jump at the chance to work with a government who made it clear they wanted to outsource so much work to the private sector.
But while outsourcing can have a role, the overreliance on external support shirks public accountability, minimises the APS’ capability, and is bad for the budget bottom-line.
Our Westminster system of government relies on ministers being supported by a frank and fearless public service and being held accountable for their decisions by the media and the electorate. Inordinate outsourcing has undermined both.
Consultants are not bound by the APS Code of Conduct nor the APS Values and are in fact often financially incentivised to tell ministers what they want to hear rather than what they need to hear.
Work that consultants produce is also exempt from freedom information requests under the ‘commercial-in-confidence’ exemptions, shielding them from public scrutiny.
But even when made public, the fact this work has been outsourced allows ministers to ‘de-risk’ themselves and their departments by having a non-government actor to point the finger at when things go wrong.
Excessive outsourcing weakens public service capacity
Outsourcing also undermines APS capability over the long term. In 2019, the Thodey Review identified excessive outsourcing as being a key factor in diminishing APS capacity and institutional memory.
This created a vicious cycle in which outsourcing lead to diminished capability, leading to further outsourcing.
Over the past ten years, a significant amount of strategically important Commonwealth work – from vaccine procurement to defence strategy – has been done by external consultants.
Those ‘institutional memories’ are valuable public resources. And without in-house know-how and crucial real-world experiences, the Commonwealth will remain in thrall to a small number of expensive private consultants.
Outsourcing can be extremely expensive
Consultants do not always represent value-for-money.
As recent revelations at the Department of Defence show, consulting firms are incentivised to inflate invoices, engineer supplementary work, and to tailor their work to maximise the chance of new business.
What is more, the ‘cost’ of consultants cannot be measured in purely monetary terms; it must be measured in addition to the depreciation in APS capacity which it often accompanies.
With some senior partners charging the Commonwealth up to $16,000 per day, and budget deficits forecasted for years to come, outsourcing is now simply fiscally irresponsible.
Outsourcing risks the reality and perception of conflicts of interest
Unlike the public service, external consultants may be subject to direct conflicts of interest between their own clients’ best interests.
The PwC example is illustrative. The Commonwealth government sought advice on how to maximise tax revenue from multinational corporations, and multinational corporations sought advice on how to minimise their revenue paid to the Commonwealth from the same firm.
These potential conflicts of interests can create the perception and reality that external consultants are not acting in the best of interests of their clients.
This is more pronounced in Australia where reporting obligations for conflicts of interest are limited to self-reporting and self-regulation.
The Labor government has made great strides in containing spending on consultants
Compared to the 2021-22 financial year, Labor cut $840 million on their spend at six of the largest consulting firms in their first year in government.
The October Budget also announced an additional $25 million ‘APS Capability Reinvestment Fund’, and the removal of the APS staffing cap via the addition of 10,000 new public servants for the 2023-24 financial year.
These are major improvements, but there’s more that can still be done.
As the Thodey Review noted, a ‘concerted and coordinated’ effort is required to reinvigorate the APS for the challenges of the 21st century.
Our submission puts forward eight solutions
Firstly, the Commonwealth Procurement Rules aren’t strong enough in determining when external policy advisers are truly required. There should be binding guidelines which require that, before external consultants are engaged for core public service functions, there is a demonstrated shortage of appropriately skilled in-house staff and there is an acute need to engage external consultants.
Secondly, the APS Capability Reinvestment Fund should be significantly expanded. Despite saving $840 million on six firms between 2021-22 and 2022-23, Labor have only committed $25 million to the fund for 2023-24. Significant, multi-year investments in the APS are required to ensure its long-run viability and generate long-term savings.
Thirdly, the APS values should be contractually embedded for all externally provided policy advisory services. As it stands, external consultants performing core public service work are not caught by the APS Code of Conduct nor the APS Values. While this may be considered a minor, perhaps symbolic, change, it would oblige consultants to act in an impartial, respectful, and ethical way, and provide an avenue for civil relief in cases such as the recent PwC tax scandal.
Fourthly, Commonwealth freedom of information exemptions for ‘commercial-in-confidence’ should be limited in their application to external advisers performing core public service functions. Ministers and their departments should not be able to avoid responsibility for their activities by outsourcing them and then relying on commercial-in-confidence exceptions to shield them from public view. APS staff and consultants performing the same work should be subject to the same transparency obligations – our Westminster system of government demands no less.
Fifthly, the Commonwealth should follow New South Wales by imposing a daily cap on the rates payable to external consultants. Assuming the cost-savings in New South Wales would transfer to the Commonwealth, over $836 million could have been saved at six firms over just the past five financial years.
Sixthly, Commonwealth departments are currently subject to minimal reporting obligations regarding their ongoing use of external consultants. External labour data should be actively reported by Commonwealth departments and reported by the Department of Finance each year.
Seventhly, the Commonwealth should contractually impose fiduciary obligations on external consultants for highly sensitive engagements. Fiduciary obligations would require that consultants do not subject themselves to a conflict of interest, nor make any unauthorised profit at the expense of the Commonwealth. Similar obligations are imposed on solicitors and their clients, and financial advisers and their clients, and it is difficult to see why consultants should not be held to the same standard.
Finally, industry self-regulation and self-reporting for conflicts of interest is simply insufficient. The Commonwealth Procurement Rules should be amended to require that, during the tender process, external consultants disclose any other engagements which may rise to the reality or perception of a conflict of interest. If successful in winning a contract, an ongoing conflict of interest disclosure obligation should be imposed for the duration of a consulting engagement.
Download our submission here.
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