28 October 2014

Address to the AICD Public Sector Governance Forum, Canberra


Check against delivery

This document is a copy of the Parliamentary Secretary to the Treasurer's address to the AICD Public Sector Governance Forum in Canberra. The topic of the speech was the Government's restructure of the public sector.

When the Government came into office last year, it was very clear that there were a range of difficult global conditions outside Australia's control, but also a number of domestic imbalances that had been adding lead into our saddle bag. Some of our concerns are the bureaucratic structures and internal operating models of the government itself.

If we were running a globally exposed business at a time of economic difficulty, we'd be very closely focussed on how our cost structures compare to those of our competitors.

There is a deal of media focus on how the Government is reforming the big spending programs of the Commonwealth. There is less awareness of how we are seriously working through reform to the internal workings of government and putting our stamp on a new approach to governing.

Our Federal Departments attract talented and hard-working people from across Australia. However, as the size of Government has grown, there are areas which have over time become unwieldy, where lines are blurred between overlapping agencies, or where the reasons for the Commonwealth being involved in various activities is ill considered or manifestly dated. We wanted to ensure that our core, our public service had a clear and effective structure.

Some of the reforms we are working through have been collaborative bipartisan exercises and I will start with those. The Public Governance Performance and Accountability Act 2013; known colloquially as the PGPA Act; passed both Houses of Parliament and received Royal Assent in late June 2013. However, its main provisions did not come into effect until 1 July 2014.

In the year that transpired between Royal Assent on 28 June 2013 and commencement in July 2014, much work was done by the newly elected Abbott Government to further ensure the new resource management framework was in a ready state to commence on time.

A consequential amendments Act, involving over 240 pieces of affected legislation, was drafted and passed. This was one of the longest consequential bills ever printed because of the extent of legislative interactions. An amendment Act to the original Act itself was also created to refine and add some additional elements which the government thought necessary. This included corrections to drafting errors and amendments to clarify and streamline the Act.

On 28 June of this year, following extensive consultation, the Minister for Finance signed the Public Governance Performance and Accountability Rule 2014, replacing regulations which had accompanied the Financial Management and Accountability Act 1997 and the Commonwealth Authorities and Companies Act 1997.

These two previous Acts formed the financial framework of the Australian Government for the past decade and a half – until July this year.

It was at the ten year point that the Commonwealth Financial Accountability Review, or CFAR as it was known, was set up to determine how those Acts were travelling. So it has taken significant time to bring thePGPA Act to life, during which there has been considerable discourse with stakeholders within the public sector and also outside the government.

What those consultations revealed was that there had been divergence in the practices under the two Acts. The Financial Management and Accountability Act 1997 was seen as prescriptive in its requirements, leaving little room for flexibility in its administration. The Commonwealth Authorities and Companies Act 1997, on the other hand, was seen as more principles-based, so less prescriptive and more outcome-focussed than transactional in nature.

The Commonwealth Authorities and Companies Act 1997 approach was favoured by most consulted, though there were some qualms about the perception that some Commonwealth Authorities and Companies Act 1997 bodies, due to their separate legal status from the legal entity of the Commonwealth, considered themselves independent from the Australian Government.

So this is why two of the underlying principles of the PGPA Act are that:

  • Government should operate as a coherent whole; and
  • A uniform set of duties should apply to all resources handled by Commonwealth entities.

In other words, citizens expect that their Government will be consistent in the way it operates, not fractured and in conflict within itself. They also expect that, as taxpayers, their money should be handled efficiently, effectively and ethically across all government activities, whatever the legal status of an entity might be.

There are several further underlying principles reflected in the PGPA Act. These are that:

  • Performance of the public sector is more than financial; and
  • Engaging with risk is a necessary step in improving performance; and

The financial framework should support the legitimate requirements of the Government and the Parliament in discharging their respective responsibilities. This final principle was included by my Government subsequent to the Act's passage, in response to bipartisan recommendations of the Joint Committee of Public Accounts and Audit).

The implementation strategy for the PGPA reforms is intended to ensure that these major reforms take effect in an "evolutionary" way, rather than cause upheaval.

To illustrate that that evolutionary nature, on 1 July those former 'FMA Act'Agencies, who now found themselves non-corporate Commonwealth entities under the PGPA Act, did not have a massive disruption to their administrative procedures. If they were in compliance with the Financial Management and Accountability Act 1997, then they are generally in compliance with the PGPA Act.

For former Commonwealth Authorities and Companies Act 1997 bodies, there was also little immediate impact. Commonwealth companies are still called Commonwealth companies under the PGPA Act. They continue going about their business primarily in compliance with the Corporations Act 2001, as they have always done, with the overlay that comes with being controlled by the Commonwealth.

One obvious change is that there is a big simplification in the variety of legal structures which government bodies are categorised into. Under the old Acts there were a number of different categories for around 190 departments and agencies. Now there are only two primary categories of government entities described in the PGPA Act. These are Commonwealth companies and other Commonwealth entities.

The grouping of most of the major bodies that are considered to be principal government bodies in one category called "Commonwealth entities", is done with the intent of clarifying that they are all part of the Australian government.

Bodies recognised in the PGPA Act however, represent only the tip of the iceberg when it comes to the composition of the Australian Government and how it organises itself to carry out its activities. There are a myriad of other Government bodies, or varying visibility and value.

On 13 May 2014, the Minister for Finance stated this Government is determined to deliver a smaller, more rational government. But in order to do that you first have to know what you have got.

It was apparent from the Commission of Audit and earlier reports by the Department of Finance that there are too many government bodies to be sustainable. There are many different types of bodies which have been put in place over the years by successive governments. While there were probably individual and, at the time, relevant reasons for their creation, the proliferation was not centrally managed with a view to its combined effect on government expenditure or on the government acting as a coherent whole.

As noted in that May release, there was no definitive and ongoing account of how many government bodies there are and what they do. Accordingly the Government has accepted recommendation 55 of the Commission of Audit to create and maintain a public searchable register of Australian Government bodies.

The Department of Finance is now developing a searchable online databasef bodies to provide transparency on the number of government bodies. We won't put up with a situation where we do not know how many bureaucracies we have and whether the total is growing or shrinking.

Unlike previous efforts which only provided a snapshot at a particular date, the Australian Government Bodies Register will be ongoing and dynamic. The transparency and the usefulness of the data in managing the size and shape of government will work in concert with Smaller Government initiatives and with a new governance policy, as key tools, to reform the structure of government. The increased transparency will also help the public in understanding the roles and responsibilities of the bodies that they need to deal with in the Australian Government

Initiatives to implement a "Smaller, more rational government" have actually been in progress from the early days of this government in line with our intent to rein in government expenditure. As the incoming government, the Machinery of Government changes we implemented in September 2013 reduced the number of Departments of State at the outset, by folding some of the activities of former Departments into others or discontinuing them.

This was part of what is described as Tranche One of the Smaller Government initiative.

Also in Tranche One, we abolished 23 non-statutory advisory bodies, plus several established but non-statutory positions and bodies whose functions were considered obsolete. We also introduced legislation to abolish statutory entities we consider superfluous and begun the sale of Medibank Private.

Tranche Two of the Smaller Government initiative was announced in May, as part of the 2014-2015 Budget. This tranche will deliver a further reduction of 36 bodies through abolitions, mergers, consolidation of some functions into departments and by exploring further opportunities for privatisations.

Tranche Three, the third and most comprehensive phase of consolidation in the number of government bodies will be considered by government in time for inclusion in the MYEFO 2014-15. A particular focus of this next stage will be to arrive at a clearer footprint for government. The side-effect of this will be to reduce the number of small bodies, such as advisory councils and stakeholder committees, which carry disproportionate and wasteful overheads.

The proposed reduction in government bodies is not matched in scale by an equivalent contraction in government functions, because a number of the reforms involve shifting functions into departments or large agencies, as well as the merger of smaller bodies to link up related functions.

Ultimately the Smaller Government initiative will reach a state where the shape of government is more sustainable and appropriate to address the needs of the nation. To ensure this de-cluttering is not reversed, we will also adopt an ongoing plan to keep control of the size and shape of government. Key to this will be a new Governance Policy that will set the parameters for deciding how a government activity or function will be carried out.

The Governance Policy is before the government for consideration now and, as the Minister for Finance foreshadowed in May, will be released in full later this year. The details will become apparent then but here's a preview of some of its important features

There is a saying, articulated as a good governance principle, that "form follows function". This means that you decide what you want a body to do before deciding what its governance arrangements will be. We have used this as an underlying principle.

One of the reasons for proliferation of bodies is that creating a new body has been naively seen by some as tangible evidence that the government is "doing something". Consequently, there is a temptation to jump the gun and announce that a new body will be in charge of a new activity, whether this has been thought through or not.

Our governance policy will not start with the presumption that a government body, existing or new, is required. We will first look at whether government should be carrying out the activity at all. For instance, is it within the constitutional powers of the Commonwealth? As we know the High Court has been active in recent years, in the Pape and the Williams constitutional law cases, in defining the limits of Australian Government activities.

Without pre-empting the White paper on the Federation, the government may also recognise that State and Territory governments are better placed to deliver certain types of programs.

This same question applies to non-government bodies, either in the not-for profit or the commercial sectors, which might be a more efficient in delivering government services.

This brings into play the government's new Contestability Framework, also announced in this year's Budget. Over the next four years, it will provide the framework for deciding which services are better delivered from outside or inside government. This policy looks at discrete activities, one by one. The emphasis is on achieving the government's aim, rather than assuming that government must deliver itself.

Size and shape are but one element of the capability of government to meet the needs of the nation. It is one thing to lessen the financial burden of government on the populace and another to be responsive in applying government resources to changing circumstances.

We all recognise that Australia's economy is more globally exposed than ever. Our economy is undergoing the stress of change but producing new opportunities. For a government to respond today, it needs to be more attuned to changes in our operating environment and prepared to respond in a nimble Way.

This is why the PGPA Act has an emphasis on engaging with risk, as a necessary step in improving performance. There are many provisions in the Act which relate to engaging with and managing risk.

So important is this focus that the Government has issued a "Commonwealth Risk Management Policy".

Effective risk management, based on sound judgement and the best information available, enhances the Commonwealth's capacity to deal with the effects of uncertainty and derive maximum benefits from new challenges.

The policy requires Government organisations to define responsibility for managing risk, embed systematic risk management into business processes and develop a positive risk culture.

Moreover the policy seeks to get away from an expensive and heavy-handed culture of 'risk elimination' which can result in burdensome regulations and reporting for the community. This is not about creating a stand-apart breed of 'risk professionals', but ensuring that risk management thinking is part of everyone's thinking. Sensible risk management keeps the costs of risk oversight proportionate to the materiality of risk.

Once risk is assessed, then comes action and improved performance. The PGPA Act provides the accountable leaders of a Commonwealth entity with clear, but high level duties.

These duties are expressed in terms that would be familiar to those of you who are members of a governing entity such as a board. Where they do differ is by broadening the focus from just the entity being governed to consideration of the effects of decisions, particularly for other parts of the government. Cooperation with others in achieving the common objectives of government is encouraged.

When imposing requirements on others, related to the use or management of government resources, an accountable authority must take into account both risks and effects of that imposition. Isolation of one government activity from another, "siloing" as it is sometimes called, is not allowed without good reason. Cohesive whole of government is the aim.

Likewise people working in and on behalf of government are expected to treat government resources in a uniform fashion. The public is right to expect consistent behaviour from government officials with regard to the use of government resources, wherever they may meet them in their dealings with government.

As I noted earlier the PGPA Act creates a new expectation that performance of the public sector is more than about financial results. This might seem like a statement of the obvious. However, it recognises that in an environment where expenditure is assessed on an annual basis, it is easy to focus only on whether the money was spent, presuming that the outcome intended was achieved by the outlay of the money. This is in direct contrast with an assessment of how the money was spent and to what effect.

The PGPA Act recognises that there needs to be a clear cycle from planning, measuring, to reporting of results.

Many Commonwealth entities already prepare corporate plans but they are not consistent. Every Commonwealth entity does an annual report but they have not been well aligned with the Appropriation bills, Portfolio Budget Statements, or corporate plans that state what was intended at the beginning of the year. It is critical that there be a clear line of sight through these documents, not a disconnect which disguises poor performance.

The Department of Finance has sought comments on an Enhanced Commonwealth Performance Framework, releasing a discussion paper in August and holding consultations throughout the September.

The discussion paper contained suggestions as to how the framework might be implemented over time, recognising that aligning the indicators of performance is not a short term exercise. We do not expect new consistent corporate plans to be in place until 31 August 2015. We want to progress with reform as quickly as we can but not at the expense of the quality of the approach.

Better quality data will support more effective government operations and more efficient decisions about the allocation of government resources. All setting the platform for a cohesive, responsive and nimble government.

Some observers of public life may not see the impetus for a big effort in reforming the internal operating model of Government.

It may not look like anything is glaringly broke, but that said many workings of government are in the back shadows away from the media spotlight. Bad internal governance practices which place you on a dismal trajectory don't become obvious early on, it takes time and neglect for conditions to reach an intolerable stage where the public gets agitated.

The Government does not believe we have the luxury of being able to muddle along with a poorly conceived and dated system of government.

We are making methodical progress towards our goal of a smaller, more rational government through policy and legislation that provides the rationale for a more responsive and nimble government. The PGPA Act, its associated Rule and guidance, the Commonwealth risk policy, our new governance policy, the online list of Australian Government bodies and the performance framework are all key elements in reforming government in ways that will allow for it to be more responsive and capable of changing its shape, and being nimble in addressing the needs of the day.

It's one thing to have smarter frameworks, but we won't deliver the best public services unless our reforms to modernise the methods of government have backing from people in positions of senior leadership all the way through the structures of government.

Ultimately what we are trying to achieve is the most workable and efficient public service model we can have. I feel like we are well on the way to getting there and I appreciate your hard work and cooperation in this process.