The Impact on Community Services of Staff and Service Reductions, Privatisation and Outsourcing of Public Services in Australian States Report 1

Report prepared for the Community and Public Sector Union (SPSF Group)

Beth Cook, Victor Quirk and William Mitchell

June 2012

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Centre of Full Employment and Equity The University of Newcastle, Callaghan NSW 2308, Australia Home Page: http://e1.newcastle.edu.au/coffee Email: [email protected]

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Table of Contents Page Heading No. Title Page i Table of Contents ii List of Abbreviations vii List of Tables xi List of Figures xiii List of Boxes xv Terms of Reference xvii Executive Summary xviii

Chapter 1 – Introduction 1-14 1.1 Background 1 1.2 The transformation of the Welfare State 4 1.2.1 The Keynesian Welfare State 4 1.2.2 Transformation to the post welfare state: the full employability framework 6 1.3 Research approach and content 11 1.3.1 Research Questions 13 1.3.2 Methodology 13 1.3.3 Structure of the Report 14

Chapter 2 – Fiscal policy and outcomes 15-59 2.1 Introduction 15 2.2 Understanding budget outcomes 17 2.3 Commonwealth-State Financial Relations 18 2.4 Fiscal strategy and outcomes: NSW 20 2.4.1 Fiscal strategy 20 2.4.2 Recent developments in NSW 25 2.4.3 Key fiscal outcomes for NSW 26 2.5 Fiscal strategy and outcomes: Victoria 28 2.5.1 Fiscal strategy 28 2.5.2 Recent developments in Victoria 31 2.5.3 Key fiscal outcomes for Victoria 33 2.6 Fiscal strategy and outcomes: Queensland 35 2.6.1 Fiscal strategy 35 2.6.2 Recent developments in Queensland 36 2.6.3 Key fiscal outcomes for Queensland 37

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2.7 Fiscal strategy and outcomes: South Australia 39 2.7.1 Fiscal strategy 39 2.7.2 Recent developments in South Australia 41 2.7.3 Key fiscal outcomes for South Australia 43 2.8 Fiscal strategy and outcomes: Western Australia 44 2.8.1 Fiscal strategy 44 2.8.2 Recent developments in Western Australia 47 2.8.3 Key fiscal outcomes for Western Australia 48 2.9 Fiscal strategy and outcomes: Tasmania 50 2.9.1 Fiscal strategy 50 2.9.2 Recent developments in Tasmania 53 2.9.3 Key fiscal outcomes for Tasmania 54 2.10 Summary and conclusion 56

Chapter 3 – Public sector staffing developments 60-101 3.1 Introduction 60 3.2 Public Sector employment outcomes in Australia 61 3.2.1 State Public sector staffing 62 3.3 Public Sector staffing in NSW 64 3.3.1 Recent developments in public sector staffing in NSW 66 3.4 Public Sector staffing in Victoria 68 3.4.1 Recent developments in public sector staffing in Victoria 71 3.5 Public Sector staffing in Queensland 72 3.5.1 Recent developments in public sector staffing in Queensland 74 3.6 Public Sector staffing in South Australia 76 3.6.1 Recent developments in public sector staffing in South Australia 78 3.7 Public Sector staffing in Western Australia 80 3.7.1 Recent developments in public sector staffing in Western Australia 82 3.8 Public Sector staffing in Tasmania 83 3.8.1 Recent developments in public sector staffing in Tasmania 85 3.9 The impact of staffing strategies 89 3.9.1 Staffing increases for frontline services 89 3.9.2 Outcome of staff cuts 90 3.9.3 Other efficiency measures: the case of Shared Services 94 3.9.4 The wider implications of reductions in public sector staffing 98 3.10 Conclusion 100

Chapter 4 – Privatisation in Australia 102-136

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4.1 Introduction 102 4.2 Extent of Privatisation in the OECD 103 4.3 The privatisation debate 105 4.3.1 Perceived public sector weakness 105 4.3.2 Arguments for privatisation 105 4.3.3 Risks of privatisation 107 4.4 Privatisation in Australia: the contribution of the Commonwealth Government 109 4.5 Privatisation in NSW 112 4.5.1 Electricity and associated businesses 113 4.5.2 Other potential privatisation initiatives of the O’Farrell Government 117 4.6 Privatisation in Victoria 118 4.6.1 Electricity and gas 120 4.6.2 Public transport and rail freight services 121 4.6.3 Privatisation in other sectors 124 4.6.4 The impact of privatisation 124 4.6.5 Future prospects 125 4.7 Privatisation in Queensland 125 4.7.1 Energy privatisation in Queensland 126 4.7.2 Other recent privatisations 127 4.8 South Australia 128 4.9 Western Australia 131 4.10 Tasmania 132 4.10.1 Electricity 133 4.11 Conclusion 134

Chapter 5 – Public Sector Outsourcing 137-171 5.1 Introduction 137 5.2 The ideological drivers of outsoucing 140 5.3 Arguments in favour of outsourcing 143 5.4 Potential problems with outsourcing 146 5.5 What has been outsourced by state governments? 151 5.5.1 Information and Communications Technology (ICT) 152 5.5.2 Health 154 5.5.3 Prisons, justice and security services 155 5.5.4 Vocational education and training (VET) 158 5.5.5 Other services 159 5.6 The extent of outsourcing 161 5.6.1 Western Australia 162

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5.7 Outsourcing to the not for profit sector 163 5.7.1 The contribution of the NFP sector 164 5.7.2 Homelessness and Disability Services 166 5.7.3 Issues with outsourcing to NFPs 168 5.8 Conclusion 169

Chapter 6 – Public Private Partnerships 172-202 6.1 Introduction 172 6.2 Pros and cons of PPPs 172 6.2.1 Efficiency 173 6.2.2 Budget constraints 174 6.2.3 Risk transfer 175 6.2.4 Value for money assessments 175 6.2.5 Contract specification 176 6.2.6 Monitoring problems 176 6.2.7 Other issues 177 6.3 PPPs in Australia 178 6.3.1 Roads 180 6.3.2 Public transport 183 6.3.3 Prisons and Justice 187 6.3.4 Education 189 6.3.5 Water 190 6.3.6 Health 193 6.3.7 Other PPPs 199 6.4 Conclusion 201

Chapter 7 – The adequacy of public services 203-238 7.1 Introduction 203 7.2 Measuring the adequacy of public service 204 7.3 Australia Data Sources 205 7.4 Health 206 7.4.1 Public hospitals 206 7.4.2 GP Services 213 7.4.3 Mental Health 213 7.4.4 Other health services 217 7.5 Housing and Homelessness 218 7.5.1 Housing issues 218 7.5.2 Social Housing 220

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7.5.3 Homelessness 225 7.6 Education 226 7.7 Disability services 229 7.8 Home and Community Care (HACC) 230 7.9 Child Protection 232 7.10 Corrective services 234 7.11 Conclusion 237

References 239-265

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List of Abbreviations ACAT Aged Care Assessment Team AIHW Australian Institute of Health and Welfare ALC Airport Link Company ALP Australian Labor Party APS American Public Service (Chapter 2 only) ARC Administrative Review Council AWA Australian Workplace Agreement BOLB Build, own and lease back BOO Build, own and operate BOOT Build, own, operate and transfer CCSU Central Corporate Services Unit CES Commonwealth Employment Service CIT Communications and Information Technology CLCV & CSPPA Consumer Law Centre Victoria and the Centre for the Study of Privatisation & Public Accountability COAG Council of Australian Governments CofFEE Centre of Full employment and Equity CPI Consumer Price Index CPSU(SPSF Group) Community and Public Sector Union – State Public Services Federation Group CRA Commonwealth Rent Assistance CWU Communications Workers Union DFT Department of Treasury and Finance DHS Department of Human Services DHHS Department of Health and Human Services DSE Department of Sustainability and Environment DTFSSC Department of Treasury and Finance Shared Service Centre EIPP Early Intervention and Placement Prevention ETSA Electricity Trust of South Australia EOI Expressions of Interest FAA Financial Accountability Act FE Forward Estimates FMA Financial Management Act FRA Fiscal Responsibility Act FTE Full-time equivalent GBE Government Business Enterprise GDC Ch4 pg 24 GFC Global Financial Crisis

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GGDEA General Government Debt Elimination Act GPP General Purpose Payments

GSP Gross State Product GST Goods and Services Tax GTE Government Trading Enterprise HACC Home and Community Care HCoA Health Care of Australia IFS Interim Fiscal Strategy IMF International Monetary fund INSW Infrastructure New South Wales JCH Joondalup Community Hospital LSL Long Service Leave MAE Material Adverse Effect MCC Melbourne Custodial Centre MDU Multiple Dwelling Units MHSB Metropolitan Health Services Board MMBW Melbourne Metropolitan Board of Works MRSA Methicillin Resistant Staphylococcus Aureus MYBR Mid Year Budget Review MYFR Mid-Year Financial Report MYR Mid-Year Review NAHA National Affordable Housing Agreement NAIRU Non accelerating inflation rate of unemployment NCP National Competition Policy ND Net Debt NDA National Disability Agreement NEAT National Emergency Access Target NEM National Electricity Market NFP Not for Profit NGO Non-government organisation NHS National Health Service NOB Net Operating Balance NP National Partnership NPM New Public Management NPP National Partnership Payments NRC1 National Rail Corporation NRC2 National Rail Consortium Pty. Limited NRG Ch 4 page 23

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OECD Organisation for Economic Cooperation and Development OHS Occupational Health and Safety OICS Office of The Inspector of Custodial Services OOHC Ch5 page26 PAC Parliamentary Accounts Committee PFI Private Finance Initiative PFP Privately Funded Projects PMBH Port Macquarie Base Hospital PSM Public Service Motivation PNFC Public Non Financial Corporations PPP Public-private partnership PS Public Service PSC Public Sector Comparator PTC Public Transport Corporation PTE Public Trading Enterprises QANGO Quasi Autonomous Non Governmental Organisation QEC Queensland Electricity Commission QGC Queensland Generation Corporation QR Queensland Rail QTSC Queensland Transmission and Supply Corporation SDO Service Delivery Outcomes SECV State Electricity Commission of Victoria SEIFA Socio-Economic Indexes for Areas SOC State Owned Corporations SOE State Operated Entities SPP Specific Purpose Payments SSSA Shared Services South Australia TVSP Targeted Voluntary Separation Packages VET Vocational and Educational Training VPS Victorian Public Service VSP Voluntary Separation Program VTESA Voluntary Targeted Employment Separation Agreement WACOSS West Australian Council of Social Services WTO World Trade Organisation

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List of Tables Table No. Title Page No. Table 1.1 Welfare State Retrenchment 9 Table 2.1 Commonwealth payments to the States, 2011-12 to 2014-15 19 Table 2.2 Objectives and targets of the General Government Debt Elimination Act 22 Table 2.3 Targets of the Financial Responsibility Act 23 Table 2.4 Fiscal Principles of the Financial Responsibility Act 24 Table 2.5 Long-term budget objectives 29 Table 2.6 Objectives of the Financial Management (Financial Responsibility) Act 30 Table 2.7 Fiscal objectives and strategies 2008-09 30 Table 2.8 Progress in achieving fiscal targets 40 Table 2.9 Fiscal strategy, Court Government 45 Table 2.10 New Fiscal Strategy, Tasmania 52 Table 2.11 Summary of fiscal outcomes 57 Table 3.1 Public sector employment, 2000 and 2010 65 Table 3.2 Employment by cluster for the NSW public sector, 2010 65 Table 3.3 Characteristics of the Victorian public sector workforce, 2010 70 Table 3.4 Departmental staff numbers, Victoria, 2011 to 2012 71 Table 3.5 Characteristics of Queensland public sector workers, 2001 and 2011 74 Table 3.6 Public sector employment in south Australia, 2010 76 Table 3.7 Characteristics of public sector workers in South Australia, 2000 and 2010 77 Table 3.8 Staff reductions by agency, South Australia 80 Table 3.9 Characteristics of the public sector workforce, Western Australia, 2000 and 2011 81 Table 3.10 State Service Agencies and State Authorities included in State Service Commission 84 staffing data Table 3.11 Characteristics of public sector employees in Tasmania, 2000 and 2011 85 Table 3.12 Staffing changes in the Tasmanian State Service, 2008-09 to 2010-11 86-87 Table 3.13 Reductions in General Government Sector Employment in Tasmania (FTE) 89 Table 4.1 Privatisation by the Commonwealth Government 110-111 Table 4.2 Privatisation in NSW 113 Table 4.3 Power privatisation in NSW 114 Table 4.4 Privatisation in Victoria 119-120 Table 4.5 Privatisation in Queensland 125-126 Table 4.6 Privatisation in South Australia 129 Table 4.7 Privatisation in Western Australia 131 Table 4.8 Privatisation in Tasmania 132 Table 5.1 Cost of services and outsourced share, 2009-10 to 2012-13 163

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Table 6.1 Roads and tunnels delivered using PPPs 180 Table 6.2 Public transport (rail and light rail) PPPs 184 Table 6.3 Prisons and justice sector 188 Table 6.4 Education 189 Table 6.5 Water and sewage PPP projects 191 Table 6.6 PPPs in the health sector 195 Table 6.7 PPPs in other sectors 200 Table 7.1 Social Housing in Australia, 2011 220 Table 7.2 Corrective services data, 2010-11 235

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List of Figures Figure No. Title Page No. Figure 1.1 The Pillars of the Full Employment welfare state framework 5 Figure 1.2 The Full Employability framework 8 Figure 2.1 Revenue, Expenses and Net Operating Balance, NSW, 1997-98 to 2014-15 27 Figure 2.2 Net Debt, NSW, 1997-98 to 2014-15 27 Figure 2.3 Revenue, Expenses and Net Operating Balance, Victoria, 1996-97 to 2014-15 34 Figure 2.4 Net Debt, Victoria, 1996-97 to 2014-15 34 Figure 2.5 Revenue, Expenses and Net Operating Balance, Queensland, 1998-99 to 2014-15 38 Figure 2.6 Net Debt, Queensland, 1998-99 to 2014-15 38 Figure 2.7 Revenue, Expenses and Net Operating Balance, South Australia, 2002-03 to 2014-15 43 Figure 2.8 Net Debt, South Australia, 2002-03 to 2014-15 44 Figure 2.9 Revenue, Expenses and Net Operating Balance, Western Australia, 1998-99 to 2014- 49 15

Figure 2.10 Net Debt, Western Australia, 1998-99 to 2014-15 49 Figure 2.11 Revenue, Expenses and Net Operating Balance, Tasmania, 2002-03 to 2014-15 55 Figure 2.12 Net Debt, Tasmania, 1999-2000 to 2014-15 55 Figure 3.1 Public sector share of employment, 1984 to 2011 61 Figure 3.2 Total public sector employment, share of total employment by state, 1984 to 2011 62 Figure 3.3 State public sector employment, 1984 to 2011 63 Figure 3.4 Growth rate of State public sector staffing compared to the growth rate of total state 63 employment, 1984 to 2011

Figure 3.5 State public sector employment in NSW, 1999 to 2010 64 Figure 3.6 Breakdown of NSW state public sector employment by function, 2010 66 Figure 3.7 State public sector employment in Victoria, 1999 to 2010 69 Figure 3.8 Composition of public sector staffing in Victoria, 2010 70 Figure 3.9 State public sector employment in Queensland, 2000 to 2011 73 Figure 3.10 Composition of public sector staffing in Queensland, 2011 74 Figure 3.11 State public sector employment in South Australia, 1998 to 2010 76 Figure 3.12 Composition of employment in the General Government Sector in South Australia, 77 2010

Figure 3.13 State public sector employment in Western Australia, 1996 to 2011 81 Figure 3.14 Composition of public sector staffing in Western Australia, 2011 82 Figure 3.15 State public sector staffing in Tasmania, 1997 to 2011 84 Figure 3.16 Composition of public sector staffing in Tasmania, 2011 85 Figure 4.1 Privatisation Revenues since 1989 (US$ billion, current prices) 103 Figure 4.2 Privatisation in OECD countries, 1990 to 2007 104 Figure 5.1 Disability services provided by NGOs, 2003-04 and 2009-10 (per cent) 166

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Figure 5.2 NGO share of accommodation services, 2003-04 and 2009-10 (per cent) 167 Figure 5.3 NGO share of community support services, 2003-04 and 2009-10 (per cent) 167 Figure 6.1 Value of PPPs by state 179 Figure 6.2 Value of PPP by sector 179 Figure 7.1 Proportion of patients receiving elective surgery within target waiting times, 2010 208 Figure 7.2 Excess elective surgery waiting times, 2010 209 Figure 7.3 Waiting times for elective surgery in public hospitals 211 Figure 7.4 Emergency Department patients treated within national waiting time benchmarks, 212 2009-10 Figure 7.5 Waiting time for urgent GP appointments 213 Figure 7.6 Number of people receiving clinical mental health care, 2006-07 to 2008-09 214 Figure 7.7 Community mental health follow up 215 Figure 7.8 Proportion of patients readmitted within 28 days of separation, 2005-06 to 2008-09 215 Figure 7.9 Proportion o flow income households in housing stress, 2007-08 219 Figure 7.10 Social housing data for NSW to October 2011 221 Figure 7.11 Satisfaction with public housing, 2010 223 Figure 7.12 New applicants for homelessness services turned away 225 Figure 7.13 Participation rates, 2010 226 Figure 7.14 Attendance by school type 227 Figure 7.15 Year 12 completion rates by SES level, 2010 227 Figure 7.16 Access to State / Territory delivered disability services, 2008-09 229 Figure 7.17 Unmet need for disability services, 2009 230 Figure 7.18 HACC clients, assistance type by hours of service received, 2009-10 231

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List of Boxes Box No. Title Page No. Box 3.1 Impact of Staff Cuts on environmental protection, Victoria 90-91 Box 3.2 The Department of Education’s Learning Management and Business Reform 95 Box 3.3 CenITex in Victoria 97 Box 4.1 The privatisation of Visionstream: impact on workers 111-112 Box 4.2 The impact of the GenTrader Agreements – failure to transfer risks 115 Box 4.3 The Cobbora Coal Mine 116 Box 4.4 Privatisation of public transport – failure to transfer risk 121-123 Box 4.5 Privatisation and renationalisation of the non-metropolitan intrastate rail network— 123 V/Line Freight Box 4.6 The case of Tasrail 134 Box 5.1 WA Acacia Prison: Accounting for ‘superior’ private sector cost-effectiveness 144-145 Box 5.2 ICT outsourcing in Western Australia 152-153 Box 5.3 Outsourcing of IT contracts by Roads and Maritime Services (RMS) (previously the 153 Roads and Traffic Authority) Box 5.4 Contracting of information technology services by Victorian Police 154 Box 5.5 The GEO Group Australia (GEO) operation of the Melbourne Custody Centre 156 Box 5.6 NSW Rail Security: Establish, downsize, privatise, re-establish, downsize… 157-158 Box 5.7 Potential downside of the introduction of contestability for government VET funding 159 Box 5.8 Outsourcing of road maintenance in Western Australia 160-161 Box 6.1 CityLink in Melbourne 181 Box 6.2 The case of the Cross City Tunnel (CCT) in Sydney 182-183 Box 6.3 Reliance Rail Waratah Train contract – illusory outsourcing of risk 184-185 Box 6.4 The Sydney Airport Rail Link 186-187 Box 6.5 Private prisons in Victoria – incomplete contracts expose the State to risk 189 Box 6.6 New Schools Privately Funded Project (PFP) – Monitoring and more transparency 190 needed Box 6.7 The Victorian Desalination Project – Public accountability and flexibility 191-193 Box 6.8 Contract dispute at North Shore Hospital, NSW 196 Box 6.9 Joondalup Hospital, Western Australia 197-198 Box 6.10 The failure of the Port Macquarie Hospital PPP 199 Box 7.1 NSW public hospitals 207 Box 7.2 The impact of health cuts in the ailing Tasmanian health system 210 Box 7.3 How adequate are public hospital services? 212 Box 7.4 A boost for community mental health services: a start but more needed 216 Box 7.5 NSW Ombudsman report on boarding houses – vulnerable people 216-217 Box 7.6 Public dental care, Victoria 217

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Box 7.7 Access to social housing in NSW 221 Box 7.8 What do tenants think of public housing? 223 Box 7.9 The crisis of social housing in Victoria 224 Box 7.10 Impact of budget cuts on education in Tasmania 228-229 Box 7.11 Disability services in Tasmania – unmet need 230 Box 7.12 The inadequacy of HACC services 232 Box 7.13 Overcrowding in South Australian prisons 236

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Terms of Reference This Report was commissioned by the Community and Public Sector Union (SPSF Group) to investigate the impact of State Government fiscal policy and “privatising” – asset sales, public-private partnerships and outsourcing - public services on both the quantity and quality of public services in Australian States. Researchers at the Centre of Full Employment and Equity (CofFEE) at the University of Newcastle developed the Terms of Reference in collaboration with the CPSU (SPSF Group). The specific Terms of Reference were: . Investigate the operation of State Government fiscal policies in Australia with particular reference to fiscal targets and outcomes; . Trace the development of “privatising” policies at the State Government level, including the sale of public sector assets to the private sector, public-private partnerships (PPPs) and outsourcing of service delivery to the non-government sector (NGOs); and . Comment on the impact of these policies on the quantity and quality of services delivered to the public. This report is a companion report to a second report The Impact on Community Services of Staff and Service Reductions, Privatisation and Outsourcing of Public Services in Australian States: Case Studies, Biosecurity and Primary Industries, Child Protection and Housing – Report 2, that investigates these issues in greater detail for three Government service areas using a Case Study methodology that includes a qualitative research component consisting of interviews with key informants for the following services: . Child Protection; . Housing, and . Primary Industry Research and Biosecurity.

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Executive Summary Chapter 2 Fiscal trends 1. Over recent decades there has been a shift in fiscal policy in Australian states toward fiscal austerity with a reduced role for the public sector being pursued. Fiscal strategies aiming to reduce the size of government have frequently been backed by legislation – in the form of fiscal rules. Fiscal rules reduce the flexibility of governments to respond to matters for which they are responsible for in an effective manner. 2. All states have set either financial targets or ratios for net operating surpluses and net debt outcomes that include an emphasis on maximising surpluses and minimising debt. The aim of these rules is that infrastructure can be funded in whole or substantially by surpluses so that the state either minimises or eliminates its net debt position. 3. All governments have expressed concern about the deterioration in fiscal outcomes and the threat to credit ratings, professing commitment to: . Prioritising expenditure to delivery of core services; . Cutting expenditure in non-core or non-service delivery areas and staffing; . Restricting public sector wage growth; . Neo-liberal policies that entail “privatising” public sector activity by various means. 4. There is abundant evidence that the self-imposed fiscal constraints have impacted on the ability of state governments to provide the range, quantity and quality of services required by the community, particularly in an era of growing and significant income and wealth inequality. 5. The evidence suggests that governments have under-invested in a range of essential services and have cut programs on the basis of self-imposed (and perceived) fiscal constraints rather than based on appraisals that these programs were unnecessary or did not meet community needs. 6. State governments have erroneously asserted that based on intergenerational equity grounds all essential infrastructure be financed through budget surpluses (or private partnerships). This claim has been used to justify the austere current policy measures. This argument fails to recognise that since public infrastructure provides the community with economic and social benefits over extended periods, usually decades, it is equitable that this infrastructure is paid for by both the current and future generations that derive benefit from it. 7. The adequacy of service provision depends on whether frontline services keep pace with rising demand as reductions in support functions impact adversely on the ability of frontline staff to deliver services. Chapter 3 Public Sector Staffing 8. Expenditure cuts in the form of ongoing efficiency dividends and cuts to specific programs have reduced public sector staffing. The evidence suggests that arbitrary efficiency dividends have long since harvested available efficiency gains so that further cuts are reflected in increased stress for remaining staff attempting to provide high quality services in a constrained environment and this has a detrimental impact on both the quantity and quality of public services. 9. Mass redundancy exercises undermine morale and organisational cohesion for extended periods, lose corporate memory and experience, and reduce functional capacity, impacting on service delivery, increasing waiting times, occasioning service rationing and depriving larger population segments of service. 10. Loss of access to services often exacerbates or causes new problems which increase public cost in the longer-term. DRAFT REPORT xvii

11. Arbitrary staffing freezes introduce inefficiencies as agencies are unable to fill important positions, while measures to circumvent them, such as the use of labour hire to obtain workers who are not counted in staffing figures, are more expensive than direct employment of staff. 12. The transfer of functions from public servants to private sector workers means services are effectively subsidised by the lower standards of pay, conditions and job security of private sector workers. Moreover, these developments have contributed to the deterioration in national skill formation capacity, exacerbating skill shortages in the labour market.

Chapter 4 Privatisation 13. Developments in Australia have mirrored international privatisation trends over the past 20 years. In the period 1990 to 2007 Australia was among the top ten privatising nations in terms of the proceeds of asset sales. 14. Privatisation was initially justified on the promise of superior private sector cost- efficiency and service quality gains, viv-a-vis the public sector. As these largely failed to eventuate, emphasis shifted to exaggerating the necessity of public asset sales to lower or avoid public debt. 15. Industrial politics has motivated changes in the power industry, education, prisons, the public service and public transport, through privatisation and contracting, which have all had the effect of reducing very strong bargaining power previously held by these unions. 16. The need to fund State infrastructure without borrowing is currently used to justify the shifting of public sector assets and functions to the private sector. 17. It was solely out of an ideological desire to promote the neo-liberal ‘small government’ agenda, that the Commonwealth began withdrawing financial support to the States in the late 1970s. It otherwise has the capacity to finance any degree of public infrastructure development, provided the real resources exist that can be purchased with the currency of which it is the sovereign monopoly issuer. Chapter 5 Outsourcing 18. The outsourcing of public services, including by competitive tender, is an ancient practice that has moved in and out of favour, largely in accordance with shifts in influence over public policy between forces of liberalism and democracy. 19. A 1970s corporate backlash against the post-war Keynesian welfare state that found its way to Australia in the mid-1970s, began an era of public sector retrenchment that continues to this day. 20. Since the 1980s, and notwithstanding early assertions of substantial cost-savings without reductions in service quality, outsourcing has produced mixed results in terms of cost savings, and serious doubts over quality of service issues. 21. Much of the evidence used to determine the public cost-benefit of outsourcing hinges on obscure technicalities, and selective accounting methodologies. 22. Comparisons of relative cost-efficiency between in-house and outsourced public service provision usually fail to consider relative efficiency in terms of the basic objectives of the organisations being compared. Public and private sectors create value in different ways, and utilise different forms of incentive to do so. Public service is characteristically motivated by low powered ‘intrinsic’ incentives, such as the personal emotional and psychological rewards and satisfactions arising from doing work one believes is important to society, or which supports a group one considers merits support. Private sector service is typically motivated by ‘high-powered’ ‘extrinsic’ economic rewards and penalties.

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23. The delivery of public services via contracted providers entails specifying what is required and enforcing compliance to avoid ‘quality shading’ and other profit maximising strategies, without sustaining excessive transaction costs. Strategic vulnerabilities arise for outsourcing governments from asymmetrical costs of contract failure and the ultimate inability of governments to transfer risk. 24. Outsourcing has been applied to a vast range of public services, and to an extent not publicly reported. Public accounts are conspicuous for their lack of detail on this point. 25. While transnational corporations are big players in the delivery of outsourced services in Australia, the not-for-profit sector has increasingly embraced government services provision, losing their capacity to advocate on behalf of their traditional clientele and for inter-agency collaboration in the process. 26. Increasingly, when Australians are dealing with their government at any level, they are actually dealing with an employee of a profit seeking firm, or an agency that behaves like one. The real possibility of this having a qualitative bearing on what they experience, including what justice they receive, what care they are given and what dignity they are left with as a result, has been inadequately considered in the rush to dismantle the public sector and what it stands for. Chapter 6 Public Private Partnerships 27. Public Private Partnership constitutes a hybrid form of private sector asset creation and outsourced service delivery designed to generate flows of wealth to private consortia from the public sector for long periods of time. 28. The complexity of these arrangements coupled with the vested interests associated with their promotion, such as various corporate accounting firms and consultants, leads to divergent estimations as to their cost effectiveness, with corporate accounting firms and other directly interested parties generally barracking for them, and auditors-general often uncovering many shortcomings. 29. The complex nature of these contracts, seldom given full public exposure at the time they are struck, obscured so often behind declarations of ‘commercial in confidence’, hide a multitude of assumptions that significantly affect the calculation of real potential cost to the State. 30. Other practices, such as paying a premium for the transfer of risk to the private sector are hard to fathom, given that governments can seldom avoid responsibility for preserving a service if the private provider withdraws. The myth that the higher private cost of funding embodies the risk premium that the private supplier/operator bears is not borne out by the fact that risk shifting in large and important projects does not occur – the public sector continues to bear the risk. 31. The cost of drawing up these complex contracts, monitoring performance and enforcing contract compliance, particularly if governments take this responsibility seriously, often adds enormously to service delivery costs, though is not always taken into account when considering the cost of provision. The cost of service provision through PPPs is far more than just the money paid to the service provider. Chapter 7 Public Service Provision 32. A recurring pattern of inadequate provision due to public sector retrenchment and fiscal austerity is discernible across a wide spectrum of service areas. 33. A review across various public policy areas reveals a failure to invest in our nation’s future, failures of governance, and the abandonment of equity as a core policy principle. 34. The paucity of meaningful information governments provide as to the quantity and quality of service provision highlights the crucial importance of preserving the independence and resources of auditors-general, and other scrutinising bodies, without DRAFT REPORT xix

whose reports the little that we do know of the state of public service provision would almost certainly remain hidden from public view. 35. Governments are aware of the suffering and neglect of the most vulnerable and disadvantaged Australians, yet continue to apply insufficient resources to their care and inclusion. In the past thirty five years of public sector retrenchment, social progress has been very slow and Australia is falling behind on many fronts. 36. After 35 years of public sector retrenchment there is little evidence to support the repeated claim that outsourcing and privatisation would improve the quality and lower the cost of providing what were useful public services. The justification for cuts to useful public services thus has no evidential basis and so we conclude the motivation was largely ideological. The efficiencies that were supposed to be gained by such cuts were to have freed resources for re-investment where they were most needed. But it is clear that there are many areas of national need remaining which are not being adequately addressed because of the withdrawal of resources from the public sector to deal with them. The Report argues for an expansion of public provision to address these needs and denounces the moribund ideology that has progressively starved the public sector of the resources to do so since the early 1980s.

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Chapter 1 Introduction

1.1 Background Since the mid 1970s the welfare state internationally has encountered attempts at containment, and retrenchment. Several major international trends can be identified which, taken together, represent a move away from collective responsibility, synonymous with the welfare state, toward shifting responsibility for welfare to individuals: . The government commitment to full employment has been abandoned; . Real benefit levels of social insurance and social assistance have been reduced, while eligibility criteria has been tightened in tandem with the introduction of activation policies to increase “employability” of working age people; . There has been a trend to “privatising” by transferring functions from the public to the private sector through the sale of public assets, the development of public-private partnerships (PPPs) to deliver infrastructure, and the outsourcing of the delivery of welfare state services. Moreover, private provision has been promoted further through incentives or enforced through legislation; . The funding burden has shifted to low- and middle-income earners through increased reliance on indirect taxes and significant reductions in company tax and income taxes, particularly for high-income earners; and . The legitimacy of welfare state interventions has been challenged despite growing economic uncertainty and need. The economic crisis of the 1970s ushered in a new period, transforming the consensus on welfare state expansion into a consensus on retrenchment (Ferrera and Rhodes 2000, Fraser 1984, Taylor-Gooby 2001). Declining profitability since the late 1960s combined with the breakdown of the Bretton Woods arrangements, oil shocks and recession in the 1970s to undermine the material basis for progressive reforms associated with Keynesianism and brought about the shift to neo-liberal economic policies (see, for instance Callinicos 2001, Dale 1981, Glennerster 1991, Gough 1979, Hutton and Giddens 2000, Mishra 1990, Scharpf 2000). Neo-liberals attributed the economic crisis to interference with the free operation of markets in the form of labour laws, the welfare state and direct government involvement in market activities. In essence, neo-liberals advocated: small government; the primacy of market interactions in determining income generation and distribution to maximise economic benefits; and claimed the ‘trickle down’ effect would improve well-being for all. The abandonment of the commitment to full employment was justified by adherence to the non accelerating inflation rate of unemployment (NAIRU) proposition that claimed that attempts to stimulate employment above the natural rate generates inflation but had no long-term impact on employment levels. Strategies promoted to overcome the profitability crisis included: . The globalisation of production, facilitated by the combination of: advances in computer and telecommunication technology; reductions in transport costs; deregulation of financial institutions; the removal of restrictions on financial movements; and tariff reductions; . Reduction of production costs through reducing real wages and working conditions, and promoting work intensification; Draft Report 1

. Opening up profit-making opportunities in functions that were previously outside the ambit of the market by privatisation and outsourcing of government business enterprises and services; and . Restricting deductions from surplus value that were channelled into the welfare state, through reductions in corporate taxation, stricter eligibility requirements and the transfer of financial responsibility to individuals. Major political parties internationally adopted neo-liberal policies and intensified attempts to roll back the welfare state, producing greater income inequality and poverty (Mishra 1990, Pierson 1994, Bryson 1992). Following the failure of neo-liberal policies to deliver the promised benefits, social democratic parties attempted to disguise attacks on welfare state provisions, declaring such measures constitute a Third Way to ‘transcend both old-style social democracy and neo-liberalism’ (Giddens 1998: 148). For example, Latham (2001b) declared right wing economic policies such as deregulation, lower tariffs, privatisation, and abolition of central wage fixing could be combined with left wing social policies such as universal health, access to education and training. However, closer examination of the social policy agenda of Third Way advocates reveals a continuation of neo-liberal policies designed to improve national competitiveness by transforming welfare provision from a collective to an individual responsibility. Third Way rejection of the ‘right’ to welfare (Giddens 1998, Buckingham 2000, Latham 2001a) and acceptance of the argument that generous welfare benefits are linked to high unemployment (Giddens 1998) exposes the real agenda of the Third Way. It has been argued that retrenchment is necessary because of: . Constraints imposed by globalisation, which dictate the destruction of working conditions and social provision to maximise international competitiveness (Faux and Mishel 2000, Latham 1998); . Demographic pressures due to ageing populations and changing family structures (Hirst and Thompson 1999, Macintyre 1999); and . Unintended consequences of the welfare state such as dependency (Murray 1984, Pearson 2000, 2001, Schmidtz 1998). A concomitant ideological assault on values such as collective responsibility, universalism, equality and social solidarity attempts to justify transferring responsibility from the social to the individual sphere, that is, to “legitimate” retrenchment. Governments and right-wing think tanks, along with international bodies such as the IMF, OECD and World Bank, have championed returning functions to the market through deregulation and privatisation and advanced the “moral imperative” that individuals accept responsibility for welfare provision, claiming that those who can afford to pay for services have an obligation to do so. These reforms have been evident in Australia and internationally. Privatisation is promoted on the basis that it increases competition and efficiency, enhances choice, reduces prices and relieves budgetary stress of governments (Bureau of Industry Economics, 1995). Privatisation may also reduce the power of vested interest groups such as trade unions and thus provide a vehicle for reducing staffing, wages and working conditions. Finally, ideological preferences for small government and private sector dominance in the marketplace have resulted in vociferous demands for withdrawal of the public sector under the catch-cry articulated by Osborne and Gaebler (1993) of “steering not rowing”. Between 1977 and 2008 revenues from privatisation totalled USD$168 billion (in 2000 prices) in the UK, US$141 billion in Italy and US$131 billion in France (Palcic and Reeves,

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2011). In Australia, privatisation of government businesses and services began in earnest in the 1990s under both ALP and Coalition governments at the Federal and State level raising a total of $85 billion, of which state electricity and gas sales comprised 40 per cent and the partial privatisation of Telstra raised $30 billion (Moran, 2000). Commonwealth government privatisations included: AUSSAT (1991), the Commonwealth Bank (1991-1996), Australian Airlines (1992), the Moomba-Sydney Pipeline (1993), Qantas (1995), the Snowy Mountains Engineering Corporation (1995), airports from 1998, and Telstra from 1997 (Fairbrother, Paddon and Teicher, 2002). Most state governments have privatised financial and insurance institutions. Victoria and South Australia have conducted more extensive privatisation including electricity, gas and port facilities (RBA, 1997). More recently sections of the power industry have been privatised in Queensland and NSW. Other areas that have been privatised include public transport and freight, docks, forestry plantations, motorways, airports and gambling agencies. PPPs have been used extensively over the past two decades and are becoming increasingly popular for the provision of infrastructure. Private sector partners finance and provide the infrastructure and manage the assets for a fee. The term PPP covers a wide variety of collaborations between the public and private sector: (1) build, own and operate (BOO); (2) build, own, operate, transfer (BOOT); (3) build, own and lease back (BOLB); and (4) operate (O). A familiar model that has been used frequently in Australia since the early 1980s involves provision of infrastructure such as toll roads which is argued to provide infrastructure more quickly than through public provision which is subject to government- imposed budget constraints. This arrangement ultimately transfers the cost of infrastructure to users with associated negative distributional impacts. PPP projects in Australia were estimated to have reached a total of $20 billion by 2006 (Joint Select Committee on the Cross City Tunnel, 2006). Outsourcing of functions previously performed by the public sector fall into three major categories (OECD, 2004): . support services such as cleaning, facilities management and food services. These were generally the first to be privatised and this type of outsourcing is widespread throughout the OECD; . ancillary activities that are not the core function of the organisation. This type of outsourcing is frequently referred to as back-office services and includes professional services such as IT and financial services; and . the most recent extension of outsourcing involves the outsourcing of core public functions such as prisons, employment services, child welfare and emergency services. An OECD report detailing the privately-provided share of public services shows that the use of private providers is widespread throughout the OECD. For education, hospitals, public transport, nursing homes, children’s institutions and waste collection services 60.1 per cent of users in Australia access services provided by private providers; the highest proportion in the OECD (OECD, 2008a). In Australia, policy decisions in the mid 1990s provided a major impetus for the acceleration of the “privatising” of government services. National Competition Policy (NCP) was introduced in 1995 to help address the various regulatory and institutional restrictions on competition that led to perceived inefficiencies within the Australian domestic economy. The objective of NCP was to enhance competition through cost control, innovation and responsiveness to consumer needs (Productivity Commission, 2005: xiii). It was based on

Draft Report 3 recommendations from the Hilmer report, which sought to redress public sector competitive advantage through industry deregulation or self-regulation and competitive tendering of services that had traditionally been provided by the public sector. The scope of the Trade Practices Act was expanded to include government business enterprises, public monopolies and other bodies not previously covered by the Act. The NCP also included establishing independent authorities to monitor prices and competition, in order to ensure that regulatory frameworks and service provision was in the public interest and that restrictions on competition were remedied to best serve civic interest. NCP coincided with the Commonwealth agreeing to maintain real funding levels and provide additional competition payments to State governments that were contingent on states meeting obligations such as the establishment of a competitive national electricity grid, reforms in gas, water supply and road transport. According to Quiggin (2004: 172), NCP locked State governments into major public sector reforms, in particular requiring them to corporatise or privatise. Additional momentum was provided by a National Commission of Audit report in 1996, which put forward recommendations to limit the role of government further: to fund but not directly provide services or infrastructure (Ranald, 2002); and to separate policy formation from service delivery to increase efficiency and effectiveness (Verspaandonk and Holland, 2003). The next section describes the transformation of the welfare state that has progressed over the past thirty five years or so. Section 1.3 provides details the methodology and content of the report.

1.2 The transformation of the Welfare State This section outlines the components of the welfare state and the process of transformation that commenced in the mid 1970s to make fundamental changes to the form and content of the welfare state, marking a return of functions to the market.

1.2.1 The Keynesian Welfare State The Keynesian welfare state that emerged in the late 1940s represented a definitive break with previous welfare provision ‘in terms of the underlying principle of social rights to income and welfare independently of the market’ (Esping-Andersen and Korpi, 1984: 202). Fundamentally, the welfare state signified government acceptance of responsibility for the welfare of citizens, reflected in the new role for economic policy enunciated in the Beveridge report: ‘The State alone can ensure that at all times unsatisfied needs are clothed with purchasing power, so as to turn them into effective demand [for] goods and services’ (Williams and Williams, 1987: 39). Similarly, Mishra (1990:18) contends: ‘the general principle behind the welfare state was that governments both could and should assume responsibility for maintaining a decent minimum standard of life for all citizens.’ There is general agreement in the literature that the welfare state was a synthesis of Keynesian economics and Beveridge’s social policy, with access to benefits and services provided as a right (Mishra, 1984; Clarke, Cochrane and Smart, 1987; Cass and Freeland, 1994; Jamrozik, 2001. Figure 1.1 sketches a depiction of the Full Employment framework of the welfare state that the Post World War 2 economic and social settlement in most Western countries was based on three pillars: (a) the Economic Pillar was defined by an unambiguous commitment to full employment and initially based on providing enough jobs to satisfy workers’ preferences. It

Draft Report 4 was also mediation of the class struggle through collective bargaining, minimum wage setting and conciliation and arbitration of disputes; (b) the Redistributive Pillar was designed to ameliorate inequalities driven by market outcomes through provision of services and income support combined with regulation; and (c) the Collective Pillar provided the philosophical underpinning for the intervention based on a concept of the intrinsic rights of citizenship. Figure 1.1 The Pillars of the Full Employment welfare state framework

Economic Pillar Redistributive Pillar Collective Pillar Commitment to Full Intervention to Rights of citizenship Employment ameliorate market outcomes

Keynesian fiscal and Transfer payments Uniform services monetary demand Redistributive Pursuit of collective management taxation will Public sector Professional employment administration Services to enable Services delivered Employer of Last participation Resort by the state

Government Rights embodied in mediates the class Regulation legislation struggle

Source: Mitchell and Muysken (2008); Cook (2006). The first major feature of the welfare state was government commitment to maintaining high levels of employment, coupled with labour market regulation in the form of minimum wages, hours of work, and injury insurance, to curtail exploitation and ensure sufficient labour supply (Levine, 1988; Mishra, 1990; Teeple, 1995). Assuming primary economic importance after World War II was the pursuit of international economic stability, dependent upon successful implementation of aggregate demand policies to facilitate full employment, price stability, and international trade and finance (Mishra, 1990; Stoesz and Midgley, 1991; Gladstone, 1995). In addition, a new international financial framework was established to facilitate reconstruction and international trade. Governments mediated the class struggle through various wage setting and dispute resolution mechanisms such as arbitration and conciliation. The Redistributive Pillar recognised that the mixed economy would generate disadvantage for some citizens. Policies to meet essential needs (Levine, 1988; Abel-Smith, 1994), maintain living standards (Mishra, 1990), or redistribute income, wealth and power (Stoesz and Midgley, 1991) operated through transfer payments, subsidies and taxation. Contrasting previous arrangements, the welfare state included extensive provision of public services (Gladstone, 1995), predominantly provided on a universal basis (Mishra, 1990; Stoesz and Midgley, 1991) and delivered by the public sector (Gilbert, 1995). Income support schemes were implemented to attenuate the disadvantage emanating from the vicissitudes of the

Draft Report 5 market economy. Australian governments assumed greater responsibility for provision of services that constitute the social wage; education; health; community services; and the like. Citizenship (under the Collective Pillar) replaced the dichotomy that had been constructed between the deserving and undeserving poor so that individuals could access standardised services such as sector employment services, public health and education systems. Access to services was provided as a citizenship right, through state funded services, professionally and impartially administered, rather than discretionary assistance that was the hallmark of earlier charity based arrangements. These three interdependent components of the welfare state combined to enhance economic growth, provide a healthy, educated workforce, and legitimise the system by providing benefits as a right of citizenship. High levels of economic growth facilitated full employment, simultaneously providing taxation revenue for delivery of formal welfare programs, and reducing need for social services (Stilwell, 2000: 29). Concurrently, welfare provision supported full employment; directly, by expanding employment opportunities particularly in the public sector, and indirectly, through transfer payments that supported aggregate demand. In Australia, responsibilities were shared by the three levels of government and are influenced by the institutional arrangements that flow from the Australian federal system. The Commonwealth implemented macroeconomic policy and distributed funds to the State / Territory governments who were primarily responsible for the delivery of services: roads, railways, water, electricity, public housing, public transport, health, education and a range of other services to the community. Local governments build and maintain local roads, are responsible for services such as waste management and libraries, maintain public areas and provide community services. Service provision has been affected by a vertical fiscal imbalance, whereby State governments have responsibility for much of the direct service provision but these responsibilities outstrip state revenue raising capacities. As a result, federal or joint federal / state financing is necessary and there is a long history of disputes regarding the adequacy of funding and blame-shifting in relation to political responsibility for failures in service provision.

1.2.2 Transformation to the post welfare state: the full employability framework From 1945 until 1975, governments manipulated fiscal and monetary policy to maintain levels of overall spending which were sufficient, in the face of fluctuations in private sector spending, to generate employment growth in line with labour force growth. Governments generally ran deficits; private savings were strong and most advanced western nations maintained very low levels of unemployment, typically below 2 per cent. This was in sharp contrast to what went before and what has persisted since the mid 1970s. Despite opposition, the Post-War stability was not broken until the first OPEC oil price hike in 1974 caused an inflation spike (Cook et al., 2008). Major economic changes in the mid 1970s - the breakdown of Bretton Woods, slowing economic growth, and the emergence of stagflation following the first oil shock - accelerated the ‘fiscal crisis’ of the state; the tendency for government expenditure to increase more quickly than revenue (O'Connor 1973, Pierson 1991), shifting the welfare state focus from expansion to retrenchment. This event provided the stimulus for a resurgence of pre- Keynesian thinking, which had categorically failed to resolve the mass unemployment of the 1930s. This paradigm shift abandoned the Keynesian notion of full employment, which underpinned the Full Employment framework, and replaced it with the natural rate or NAIRU (Non-Accelerating Inflation Rate of Unemployment) approach (see Mitchell and Muysken, 2008 for a full account of this transition). According to the NAIRU approach, government

Draft Report 6 could only achieve better macroeconomic outcomes (higher productivity, lower unemployment) through microeconomic reforms which implied a greater reliance on market- based outcomes with a diminished role for the public sector. While imperfect synchronisation of events across countries prevents establishing a precise date for this policy transformation, from around the mid 1970s welfare expansion ceased and a new consensus formed around a program of retrenchment, encompassing the neo-liberal agenda of cost constraint, private welfare provision and workfare (Bryson 1992, Ferrera and Rhodes 2000, Fraser 1984, Taylor-Gooby 2001). Retrenchment was not simply initiated by governments in response to these pressures but was actively promoted by supranational institutions such as the IMF, World Bank, OECD and European Union. The IMF and World Bank provide financial assistance, primarily to developing countries in times of financial crisis. Assistance has been tied to structural adjustment conditions including fiscal restraint, trade liberalisation, privatisation, deregulation, credit reduction, and wage suppression (O'Brien and Williams 2004). The OECD, and more recently the European Union, have promoted similar policies in relation to reducing budget deficits, instituting more flexible labour markets and reducing social provision. Subsequently, the major reasons advanced for winding back welfare provision have included: . Globalisation of production and financial markets has been used to justify pruning national welfare benefits to restore international competitiveness; . Labour market changes, particularly persistently high levels of unemployment coupled with the secular decline in full-time, permanent employment and the growth of insecure, part-time and casual jobs, continue to place pressure on welfare systems; . Significant demographic changes associated with population ageing and changing family structures have increased welfare demand; and . Critics apportion blame for economic and social problems to perverse incentives created by the welfare state. Figure 1.2 sketches the Full Employability framework which abandoned the three major pillars of the Post War full employment consensus and, instead, promoted full employability and price stability as the major economic aims of government. Further, market-based outcomes unfettered by government intervention are now seen as the major basis for economic prosperity. Finally, the concept of individuality has replaced collective will and the intrinsic rights of citizenship have lapsed in favour of ever increasing social controls. The neo-liberal challenge to the traditional public sector role from the early 1980s was driven by the need to open up new avenues for private corporations and to restrict deductions from surplus value that constituted the social wage. In short, the objective of neo-liberal policies was to return functions to the ambit of the market and to shift the financial burden from governments to individuals.

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Figure 1.2 The Full Employability framework

Economic Pillar Redistributive Pillar Individuality Pillar Primacy of market- Intervention to No intrinsic rights of based economic stimulate market citizenship outcomes outcomes

Inflation targeting Compliance tests Non-uniform and penalties services Fiscal drag mediating transfer Individuals Full employability payments responsible for their and compliance Taxation advantages own outcomes programs for high incomes Mutual/reciprocal (Workfare) Policies to force obligation Government as an participation Outsourcing of agent for business public services Deregulation Labour market Privatised service deregulation Welfare-to-Work delivery

Source: Adapted from Mitchell and Muysken (2008, Figure 5.1). The Jobs Study advocated extensive macroeconomic reform, in particular the reduction of budget deficits and public debt, which was based on the claim that fiscal consolidation would ‘allow interest rates to be reduced and hence provide a better environment for private sector investment’ (OECD, 1994: 44). In short, the OECD appealed to a simple-minded crowding out argument based on the primacy of market-driven private spending over public spending. The Jobs Study also cited the negative roles played by legislated minimum wages; non-wage labour costs; social security payments; and direct taxation in general. Employment security provisions were also considered to be constraints on hiring because they allegedly encourage firms to adopt an overly cautious approach to job creation. The particular focus on the labour market was to increase the ‘speed limits to growth’ by reducing structural impediments. The established class settlement came under attack as the capitalist class sought to overturn the gains workers had made in the post-war period by reducing real wages and working conditions, intensifying work and introducing greater flexibility through replacing workers with a more part-time and casualised workforce. The abandonment of full employment created a new problem. With unemployment persisting at high levels due to the deliberate constraints imposed on the economy by restrictive fiscal (and monetary) policy, rising welfare payments placed pressures on the Redistributive Pillar. The economic and social costs of failing to achieve and maintain full employment are considerable. There is a broad consensus across researchers from a number of disciplines, including economics, psychiatry and epidemiology that sustained unemployment is also associated with significant personal and social costs that include:

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. social exclusion and the loss of freedom; . skill loss; . psychological harm; . ill health and reduced life expectancy; . loss of motivation; . the undermining of human relations and family life; . racial and gender inequality; and . loss of social values and responsibility. The adverse consequences of unemployment, combined with underemployment placed increased pressure on the ability of governments to eliminate budget deficits. Moreover, the campaign to reduce the labour share of national income required that the alternative of relying on income support and other services was as unattractive as possible. Concerted attacks were made on redistributive services to force individuals to become accountable for their own economic outcomes. This process can be understood within a framework of retrenchment policies that consist of two types of retrenchment; programmatic and systemic.

Table 1.1 Welfare state retrenchment Type of Policies Measures Retrenchment Programmatic Spending cuts  No indexation Retrenchment  Change indexation method Reshaping welfare  Change eligibility requirements programmes  Provision of transitional benefits.  Split consumer-producer coalitions Systemic Defunding  Cutting taxes Retrenchment  Attempting to increase the visibility of tax  Shifting to unsustainable sources of revenue  Increasing non welfare state expenditure Change in public opinion  Increasing preferences for private provision by subsidising costs for privately provided education, health care etc…  Portray beneficiaries as undeserving to reduce public support Modify institutions  Centralise or decentralise political authority  Change industrial relations institutions Source: Pierson (1994) Pierson (1994) explains that programmatic retrenchment involves discretionary policy initiatives encompassing expenditure unrelated to variations in economic or demographic variables, along with alterations in eligibility criteria, generosity of benefits, and rights. Systemic retrenchment refers to ‘policy changes that alter the broader political economy and alter welfare state politics’, including reducing revenues necessary for welfare state funding, Draft Report 9 policy induced changes in public opinion, modifications to political institutions, or weakening of pro welfare state interest groups (Pierson, 1994: 15-17). Table 1.1 outlines retrenchment policies and specific measures governments may employ to achieve retrenchment. The first aspect of programmatic retrenchment involves curtailing expenditure by direct cuts to spending, changing indexation methods or failing to expand services in line with increasing demand. Alternatively, programmatic retrenchment may involve reshaping programs by revising eligibility criteria, introducing means-testing, or co-payments. Systemic retrenchment involves a suite of policies designed to undermine welfare state viability. In an environment when governments are committed to budget surpluses, tax cuts, especially for high income earners and corporations, impose constraints on welfare state expenditure. Eroding public support for the welfare state is important for successful retrenchment. Neo- liberal denigration of income support recipients as undeserving, pathologically dependent, lazy and morally deficient has been a feature of attacks from politicians, media organisations and think tanks (see Murray, 1984; Jordan, 1998). Attempts to undermine support for public education, health and housing programs have included funding reductions combined with financial inducements for using private alternatives, thereby gradually transforming universal programs to residual assistance for those unable to afford private alternatives. Similarly, means-testing of formerly universal programs ensures that the majority have no direct interest in defending these programs against future retrenchment. In addition, opposition can be reduced by absorbing pro-welfare state groups such as charities into the state apparatus through extensive outsourcing of service delivery to NGOs. Similarly, opposition by organised public sector workers can be eradicated by privatisation. Current welfare policy assumes that individual responsibilities are the necessary counter- balance to existing rights while promoting the movement from passive to active welfare (Cook, Dodds and Mitchell., 2003; Cook, 2006; Mitchell and Muysken, 2008). Individuals now face broader obligations and their rights as citizens have been replaced by compulsory contractual relationships with behavioural criteria imposed as a condition of benefit receipt. The aim of the redistributive pillar has become one of using government transfer systems to stimulate rather than ameliorate market outcomes. In doing this, considerable power has been transferred from workers to employers. The necessity of reintegrating the allegedly, welfare dependent underclass into the community provided the justification for mutual obligation and the abandonment of rights of citizenship per se. The resulting two-tier system, complete with the return of the concept of the ‘deserving’ and ‘undeserving’ poor has been labelled the post-welfare state by Jamrozik (2005), indicating that the welfare state values of social solidarity, equity and welfare benefits as a citizenship right are no longer the guiding principles of welfare provision in Australia. The population is divided into two distinct groups: those with access to secure, well-paid employment, the choice of public or privately provided education, health and other services; and those forced to rely on insecure employment, and declining and increasingly inadequate publicly provided services. Successive Australian Governments have pursued programs of fiscal consolidation and inflation-linked monetary policy. This has been accompanied by the introduction of supply- side measures, notably severe labour market deregulation, privatisations, and “activation” strategies.

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From the 1990s there were extensive programmes of privatisation at both the federal and state level. The Hawke and Keating Labor Governments championed the introduction of competition as the economic driving force. The introduction of National Competition Policy in the mid 1990s entrenched a national mechanism for increasing competition through the introduction of competitive neutrality so that public sector organisations could derive no competitive advantage over actual or potential competitors. The increased use of National Partnership Payments enables the Commonwealth to maintain control of how state governments use grants to deliver programs. Commonwealth policies have also contributed to the transfer of activities to the private sector in education and health.1 “Privatising” programs in Australian states have varied in extent and timing but have included the sale of government business enterprises, opening up major infrastructure projects to the private sector through public-private partnerships (PPPs) and outsourcing publicly-financed services for delivery by the for profit and not-for-profit private sector (hereafter, the non-government sector-NGOs) (see Fairbrother, Paddon and Teicher, 2002). The “privatising” of delivery was also designed to weaken pro-welfare state groups, including public sector unions and charities. Charities and religious organisations have been progressively absorbed into the state apparatus through increased conditionality on funding, such as the change from block grants to tendering for services defined by governments. In this way, privatisation programs served the dual purpose of returning welfare state functions to the private sector and weakening opposition to cuts; opposition that was previously organised by public sector unions with the support of client advocacy groups. Taken together, these developments comprise an inexorable movement to return areas of business opportunity to the private sphere. Both major political parties remain committed to “fiscal responsibility” and the provision of opportunities for corporations to maximise profits; factors which preclude significant expansion of the welfare state. These policies will continue to conflict with the aspirations of the population for economic security and access to quality services.

1.3 Research approach and content This report examines specific aspects of the transformation of the welfare state in Australia, focussing on the role of fiscal policy and the “privatising” activities of State governments to illuminate the repercussions of policy innovations for the quantity and quality of services delivered to the Australian public. Despite the widespread adoption of restrictive fiscal strategies and privatising initiatives as vehicles for delivering budget sustainability and ensuring the efficient and effective delivery of high quality public services, these policy prescriptions remain highly contested. Australian and State governments have initiated various types of fiscal responsibility legislation that operates in relation to the economic outlook, demographic and social trends, fiscal risks and the outlook for credit ratings (Wilkinson, 2010). State governments have adopted fiscal strategies that involve targets for achieving surpluses in the net operating balance to reduce net debt, maintain credit ratings and ensure competitive tax regimes. Sawyer (2011) critiques the policy objective of reducing budget deficits and attempting to achieve balanced structural budgets. In considering the budgetary stance of the Conservative government in the UK, he notes that it is consistent with the OECD and IMF view that fiscal consolidation that relies predominantly on spending constraint promoted growth. However, he states that the IMF has challenged this view and concluded from empirical studies that: Fiscal consolidation, typically has a contractionary effect on output. A fiscal consolidation equal to 1% of GDP typically reduces GDP by about 0.5% within two Draft Report 11

years and raises the unemployment rate by about 0.3% point. Domestic demand – consumption and investment – falls by about 1% (IMF, 2010: 94, quoted in Sawyer, 2011). As outlined above, State governments have also embraced privatisation of public services. Privatisation policies are premised on the belief that private sector performance is superior to the public sector due to the discipline of competition. Privatisation has also provided governments with the opportunity to reduce public sector debt. However, the proceeds of privatisation are at the expense of future revenue flows and may simply replace a public monopoly with a private monopoly without achieving the expected gains for consumers in terms of reduced prices and higher quality services. The benefits of PPP arrangements include the provision of major infrastructure earlier than if it was provided by governments, reduced costs due to private sector efficiency and, importantly, shifting financial risks to the private sector. The Allen Consulting Group (2007: 1) investigated the performance of traditional procurement and PPPs in Australia and concluded that: …PPPs provide superior performance in both the cost and time dimensions, and that PPP advantage increases (in absolute terms) with the size and complexity of projects. However, there have been numerous Australian and international examples of major cost escalations in PPP projects. Moreover, some PPP providers have abandoned projects at significant financial and social costs to governments, demonstrating that the purported shifting of risks to the private sector has not been actualised. Shaoul et al. (2008) examined the financial costs of the first 12 hospitals financed under the Private Finance Initiative (PFI) in the UK. They found that annual payments to PFI partners were around 20 per cent higher than estimated and resulted in pressure on the National Health System to reduce costs through cuts to jobs and working conditions. Outsourcing of government services has been promoted as a strategy to reduce costs and increase efficiency and effectiveness, and utilise private sector expertise as well as providing an opportunity for government agencies to concentrate on core services (Harland et al., 2005; Plantinga et al., 2008; Young, 2007; Domberger and Hall, 1996; Figgis and Griffith, 1997). However, significant risks accompany these potential advantages. In the first instance, outsourcing complex public services is subject to significant principal-agent risks since all aspects of service delivery cannot be comprehensively monitored. Failure to manage outsourcing relationships effectively may result in reductions in the quality and/or quantity of services delivered to customers and result in variations in service delivery between providers (Harland et al., 2005; Figgis and Griffith, 1997). There can also be significant differences in services provided to individual clients, especially when there are financial incentives for providing more services to clients assessed as being likely to achieve a payable outcome or requiring less intensive assistance (Tang, 1996; Plantinga et al., 2008). Over time, outsourcing may create large private sector organisations with considerable market power and reduce departmental expertise (Harland et al., 2005; Tang, 1996). Critics claim that outsourcing may reduce wages and employment conditions for workers (see Jensen and Stonecash, 2004: Figgis and Griffith, 1997). The fact that outsourced services are sometimes outside administrative law provisions may also reduce the ability of consumers to complain about poor services (Tang, 1996) and introduce risks to privacy and confidentiality of personal information (Figgis and Griffith, 1997). At a more fundamental level, there is a danger that the emphasis on efficiency in the delivery of services may ‘displace substantive goals, such as family support and the well-being of

Draft Report 12 children (Tang, 1996:5). In addition, the introduction of competition between providers (NGOs) reduces incentives for collaboration that may impact negatively on overall service delivery (Tang, 1996).

1.3.1 Research questions This research will investigate the impact of the fiscal stance of State governments, public sector staffing levels, and the shift of service delivery from the public to the private sector. The major research questions are: . How have the fiscal strategies of State governments in Australia impacted on the delivery of community services? What has been the quantum and distribution of staff cuts across the public sector in the past five years or so? Which programs and services have been cut or wound back and what has been the motivation for these cuts to services? . How extensively have state governments pursued an agenda of privatisation, public- private partnerships and outsourcing of public services? What aspects of public provision have been privatised? How have these policies varied between jurisdictions? How do privatised services perform? Are there differences between the impact of privatisation, PPPs and outsourcing in relation to the quantity and/or quality of services or costs to consumers?

1.3.2 Methodology This research will involve a number of components as outlined below. Literature review An international literature review will examine the debates around fiscal strategies, privatisation and outsourcing. The literature review will use library databases to search published research reports, international journal articles and books. Literature searches will include subjects such as: “contracting out government services”; “outsourcing government services”;” privatisation of government services”; “public-private partnerships”; “fiscal stance”; “budget deficits”; “budget surpluses”; “net debt” and. “fiscal rules”. The literature review will consider how economic developments over the past few decades have influenced government policy formation in relation to fiscal strategies that privilege budget surpluses. It will also examine the retreat from public service provision that was a fundamental characteristic of the Keynesian welfare state, in favour of various privatising policies that include privatisation, PPPs and outsourcing of services. Analysis of state government budgets An analysis of state government budgets will be conducted to identify the current fiscal stance and changes in fiscal strategies over time. This component of the research will present data on the major fiscal outcomes for each state within a comparative framework. Fiscal outcomes such as the net operating balance, fiscal balance or net lending/ (borrowing), net debt and capital investment will be reported for each state. The analysis will include an examination of the trajectory of revenues and expenses and related policy decisions. In addition, the impact of cyclical factors and the global financial crisis on budget outcomes will be considered.

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Privatisation Information on the privatising of public sector activities will be assembled for each state. This will include privatisation through the sale of assets to the private sector, the nature and extent of public-private partnerships (PPPs) and outsourcing of public sector functions to the private sector. In addition to journal articles and books, relevant publications by government departments and reviews by state Auditors-General and will be consulted. These documents include reports on specific privatisations, PPPs and outsourcing of public services to the private sector. The analysis will not include a detailed analysis of privatisation of Commonwealth assets and functions. Reductions in public sector staffing and services In addition to privatising public services, state governments have reduced public sector staffing and services. Over time, the composition and quantum of public services has changed as new services have been implemented and existing services have been cut. The research will detail reductions in staffing and functions, concentrating on the last five years. Data on public sector staffing from all states will be examined and major changes in staffing will be identified. The justifications for cuts to staff or services will be presented along with critiques that detail negative consequences for service delivery or reductions in the ability of the public sector to meet the needs of citizens.

1.3.3 Structure of the Report The report is structured as follows. Chapter 2 examines the fiscal strategies of state governments in Australia over the past 10 years or more using Budget Papers on Treasury websites in each state. The chapter outlines the formal fiscal strategies and targets and changes in these over time. Chapter 3 details the trajectory of employment levels in the state public sector and compares aggregate staffing changes to the growth of employment in each state. The chapter also looks at major staff cuts in the public sector in each state, focussing on the past few years. The next three chapters examine the “privatising” of functions and services that were previously delivered by (or could be delivered by) the public sector. The term “privatising” is broadly defined in this report to include: (1) outright privatisation of state-owned assets through sale or transfer to the private sector (Chapter 4); (2) outsourcing of functions that were previously performed by the public sector and new functions and services (Chapter 5), public-private partnerships that provide control and/or ownership of assets and services to the private sector for an extended period of time in return for private financing, construction and management (Chapter 6); and (3) Chapter 7 examines the adequacy of public services provided by State Governments.

1 Government education funding for private schools has increased significantly. In 2009 77 per cent of recurrent funding for Catholic schools came from the Federal and State Governments and 72 per cent of independent schools received more than 50 per cent of recurrent funding from governments (Review Panel, 2011). Similarly, the government has promoted private health insurance and private hospitals through subsidies to private health insurance and the Medicare surcharge for higher income earners. The private hospital share of separations increased from 29 per cent in 1991-92 to 40.6 per cent in 2009-10 (AIHW, 2011a).

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Chapter 2 Fiscal policy and outcomes

2.1 Introduction In the post-war period governments in the advanced industrial countries utilised macroeconomic policy to support economic growth and maintain high levels of employment to offset fluctuations in private sector activity. The major strategies for ensuring full employment were Keynesian fiscal and monetary policies including counter-cyclical capital works programs, and public sector employment. Scharpf and Schmidt (2000a) noted that full employment policies in England combined expansion and contraction of public investment to compensate for fluctuations in private investment with interest rate variations to stimulate private investment (Beveridge, 1944; Cass and Freeland, 1994; Scharpf and Schmidt, 2000b). A similar policy of counter-cyclical public capital expenditure was pursued in Australia in conjunction with attempts to stimulate private investment by maintaining low interest rates and controls over bank lending (Coombs, 1994). The redistributive pillar of the welfare state operated through fiscal policy. Governments financed transfer payments for those in need, primarily those unable to earn a living from market activities; those who were unemployed, elderly, disabled, or had family responsibilities. Increasing costs for transfers emanated from the expansion of eligibility criteria over time as governments accepted responsibility for the welfare of new groups and increases in benefit rates (Heidenheimer, Heclo and Adams, 1990). Governments also financed the social wage aspects of the welfare state by direct provision of a range of services to satisfy the needs of citizens. Government funded services such as health, education, housing, disability and community services expanded rapidly in the decades to the mid 1970s. These services were outside the ambit of the market so that the profit making opportunities of the private sector were reduced. Education expenditure increased rapidly from the early 1960s to the mid 1970, rising from 3.2 per cent of GDP in the OECD-181 countries to 4.9 per cent (OECD, 1978). Similarly, the public share of health expenditure in these countries increased from 60 per cent in 1960 to 75.4 per cent in 1975. In Australia public expenditure on education increased from 2.4 per cent of GDP to 3.8 per cent of GDP over this time, while the public share of health expenditure increased from just over half to almost three-quarters (OECD, 1978). The third aspect of fiscal policy involved taxation measures. Progressive income taxes ensured that high income earners made a greater proportional contribution to fund collective provision. Tax increased from around 25 to 33 per cent of GDP in the mid 1950s to between 35 and 50 per cent by the mid 1980s (Heidenheimer, Heclo and Adams, 1990). High levels of economic growth facilitated full employment, simultaneously providing taxation revenue for delivery of formal welfare programs, and reducing need for social services (Stilwell, 2000). As mentioned in the previous chapter, the objective of neo-liberal policies was to reduce deductions from surplus value that constituted the provision of services or the social wage, to return functions to the market to open up new profit making opportunities and to shift the financial burden for collective provision from governments to individuals through changes in the tax burden, targeting of services and increased co-payments for some services. The ascendency of neo-liberal policies after the economic crisis of the mid-1970s was predicated on the failure of Keynesian policies. The emergence of stagflation, a situation where high unemployment rates coexisted with high inflation rates, challenged the conventional wisdom that there was an unemployment-inflation trade-off. Governments abandoned the pursuit of full employment in favour of attempting to fight inflation first.

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Fiscal consolidation was proposed as a means of stimulating economic activity through generating higher levels of private sector investment (Cook et al., 2008). However, Mitchell and Muysken (2008) point out that the neo-liberal logic is flawed since government surpluses equal non-government sector deficits, resulting in a slowing of economic activity. The past three decades have witnessed fundamental changes in fiscal policy. Reversing the trend up to the mid 1970s, governments have sought to reduce real income support benefit levels and eligibility criteria has been tightened to minimise expenditure. Spending on direct service provision has failed to expand in line with need. Moreover, the funding burden has shifted to low- and middle-income earners through increased reliance on indirect taxes such as the GST and significant reductions in company and income taxes, particularly for high- income earners. The magnitude of the task of reversing welfare state provision has required a sophisticated campaign so that governments can successfully implement profoundly unpopular cuts to community benefits while minimising the political backlash. In terms of taxation, governments have progressively reduced the burden on companies through reductions in company tax rates and other imposts such as payroll tax. These policies have been justified as necessary to maintain international competitiveness and on the basis that mobile capital resources would leave Australia for lower taxing locations. State governments have also engaged in bidding wars to attract inward investment by providing tax breaks or discounts for services such as electricity (Cook, et al., 2008). In Australia, Commonwealth and state governments embarked on fiscal consolidation from the 1980s (Wilkinson, 2010; Greun and Sayegh, 2005). In order to overcome popular opposition to reductions in public services, or the failure to expand services to meet need, governments have argued that the gravity of the fiscal situation is such that there is no alternative. Governments have also split consumer groups by promoting private alternatives such as private education and private health insurance, that leave the more disadvantaged reliant upon the public sector. The ability of governments to constrain spending has been enhanced by the introduction of fiscal rules that specify various fiscal targets to ensure “fiscal sustainability”: . Net operating balance: achieving balance or a surplus in each year or over a period of time; or achieving a surplus of a certain size which may be specified as an actual amount or a proportion of GSP; . Net Debt: to reduce net debt by specified amounts; to maintain negative net debt; to ensure net debt remains below a proportion of GSP; . Maintaining a particular credit rating or regaining a higher credit rating; . Limits on total expenditure in absolute or relative terms; and . Revenue rules that limit revenue raising or growth rates, with a view to maintaining competitiveness. The chapter is organised as follows. Section 2.2 outlines the determination of budget outcomes as a product of both fiscal policy and economic conditions, pointing to the possibility that restrictive policy settings may generate perverse outcomes by dampening economic activity. Section 2.3 discusses the financial relationship between the Commonwealth and State governments which includes the revenue generation, funding and service delivery roles of the different levels of government. The remainder of the chapter outlines the fiscal strategies, specific policies and the outcomes for each of the six Australian states.

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2.2 Understanding budget outcomes Fiscal strategies entail setting targets for net operating balance and net debt target, along with other objectives. Adherence to neo-liberal fiscal strategy dictates that governments strive to achieve fiscal sustainability, which is normally defined in terms of achieving budget surpluses and minimising net debt. However, actual budget outcomes are not solely determined by the fiscal stance of governments. They are also determined by a range of factors that include wider economic conditions that are beyond the control of state governments. For each state, the state government's budget balance which is published in the Budget Papers each year is the difference between total state revenue and total state outlays. So, if total revenue is greater than outlays, the budget is in surplus and vice versa. Many observers and politicians use the actual reported budget balance to indicate the fiscal stance of the government. So, if the budget is in surplus they conclude that the fiscal impact of government is contractionary (withdrawing net public spending), and if the budget is in deficit, they conclude that the fiscal impact is expansionary (adding net public spending). However, the complication is that we cannot then conclude that changes in the fiscal impact reflect discretionary policy changes. The reason for this uncertainty is that there are automatic stabilisers which are in-built into the budget outcome and vary with the level of economic activity independent of discretionary policy changes. To see this, a simple model of the budget balance can be written as: Budget Balance = Revenue – Spending. Budget Balance = (Tax Revenue + Other Revenue) – (Welfare Payments + Other Spending) We know that Tax Revenue and Welfare Payments move inversely with respect to each other, with the latter rising when growth in State Product falls and the former rises with growth in State Product. These components of the Budget Balance are the so-called automatic stabilisers. In other words, without any discretionary policy changes, the recorded Budget Balance will vary over the course of the business cycle. When the economy is weak, tax revenue falls and welfare payments rise and so the Budget Balance moves towards deficit (or an increasing deficit). When the economy is stronger, tax revenue rises and welfare payments fall and the Budget Balance becomes increasingly positive. Automatic stabilisers attenuate the amplitude in the business cycle by expanding the budget in a recession and contracting it in a boom. As a result, we cannot conclude that a rising budget deficit indicates that the State government has suddenly become of an expansionary mind. An important point to understand is that the actual budget balance is to a major extent, out of the control of the State government because the cyclical component reflects the variations in the spending decisions of private sector agents (household, business firms, external relations). As a result, it is often counter-productive for a government to attempt to cut back the budget outcome with discretionary spending cuts and/or taxation increases because it fears the budget balance is excessive. In these circumstances, the imposition of austerity may then cause State Product to contract and the automatic stabilisers (principally, tax revenue at the State level) to push the budget further into deficit. It also follows that a growth strategy underpinned by discretionary stimulus spending and/or tax cuts can drive reductions in the budget deficit outcome as the level of economic activity increases and tax revenues recover.

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2.3 Commonwealth-State Financial Relations In Australia, the responsibility for the delivery of public services is influenced by the institutional arrangements that flow from the Australian federal system. All three levels of government assume responsibility for service provision. In contrast to local authorities in other countries, Australian local governments are responsible for a smaller range of services that have traditionally centred on development of physical infrastructure and waste services. However, in recent years local government has expanded its role to include a broader range of community services (Worthington and Dollery, 2000). Traditionally State / Territory governments have provided infrastructure and social services such as: roads; railways; water; electricity; public housing; public transport; health; education; child protection; corrective services and a variety of social services. The Commonwealth is solely responsible for a range of social services and welfare payments. Vertical fiscal imbalance, whereby the Commonwealth Government has primary responsibility for raising taxes while State governments shoulder responsibility for delivery of major social programs, has affected the provision of services such as health and education. Vertical fiscal imbalance means that federal or joint federal / State financing is essential to service provision and there is a long history of disputation regarding the adequacy of funding and blame-shifting in relation to political responsibility for failures in service delivery. The Council of Australian Governments (COAG) provides a framework for inter- governmental policy development. Australian Governments signed the Intergovernmental Agreement on Federal Financial Relations (IGA) in December 2008. This agreement reformed Commonwealth/ State financial relations to embed a greater emphasis on shared outcomes and improving service delivery as well as improving accountability and streamlining funding arrangements From NSW budget paper 2 2009-10 The Australian Government provides two major types of funding to states: General Purpose Payments (GPPs) and Specific Purpose Payments (SPPs). SPPs include (Australian Budget 2011-12): . National SPPs for key services: National Healthcare SPP; National Schools SPP; National Skills and Workforce development SPP; National Disability Services SPP; and National Affordable Housing SPP; . National Health Reform (replacing the National Healthcare SPP on 1 July 2012); and . National Partnership payments (NPPs) for States to deliver specific projects that could include improving the quantity or quality of service or to reward States for implementing significant reforms or improving service delivery. A process of horizontal fiscal equalisation is implemented by the Commonwealth Grants Commission to allocate funding to the states on the principle that each state and territory should have the financial capacity to provide the same level of service to citizens, subject to comparable revenue raising efforts and operational efficiency in service delivery (Pickernell, et al., 2008). A report on the review of GST revenues is expected to be delivered in late 2012 and the new arrangements are expected to be decided upon in 2013.

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Table 2.1 Commonwealth payments to the States, 2011-12 to 2014-15 NSW VIC QLD WA SA TAS ACT NT Total(a) $m $m $m $m $m $m $m $m $m 2010-11 Payments for specific purposes 14,753 10,708 9,821 4,984 3,759 1,317 710 1,304 47,356 General revenue assistance 14,042 10,639 8,414 3,263 4,296 1,672 877 2,372 46,524 Total payments to the states 28,796 21,347 18,235 8,247 8,055 2,989 1,587 3,676 93,880 2011-12 Payments for specific purposes 14,292 10,256 9,510 4,700 3,883 1,084 659 1,103 45,515 General revenue assistance 14,988 10,908 9,139 3,677 4,493 1,743 903 2,672 49,459 Total payments to the states 29,279 21,163 18,649 8,377 8,375 2,827 1,562 3,775 94,974 2012-13 Payments for specific purposes 13,725 11,120 10,259 4,860 3,364 1,013 633 780 46,611 General revenue assistance 16,216 11,690 9,883 3,723 4,719 1,845 958 2,883 52,853 Total payments to the states 29,941 22,810 20,142 8,583 8,083 2,858 1,591 3,663 99,464 2013-14 Payments for specific purposes 13,636 11,831 12,461 5,230 3,031 1,003 647 730 49,499 General revenue assistance 17,270 12,202 10,993 3,705 4,907 1,865 960 2,963 55,812 Total payments to the states 30,906 24,034 23,453 8,935 7,938 2,868 1,608 3,693 105,311 2014-15 Payments for specific purposes 12,859 10,850 9,901 4,642 2,937 962 669 633 44,357 General revenue assistance 18,090 12,845 11,578 3,983 5,097 1,928 1,005 3,040 58,498 Total payments to the states 30,949 23,696 21,478 8,625 8,035 2,890 1,674 3,673 102,855 Note: (a) total column may not equal sum of State totals. There is no basis on which to estimate State allocations for a number of payments which are not reflected in State totals. Source: Australian Government (2011) Budget paper 3, 2011-12 Budget

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Table 2.1 details Commonwealth payments to the States between 2010-11 and 2014-15. Over the period there will be an overall increase of only 2.3 per cent per annum. There is a differential rate of growth of funding, with GPPs increasing at around 5.9 per cent per annum while SPPs will contract at 1.6 per cent per annum. The decline in SPPs is influenced by the winding down of the stimulus spending. Queensland’s share of funding will increase by 1.5 per cent and Victoria will increase by 0.3 per cent. All other states and territories will record a decline in their share of funding, with the largest falls occurring in South Australia (0.8 per cent) and NSW (0.6 per cent). Federal Government policies may assist or hinder State Government attempts to deliver specific Budget outcomes. For example, the large funding injections from the economic stimulus packages following the onset of the GFC supported economic activity throughout Australia to modify the contractionary effects of the reduction in private sector activity. As a consequence, State Government finances that are sensitive to the level of economic activity, such as payroll tax and stamp duty, declined less than would have otherwise been the case. By supporting employment in infrastructure projects, Commonwealth funding also assisted to reduce the demand for welfare services provided by the States. In contrast, the insistence by the Gillard Labor Government that it will deliver a surplus in 2012-13 will result in cuts to Commonwealth spending that may include direct cuts to state funding, and will result in a lower level of economic activity than if spending was maintained.

2.4 Fiscal strategy and outcomes: NSW

2.4.1 Fiscal strategy NSW Government Fiscal strategy between 1988 and 2011 has broadly been framed by three medium term strategy pronouncements, namely: . Medium Term Strategy 1988/98 – 1993/94, enunciated in the 1988/89 budget of the Greiner Liberal National Government . General Government Debt Elimination Act 1995, of the Carr Labor Government . Fiscal Responsibility Act 2005 of the Iemma Labor Government. The medium Term Strategy focussed on a reduction in the size of government and the reduction of debt, based on a criticism of previous government practices of increasing expenditure initiatives when revenues were high (maintaining a balanced budget) and taxing more when revenues were low to maintain those initiatives. Past balanced budgets were achieved by counting loan funds as revenue – but this added to debt and loan servicing costs. (NSW 1988/89 Budget: 3). The strategy had four elements: (a) Containment of growth in recurrent funding by keeping consolidated fund payments constant in real terms, with additional funding for priority areas (health, law and order, education) achieved through productivity savings and reallocation within portfolios; (b) Debt Containment Program to phase out inner budget (General Government) sector borrowing for non-revenue generating public works; (c) Taxation cuts to eliminate excess taxation in NSW in relation to other States; and (d) Provision for funding of accruing liabilities in public sector superannuation, LSL and insurance liabilities progressively over time. Eliminating the underlying deficit of the inner budget (non-public trading enterprise) sector while restraining borrowing in outer budget sector, was expected to contribute to addressing

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Australia’s balance of payments problem. It would generate $200 million per annum in interest savings, and reduce state debt as a proportion of Gross State Product (GSP) by 5 percentage points over five years. The provision of substantial tax relief was expected to make NSW a more attractive place to work and invest to boost economic growth and reduce the State’s unemployment level (NSW 1988/89 Budget: 3). The Greiner Government reported that the focus on the Budget deficit, containment of debt and liabilities allowed it to control debt costs as a proportion of budget outlays and move toward full funding of superannuation liabilities, weather the 1991-93 recession while maintaining the State’s triple A credit rating, and maintain capacity to address high priority social needs. It claimed the enunciation of (and adherence to) the fiscal strategy contributed to the preservation of triple A credit rating, and hence lower debt servicing costs, which in turn bolstered consumer and business confidence that slumped in other States. The General Government Debt Elimination Act 1995 was legislated to enunciated principles of fiscal management and to oblige the government to report on progress toward its short, medium and long term fiscal targets, expressed in the Act as: . Short term fiscal target of achieving a sustainable budget surplus for the general government sector within three years. . Medium Term Fiscal target to reduce by 30/6/2005 the level of general government sector net debt to a level where the budget can absorb the impact of an economic cycle without significant corrective action on the revenue of expenditure side, considering: o structure of expenditure and revenue; o preservation of the highest possible credit rating; o exposure to budget risks; and o democratic and social trends impacting on the budget . Long Term Fiscal Targets to eliminate net debt for the General Government sector by 3/6/2020 and eliminate unfunded superannuation liabilities by 30/6/2030. The 2005-06 budget reported on outcomes of the GGDEA after 10 years and its replacement with the Fiscal Responsibility Act 2005 (Government of NSW Budget Paper, 2005). The results for the period 1995-96 to 2005-06 are shown in Table 2.2.

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Table 2.2 Objectives and targets of the General Government Debt Elimination Act

Objective Target

Adherence to fiscal General government sector underlying net debt was $3.2 billion (1.1% of GSP) in principles June 2005 down from $12.2 Billion (7.4% of GSP) in June 1995. The State was on target to eliminate GG sector debt by June 2020.

General Government Increase by an average 5.5% per annum in real terms from June 1997 to June 2005. Sector worth

Unfunded Would continue to rise until 2010 and thereafter decline as those on the old scheme Superannuation begin to retire. liability

Asset maintenance and Total Asset Management policy transferred to Treasury in 2003, since the time management progress is reported in the production of policies to require agencies to align their physical asset investments with services outlined in the results and services plans.

Constrained Average annual growth for four years previous to 2005-06 in total cost 5.9 per cent, expenditure growth and in net cost 5.6 per cent, while Gross State Product increased by 6.6 per cent – in compliance with the fiscal principle.

Prudential Risk Policies developed. Management

Tax Restraint Between 1999-00 and 2005-06, NSW tax burden was reduced by $770 million. Source: General Government Debt Elimination Act (NSW) (1995) The Fiscal Responsibility Act 2005, enacted by the ALP Government of Morris Iemma, set out fiscal targets and principles, and obliged the government to report deviations from the course it mapped out. The main differences between this and its’ predecessors were: . The focus of the GGDEA was to eliminate General Government (GG) net debt (by 2020), while the aim in the FRA is to limit its growth (by setting a debt-to-GDP ceiling). The FRA widens the fiscal framework by adding a similar constraint on net financial liabilities. . The GGDEA sought to constrain the annual fiscal outcome (net lending, being the sum of the current and capital balances), while the FRA limits this constraint to the current balance (the operating result) (2005-06 Budget Papers). According to the Statutory Review of the Fiscal Responsibility Act: These changes in emphasis reflected the view that by the mid-2000s the GGDEA was largely on track to achieve its principal objective - GG net debt had declined from over 7 per cent of GSP in 1995 to I per cent by 2004. It was considered that a prohibition on debt was not optimal from a financial management standpoint and was impeding the response to infrastructure requirements. (Statutory Review of the Fiscal Responsibility Act, 2011, quoted in Treasurer, 2011: 3). The medium- and long-term targets of the FRA are in Table 2.3 and the fiscal principles of are detailed in Table 2.4.

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Table 2.3 Targets of the Financial Responsibility Act

Medium term targets Long-term targets

To reduce the level of general government net To reduce the level of general government net financial liabilities as a proportion of gross state financial liabilities as a proportion of gross state product to 7.5 per cent or less by 30 June 2010. product to 6 per cent or less by 30 June 2015.

To maintain underlying general government net debt To maintain underlying general government net debt as a proportion of gross state product at or below its as a proportion of gross state product at or below its level as at 30 June 2005, unless an increase is required level as at 30 June 2005, unless an increase is required in net debt to reduce one or more components of in net debt to reduce one or more components of general government net financial liabilities. general government net financial liabilities.

To eliminate total state sector unfunded superannuation liabilities by 30 June 2030.

Source: Treasurer (2011) The Statutory Five Year Review of the Fiscal Responsibility Act in June 2011 found that fiscal performance deteriorated over the five years to 2009-10, producing higher debt and net financial liabilities (Treasurer, 2011). Standard and Poor’s Triple A credit rating would not be retained should there be further deterioration. The ratio of net financial liabilities to GSP target of 7.5 per cent or less by June 2010 appeared to be on track, with a reduction from 19.1 per cent in 1994-95 to 7.3 per cent in 2006-07. However, the subsequent increase to 13 per cent in 2009-10 was attributed to the increased capital program and lower revenues as a result of the GFC. Similarly, the net Debt to GSP ratio increased from the target rate of 0.9 per cent in 2005 to 2.3 per cent by June 2010 at 0.9 per cent. Net operating surpluses were delivered in four out of five years but were insufficient to reduce net debt. Growth in expenses and costs outstripped revenue growth. Public sector employee costs grew at an average rate of 6.3 per cent rather than the 2.5 per cent target. The evaluation of capital proposals was not always adhered to such as the CBD Metro and the proposed Parramatta to Epping rail line. Other targets that were met included increasing the General Government sector net worth, total asset management plans, tax restraint, while the target of eliminating unfunded superannuation liabilities by 2030 was reported to be on track. The incoming O’Farrell Coalition Government established a Financial Audit (the Lambert Review) to develop a new State Financial Strategy and an Expenditure and Management Review (Schott Report) to examine all aspects of public sector management and service delivery. The Lambert Review recommended that the ratio of net debt and net superannuation liabilities be at or below 100 per cent of total revenue for the total state sector to ensure that the Triple A credit rating is maintained (Lambert, 2011). Summary Beginning with the Medium Term Strategy introduced by the Greiner Government in the 1988-89 budget, NSW governments have set parameters aimed at addressing debt and long term liabilities, largely with a view to maintaining the confidence of credit ratings agencies such as Standard and Poor. The superseding of the General Government Debt Elimination Act 1995 with the Fiscal Responsibility Act 2005 reflected the relative success of the former of reigning in recurrent expenditure and debt, with the focus then shifting to addressing long term structural issues such as infrastructure provision, long term fiscal challenges such as the ageing population, and eliminating unfunded superannuation liabilities.

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Table 2.4 Fiscal Principles of the Financial Responsibility Act

Fiscal Principle Description Budget surplus A surplus net operating result for the general government sector consistent with the fiscal targets. Constrained growth in net cost of Growth in net cost of services and expenses of GG sector: a) to be kept at or below revenue growth; b) to be calculated for the 4 year services and expenses period prior to the budget and the 4 year budget and forward estimates period; and c) an assessment of past and prospective long-term average revenue growth to be reported in the budget. Public sector employee costs Rates of pay and conditions of employment of GG sector employees to be consistent with the fiscal targets. Public trading enterprises to take into account industry conditions and the government's policy for negotiating rates of pay and related conditions of employment of general government sector employees. Capital proposals Capital expenditure proposals to be evaluated in accordance with government procurement policy requirements. Managing State finances with a The budget should be framed taking into account the anticipated future fiscal gap likely to develop as a result of increased spending view to long-term fiscal pressures associated with the ageing of the population and other long-term trends. pressures An assessment of long-term fiscal gaps and the impact of budget measures on the long-term fiscal gap is to be presented in the annual budget papers. Net worth of GG sector GG sector net worth should at least be maintained in real terms and implementation measures identified and subject to progress reports in the annual budget papers. Funding employer (a) Employer superannuation liabilities are to be managed and funded to eliminate total state sector unfunded superannuation liabilities by superannuation liabilities 30 June 2030, the manner of management and funding of these liabilities to be subject to periodic review; and (b) Implementation measures identified and subject to progress reports in the annual budget papers. Total asset management (a) Government agencies must align their physical asset management practices (on a whole-of-life basis) with their service delivery priorities and strategies; and

(b) Implementation measures identified and subject to progress reports in the annual budget papers. Risk management Financial risk is to be managed prudently on the basis of sound risk management principles: (a) maintaining total state sector net financial liabilities at prudent levels, (b) managing risks associated with contingent liabilities, and (c) managing risks associated with the

total state sector's debt and financial assets, including commercial risks arising from the ownership of public trading enterprises. Measures taken to implement this fiscal principle are to be identified and subject to progress reports in the annual budget papers. Tax restraint Adjustments to taxes to take into account the impact and ensure predictability and stability. The impact to be reported in the budget papers.

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2.4.2 Recent developments in NSW A number of trends in fiscal initiatives in NSW can be identified: . Attempts to cut expenditure to align expenditure and revenue growth. . Concentration on improving frontline services, including staffing increases for nurses, teachers and police. At the same time there have been significant reductions in staffing in what is referred to as back office or non-service delivery positions. . The introduction of agency wide efficiency dividends that impose cuts in funding that leave decisions of where the cuts are imposed to individual agencies. . Restrictions on public sector wage growth that specify productivity savings must offset wage increases over a particular level. . Transfer of service delivery to the private sector through three major mechanisms: o Privatisation proposals justified as essential to fund new infrastructure in an environment where fiscal policy precludes debt financing in order to protect credit ratings; o Using public-private partnerships (PPPs) for new infrastructure that involves private sector development, financing and management of infrastructure for extended periods of time; and o Outsourcing service delivery to non-government organisations (NGOs), including the for-profit and not-for-profit sectors. Expenditure growth has outstripped revenue growth causing concern for successive governments. The Labor government announced a program to make large reductions in expenditure in the 2008-09 Mini Budget to achieve savings of $3.3 billion over four years (in the MYR). The O’Farrell Government announced a total of $8 billion in savings over four years from 2011-12. The cuts were justified on the basis of fiscal responsibility and further cuts have been foreshadowed. Increasing demand for services due to population growth and the ageing of the population has intensified difficulties in delivering outcomes in line with the fiscal strategy. Increases in resources in recent years have been highly targeted to what is usually referred to as frontline services – health, education, law and order, transport, disability and community services, particularly for the implementation of new policies such as child protection (Keep Them Safe: A Shared Approach to Child Wellbeing), disability (Stronger Together: A New Direction for Disability Services) and health (Caring Together: The Health Action Plan for NSW). The 2009-10 Budget pointed to increased expenditure of $750 million over five years for child protection to implement the Keep Them Safe package, $16 million for domestic violence victims, and $485 million over four years for Caring Together, including an additional 500 Clinical Support Officers. Funding of $1.3 billion over five years for the Stronger Together program provides support for people with disabilities. The quid pro quo for increased resources in frontline service areas has been the progressive reduction of staffing in administrative or “non-frontline” or “back office”. The GFC accelerated the process of reducing non-frontline positions. In addition to specific job cuts, public sector resources have been reduced by the introduction of efficiency dividends akin to those introduced in the APS by the Hawke Government in 1986. Ongoing expenditure reviews of individual programs and services have also been a prominent feature of public sector management in NSW. Chapter 3 details staffing policies and outcomes.

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The imposition of limits to public sector wage growth is another strategy to limit expenditure growth. In 2007 the Labor Government announced that it would fund wage increases of 2.5 per cent per annum so that any increases above that amount would be offset by other reductions in employee costs e.g. staff cuts. The incoming O’Farrell Government was critical of past performance, stating that the offsetting savings were not achieved. The 2011-12 Budget limited wage increases for NSW public sector workers to 2.5 per cent to save $2 billion over four years and discontinued the non forced redundancy policies of the previous government. Privatisation proposals have been promoted as a necessity to reduce future large investments in infrastructure such as electricity generation and provide billion of dollars for new infrastructure and frontline services. PPPs have been extensively used to provide roads over a long period of time and the financing model has been extended to hospitals and schools. The outsourcing of both core and non-core services to the private sector has accelerated over time, including private operation of Parklea prison from 2009. The incoming O’Farrell Government has foreshadowed a much greater role for the private sector including greater contestability for road maintenance and prisons. It has also announced the privatisation of the state’s electricity generators, long-term leases for the Kurnell desalination plant, Port Botany and management of Sydney Ferries. In addition, the government has announced the formation of the Property Asset Utilisation Taskforce that will conduct an audit of state assets and recommend a strategy that is likely to include further privatisations (Nicholls, 2012).

2.4.3 Key fiscal outcomes for NSW Figure 2.1 shows revenue, expenses and the net operating balance for NSW for the period 1997-98 to 2010-11 and projected data to 2014-15. Between 1997-98 and 2010-11 the average annual rate of growth in expenses of 6.1 per cent outstripped revenue growth of 5.9 per cent. Employee costs accounted for around 49 per cent of total expenses and grew at an annual rate of 6.7 per cent due to the combination of wages growth and employment growth of 1.8 cent per annum (NSW Commission of Audit, 2012). The rate of growth of both expenses and revenues is projected to moderate over the budget and forward estimates period (2011-12 to 2014-15) bringing average annual growth rates over the entire period to 5.4 per cent for revenues and 5.7 per cent for expenses The net operating balance has been in surplus for the entire period with the exception of a deficit in 2008-09 and an expected deficit in 2011-12. However, there has been a marked deterioration in the operating result in the period after 2005-06 (NSW Commission of Audit, 2012) and only small surpluses have been projected for the future.

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Figure 2.1 Revenue, Expenses and Net Operating Balance, NSW, 1997-98 to 2014-15

Source: NSW Budget Paper 2, various years The columns in Figure 2.2 show the net debt outcome over the same time period and the line indicates net debt as a proportion of the GSP for NSW. Net debt has been positive for the entire period. There are two distinct trends: net debt fell consistently until 2005-06 and has risen in almost every year since then. The outcome in comparison to GSP reveals that net debt declined from almost 5 per cent of GSP in 1997-98 to a minimum of around 0.4 per cent in 2005-06 before rising to around 1.8 per cent by 2010-11. The reduction in net debt in 2010-11 is due to the sale of electricity retail businesses by the NSW Government (NSW Treasury, 2011) Figure 2.2 Net Debt, NSW, 1997-98 to 2014-15

Source: NSW Budget Paper 2, various years; ABS, 2011, Cat no. 5220.0 Australian National Accounts, Table 1, Gross State Product (current prices).

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2.5 Fiscal strategy and outcomes: Victoria

2.5.1 Fiscal strategy This section traces the development of fiscal strategy from the Kennett Liberal Government in the early 1990s. Major budget outcomes are then presented. The Kennett Government was committed to making drastic reductions in expenditure in order to reduce government debt which had escalated to $32 billion under the ALP Government (Wilkinson, 2010; Hayward, 1999). The 1992 economic statement set the objective of restoring the budget to balance by 1995-96 and then to a sustainable surplus (Novak, 2011; Hayward, 1999). This was to be achieved by imposing large cuts to expenditure and public sector staffing and increasing revenues, including the sale of public assets. These policies impacted swiftly on the delivery of government services. Hayward (1999) explains that, by 1993, 37000 public servants had lost their jobs, $1.2 billion had been cut from expenditure and $1 billion additional revenue had been raised from new taxes and charges. The consequences for the public school system were dire: 8,000 teachers had taken voluntary redundancies or resigned, 351 schools were closed, there were significant reductions in special programs and maintenance, and parents were required to shoulder an increased proportion of the costs of education through the imposition of charges (Spaull, 1999). As a consequence of the 1993 minibudget, expenditure for the Department of Health and Community Services was cut by $381.7 million over two years, resulting in the loss of 10,000 jobs and the closure of 4 city and 12 country hospitals and reduced hospital beds by 1,400 (Harkness, 1999). From 1993-94 the proceeds of an extensive privatisation program were used to retire debt, which declined to $11.7 billion by 1997 and reduced interest payments by $650 million per annum. The privatisation of assets is discussed in further detail in Chapter 4. The Financial Management Act 1994 detailed financial objectives such as ‘prudent financial management risk; ensuring taxation stability and predictability; tax system integrity; intergenerational equity; and disclosure of financial information’ (Novak, 2011). New fiscal targets for the period 1995-96 to 1998-99 included: . No later than 1998-99, achieve a sustainable current account surplus to cover depreciation of the budget sector capital stock without increasing the tax level; . Maintain budget sector investment on infrastructure from public and private sources averaging about 1.25 per cent of GSP; . Application of net proceeds of privatisation to debt reduction; . Longer term targets of reducing state debt and debt servicing ratios to a level consistent with restoring the states AAA credit rating (Novak, 2011). In the latter part of the 1990s the Kennett Government introduced tax cuts and increased spending on health and education as a ‘social dividend’ (Harkness, 1999; Hayward, 1999). The 1999-2000 Budget drew attention to the fiscal accomplishments of the Kennett Government since 1992: public sector net debt had been reduced by 80 per cent; the Budget had been in what was described as a “sustainable surplus position” for five years; privatisation had enabled the government to deliver tax cuts; and outsourcing of functions previous performed by the public sector were claimed to have improved efficiency and

Draft Report 28 innovation, reduced costs and enhanced service quality for consumers. The government specified long-term objectives and medium-term operational targets as shown in Table 2.5. Table 2.5 Long-term budget objectives

Long-term objective Medium-term operational target

Maintain a sustainable budget operating surplus sufficient to fully fund infrastructure investment

Maintain public sector debt at levels consistent with a Privatisation proceeds applied to reduce net debt and triple-A credit rating other liabilities

Provide quality, value-for-money services relevant to community needs

Ensure adequate infrastructure to support service Budget sector investment to be maintained at a delivery and economic growth minimum 1 per cent of GSP

Bring Victoria’s tax rates into alignment with the national average Source: 1999-2000 Budget Paper 2 The Bracks ALP Government was elected in 1999 and increased expenditure on health, education and community services. However, the government maintained similar fiscal policies to those of the Kennett Government, including an emphasis on fiscal responsibility as well as continuing with an extensive program of public private partnerships and the outsourcing of services to the private sector. The Financial Management (Financial Responsibility) Act was passed in 2000. This Act committed the Government to ‘operate in accordance with broad financial management principles including the ‘prudent management of risks’, pursuit of expenditure and revenue policies consistent with stable and predictable levels of taxation burdens’ (Novak, 2011: 26). The first budget handed down by the Bracks Government (2000-01) specified both long-term and short-term financial objectives as details in Table 2.6. The Government established specific targets for the net operating balance and infrastructure expenditure and prioritised expenditure on education, health and community safety. These objectives were conditional on maintaining the triple-A credit rating. These fiscal strategies were largely maintained for the duration of the ALP Governments in Victoria over the next decade. In the 2001-02 Budget, the Government specified implementation of the reforms to the business taxation system and investment in infrastructure projects, including those funded by the Growing Victoria infrastructure reserve (Victorian Government, 2001 Budget 2001-02). Implementation of the 2002 election commitments was specified as the short-term service delivery objective from 2003-04 and the 2006 election commitments were included from 2007-08.

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Table 2.6 Objectives of the Financial Management (Financial Responsibility) Act

Long-term Short-term

Maintain a substantial budget sector operating surplus Operating surplus of at least $100 million in each year

Provide capital works to enhance social and economic Establish a $1 billion infrastructure reserve infrastructure throughout Victoria

Provide improved service delivery to all Victorians Expenditure priority on education, health, and community safety

Ensure competitive and fair taxes and charges to Re-examine and improve Victoria's business taxation Victorian businesses and households system

Maintain state government net financial liabilities at Maintain a triple-A credit rating prudent levels

Source: Victorian Government (2000) 2000-01 Budget Fiscal targets were amended in 2008-09 after the onset of the GFC (Table 2.7). The target for the short-term operating surplus changed from at least $100 million to at least 1 per cent of revenue each year, so that the surplus would reflect growth in revenue. This target reverted to $100 million per annum in the 2009-10 Budget. Table 2.7 Fiscal objectives and strategies 2008-09

Objective Short-term target Long-term target

Operating surplus At least 1 per cent of revenue Maintain a substantial budget operating surplus in each year that allows for the delivery of the government’s infrastructure objectives

Infrastructure Implement strategic Deliver world-class infrastructure to maximise infrastructure projects economic, social and environmental benefits

Service delivery Implement the 2006 election Provide improved service delivery to all commitments Victorians

Taxation Implement reforms Provide a fair and efficient tax system that is competitive with other States

Net financial liabilities Maintain a AAA credit rating Maintain State government net financial liabilities at prudent levels Source: Victorian Government, 2008: Budget 2008-09 The incoming Baillieu Liberal Government announced an Independent Review of State Finances in January 2011 to examine the State’s finances, debt, service delivery and public sector governance. The Interim Report, released in April 2011 stated that the current short- term targets were inadequate and recommended the adoption of new fiscal principles to manage the State’s finances responsibly by managing the net operating balance, debt and net infrastructure investment. The Review also identified the necessity to increase expenditure on infrastructure by around $2 billion per annum more than was currently forecast and stated that this should not be funded by debt. The implication of this program would be that the composition of expenditure would need to be changed significantly, recurrent expenditure would need to be reduced to fund the additional infrastructure expenditure.

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The Government introduced a new fiscal strategy in the 2011-12 Budget, with the following objectives (Victorian Government, 2011: BP2: 25): . Delivery of Government’s commitment to have surpluses of at least $100 million in each year, with surpluses averaging $164 million over the forward estimates; . Constraint in expenditure growth, including the delivery of a $2.2 billion five year package of efficiency savings; . Ensuring that debt as a percentage of GSP will stabilise, with net financial liabilities falling as a percentage of GSP by 2014-15, and remaining consistent with retaining Victoria’s triple-A credit rating; . Addressing the issue of cost overruns by increasing the Treasurer’s direct involvement in oversight of major projects to provide more rigour in delivery against timelines and budgets; and . Emphasising the importance of the Government’s policy of having no wage policy outcomes greater than 2.5 per cent, unless they are funded from productivity gains. The 2011-12 Budget forecasts include targets for surpluses every year, debt stabilisation, efficiency savings, restrictions on public sector wage increases: . A surplus of at least $100m per year – 2011-12 will have surplus of $140 million and surpluses will average of $164m over the forward estimates; . Efficiency savings of $2.2 billion over 5 years. Spending is forecast to rise by an average of 3.2 per cent per year; . No wage increases over 2.5 per cent unless funded by productivity gains; and . Debt will stabilise as a percentage of GSP (around 6 per cent) and net liabilities will fall as proportion of GSP. The Independent Review of State Finances Interim Report (2012) was critical of the short- term fiscal focus and recommended setting medium-term targets. These included achieving a rolling five-year net operating surplus sufficient to fund net infrastructure investment, which would mean that all infrastructure spending would be funded from recurrent surpluses. This would have implications for policies to achieve sufficient surpluses that may entail substantial increases in revenues or cuts in expenditure. This negates intergenerational equity principles since future uses of the infrastructure would make no contribution to funding. The difficulty of achieving this target would be exacerbated by the second target of a rolling five-year infrastructure investment target of at least the equivalent of 0.5 per cent of GSP. The other targets specified in the Interim Report are: . General Government net debt is equal to zero on average over a 10-year rolling period; . Government superannuation liabilities are equal to zero by 2035; and . When revenue growth exceeds that rolling five-year average, the government preserves the excess in cash reserves or equivalent financial assets.

2.5.2 Recent developments in Victoria The dedication to producing budget surpluses has required successive Victorian governments to prioritise spending to facilitate an expansion of services to meet growing needs due to population growth, demographic changes and so on. Increases in expenditure have been

Draft Report 31 targeted to core services – health, education, disability and community services and protective services (police, corrections and child protection). The Labor Government stated: When our government first came to office, we made a commitment to restore and rebuild these services after many years of neglect and indifference (Budget Paper 1, 2009: 7). Similarly, the Coalition Government stated: The Government will enhance disability services, expand child protection, deliver new mental health initiatives and fund a massive new upgrade to special and autistic schools across the State (2011-12 Budget Paper 1 Treasurers Speech: 2). In 2007-08 the Government stated that hospital funding had increased by 80 per cent in seven years. Increased expenditure has been provided to increase elective surgery, reduce waiting times in emergency departments, increase outpatient services and increased maternity facilities in outer suburbs and additional mental health services. More specialised services have also been improved, such as the Cancer Action Plan and a new centre for cancer treatment. Health screening was also made available for through WorkHealth for Victoria’s 2.6 million workers. Assistance for people with disabilities and carers has been a feature of past Budgets. In 2007- 08 an additional $83 million was provided for Home and Community Care services; people with disabilities received funding of $214 million, including accommodation and support packages, aids and equipment. In 2011-12 the Government announced additional supported accommodation places, respite care and support for Victorians with disabilities, families and carers. Children’s services have also been expanded through the development of 40 new Children’s Centres and an increase in kindergarten subsidies and upgrading of not-for-profit kindergartens in 2007-08. The following year more funding was available to expand the number of kindergarten places and to support children with disabilities, including new programs for autistic children and their families. An additional $135 million was dedicated to improving the care and support of children in out of home care in 2009-10 and a further $66 million was provided in 2010-11. In the 2011-12 Baillieu Government Budget $5.4 billion or 76 per cent of new initiatives were for five departments - the Department of Health, Department of Education and Early Childhood Development, Department of Human Services, Department of Planning and Community Development and Department of Justice. Hospital Operations Growth Funding provides $1.1 billion over five years, the Better, More Transparent Services initiative in child protection and family services allocates $203.6 million over five years and there is funding of $19.5 million over four years for additional child protection staff (Public Accounts and Estimates Committee, 2011). The expansion of core services has included significant increases in public sector staffing in these areas. However, the self-imposed fiscal constraints have meant that Governments have imposed large spending and staffing cuts in non frontline delivery areas. Chapter 3 details recent developments in public sector staffing. In the 2007-08 Budget, the Government introduced the Efficient Government agenda to implement savings of $632 million, stating that the savings would be ‘reinvested in frontline services’ (Budget Paper 1 Treasurers Speech, 2007: 3). The incoming Baillieu Government implemented cuts of $1.6 billion over five years that were promised in the election campaign. In the 2011-12 Budget these were extended by $637.7 million due to reductions in GST receipts. Spending cuts included $443 million over four years.

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The Government is also attempting to constrain growth in the public sector wage bill by restricting funding of wage increases to 2.5 per cent, with any increases above that level to be funded by productivity savings. Victorian Governments have announced large infrastructure plans over the past several years. The Victorian Schools Plan involved a 10 year $1.9 billion plan to rebuild or modernise all government schools and to construct 11 new schools using PPPs. The Victorian Transport Plan, with total funding of $38 billion for road, rail and freight projects. In 2007-08 the Government announced funding of $1.4 billion over four years to build additional public housing. Major water infrastructure projects totalled more than $5 billion in the five years to 2009. Infrastructure expenditure increased dramatically after the onset of the GFC with funding from the federal government for the Nation Building and Building the Education Revolution projects. Both Labor and Coalition Governments have emphasised the use of surpluses to fund infrastructure. In the 2008-09 Budget, the Government boasted of $20 billion infrastructure expenditure since coming to office in 1999 and promised a further $17 billion, stating: In other words: today’s surpluses will be tomorrow’s schools, hospitals, roads and trains (Budget Paper 1 Treasurers Speech, 2008: 4). Similarly, the Baillieu Coalition Government pointed out in the 2011-12 Budget that efficiency measures would produce large surpluses that would fund 94 per cent of the infrastructure program. Treasurer Wells stated: We can no longer aim, to run small marginal surpluses. We need to build the operating surplus to higher levels in order to fund infrastructure without increasing net debt (Cresswell, 2011) In addition to the extensive sale of public assets under the Kennett Government, Victorian Governments have expanded the role of the private sector through the extensive use of PPPs for infrastructure projects. Some of these PPPs included: (1) major road projects such as Melbourne City Link, EastLink and Peninsula Link; (2) new schools commissioned under the Victorian Schools Plan; (3) health infrastructure such as the Royal Children’s Hospital Redevelopment and the Victorian Comprehensive Cancer Centre; (4) the desalination plant; and (5) prisons such as Ararat, the Metropolitan Remand Centre and the Marngoneet Correctional Centre

2.5.3 Key fiscal outcomes for Victoria Figure 2.3 shows revenue, expenses and the net operating balance for the general government sector in Victoria from 1996-97 to 2010-11 and projected data until 2014-15. In the period to 2007-08 revenues were significantly higher than expenses but this situation has moderated in recent years. Between 1996-97 and 2010-11, revenue growth averaged 6.0 per cent per annum compared to growth in expenses of 6.8 per cent. Growth rates are expected to be lower for the remainder of the forward estimates period. Successive Victorian governments have achieved the objective of maintaining not operating surpluses. There have been positive NOB since 1996-97 and this is expected to continue over the forward estimates period. The NOB surplus peaked at over $2800 million in 1998-99 and then declined to be less than $250 million in 2010-11 (Government of Victoria, 2011-12 Budget).

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Figure 2.3 Revenue, Expenses and Net Operating Balance, Victoria, 1996-97 to 2014-15

Source: Victorian Budget Papers, various years The columns in Figure 2.4 show Victoria’s Net Debt for the period 1996-97 to 2010-11 and projections to 2014-15. The line depicts Net Debt as a proportion of GSP. Net Debt declined rapidly during the 1990s as the proceeds of the large asset sale program were used to repay debt (see Chapter 4 for full details of privatisation). Debt remained at low levels until the GFC, then increasing rapidly, from $1,070 million in 2001-02 to an estimated $11,907 million in 2010-11. As a proportion of GSP, the decline in net debt in the late 1990s and early 2000s was dramatic, falling from 6.2 per cent in 1996-97 to less than 0.6 per cent by 2001-02. It has since increased to around 3.8 per cent of GSP in 2010-11. Figure 2.4 Net Debt, Victoria, 1996-97 to 2014-15

Source: Victorian Budget Papers, various years; ABS, 2011, Cat no. 5220.0 Australian National Accounts, Table 1, Gross State Product (current prices).

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2.6 Fiscal strategy and outcomes: Queensland

2.6.1 Fiscal strategy The Goss ALP government fiscal strategy in 1990 had three central objectives (Wilkinson, 2010): . Fully fund long-term liabilities (such as superannuation and workers’ compensation); . Restrain borrowing –non-revenue generating assets such as hospitals and schools were funded from recurrent revenues and borrowing was restricted to assets that could produce revenue at least equal to the interest charges; and . Restraining revenue – committed to neither introduce new taxes nor increase charges and fees in real terms. This stance was maintained under the Borbidge National Party government. In 1998 the Beattie ALP amended the Financial Administration and Audit Act 1977, requiring the government to prepare a Charter of Social and Fiscal Responsibility. The fiscal strategy outlined in the 2000-01 Budget articulated fiscal principles designed ‘with the overriding requirement to maintain the integrity of the State’s finances’ (Queensland Government, Budget Paper 2, Budget Overview 2000-2001, 2000). The principles included: . Competitive Tax Environment: The Government will ensure that State taxes and charges remain competitive with the other States and Territories. . Affordable Service Provision: The Government will ensure that its’ level of service provision is sustainable by maintaining an overall General Government operating surplus, as measured in Government Finance Statistics terms. . Capital Funding: Borrowings or other financial arrangements will only be undertaken for capital investments and only where these can be serviced within the operating surplus, consistent with maintaining a AAA credit rating. . Managing Financial Risk: The Government will ensure that the State’s financial assets cover all accruing and expected future liabilities of the General Government Sector. . Building The State’s Net Worth: The Government will at least maintain and seek to increase Total State Net Worth. In 2002-03 the fiscal strategy was expanded to include the requirement for all Government departments to ‘achieve cost effectiveness improvements’ (BP2, 2002-03, page 4). In 2002 the Government also released its Public Private Partnership initiative to provide infrastructure through the private sector if cost savings could be realised. From 2005-06 specific targets were included with each fiscal principle and these were adjusted each year. For example, the target for the General Government Operating Surplus was set at $934 million for 2005-06; $245 million for 2006-07; $268 million for 2007-08 and $809 million for 2008-09. The fiscal outcomes in Queensland deteriorated as a consequence of the GFC. The Financial Accountability Act 2009 required the Treasurer to prepare and table the Charter of Fiscal Responsibility and outcomes in the Legislative Assembly. The revised fiscal principles are based on (BP2, 2009-10): . Fiscal sustainability

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o Meet all operating expenses from operating revenues in the General Government sector (operating expenses are total expenses less depreciation). o Growth of own-purpose expenses in the General Government sector not to exceed real per capita growth. o Achieve a General Government net operating surplus no later than 2015-16. . Maintain a competitive tax regime for business; and . Managing the State’s balance sheet. o Stabilise net financial liabilities as a proportion of revenue in the Non- Financial Public sector. o Target full funding of long-term liabilities such as superannuation. In the 2009-10 Budget the Government introduced structural initiatives to achieve the net fiscal targets, including savings and efficiency measures and asset sales. Public sector efficiency targets have become an integral component of fiscal policy in recent years as the Government has attempted to minimise expenses. Annual public sector efficiency targets increased from $60 million in 2008-09 to $180 million in 2009-10, $200 million in 2010-11, and are expected to reach $500 million per annum in 2014-15. (Queensland Government 2008, Queensland Government (2010)). Savings were to be achieved through reductions in corporate overheads, marketing and communication costs. The Government also implemented a wages policy to restrict wage increases to 2.5 per cent per annum until the Budget returns to surplus (Budget Paper 2, 2010-11). In the 2010-11 Mid Year Fiscal and Economic Review, the Government announced a program of 3,500 voluntary separations that were to occur in 2011-12 and 2012-13 in non- service delivery areas of the public sector to deliver annual savings of $175 million from 2012-13. The 2011-12 Mid Year Fiscal and Economic Review extended the Voluntary Separation Program to include an additional 1,500 positions to achieve additional ongoing savings of $150 million from 2013-14. The savings generated will be returned to the Consolidated Fund as agency savings dividend (2011-12 Mid Year Fiscal and Economic Review). The 2010-11 budget performance was adversely affected by natural disasters such as Cyclone Yasi as well as downward revisions to the GST and coal royalty revenues, causing the deficit to reach $1.616 billion. The deficit would have been higher except for advance payments of $1.4 billion for disaster relief (Queensland Government 2011).

2.6.2 Recent developments in Queensland Queensland Labor Governments have followed fiscal consolidation programs in recent years in an attempt to meet the targets set in the fiscal strategy. The Government announced an efficiency target of $60 million for 2008-09 and $80 million in 2009-10 (2008-09 Budget). This was subsequently extended by an extra $100 million in 2009-10 in the 2008-09 MYR. The efficiency target was increased again in the 2010-11 MYR to $400 million in 2012-13 and $450 million in 2013-14 and $500 million in 2014-15 (2010-11 MYR). The targets were further extended in the 2011-12 MYR to over $550 million for 2014-15. At the same time there was a reduction of $500 million for capital expenditure over the forward estimates period. The Government has also announced reviews for individual agencies. For example, a rationalisation of programs of Department of Employment, Economic Development and Innovation to remove areas of overlap and duplication was expected to harvest annual savings of $20 million. (2010-11 MYR).

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In common with other states, Queensland has concentrated increases in expenditure in areas of direct service delivery; health, education, disability and community services and law and order. This is evidenced by the fact that expenditure in social welfare, housing and community services increased by 163 per cent in the nine years from 1998. Child protection expenditure has risen in recent years. Therapeutic care and alternative care services were upgraded in 2008-09, and additional frontline staff were provided. A $45 million four year pilot for secondary services commenced in 2010-11 along with an additional $12 million for frontline staff. The 2011-12 Budget provided increased funding for domestic violence services, safe houses in remote areas and accommodation services for people with disabilities, children in the child protection system and the homeless. Another major theme in Queensland has been the fostering of a greater role for the private sector through asset sales, PPPs and outsourcing. Asset sales have been justified on the basis that private markets are able to operate efficiently and the proceeds can be used for other infrastructure: …decisions are being taken to exit mature and effective markets, freeing up funds to be redirected into significant and important government priorities (Budget Paper 2, 2008: 40). There have been two major asset sale programs. Energy retailers were sold in late 2006 and 2007 returning over $3 billion which was used to establish the Queensland Future Growth Fund to fund future infrastructure projects such as the Queensland Children’s Hospital and hospital facilities in Cairns, Mackay and Mt Isa. The second round of asset sales occurred in 2010 and 2011 and included Forestry Plantations Queensland, Queensland Motorways Ltd, the Port of Brisbane Corporation Limited, Abbot Point Coal Terminal and QR freight services. The sale proceeds were used to retire debt and support disaster recovery. The Queensland Government has engaged in alliance contracts and PPPs with private sector partners. PPPs have been used for the development of Kogan Creek coal mine, the construction of seven new schools in south east Queensland, hospitals and transport infrastructure. As has been the case with the Commonwealth and other state governments, the outsourcing of service delivery in Queensland has accelerated in recent years.

2.6.3 Key fiscal outcomes for Queensland Figure 2.5 shows the Budget outcomes in terms of revenues, expenses and the Net Operating Balance for Queensland for the period 1998-99 to 2010-11 and projections to 2014-15. Revenues increased at a slower rate than expenses in the period between 1998-99 and 2010- 11; 7.4 per cent compared to 8.5 per cent. In the years immediately prior to the GFC, revenues were significantly higher than expenses but the position was then reversed. The impact of the GFC is clearly reflected in the net operating balance outcome which was in surplus during the boom in the early to mid 2000s, reaching a maximum of $3,942 million in 2004-05. It has been in deficit since 2009-10 ($56 million) and is expected to remain in deficit for the entire Forward Estimates period, peaking at $4,058 million in 2011-12 before improving.

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Figure 2.5 Revenue, Expenses and Net Operating Balance, Queensland, 1998-99 to 2014-15

Source: Queensland Budget Paper 2, various years Te columns in Figure 2.6 show Net Debt from 1998-99 to 2010-11 and projections to 2014- 15. The line represents Net Debt as a proportion of GSP. Queensland has achieved a strong net debt outcome by maintaining negative net debt since 1998-99. However, positive net debt results are projected from 2012-13. As a proportion of GSP, net debt has been negative throughout the period. It reached negative 12.5 per cent in 2006-07 before deteriorating to negative 3.7 per cent in 2010-11. Figure 2.6 Net Debt, Queensland, 1998-99 to 2014-15

Source: Queensland Budget Paper 2, various years; ABS, 2011, Cat no. 5220.0 Australian National Accounts, Table 1, Gross State Product (current prices).

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2.7 Fiscal strategy and outcomes: South Australia

2.7.1 Fiscal strategy During the 1990s the fiscal strategy of successive Liberal Governments in South Australia was to deliver budget surpluses and reduce debt. The four year targets introduced in 1997-98 included: . To provide community services to a standard and level at least comparable with other States; . To maintain the non commercial sector in underlying balance over the medium term; . To further reduce debt in real terms with the aim of achieving an AA plus rating as soon as possible; . To eliminate the State’s unfunded superannuation liability; . To ensure the State has a competitive tax regime for business and job creation; and . To ensure the State has an adequate economic and social infrastructure to promote business investment and contribute to social well-being. In the 1998-99 Budget, the Government announced a major asset sales program that included the sale of electricity assets. After initially failing to secure passage of the electricity sale legislation, the Government was able to obtain approval in June 1999 and privatisation proceeded. The sale allowed the Government to repay debt and reduce future interest payments. The Ports Corporation, TAB and the Lotteries Commission were subsequently privatised. The newly elected Rann Labor Government passed the Public Finance and Audit (Honesty and Accountability in Government) Amendment Act 2002 that required the Government to prepare a Charter of Budget Honesty that defined the fiscal principles and reporting requirements and preparation and release of a pre-election report (Government of South Australia, 2002, 2002-03 Budget). The Government introduced a new Fiscal Responsibility Framework in the 2002-03 Budget that was primarily focussed on achieving balanced budgets on average as measured by the zero net borrowing over any four-year term. The specific targets were: . To achieve, on average, balanced budgets in the general government sector; . To ensure the State has an effective tax regime having regard to the Government’s social and economic objectives; . To provide value for money community services and economic infrastructure within available means; . To fully fund accruing superannuation liabilities and progressively fund past service superannuation liabilities; . To ensure risks to State finances are prudently managed, while maintaining at least AA plus credit rating; and . To ensure public non-financial corporations (PNFC) will only be able to borrow where they can demonstrate that investment programs are consistent with commercial returns (including budget funding). In the 2005-06 Budget the Government noted that the fiscal stance was more restrictive than was necessary and amended the fiscal targets:

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. To achieve at least a net operating balance in the general government sector in every year; and . To achieve net lending outcomes that ensure that the ratio of net financial liabilities to revenue continues to decline towards that of other triple-A rates states. The 2011-12 Budget provided details of achievements against the fiscal targets as shown in Table 2.8. Table 2.8 Progress in achieving fiscal targets

Target Progress

To achieve at least a net operating balance in the South Australia is forecasting a net operating deficit in general government sector in every year. 2010−11 and 2011−12 before returning to surplus in 2012−13.

To achieve net lending outcomes that ensure the ratio The net financial liabilities to revenue ratio is forecast of net financial liabilities to revenue continues to to peak in 2013−14 and decline to below current levels decline towards that of other triple-A rated states. by 30 June 2015. Most other triple-A rated jurisdictions have been reporting short-term increases in their ratios.

To ensure the state has an effective tax regime having Taxation revenue is forecast to grow broadly in line regard to the government’s social and economic with household income over the forward estimates, objectives. providing funds to meet the cost of public services expected by the public.

Tax reforms implemented by the government in recent years have promoted a harmonised approach with other jurisdictions and a competitive taxation regime for mobile business resources.

To provide value for money community services and The 2011−12 Budget maintains significant economic infrastructure within available means. infrastructure spending over the forward estimates in accordance with the Strategic Infrastructure Plan for

South Australia. It continues to provide the government opportunity to maintain good service levels for the public.

To fully fund accruing superannuation liabilities and The government is on target to fully fund progressively fund past service superannuation superannuation liabilities by 2034. liabilities.

To ensure that risks to state finances are managed South Australia is rated triple-A by both Standard and prudently to maintain a triple-A rating. Poor’s and Moody’s Investor Services.

To ensure public non-financial corporations (PNFCs) The Department of Treasury and Finance advises on will only be able to borrow where they can public non-financial corporations’ (PNFC) compliance demonstrate that investment programs are consistent with the government’s target as part of the Cabinet with commercial returns (including budget funding). project approval process. It is the government’s policy that projects approved by the relevant PNFC boards should also comply with this target. Source: Government of South Australia, 2011 BP2 2011-12 The fiscal targets were modified in the 2011-12 MYBR which stated that a surplus should be targeted over the economic cycle rather than every year. The specific targets established were: . A net operating surplus by the end of the forward estimates;

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. Once surplus is achieved, operating expenditure growth will be limited to trend growth in household income; and . Achieve a level of general government net debt that remains affordable over the forward estimates — a maximum ratio of net debt to revenue of 50 per cent.

2.7.2 Recent developments in South Australia This section reviews recent developments in fiscal policies in South Australia, particularly with regard to the amount and focus of expenditure policies, implementation of efficiency strategies, public sector staffing and increased private sector involvement in service delivery. The Government priorities for increased expenditure have been health, education, social inclusion, and public order and safety as well as boosting infrastructure expenditure. In 2007- 08 additional expenditure of $1498 million over four years included $523 million for health and mental health reform, $163 million for services for children in need and the disabled, $542 million for transport infrastructure and $114 million for law and order and community safety.2 The 2010-11 Budget included significant expenditure on frontline services. New initiatives in health totalled $883.5 million over four years to meet increased demand for health services and to implement new programs such as additional elective surgery, the four hour target for emergency departments and additional staffing. Child Protection was a particular focus of service delivery from 2002 as the Government implemented recommendations of the Layton Review and the Mullighan Inquiry. In 2008-09 there was also a significant increase in expenditure to implement the child protection strategy, Keeping Them Safe – In Our Care for early intervention, case management, home visiting and reunification services and residential care. A further $137.7 million over four years was provided for children in care in the 2010-11 Budget, including an increase in the number of child protection workers. Other priorities included services for people with disabilities and accommodation for the homeless, policing and correctional services. In 2010-11 disability services funding was increased by $70.9 million and an additional $13.8 million was made available for disability equipment. Education spending of $156 million over 4 years provided for additional teachers and school staff, capital works and support for students with disabilities. The Nation Building – Economic Stimulus Plan introduced by the Commonwealth and State governments following the onset of the GFC provided additional funding of almost $3 billion over four years for education housing, transport and other infrastructure projects. In recent years there have also been cuts in spending and staffing which the Government has targeted at non-frontline services. The cuts have been justified as unavoidable due to the deterioration in fiscal outcomes and the need to prioritise frontline service delivery. In 2006- 07, as a consequence of a review of spending priorities, the Budget also contained significant projected savings of $695.1 million over four years, including a 0.25 per cent efficiency dividend expected to save $51.8 million per annum and the imposition of a cap on full-time equivalent staffing for general government agencies (Budget Paper South Australia, 2006). The South Australian Government responded to the GFC with expenditure cuts. The 2008-09 Budget included savings of $250 million to be achieved over three years ($25 million in 2009-10, $75 million in 2010-11 and $150 million in 2011-12). The Sustainable Budget Commission was announced in the 2009-10 Budget to …recommend strategies to achieve additional budget improvement measures of $750 million in the forward estimates period, with $150 million to be achieved in 2010-11,

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$250 million in 2011-12 and $350 million in 2012-13 (Government of South Australia, 2009: 5 -2009-10 Budget Speech, Budget Paper 2). The fiscal strategy was designed to return the state to sustainable surpluses in the medium- term. In the 2009-10 Budget a cap of 2.5 per cent for public sector wage increases was proposed on the basis that inflation was low, public servants were privileged due to employment security and wage restraint would result in fewer job losses. The Government established a Sustainable Budget Commission tasked with recommending strategies to save $750 million over the forward estimates period3. Despite the improvement in economic performance since the establishment of the Commission and the observation that ‘The South Australian Budget is not in crisis’ (Sustainable Budget Commission, 2010: vii), the report urged the Government to proceed with large savings measures and maintain a net operating surplus large enough to make adequate contributions to fund capital expenditure to ‘avoid a marked deterioration in the State’s net financial liabilities-to-revenue ratio’ (Sustainable Budget Commission, 2010: 19). Recommendations included measures to reduce waste and duplication to increase public sector efficiency but also included cuts to, and elimination of, some programs despite the fact that the Commission acknowledged the programs had merit. The Government was generally supportive of the majority of recommendations although it did not support the abolition of the Department of Trade and Economic Development and the transfer of its’ functions to other departments, the abolition of Bio Innovation SA and Zero Waste programs, changes to government procurement or the sale of SA Lotteries and Forestry SA (Government of South Australia, 2010). Large savings measures of $1.5 billion over the forward estimate period were announced in the 2010-11 Budget. The largest savings were in Health ($316 million) and across government savings ($308.5 million). Staffing reductions announced in the budget would total around 3750 over four years when added to the reductions already announced. Further staff reductions of 400 FTEs were included in the 2011-12 Budget with projected savings of $31 million per annum. Infrastructure projects have been an important component of the delivery of Government economic and social policy in recent years. Projects have included the Nation Building transport, housing and education initiatives. Major infrastructure commitments include a number of PPPs such as the $1.7 billion Marjorie Jackson-Nelson Hospital and a total of $600 million for education and correctional services projects. The Education Works Strategy announced in the 2006-07 Budget included six new schools at a cost of $134 million. A prison at Mobilong, a new secure facility for youth and a pre-release centre were also to be delivered by PPPs worth $500 million. Some projects have not proceeded. The $100 million for the upgrading of the AAMI stadium was announced in the 2008-09 Budget and subsequently deferred until after 2011-12 in the 2008-09 MYBR. Similarly, the New Prisons and Secure Facilities Project was cancelled in 2009. An extensive privatisation program was implemented by the previous Coalition Government in the 1990s. The Labor Government announced privatisation initiatives in the 2011-12 Budget; the licensing of SA Lotteries and the sale of the harvest rights to Forestry SA plantations to private operators.

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2.7.3 Key fiscal outcomes for South Australia The revenues, expenses and net operating balance for South Australia since 2002-03 are shown in Figure 2.7 (actual data to 2010-11 then projections). While revenues have generally been higher than expenses they have been growing at a slower rate. Between 2002-03 and 2010-11 average annual revenue growth of 6.1 per cent was significantly lower than the 6.8 per cent average growth in expenses. The Government delivered net operating surpluses prior to the GFC, peaking at $464 million in 2007-08. Deficits have been recorded in recent years with the largest deficit expected to reach $453 million in 2012-13. A surplus of $334 million has been projected for 2014-15. Figure 2.7 Revenue, Expenses and Net Operating Balance, South Australia, 2002-03 to 2014- 15

Source: South Australian Budget, various years; 2011-12 Mid Year Budget Review. Figure 2.7 shows the Net Debt performance for South Australia. The columns represent the Net Debt outcomes to 2010-11 and estimated outcomes to 2014-15. The line shows Net Debt as a proportion of GSP. The South Australian Government successfully reduced net debt in the early 2000s and achieved small negative net debt results between 2005-06 and 2007-08. However, the situation was quickly reversed with the onset of the GFC as net debt turned positive in 2008-09 and then accelerated. This deterioration is reflected in the net debt to GSP ratio which grew from -0.4 per cent in 2007-08 to 3.6 per cent by 2010-11.

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Figure 2.8 Net Debt, South Australia, 2002-03 to 2014-15

Source: South Australian Budget, various years; ABS, 2011, Cat no. 5220.0 Australian National Accounts, Table 1, Gross State Product (current prices).

2.8 Fiscal strategy and outcomes: Western Australia

2.8.1 Fiscal strategy In 1992, the fiscal strategy of the Lawrence ALP Government in Western Australia emphasised: containing increases in total state debt to at least 1 per cent less than economic growth (on average); repayment of debt; and, regaining the Triple-A credit rating in the medium term (Wilkinson, 2010). The incoming Court Liberal-National Government continued to prioritise debt reduction and balanced budgets. The Government Financial Responsibility Act 2000 established principles that included: funding current services from current revenues; spending and taxing policies that ensured stability and predictability; and prudent management of financial risks (Government of Western Australia, 1999 Budget Paper 3). The fiscal policy developed is shown in Table 2.9. Targets included net assets, net debt, operating expenses, the operating balance, and rationalisation of public sector ownership.

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Table 2.9 Fiscal strategy, Court Government

Item Target

Net assets Maintained or increased

Net debt A declining net interest cost as a proportion of own source revenue for the public sector

Operating expenses Real per capita expenses for the Consolidated Fund Entity be decreased

Operating balance An accrual operating surplus for the total public sector

Cash surplus The Consolidated Fund and general government sectors run an underlying cash surplus

Risk management Maintenance over the forward estimates of the financial management plan announced in the 1998-99 Budget to manage and fund accruing superannuation liabilities

Public ownership Rationalise ownership of assets exposed to business risks Source: Government of Western Australia, 1999 During the term of the Court Government, a privatisation program was implemented that resulted in the sale of the State Government Insurance Office, BankWest and the Western Australian State Printing Division. The Labor Governments of Gallop (2001-2006) and Alan Carpenter (2006-2008) maintained the fiscal stance, seeking to achieve net operating surpluses and reduce debt (Wilkinson, 2010). The Government undertook to implement election promises through savings, such as, a reduction in the number of ministers; cuts to spending on advertising and consultants, the introduction of a ‘priority dividend’ that grew from 1.5 per cent of agencies’ total operating expenses in 2001-12, to 2 per cent in subsequent years and then a further $50 million per annum (Government of Western Australia, 2001 budget paper 3). Frontline services including health, education, police, community development and the Disability Services Commission were exempt from the priority dividend. The fiscal strategy outlined for the 2001-02 to 2005- 06 period were (Government of Western Australia, 2001 budget paper 3): . Introduction of the Government’s election commitments in a fully funded manner; . Achievement of the Government’s election platform within a framework of fiscal targets: o Retain the State’s triple-A credit rating; . Net debt to total non-financial public sector revenue at or below 45 per cent; and . Real per capital expenses for general government not to increase. o Maintain or increase the net worth of the public sector; o Achieve an operating surplus for the general government sector; and o Maintain Western Australia’s tax competitiveness. . Repair of a growing imbalance between revenue and expenses which resulted in four consecutive operating deficits to 1999-2000, and was masked in 2000-01 by unusually strong growth in revenue parameters and one-off factors including asset sales; and

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. The implementation of revenue measures which contribute to the equity and efficiency of the tax system to address the imbalance. In the 2001-02 Budget, the government announced an enhanced voluntary redundancy package for public sector employees and a process of functional reviews to be conducted in 2002-03 to identify areas of duplication or functions that ‘least serve priority community outcomes’ (Government of Western Australia, 2002: 8 budget paper 3) with a view to redirecting resources. Continued targeting of expenditure is reflected in the increase in spending on health, education and training, law and order and community support of $352 million (or 84 per cent of the total increase in general government expenses in 2004-05). Reductions in state government charges for stamp duty on property conveyances, land tax and household fees and charges were also provided. The fiscal targets presented in the 2005-06 Budget further defined specific objectives and measures: . Maintain or increase the net worth of the public sector; . Achieve an operating surplus for the general government sector; . Retain the state’s triple-A rating o Maintain the debt to revenue ratio for the non-financial public sector at or below 14 per cent; and o Ensure that real per capita own-purpose expenses for the general government sector do not increase; . Maintain Western Australia’s tax competitiveness – maintain tax revenue as a share of GSP below the other states’ average. Throughout the term of the Labor Governments, surpluses were used to fund capital investments. New spending initiatives and tax relief were also provided. In 2007-08 the government announced housing affordability and climate change measures as well as the establishment of the Department for Child Protection in response to the Ford Review Report. In the 2008-09 Budget the government announced the building of the Fiona Stanley Hospital through a public private partnership that would not increase public sector debt, and other infrastructure programs. The Barnett Government cited the declining economic situation as the motivation for a 3 per cent efficiency dividend and caps on public sector staffing in the 2009-10 Budget along with other savings measures while maintaining the long-standing fiscal strategy and targets with some amendments: . Maintain or increase the real net worth of the total public sector; . Achieve an operating surplus for the general government sector; . Maintain the ratio of total non-financial public sector net interest costs as a share of revenue at or below 5%; . Ensure that real per-capita own-purpose general government expenses do not increase; and . Provide a fair and efficient taxation system that is competitive with other Australian States.

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The new targets replaced the former net debt to revenue ratio target with a net debt affordability ratio (as measured by net interest costs as a share of revenue). The general government expense target is now based on growth in wages. The 2010-11 Budget prioritised improvements in service delivery for key public services, infrastructure projects and strong financial management to retain the triple-A credit rating and sound finances. The fiscal targets from previous years remained, except public sector interest costs were to be at or below 4.5 per cent of revenue (down from 5 per cent). The Government outlined the policies that had been introduced to reduce the rate of growth of expenses: a 3 per cent efficiency dividend; a new policy for public sector wages; a ceiling on staff numbers; and voluntary redundancy programs (469 packages from $48 million allocated in March 2009; around 300 in March 2010; and a further 400 announced in the 2011-12 Budget). Expenditure cuts were imposed despite the fact that the Government acknowledged that the demand for services such as health and education was increasing (Government of Western Australia, 2011 Budget paper 3 2011-12). In response to the Economic Audit Committee report (2009) the government has instituted a Partnership Forum consisting of representatives of Government departments and NFP organisations to oversee the expansion of the outsourcing of the delivery of government services. The 2011-12 Budget included $604 million funding for the not-for-profit sector which will ensure sustainable funding into the future.

2.8.2 Recent developments in Western Australia Buoyant economic conditions in Western Australia due to the mining boom have spared the state from some of the fiscal problems encountered by other states in recent years. Western Australia has also experienced strong population growth that has stimulated the demand for public services. Growth in expenditure in staffing has been concentrated in frontline positions such as child protection, police and corrections staff, teachers and health professionals. However, significant expenditure and staffing cuts have also been a feature of Western Australian budgets. The incoming Barnett Liberal /Coalition Government established an Economic Audit Committee to examine the performance of the public sector. The 2008-09 Mid Year Projections Statement (Government of Western Australia, 2008: 3) included a 3 per cent efficiency dividend that was allocated to all agencies from January 2009 which was ‘integral to maintaining the State’s financial health’. This measure was expected to deliver savings of $1.7 billion from 2009-10 to 2012-13 (Budget 2010-11). The efficiency dividend was subsequently extended to include a 5 per cent measure for Government Trading Enterprises from 2011-12. In the 2009-10 Budget the Government announced savings of $1.1 billion and foreshadowed further cuts after the final Economic Audit Committee report was released. In addition to the efficiency dividend, a ceiling on full-time equivalent staffing levels was imposed in general government agencies (Government of Western Australia, 2009). Further expenditure cuts were announced in the 2009-10 Government Mid-Year Financial Projections Statement to achieve total savings of $1.4 billion in 2009-10, and $8.5 billion over the four years to 2012- 13. Further savings of $300 million announced in the 2011-12 Budget are to be achieved by reviewing existing programs. Large budget surpluses have enabled the Government to repay debt and fund some large infrastructure projects without recourse to debt financing. The Government used the surplus from 2005-06 to pay off all debt for the New MetroRail project. Similarly, $1.09 billion of

Draft Report 47 the 2006-007 surplus was used to fully fund the new Fiona Stanley Hospital in Perth. The Government stated: … the Carpenter Government will have fully paid for the two biggest public sector capital works projects ever undertaken in Western Australia. What is more we will have funded these two major projects without the need for borrowings and with no debt servicing costs into the future (2007-08 Budget Speech). The large size of the infrastructure program meant that some debt financing was also required. In 2007-08 the Government announced that infrastructure expenditure would reach $21.6 billion over four years. The following year projected infrastructure expenditure rose to $26 billion over four years for hospitals, prisons, police stations etc. In 2009-10 the coalition Government committed to further electricity generating capacity and flagged an intention to increase the use of PPPs to deliver infrastructure. PPPs for the Queen Elisabeth II Medical Car Park, Midland Health Campus and the Eastern goldfields Regional Prison were announced in the 2011-12 Budget. The Country High Schools Hostels Authority also used PPPs to deliver residential colleges at high schools. The Government has also outsourced a variety of services. Health promotion programs were outsourced to NGOs including healthy eating, diabetes awareness, anti-smoking campaigns and safety in the home (2007-08 Budget). Management of Acacia Prison was outsourced to SERCO in 2006. The value of child protection services outsourced to NGOs increased from $65.1 million in 2005-06 to $82.8 million in 2010-11 and continues to rise. Similarly grants to NGOs for disability services increased from $163.6 million in 2005-06 to $255.3 million in 2010-11. The value of per capita grants to private schools increased from $197.5 million to $316.8 million over the same period. Court security and custodial services and traffic infringement processing has also been outsourced. The philosophical commitment of the current Government to outsourcing suggests that the recent acceleration will continue into the future. In the 2010-11 Budget the Government committed to financing capacity building in the NGO sector: By recognising that government does not always have to “do” but is sometimes best placed to “enable”, we have set the framework to build the capacity of those organisations so we can begin shifting the delivery of more services away from government agencies to the community sector. (Budget Speech 2010-11; Page no??) The Government provided a $10 million Community Development Investment Fund to provide low interest loans to NGOs to purchase property, vehicles and equipment and funding of $2 million in 2010-11 and $4 million annually from 2011-12 for a Social Innovation Grants Program to ‘promote new ways of delivering human services by encouraging innovation within the community sector’ (Budget Paper 1, Budget Speech 201: 8). In 2011-12 the Government announced that funding for NGOs delivering human services would increase by 25 per cent by 2014-15.

2.8.3 Key fiscal outcomes for Western Australia In contrast to other states, revenue growth has outstripped growth in expenses in Western Australia in the period from 1998-99 to 2010-11. Figure 2.9 shows revenues, expenses and the Net Operating Balance from 1998-99 to 2010-11 and projections to 2014-15. Revenue growth averaged 8.4 per cent per annum while expenses increased at 8.0 per cent. Western Australia has consistently recorded net operating surpluses since 2000-01, with the largest surpluses achieved in the period immediately prior to the GFC ($2507 million in 2007-08). In the post-GFC period surpluses/expected surpluses have plateaued at a much lower level.

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Figure 2.9 Revenue, Expenses and Net Operating Balance, Western Australia, 1998-99 to 2014-15

Source: Government of Western Australian, Budget papers various years Figure 2.10 shows the Net Debt outcome for Western Australia between 1998-99 and 2010- 11 and expected outcomes to 2014-15. The columns represent Net Debt and the line shows Net Debt as a proportion of GSP. Net debt declined in the early part of the period from 1998- 99 and became negative in 2003-04 and continued until 2009-10 as a result of the large NOB surpluses. Net debt became positive in 2010-11 and is expected to increase substantially in the forward estimates period due to the combination of low NOB surpluses and large expenditure on infrastructure. Figure 2.10 Net Debt, Western Australia, 1998-99 to 2014-15

Source: Government of Western Australian, Budget papers various years; ABS, 2011, Cat no. 5220.0 Australian National Accounts, Table 1, Gross State Product (current prices).

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2.9 Fiscal strategy and outcomes: Tasmania

2.9.1 Fiscal strategy The Tasmanian Government has implemented a number of fiscal strategies in recent years that have focussed on producing surpluses and eliminating debt. The 1994-95 Budget introduced a 5 year strategy aimed at reducing government Net Debt to no more than 10.5 per cent of GSP by June 2000 (Wilkinson, 2010). The Fiscal Strategy implemented as part of the 1998-99 Budget sought to maintain budget surpluses, reduce net debt and debt servicing levels and address the State’s unfunded superannuation liability (TDTF, 1999). The Fiscal Strategy that was due to run until 2003-04 included targets such as: . The Budget was to be managed on a long-term sustainable basis by maintaining the Consolidated Fund in surplus from 1999-2000; . Proceeds from major asset sales were to be used to repay debt; . Costs were to be reduced by providing more efficient administration across the State Service; . The Tax burden on industry would not be increased; and . The Debt burden to be reduced by keeping the General Government Net Debt as a proportion of GSP below 10 per cent and keeping the net interest cost ratio 5 per cent. All targets were met two years ahead of schedule and a new Fiscal Strategy (2002-03 to 2005-06) was introduced with the objectives of: maintaining ongoing Budget surpluses; eliminating General Government Net Debt and net interest payments; making significant reductions in Total State Sector Net Debt; and eventually eliminating the Government’s unfunded superannuation liability. The next Fiscal Strategy that was to run from 2006-07 to 2010-11 included the following targets: . Maintain a sustainable Budget Position through Net Operating Surpluses and Fiscal Surpluses (over a four-year rolling period); . Reduce the debt and liability burden by ensuring that the General Government Sector remained debt free and eliminating the unfunded superannuation liability by 2033; . Maintain a competitive business environment – no new taxes; and . Maintain the General Government Sector investment in infrastructure in real terms The impact of the GFC meant that these targets could not be met. The 2009-10 Budget (Tasmanian Government, 2009: 1.2) noted: As a result of the GFC, the Government could not achieve its previous Fiscal Strategy targets over the 2009-10 Budget and Forward Estimates without breaching the Government's commitment to maintain frontline services, minimise the impact on public sector jobs and invest in infrastructure. Accordingly, the Government has developed an Interim Fiscal Strategy (IFS) that establishes a set of targets, the progressive achievement of which will return the Budget to a sustainable position. The Interim Fiscal Strategy was to be in place from 2009-10 to around 2014-15, by which time normal economic conditions were expected to prevail. Specific targets include:

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. By 2014-15 achieve a Net Operating Surplus, on average over a rolling four-year period in the General Government Sector; . By 2014-15, achieve an underlying Net Operating Surplus, on average over a rolling four-year period for the General Government Sector; . By 2014-15, achieve a modest Fiscal Surplus; . By 2014-15, achieve a modest Consolidated Fund Surplus; . Make the provisions necessary to extinguish the net unfunded superannuation liability by 2035; . The ratio of Net Financial Liabilities to Revenue for the Non-Financial Public Sector will not exceed 110 per cent by 2014-15; and . The General Government Sector will remain Net Debt free. The Interim Fiscal Strategy was to support employment and ensure that frontline services were delivered to Tasmanians. Budget Management Strategies were also implemented with a view to reducing Government consumption by 2 per cent in real terms in 2009-10 and saving $760 million in 2009-10 and over the Forward Estimates period. Agencies were required to reduce the size of the SES and review middle management. Other savings included efficiency dividends, wage restraint, and other cost reduction strategies. The 2010-11 Mid-Year Financial Report noted that the impact of the GFC in reducing revenues and increasing expenditures had been more severe than forecast in the 2010-11 Budget. According to the 2010-11 MYFR, the ongoing impact of reduced economic activity in the aftermath of the GFC meant that the targets established in the Interim Fiscal Strategy could not be achieved without remedial action. Factors that impinged on the ability to meet these targets included: . Further reductions in GST revenues from the Australian Government totalling $194.6 million over the Forward Estimates period due to lower than expected economic activity and increased savings by the Australian population; . Increased infrastructure commitments that will support economic activity; . Reduced State taxation revenues due to reduced economic activity; and . Additional funding for the Department of Health and Human Services and Department of Education to support service delivery (around $84 million in total). A number of the targets set in the Interim Fiscal Strategy were not being achieved. None of the targets for the Net Operating Balance, the Fiscal Balance or the Consolidated Fund were on track to achieve surpluses by 2014-15. Similarly, the target of eliminating the Net Unfunded Superannuation Liability by 2035 was not expected to be met. The Government introduced a new Fiscal Strategy in the 2011-12 Budget that simplified the fiscal targets and increased the medium to long-term focus of the strategy. Rather than focusing on targets to be achieved on a four-year rolling basis, the new Fiscal Strategy introduced short-term, medium term and long-term targets as detailed in Table 2.10. The new targets were described as ‘more difficult than those in place under the previous Interim Fiscal Strategy’ (Tasmanian Government Budget Paper, 2011: 3.10). The increase in the Net Operating Balance (NOB) targets in the medium and long-term indicates that the government intends to generate revenues that are substantially in excess of current expenditures. Responsible fiscal management requires that recurrent expenditure can be financed by recurrent revenues over the economic cycle. The targets set by the Tasmanian government fiscal policy will unnecessarily reduce government expenditures, causing reductions in the level and quality of services delivered to the community.

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Table 2.10 New Fiscal Strategy, Tasmania

Principle Financial Measure Short-term target Medium-term target Long-term target

To achieve and maintain a sustainable . Net Operating Balance 2011-12: > ($120 m) 2014-15: > $50 m 2022-23: > $200 m Budget position

The debt and liability burden on the . General Government Net Debt 2011-12: < $0 2014-15: < ($300 m) 2022-23 < ($1500 million) Tasmanian community will continue to be reduced over the longer term and financial risks will be prudently managed . Ratio of Net Financial Liabilities 2011-12 : < 115% 2014-15: < 110% 2022-23: < 110% to Revenue for the Non-Financial Public Sector

A competitive business taxation . Tasmania's Tax Severity Index 2011-12: <100 2014-15: < 100 2022-23: <100 environment will be maintained

Investment in core General . Level of Capital Expenditure in 2011-12: > $0 2014-15: > $0 2022-23: > $0 Government infrastructure will be Excess of Depreciation maintained in real terms Source: Tasmanian Government Budget Paper (2011)

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2.9.2 Recent developments in Tasmania In a fiscally constrained environment, expenditure increases in Tasmania have been targeted to the major service delivery areas of health, education, community services and housing. Major infrastructure programs have also been prominent in recent years, including the Nation Building funding from the Commonwealth. The concentration of expenditure was indicated in the 2008-09 Budget that delivered total expenditure of $4 billion which was concentrated in Education ($1.1 billion) and Health and Human Services ($1.5 billion). Similarly, funding of $1.8 billion over four years was provided for schools, hospitals, local roads, highways, community centres and community sports facilities in the 2010-11 Budget. The 2007-08 Budget included an ambitious program of education reform to post compulsory education that included the establishment of three entities from the senior secondary colleges and TAFE Tasmania. Year 11 and 12 education would be provided by the Tasmanian Polytechnic and the Tasmanian Academy and the Tasmanian Skills Institute to focus on workforce skills development. Increased funding was provided to implement the Tasmanian Health Plan, affordable housing, child protection and family support. An additional 100 ambulances were provided but user charges were introduced for the use of ambulance services. Despite increasing funding, expenditure by the Department of Health and Human Services has been over budget in recent years due to increased demand for medical treatment, disability services and child and family services. Specific programs that have attracted additional funding include: . Education - literacy and numeracy, reductions in class sizes, assistance for children with high needs; . Health and Human Services – additional elective surgery, reduction in waiting times for emergency departments, public health campaigns, family services for at risk families, additional child protection workers, out of home care services, services for people with disabilities. Public sector staffing increases were targeted to these frontline services. However, the detrimental impact of the GFC on fiscal outcomes prompted the Tasmanian Government to implement stringent savings measures that have impacted on public sector staffing and the delivery of services to the people of Tasmania. In the 2009-10 Budget the Government revealed that negotiations with public sector unions to implement a wage pause were unsuccessful and an Employee Management Program would be introduced. While existing wage agreements would be honoured, a subsequent wages policy would fund agencies for wage increases of only 1 per cent in 2009-10 and 2010-11 and 2.5 per cent per annum from 2011-12 to save $100 million. Higher wage increases would be unfunded and would need to be paid by finding other savings. In total, the 2009-10 budget entailed savings of over $760 million reflecting the Government’s ‘ongoing commitment to strong financial management and to returning the Tasmanian Budget to a sustainable position’ (page 12 of 2009-10 Budget Speech). In the 2010-11 Mid-Year Financial Report the Government announced that immediate measures were required to meet the fiscal targets established in the 2010-11 Budget. Corrective measures include: . Deferring or ceasing spending commitments attached to election pledges for the 2010 election until the impact of the GFC has dissipated;

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. Ceasing non-critical infrastructure projects; . Implementing a Public Sector Productivity Strategy to reduce expenditure to within the State’s revenue capacity; . Bring annual capital expenditure back to levels attained prior to the GFC; and . Increased oversight and efficiency of government-owned businesses to reduce risks to taxpayers and reduce the impact on essential services. The Public Sector Productivity Strategy included a major review of agency programs to cut programs that did not meet government priorities or were ineffective or inefficient. A 3 per cent annual productivity savings target equivalent to 2300 FTEs over the four years to 2014- 15 was to be achieved by attrition, transfers and targeted separations. Subsequently, the Government extended the Education Department’s Workforce Renewal Incentive Program to all agencies. The 2011-12 Budget reaffirmed the Government’s commitment to achieving large savings by announcing expenditure cuts totalling $1.25 billion in central measures and specific agency measures over four years. Specific agency measures are expected to reach $176.7 million in 2011-12 and a total of $877.2 million by 2014-15 (Tasmanian Government, 2011a). The largest funding cuts will be to the Department of Health and Human Services ($520.6 million or 59.3 per cent) and the Department of Education (189.8 million or 21.6 per cent). The Treasurer acknowledged the severity of the proposed cuts: Achieving these savings will not be simple and it will not be painless. It will impact on public sector staff and, where it is unavoidable, it will impact on some services they provide to Tasmanians. (Budget speech 2011-12 page 2). In Tasmania, functions have been transferred from the public sector to the private sector over time. Outright privatisation programs have not been extensively used as has been the case in some other states. The Government announced its intention to sell Hobart Airport, the Southern Regional Cemetery Trust and the Printing Authority of Tasmania in 2007. In 2011 TOTE Tasmania was sold and Forestry Tasmania sold the rights to its plantation estate. The Government has engaged in extensive outsourcing of service delivery to NGOs, particularly disability services and child and family support services.

2.9.3 Key fiscal outcomes for Tasmania Figure 2.11 shows actual revenues, expenses and the Net Operating Balance from 2002-03 to 2010-11, and estimated outcomes from 2011-12 to 2014-15. Over the period to 2010-11 the annual average growth of expenses (7.0 per cent) outstripped revenue growth (5.9 per cent). Over the Forward Estimates period minimal growth is expected, although revenues are expected to grow more quickly than expenses. The magnitude of expenditure restraint is underlined by the fact that nominal expenditure is projected to decline from $4,790 million in 2010-11 to $4,781 million in 2014-15. This represents a large cut in real expenditure which will have significant detrimental impacts on service delivery in Tasmania. The Net Operating Balance has been positive for most of the period; surpluses were recorded between 2002-03 and 2005-06, followed by deficits in 2006-07 ($39 million), 2008-09 ($79 million) and 2010-11 ($23 million). A further deficit is expected for 2011-12 ($113.8 million), before a return to surplus in 2012-13.

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Figure 2.11 Revenue, Expenses and Net Operating Balance, Tasmania, 2002-03 to 2014-15

Source: Tasmanian Government (2011); TDTF (various years). Figure 2.12 tracks net debt since 1999-2000. The columns show actual Net Debt to 2010-11 and projections to 2014-15 while the line depicts Net Debt as a proportion of GSP. Until 2003-04 net debt was positive and falling progressively. Between 2004-05 and 2007-08 net debt was negative and the net debt position was improving. Since the economic downturn, net debt has continued to be negative but has deteriorated. The improvement in net debt saw it decline from 9.3 per cent of GSP in 1999-2000 to negative 4.7 per cent of GSP by 2007-08 and it remained at negative 1.7 per cent in 2010-11. The Government has staunchly adhered to remaining Net Debt free by instituting large cuts in service delivery and public sector staffing. Figure 2.12 Net Debt, Tasmania, 1999-2000 to 2014-15

Source: Tasmanian Government (2011): TDTF, Treasurer’s Annual Financial Report (various years); ABS, 2011, Cat no. 5220.0 Australian National Accounts, Table 1, Gross State Product (current prices).

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2.10 Summary and conclusion Over the past few decades there has been a shift in fiscal policy in Australian states toward fiscal constraint and a reduced role for the public sector. Fiscal strategies have frequently been backed by legislation such as the Financial Accountability Act 2009 in Queensland; Financial Management Act 1994 in Victoria; Fiscal Responsibility Act 2005 in NSW. All states have set targets for budget sustainability that have involved either financial targets or ratios for net operating surpluses and net debt outcomes that include an emphasis on maximising surpluses and minimising debt so that infrastructure can be funded in whole or substantially by surpluses so that the State either does not go into, or minimises, its net debt position. Some states have travelled further down this road than others. . Fiscal Strategies. Comparing outcomes for Australian states is far from straightforward due to differential impacts of: (1) economic conditions, including periods where some states have experienced booms while others have stagnated or produced low rates of economic growth, commonly referred to as the two-speed or multi-speed economy; and (2) short-term financial benefits such as the proceeds of privatisation that are offset by future revenue losses. Most State governments produced net operating surpluses for most of the past decade or longer. However, the onset of the GFC undermined revenues, particularly those directly related to the level of economic activity such as GST distributions from the Australian Government and state taxes such as payroll tax and stamp duties. Fiscal outcomes for NOB, net debt, and growth in revenue and expenses are shown in Table 2.11. . Net operating Balance. While all states have targeted NOB surpluses, these have not always been delivered. The GFC has caused a significant deterioration throughout Australia. Victoria has achieved a NOB throughout the period but this has been substantially reduced in the post-GFC years. Other states have recorded surpluses in most years (NSW and Western Australia). Queensland, South Australia and Tasmania had surpluses in the pre-GFC period and mixed results since then, with Queensland recording sustained deficits. . Net Debt. Despite the severe economic downturn following the GFC the Tasmanian Labor/Green Government has steadfastly refused to countenance going into debt. Queensland, Western Australia and South Australia have moved into a position of net debt after the GFC. NSW and Victoria have been in debt for the entire period and net debt has been increasing in recent years. . Revenue and Expenditure growth. Revenues grew more slowly than expenses in all states with the exception of WA, where average annual revenue growth of 8.0 per cent outstripped growth in expenditure of 8.0 per cent. The discrepancy was largest in Tasmania, where revenue growth was only 5.9 per cent compared to expenditure growth of 7.0 per cent.

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Table 2.11 Summary of fiscal outcomes

State Net operating balance Net debt Revenue Expenses Growth Growth (%) (%)

NSWa In surplus for the entire period Net Debt has been positive for the 5.9 6.1 with the exception of 2008-09 entire period. It fell until 2005-06 and 2011-12. and then increased (or is forecast to increase) in most years.

VICb Actual and forecast surpluses for Net Debt has been positive 6.0 6.8 the entire period although the throughout the period. It declined surpluses have fallen until 2007-08 but then increased. substantially.

QLDc Surplus results for most of the Negative throughout the period 7.9 8.5 period prior to the GFC. In deficit from 1998-99 but is forecast to be since 2007-08 (except for a small positive from 2012-13. surplus in 2008-09) and forecast to remain in deficit.

SAd NOB has been positive for the Negative Net Debt between 2005- 6.1 6.8 majority of the time – was 06 and 2007-08 but positive for negating in 2008-09, 2010-11 and the remainder of the period. forecast to be negative in 2011- 12.

WAc In surplus for the entire period Net Debt was negative between 8.4 8.0 except 1998-99 and 1999-2000. 2003-04 and 2009-10 but positive Surpluses rose sharply in 2005-06 for the remainder of the period. and peaked in 2007-08.

TASd Surpluses until 2005-06 then Positive net debt until 2003-04 5.9 7.0 mainly deficits. then negative for the remainder of the period. Notes: a. 1997-98 to 2010-11; b. 1996-97 to 2010-11; c. 1998-99 to 2010-11; d. 2002-03 to 2010-11 Source: Budget Papers, various years. All governments have expressed concern about the deterioration in fiscal outcomes and the threat to credit ratings and various strategies have been employed in recent years in an attempt to improve outcomes. These can be summarised as: . Prioritising expenditure to deliver core services – health, education, policing, disability, children’s and community services. However, even these service areas have been subject to stringent constraints in expenditure growth so that it can be observed that programs and expenditures are not determined on the basis of providing the quantity and quality of services needed to meet community needs. . Cutting expenditure in non-core or non-service delivery areas and staffing. Strategies to implement this objective include large retrenchment exercises targeted at non-frontline staff, the imposition of so-called efficiency dividends and the elimination of lower priority programs and other costs. These types of policies have been prominent since the GFC and have the effect of further suppressing economic activity which causes a further deterioration in the fiscal position of states. In addition, as we will discover in the next chapter, there is no neat delineation between frontline and back office staff. Moreover, reductions in non-frontline positions impact

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on frontline staff who are required to shoulder a greater administrative burden as well as deliver services to the public. . Restricting public sector wage growth. States have adopted policies that restrict public sector wage growth. Some states have set maximum wage increases at 2.5 per cent, with any increases above that to be offset by productivity increases. In effect, these policies impose real wage cuts and/or result in further staff cuts. . Governments have embraced neo-liberal policies by engaging in “privatising” tasks that were previously performed in the public sector or new services that could have been publicly delivered. All states have sold assets, although the extent of privatisation has varied significantly as we shall discover in Chapter 4. In addition, governments have used PPPs to deliver infrastructure which is the subject of Chapter 5. Finally, service delivery has been outsourced or contracted out to NGOs for a variety of reasons which are discussed in Chapter 6. State Governments have imposed fiscal constraints that have impacted on the ability to provide the range and quantity of services required by the community, particularly in an era of significant income and wealth inequality. The increase in labour underutilisation manifest in high levels of unemployment and under-employment and the growth of casual and contract employment necessarily results in greater demand for state provided services and assistance as some citizens are not able to rely on market outcomes to provide sufficient resources to fulfil their needs. In addition, the ageing of the population also increases the demand for services. The evidence suggests that governments have under-invested in a range of essential services and have cut programs on the basis of fiscal constraints rather than based on appraisals that these programs were unnecessary or did not meet community needs. One of the most frequently heard refrains from governments implementing neo-liberal policies is that it is necessary to reduce or eliminate net debt and that intergenerational equity demands that essential infrastructure is financed through budget surpluses. Since public infrastructure provides the community with economic and social benefits over extended periods, usually decades, it is equitable that this infrastructure is paid for by those that benefit – the current and future generations. This point is elaborated by Russell (2000: 20) It is, on the other hand, important that the issue of State debt be seen in perspective. A State Government can be said to abuse debt if it is used to finance recurrent expenditure, to build public monuments or to finance non-productive activities. It is not abuse if it is within the capacity of the community to service, and if it serves as a fair means of sharing the cost of a long lasting public asset across the generations that will enjoy it. A substantial proportion of Victoria’s debt in 1992 had been incurred to finance key State assets such as power stations, which in themselves returned dividends to the State. Similarly, the Independent Review of State Finances (Vertigan Review) warns that the preoccupation with maintaining a Triple A credit rating may have adverse consequences for service delivery (Independent Review of State Finances, 2012: 15): A credit rating relates primarily to debt management; of itself, the achievement of a high rating does not suggest that a government’s financial management has delivered the right level or standard of services provided to the community – a key element of responsible financial management. Australian state governments have prioritised core or frontline service delivery at the expense of other functions. In relation to the adequacy of services it is necessary to determine whether frontline services have kept pace with rising demand, whether reductions in other services

Draft Report 58 and support functions have impacted adversely on the ability of frontline staff and the services they deliver. These issues will be explored in greater detail in the remainder of this report.

1 The OECD-18 countries are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom and the United States. 2 Efficiency savings of $193 million in Health and $9 million in Families and Communities will partially offset the significant additional investment in these portfolios. 3 $150 million in 2010-11; $250 million in 2011-12; and $350 million in 2012-13.

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Chapter 3 Public sector staffing developments

3.1 Introduction Public sector employment played the key role in facilitating the virtual elimination of unemployment for the thirty years following WWII until the policy was abandoned in the mid 1970s. The public sector was also integral to the redistributive aspects of the welfare state, directly providing health, education, employment, and other services as well as operating government business enterprises (GBE) including essential services such as telecommunications, electricity, gas and water. The neo-liberal challenge to this traditional role from the early 1980s was driven by the need for new areas of operation for private corporations, ideological preferences for small government and private sector dominance in the marketplace. By embracing New Public Management (NPM) Governments have articulated the objective of transforming the public service from being bureaucratic, input-focused and process-driven, to becoming a dynamic, output-focused, efficient and effective organisation. Such ambitions commenced with the Coombes Commission in 1976 and continued through the Reid Report in 1983 and the Public Service Act 1999 (Cook, 2006). The Hawke federal government instituted managerialist reforms from the mid 1980s, coinciding with the balance of payments and exchange rate crises and the introduction of the Structural Efficiency Principle under the Accord. The government streamlined functions and agencies in 1986, and then amalgamated departments to form mega departments in 1988. From 1988, commercial practices were introduced in government business enterprises (Bureau of Industry Economics, 1995). Similar policies were implemented by state governments. From the 1990s governments increasingly adopted the purchaser-provider split model which entailed separating the policy and service delivery sections of agencies and embracing the “steering not rowing” agenda articulated by Osborne and Gaebler (1993) that promoted privatisation. Subsequent privatisation policies further reduced public sector employment with significant adverse consequences flowing throughout the economy and society. Privatisation agendas have been vigorously pursued by Governments of both persuasions in Australia at the Commonwealth and State levels. These issues will be discussed in detail in subsequent chapters. Mitchell (2001) demonstrated that declining public sector employment contributed significantly to persistently high unemployment in an environment where private sector employment growth failed to match labour force growth. From the mid 1980s public sector employment growth slowed, then in the recession in the early 1990s pro-cyclical job losses exacerbated unemployment, and a large number of public sector jobs were destroyed in the late 1990s (Mitchell, 2001: 198). Public sector employment has also been affected by government industrial relations policies at the federal and state level, including the introduction of enterprise bargaining from 1992, and individual Australian Workplace Agreements (AWAs) as part of the Workplace Relation Act 1996, which also limited trade union access to workplaces, reduced employment conditions as part of the award simplification process, and transferred workers from paid rate to minimum rate awards, eroding pay over time (Verspaandonk and Holland, 2003). Enterprise bargaining ended the strategy of service wide industrial campaigns spearheaded by strategically important workers while corporatisation, contracting out and privatisation similarly weakened the industrial strength of public sector workers, or created private sector workers with less bargaining power than their public sector counterparts.

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This chapter traces developments in relation to public sector staffing in Australia. Section 3.2 outlines the relative employment performance of the public sector since 1984. The remainder of the Chapter traces the trajectory of public sector staffing in each of the six Australian states and considers the outcomes for public sector workers and the delivery of public services.

3.2 Public Sector employment outcomes in Australia Between 1984 and 2011, a period where total employment grew by almost five million, public sector employment increased by only 235,400 (from 1,660,700 to 1,896,100) and its employment share declined significantly. Figure 3.1 shows Commonwealth, State and Local public sector employment (columns) and public sector employment share (line) in Australia between 1984 and 2011. The data is at May of each year to 2004 and then June for 2008 and 2011. Over the period, the share of total employment located in the public sector fell from 25.6 per cent to 16.6 per cent. Commonwealth employment declined in both absolute and relative terms, falling from 421,900 in 1984 to 251,400 in 2011. State and Local Government employment increased in absolute terms but at a much slower rate than total employment growth. Figure 3.1 Public sector employment, 1984 to 2011

Source: ABS (2007) Wage and Salary Earners, Public Sector, Australia, 6248.0.55.001; ABS (2011) Employment and Earnings, Public Sector, Australia, 6248.0.55.002; ABS (2011) Labour Force, Australia, Cat no. 6202.0. The largest fall in total public sector employment occurred between 1992 and 2000 when public sector employment shrank from 22.2 per cent to 16.4 per cent of total employment. This period coincided with substantial reductions in the number of Commonwealth public sector employees in the final years of the Keating ALP Government (employment declined from 397,000 in May 1992 to 354,800 in May 1996). Commonwealth employment was slashed during the Howard Coalition Government to reach only 237,100 by June 2008. The number of Commonwealth public sector employees then increased to 251,400 in June 2011. The industry composition of public sector employment has changed dramatically over the past thirty years. Education, government administration and defence, and health and community services have dominated government employment, growing from 54 per cent of public sector employment in 1983 to 86 per cent in 2011. Between 1983 and 2011 public sector employment increased from 342,700 to 591,200 in education, 277,700 to 598,500 in

Draft Report 61 government administration and defence, and 268,800 to 431,400 in health and community services. Staffing reductions in transport and storage, electricity, gas and water, communication services, finance and insurance, and manufacturing reflect government privatisation policies.

3.2.1 State Public sector staffing This section compares the trajectory of employment in the state public sector since 1984. Figure 3.2 shows the employment share of state public sector employment for all states between 1984 and 2011. In 1984, Tasmania had the highest proportion of employees working in the public sector at 31.2 per cent. The other states ranged from 24.2 per cent in NSW to 26.5 per cent in South Australia. By 2011 the employment share had declined to between 14.9 per cent in Victoria to 21.8 per cent in Tasmania. Figure 3.2 Total public sector employment, share of total employment by state, 1984 to 2011

Source: ABS 6248.0.55.001 Wage and Salary Earners, Public Sector, Australia, Jun 2007; ABS 6248.0.55.002 Employment and Earnings, Public Sector, Australia, 2010-11; ABS 6202.0 Labour Force Australia. Figure 3.3 shows the level of state public sector employment for Australian states between 1984 and 2011. The most populous states have the highest level of state public sector employment. NSW employment increased from 349,600 in 1984 to 444,700 in 2011. Employment in the NSW state public sector was relatively flat throughout the 1980s and 1990s but then increased in the past decade. In Victoria there was a significant decline in employment levels in the 1990s (employment fell from 314,000 in 1988 to 217,700 in 1997) before increasing continually through to 2011. The highest growth rates occurred in Queensland (1.99 per cent) and Western Australia (1.34 per cent), which may be attributable to increasing demand due to a faster rate of population growth. Queensland state public sector employment has grown more quickly than other states, rising from 178,300 in 1984 to 303,400 in 2011. Employment levels in the Western Australia state public sector remained relatively flat until 2003 but then increased from 118,000 to 166,600 by 2011.

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Figure 3.3 State public sector employment, 1984 to 2011

Source: ABS (2007) Wage and Salary Earners, Public Sector, Australia, 6248.0.55.001; ABS (2011) Employment and Earnings, Public Sector, Australia, 6248.0.55.002. South Australia and Tasmania have experienced virtually no growth in state public sector employment throughout the period (an average of around 0.24 per cent per annum). Employment fell sharply in Victoria in the 1990s (from 316,300 in 1990 to 221,500 in 2000) and finally surpassed the 1990 employment level in 2010. While the growth rate for NSW for the entire period was 0.90 per cent, employment levels were fairly stagnant until the mid early 2000s and then increased significantly. Figure 3.4 Growth rate of State public sector staffing compared to the growth rate of total state employment, 1984 to2011

Source: ABS 6248.0.55.001 Wage and Salary Earners, Public Sector, Australia, Jun 2007; ABS 6248.0.55.002 Employment and Earnings, Public Sector, Australia, 2010-11; ABS 6202.0 Labour Force Australia. Despite the fact that all states have experienced some increase in public sector employment levels during the period, the rate of growth has been substantially lower than the growth of

Draft Report 63 total employment. This phenomenon is clearly shown in Figure 3.4. In all states the growth in total employment has been greater than the growth rate for state public sector employment. Total employment grew by an average of 3.1 per cent per annum in Queensland while state public sector employment increased at the slower rate of 2.0 per cent. Similarly state public sector employment increased more slowly than total employment in all other states, with the lowest state public sector growth rate of only 0.2 per cent in South Australia and Tasmania.

3.3 Public Sector staffing in NSW This section traces public sector staffing developments in NSW. Figure 3.5 shows public sector staffing from 1999 to 2010, at 30 June each year. FTE staffing has increased at around 1.5 per cent per annum; from 272,863 to 322,452. The line represents public sector employment as a proportion of total employment in NSW. The growth of public sector employment is more stable than its proportion of total employment. The greater variability in the employment share is primarily due to the impact of economic cycles that affect total employment. For example, the public sector share fell from 9.3 per cent to 9.1 per cent in 2007-08 as total employment growth of 3.1 per cent exceeded public sector growth of 1.3 per cent. Private sector employment and total employment contracted with the onset of the GFC so that the public sector employment share increased in 2008-09. Figure 3.5 State public sector employment in NSW, 1999 to 2010

Source: Department of Premier and cabinet, The NSW Public Sector Workforce, various years; ABS Labour Force, Australia, Cat no. 2002.0, various years. Table 3.1 shows the composition of the NSW public sector workforce at June 2000 and June 2010. These data relate to state government controlled agencies including budget dependent agencies, government trading enterprises (GTEs), state owned corporations (SOCs) and other government controlled self-funding bodies. In the 10 years to 2010 total public sector employment grew by around 19 per cent but declined from 13.4 per cent of NSW employment to 11.1 per cent. Over the period, the major changes in employment status were the increase in the proportion of temporary employees (increased from 5.4 per cent to 12.2 per cent, the decline in casual employees (from 14.0 per cent to 6.4 per cent) and the increase in part-time employment (from 18.9 per cent to 24.9 per cent). The proportion of females also increased from 58.4 per cent in 2000 to 60.9 per cent in 2010. Draft Report 64

Table 3.1 Public sector employment, 2000 and 2010

2000 2010 Employees 324,345 386,183 Full-time equivalents 270,688 322,453 Proportion of employed 13.4 11.1 Female (%) 58.4 60.9 Permanent (%) 79.7 79.2 Temporary (%) 5.4 12.2 Casual (%) 14.0 6.4 Contract based (%) 0.7 1.1 Other (%) 0.2 1.2 Part-time (%) 18.9 24.9 Source: NSW Premier’s Department, Review and Reform Division (2001) Overview Report for the NSW Public Sector Workforce Profile 2000; DPC (2011) The NSW Public Sector Workforce: A 2010 Snapshot and Snapshot Tables, Updated 09 August 2011. The NSW PS was restructured into clusters or super departments from July 2009. The clusters are detailed in 3.2 along with the number of full-time equivalent (FTE) staff and the share of total public sector employment. Table 3.2 Employment by cluster for the NSW public sector, 2010

Cluster FTE % Total PS employment Premier & Cabinet 1974 0.6 Treasury 3655 1.1 Communities 3268 1.0 Human Services 18881 5.9 Health NSW 96364 29.9 Education and Training 98191 30.5 Planning 2609 0.8 Industry and Investment 19594 6.1 Transport 28434 8.8 Environment, Climate Change and Water 9749 3.0 Services, Technology and Administration 3380 1.0 Justice and Attorney General 12359 3.8 Police & Emergency Services 23994 7.4 Total 322452 100.0 Source: Department of Premier and cabinet, The NSW Public Sector Workforce: A 2010 Snapshot and Snapshot Tables. Figure 3.6 shows the breakdown of state public sector employment by function. Employment is highly concentrated in Education and Training and Health which account for 56 per cent of total public sector employment.

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Figure 3.6 Breakdown of NSW state public sector employment by function, 2010

Source: Department of Premier and cabinet, The NSW Public Sector Workforce: A 2010 Snapshot and Snapshot Tables. Agencies were further consolidated into nine principal departments in 2011. The current clusters are: (1) Attorney General and Justice; (2) Education and Communities; (3) Family and Community Services; (4) Finance and Services; (5) Trade and Investment, Regional Infrastructure and Services; (6) Health; (7) Premier and Cabinet; (8) Transport; and (9) Treasury (Auditor-General of New South Wales, 2011a).

3.3.1 Recent developments in public sector staffing in NSW As mentioned in the previous chapter, successive NSW Governments have prioritised increased employment in frontline or service delivery functions, while cutting non-frontline positions to meet self imposed budget constraints. As previously stated, there is no clear delineation between service delivery and back office jobs and it is very likely that large cuts to jobs classified as back office will have significant adverse impacts on the ability of frontline workers to deliver services effectively. This section will review recent staffing changes and attempt to point to the potential impact on the delivery of quality services to the people of NSW. Boosting staffing for frontline services As community needs have been recognised by governments there has been an expansion in programs and associated staffing to meet those needs. In the 2008-09 Budget the Government emphasised that recent increases in expenditure had been prioritised to Aboriginal health, emergency departments, child protection, mental health and disability services, including additional staffing for service delivery. Child protection staffing was increased in the 2009-10 Budget that commenced implementation of the recommendations of the Wood Inquiry. In particular, National Partnership Agreements between the Commonwealth and states have funded new programs in health and education. The NSW government highlighted increased in frontline positions resulting from initiatives in: . Education: Low Socio-economic Status Schools Communities NP, the Teacher Quality NP, Raising the School Leaving Age, the Best Start literacy initiative, reductions in class sizes (2009-10 Budget).

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. Health: the Hospital and Health Workforce Reform, Elective Surgery and Health Services NP (2009-10 Budget). . Child protection: implementation of Keep Them Safe: A Shared approach to Child Wellbeing (2010-11 Budget). . Disability: Stronger Together: A New Direction for Disability Services (2010-11 Budget). . Police: The number of police officers increased by 1,350 between 2006 and 2011 at a cost of $152 million. The 2011-12 Budget provided for 940 additional nurses of the 2,400 increase promised for the first term of the O’Farrell Government. The Budget also included 200 additional teachers for literacy and numeracy as part of 900 more teachers over the first term. Similarly, 150 additional police officers were to be employed in 2011-12 and 550 over the first term. After announcing staff reductions of 5,000 in 2011 that included the loss of 292 positions in education, the Premier boasted that teacher numbers were boosted by 967 new teachers commencing in NSW public schools in 2012 (O’Farrell, 2012a). Staff cuts The large reductions in staffing that have occurred in recent years have been due to fiscal constraints rather than a review of the resources necessary to deliver high quality services to the community to satisfy need. Staff reductions of 5,000 non-frontline positions announced in the 2006-07 Budget were to be achieved through natural attrition and voluntary redundancies. Following the onset of the GFC and reductions in State Government revenues, the 2008-09 Mini-Budget cut the size of the Senior Executive Service by 20 per cent over four years and froze all non-frontline positions until June 2009 (Government of NSW, 2008-mini budget). The wage freeze was extended in the 2009-10 Budget. Further staffing reductions were to be achieved through economies of scale when the Machinery of Government changes announced in 2009 amalgamated 160 agencies into 13 clusters. The O’Farrell Government announced another reduction of 5,000 non-frontline job losses over four years in the 2011-12 Budget, ‘to reduce the number of head office and backroom positions in non-service delivery areas’ (Budget Speech, 2011-12, Budget Paper No. 1: 8), justified by the need to save $8 billion over 4 years. While full details of the cuts that are to be achieved over four years were not specified, the first round of job losses announced in October 2011 included more around 1900 jobs: 489 in jails and courts, 262 in education; 248 in trade and investment; 214 in finance; 200 in transport; 173 in family services, 150 in health; and 138 in Premier and Cabinet (General Purpose Standing Committee No. 1, 2011a). The Government is also eliminating transit officer positions in RailCorp. The existing 610 positions will be replaced by 150 revenue protection workers and an increase of 300 police to patrol trains, buses and ferries (Saulwick and Patty, 2012). In order to encourage public servants to accept redundancies, the Government passed legislation changing the voluntary redundancy arrangements. The situation for Corrections was explored in Budget Estimates hearing, where the Director General of the Department of Attorney General and Justice, Mr Glanfield explained (General Purpose Standing Committee No. 4, 2011: 4). The fact of the matter is, though, and I need to give the background to this, there are two aspects to voluntary redundancies. The Government brought in a policy of voluntary redundancy, ultimately leading after three months to potential compulsory redundancy, directed towards those officers who were not in a funded position who had Draft Report 67

been declared excess and had simply effectively been taken off the books but were still being paid. That was what was being discussed yesterday. In relation to our voluntary redundancies, the vast bulk of all those redundancies, 450 of them in fact—it is only an estimate—relate to Corrective Services and what we are doing in Corrective Services is, we had three areas that had been closed, three prisons, that equated to about 250 positions and also there were negotiations with the union about industrial reforms that equated to a reduction of 350 positions, so 600 all up. We sought expressions of interest across the board of Corrective Services and our intention of course was to try to find people who were interested in leaving voluntarily—no compulsion whatsoever—and that would enable us to minimise, if at all, the need for anyone to be forcibly made redundant. We had more than 800 expressions of interest and at the moment we are working through that process. Efficiency dividends In addition to large redundancy rounds the Labor Government introduced the first efficiency dividend of 1 per cent per annum of discretionary spending in 2005-06 1. Further efficiency dividends applied from 2007-08 (1 per cent) and 2008-09 ($200 million) to achieve a total of $1.7 billion in savings by 2008 (2008-09 Budget). In the 2009-10 Budget the efficiency dividends were extended to 2011-12 and increased to 1.5 per cent for 2011-12 and 2013-14. In the 2011-12 Budget, the O’Farrell Government increased the existing efficiency dividend by $150 million for 2014-15 and to save a total of $6 billion over four years as well as assessing individual programs and cutting those “no longer delivering for the taxpayers” (Budget Speech, 2011-12, Budget Paper 1, 2011: 8). Other measures to reduce expenditure have included stringent wages policies. The Labor Government imposed a wage policy in 2007 that stated that wage increases in excess of 2.5 per cent would be offset by employee related cost savings and this policy has been continued by the O’Farrell Government (2009-10 Budget). Future outlook for public sector staffing The NSW Commission of Audit (2012) (the Schott report) recommended widespread changes to the industrial relations landscape in the NSW public sector. Recommendations focussed on reducing the number of awards, ensuring that staffing ratios were not included in industrial instruments, provide greater flexibility in staffing and review policies relating to excess employees to extend that coverage of the Managing Excess Employees Policy.

3.4 Public Sector staffing in Victoria Figure 3.7 shows state public sector employment in Victoria and its share in total employment from 1999 to 2010. In the prior period (1992 to 1999) the number of FTE staff in the Victorian Public Sector (VPS) fell by 45 per cent due to the policies of the Kennett government (Russell, 2000). Between 1999 and 2010 total public sector employment increased from 153,902 to 212,474 or an average of just under 3.0 per cent per annum over this period. While the rate of growth has been higher than for NSW, the public sector employment share is significantly lower at between 7.0 per cent and 7.6 per cent. Again the employment share fell in the period of economic expansion prior to the GFC and then increased in 2008-09 as total employment stagnated.

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Figure 3.7 State public sector employment in Victoria, 1999 to 2010

Source: State Services Authority, The State of the Public Sector, various years; ABS 6202.0 Labour Force Australia, various years Table 3.3 provides information on some major characteristics of the Victorian Public Service in 2010 the difference between the headcount and FTE figures is explained by the fact that 41 per cent of employees work on a part-time basis. One in four employees works on a non- ongoing, fixed term, temporary or casual basis. Two-thirds of employees are female. The majority of employees work in what are recognised as front-line jobs such as: health professionals (26 per cent of total employment); education professionals (21 per cent); welfare, aides and care providers (11 per cent); and police, fire fighters and ambulance drivers (7 per cent). The high concentration in front-line jobs means that governments intent on implementing large staff cuts from administrative or back office jobs are severely constrained.

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Table 3.3 Characteristics of the Victorian public sector workforce, 2010

2010 Employees 261,068 FTE 212,474 Employment ratios % of FTE Female 67 Ongoing 80 Fixed term, temporary or casual 20 Part-time 41 Professions % of FTE Doctors, nurses and other health professionals 26 Teachers and other education professionals 21 General administration and support employees 16 Welfare, aides and care providers 11 Police, fire fighters and ambulance officers 7 Managers 5 Source: SSA (2011) State Services Authority, The State of the Public Sector Figure 3.8 displays the sectoral employment composition of state public sector employment in Victoria. In total, 65 per cent of workers are employed in education or health care. Other significant sectors are the Victorian Public Services with 17 per cent of total staffing and police and emergency services that account for 9 per cent of total employment Figure 3.8 Composition of public sector staffing in Victoria, 2010

Source: SSA (2011) State Services Authority, The State of the Public Sector At a Budget estimates hearing in 2011 Mr Baillieu stated that ‘…this budget seeks to increase the number of public sector workers over the forward estimates by some 4000’ (Public Accounts and Estimates Committee, 2011: 6). Table 3.4 shows that staffing levels are expected to increase by 196 FTE or 0.6 per cent in 2011-12. The largest losses will be incurred by Education and Early Childhood Development (4.0 per cent) and Business and

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Innovation (3.5 per cent). Some departments are expected to record staffing growth, including Premier and Cabinet (3.5 per cent) and Justice (2.7 per cent). Table 3.4 Departmental staff numbers, Victoria, 2011 to 2012 Department 30 June 2011 30 June 2012 Change

(EFT number) (EFT number) (per cent) Business and Innovation 790.7 763.2 -3.5 Education and Early Childhood Development 2,853.0 2,738.0 -4.0 Health 1,601.9 1,601.9 0.0 Human Services 10,280.8 10,406.9 1.2 Justice 8,152.4 8,369.4 2.7 Planning and Community Development 982.1 963.4 -1.9 Premier and Cabinet 428.4 443.4 3.5 Primary Industries 2,409.1 2,409.1 0.0 Sustainability and Environment 3,005.0 2,993.9 -0.4 Transport 1,220.0 1,220.0 0.0 Treasury and Finance 718.8 729.8 1.5 Parliament 589.8 588.8 -0.2 Total 33,032.0 33,227.8 0.6 Note: excludes the Government Teaching Service, health services, police and major budget-funded agencies Sources: departmental responses to the budget estimates questionnaire — part B, q.15, with modification as advised by the Department of Business and Innovation, correspondence received 23 August 2011

3.4.1 Recent developments in public sector staffing in Victoria This section outlines recent developments in public sector staffing in Victoria, including additional services and associated staffing, major job cuts, efficiency dividends and other issues including pay and conditions and future directions. Additional staffing for frontline services In the 2007-08 Budget the Labor Government outlined its performance in providing additional services for frontline services since coming to office in 1999. These achievements include: . increasing hospital funding by 80 per cent; employed an additional 7,200 nurses and 1,500 doctors; and . increasing funding for police by more than 50 per cent, employing 1,400 additional police and building or upgrading more than 150 police stations. In the 2007-08 Budget the Government provided funding for an extra 300 teacher assistants, 200 new specialised teachers and continuation of employment of 256 primary welfare officers. Health funding was increased by $38 million for expansion of Victoria’s rural health workforce, including new specialist and GP obstetrics positions. Other staffing increases included employment of an additional 22 train drivers, 350 police officers, 25 specialist crime fighters and 25 forensic investigators. Health funding increased again in 2009-10 with the provision of extra money and staff to meet additional demand; screening for breast cancer; major hospital upgrades and $182 million for mental health. Other enhancements included an additional $87 million to assist Draft Report 71 people with disabilities to live independently and funding for 250 teaching coaches in maths, science and information technology. The 2010-11 Budget announced funding to employ an additional 1,966 frontline police over five years. This commitment was confirmed by the Baillieu Government in 2011-12 when it promised an additional 1,600 police officers and 100 transit safety police would be in place by November 2014. In addition, the Government announced that 940 protective services officers would be available to patrol metropolitan and regional railway stations. Another major focus of the 2011-12 Budget was education. Funding commitments included employment of 100 maths and science specialists in primary schools, an additional 150 primary welfare officers, 400 scholarships to attract science graduates into the teaching profession and new programs to combat bullying. Considerable expansion in health, corrective services and child protection has required additional staffing in these areas. Child protection services were expanded through the employment of an additional 47 child protection workers in 2011-12. Efficiency dividends, funding and staff cuts In the 2003-04 Budget the Labour Government announced cuts of $141 million as part of a “productivity dividend”, including savings of $36.4 million in DHS and $2.2 million in Justice (Hannan, 2003). The savings could be made through offering redundancy packages. In the wake of the GFC the Government embarked on further cost cutting including reducing the number of ministerial and media staff, capping head office staffing and reducing advertising (2010-11 Budget). Prior to the 2010 election Mr Wells (now Treasurer) declared no jobs would be lost to reach the Coalition's budget bottom line: ‘There will be no cuts to the public service, full stop’ (Rout and Massola, 2010). This was despite plans to cut the budget to fund $7.8 billion in election promises. Savings of $722 million were to be harvested by cutting non-payroll running costs, $255 million from government advertising; $185 million from consultancies; $131 million by capping head-office public service staff; and, $85 million by cutting press secretaries (Rout and Massola, 2010). Community and Public Services Sector Union state secretary Karen Batt said the cuts could mean as many as 3000 jobs lost (Rout and Massola, 2010). In April 2011 a spokeswoman for the Treasurer reiterated the commitment stating ‘The Baillieu government made a rock-solid commitment to protect levels of public sector employment (Ferguson, 2011a). There were no mass job losses contained in the 2011-12 Budget but the Capping the Head Office Staff initiative sought to ensure that growth was confined to frontline positions. In December 2011 the Premier announced that 3600 non-frontline PS jobs to go over 2 years as part of the Sustainable Government Initiative. Another 600 job cuts were announced in the 2012-13 Budget. The reductions were to be achieved in administrative and back office areas through voluntary redundancies and the expiry of fixed-term contracts (2011-12 Budget Update, 2011). Ferguson (2011b) observed: The decision to axe public service jobs and raise extra tax revenue is a marked departure from its time in opposition, when the Coalition gave iron-clad guarantees there would be no job losses. The Department of Human Services (DHS) is expected to lose around 500 jobs and the Department of Sustainability and Environment (DSE) could lose around 400 positions which

Draft Report 72 could be concentrated among the 355 staff on fixed-term contracts. The cuts would reduce the department’s ability to progress work on climate change and renewable energy. In March 2012 Premier Baillieu announced the establishment of the Better Services Implementation Taskforce to develop strategies to achieve the Government’s public services reform agenda to provide high quality, lower cost services compatible with the Sustainable Government initiative and recommendations from the Independent Review of State Finances (Vertigan Review). The terms of reference for the Vertigan Review include: The use of/potential for private sector involvement in service delivery (where appropriate/relevant) including through the use of market-based instruments or other service delivery reforms (Independent Review of State Finances, 2012). There are likely to be significant impacts on public sector staffing resulting from the Vertigan Review and the Better Services implementation Taskforce.

3.5 Public Sector staffing in Queensland This section provides details of the trajectory of state public sector employment in Queensland, the characteristics of employees and information on recent government policies and their impact. Figure 3.9 shows the growth of public sector employment in Queensland from 2000 to 2011 and its share of total employment. FTE staffing increased from 146,323 in 2000 to 206,802 which was an average annual growth rate of around 3.2 per cent. The highest growth occurred between 2005-06 and 2008-09 when it averaged 4.6 per cent. Public sector employment began the period at 8.7 per cent of total employment, declined to 8.1 per cent in 2005 and then increased to 8.8 per cent by 2010. Figure 3.9 State public sector employment in Queensland, 2000 to 2011

Source: Queensland Public Service Characteristics; ABS (2011) Labour Force Australia, Cat no. 6202.0. Figure 3.10 depicts the composition of Queensland public sector staffing by function. Health and Education and Training account for around 65 per cent of total staffing, while another 17 percent is comprised of Communities, Community Safety and Police.

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Figure 3.10 Composition of public sector staffing in Queensland, 2011

Source: Public Service Commission (2011) Queensland Public Service Characteristics: 2010-11 Table 3.5 provides basic characteristics for public sector workers in Queensland in 2001 and 2011. Over the decade the proportion of Queensland employees has remained stable at over 10 per cent of the workforce. The proportion of public sector workers employed on a permanent basis has declined from 83.0 per cent to 80.6 per cent. Conversely the proportion of part-time employees increased significantly, from 19.2 per cent to 26.1 per cent. The female employment share also increased, from 59.0 per cent to 64.1 per cent. Table 3.5 Characteristics of Queensland public sector workers, 2001 and 2011

2001 2011 FTE 147722 206807 Proportion of employed (%) 10.3 10.4 Female (%) 59.0 64.1 Part-time (%) 19.2 26.1 Permanent (%) 83.0 80.6 Source: Public Service Commission (2011) Queensland Public Service Characteristics: 2010-11

3.5.1 Recent developments in public sector staffing in Queensland The trends in public sector staffing in Queensland mirror developments in other states. There have been large increases in frontline services in recognition of increased demand as a consequence of rapid population growth. Initiatives to rein in expenditure have included the introduction of a “productivity dividend” and its expansion over time as well as offering voluntary separation packages. Additional staffing Additional staffing allocated to the public sector in Queensland has been concentrated in frontline services. The 2005 Health Action Plan reforms provided an extra 1,573 doctors, 5,013 nurses and 1,810 allied health professionals by 2008. Additional staffing in education addressed increased demand and the implementation of Prep Year in 2008.

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The 2007-08 Budget funded 192 additional teachers and teachers aids, 250 ambulance officers, 200 extra police. 300 doctors, 500 nurses and 400 allied health professionals. Similarly in 2010-11 there was funding for an additional 316 teachers and teachers aides, 1200 doctors, nurses and health professionals and 203 police. Increased funding of $18.9 million over four years was provided to meet the need for increased services in youth detention including additional staff. The budget also provided $8 million in additional funding for staffing child protection functions; 10.5 FTE for licensing and monitoring functions and 3 staff to provide training to assist staff with complex legislative issues. Increased education funding of $50 million was required to provide teachers and materials for the implementation of Prep Year in 2008. Public sector staffing increases in the 2008-09 Budget included: 270 teachers and teacher aides to meet increased demand and to support students with disabilities; 250 ambulance offices; 200 police officers. An additional 106 traffic police were included in the 2008-09 Mid Year Review. In 2009-10 the Government provided an additional 350 teachers and teacher aides, 50 ambulance officers, 203 police and 645 doctors, nurses and allied health professionals. Increased staffing in frontline services provided in the 2010-11 Budget included 203 police, 316 teachers and teacher aides, 1,200 doctors, nurses and allied health professionals. Further staff increases in 2010-112 included 300 additional teachers and teachers aides, 150 police and 50 ambulance officers. Reforms to child protection announced in the 2011-12 Budget included $12 million over 4 years for additional frontline child protection workers. There was also funding of $42.8 million over four years for firefighters and $18.5 million over four years for 75 extra ambulance officers. Productivity dividends and staff cuts While staffing levels increased in some frontline service areas there has also been contraction in public sector staffing due to the introduction of productivity dividends and voluntary separation packages. In 2008 the Government announced a “productivity dividend” of $60 million for 2008-09 and then $80 million per annum to achieve total savings of $300 million over four years. These productivity dividends have subsequently been increased significantly. In the 2008-09 Mid Year Review another dividend of $100 million in 2009-10 and $200 million per annum from 2010-11 was imposed in addition to the earlier dividends. It was intended that agencies would achieve these savings by reductions in overheads, publication, marketing and communication costs. The dividend was increased by $57 million per annum in the 2010-11 Budget and the Mid Year Review increased the target for 2012-13 from $400 million to $450 million and for 2014-15 to $500 million. There have also been mass voluntary separation offers to reduce the number of public servants. A voluntary separation program (VSP) to reduce staffing by 3,500 in non-service delivery areas was announced in the 2010-11 MYR. It was expected to provide savings of $175 million from 2012-13 with the cost of the separation payments estimated to cost around $245 million in 2011-12. In the 2011-12 MYR the program was extended to include an additional 1,500 packages to produce savings of $150 million from 2012-13.

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3.6 Public Sector staffing in South Australia This section examines state public sector employment in South Australia, focussing on the period since the late 1990s. The South Australian Public Sector includes government departments, statutory bodies, subsidiary organisation of public sector organisations and other bodies where a public sector organisation has complete or majority ownership. Figure 3.11 State public sector employment in South Australia, 1998 to 2010

Source: Government of South Australia, South Australian Public Sector Workforce Information, various years. Figure 3.11 shows FTE staffing from 1998 to 2010. Staffing declined from 71,712 in 1998 to 68,615 in 2000 before increasing to 84,900 by 2010. However, we note that prior to this period public sector staffing peaked at 103,337 FTEs in 1990 and then contracted significantly for the rest of the decade (Commission of Public Service Employment, 1999). The line in Figure 3.11 shows the employment share of public sector employment declined from 11.3 per cent in 1998 to a minimum of 9.9 per cent in 2003 and then increased to 10.4 per cent by 2010. Table 3.6 Public sector employment in South Australia, 2010

Sector FTE % of Total PS employment

General Government Sector 79505 93.6 Public Non-Financial Corporations Sector 4431 5.2 Public Financial Corporations Sector 511 0.6 Non-Budget Entities 453 0.5 Total PS employment 84900 100.0 Source: Government of South Australia (2011) South Australian Public Sector Workforce Information, Reconciliation of the 2010-11 Budget Papers Workforce Figures. Table 3.6 shows the composition of public sector employment by sector. The majority of public sector employees are in the General Government Sector (93.6 per cent), while 5.2 per cent are employed in Public Non-Financial Corporations and just over 1 per cent are employed in other parts of the public sector.

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Figure 3.12 Composition of employment in the General Government Sector in South Australia, 2010

Source: Government of South Australia (2011) South Australian Public Sector Workforce Information, Reconciliation of the 2010-11 Budget Papers Workforce Figures. Employment in the General Government Sector is concentrated in a small number of large departments (Figure 3.12). The two largest employers account for 58 per cent of total employment in the General Government Sector. The Department of Health and Health Units has 34 per cent and Education and Children’s Services has another 24 per cent. Other large employers are Police (7 per cent), Further Education, Employment, Science and Technology (6 per cent), Families and Communities (6 per cent) and Transport, Energy and Infrastructure (3 per cent). Table 3.7 Characteristics of public sector workers in South Australia, 2000 and 2010

2000 2010 Ongoing employment 64.6 64.6 Short-term contract 16.7 15.4 Long-term contract 10.1 7.9 Other 8.6 12.1 Part-time 39.1 36.1 Female 66.0 62.1 Source: http://www.espi.sa.gov.au/files/wic---data/table-4---june-2010.pdf; Office for the Commissioner for Public Employment (2000) South Australian Public Sector Workforce Information at June 2000, Office for the Commissioner for Public Employment. Adelaide. Characteristics of the South Australian public sector workforce are shown in Table 3.7 for South Australia in 2000 and 2010. Over the course of the decade the proportion of workers employed on an ongoing basis has remained stable at 64.6 per cent. There has been a decrease in the proportion of workers on long-term contracts and an increase in other employment arrangements. In contrast to the experience for other states, the proportion of both female and part-time employees declined over the period, with part-time employment falling from 39 per cent to 36 per cent and the female employment share declining from 66 per cent to 62 per cent.

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3.6.1 Recent developments in public sector staffing in South Australia As has been the case in other states, public sector staffing policies pursued by the South Australian Government over the past several years are characterised by increases in frontline staffing and large reductions in administrative and back office staff, with additional reductions due to efficiency dividends. This section reviews fiscal policies that have impacted on public sector staffing. Additional staffing and resources Additional funding for service delivery in the 2007-08 budget included $163 million for Families and Communities, $114 million for law and order and community safety and $24.4 million for prison accommodation and staffing. In total, general government employment increased by 723 FTEs in 2007-08, primarily due to the return of Modbury Hospital to the public sector. The Government stated that in the five years to June 2007 an additional 2,406 nurses and 699 doctors had been employed in the public health system. New initiatives in the 2008-09 Budget funded an additional 199 FTEs in Justice, 35 in Education and Children’s Services, 25 in the Department of Primary Industries and Resources. In the 2009-10 Budget an additional 685 FTEs were provided for frontline services. These included: 342 in Health; 198 in Education and Children’s Services; 68 in the Environment and Conservation and the River Murray; and 37 in Families and Communities. Then in the MYBR there was an additional $318.3 million allocated over four years for operational and staffing costs for Health. Despite large staffing cuts in the 2010-11 Budget (see below) there were additional positions provided in Health (1794 FTEs) and Families and Communities (206 FTEs). Health expenditure increases funded the Every Patient Every Service initiative to increase elective surgery and reduce emergency department waiting times. Additional staffing associated with the funding included 50 medical officer training positions and 50 new nurse practitioner positions. The expansion of Families and Communities funding continued the implementation of child protection reforms from the Layton Review and the Mullighan Inquiry and the expansion of disability services. There were also additional teachers and school staff employed as well as an extra 300 police officers. Increased staffing in the 2011-12 Budget in Health services and Families and Communities were offset by more redundancies. Additional doctors, nurses and health workers were to be employed in public hospitals. Similarly, additional staff would be employed as a consequence of increased spending for disability services, family reunification, education and children’s services. Staff cuts, efficiency dividends and other savings measures Following a review of spending designed to prioritise front-line services, the 2006-07 Budget introduced savings of $695 million over four years and introduced an annual 0.25 per cent efficiency dividend. The Government also introduced FTE caps of all agencies. Efficiency savings in the 2007-08 Budget included $193 million in Health and $9 million in Families and Communities. The Auditor-General (2008) noted that in addition to existing measures the 2008-09 budget identified new savings of $290 million over four years. Staffing in the Department of Further Education, Employment, Science and Technology was reduced by 146 FTEs and a further 64 FTEs were eliminated in the Department of Environment and Heritage (Budget Paper 3, 2008). In response to the GFC, the Government announced measures to reduce the deficit in the 2008-09 Mid-Year Budget Review. The Government announced public sector job cuts of Draft Report 78

1600 FTEs, including 1200 in 2009-10 and a further 200 in 2010-11 and 2011-12. These staff reductions, targeted primarily at administrative positions, were to be achieved by not filling vacancies or by identifying and eliminating positions that were no longer required. Some reductions were achieved by efficiency measures while others were achieved by offering Targeted Voluntary Separation Packages (TVSPs). These cuts were in addition to the annual efficiency dividend of a 0.25 per cent per annum reduction in employee expenses announced in the 2006-07 Budget. Large savings measures of $1.5 billion over the forward estimate period were announced in the 2010-11 Budget. The largest savings were in Health ($316 million) and across government savings ($308.5 million). Staffing reductions announced in the budget continued and accelerated recent staffing cuts to total around 3750 over four years when added to the cuts previously announced. The cuts included a 20 per cent reduction in executives. There was considerable encouragement for employees who were declared redundant to take up the TVSPs. First, after six months redeployment the maximum package will be reduced to 88 weeks pay. The second means of encouraging take up is the threat of forced redundancies. To date Government policy has included a commitment that there would be no forced redundancies. The sustainable Budgets Commission recommended that the Government withdraw its commitment to no forced redundancies, stating: ‘there should be a non- voluntary separation policy for managing staff that are excess to agency requirements’ (Sustainable Budget Commission, 2010: 84). The Government duly moved away from its commitment, announcing in the 2010-11 Budget that: …if the required reduction in employee numbers is not achieved in 12 months through redeployment and voluntary separation packages, the government will reconsider its ‘no forced redundancy’ policy (2010-11 Budget: 5). Further staff reductions of 400 FTEs were included in the 2011-12 Budget with projected savings of $31 million per annum to offset increases in Health and Families and Communities. The staffing reductions comprise 200 FTEs in 2011-12 and another 200 in 2013-14. This will bring total staff reductions to 4,150 since the original announcement in the 2008-09 MYBR. Staffing in the general government sector is expected to decrease from 79,879 in 2011 to 78,816 by June 2015. The staffing reductions recently achieved and those planned for the future place a financial burden on the government in the short-term with the promise of savings in the future. The 1187 TVSPs achieved in 2009-10 cost $126.9 million and were estimated to produce savings of $86.5 million in a full year (Auditor-General, 2010). It will therefore take around 18 months to recoup the cost of the packages. The additional 3000 TVSPs announced in the 2010-11 Budget are expected to cost a further $353.8 million over four years. In another attempt to reduce employee expenses the 2010-11 Budget contained proposed changes to employee entitlements in relation to leave loadings and long service leave accruals. The abolition of the 17 per cent leave loading for recreation leave in return for an additional two days leave was expected to result in savings of 22.8 million in 2012-13 and 23.7 million in 2013-14 (total savings of $46.6 million). However, the Government subsequently decided not to proceed with the change to leave loading (2011-12 Budget). The Government also changed long service provisions in the 2010-11 Budget. Long service leave was available after 10 years service and after 15 years service the accrual rate increased from 9 days to 15 days per year of service. The Budget initiative sought to reduce the accrual rate after 15 years service from 15 days to 9 days to produce savings of $90.7 million over

Draft Report 79 three years from 2011-12 ($28.7 million in 2011-12; $30.1 million in 2012-13; $31.9 million in 2013-14). The Public Service Association website listed a total of 1090 jobs that had been destroyed as at 30 April, 2012 as shown in Table 3.8. Table 3.8 Staff reductions by agency, South Australia Department Job Cuts Attorney Generals 50 Department for Communities & Social Inclusion 117 Department for Correctional Services 6 Department of Education and Child Development 68 Dept of Environment & Natural Resources 74 Department of Further Education, Employment, Science and Technology 29 Department for Health and Ageing 261 Department of Manufacturing, Innovation, Trade & Resources 78 Department of Planning & Local Government 15 Department of Planning, Transport & Infrastructure 147 Department of Premier and Cabinet 91 Department of Primary Industries & Regions 21 Department of Treasury and Finance 61 Department of Water 44 SA Ambulance Service 2 SA Fire & Emergency Services 25 SA Police 1 Total 1090 Source: PSA (2012) Job Cuts = Service Cuts, viewed 30 April, 2012, available at: http://www.doesntaddup.com.au/job-watch

3.7 Public Sector staffing in Western Australia Between 2000 and 2011 the Western Australian public sector experienced strong growth in line with population and total employment growth. FTE public sector staffing increased from 87,853 in 2000 to 119,416 by 2011 which represented an average annual growth rate of 2.8 per cent. Public sector employment fell dramatically from 97,298 FTEs in 1993 89,005 in 1996 (Public Sector Management Office, 1998). Figure 3.13 shows that staffing numbers were relatively flat between 1996 and 2004 but then increased markedly and stabilised from 2009. The relative share of public sector staffing has declined significantly. In 1996 it comprised 10.7 per cent of the workforce but then declined rapidly to reach 9.4 per cent in 2002 and 2003. It remained relatively flat subsequently and remains at 9.6 per cent in 2011.

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Figure 3.13 State public sector employment in Western Australia, 1996 to 2011

Source: State of the Service Report, various years Table 3.9 shows that the share of employment for females has increased from 59 per cent to 69 per cent over the past 11 years. In contrast to experience elsewhere, the share of part-time employment shrunk slightly between 2000 and 2010. The other factor that is evident from the table is that permanent employment has declined from 71 to 69 per cent between 2000 and 2011, while fixed-term and casual employment has increased. Table 3.9 Characteristics of the public sector workforce, Western Australia, 2000 and 2011

2000 2011 FTE 87,853 119,416 Headcount 110,592 152,859 Females (%) 59.3 69.2 Part-time 35 34a Employment status (%) Permanent 71.3 68.5 Fixed-term 17.9 18.8 Casual 9.5 10.6 Other 2.1 2.1 Note: a Data is for 2010 Source: Ministry of the Premier and Cabinet (2000) Profile of the Western Australian State Government Workforce, 30 June 2000; Ministry of the Premier and Cabinet, Perth; PSC (2011) State of the Sector 2011: SOTS Statistical Bulletin, Public Sector Commission, Perth Figure 3.14 shows the composition of public sector staffing by function in Western Australia in 2011. Together, health and education and training accounted for 65 per cent of total staffing. The other areas with significant staffing levels were police with 7 per cent of total staffing, communities and community safety which each accounted for 5 per cent of total staffing.

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Figure 3.14 Composition of public sector staffing in Western Australia, 2011

Source: State of the Service Report, 2011

3.7.1 Recent developments in public sector staffing in Western Australia The number of public sector workers declined significantly in the 1990s as stated above and the public sector share of employment declined. This section outlines some recent trends in relation to public sector staffing in Western Australia Staffing increases The Gallop Labor Government made significant increases in staffing during its first term of government. Between 2001 and 2005 there were an additional 954 teachers employed and class sizes declined for Years 1 to 3. There were 250 extra police officers, 50 additional transit police and 1,346 more nurses in public hospitals (Government of Western Australia, 2005). The Government reduced the use of fixed-term, temporary and casual employment in the public sector, and converted over 4,000 casual or fixed-term positions to permanent positions, including over 2,390 teachers. More recent staffing increases have also been concentrated the main frontline service areas: . Police numbers have increased significantly; 90 in 2008-09, bringing the total to 600 since 2001; 500 police and 200 civilian staff in 2009-10; and 100 police and 30 support staff in 2010-11. . Additional health workers were a major focus in the 2008-09 Budget. Increased staffing that year included 586 nurses (a total increase of 28 per cent since 2001) and 172 interns bring the total number of doctors to 52 per cent more than in 2001 (2008- 09 Budget). . Additional child protection staff have been employed in response to growing demand, including 133 staff employed in 2006, $15 million in 2009-10 for case workers, domestic violence intake teams and intensive in-home support services; $43.5 million for support and protection services for children in 2010-11, including additional child protection workers.

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. In education there have been additional teachers for the Getting It Right Literacy and Numeracy Strategy in 2007-08; funding for 50 school psychologists from 2008-09; 316 teachers and education assistants as well as extra school support staff in 2010-11. . An allocation of $37 million was made in the 2008-09 Government Mid-Year Projections Statement (Government of Western Australia, 2008) to bolster corrective services staff in preparation for higher prison populations as a consequence of law and order election commitments. Voluntary redundancies and efficiency measures There have been a number of voluntary redundancy offers, primarily for management and administrative staff. A voluntary redundancy offer was made to public sector workers in 2002-03. In 2008-09, 469 staff accepted voluntary redundancies and another 300 were offered in 2009-10. A total of 1135 voluntary separations were accepted by public servants in the three years to 2011 saving around $54 million per annum (2011-12 MYR). Another 400 redundancies were offered in the 2011-12 Budget. Growth in public sector staffing has been restricted to 1.7 per cent for 2011-12 despite the acknowledgement that there is: … increasing demand for State government services (e.g. health and education) and infrastructure (e.g. public transport, electricity and water infrastructure). (2011-12 Budget: Economic and Fiscal outlook, Budget Paper No. 3.Page 31) The Barnett Coalition Government introduced FTE ceilings in FTE staffing levels for General Government agencies and a 3 per cent efficiency dividend to apply from January 2009 (2008-09 Government Mid-Year Financial Projections Statement (Government of Western Australia, 2008). The Government also introduced a public sector wages policy from July 2009 that involved tying wage increases to the Perth Consumer Price Index. Any increases above the CPI were required to be linked to improved efficiency, with total increases (CPI plus efficiency) capped at the WA Wage Price Index for all sectors (Department of Commerce, 2009).

3.8 Public Sector staffing in Tasmania The general government staffing data refers to 14 Agencies; nine State Service agencies and four State authorities listed in Table 3.10. The statistics do not include: . Government Business Enterprises (GBEs), such as, Forestry Tasmania, Hydro Tasmania, Motor Accidents Insurance Board, Tasmanian Irrigation and Tasmanian Public Finance Corporation; or, . State-owned Corporations (SOC), such as, Aurora Energy, Metro Tasmania, TasPorts, TasRail, Townsend Networks and TT-Line Company. .

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Table 3.10 State Service Agencies and State Authorities included in State Service Commission staffing data

State Service Agencies State Authorities Department of Economic Development, Tourism and the Arts Integrity Commission Department of Education Port Arthur Historic Site Management Department of Health and Human Services Authority Department of Infrastructure, Energy and Resources Tasmanian Skills Institute Department of Justice The Public Trustee Department of Police and Emergency Management Department of Premier and Cabinet Department of Primary Industries, Parks, Water and Environment Department of Treasury and Finance Tasmanian Audit Office. Source State Service Commissioner Tasmania, 2011 Figure 3.15 shows the FTE staffing for the general government sector from 1997 to 2011. For most of the period the FTE staffing consisted of “structured FTEs” (blue columns), a measure that includes employees that are employed but not paid at the reporting date. From 2009-10 the State Service Commission Annual Report has reported “paid FTEs” (red columns) which only includes employees in receipt of remuneration, that is, employees either undertaking their work duties or on paid leave. This is considered to provide a more accurate reflection of the resources actually engaged in the state service. As can be seen, there is a significant difference in FTE when using the more accurate paid FTE measure. In 2010 there were 23,780 structured FTEs but only 22,757 paid FTEs. Employment declined at the beginning of the period and then increased until 2009 and stabilised. A significant decline in employment is expected in 2012 as the full impact of staff cuts take effect (see Section 3.8.1). Figure 3.15 State public sector staffing in Tasmania, 1997 to 2011

Source: State Service Commissioner Tasmania, Annual Report, Various years; ABS 6202.0 Labour Force Australia Table 3.11 displays basic characteristics of state public sector employees in Tasmania in 2000 and 2011. The proportion of permanent employees has increased from 73.7 per cent in 2000

Draft Report 84 to 83.6 per cent in 2011. Part-time employment has also increased from 33.9 per cent to 45.8 per cent, with around 56 per cent of females and 22 per cent of males working on a part-time basis. The female employment share has also increased from 65.7 per cent to 69.0 per cent. Table 3.11 Characteristics of public sector employees in Tasmania, 2000 and 2011

2000 2011 FTE 19092 23898 Headcount 22143 30866 Female 65.7 69.0 Permanent 73.7 83.6 Fixed Term / Temporary 26.3 15.5 Part-time 33.9 45.8 Source: State Service Commissioner Tasmania, Annual Report, Various years Figure 3.16 shows that public sector employment in Tasmania is highly concentrated with over three-quarters of employees in Health and Human Services (41 per cent) and Education (35 per cent). Other departments have relatively small employment shares. Figure 3.16 Composition of public sector staffing, 2011

Source: State Service Commissioner Tasmania, Annual Report, 2010-11

3.8.1 Recent developments in public sector staffing in Tasmania This section details recent developments in public sector staffing during a period of “fiscal discipline” which the Tasmanian Labor Government credited with the achievement of a Triple A credit rating by Moodys in December 2006 (2007-08 Budget speech). The section is divided into several themes that illustrate how and why public sector employment has changed over time. The focus on targeting frontline services for any staff increases. As has been the case in other states, the Tasmanian Government, acting in a situation of self- imposed fiscal constraints, has attempted to channel increased funding and associated staffing into frontline service delivery areas. Table 3.12 details major changes in staffing levels between 2008-09 and 2010-11. Commonwealth funding through National Partnerships, has

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generated much of the additional funding and staffing, particularly in health and education (e.g. Lead Teachers and the Raising the Bar, Closing the Gap literacy and numeracy program). There have also been large transfers of staff from one agency to another due to the changes to post compulsory education. Table 3.12 Staffing changes in the Tasmanian State Service, 2008-09 to 2010-11

Year Department/Agency Change in FTE 2007-08 Department of Education Increase of 107.63 FTEs for additional administrative staff, teachers aides and for literacy and numeracy programs. Department of Infrastructure, Increase of 24.64 FTEs for infrastructure planning activities Energy and Resources and support or mining and forestry planning. Department of Justice Increase of 27.5 FTEs for a range of projects and for the Tasmanian Prison Service. Department of Premier and Cabinet Increase of 26.57 FTEs to establish the Offices of Climate Change and Social Inclusion Unit and transfer of drivers from casual to permanent employment status. TAFE Tasmania Increase of 18.79 FTEs due to increase in training activities. 2008-09 Department of Education Decrease of 416.23 FTEs: transfer of 303 to Tasmanian Polytechnic and the Tasmanian Academy; 100 FTEs increase for literacy and numeracy and for students with disabilities; decrease due to declining enrolments and internal vacancy control. Department of Health and Human Increase of 655.95 FTEs 112.78 increase for hospitals and Services allied health professionals (Commonwealth initiatives); increase of 168.03 nurses, 53.70 medical practitioners, 13 ambulance officers, 78.70 fixed term and 75.56 permanent administrative support, 146.08 employees changed employment status, decrease due to vacancy control. Department of Infrastructure, 10.52 decrease –completion of projects Energy and Resources Department of Justice Increase of 17.44 FTEs: transfer in of Sullivans Cove Waterfront Authority; new workplace inspectors and employees for the Witness Assistance Program, Legal Aid and Inspectors at Workplace Standards, and Custodial Officers. Department of Police and Decrease of 22.90 FTEs-end of contracts for defined Emergency management project work, reduction in hours of p-t employees and retirement of a number of firefighters. Department of Premier and Cabinet Increase of 7.11 FTEs: recruitment for Climate Change office and Social Inclusion Unit, Policy Division and Corporate Services. Department of Primary Industries Decrease of 45.66-completion of fixed term contracts and and Water voluntary redundancies. TAFE Tasmania Decrease of 1081.65 due to establishment of Tasmanian Academy, Tasmanian Skills Institute and Tasmanian Polytechnic. Tasmanian Academy Increase of 153.53. Tasmanian Polytechnic Increase of 1045.62. Tasmanian Skills Institute Increase of 363.43.

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Table 3.12 Staffing changes in the Tasmanian State Service, 2008-09 to 2010-11 (cont.)

Year Department/Agency Change in FTE 2009-10 Department of Economic Increase of 62.45: transfer of 98 FTEs from the Divisions Development, Tourism and the Arts of Arts and Heritage; 22 redundancies with closure of Tasmanian Temptations Travel Centres; 36 FTE voluntary redundancies. Department of Education Decrease of 80.36 FTEs; transfer of 99.69 FTE College staff to Tasmania Polytechnic and Tasmanian Academy; increase in staff due to targeted programs. Tasmania Academy Increase of 59.19 FTEs –transfer of staff from Department of Education. Tasmania Polytechnic Increase of 81.81 FTEs –transfer of staff from Department of Education. Department of Health and Human Increase of 302.52 FTEs; increased staffing in Area Health Services Services and ambulance officers; vacancy control. Department of Infrastructure, Decrease of 6 FTEs due to abolition of Rail Management Energy and Resources Unit, internal vacancy control. Department of Police and Decrease of 15.6 due to voluntary redundancies. emergency Management Department of Premier and Cabinet Decrease of 36.49 FTEs-internal vacancy control, VTESA and resignations. Department of Primary Industries, Increase of 351.26 FTEs: transfer in of staff from Parks, Water and Environment Department of Environment, Parks Heritage and the Arts (abolished); reduction in corporate staff, vacancy control 2010-11 Department of Education Increase of 661.85 FTEs transfer of the Tasmanian Polytechnic and the Tasmanian Academy on 1 January 2011 and increased funding for National Partnerships, Lead Teachers and Raising the Bar, Closing the Gap. Tasmania Academy Decrease of 203.38– transfer to Department of Education. Tasmanian Polytechnic Decrease of 1088.33 –transfer to Department of Education. Department of Health and Human Increase of 217.21 FTEs: 9.91 FTE ambulance officers; Services 35.93 allied health professionals; 72.68 medical practitioners and 200.78 nurses. Department of Justice 32.38 increase in the for Community Corrections employees, Monetary Penalties Enforcement Services, Crown Law and Legal Aid and cancellation of an outsourced counselling service. Department of Premier and Cabinet Reduction of 15.25 FTE. Department of Primary Industries, Increase of 62.62 FTE. Parks, Water and Environment Department of Treasury and Decrease of 17.91. Finance Source: State Service Commissioner Tasmania, various years Cuts to services and staffing In the 2008-09 Mid Year Financial Report the Government announced measures in response to the GFC that included agency efficiency dividends and changes to indexation arrangements. In 2009-10, efficiency dividends over the Forward Estimates period were expected to save a total of $308.4 million. The Government announced a one year wage Draft Report 87 freeze for members of Parliament and Tasmanian Senior Executive service employees. The Government also announced that it was introducing an Employee Management Program because it had been unsuccessful in negotiating a wage pause with public sector unions. Under the program the Government indicated that at the expiration of current wage agreements it would provide agencies with funding for wage increases of 1 per cent for 2009- 10 and 2010-11 and 2.5 per cent per annum thereafter. The Program was also expected to save a further $200 million through targeted voluntary redundancies commencing in July 2009, vacancy control, early retirement, leave-without pay, encouragement of part-time work and so on. Taken together, these measures were expected to reduce staffing levels by around 800 FTEs. The savings were justified on the basis of fiscal constraints: No government wants to make such significant budget savings as these but they reflect an ongoing commitment to strong financial management and to returning the Tasmanian Budget to a sustainable position (page 12 of 2009-10 Budget Speech Year?) After significant further reductions in revenues the Government announced additional savings measures in the 2010-11 Mid Year Financial Report. A Public Sector Productivity Strategy would include a major review of agency programs to be completed by 2012-13 with a view to cutting programs that do not meet government priorities or are ineffective or inefficient. A 3 per cent annual productivity savings target equivalent to 2300 FTEs over the four years to 2014-15 was to be achieved by attrition, transfers and targeted separations. Savings of $30 million in 2011-12 would increase to $200 million per annum by 2014-15. Government- owned businesses will be reviewed by Treasury prior to the 2011-12 Budget. The 2011-12 Budget included a new wages policy, individual agency savings strategies and central program reviews that were announced in the MYFR. The wage policy provides for non-productivity wage increases of 2 per cent per annum and a productivity component up to a maximum of 0.5 per cent in order to achieve substantial savings. Implementation of this strategy is expected to save $8.1 million in 2011-12 and $135.6 million over the Budget and Forward Estimates period. Agency savings $877.2 million over four years are to be achieved by reductions in employee costs equivalent to around 1,700 FTE over the Budget and Forward Estimates period and other savings. The largest savings will be achieved from the Department of Health and Human Services ($520.6 million or 59.3 per cent) and the Department of Education ($189.8 million or 21.6 per cent). To achieve the wage cost savings the Government provided for targeted voluntary redundancies. Redundancies under the Voluntary Targeted Employment Separation Agreement (VTESA) totalled 262 in 2009-10 and 145 in 2010-11. A further 168 staff left the sector under the Workforce Renewal Incentive Program, including 110 from the Department of Education. A Department and Treasury progress report on the savings strategies outlined in the 2011-12 Budget revealed that for the first half of 2011-12, full-time equivalent (FTE) employment in the General Government sector declined by 802 or 3.2 per cent (Table 3.13). The largest absolute reductions have occurred the key service delivery agencies of in Health and Human Services (375 FTEs or 3.8 per cent of total staffing) and Education (273 FTEs or 3.1 per cent). Agencies which appear to have largely escaped the staff cuts include Justice, Premier and Cabinet and Parliamentary and Statutory Offices. The largest relative cuts were in Ministerial and Parliamentary Support (7.9 per cent reduction in staffing) and economic development, Tourism and the Arts. Reductions in staffing levels will continue.

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Table 3.13 Reductions in General Government Sector Employment in Tasmania (FTE) Department Jun-11 Sep-11 Dec-11 Decrease Decrease (%) Economic Development, Tourism and the Arts 471 453 438 33 7.0 Education1 8766 8458 8493 273 3.1 Health and Human Services 9879 9766 9504 375 3.8 Infrastructure, Energy and Resources 497 490 487 10 2.0 Justice2 1050 1060 1050 0 0.0 Ministerial and Parliamentary Support3 151 147 139 12 7.9 Police and Emergency Management 1611 1594 1577 34 2.1 Premier and Cabinet 297 297 296 1 0.3 Primary Industries, Parks, Water and Environment 1311 1282 1284 27 2.1 Tasmania Fire Service 461 449 446 15 3.3 Tasmanian Skills Institute 344 344 334 10 2.9 Treasury and Finance 298 286 287 11 3.7 Parliamentary and Statutory Offices 316 316 315 1 0.3 Total 25452 24942 24650 802 3.2 1. Education employment data includes the Tasmanian Polytechnic and the Tasmanian Academy. The staffing profile of the Department of Education is subject to a high level of seasonal variation across the school year and is particularly affected by casual, temporary and fixed term employment on a school term basis. Pay to Pay comparisons are not a reliable indicator of trends, although individual pay comparisons from 2011-12 are showing a decline in paid FTEs. 2. Justice FTEs show no change due to the employment of additional correctional officers to reduce overtime costs as well as new positions relating to the Monetary Penalties Enforcement Service. 3. Since January 2011, the number of staff within Ministerial and Parliamentary Support has reduced by 29 FTEs. Source: Department of Treasury and Finance 2012) Progress Report 2011-12 Budget savings Strategies, Department of Treasury and Finance, Hobart.

3.9 The impact of staffing strategies

3.9.1 Staffing increases for frontline services The strategy adopted by state governments seeking to reduce the rate of expenditure growth has been to target expansion of services and staffing to those areas referred to as frontline or key services, notably health, education and areas that have been the subject of adverse reviews such as child protection. The issues that need to be explored in this regard are: . Has the expansion of existing services been sufficient to meet demand? . Have new services been provided to meet areas of need that have been identified? . Have access and equity issues been adequately addressed? These issues are considered in Chapter 7 which examines the adequacy of publicly funded services.

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3.9.2 Outcome of staff cuts As shown above, all state governments in Australia have engaged in cutting public sector staffing due to self-imposed budget constraints. Staffing reductions are generally characterised as being in non-frontline areas, and therefore, have little or no impact on service delivery. There are a number of important possible consequences of public sector staff cuts: . Direct impacts on frontline workers; . Loss of highly productive workers and corporate memory; . Demoralisation of the remaining workforce resulting in reduced efficiency; . Impact on services. Impact on frontline staff While governments claim that reducing back office staff will have a minimal impact on the ability of frontline workers to deliver high quality services to the public, this outcome is not assured. First, there is not necessarily a clear demarcation between the functions performed by frontline service delivery staff and their back office counterparts. Secondly, even where clearly defined separate roles exist, there is a distinct possibility that some of the functions performed by the back office workers are crucial for frontline workers to delivery services. For example, if non-frontline workers are entering data that frontline workers rely on to work efficiently, any delay in data entry diminishes the quality of the service provided to the community. Reductions in the number of support workers may result in a transfer of administrative functions to frontline workers, diverting them from service delivery. These types of outcomes are counterproductive and impact adversely frontline workers and the quality and quantity of services delivered to the public. The fact that the majority of public sector workers are already engaged in direct service delivery and the past practice of cutting administrative positions means that it will become progressively more difficult to cut these jobs without causing major disruptions to services. As the proportion of support workers shrinks there is a danger that staffing levels will fall below a critical mass that is essential for services to be delivered efficiently and effectively. Such situations would also be exacerbated by staff taking unrostered leave. Despite assurances by governments that staff cuts will be concentrated in non-frontline areas, there are losses in service delivery positions that impact directly on the community. This is a particular problem when blanket decisions are made such as staff freezes or allowing fixed- term contracts to lapse. Box 3.1 describes the impact of the failure of the Department of Sustainability and Environment to renew contracts.

Box 3.1 Impact of staff cuts on environmental protection, Victoria Jobs set to go so far include Coastcare facilitators in Victoria's south-west who help organise hundreds of volunteers doing unpaid conservation work on popular beaches along the Great Ocean Road and further west to the South Australian border. Six scientists at the state's biodiversity research agency - the Arthur Rylah Institute - working on vegetation mapping, threatened species and the health of the Murray-Darling, were also told this week their contracts would not be renewed. Volunteers are now protesting the loss of Coastcare organisers - with contracts to end on June 30 - which they say are the kind of front-line jobs the government says it will shield from the public service cuts. Draft Report 90

Lou Hollis, a Killarney Coastcare volunteer, told The Saturday Age the group would have to scale back its work if it could not get support. ''Most volunteer groups rely on having somebody to access to help with projects and funding opportunities,'' she said. ''By taking away the facilitator it shows the government has a total disregard for volunteers in the community.'' Last month the ABC reported 10 threatened species officers, also in the state's south-west, had been cut, including experts on threatened orchids and the brush-tailed rock wallaby. It is believed staff looking after red-tailed black cockatoos, the orange-bellied parrots, wetlands, and swamp-scrub vegetation communities, will also be lost. Source: Arup, 2012.

Loss of productive workers and corporate memory Voluntary redundancy avoids the acrimony experienced with involuntary redundancy (Clarke, 2007), but increases the risk that the most productive and experienced workers may leave the organisation. There is a danger that a large proportion of workers made redundant are among the most productive and experienced. This is because individuals faced with the prospect of voluntary redundancy assess the benefits of redundancy by weighing up the financial gains of the redundancy package against potential losses from unemployment. The most productive workers are more likely to secure employment quickly and therefore reap greater financial gains from accepting the package. Those with the best prospects of securing employment elsewhere are more likely to accept the package while those with few employment prospects are likely to seek redeployment because the long-term cost outweighs the short-term benefit of accepting the offer. Another counter-productive result of skill reduction is if the most productive workers accept voluntary redundancy or early retirement. The danger for the organisation is that losing the most productive workers will impact negatively on productivity and that the less experienced workers who remain require additional training and may struggle to cope with the extra workload. A study of the costs to the SA public service of the original reduction of 1600 FTE by Ranasinghe and Spoehr (2012: 10) highlighted the costs to organisations when experienced workers leave: Long-term regular employees gain valuable skills and corporate knowledge over time, gathered by training programs, on-the job training or by many years of professional experience. When such workers leave, they take with them these skills and knowledge. Whilst the cost of this loss is hard to quantify, it has genuine and explicit implications for employers. Ranasinghe and Spoehr (2012) estimated the sunk costs that could not be recovered when employees leave the public service. Based on the loss of 1913 people (1600 FTE) with a one off recruitment cost of $20,000 per worker and annual training costs of $735 per employee for an average of 18 years, the estimated value of the loss of skills and knowledge was $635,670,660. However, they caution that there are additional costs related to ‘the intrinsic value of experienced workers which is much harder to measure’ (Ranasinghe and Spoehr, 2012). The sunk costs will have risen considerably when the subsequent rounds of job losses are included. A major phenomena identified in the literature is the loss of institutional memory due to downsizing so that efficiency is impaired rather than enhanced (Feldheim, 2007). A GAO

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(1996: 39) study of downsizing in the US public sector between 2003 and 2006 reported that half of the respondents said that ‘downsizing somewhat or greatly hindered their agency’s mission.’ Negative consequences of downsizing included loss of institutional memory, service shortfalls, skill imbalances, increased use of overtime, increase in work backlogs, lowered morale and the productivity of the remaining workforce. Some organisations estimated that it may take several years to return to the previous skill levels and some had found it necessary to reemploy some of the downsized employees, either directly or on a contract basis. Demoralisation and reduced efficiency While organisations downsize to improve efficiency and productivity these outcomes are not guaranteed. The negative consequences for efficiency in downsized organisations is highlighted by Dunford, Bramble and Littler (1998) who describe the effects of work intensification as work that was previously done by specialist staff (such as administrative staff) is redistributed. In addition they contend that in a period where the role of management becomes more critical to manage the process of change, many managers are unable to handle the increased complexity of their role and consequently suffer increased stress and psychological problems. Absenteeism is frequently viewed as a proxy for worker dissatisfaction. Firns, Travaglione and O’Neill (2006) studied absenteeism in a major public sector transport organisation in Australia during a period of modernisation and downsizing and found that absenteeism increased amongst employees who intended leaving the organisation. The experience of public sector staff cuts in South Australia As mentioned previously, the South Australian Government has embarked on a program of staff cuts that will total 4,150 between 2009-10 and 2014-15. A survey of 3000 South Australian public servants by Rafferty, Schutz and Yu (2010) provides some insight into these issues. The survey was conducted following the announcement of the 1600 FTE staff cuts and sought to investigate experiences with previous staff reductions as well as expectations about current and impending cuts. The survey found that there is no clear delineation between back office administration and front-line staff. A high proportion of workers were involved in front-line service delivery in some way. Around 30 per cent of respondents described themselves as predominantly engaged in front- line service delivery and 27 per cent as predominantly administrative support. However, 43 per cent said that they performed a combination of front-line and administrative functions. Rafferty, Schutz and Yu (2010: 4) conclude: Put simply, we found that the planned cuts in staffing of the public sector can be expected to have a deleterious effect on the availability and quality of public services, and will increase workload pressures on remaining staff. The proposition advanced by the Government – that by concentrating cuts on so called back office administrative staff, the cuts will not affect services finds no support in this research. Respondents reported significant working issues including working unpaid overtime (55 per cent), not being able to get through their workload during normal working hours (30 per cent), having too large an administrative burden (36 per cent) and feeling stressed or overworked (39 per cent). Of those who had experience staff cuts in the past: 80 per cent experienced more stress and pressure; 70 per cent reported increased workloads, 55 per cent reported an increase in administrative duties that took them away from front-line service delivery. According to Draft Report 92 respondents, the deterioration in service delivery was evident in longer queues (45 per cent), delays in meeting client needs (73 per cent), failure to meet client needs (54 per cent) and more aggression toward staff (55 per cent). Moreover, 57 per cent reported performing duties without appropriate training. In total, 66 per cent of service delivery workers were of the opinion that further staff cuts would result in ‘a one-for-one or greater diminution of service delivery’ (Rafferty, Schutz and Yu, 2010: 22). A survey of 3,380 SA public servants in 2010 found that half the respondents had experienced staff cuts in their workplace in the last year, with one-third describing these as “significant cutbacks”. More than half thought their workplace was understaffed and staff were working an average of 2.7 hours overtime per week, with 85 per cent of overtime unpaid (Hordacre and Spoehr, 2011b). The impact on morale and the amenity of the workplace was significant: As a result of the 2010-11 Budget, one third of respondents reported a very negative impact on their morale, while one quarter of respondents indicates very negative impacts on their stress levels and the pressure they experienced at work (Hordacre and Spoehr, 2011b: 1). The impact of the 2009-10 Budget staff cuts on service delivery included negative impacts on: the ability to meed client or community needs (66.0 per cent); the level of service delivery to the community (64.9 per cent); the quality of service delivered by their work unit (54.1 per cent); and the maintenance of publicly funded infrastructure (51.1 per cent) (Hordacre and Spoehr, 2011a). The staff cuts announced in the 2010-11 Budget heightened expectations in deteriorating service delivery among respondents so that: . 79.0 per cent expected negative impacts on their ability to meet client or community needs; . 78.2 per cent expected negative impacts on the level of service delivery to the community; . 69.1 per cent expected negative impacts on the quality of service delivery from their work unit; and . 68.6 per cent expected negative impacts on the maintenance of publicly funded infrastructure. The magnitude of the staff cuts to be achieved over the next four years and the evidence of the adverse impacts of previous staff reductions suggests that working conditions will deteriorate for remaining staff and that the quality of service delivery is also likely to decline. The stated intention of the Government of harvesting staff reductions predominantly from administrative functions is likely to be extremely difficult to achieve since the majority of public sector workers have at least some service delivery functions. Past experience suggests that staff cuts will be accompanied by increased workload for the remaining staff who will be working in a resource constrained environment. There are likely to be adverse impacts on morale, loyalty and commitment of staff and a loss of organisational capacity and corporate memory as experienced staff exit the public sector. There is evidence that past staffing reductions have also worsened service delivery and further large reductions will exacerbate this situation. The wider impact of government policies on service delivery is considered in more detail in Chapter 7.

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3.9.3 Other efficiency measures: the case of Shared Services Shared services have been introduced in a number of states to amalgamate corporate services in order to reap scales of economy to produce substantial savings and reduce the number of staff engaged in these activities. This section considers some of the experiences of states with the introduction of shared services. The international literature is divided on the benefit of shared services in the public sector. Potential benefits include lower transaction costs, consolidating expertise, more professionalism and better career paths, allowing agencies to focus on core functions, facilitating regional development policies, and facilitating Machinery of Government changes AIM (2011). Some studies have reported substantial savings from shared services. Similarly, the NSW Government cited research that showed 61 per cent of shared services operations in public and private organisations in the US, EU and the Asia Pacific region had achieved savings of more than 20 per cent (DPC, 2010). A. T. Kearney (2007) suggested that savings of between 15 per cent and 25 per cent could be achieved but caution that savings are hard to measure. However, the savings of up to 25 per cent have been challenged by Whitfield (2007a, 2007b) who claims that no evidence is available to verify these savings and that transaction costs are underestimated. Similarly, a report by Firecone Ventures Pty Ltd (2007: ii) in Victoria stated: Although the main focus has been efficiency, there is limited data on the impact of shared services on inputs (such as head-counts) or on costs. There is a lack of publicly available benchmark data before and after the implementation of shared service reforms. There are risks and costs associated with the introduction of shared services. For staff there may be cuts in the number of jobs, the necessity to relocate or commute long distances and there could be changes in working conditions. Shared services could also impact on regional economies. The establishment of shared services in regional areas could be of substantial benefit to the region, whereas centralisation of function in major metropolitan areas could reduce employment opportunities in regions. Pricewaterhouse Coopers (2010: 53) warn that implementation costs could be larger than anticipated and that there could be ‘an overriding focus on cost savings rather than overall value and performance delivery.’ Spoehr, Burger and Barrett (2007) suggest that the benefits, costs and risks should be made public to ensure transparency and accountability. One of the common themes to emerge from monitoring the implementation of shared services in Australia is that the promised savings exceed actual savings. NSW The NSW Government established the Central Corporate Services Unit (CCSU) in 1996 by amalgamating the corporate services staff from 11 agencies (Auditor-General of NSW, 2008). The 2002 Shared Corporate Services Strategy was designed to obtain savings in various areas of corporate services: human resources, finance, information technology and office services by using the CCSU, establishing shared services within agencies, or organising a cluster arrangement with other agencies. An audit by the Auditor-General of NSW (2004) found that the level of savings fell short of expectations. By June 2003 $13.6 million of savings had been achieved which was only 5 per cent of the expected savings to 2006. Implementation costs were estimated to be $79.4 million. Moreover the Auditor-General of NSW (2004: 3) found that

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…it is not possible to accurately measure the benefits arising from shared arrangements as baseline data is incomplete and most agencies do not have systems in place to identify, measure and monitor benefits. The machinery of Government changes in 2009 that amalgamated agencies into 13 clusters included the Corporate and Shared Services Implementation Project for: finance; human resource management; industrial relations; occupational health and safety; information technology and communications; contracts and procurement; governance and risk; executive services; records and knowledge management; property, facilities and fleet management; and asset management (DPC, 2010).

Box 3.2 The Department of Education’s Learning Management and Business Reform (LMBR) In 2006 the Department developed a plan to replace the finance, human resources and payroll system and the student and administration system in two stages over 8 years. The Auditor- General reported that the SAP Finance system was delivered in March 2010 but that it did not provide the expected benefits. In particular: (Auditor-General of NSW, 2011b: 44): 1. The finance system did not fully meet the Department’s needs and users had to build some manual workarounds, which resulted in lost time and additional effort and costs, not included in the original business case. 2. System users had some difficulty obtaining accurate and/or relevant and timely information. 3. The Shared Service Centre did not have the required skills, resources and knowledge to fully support the system. 4. System users did not have sufficient knowledge of the new system and its functionality. Source: Auditor-General of NSW (2011b)

The Coalition Government has retained shared services with amendments to the structure to reflect further amalgamation from 13 clusters to 9 from April 2011. A recent review of shared services in the Department of Education found that the anticipated savings were not fully realised (Box 3.2). South Australia Similarly, in South Australia the expected savings were far greater than the savings realised. In addition the costs were understated and there have been significant concerns regarding underperformance. Shared services were announced in the 2006-07 Budget when it was estimated that the Government would achieve savings of $130 million over the four years to 2009-10 for a cost of establishing the shared services model of $60 million. The initiative involved transferring employee services, ICT services, finance and accounting services and procurement from individual departments to a central provider, Shared Services South Australia (SSSA). Savings would be redirected to improving services such as health, education and community safety. Regional staff involved in these functions (approximately 256 FTEs in 2005-06) had the choice of moving to Adelaide, being redeployed to other positions or being declared surplus. The cost of implementing the shared services reform accelerated over time. In the 2010-11 Budget an extra $8.3 million was allocated. Funding for premises totalling $15.4 million to

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2013-14 has also been provided. An additional amount of $23 million was also required to implement e-Procurement (Auditor-General of South Australia, 2011). The savings have been significantly lower than expected. To June 2010 savings achieved fell $42.8 million short of the original estimate of $130 million. In recognition of the fact that savings targets had been overestimated the Government revised these down in the 2010-11 Budget. Instead of the original savings of $60 million, the new targets were $10.0 million in 2010-11; $50.3 million in 2011-12; and $56.5 million in 2012-13 (Auditor-General of South Australia, 2011). Significant shortcomings in the operation of SSSA were noted by the Auditor-General of South Australia (2010). After assuming responsibility for the payroll functions of the SA Ambulance Service, SSSA processed back pays to staff of $18.3 million in 2009 due to a new Enterprise Agreement. A subsequent audit found that there was a “high incidence of error” which further investigations established to be in the order of 50 per cent. The overpayments were recovered from the affected staff but there were adverse financial impacts in the form of superannuation and tax implications. The Auditor-General concluded that: It is of concern that this event was not risk identified and the SSSA did not respond to the errors in the back pay calculation within a quicker timeframe (Auditor-General of South Australia, 2010: 15). SSSA’s performance of bank reconciliations for the Department for Transport, Energy and Infrastructure was also found to be substandard. The Auditor-General noted that: …effective processes to match general ledger transactions to bank records were not established upon transition. There were also delays in completing the bank reconciliations and there were significant unreconciled bank and ledger transactions. (Auditor-General, 2010: 15). A subsequent review in 2010 revealed that: SSSA had not satisfactorily completed the bank reconciliations…. The reconciliations contained significant bank deposits and withdrawals which were not recorded in the general ledger and transactions recorded in the general ledger which were not matched to bank records (Auditor-General of South Australia, 2010: 15). Similarly, reviews of SSSA processing for three agencies revealed significant common weaknesses that included: (1) user access was insufficiently controlled; (2) segregation of duties was insufficient; (3) understanding of user access profiles needed improving; (4) processing and reconciliation controls needed to be improved; (5) policies and processes needed to be updated and/or documented; and (6) logging and log monitoring needed to be increased. Victoria More serious issues have emerged with CenITex which is the shared services IT provider for Victorian Government departments. Shared services in IT commenced with the creation of two ICT shared service providers –the Shared Services Centre and Information and Technology Services in 2006. These organisations were merged in 2008 to form CenITex. In 2011, over 35 per cent of the 495 FTE staff were employed on a fixed-term or casual basis. Box 3.3 relates allegations of a criminal nature against individual employees of CenITex as well as concerns regarding poor performance and governance.

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Box 3.3 CenITex in Victoria CenITex was to deliver shared IT services for entire VPS by amalgamating the government’s network systems, internet providers, data centres and help-desk services to make savings. ‘But some of those who established the agency told Fairfax these savings – to be diverted to “frontline” services for Victorians – may take years to materialise’ (Fyfe, 2012). In 2011 the Baillieu Government ceased the transfer of IT services to CenITex while a review was conducted by the State Services Authority. This review was in addition to a police investigation into procurement procedures after it was revealed that CenITex project managers had awarded themselves $1.5 million contracts. In June 2011 the Ombudsman also decided to include CenITex in the investigation into ICT enabled projects but decided to remove CenITex after advice by the Minister for Technology that CenITex was subject to a full review by the State Services Authority. The report by the State Services Authority was due to be completed in February, 2012 but has not been publicly released. Fyfe (2012) claimed that the report has been ‘labelled cabinet-in-confidence’. ‘Critics of Cenitex claim that it is captive to private contractors who are more interested in profits than public sector performance. But its supporters say private contractors are complaining because if CenITex succeeds, there will be less work for consultants.’ (Epstein and Fyfe, 2011) CenITex 3 inquiries this year –Ombudsman’s investigation and a police probe and State Services Authority review (which has been suppressed and labelled “cabinet-in-confidence”). The Government is removing the Board of CenITex due to poor governance. Source: Fyfe, 2012; Tay, 2011; Epstein, R. and Fyfe, 2011

Shared Services in Queensland and Western Australia Firecone Ventures Pty Ltd (2007: ii) noted that ‘Queensland and Western Australia have had the most aggressive timeframes but had not reached their targeted savings. In December 2003 the Western Australian Government endorsed the Shared Corporate Services Project to transfer financial and human resource functions to three shared services agencies with the promise of cost savings. The Auditor-General of Western Australia (2007) concluded that the model was ambitious and high risk and governance was inadequate. In anticipation of completed implementation of shared services by the end of 2006 DTF harvested savings totalling $34 million from agencies in the 2006-07 Budget. Due to implementation delays DTF refunded $19 million of the harvested savings to agencies. In 2007-08 DTF harvested savings of $55 million but further delays which the Auditor-General thought may result in refunds being considered. The Auditor-General (2007: 5) also noted that ‘Agencies have incurred additional expenses and staffing pressures that were not factored into the original business case’ Moreover, estimates of costs increased by $20 million from the 2006 estimate of $178 million to 2008- 09. An inquiry into the Department of Treasury and Finance Shared Service Centre (DTFSSC) in 2011 found that: the expected benefits of shared services had not been achieved; the original

Draft Report 97 business case was flawed since costs were underestimated; and the schedule was not realistic. Agencies indicated that services had deteriorated under DTFSSC, processing timeframes had lengthened and services were less efficient than in house services (Economic Regulation Authority, 2011) Particular findings included: In 2007 the DTF was tasked by the Government to roll agencies into the DTFSSC on a very aggressive timetable designed to minimise the financial loss from the project. Services were expected to deteriorate during the roll-in period, but were expected to improve once this process was complete. However, the Authority considers that the focus on rolling in agencies at the expense of service delivery inevitably led to the problems encountered by agencies and the low level of trust between the two parties (Economic Regulation Authority, 2011:104). The Authority does not believe that DTFSSC has generated any efficiency savings for agencies….The Authority’s analysis indicates that when all costs are considered (including sunk costs), the shared services project will never deliver a net cost saving for the Western Australian public sector…. In addition, substantial direct and indirect costs have been imposed on agencies. Furthermore any conceivable savings from this point will not give the project an overall positive return’… ‘The Authority has established that continuation of the existing model is not sustainable for the DTFSSC or the agencies serviced (Economic Regulation Authority, 2011:103). The government accepted the recommendation that DTFSSC should be decommissioned and the functions returned to agencies (Barnett and O’Brien, 2011). The implementation of shared services in Australian states bears out the conclusion that it is a complex process with uncertain returns and ‘there has not been one fully successful implementation in the public sector of any Australian jurisdiction (Economic Regulation Authority (2011: 104). This by no means comprehensive review of shared services demonstrates that the expected savings have not been fully achieved and there are a range of other issues that have not been addressed satisfactorily in regard to efficiency, accuracy and good governance.

3.9.4 The wider implications of reductions in public sector staffing While the adoption of neo-liberal policies and NPM have insisted that management of the public sector mimic that of the private sector and withdrawal of the public sector from some economic functions, this has been to the detriment of some of the special functions that the public sector performed during the post-war period that contributed significantly to economic efficiency. It was noted in the introduction that public sector employment played the key role in facilitating the virtual elimination of unemployment until the policy was abandoned in the mid 1970s. While the ALP had the establishment of full employment in its sights long before John Maynard Keynes published his ‘General Theory of Employment Interest and Money’ in 1936, Keynes’s work explained why private sector activity can result in a chronic deficiency in aggregate demand for goods and services, leaving productive resources like workers unutilised. The public sector, he argued, needed to close this gap in aggregate demand through additional employment and expenditure, to produce full employment. The war proved the point to Australians, that the Commonwealth had the capacity, through large scale public sector employment, to maintain full employment indefinitely, and the Australian people supported that policy at the ballot box for thirty years. As well as adding to the

Draft Report 98 aggregate demand for workers, agencies were created to facilitate the efficient development and allocation of labour in a tight labour market, such as the Commonwealth Employment Service. After 1975, we were never offered the right to vote for full employment again. The growth of labour underutilisation that resulted from the abandonment of the commitment to full employment has had negative economic and social consequences for Australia as productive labour resources lay idle and the impact of unemployment contributed to the types of social problems referred to in the previous chapter – deterioration in physical and mental health, social isolation, family breakdown and so on. The loss of national skill formation capacity The skills shortages that have plagued Australian industry since the early 1980s are the consequence of ending the post war policy that had the public sector train more tradespeople and professionals than it required, in order to act as a net supplier of skilled workers to the private sector. Government departments, public utilities, railways, local councils etc… were large scale employers and trainers of trades apprentices and graduate professionals, who learnt their trade in the public sector and then left in pursuit of better opportunities in the private sector. Since the public sector abandoned this role, the chronic propensity of the private sector to under-invest in skill formation has created permanent skill shortages that have proven intractable to address in any other way (not by tax concessions, training guarantee acts, skilled migration, industry boards or the marketisation of vocational training). Private employers opt to hire already trained and skilled workers from the market rather than bear the costs and risks of training them, since in order to prevent their skilled staff being poached they need to pay them the going market rate anyway. Because so many rely on others to train the skilled workers their industry requires, insufficient training is undertaken. During the full employment era, despite a booming housing industry, and expanding manufacturing sector, Australian industries were well supplied with skilled workers. During the first waves of public sector corporatisation and retrenchment in the 1970s and 1980s, in order to emulate the more ‘efficient’ private sector, the public sector’s surplus training functions were among the first to go. Australian industry leaders have identified chronic skill shortages as a principle impediment to innovation and international competitiveness ever since (Mitchell & Quirk, 2005; Cook et al., 2008). The lost yardstick of decent standards of employment Public sector enterprise had also been effective as a way of applying competitive pressure to regulate private sector business behaviour. The Commonwealth Bank was formed in 1911 as an initiative of a Labor Federal Government to act as a commercial competitor of the private banks, which forced them to offer better terms on loans and deposits than they otherwise would. During the 1914-1918 war, profiteering from meat and other goods in short supply was controlled by the Queensland Labor Government by establishing government butcher shops, and even government hotels to stop price gouging (Fitzgerald, 1994). While the use of public sector competition to constrain market power fell out of favour, in one area of competition, that of observing standards of ethical conduct as an employer, the public sector continued to set the standard. In areas such as non-discrimination, appointment on merit, family friendly conditions, employment security, staff training and development, the public sector was expected to lead rather than follow. As the new ethos of small government came to dominate, employment security was eroded as the public sector workforce was increasingly casualised, with large numbers of staff now employed on contract. As the process of eliminating the public sector component of public service

Draft Report 99 continues, the value of public sector employment as a benchmark of decent employment is being lost.

The loss of the positive aspects of public bureaucracy Another consequence of the transfer of functions from the public sector to the private sector (including not-for-profit organisations) is the decline in equality of treatment and transparency. The administration of the formal aspects of the welfare state was entrusted to large, bureaucratic public sector organisations. Rigid, centrally determined rules can become the major focus rather than outcomes, and prevent local solutions to unique circumstances. Notwithstanding these criticisms, several positive aspects of bureaucratic organisations facilitated welfare provision. A professional public sector administered social policies: interpreting rules and regulations governing entitlements and payment rates; ensuring uniform service delivery; evaluating program adequacy and effectiveness; and recommending policy changes. Contrasting previous welfare provision by charitable organisations the welfare state machinery ensured that, in the main, beneficiaries in similar circumstances achieved similar treatment. Outsourcing it has become more difficult to ensure that these principles apply due to a lack of transparency. Integral to the justification for outsourcing functions is the belief that private sector organisations will be more innovative, which necessarily introduces variety into the amount and composition of services. Therefore, the actual service received by two like individuals may vary considerably according to their service provider. There is also the possibility that clients will be judged according to the beliefs of the organisation providing services. The utilisation of “commercial-in-confidence” clauses and the like to restrict publicly available information raises questions about service delivery. Moreover, many of the private sector organisations delivering publicly funded services are large bureaucratic organisations that are likely to suffer from the same limitations as public bureaucracies. Issues related to outsourcing are discussed in more detail in Chapter 6.

3.10 Conclusion Government policies over the past two decades have impacted significantly on public sector employment. In addition to the preoccupation with reducing debt and producing budget surpluses, governments at both the federal and state level have pursued privatisation and outsourcing and attacked employment conditions of public sector workers. Specific policies pursued by governments in Australia have included large rounds of staff cuts in some states, the imposition of staff ceilings, efficiency dividends, attempts to impose freeze wages or to take back long-standing payments and employment conditions. There are a number of trends that can be identified in the trajectory of state public sector staffing in Australia over the past few decades: 1. Increases in frontline staffing have occurred in response to increased need due to population growth, ageing of the population, the inability of people to satisfy their needs through market activity, growing social problems such as substance abuse, the impact of changes in policies relating to mental illness. There has also been recognition of new areas of need and improved methods of meeting needs identified through research. The adequacy of the expansion of staffing and funding for public services will be examined in Chapter 6.

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2. Expenditure cuts in the form of ongoing efficiency dividends and cuts to specific programs have reduced public sector staffing. The evidence suggests that arbitrary efficiency dividends have long since harvested available efficiency gains so that further cuts are reflected in increased stress for remaining staff attempting to provide high quality services in a constrained environment and this has a detrimental impact on both the quantity and quality of public services. There have been notable instances, such as shared services reforms, where staffing cuts have occurred on the assumption that savings would be achieved but savings have fallen short of expectations, placing an increased burden on staff. 3. Staffing cuts or restrictions due to government imposed budget constraints or privatisation of functions: a. Mass redundancy exercises have a number of significant negative consequences for staff and service delivery. In the first instance there is a high level of stress for staff that results in a reduction in productive work while the redundancies proceed. The lost of productive workers reduces the overall skill level of the organisation and there is a loss of corporate memory. Some impacts on service delivery include: a decline in the quantity or range of services offered; increased waiting times; increased targeting of services so that many people miss out on services. b. In the case of cuts to programs, at best, this results in the loss of services that were previously provided to clients. It may also result in exacerbating the problem or causing new problems which increase costs in the longer-term. c. FTE ceilings and staffing freezes introduce inefficiencies as agencies are not able to fill important positions. Attempts to circumvent FTE ceilings can result in higher costs e.g. the use of labour hire to obtain workers who are not counted in staffing figures is more expensive than direct employment of staff. Developments in public sector staffing throughout Australia have been dominated by State Government adherence to neo-liberal policies that have included: (1) erosion of welfare state funding through the reduction of taxation on businesses and high income earners; (2) the imposition of budget constraints on expenditure on public services; and (3) the transfer of service delivery to the private sector through privatisation, PPPs and outsourcing. Compared to their public sector counterparts, private sector workers frequently have lower levels of qualifications and endure inferior wages and working conditions. In effect these workers can be viewed as effectively subsidising the low cost production of services. Moreover, these developments have contributed to the deterioration in skill formation exacerbating skill shortages in the labour market.

1 Discretionary expenditure covers most spending excluding items an agency cannot directly control like depreciation, the pass through of Commonwealth grants and interest

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Chapter 4 Privatisation in Australia

4.1 Introduction As outlined in Chapter 1, the public sector was integral to the welfare state. It directly provided services such as health, education, employment, and other services as well as operating government business enterprises (GBE) including essential services such as telecommunications, electricity, gas and water. The neo-liberal challenge to this traditional role from the early 1980s was driven by the need for new areas of operation for private corporations. For proponents, the benefits of privatisation are many-faceted. Privatisation is promoted as a means of increasing competition and efficiency and providing benefits to consumers through increased choice and reduced prices. Privatisation may also be used as a vehicle for reducing the power of vested interest groups such as trade unions to facilitate reductions in staffing levels, wages and working conditions. Internationally, ideological preferences for small government and private sector dominance in the marketplace have resulted in vociferous demands for withdrawal of the public sector under the catchcry articulated by Osborne and Gaebler (1993) of “steering not rowing”. There are three primary forms of “privatising” public sector functions: . Privatisations refers to the transfer of ownership to the private sector through the sale of enterprises which has occurred through trade sales or public floats; . Outsourcing of activities currently or traditionally performed in the public sector; and . Public Private Partnerships (PPPs) that involve partnership for major infrastructure projects involving private sector participation, usually in the form of financing, building and operation. While these are conceptually separate, in practice these types of “privatising” activities are not always clearly delineated. The next three chapters explore the extent and timing of the “privatising” of public sector activities in Australia. There are also less visible means of privatising that have been used by governments in Australia and internationally. One way of privatising services is through changes to the eligibility criteria that exclude groups of people. This has been used extensively in Australia where universal entitlements have become targeted or eligibility for means-tested programs has been tightened. Those excluded from government funded services must then rely on the private sector. Another method that encourages a shift from public provision is the running down of government services through under-funding. In the case of public dental services in Australian states, lengthy waiting times frequently force individuals to choose to use expensive private dental services or to forego treatment. Similarly, the failure to provide sufficient quantities of social housing forces low income earners to rent in the private market, despite the fact that they meet the eligibility criteria for social housing. In other instances chronic underfunding may be combined with incentives for using privately provided services creating the illusion of consumer choice. The deterioration in the adequacy of funding for public schools, combined with increased Commonwealth funding of private schools has facilitated the increasing share of students in the private system as those concerned with the quality of education in the state sector opt to send their children to the better funded private sector, resulting in a downward spiral in the public sector. The failure to Draft Report 102 provide adequate hospital services, combined with subsidisation of private health insurance contributions, encouraged people to take out private health insurance and utilise the private hospital system. The government could have provided an identical boost to health resources by increasing funding to the public system that would have benefited all Australians. These less visible “privatising” strategies are not directly considered in this research. This chapter examines outright privatisation or the transfer of ownership of assets from the public to the private sector. The OECD defined privatisation as: …any material transaction by which the state’s ultimate ownership of corporate entities is reduced. This definition includes direct divestment by the state, divestment of corporate assets by government-controlled investment vehicles as well as the dilution of state positions in SOEs by secondary share offerings to the non-state shareholders (OECD, 2010: 7).. Chapter 5 explores the extent of outsourcing in the State public sector. Chapter 6 discusses the growth of partnerships with the private sector through a variety of PPP arrangements. The following section surveys the extent of privatisation in the OECD over the past two decades. Section 4.3 considers the arguments used to promote privatisation and the risks associated with privatisation programs in terms of outcomes for governments, consumers and the general public. The remainder of the chapter details privatisation in Australia and discusses the implications of privatisation. Privatisation details were collected from a multitude of sources including Budget documents, government reports, research papers, newspaper articles and websites of various interest groups.

4.2 Extent of Privatisation in the OECD From the 1980s there have been extensive privatisation programs in OCED countries, commencing with the pioneering efforts of the Thatcher Government in the UK. Privatisation included public assets in electricity, gas, iron and steel, coal, water supply, railways, airlines, telecommunications and the sale of large amounts of public housing. Figure 4.1 Privatisation Revenues since 1989 (US$ billion, current prices)

Source: Privatizationbarometer (2011). Figure 4.1 shows privatisation revenues for 1988 to 2010 for the world and for the EU25. There are two waves of privatisation evident; the late 1990s and the late 2000s. Receipts rose Draft Report 103 sharply in the period from 1996 to 2000, averaging US$144 billion per annum before falling dramatically. In 2009 privatisation surged to US$265 billion and remained at US$214 billion in 2010. Almost half the proceeds of privatisation have been in EU25 countries for the period as a whole –ranging from a low of 20 per cent in 1988 to almost 73 per cent in 2004. The European countries with the largest privatisation revenues in 2010 were France, Poland, the UK, Germany and Italy. Figure 4.2 Privatisation in OECD countries, 1990 to 2007

Source: OECD Privatisation Database Taking a longer-term view of the privatisation phenomenon, Figure 4.2 shows the extent of privatisation in OECD countries between 1990 and 2007. The countries included are those with the largest financial returns from privatisation in the period 2000 to 2007. In 1990-1999 privatisation proceeds in these 10 countries accounted for 63.7 per cent of total OECD proceeds of US$560.2 billion. In 2000-2007 they accounted for 77.7 per cent of total proceeds for the OECD of US$497.7 billion. The size of privatisation receipts is impacted by the historical legacy of the size of public sector asset holdings as well as the timing and extent of privatisation programs. For early adopters of privatisation strategies there is a decline in receipts over time. Extensive privatisation in the 1980s relegates the UK to a lower ranking for the period shown above since much of the public infrastructure had already been disposed of prior to 1990. From 1977 to 1989 total value of privatisation receipts in the UK reached US$49.983 billion (US$152.283 billion in total 1977 to Dec 2010). Although privatisation activity has covered a wide range of industries, total revenues have been highly concentrated. Between 1990 and 2006, 29 per cent of value of infrastructure privatisation transactions was in telecommunications; 18 per cent in public utilities; 10 per cent in transportation; 6 per cent in petroleum and 37 per cent in other transactions (OECD, 2008b). In 2010, utility sales accounted for over half the privatisation receipts for the EU, while other major sectors including manufacturing, finance and transport (Privatizationbarometer, 2011). In Australia, extensive privatisation programs have been carried out by both the Commonwealth and state governments. Figure 4.2 shows that privatisation receipts were much higher in the 1990s than in recent years. At the Commonwealth level the massive privatisation program of the Hawke and Keating Labor Governments was continued by the Draft Report 104

Howard Coalition Government throughout the 1990s (see Section 4.4). The Kennett Government also attempted to privatise a large proportion of public sector activity in Victoria during the 1990s, including the power industry and public transport (See Section 4.6).

4.3 The privatisation debate

4.3.1 Perceived public sector weaknesses One of the fundamental justifications for privatisation of functions that were provided by the public sector is the argument that the public sector is inherently inefficient and unproductive because it is not subject to the discipline of the market (Smith, 1997). Schneider (2003) contends that the reason public enterprises are less efficient is the lack of competition rather than ownership per se. Martin and Parker (1997) state that disillusionment with public sector provision emanates from the perception that it is inefficient, is not innovative in the development and adoption of new technologies and is subject to political interference. Public sector managers may be more likely to invest in additional resources to grow the business, resulting in higher capital-labour ratios and higher staffing levels rather than pursuing profits (Schneider, 2003; Martin and Parker, 1997). The belief that public sector workers wield too much power is rooted in the fact that public sector employees have been more inclined to join unions than their private sector counterparts and they face less competition for jobs due to internal labour markets (Schneider, 2003; Martin and Parker, 1997). The implications are that employees resist attempts to reduce wages, conditions or staffing levels which limits profit- making opportunities. These perceived negative qualities of the public sector resulted in attempts to make the public sector emulate the private sector. Over the years public sector businesses have been subject to numerous reorganisations including corporatisation and breaking large businesses into a number of businesses to increase competition within the industry. The Hilmer Report (National Competition Policy Review Committee, 1993) recommended that public companies should be subject to competitive neutrality principles that eliminated any competitive advantages due to their public sector status. Government businesses are required to make dividend and tax equivalent payments to government as well as risk-related guarantee fees where borrowing rates are more favourable than those available in the private sector. Lambert (2011) contends that despite competitive neutrality, measures in market distortions have persisted, resulting in inefficiencies.

4.3.2 Arguments for privatisation Private sector superiority Justifications of privatisation revolve around the concepts of efficiency, productivity, competitiveness, fiscal imperatives and reducing government interference in markets (Teeple, 2000). The potential to harvest efficiency gains through privatisation has been a major focus in the literature (Button and Weyman-Jones, 1994; Kilicaslan and Tasiran, 2008; Pollitt and Smith, 2002; Schneider, 2003; Martin and Parker, 1997). Increased productivity from privatisation is also a major justification (Teeple, 2000; Button and Weyman-Jones, 1994; Kilicaslan and Tasiran, 2008; Pollitt and Smith, 2002; Schneider, 2003; Martin and Parker, 1997) as enunciated by Kilicaslan and Tasiran (2008: 3) ‘there is a presumption that privatisation and liberalisation will lead to an improvement in productivity growth.’ Closely related to increase in efficiency and productivity are the possibilities of lower production costs (Martin and Parker, 1997; Kilicaslan and Tasiran, 2008). Governments have also promoted potential increases in competitiveness to gain favour for privatisation plans (Teeple, 2000; Button and Weyman-Jones, 1994). Finally, Lambert (2011) claims that Draft Report 105 privatisation enhances decision making due to direct shareholding by the private sector which implies that the private sector decision-making is inherently superior to that of the public sector. There are also other objectives that are seen to accrue from privatisation that can broadly be categorised as benefits to business. The neo-liberal belief in small government and that economic activity should be regulated by the market rather than through government interference has been prominent in the literature. Removing both bureaucratic processes and the necessity to achieve government policy goals such as social obligations is viewed positively (Lambert, 2011; Teeple, 2000; Kilicaslan and Tasiran, 2008; Martin and Parker, 1997; Smith, 1997). Privatisation is seen as delivering more efficient capital investment because the market discipline ensures that firms are not inclined to overinvest (Lambert, 2011; Martin and Parker, 1997). Indirect benefits of privatisation include the strengthening of financial markets and the building of wider business ownership through public floats that encourage small shareholding by large sections of the community, e.g. the Telstra float in Australia (Smith, 1997). Benefits for governments Significant benefits for governments are promoted as part of the privatisation process. The first gain relates to the benefit of the proceeds of sales which can be used to pay down public debt, reaping the financial reward of lower interest payments to be made from recurrent revenues (Lambert, 2011; Teeple, 2000; Jones, Tandon and Vogelsang, 1990; Martin and Parker, 1997). Jones, Tandon and Vogelsang (1990: 5) make the point that ‘real-world divestures are motivated at least in part by deficit reduction considerations.’ Debt reduction lowers the overall risk rating of the state since risks are transferred to the private sector (at least theoretically), thereby improving the national or state credit rating (Lambert, 2011). To the extent that a profit is made from asset sales, the government is in a position to use the proceeds to fund government priorities such as new infrastructure. Consumer benefits The benefits for consumers revolve around the arguments above, that the private sector is more efficient, innovative and customer focused. If these characteristics hold, the higher efficiency and productivity of the private sector, driven by market discipline and private sector expertise, will produce substantial cost reductions and allow the price of services to be reduced (Lambert, 2011; Pollitt and Smith, 2002). The focus on satisfying customer needs is said to ensure that the private sector will deliver the services customers desire and in the quantities required. Pollitt and Smith (2002: 468) claim that the privatisation of British rail was an attempt to utilise competition, not just privatisation for this end: …to harness the skills of private sector management in order to achieve greater responsiveness to customer needs, higher service quality, improved efficiency and better value for money. Moreover, the innovative abilities of the private sector are expected to provide greater choice of supplier and/or product range (Button and Weyman-Jones, 1994). Transparency and accountability Finally, proponents of privatisation claim that it increases transparency and accountability through the establishment of regulatory bodies and the discipline of financial markets (Button and Weyman-Jones, 1994). The OECD (2010) emphasises that transparency and accountability are essential components of the privatisation process and should include

Draft Report 106 disclosure to parliament and the general public, there should be oversight by an independent auditing body and the privatising authority and the auditing body should be held accountable.

4.3.3 Risks of privatisation The previous section outlines the purported benefits of privatisation. This section examines the risks attached to privatisation for governments, consumers of services and the community as a whole, since the expected benefits of privatisation may not materialise. Efficiency and productivity gains The assumption that the private sector is more efficient has been challenged. An overarching risk of privatisation is that the transfer of businesses to the private sector could be accompanied by fundamental changes in services since the public sector ethos of providing a service to the public may be replaced by the motivation of the private firm to make a profit. The importance of ownership in achieving objectives is elaborated by Smith (1997: 46) in relation to the proposition to sell the NSW electricity assets: The ownership of a utility is important because it is this that determines the utility’s objectives. In one case the managers report back to a Minister and the voting public, and the firm’s objectives may be set by Ministerial direction. In the other case the shareholders ultimately form the utility’s objectives. The managers of a privately owned firm will be concerned with meeting the requirements of the capital market and be faced with threats of take-over or bankruptcy. In contrast, the public firm will concentrate on the satisfaction of Ministerial objectives and will not typically be threatened by take-over or bankruptcy. Measuring the impact of privatisation is difficult for technical reasons (Kilicaslan and Tasiran, 2008; Newbery and Pollitt, 1997) and also because there is no counterfactual – we do not know what would have happened if privatisation had not occurred. There have been mixed results from research conducted into particular privatisation exercises in various countries. Kilicaslan and Tasiran (2008) explain that it is difficult to isolate the impact of privatisation on productivity from other factors such as technological change. In addition to the difficulties due to technological change, Newbery and Pollitt (1997) mention difficulties measuring capital inputs, controlling for additional environmental regulations and so on. The empirical evidence on efficiency and productivity outcomes from privatisation is mixed. For example, Bacchiocchi et al., (2005: 1595) tested for macroeconomic evidence of changes in productivity in the UK between 1979 and 1999 and concluded: This study suggests that there is no clear evidence of a structural break in GDP growth before and after privatization. Moreover, there is no evidence of productivity changes in the long run; the participation rate did not increase; public investment dropped sharply; the long term inflation in the UK was no lower than that of other European countries. Similarly, a study of several privatised firms in the UK found that there was labour productivity growth improved in the pre-privatisation period characterised by large job cuts but little evidence that privatisation resulted in a significant improvement in performance (Martin and Parker, 1997). Conversely, a study of the impact of electricity privatisation in the UK by Jamasb and Pollitt (2007) found that from 1990 there was evidence of reduced costs, prices and energy losses while the quality of service was maintained. Some analysts have suggested that anticipation of privatisation has increased productivity in the public sector. A study of the productivity

Draft Report 107 performance of 9 large public enterprises in the UK over 20 years found that increased labour productivity and total factor productivity between the 1970s and 1980s could be attributed to changes in the regulatory environment rather than a change of ownership or anticipation of a change of ownership (Bishop and Thompson, 1992). An empirical examination of the impact of privatisation on efficiency and productivity is outside the parameters of this study. Improvements in the quality of service There is a possibility that service quality may deteriorate post-privatisation, which is related to the tendency for the private sector to invest less than the public sector due to market discipline (which was listed as a benefit of privatisation in the previous section). Mota (2004) points to underinvestment in the electricity sector in Brazil after privatisation that combined with a severe drought to produce in a supply crisis in 2001. Button and Weyman-Jones (1994: 26) note that ‘ a privatisation-regulatory development emphasising quantitative efficiency and light regulation may degrade supply quality.’ To overcome these tendencies may entail a heavy regulatory burden in order to monitor the quality of services. The OECD notes that one of the difficult problems related to privatisation is that governments need to ensure that the interests of the community are protected: In most cases the SOE to be privatised was put in the public sphere for a reason – in pursuit of some concern to the public interest (OECD, 2010: 27). The importance of adequate levels of regulatory control, especially for monopolies, is emphasised by Smith (1997: 31): In the absence of any regulatory control over quality of services, cost cutting activities by privatised companies will feature a mixture of genuine cost efficiencies and reductions in the quality of service. The danger of underpricing assets A particular problem pertaining to the privatisation of public assets is determining the sale price. Governments have a responsibility to protect the value of the assets the community has entrusted them with. Privatisation of these assets should not be below the full value of the assets which would provide the private sector purchases with windfall profits at the expense of the community. Underpricing measures the immediate capital gain of assets or the abnormal adjusted return 24 hours after the initial public offering (the difference between the market price and the price paid). The underpricing of privatised firms is seen as a deliberate strategy by governments who ‘provide a fair wind by making sure that the price is not too demanding’ (Privatization International Yearbook, 1994, quoted in Florio and Manzoni, 2004: 120). Research in the UK found that for initial public offerings between 1980 and 1988 the average abnormal adjusted return was 14.3 per cent (this included private companies and the privatisation of public companies) but when the sample was restricted to privatisations the return jumped to 37.25 per cent, suggesting that excess underpricing for privatisations was around 23 per cent (Florio and Manzoni, 2004). In a study of the pricing of UK privatisations between 1977 and 1996, Florio and Manzoni (2004: 132-133) found that abnormal adjusted returns for 55 privatisations averaged 13 per cent. They concluded that: …[i]t is clear that the actual terms of British privatizations determined considerable underpricing… The winners were those who bought shares on issue, and the losers were the taxpayers. The taxpayer would have had lower taxes or more public services.

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Reductions in accountability and transparency If the necessary elements of accountability and transparency outlined in the previous section (disclosure to parliament and the general public, independent oversight and audit) are not implemented there is a danger that privatisation will result in a loss of accountability since the discipline of the ballot box will no longer apply. Failures of transparency relate to situations where details of privatisations are not available for public scrutiny or are presented in formats that are misleading. Accountability deficits may occur if the oversight bodies do not have sufficient authority to access all relevant information in order to make informed decisions about performance or if there is political interference with these bodies.

4.4 Privatisation in Australia: the contribution of the Commonwealth Government Privatisation of government businesses began in earnest in the latter part of the 1980s and accelerated in the 1990s under both ALP and Coalition Governments at the federal and state level. Progress toward privatisation frequently involved major restructuring as enterprises were corporatised, broken into discrete organisations, and ultimately privatised. Aulich and O’Flynn (2007: 366) contend that the Hawke/Keating Labor Governments implemented its extensive privatisation program in order to improve competitiveness and efficiency, whereas the Howard Government was ideologically driven and sought ‘to pursue a major reconfiguration of the balance between public and private.’ Since 1995 this process has accelerated with implementation of National Competition Policy (NCP), based on the Hilmer recommendations, which included industry deregulation or self- regulation and competitive tendering for the provision of public services to eliminate public sector competitive advantage. At the Council of Australian Governments’ Meeting (COAG) in 1995 State and Territory governments agreed to implement NCP to increase competitiveness and economic growth (COAG, 1995). The reform package involved: …extending trade practices legislation to State and Local Government business enterprises and unincorporated businesses, providing access to essential facilities and encouraging competition in the business activities of governments and other sectors of the economy through a program of regulation review, enhanced prices oversight, application of competitive neutrality principles and procedures for structural reform of public monopolies (COAG, 1995). The Commonwealth agreed to maintain real funding levels to States and provide additional competition payments, contingent on States meeting their NCP obligations, including the establishment of a competitive national electricity grid, reforms in gas, water supply and road transport. According to Quiggin (2004a: 172), NCP locked State governments into major public sector reforms, in particular requiring them to corporatise or privatise. In 2008 COAG agreed to regulation and competition reforms under the National Partnership Agreement to Deliver a Seamless National Economy that involved reforms related to deregulation and competition reform (COAG Reform Council, 2011c). States and territories are eligible for facilitation payments for deregulation priorities but not for competition reforms. Details of privatisation by Commonwealth Governments are shown in Table 4.1. The privatisations included government manufacturing businesses, banks, airlines, airports, railways and telecommunications businesses.

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Table 4.1 Privatisation by the Commonwealth Government Year Asset Price $m 1987 Williamstown Dockyard 1988 Commonwealth Accommodation and Catering Services 14.9 1988 Defence Service House Corporation loan portfolio 1,515.0 1989/90 Australian Industry Development Corporation 25.0 1991 Australian Defence Force Home Loan Franchise 42.0 1991 AUSSAT 504.0 1991 Commonwealth Bank 1,311.0 1992 Australian Airlines 400.0 1993 Commonwealth Bank 1,686.0 1993 Qantas 665.0 1993/94 Moomba-Sydney Pipeline 534.0 1993/94 Snowy Mountains Engineering Corporation 1.0 1994-95 Government Aircraft factories-Fisherman's Bend and Avalon 1994/95 Snowy Mountains Engineering Corporation 0.3 1995/96 Snowy Mountains Engineering Corporation 0.3 1994 Commonwealth Serum Laboratories 299.0 1995 Aerospace Technologies of Australia 40.0 1995 Qantas 1,450.0 1996 Commonwealth Bank 3,390.0 1996 Commonwealth Funds Management 63.0 1996 Visionstream 1997 Avalon Geelong Airport 1.5 1997 Brisbane Airport 1,387.0 1997 Commonwealth Bank 1,770.0 1997 Melbourne airport 1,307.0 1997 Perth Airport 643.0 14,330. 1997 Telstra 0 1997 DASFLEET 408.0 1997 Department of Administrative Services units 28.9 1997/98 Australian Industry Development Corporation 200.0 1997/98 Australian National (interstate freight and interstate passenger services) 95.0 1998 Adelaide, Canberra, Coolangatta, Alice Springs, Darwin, Launceston, Hobart and 35.4 Townsville airports 16,026. 1999 Telstra 0 1999 Ordinance Factory Bendigo

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Table 4.1 Privatisation by the Commonwealth Government (cont.) Year Asset Price $m 1999 Australian Government Clothing Factory-Bendigo, Coburg and Leichhardt 1999 Munitions Factory Benalla 1999 Ammunition Factory Footscray 1999 Small Arms Factory Lithgow 1999 Garden Island Dockyard 2001 Essendon Airport 22.0 2002 Sydney Airport 4,233 Freightcorp (owned by NSW) and National Rail Corporation(Commonwealth was part 2002 owner) 1172 2003 Bankstown, Camden and Hoxton Park Airports 211.0 2006 Telstra 15,500

Some privatisation programs have been conducted by collaboration between the federal and state governments. The National Rail Corporation (NRC1) was established under joint ownership of the Commonwealth, NSW and Victoria in 1991 to operate interstate freight. Proposed privatisation of NRC was expected to have an adverse impact on Freightcorp. The NSW government announced that the two assets would be sold together in 2000 by competitive tender to a single purchaser. The business was sold to National Rail Consortium Pty Ltd (NRC2), a joint venture of Toll Holdings Ltd and Lang Corporation in 2002 for $1172 million (NSW Treasury, 2003). The consequences of privatisation include transferring employment from the public to the private sector. This may impact on the employment conditions under which workers are employed including the type of employment contract itself - employee or self-employed contractor; full-time, part-time, casual or contract - security of tenure, wages and general employment conditions. Box 4.1 describes the consequences of privatisation for employees of Visionstream.

Box 4.1 The privatisation of Visionstream: impact on workers The following is a report from the Communication Workers Union on the fate of workers after Visionstrean was bought by Leighton Holdings. ‘Visionstream was sold to Leighton Holdings in December 1996 with staff transferring on (broadly) the same terms and conditions as those they had enjoyed when the company was a stand-alone subsidiary of Telstra…. In late 1999, however, Visionstream decided to restructure its operations and began progressively turning its permanent workforce into sub-contractors. The company at that time employed some 1200 permanent workers as well as making limited use of labour hire staff in specialised areas. ‘While acceptance of the offer to become a sub-contractor was nominally voluntary, the company clearly signalled that the future of those who did not take it up was bleak. Indeed, by April 2000, when Visionstream indicated it would introduce sub-contracting to perform broadband installations in multiple dwelling units (MDUs), the explicit alternative facing affected staff was retrenchment.

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‘The Union wishes to stress this point because the issue of contracting is often discussed as though the choice of this form of work were entirely voluntary and the small contractor were truly independent. In the Union’s experience, such forms of employment have become prevalent in the installation/maintenance area of the telecommunications industry because of the employment preferences of the major contracting companies rather than those of telecommunications workers themselves. ‘Nor are the individual sub-contractors truly independent. … In practice, such workers have found themselves facing increasing pressure on their working conditions and incomes as head contractors bid against one another for Telstra work. ‘Even in 1999, however, the claimed rewards of sub-contracting were largely illusory. Visionstream had originally indicated to its employees that they could gross up to $150,000 a year as subcontractors (based on an average of six jobs a day). Actual sub-contracting trials conducted in early 2000 produced the more modest (but still superficially attractive) of $70,000 p.a. for a 52-55 hour week, after deducting costs of materials. On the face of it, this compared very favourably with the earnings of an equivalent permanent staff member who would have been receiving $38,063 p.a. for a 39 hour week. ‘Apart from the cost of materials, however, the sub-contractor was liable for a range of expenses which the CEPU estimated as being upwards of $12,582 p.a. and Telstra itself had suggested could be as high as $17,400 p.a., leaving effective (pre-tax) earnings of $53- 58,000. At that time, a permanent employee’s total package (including superannuation, leave, redundancy entitlements and allowing for equivalent overtime) was, at the Union’s estimation, worth over $76,000. ‘More fundamentally, the sub-contractor was not, of course, guaranteed the hours that would produce this income…. In these circumstances, it is not surprising that many Visionstream sub-contractors found themselves financially squeezed as time went on.’ Source: Communication Workers Union (CWU) 2012.

4.5 Privatisation in NSW Privatisation of public assets has not been as extensive as in the federal sphere or Victoria. Details of privatisation are contained in Table 4.2. Major asset sales in the 1990s included the Government Insurance Office, the State Bank and the TAB. In 2002 Powercoal coal mines were sold and FreightCorp and the National Rail Corporation that was jointly owned by the Commonwealth, NSW and Victorian Governments. The pace of privatisation has increased in the past few years, particularly the ongoing privatisation of electricity assets and this trend appears to be set to continue.

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Table 4.2 Privatisation in NSW Date Asset Proceeds Government $m 1989/90 NSW Investment Corporation 60 Coalition 1992 Government Insurance Office 1260 Coalition 1993 NSW Grain Corporation 96 Coalition 1994 State Bank of NSW 527 Coalition 1996/97 Axion Funds Management 240 ALP 1998 NSW Totalizator Agency Board (TAB) 1011 ALP 2002 Powercoal 331 ALP 2002 FreightCorp & National Rail Corporation (part owner)a 1172 ALP 2010 NSW Lotteries 850 ALP 2010 Gentrader transactions 5300 ALP 2011 WSN Environmental Solutions 235 ALP a. The National Rail Corporation was jointly owned by the Commonwealth, NSW and Victorian Governments

4.5.1 Electricity and associated businesses The ALP government succeeded with partial privatisation of the electricity industry in NSW despite trenchant opposition from sections of the ALP and the general public. The O’Farrell government has since continued the privatisation program. The restructuring of the Electricity Commission of NSW dovetailed with COAG agreements on the disaggregation of State energy providers and implementation of National Competition Policy. In 1991 the Energy Commission of NSW was renamed Pacific Power and restructured into six business units. The subsequent Electricity Reform Statement in 1995 stated that reforms were to improve efficiency and service levels as well as providing consumers with choice. The Electricity Transmission Authority (TransGrid) was formed as a separate statutory authority in 1995 with six distribution and retail companies, which were corporatised in 1996 in preparation for the introduction of a competitive retail market later that year (NSW Treasury, 1997). Pacific Power generating was split into three corporations Macquarie Generation (Bayswater/Liddell); Delta Energy (Mt Piper, Wallerawang, Vales Point, Munmorah); and Eraring Energy (originally called Pacific Power) (McDonell, 2004). Coal mines corporatized as part of the 1995 electricity restructuring plan (NSW Treasury, 1995). The government announced that it would sell Powercoal (subsidiary of Pacific Power, operating six underground mines in the Central Coast, Lake Macquarie and Lithgow areas that supplied one-third of coal for generators). The rationale for the sale was to allow Powercoal to pursue business opportunities without exposing the government to risk and to allow it to invest in new capacity (Leary and Abbertson, 2003). It was sold in 2002 to Centennial Coal Company Pty Ltd for $311 million. The NSW Government received $139 million after making transfer payments for employees, sale costs and paying off debt. As a condition of the sale, the existing employees remained on their current enterprise agreements and Centennial Coal was required to invest over $220 million over two years. The supply of coal to power stations was guaranteed by long-term contracts. The first proposal to sell the generation, retail and transmission assets was made by the Carr ALP Government in 1997. The government estimated that the sale would generate to $22 billion. However, the proposal was rejected by State ALP Conference in 1997. The Draft Report 113

Government stated that the privatisation would benefit the people of NSW by eliminating state debt to save $500 million per annum and the use of the proceeds of the sale to invest in infrastructure (Smith, 1997). Table 4.3 Power privatisation in NSW Vendor Purchaser Gross Proceeds $m (excluding GST) Retail businesses Country Origin 1300 EnergyAustralia TRUenergy 1486 Integral Origin 1000 Gentraders Eraring Origin 960-1158 Delta West TRUenergy 540-600 Development Sites EnergyAustralia (Marulan) TRUenergy 6.4 Delta TRUenergy 8.6 Delta TRUenergy 1.0 Source: Tamberlin, 2011 In 2008, the ALP Government launched a new attempt at privatisation, introducing a bill that would enable it to privatise electricity utilities but retain the transmission assets (poles and wires). The bill was defeated due to opposition by the Greens and Liberals. In an attempt to privatise without the need for legislation the Government decided to pursue the GenTrader model to allowed it to outsource the trading rights of the generators to the private sector (Tamberlin, 2011). The Government’s Energy Reform Strategy consisted of the sale of retail businesses and development sites, contracting out generation (gentrader option) and retaining the transmission network. The contracts provide exclusive trading rights to the gentraders for power generated by the publicly owned generators. Generators have agreements that specify monthly targets for all generation units at each power station and for peak, off-peak, weekend and super peak periods (Tamberlin, 2011). Failure to supply enough power results in Availability Liquidated Damages and charges also apply if generators supply more energy than required.

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Box 4.2 The impact of the GenTrader Agreements – failure to transfer risks The total proceeds from the electricity transactions were $5.3 billion which resulted in a profit of $1.2 billion. GenTrader Transactions The GenTrader contracts all output of Eraring and Shoalhaven power stations was sold to Origin Limited from 27 February 2011. All output of Mt Piper and Wallerawang power stations was sold to TRUenergy Pty Ltd from 1 March 2011. The NSW Auditor-General (2011) found that the transactions resulted in combined losses of $1.849 billion ($902.1 billion for Delta electricity and $946.9 million for Eraring). The proceeds of the sales equalled only 41.9 per cent of the carrying value of the power station assets. The carrying value is the expectation of net cash to be earned over the remaining life of the power stations. Sale of electricity retail businesses The electricity retail businesses were sold to TRUenergy and Origin energy on 28 February and 1 March 2011 respectively. The profits from the sale totalled $3.083 billion ($1.248 billion for Energy Australia; $1.076 for Country Energy; and $0.759 billion for Integral Energy). Risks Generators are exposed to ongoing financial risks: Liquidated Damages: One of the risks of the contracts was liability for Liquidated Damages when generators fail to meet contracted targets. In the period from 1 March 2011 to 30 June 2011 Delta Electricity incurred costs of $221,479 for liquidated damages and these costs are estimated to be around $46.3 million over the four years. Net liquidated damages for Eraring Energy from 27 February to 30 June were $2 million and are expected to amount to $6.7 million for 2011-12. Generation of excess electricity: The generators are liable for charges if they produce more electricity than instructed by the GenTrader. Fixed operating costs, maintenance and capital costs: Generators are exposed to risk in variability between operating and maintenance costs and the fixed, variable and pass through charges in the GenTrader Agreements. Source: NSW Auditor-General, 2011.

The sale was highly controversial, resulting in the resignation of a number of directors of the electricity generators and the proroguing of parliament by the Keneally government while a Legislative Council inquiry into the Gentrader transactions was in process. While the gross proceeds of the sales were $5.3 billion, the net proceeds were estimated to be significantly less than the $3.272 billion stated by the Government and there were significant risks associated with the transactions (General Purpose Standing Committee No 1, 2011b: xi-xii): . Availability Liquidated Damages - significant and uncertain future liability for taxpayers; . There are risks relating to the electricity market, coal supply and operating and maintaining generators which could result in ‘yet unquantified costs’ for taxpayers; Draft Report 115

. Risks associated with set maintenance payments for the life of the contracts if there are unexpected maintenance costs; . The government is subsidising the cost of coal to the GenTraders; and . The risk that a Coalition Government may privatise the remaining electricity assets. In addition to these risks the previous government incurred significant costs for the Cobbora coal mine as described in Box 4.3.

Box 4.3 The Cobbora Coal Mine The three generators (Macquarie Generation, Delta Electricity and Eraring Energy) were developing the Cobbora coal mine to ensure the availability of coal at reasonable prices. In 2010 the Labor Government transferred the Cobbora Coal Mine to a separate state-owned company, Cobbora Holding Company Pty Limited to facilitate development of the open-cut coal mine. In February 2011 immediately prior to the NSW election, Cobbora executed coal sale contracts with the three generators at prices below the cost of production. On the currently contracted volumes, Ernst and Young estimated that the contracts have a negative net present value of to the state of approximately $300 million. The NSW Auditor-General (2011: 29) recommended that: The Treasurer should consider releasing the Energy Reform Strategy relating to the development and ownership of the Cobbora Coal Project for public scrutiny to ensure transparency of the energy reform process. There should be a clearly articulated business plan to demonstrate to the people of New South Wales the benefits from the project.’ Source: NSW Auditor-General, 2011 Government of NSW, 20112011-12 Budget

The incoming O’Farrell Coalition Government established the Tamberlin Inquiry in April 2011 to examine the Electricity Transactions. Reporting in October 2011, the Tamberlin inquiry stated that the privatisation was justified as a means to deliver a more competitive electricity market and that NSW was in a stronger financial position (Tamberlin, 2011). The inquiry recommended that the government offer the generators for sale of long term lease, sell the development sites and the Cobbora mine. In line with recommendations of the Tamberlin inquiry, Premier O’Farrell announced in November 2011 that NSW electricity generators, Eraring, Delta West, Delta Coastal and Macquarie Generation, will be sold for an estimated $5 billion. The transmission network will remain in public ownership, at least for the remainder of the current term of government. The privatisation will affect Bayswater, Liddell, Munmorah, Eraring, Vales Point and Colongra power stations. The government will also sell electricity development sites and either sell or lease the Cobbora Coal Mine (Harris, 2011). In late 2011 the O’Farrell Government announced that it would sell the power generators, the Cobbora coal mine and electricity development sites. In March 2012 the government decided to merge the electricity distribution companies - Ausgrid, Endeavour Energy and Essential Energy - into a new State owned corporation and the three distribution companies would provide services under their current brands. The rationale for the change is to improve efficiency by eliminating duplication of management and corporate services to reduce power

Draft Report 116 bills for consumers. Savings of $400 million over four years will fund electricity rebates for low to middle income earners (Trade & Investment, 2011). The sale of the generators is complicated by the liabilities incurred as part of the GenTrader contracts that left generators with liquidated damages responsibilities entailing financial penalties for unplanned outages and power failures. The Tamberlin inquiry noted that these clauses would “significantly compromise” the sale of power stations. To remedy this situation, Nicholls (2012) notes that the legislation to facilitate the sale of the generators ‘gives the Treasurer, Mike Baird, the power to transfer the financial liabilities attached to the power generators to other state-owned entities before they are sold.’ Thus potential multi- million ongoing risks would remain with the public sector rather than being transferred to the private sector. While the Government has ruled out privatisation of the electricity transmission network (poles and wires), worth up to $30 billion, in its first term of government, the longer-term future of public sector delivery remains in doubt.

4.5.2 Other potential privatisation initiatives of the O’Farrell Government After winning the 2011 election, the O’Farrell Government established a Financial Audit (The Lambert Report) which reported in September 2011 (Lambert, 2011). The report noted that private sector ownership or operation of government businesses could increase efficiency and reduce the need for public sector investment in infrastructure and suggested the following areas of public sector ownership could be considered for privatisation: . A number of State owned corporations (SOCs) and commercial public trading enterprises (PTEs), such as Forests NSW and Landcom, operate in contestable markets, so decisions on ongoing government ownership need to consider the role these businesses play in achieving broader public outcomes. It should be noted that broader public outcomes can be achieved by mechanisms other than public ownership. . Regulated monopoly businesses, such as energy infrastructure and water utilities, have precedents for successful privatisation in other jurisdictions, where their monopoly status has been managed through effective regulation. . Businesses in the ports sector display monopoly characteristics, however their market power is balanced by established commercial relationships with a relatively small number of sophisticated customers. These circumstances are well suited to lighter handed forms of economic regulation under private sector ownership (Lambert, 2011: 18-6). The Schott Report (NSW Commission of Audit, 2012) recommended an investigation of which assets could be disposed of or leased on a long-term basis and the establishment of a special unit to implement privatisation to fund infrastructure spending. In addition, it recommended that agencies be required to report on ‘the extent to which sales of existing assets can partially fund proposed new capital investments (NSW Commission of Audit, 2012: 149). The government also established Infrastructure NSW (INSW) that will develop a 20 year State Infrastructure Strategy by September 2012 to identify infrastructure needs and, priorities as well as the possible public and private sector roles in delivery. The Chairman of Infrastructure NSW, former Liberal Premier, Nick Greiner outlined constraints on public sector funding due to reduced revenues and the impact of debt on the Triple AAA credit rating, and stated: Draft Report 117

That really leaves you, in terms of new money [for infrastructure], essentially with two areas – asset recycling…and the other way is private funding (Wade, 2012). The first O’Farrell Government Budget in September 2011 announced the long-term lease of Port Botany and the desalination plant at Kurnell which are each expected to raise around $2 billion that will be allocated to Restart NSW for infrastructure investment. The desalination plant was a joint venture comprised of construction by John Holland Pty Ltd and operation by Veolia Water Australia Pty Ltd on behalf of Sydney Water. Three bidders have been shortlisted: Industry Funds Management; Mitsubishi Corp and Acciona; and Hastings Funds management with Ontario Teachers Pension Plan. Binding bids are to be submitted by May 2012. The 99 year lease of Port Botany will consist of three container terminals and 11 container vessel berths and is expected to be finalised in 2013.

4.6 Privatisation in Victoria Along with the federal government, Victoria spearheaded privatisation in Australia in the 1990s and had the most comprehensive privatisation program of any Australian state. The first privatisation was conducted by the Kirner Labor Government that sold the State Insurance Office for $125 million and a 40 per cent share of the Loy Yang B power station for $544 million in 1992. The incoming Kennett Coalition Government then aggressively pursued a privatisation agenda ($34 billion in asset sales between 1992-1998), along with massive cuts to public services. This was in accordance with ‘Project Victoria’, a plan drawn up by the Institute of Public Affairs and the Tasman Institute for a future Liberal government, jointly commissioned in 1990 by 13 business organisations including the Australian Chamber of Manufacturers, the Business Council of Australia, the Victorian Chamber of Commerce and Industry, Victorian Employer’s Federation and Victorian Farmer’s Federation (Beder, 2006:96). The justifications given for privatisation outlined by the Audit Review of Government Contracts (2000) were: . Ideological commitment that privatisation ‘represented a comprehensive path to public sector reform’ (Audit Review of Government Contracts, 2000:11); . To reduce state debt and regain the triple A credit rating1; . Reduce public risk through the transfer of risk to the private sector; . To provide public assets more quickly than would have been possible using conventional public sector mechanisms; and . To weaken the power of unions. This section reviews some of the major privatisation exercises in Victoria throughout the 1990s. Table 4.4 lists the privatisations that occurred over this period. These include outright privatisation and long-term leases that transfer control of assets for extended periods of time.

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Table 4.4 Privatisation in Victoria Year Entity Proceeds Government $m Asset Sales 1992 State Insurance Office 125 ALP 1993 Heatane 130 Coalition 1992/93 Loy Yang B 544 ALP 1992/93 Heatane Division of Gas and Fuel Corporation 130 Coalition 1992/93 Portland smelter Unit Trust 171 Coalition 1994 Herman Research Laboratories 182 Coalition 1994 BASS (Ticket Sales) 3 Coalition 1994 Grain Elevators Board 52 Coalition 1994 Tabcorp 609 Coalition 1994 VicRoads Plant 42 Coalition 1995 Citipower 1575 Coalition 1995 Eastern Energy 2080 Coalition 1995 Powercor 2150 Coalition 1995 Solaris 950 Coalition 1995 United Energy 1553 Coalition 1995 GFE (Gas and Fuel exploration) Resources 56 Coalition 1996 Hazelwood/Energy Brix 2357 Coalition 1996 Yallourn Energy 2426 Coalition 1996 Port of Geelong 51 Coalition 1996 Port of Portland 30 Coalition 1997 Loy Yang A 4746 Coalition 1997 Loy Yang B 1150 Coalition 1997 PowerNet 2555 Coalition 1997 Southern Hydro 391 Coalition 1998 Victorian Plantations Corporation 550 Coalition 1998 Aluvic 502 Coalition 1998 Victorian Plantations Corporation 550 Coalition 1998 Victorian Network Switching Centre 8 Coalition 1998 Victorian Electricity Metering Board 5 Coalition 1998 Hume 8 Coalition 1998 Met Bus 11 Coalition 1999 Generation Victoria/Ecogen 361 Coalition 1999 Kinetik Energy 1617 Coalition 1999 Stratus/Energy 21 1670 Coalition

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Table 4.4 Privatisation in Victoria (cont.) Year Entity Proceeds Government $m 1999 Gasnet 1025 Coalition 1999 Ikon Energy 1970 Coalition Asset Leases and Franchises 1997 National Bus Co 203 Coalition 1999 Yarra Trams 308 Coalition 1999 Swanston Trams 511 Coalition 1999 Hillside Trains 1205 Coalition 1999 Bayside Trains 917 Coalition 1999 V/Line Passenger 721 Coalition

4.6.1 Electricity and gas The proceeds of electricity privatisation between 1993 and 1999 totalled $21.4 billion and the sale of gas produced $6.5 billion. The privatisation of electricity and gas was a long-term project that followed a familiar trajectory of disaggregation, downsizing the workforce and hiving off non-core functions. Teicher, Van Gramberg and Holland (2000) trace these developments commencing in 1989 with downsizing through offering redundancy packages and contracting out. Following a review of non-core functions in 1990 the SECV sold the transport fleet and associated functions to Linfox in 1990 with workers given the choice of transferring to the new employer, being redeployed with the SECV or taking redundancy. In 1991 the electrical workshops were sold to Siemens and workers could take a redundancy or transfer to Siemens with a 3 year guarantee of employment. Mine maintenance was outsourced to Fluor Daniels and Transfield in 1993. Also in 1993 the SECV was divided into separate organisations (Audit Review of Government Contracts, 2000): . 6 generators – Yallourn Energy, Hazelwood, Loy Yang A, Loy Yang B, Southern Hydro; . Transmission - PowerNet; and . 5 distribution and retail companies - (United Energy, Solaris Power, Eastern Energy, PowerCor and CitiPower) . In 1995 the retail distribution companies were sold (see Table 4.4 for details), the generators were split into 5 companies (3 for coal generators, 1 for hydro and 1 for gas) and all businesses were subsequently sold in the period to 1999 (see Table 4.4 for details of the energy transactions). . A similar path was taken in relation to gas, with the monopolistic functions of transmission and distribution separated from the competitive elements of production and retail and sold (see Table 4.4 for details). Westar/Kinetil was sold to Texas Utilities for $1.6 billion, Multinet/Ikon was sold to Utilicorp United Inc and AMP for $1.97 billion and Stratus/Energy 21 was sold to Boral Energy and Envestra for $1.67 billion.

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4.6.2 Public transport and rail freight services Victoria pioneered the privatisation of public transport in Australia on the basis of improving service provision: The efficiency of Victoria’s public transport system is a key factor affecting the quality of life of its citizens and the government’s aim is to turn Victoria’s public transport system into a best practice service, which genuinely meets the needs of the travelling public at a cost which is affordable for taxpayers (Budget Paper 1988: 154) The government sold Melbourne’s publicly provided bus services in two tranches in the 1990s (Audit Review of Government Contracts, 2000). In 1993 NBC was the successful tenderer for 80 per cent of Met Bus services acquiring a 7 year lease agreement and a new 10 year contract was negotiated in 1997. NBC initially leased the buses but subsequently purchased them in 1996 for $1.5 million. In 1998 the remaining 20 per cent of Met Bus services were sold to MBL, including the bus fleet and two depots for $11.1 million. Risks related to procuring new vehicles was transferred to the private sector operators but the more substantial revenue risk remained with the state (Audit Review of Government Contracts, 2000). In 1997 the Government announced that train and tram services would be sold by March 1999. Passenger train services Hillside and Bayside in the metropolitan area and V/Line Passenger along with two tram companies Yarra and Swanston were to be privatised through fixed-term franchise contracts. National Express obtained the franchise for Bayside Trains, Swanston Trams and V/Line Passenger. MetroLink was awarded the franchise for Yarra Trams and Melbourne Transport Enterprises took over Hillside Trains. Franchisees receive a specified level of financial assistance in return for operating the services in line with government regulations. Standards specifications in the contracts included frequency of services, regulation of fare increases, obligation to provide concession fares, timetable information and provision for incentives and penalties. The cost of rail and tram privatisation to the Government was $120 million which does not include the costs incurred by the PTC (Audit Review of Government Contracts, 2000). The experience with the metropolitan rail and tram services is shown in Box 4. 4.

Box 4.5 Privatisation of public transport – failure to transfer risk The basis for the future sweeping privatisation of public transport in Melbourne was laid over the 1980s when government agencies were amalgamated to form the Public Transport Corporation (PTC), which in Melbourne traded as ‘The Met’. In 1993, the newly elected Liberal Kennett government commenced the Public Transport Reform Program designed to improve the efficiency of the PTC. Over the next 5 years, the PTC’s workforce and cash operating subsidy were more than halved, as a result of rationalization of workshops and crewing, along with extensive outsourcing. (Mees, 2005). In 1998 the PTC was split into 5 separate passenger services to enable franchising: The new divisions were: (1) V/Line for country rail and feeder bus services; two metropolitan train entities, (2) Bayside and (3) Hillside trains; (4) Swanston trams; and (5) Yarra trams. The Kennett Government privatised the rail and tram network in Melbourne in 1999 in order to introduce ‘private sector discipline and innovation into public transport’ (Grieg, 2002: 237), and boasted that privatisation would deliver reductions in public subsidies amounting to $1.98 billion and provide $1.6 billion in new infrastructure investment (Hammond, 2003).

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Expressions of interest were invited October 1998, successful bidders were selected June 1999 and 5 operating franchises commenced August 1999. National Express (UK) was awarded V/Line, Bayside Trains and Swanston Trams, French company Transdev (French) received Yarra Trams while Vivendi/Connex (French) was awarded Hillside Trains. The Reform Program also saw the privatisation of Melbourne’s publicly operated bus services. The government and other commentators claimed that in addition to cost savings, bus privatization had led to improved services that in turn produced increased patronage. Mees (2005) concluded that the claims were false, with patronage, in particular, having declined. The Kennett government was defeated in October 1999 and the incoming Labor government of Premier Steve Bracks retained the franchised networks and commissioned a review. The Audit Review of Government Contracts (2000) concluded that the franchising of train and tram services in Melbourne promised to deliver significant benefits for the community. The review concluded subsidy costs would be reduced very substantially, while new investment would improve rolling stock and new incentive regimes would encourage operators to focus on performance and patronage growth. It estimated cost savings of $1.8 billion over 12-15 years. However, this optimistic forecast was not realised. The failure of private operators to meet patronage targets was explicitly recognized in the interim financial rescue package of February 2002, in two ways (Mees, 2005). First, the Victorian government provided the operators with a payment of $27 million tied to reaching agreement with the operators on business recovery proposals. Secondly, the government also agreed to a revision of the patronage incentive payment scheme with one that recognised that the operators were achieving patronage growth (Mees, 2005). In other words, the scheme in the franchise agreements, which required the private operators to improve on the rate of patronage growth achieved by the PTC to be eligible for bonus payments, would be replaced by one that rewarded them for not performing any better than the PTC did. In February 2002 the Victorian government announced that it would pay the three private rail and tram franchisees $105 million in addition to the subsidies provided in their franchise agreements, following a threat by the operators to pull out of public transport provision in the State. Further contract revisions leading to additional subsidy increases were foreshadowed. National Express which was awarded 3 of the 5 franchises walked away in December 2002 leaving debts of $55 million and forcing the state government to assume responsibility for operation of the rail network. The Government appointed receivers to manage the businesses. It also bailed out smaller creditors to the tune of $20 million. Subsequent restructuring of the privatised franchises resulted in higher public subsidies, eroding the expected gains from the privatisation. Hammond (2003) claims that the expected major infrastructure investment by the private operators also failed to materialise. In its’ 2003/04 budget, delivered in May 2003, the government made an allowance of approximately $1 billion over the next 5 years to cover subsidy increases not foreseen at the time of privatisation. The Government also announced at this time that it would be seek to re-franchise on the model of one train operator and one tram operator. Finally, in February 2004, the state government announced that it had agreed to pay the two remaining operators Yarra Trams and Connex $2.3 billion, or around $1 billion more than forecast, to take over the train and tram systems for 5 years, following which they would be re-franchised. Draft Report 122

New contracts commenced 31 August 2009 and involved a Government guarantee to make up revenue shortfalls below guaranteed revenue. Source: Auditor-General of Victoria, 2010; Audit Review of Government Contracts, 2000; Grieg, 2002; Hammond, 2003; Mees,

V/Line Freight was also privatised in 1998. Developments with V/Line Freight are detailed in Box 4.5.

Box 4.5 Privatisation and renationalisation of the non-metropolitan intrastate rail network—V/Line Freight In April 1999 a private operator paid the Victorian State $70.4 million to acquire the V/Line Freight Corporation ‘above-rail’ freight business and $89.7 million for a 45 year infrastructure lease of the intrastate regional ‘below-rail’ network to operate and maintain it. In August 2004 the initial lessee was taken over when its’ business, including its plant and equipment, and the infrastructure lease was acquired for $285 million. The new lessee was owned jointly by two major corporations operating in the Australian freight and logistics sector. Successive lessees took a contractually compliant, minimum maintenance approach on freight-only lines. Some lines were allowed to deteriorate further and others to effectively fall out of service. The lease failed to impose effective maintenance obligations on the lease. In April 2007 the government announced it had agreed to ‘buy back’ the intrastate regional rail network for $133.8 million. Under the buy-back agreement the lessee surrendered its lease over the rail network and transferred associated track infrastructure assets to the state. There is little doubt that the buy-back unwound a lease which was ineffective in maintaining the asset. It also improved the state’s capacity to carry out major investments in upgrading the network. In negotiating the buy-back, the state made other strategic gains of broader significance to Victoria’s freight and logistics network, primarily related to freeing up rail access to the Port of Melbourne. However, no assurance can be given that the state paid the lowest reasonable purchase price obtainable in the circumstances. At the time the state committed to the buy-back without obtaining sufficient advice to support its decision about how much to pay, for example there was not an adequate business valuation. Further, it is clear that the cost of the buy-back exceeded the publicly announced cost. The full cost is likely to exceed $200 million, compared with the announced cost of $133.8 million. Source: Victorian Auditor-General, 2009a

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4.6.3 Privatisation in other sectors Increasing efficiency and reduced costs for users were the reasons given for privatisation of ports in Victoria. In 1995-96 the Victorian Channels Authority was corporatised as the Melbourne Port Corporation to manage and maintain the ports and channels in Melbourne, Geelong, Portland and Hastings (1998-99 Budget). Regulatory functions were transferred to other organisations. The Portland and Geelong ports were sold in 1996 for $30 million and $51 million respectively. In 1997 the subsidiary of the Melbourne Port Corporation, Melbourne Port Services was sold for $8 million and the Port of Hastings was contracted out for 10 years (plus two five-year options) to Toll Holdings. The sale of the Victorian Plantations Corporation was proposed as a means of improving investment and export prospects by increasing competitiveness (1998-99 Budget). The Victorian Plantations Corporation was sold to Hancock Victorian Plantations Pty Ltd in 1998 for $550 million.

4.6.4 The impact of privatisation The rationale for privatisation of public assets in Victoria was that it was necessary due to the parlous state finances when the Kennett Government came to power in 1992. The use of sale proceeds to pay off debt reduced interest payments. For this argument to hold, a necessary condition is that the reduction in interest payments exceeds the benefit of retaining the assets in public ownership. Quiggan (2004) examined the situation in relation to the sale of electricity assets by comparing the extent of reductions in interest payments with earnings if the privatisation had not occurred. He estimated that proceeds of $20 billion would reduce the interest bill by around $1200 million per annum assuming an interest rate of 6 per cent, which was almost exactly the same as earnings of the State Electricity Commission of Victoria (SECV) in the year prior to privatisation ($1200 million). Quiggan (2004) proposes an alternative method of evaluation that consists of comparing the net present value of earnings if the assets remained in public ownership. He estimated that a net present value of retaining the electricity assets of $30 billion, using a 4 per cent discount rate, or $21 billion using a 6 per cent discount rate. Whether using the comparison of reduction in interest payments with annual income, or using the net present value calculations, Quiggan (2004: 119) concludes that there was an overall neutral impact from the sale and notes that previous asset sales ‘yielded low returns while giving up valuable income streams.’ There is little data on the impact of privatisation in service quality which is another justification for privatisation. The outcomes of electricity reform for consumers was investigated by the Consumer Law Centre Victoria and the Centre for the Study of Privatisation & Public Accountability (CLCV & CSPPA, 2006: i) to test the proposition that ‘reform has delivered improved services, lower prices, greater access and improved accountability for all Victorian electricity consumers.’ The findings were generally positive but there were clearly winners and losers from the reforms: . Price savings had occurred but these were not equitably distributed – higher volume and metropolitan consumers have benefited rather than low volume and rural and regional users; . There have not been substantial changes in access. However, ‘low-use and rural and regional customers are at a relative disadvantage in their ability to access market

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offers and to exercise choice between competing energy suppliers’ (CLCV & CSPPA, 2006: ii); . The quality of services has generally improved with the exception of: (1) momentary interruptions, where quality has declined; (2) rural and regional consumers had not achieved the same level of improvement as consumers in metropolitan areas; and (3) new consumers had been affected by ‘misleading and deceptive conduct in the marketing of energy contracts’ (CLCV & CSPPA, 2006: ii); and . The establishment of an independent economic regulator and a dispute resolution scheme had enhanced accountability mechanisms.

4.6.5 Future prospects There is speculation that the Baillieu Coalition Government will embark on a further round of privatisation through the sale of the Port of Melbourne which is the last remaining publicly owned port on the east coast. The sale of the Port that paid a dividend to the Government of $13.4 million in 2010-11 and made $39 million in after-tax profits could be worth $2.4 billion (Gordon, 2012). Other possible targets for privatisation include the four Melbourne water authorities.

4.7 Privatisation in Queensland In contrast to Victoria’s rush to privatise in the 1990s, the pace of privatisation has picked up in recent years. Table 4.5 details privatisation in Queensland that includes: energy, finance and business, gambling, forestry, ports and motorway entities. The Goss Labor Government sold the Gladstone Power Station in 1993 (RBA, 1997). The Coalition Government then privatised a number of businesses over the remainder of the 1990s. The largest sales were Suncorp/Qld Industry Development Corp which was sold for $698 million in 1996-97 and Suncorp-Metway Ltd in 1997-98 for $610 million. Privatisation has accelerated in the past 7 years under the Beattie and Bligh Labor Governments incorporating privatisation of major infrastructure in energy, ports, rail and roads. Table 4.5 Privatisation in Queensland Date Entity Proceeds Government $m 1993 Gladstone Power Station 750 ALP 1996/97 State Gas Pipeline 163 Coalition 1996/97 Suncorp/Qld Industry Development Corp 698 Coalition 1997/98 Suncorp-Metway Ltd 610 Coalition 1998 Queensland Mines Rescue Service (QMRS) Coalition 1999 Queensland TAB 268 ALP 2001 Dalrymple Bay Coal Terminal 630 ALP 2006 Allgas Energy 521 ALP 2007 Sun Gas 75 ALP 2007 Energex (Sun Retail) 1203 ALP 2007 Powerdirect Australia 1200 ALP

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Table 4.5 Privatisation in Queensland (cont.) Date Entity Proceeds Government $m 2007 Golden Casket 542 ALP 2010 QR National 4606 ALP 2010 Forestry Plantations Queensland 613 ALP 2010 Port of Brisbane 2095 ALP 2011 Queensland Motorways 3088 ALP 2011 Abbot Point Coal Terminal 1829 ALP

4.7.1 Energy privatisation in Queensland The privatisation of power in Queensland has occurred progressively since the 1993 sale of the Gladstone Power Station by the Goss ALP Government to a consortium consisting of Comalco, NRG and a group of aluminium traders for $750 million (RBA, 1997). The State Gas Pipeline was subsequently sold by the Borbidge Coalition Government in 1996-97 for $163 million. The electricity industry was restructured from 1995 when the Queensland Electricity commission (QEC) was split into: . the Queensland Generation Corporation (QGC) that owned generators; and . the Queensland Transmission and Supply Corporation (QTSC). Transmission was the responsibility of Powerlink, while retail functions remained with seven distribution companies. In 1997 QCG was split into three generators (Stanwell, Tarong and CS Energy), and an engineering services organisation, AUSTA Energy. Powerlink and the distributors were corporatised. Retail functions were split from distribution, with the formation of three new retail corporations: ENERGEX, Ergon Energy and Omega Energy. In 1998 Ergon Energy and Omega Energy merged and the distribution companies were amalgamated with ENERGEX and Ergon Energy (Queensland Government, 2010a). Following the recommendations of an independent review of the Governments energy businesses, the Beattie ALP Government announced in April 2006 that it would sell the electricity and gas distributors. The rationale for the sales was that public sector businesses would be subject to aggressive competition from the private sector when full retail competition was introduced in July 2007 and the value of the businesses would decline. Therefore, the Government claimed that the sale of energy distributors prior to full competition would maximise the returns for Queenslanders and the proceeds would be placed into the Queensland Future Growth Fund to provide infrastructure into the future (Queensland Government, 2007). Furthermore, the Government subsequently expressed a clear ideological preference for private provision: It was considered that, given the expected level of intensity in competition with full retail contestability, it was no longer appropriate for public resources to be allocated through ENERGEX and Ergon Energy to a service function which will be able to be fully met in an economic and efficient way by the private sector (Budget Paper 2, 2007: 38).

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The businesses were restructured in late 2006 to form Allgas Energy, Sun Gas, Sun Retail and Powerdirect and sold immediately. Allgas was sold in late 2006 to the Australian Pipeline Trust for $521 million and Sun Gas was sold to AGL Energy for $75 million in 2007. Around 390,000 customers from Sun Retail, the retail business of Energex, were transferred to form Powerdirect Australia in an attempt to boost competition. Sun Retail and Powerdirect Australia were each sold for $1.2 billion in early 2007 (to Origin Energy and AGL Energy, respectively). Ergon Energy Australia retained the regional retail customers (which were largely unprofitable) (Queensland Government, 2010a). The $3 billion sale proceeds were placed in the Queensland Future Growth Fund. In addition to asset sales, the private sector has been encouraged to assume a greater role in the provision of new generation capacity. The public sector owned Kogan Creek Power station opened in 2007 and supplies an additional 750 megawatts of baseload electricity but was developed and is being operated by Golding Contractors. Private sector investors have a 50 per cent interest in the Callide C and Tarong North power stations. The Callide C power station was commissioned in 2001 as a joint venture of CS Energy and a private sector partner, InterGen. Tarong North was a joint venture between Tarong Energy and a private sector partner, TM Energy. The power station was commissioned in 2003 and full ownership reverted to Tarong energy in November 2009 after the purchase of the 50 per cent share for $275 million.2 The 2008-09 Budget noted that the private sector share of total generation capacity would increase from 42.3 per cent to 48.6 per cent when five new gas-fired plants came into operation (Budget Paper 2, 2008). A Shareholder Review of Queensland Government Owned Corporation Generators (Genco Review) was established to review the operation of the GOC Generators ‘with a view to reducing the share of the aggregate capacity the State owns or operates in Queensland from 65% in 2010 to around 50%’ (Queensland Government, 2008: 36). Following the release of the Genco Review, the Government announced in November 2010 that the generators would be restructured. The Generators CS Energy, Stanwell and Tarong Energy were restructured in July 2011 into CS Energy and Stanwell – Tarong Energy is now a subsidiary of Stanwell.

4.7.2 Other recent privatisations In the 2008-09 Mid Year fiscal and Economic Review the Government announced that it would pursue opportunities to encourage private sector investment and ownership in infrastructure (Queensland Government, 2008). The Government announced a major asset sale program in June 2009 that was expected to generate up to $15 billion. The assets included were: Queensland Motorways Limited; Port of Brisbane Corporation Limited; Forestry Plantations Queensland; Abbot Point Coal Terminal; and QR freight services. The sales occurred in 2010 and 2011. . Forestry Plantation Queensland was created in 2006 as part of a commercial reform of the State’s forestry assets. Following a competitive tender process Hancock Queensland Plantations Pty Ltd acquired a 99 year lease for $603 million. The 2010- 11 Budget stated ‘The sale of FPQ concludes a progressive long term process of reforming the State’s plantation management business to improve its efficiency and competitiveness.’(Budget Paper 2, 2010: 154). Ownership of only around 10 per cent of the Crown land plantation was included. . Port of Brisbane. In 2007 25 per cent of the Port of Brisbane’s interest in Brisbane airport Corporation was transferred to the Queensland Investment Corporation and the remaining 12.4 per cent share was disposed of in 2008. In the 2008-09 Budget the Government announced that the Brisbane Ports corporation would invest $536.6

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million over five years constructing new wharves to increase the container-handling capacity by 25 per cent. The subsequent 99 year lease of the Port of Brisbane corporation to Q Port Holding Consortium for $2,095 million was conducted through a competitive bidding process.3 . QR National. The assets involved are QR Limited’s above and below rail coal business plus options to sell QR’s bulk freight, intermodal, retail and regional freight services. The assets were leased for 99 years through a share offer on the Australian Stock Exchange in November 2010 that raised $4.6 billion (Fraser, 2010). . Abbott Point Coal Terminal was leased for 99 years to Mundra Port and Special Economic Zone Ltd in 2011 for $1,829 million. . Queensland Motorways. After completion of the $1.8 billion Gateway Upgrade Project the Queensland Motorways was leased for a period of 40 years from 2011 for $3,088 million. The deal involved tolling rights on the Sir Leo Hielscher Bridges and the Logan Motorway.

4.8 South Australia South Australia has undertaken extensive privatisation dating back to the early 1990s. Almost all of the privatisations occurred under Liberal Governments between 1993 and 2002. The earliest privatisations occurred under the Arnold Labor Government on the basis that the government needed to reduce debt. The Liberals shed a number of businesses ranging from finance and insurance institutions to timber, meatworks, clothing manufacture, gas, and ports (see Table 4.6). The largest privatisation were in the power industry. ETSA was corporatised in 1995 and broken into subsidiary organisations. Premier Olsen announced a privatisation program that included ETSA and possibly also include the TAB, Lotteries. Workcover, the Motor Accident Commission, HomeStart and the Ports Corportaion. The proposed sale of ETSA was justified as: (1) a way to eliminate risks when South Australia entered the National electricity Market (NEM); and (2) to make South Australia debt free to enable funding of education and health. The contract was handled by Morgan Stanley and the sale plan was released in June 1998. Conditions attached to the sale included: a 5 year freeze on average consumer prices; environmental standards for the generators; and, job protection for electricity workers. After encountering difficulty getting the legislation for the sale of ETSA through Parliament, the government opted to lease the assets for 99 years.

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Table 4.6 Privatisation in South Australia Date Entity Proceeds Government $m 1993 SAGASCO 29 ALP 1993 SAGASCO 417 ALP 1993/94 SA Financing Trust 5 Liberal 1994 Austrust Trustees 44 Liberal 1994 Pipeline Authority of SA 304 Liberal 1994/95 Enterprise Investments 38 Liberal 1994/95 Island Seaway 2 Liberal 1994/95 State Bank of SA 10 Liberal 1995 Forwood Products (Timber) 123 Liberal 1995 State Governement Insurance Commission 175 Liberal 1995/96 Sign Services 0.2 Liberal 1995/96 State Bank of SA 720 Liberal 1995/96 State Chemistry Laboratories 0.3 Liberal 1995/96 State Clothing Corporation 1.4 Liberal 1996/97 Radio 5AA 8 Liberal 1996/97 SAMCOR (meatworks) 5 Liberal 1997/98 Port Bulk Handling facilities 18 Liberal 1999 Flinders Power 465 Liberal 1999 ETSA Utilities 3500 Liberal 2000 ETSA Power 175 Liberal 2000 TXU Torrens Island 295 Liberal 2000 Electranet 938 Liberal 2001 South Australian Ports Corporation 132.5 Liberal 2001 Adelaide Casino 180.25 Liberal 2002 South Australian TAB Pty Ltd 43.5 Liberal

ETSA Utilities was sold (a 200 year lease) in 1999 for $3.5 billion to the Hutchson Whampoa group joint venture the consisted of Hong Kong Electric and Cheung Kong Infrastructure (CKI). The other distributor, ETSA Power was sold in 2000 for $132.5 million to CKI. The transmission company Electranet was sold in 2000 for $938 million to Queensland’s Powerlink ABB and Macquarie Bank. The generators were sold for just $760 million in total. Flinders Power was sold to NRG Energy in 1999 for $465 million and TXU Torrens Power was sold the following year for $295 million. The Auditor-General confirmed that the cost of consultants between 1997-98 and 2000-01 was $114 million (Spoehr, 2004). In 2002, with Victoria and South Australia the only States to have at that stage privatised electricity generation, Kenneth Davidson (2002) explained why at that time they had the highest electricity prices in the country:

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There has been no new base-load generating capacity built in Victoria since 1992. The reason is nobody has been responsible for ensuring adequate supply to meet demand since the SECV was broken up and sold in the mid-1990s. The privatised generating companies have a vested interest in supply shortages because this drives up the price of electricity they sell into the grid through the national electricity market. The prices received by generators in Queensland and NSW, as well as in Victoria and South Australia have increased as a result. Generator profits increase at the expense of electricity retailers. This doesn’t matter in Queensland and NSW because the State governments have maintained ownership (and control) of their systems, even though they have broken them into competitive generating, transmission, distribution and retailing businesses. Thus the extra profits on the swings (the generators) have been used to subsidise the losses on the roundabouts (the retailers) and the consumer has not felt a thing in these two states. In Victoria and South Australia the generation and retailing businesses are separately owned, the that higher prices for electricity have to be passed on by retailers to their customers (Davidson, 2002). Other major privatisations during the 1990s included the sale of the Pipeline Authority of SA to Tenneco & Santos for $304 million in 1994; the State Bank of South Australia for $720 million in 1995-96; the Adelaide Casino to Sky Casino for $180 million in 2001 and the sale of the South Australian Ports Corporation for $132 million to the Finders Ports consortium of Adsteam Marine and Egis. The Rann Labor Government announced the intention to investigate sale of ForestrySA’s harvests in 2008-09 Mid Year Budget Review in a bid to reduce debt and fund the infrastructure program. In May 2011, the government announced sale of three forest rotations in the South East of South Australia4. A Select Committee was formed to examine the proposal to forward sell Forestry SA harvesting rights. The Interim Report of the Select Committee said that the majority of evidence presented to the Committee did not support the forward sale due to the economic, social and environmental impacts. The Government engaged consultants to give advice on the proposed sale and conduct an analysis of the regional impact. In May 2011 the Government announced that it had decided to proceed. Expressions of Interest (EOI) closed 31 January 2012. Selected tenderers will be asked to lodge indicative bids (Government of South Australia, 2012). The successful contractor will pay a lease fee and take commercial control of up to three forward rotations of softwood plantations in the south east of SA. They will also be subject to replant obligations and have to honour all existing log supply contracts. ForestrySA will continue as the operational manager of the forests for at least five years. The long-term lease (sale) of SA Lotteries was announced in the 2011-12 Budget. SA Lotteries has been valued at $330 to $360 million by Deutsche bank and the sale will be overseen by the international banking and asset management group Investec5. An Australian Newsagents Federation submission to the South Australian Treasury was reported to have claimed that the sale will reduce profitability for newsagents and lead to job losses and business closures as well as costing up to 75 per cent of jobs at SA Lotteries (Edwards, 2012).

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4.9 Western Australia Details of privatisation in Western Australia are provided in Table 4.7. The privatisation program of the Court Liberal Government commenced with the sale of the State Insurance Office in 1993. In 1995 BankWest was sold to the Bank of Scotland which then offered 49 per cent of the share to the public. The largest privatisation in terms of sale price was for the Dampier-Bunbury natural gas pipeline which was sold the Epic Energy Consortium that consisted of the American power companies, El Paso and consolidated Gas as well as AMP, NSW State Super and Hastings. In 2000 Alinta Gas’ distribution and retail businesses and the freight operations of Westrail Freight were privatised by the Court Government. The Alinta sale raised $971 million and Westrail Freight raised $585 million. The Government undertook to use the net proceeds to fund capital investment (Budget Paper, 2000). In 1995 the State Energy Commission of Western Australia was disaggregated into separate gas and electricity corporations (Alinta and the Western Power Corporation respectively). In 2000 a bill was passed by the Western Australia Parliament for the sale of Alinta which was listed on the Australian Stock Exchange in October 2000. In contrast to Victoria, South Australia and New South Wales, outright privatisation of electricity has not occurred in Western Australia, “privatising” objectives have been achieved through other measures. The Gallop Government opposed outright privatisation of electricity stating that it would simply turn a public monopoly into a private monopoly (Egan, 2002). Table 4.7 Privatisation in Western Australia

Date Entity Proceeds Government

$m

1993 State Government Insurance Office 165 Coalition

1995 BankWest 900 Coalition

1995 WA State Printing Division Coalition

1996/97 Healthcare Linen 9 Coalition

1998 Dampier-Bunbury Natural Gas Pipeline 2470 Coalition

2000 Alinta Gas 971 Coalition

2000 Westrail Freight 585 Coalition

The Gallop Government Established the Energy Reform Task Force to introduce competition into the electricity market without privatisation (Government of Western Australia, 2005). The Task Force recommended disaggregation of Western Power, the State owned electricity corporation. Western Power Corporation was restructured into four separate corporations in 2006 –Synergy, Horizon Power, Verve Energy and Western Power. Private power generation accounted for around 45 per cent of total generating capacity in the state in 2004 although much of this is generated by companies for their own consumption. Private electricity suppliers include: Alinta; ERM Power Ltd; Griffin Energy; Landfill Gas and Power Pty Ltd; Perth energy; TransAlta; Westfarmers Premier Power Sales Pty Ltd; and Worsley Alumina Pty Ltd. ERM Power Ltd is also an electricity generator. Draft Report 131

The Gallop Labor Government also reversed privatisations that had occurred under the previous government or shelved future privatisation plans (Government of Western Australia, 2002). The privatisation of VacSwim was reversed and the learn to swim program returned to the Department of Education. The Government also abandoned plans to fund the Performing Arts Centre at John Curtin High school by selling off part of the school and plans to sell part of Edith Cowan University’s Claremont campus for housing (Government of Western Australia, 2005). The government also resisted calls by the National Competition council to privatise the CTP insurance scheme (Government of Western Australia, 2005). The future may be brighter for advocates of privatisation. The Barnett Liberal-National Government established the Economic Audit Committee in 2008 to review the operational and financial performance of the state. The committee reported in 2009 with recommendations to increase the use of partnerships with both the for-profit and not-for- profit private sector and to consider: …whether continued ownership of a commercial activity and the associated governance model remains appropriate. Privatisation should be considered as an option when it is identified as the most effective way to deliver the commercial outcomes sought by Government and there are viable alternatives for delivering significant social, industry and economic development policy outcomes currently pursued through ownership of the GTE (Economic Audit Committee, 2009: 119-120). In particular, the committee recommended encouragement of greater private sector involvement, competition and innovation as an integral component of water and electricity reform.

4.10 Tasmania The privatisation agenda has not been pursued as aggressively in Tasmania as in the mainland states. Details of privatisations by Tasmanian Governments are shown in Table 4.8. In the 1990s the only privatisation was the State Insurance Office. Table 4.8 Privatisation in Tasmania

Date Entity Proceeds Government

$m

1993/94 State Insurance Office 42 Liberal

2007 Hobart Airport 352 Labor

2007 The Printing Authority of Tasmania, 0.995 Labor

2008 The Southern Regional Cemetery Trust, 0.575 Labor

2011 Forestry Tasmania plantations 156 Labor/Greens

2012 TOTE Tasmania 103 Labor/Greens

Subsequent privatisations occurred from 2007 when the Hobart Airport was sold to Tasmanian Gateway Corporation Pty Ltd for $352 million. The airport was originally acquired by the Tasmanian Ports Corporation Pty Ltd through a 50 year lease with an option of another 49 years when the Commonwealth privatised airports in 1998. In the same year the

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Printing Authority of Tasmania was sold to Printlinx and the following year the Southern Regional Cemetery Trust was sold to Southern Cemeteries Pty Ltd. These sales were justified as a means to invest in new infrastructure (Budget Speech 2007). The government also stated that ‘strong emphasis will be placed on continuity of employment and, to the greatest extent possible, current employment conditions will be maintained (Budget Speech 2007: 12) Forestry Tasmania owned a 50 per cent share in the Taswood Growers plantation joint venture. The plantations which are on government owned land were sold to New Forests in 2011 for $156 million. Forestry Tasmania used part of its $78 million share to pay off $40 million debt (Clark, 2012) In December 2011 the Tasmanian Government announced the sale of TOTE Tasmania to Tattsbet Limited, a subsidiary of the Tatts Group for $103 million. The sale included the TOTE radio station. In addition to the purchase price, TOTE Tasmania may be entitled to certain future GST benefits of up to $43.6 million, which Tattsbet Limited has agreed to remit to the Government as and when they are utilised (Tasmanian government, 2012, Mid Year Financial Report 2011-12). After finalisation of the sale in March 2012 the new owners announced that up to 180 jobs would be lost as more than a third of the workforce would be cut immediately. Future racing broadcasts are to be from a Brisbane radio station resulting in the loss of almost all the jobs in the TOTE radio station in Tasmania (Killick,. 2012b).

4.10.1 Electricity Initial movements toward privatisation in electricity ceased after the Bacon Labor Government was elected in 1998. In the 1998-99 Budget speech, Treasurer David Crean stated: Unfortunately the advent of a Labor Government was not soon enough to prevent such wasteful expenditures as the $2.372 million spent investigating the sale of the Electricity Generation business (Budget Speech 1998: 11). An expert panel appointed in 2010 to review the efficiency, effectiveness and competitiveness of electricity sector. The panel reported in March 2012 with recommendation to: split Hydro Tasmania’s trading functions into three public businesses; sell Aurora Energy’s retail electricity business in three parcels and introducing full contestability; merge the distribution and transmission networks; and sell the Tamar Valley Power Station (Electricity Supply Expert Panel, 2012). Premier Giddings responded to an Infrastructure Partnerships Australia assessment that the sale of electricity assets would fetch up to $7.9 billion by stating that Hydro Tasmania would not be sold because electricity generation was a core business that should remain in the public sphere (Killick, 2012a). The Government response to the Expert Panel report was delivered on 15 May 2012 (Green, 2012). The government indicated that it was in general agreement with the findings of the Expert Panel but had chosen a different strategy to achieve the objectives of delivering lower electricity price increases than would occur under the current situation, provide greater customer choice and ensure sustainability of government electricity businesses. The government reiterated its commitment not to privatise Hydro Tasmania or transmission and distribution. The reform package proposes to amalgamate Aurora’s Distribution Businesses and Transend Networks into a single government business to achieve annual cost savings of at least $8 million. Aurora’s customer base will be the sole customer base after an implementation plan is developed. The Tamar Valley Power Station will either be transferred Draft Report 133 to Hydro Tasmania or sold by 30 June 2013, depending on assessments of which option provides the greatest benefit to Tasmania. The government has committed to attempt to minimise job losses that flow from implementation of the reform package. The Tasmanian Government has also been involved in purchasing assets that were previously sold to the private sector. Tasrail was previously owned by the Commonwealth Government and was sold in 1997. Box 4.6 paints a picture of the outcome of this privatisation in relation to the risks that were outlined earlier in the chapter. These include the deterioration in the employment conditions of workers, failure to maintain the asset sufficiently to provide a quality service, and holding the government to ransom by threatening to discontinue the service.

Box 4.6 The case of Tasrail The Australian Government sold TasRail to the Australian Transport Network in 1997 for $22 million, which included a 50 year lease of Crown land. The Australian Transport Network was a partnership between TranzRail and Wisconsin Central Transportation. After purchasing the Tasrail freight operations Wisconsin Central Transportation (Wisconsin) imposed AWA on the workforce and it took five years for workers to secure a collective agreement. The Rail, Tram & Bus Union Australia claimed that the promised improvements to the service were not delivered and assets deteriorated due to a lack of investment. After the sale Tranz Rail was taken over by Toll Holdings and Wisconsin was taken over by Canadian National and the railway was purchased by Pacific National (Toll Holdings and Patrick Corporation) in 2004. In 2005 Pacific National threatened to cease operation unless the Tasmanian and Australian governments paid a subsidy of $100 million (Rail, Tram & Bus Union Australia no date). Subsequently the Tasmanian and Australian governments provided a $120 million rescue package and then the Australian Government provided another $78 million in AusLink funding for capital investment in 2007 and the Tasmanian Government agreed to provide $4 million annually for maintenance after the government agreed to assume responsibility for the below rail assets (track and associated infrastructure). The Tasmanian Government purchased the above rail (rolling stock) and business assets and the Melba line in 2009 to continue operations by the State owned business, Tasmanian Railway Pty Ltd, known as TasRail. The government then provided investments of $19 million for rolling stock and infrastructure and announced a further $315 million over four years for infrastructure and operations (Tasmanian Government, 2010). Source: Rail, Tram & Bus Union Australia (no date); Department of Infrastructure, Energy and Resources, 2009; Tasmanian Government, 2010.

4.11 Conclusion Developments in Australia have mirrored international privatisation trends over the past 20 years. In the period 1990 to 2007 Australia was among the top ten privatising nations in terms of the proceeds of asset sales. The major arguments for privatisation have been the potential benefits from increased efficiency, productivity and competitiveness and the privatisation push has been an integral

Draft Report 134 component of the COAG National Competition Policy and the National Partnership Agreement to Deliver a Seamless National Economy. The second major justification for privatisation of public assets has been the dire budgetary position of state governments who have argued that there is no alternative to privatisation because the proceeds can be used to fund essential infrastructure. Another motivation that has not been promoted vigorously by governments has been the disciplining of the workforce as elaborated by the Audit Review of Government Contracts (2000: 13) in relation to developments in Victoria: Changes in the power industry, education, prisons, the public service and public transport, through privatisation and contracting, have all had the effect of reducing very strong bargaining power previously held by these unions. This objective was not always as transparent as the other goals mentioned, doubtless for tactical reasons Extensive privatisation programs were implemented by the Commonwealth, Victorian and South Australian Governments in the 1990s. In the case of the Commonwealth, privatisation was pursued by both Labor and Coalition Governments. The situation was somewhat different in Victoria and South Australia where privatisation programs were implemented by Coalition Governments in the 1990s but little additional privatisation occurred after Labor Governments gained office. In recent years, state governments have returned to privatisation as a policy solution for raising the resources to invest in public infrastructure, after several years of restraint owing to the electoral backlash that followed in the wake of unimpressive results from the previous privatisation rounds. Electricity prices were not kept down, public transport providers neglected maintenance and abandoned contracts, leaving governments to invest far more than original contracts specified, and any gains in quality appear to be fairly marginal to the public that use them. The IPA Research Fellow and former Kennett Government advisor Richard Allsop dismisses these perceptions as a failure of public memory: And in public transport privatisation, while in terms of the savings to the taxpayer weren't as great as perhaps was expected in the privatisation, certainly on every indicator, the quality of the service has improved significantly (audience laugh) in Victoria. People might - I think people have very short memories about how poor the service used to be, I think (ABC DOO, 2007). Had the privatisation of public assets proven to be the panacea its advocates in the neo-liberal think-tanks, corporate consultancies and neo-liberal governments (Labor and Liberal) professed it to be, there would be little resistance to its continuing advance. In truth, governments have only dared to announce their privatisation agendas after they win office, and only after obtaining access to public resources with which to fund the necessary public communications strategies necessary to ‘sell’ it. Privatisation is these days rarely promoted as a way to deliver a better level of public service, with more reliance placed on it being a dire necessity owing to the need to reduce a debt burden left by a previous government, or to avoid creating one. Avoiding public debt so that future generations are not burdened with its repayment is presented as a moral imperative. The current line of argument being advanced by the O’Farrell and Ballieu governments, for example, is that infrastructure has suffered from insufficient investment in recent years, and that asset sales will free up resources for building critically needed public roads, hospitals and other desirable infrastructure without borrowing.

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The fiscal austerity and debt aversion arguments used to justify channelling long term secure income streams of public money to private corporations, while effective in reconciling a now otherwise sceptical public to this agenda, is largely an ideological construct that ignores fundamental economic principles. While the funding of recurrent expenditure with debt is generally undesirable, it is perfectly sound and ethical to fund the building of long term assets that will be used by citizens over many decades by borrowing to spread the cost burden across the years of its use. After all, people do not consider it necessary to sell their car, furniture, clothes and other assets in order to buy their home out of a single year’s income. It needs also to be understood that the fiscal austerity imposed on the states, that has been responsible for so much retrenchment of public provision and loss of governance and public employment since the 1970s, and claimed to have necessitated so much privatisation, was itself ideologically and strategically motivated, given that the Commonwealth could have funded any amount of public infrastructure (provided the real resources were available to be purchased with Australian currency) because it is the sovereign monopoly issuer of the currency. It was through this capacity that it financed war time defences and maintained an expanded public sector for thirty years after the World War 2, and it was because of the withdrawal of Commonwealth support to the States, out of a desire to promote the neo-liberal ‘small government’ agenda, that the Commonwealth began withdrawing financial support to the States in the late 1970s.

1 The 1998-99 Budget indicates that the use of the proceeds of asset sales enabled the government to reduce debt from $32 billion to $11 billion in 1998 producing annual savings of $762 million per annum 2 The 50 per cent share was owned by the Tokyo Electric Power Company Incorporated and Mitsui & Co, Ltd. 3 Q Port Holding Consortium includes Global Infrastructure Partners (GIP), Industry Funds Management (IFM) and the funds managed by QIC Limited and a minority stake is held by Tawreed Investments Ltd, a subsidiary of the Abu Dhabi Investment Authority (ADIA 4 There is no definition of the length of time of a rotation. The Interim Report of the Select Committee indicates that ForestrySA has used 38 years but this may be around 35 years. The Government specified ‘an area weighted average clearfall age of between 32 and 35 years’ (Government of South Australia, 2012: 3). 5 Investec was involved in the sale of the Tasmanian TOTE, NSW Lotteries and the TAB in NSW, the Northern Territory and Queensland.

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Chapter 5: Public sector outsourcing.

5.1 Introduction Public sector outsourcing entails the delivery of public services by a workforce employed by an employer external to the government agency that is responsible for their delivery. In most (non-USA) literature, on the subject it is distinguished from the term “privatisation” which is more usually applied to situations where public assets are transferred to private ownership (usually through sale). The Australian experience with privatisation was discussed in the previous chapter. Some forms of outsourcing may coincide with public funding of private asset creation, or public private partnerships (PPPs) such as ‘build own operate transfer’ (BOOT) arrangements,1 but our focus here is on outsourcing through competitive tendering or service agreements. PPPs are the subject of the next chapter. Though the rise in outsourcing and other shifts toward greater private sector provision are presented as innovations in public service delivery, in truth the practice dates back centuries. Despite a general acceptance of its capacity to lower the cost of service provision, outsourcing has remained a contentious and politically charged policy approach, not least because of its somewhat notorious history in relation to how its cost savings have sometimes been made. In Britain, for example, what is generally considered the most brutal period of the 1598-1834 English Poor Law was the period from 1720 to the mid 1790’s when the provision of poor relief was outsourced by competitive tender to poor law ‘entrepreneurs’, who would contract to meet the statutory obligations of a parish or group of parishes to relieve the destitute, for an agreed annual sum. The practice became a popular strategy for reducing the burden of parish rates. Armed with the legal right to compel recipients to live in prison-like ‘workhouses’ as a condition for receiving poor relief, poor law entrepreneurs maximised their profit by making the workhouses as repugnant as they could in order to deter all but the most desperate from applying for relief. Orphans, the insane, sick and dying were thrown together, subjected to hard labour, and provided with minimal food or heat. The system broke down in the 1790s when its profitability was undermined by the abolition of the ‘workhouse-test’ (Poynter, 1969; Slack, 1990). Australia’s Second Fleet was also an outsourced operation, in which a third of transportees perished on some ships because of inadequate food, beatings and over- crowding by the firm (experienced slave transporters Camden, Calvert & King) contracted to deliver them (Flynn, 1993). Australian governments continued to procure goods and services from the private sector, by tender and other means, since white settlement. 19th century Australian public administration made extensive use of contractors and competitive tendering. Among numerous examples, in 1833 for example, the Tasmanian government was ordered to use contractors for works that had till then been undertaken by convicts, who thereafter worked for the contractors. Problems in managing contracts were evident from the earliest days. In Victoria, for example, the Government provided £500,000 to the Victorian Central Road Board in 1853 for the construction of roads and bridges, all to be allocated to contractors by competitive tender (McIntosh et al, 1997). The President of the board subsequently reported on the difficulties entailed in constructing the roads to the main gold fields: Add to these [problems] the slovenly description of work performed by contractors ignorant of the business they undertook, or dishonest enough to slur it over, and which no amount of supervision, I am advised, could fully rectify (quoted in McIntosh, et al., 1997: 15)

Draft Report 137 In 1850s New South Wales, the Colonial Architects office was not only responsible for letting and managing contracts in bridge and road construction, but also for ‘cleaning windows and buildings, winding the clocks of public buildings, chimney sweeping, emptying the latrines of the military barracks, providing coffins for pauper funerals, furniture repairs and building ballot boxes’ (McIntosh, et al, 1997:15). It was only after 1890 that the reliance on contracting of government services came to be gradually challenged by increasing use of ‘day labour’, directly employed by governments to undertake public works. Its rise coincided with the extension of democracy and the rise of the labour movement which lobbied for direct public employment as: …it represented a major advance in working conditions, greater attention to safety procedures, improvement in wages and more stable and fair employment. From a financial point of view proponents of day labour disputed the apparent pecuniary advantages of contract work, viewing public employees as producing work of a higher quality and being as competitive on price as long as day labour was run along “business lines” with strict supervision and selection of quality workers (McIntosh et al, 1997:16) Official and public acceptance of the arguments of contractors that they were always more cost effective was undermined by an 1896 NSW Royal Commission into public works contracting that discovered ‘widespread rorting, entailing schedule rigging, cutting corners deliberately doing inferior work and using second-rate materials as well as frequently completing work well behind schedule’(McIntosh et al., 1997:17). Though contractors continued to dominate public works, the election of a ‘Protectionist’ government in 1899 led to expansion of public sector employment. Contractors lobbied heavily against this trend. The election of a Liberal government in 1904 led to cuts to public employment and more contracting, while the election of a Labor Government in 1910 shifted the pendulum back toward more public employment (McIntosh et al., 1997:17). Nevertheless, contracting of services remained ubiquitous. Some iconic structures of the twentieth century, such as the Sydney Harbour Bridge and the Snowy Mountain Scheme entailed combinations of public sector and contracted employment. With the latter, contractor employees peaked at 2656 in 1965-66 while the Snowy Mountain Hydroelectric Authority employees peaked at 3168 in 1966-67 (McIntosh et al., 1997:24). The development of the Keynesian welfare state in the post World War II period fundamentally changed the role of the state as explained in Chapter 1. The welfare state social settlement involved the state accepting responsibility for ensuring a high level of employment to enable citizens to support themselves and the provision of social services as part of the formal tier of the welfare state. “Social wage” services such as education, housing, health, income support and the like formed the redistributive arm of the welfare state and entailed delivery of services predominantly by the public sector. In contrast to previous provision by charities with the “deserving” and “undeserving poor” dichotomy, the welfare state services were provided as entitlements and with principles such as equal treatment for people in similar circumstances. The policy of maintaining full employment, combined with the social wage components of the welfare state resulted in an increasing share of public employment. The large scale use of public sector employment during and following the Second World War was the principle device by which unemployment was maintained below 2 percent (full employment) for thirty years (1944-74). The maintenance of more jobs than job seekers led to a strengthening of the economic and social position of working people, the de-casualisation of the labour force, a narrowing of the gap between rich and poor, and a steady increase in the general standard of

Draft Report 138 living. Originally established by the Curtin / Chifley governments, it was maintained by the Liberal government under Robert Menzies after 1949 due to fear of the certain electoral backlash of abandoning the policy. The transition to the post welfare state or full employability state entailed the abandonment of the commitment to full employment and the commencement of public sector downsizing, privatisation and outsourcing from the late 1970s (Mitchell & Muysken, 2008; Quirk 2011). Since the 1980s, governments have dramatically extended the range of services they have contracted out, in areas such as municipal garbage collection and street maintenance, school and hospital cleaning, communications and information technology (CIT), public transport systems, electricity supply, prison management, public employment and vocational training services, community health and welfare services, and many more. Developments in Australia mirror international trends. The UK has been at the forefront of all types of “privatising” including outsourcing, as outlined by the then director of the SERCO institute, Gary Sturgess (2006). He stated that UK outsourcing had included: management of the Atomic Weapons Establishment for 25 years; registration and tracking of fissionable material; the military’s new air tanker fleet, with the crew trained as ‘sponsored reserves’ who can be switched to military control in case of war; management of the Criminal Records Bureau, London’s congestion charge, Local Education Authorities, welfare to work; and case management of offenders from sentencing until the completion of probation. He stated: Lest there be any misunderstanding, this is not just competitive tendering and contracting. This is nothing less than the creation of a public service economy (Sturgess, 2006). SERCO is a U.K. based transnational public services contracting corporation that is deeply embedded in outsourced service provision in Australia, receiving billions from Australian governments annually. In 2011, after ten years as Director of the corporation’s research and public education wing, a post he transferred to after presiding over NSW public sector cuts in the early 1990s as head of Nick Greiner’s cabinet office, Sturgess was appointed: …to a special NSW Premier's chair in public service delivery at the Australia and New Zealand School of Government, a role that will position him to feed ideas into the new reform push under NSW Premier Barry O'Farrell, who has signalled a shake- up of the public sector. The role includes direct co-operation with the NSW Public Service Commission, a body set up by Mr O'Farrell to drive changes in the bureaucracy (Salusinszky, 2011). These developments coincide with a suite of changes along the lines of New Public Management made to the structure and operations of the public services in Australia during the 1980s and 1990s, with the repeatedly ‘reformed’ Australian Public Service (APS) now characterised as having: . [Greater] flexibility regarding processes, accountability for outputs and outcomes, and a strong emphasis on efficiency; . [Increased] similarity with the private sector in organisation and service delivery, and increasing use of the private sector to deliver services; . a more diverse workforce, particularly at senior levels; . increasing use of contract employment and greater scope for public servants to be dismissed; . responsibility for policy advice shared with political advisers and consultants;

Draft Report 139 . employment opportunities at all levels for people not currently employed by the public service; . enhanced political control of the bureaucracy; . a variety of avenues for citizens to obtain information and/or redress; . devolution of personnel practices and conditions, and . decentralisation of budget responsibilities (Verspaandonk & Holland, 2003:4). But most significantly of all, since the mid 1970s there have been steady and significant reductions in the number of people employed in the public services throughout all levels of government (Mitchell, 2000). Outsourcing is now an integral component of public sector service delivery. Despite the three recent decades of energetic application of this strategy throughout all levels of government in Australia the net benefits of public sector outsourcing in Australia, as elsewhere, continue to be debated (Jensen & Stonecash, 2005). In the following section, we explore the motivations for its emergence and test the claims made as to its efficacy. The remainder of the chapter considers the extent of outsourcing in terms of the services that have been outsourced, the value of contracts, and the role of the not-for- profit (NFP) sector.

5.2 The ideological drivers of outsourcing Contributions to scholarly debates around developments such as the increased resort to outsourcing, are typically superficial in their approach as to their origins. Ideological ‘shifts’ such as an emerging public aversion to bureaucracy, or ‘the ascendency of arguments for smaller government’ and ‘growing belief in the virtue of fiscal austerity’ (Verspaandonk & Holland, 2003:4), are routinely presented as ‘givens’, without acknowledgment that they were consciously designed and propagated with clear strategic intent (Carey, 1995; Beder, 2006, 1999). Similarly, the trend since the 1970s of reducing the resources available for public service provision is treated as an unquestioned ‘given’ in mainstream studies, or vaguely explained away as a consequence of ‘globalisation’ raising the need for ‘international competitiveness’, or due to ‘economic instability’ emerging in the 1970s (for example: Hoque and Moll, 2001). While it aids our comprehension of the drivers of these developments to view them in the abstract, in terms of the broad interplay of historical forces at work (as presented in Chapter 1), at the same time, we should not lose sight of the reality that these developments are the cumulative result of considered actions by business groups, politicians, public administrators and policy lobbyists, themselves subject to various incentives and inducements, to advance this agenda. These actions encompass changes to laws and regulations, strategic appointments to decision making roles, commissioning of public relations campaigns and organisational cultural re-engineering programs, an have been enacted by well-organised, well-funded, professional advocates. For example, considerable evidence exists that at least part of this shift is the consequence of a global ‘economic education’ campaign that the US Chamber of Commerce called upon corporate America to fund in the early 1970s, motivated by an apprehension over rising ‘anti- capitalist’ sentiment and profit squeeze around the globe. Its development was undertaken by think tanks and other institutions funded by trans-national corporations, and was rolled out in the USA (the largest marketing program in US history at that time), and later by other countries including Australia in the mid – late 1970s. Its message was embraced by governments and non-government organisations such as the OECD, IMF and World Bank. Influence was achieved through strategic directing of political funding, selective

Draft Report 140 appointments to influential positions, large scale production and distribution of ‘educational’ material (approved text books, radio and TV advertising, pamphlets, public speakers, etc.), and private media and senior bureaucrat briefings by celebrity advocates such as Milton Friedman. It advocated a reduction in the size of government to reinstate market-mediated forms of societal management, after decades of Keynesian welfare statism (Carey, 1995 Beder, 2006, 1999). It is evident that public sector reforms emerging in the wake of this campaign have strengthened the position of transnational capital relative to nation states and hence their citizens, characterised by some as a ‘hollowing’ out of the state (Harland et al, 2005). This pursuit of ‘small government’ became institutionalised in public policy in the 1980s and 1990’s with the rise of the Thatcher (UK), Reagan (USA) and other regimes around the world, including the Hawke/Keating administrations (Australia) and their successors. Common (1998) dismisses the suggestion that the rise in New Public Management, and the global outsource / privatisation movement, reflected a right wing political agenda, because alongside Reagan and Thatcher it was also embraced by social democrat governments such as the Labor Governments of Australia and New Zealand. The assumption that these parties were untainted by the same ideological motivations as the conservative parties in power in the 1980s fails to appreciate the penetration of rightwing ideology arising from heightened dependence on campaign donations from corporations, that brought the ALP, for example, under the domination of pro-business right-wing elements in NSW. Party labels and past locations on the political spectrum are not necessarily indicative of a party’s current ‘political stripe’ (Wilkinson, 1996). In Australia, the earliest practical expression of this shift was the bi-partisan re- institutionalisation of the use of unemployment as a means of disciplining the workforce during 1975. After an initial surge to 5 per cent in that year, the Fraser-led Coalition opposition promised to restore full unemployment (2 per cent unemployment), but immediately reneged on gaining office declaring they would ‘fight inflation first’. By the time Labor was returned to office seven years later, public sector retrenchment and the use of labour underutilisation as a productivity driver was an undeclared bi-partisan policy. Cutting public sector employment produced the unemployment and other forms of labour underutilisation that have undermined the bargaining power of workers vis-a-vis employers ever since, enabling historic reductions in real labour costs. Labour underutilisation in the forms of unemployment, under-employment and labour market exclusion, now directly impact upon over two million Australians (Mitchell & Muysken, 2008; Quirk, 2004). ...the drivers of economic rationalism in Canberra have been top ministers and the Senior Executive Service economists. In practice this means the offices and departments of the Prime Minister and Cabinet, the Treasurer and the Minister of Finance – together with two or three senior cabinet ministers – and a handful of elite and narrowly trained neo-classical economists, most of them steeped in American econometrics and with experience in Washington, the OECD, the WTO, the World Bank, or the IMF. Together they have destroyed the capacity of a once excellent and highly professional public service, one of the best in the world, to deliver independent advice and policy in the public interest and without fear or favour (Pusey, 2003:10). Recognising that the disempowerment of the labour movement has been an enduring objective of this agenda, and the electoral difficulty politicians would create for themselves by enunciating such a strategy, we can better appreciate why frequent failures of outsourcing to deliver seem not to dampen the enthusiasm of governments for it, despite the rhetoric that reforms are aimed at improving cost effectiveness and improving the quality of ‘customer

Draft Report 141 service’. Thus in examining what appear to be negative consequences of outsourcing we cannot discount the possibility that such outcomes are actually intended, and may well be a prime objective of the policy. For example, when the Hawke / Keating government sought to increase the conditionality of welfare entitlement after 1987, exemplified by the introduction of the ‘activity test’, in order to intensify competition for jobs in the labour market, a significant number of Commonwealth Employment Service (CES) staff resisted. From their perspective, it entailed abandonment of the principle the department had previously promoted of acting as an honest broker between two equally important clients (jobseekers and employers). Pride in the skill entailed in achieving this balance, and using it to facilitate good quality job placements, was a significant source of intrinsic incentive for many CES staff to perform their work conscientiously. After several failed attempts to enforce a more authoritarian staff – client relationships through intensified staff surveillance and stricter operating rules (Newstart Program), the Keating government eventually decided to overcome staff resistance to treating the unemployed more harshly by progressively outsourcing the public employment service. The final phase of implementation occurred under the Howard administration in 1998. Job Network contracts were designed so that the viability of employment agencies, and the livelihoods of their staff, depended (in subtle ways) on their propensity to pressure the unemployed through cuts to benefits (‘reduce their dependence on welfare’) while competing for the approval of employers. Altruistic agencies that failed to show sufficient commitment to cutting benefits were weeded out of the system in successive contract rounds (Jose & Quirk, 2002). This underpinning motivation for this ‘reform’ is not acknowledged in almost any of the literature, despite its having attracted international attention as a test case in the marketisation of public employment services. Evaluations, official and otherwise, have largely confined themselves to establishing cost comparisons between the two methods of service delivery and perhaps critiquing the failure of the Job Network to meet the stated objectives the Howard government set for it, in terms of improving service quality. The Productivity Commission, for example, supported retention of the Job Network in a review conducted in 2002, saying that although it had not produced better quality services, or an improvement in placement outcomes, it was more cost effective owing to significantly higher ‘compliance effects’, meaning it cut more people off their benefits (Productivity Commission, 2002). The latest development (April 2012) in this outsourcing experiment is that after 15 years of fraud revelations and constant criticism of poor quality service, an official inquiry has reported that only 43 per cent of reviewed claims for payments by employment service contractors were legitimate, and once again, the government is foreshadowing changes to the system (Besser, 2012). Outsourcing in this context may well be considered efficient by those in government, even when key stakeholders such as staff and citizen clients think otherwise, since it enables governments to pursue an unconscionable policy objective without having to publicly declare it. This idea that the claimed pursuit of cost effectiveness (cost + quality) is not the key driver of the outsourcing movement, as is routinely claimed, is further suggested by studies such as Bisman (2006) that have surveyed public sector managers about their outsourcing practices. She reports that despite the emphasis placed on relative cost effectiveness comparisons between public and private service provision by its advocates, and in academic literature, it seems not to weigh very heavily in actual outsourcing decision-making:

Draft Report 142 …[the] cost savings objective was neither dominant nor actively pursued, transaction costs were often ignored in making decisions and the cost economy of decisions was rarely evaluated after the fact. These findings strongly suggest that cost savings from outsourcing by Australian public sector organisations were anecdotal (or illusory) (Bisman, 2006:21) Nevertheless, the key argument offered in favour of outsourcing by its advocates is its superior cost-effectiveness. How then does it stand up?

5.3 Arguments in favour of outsourcing Much of the literature on outsourcing is confined to the technical debate over the conditions that give rise to positive outsourcing results, and estimations of actual cost effectiveness given the vexed question of how to measure or compare the relative quality of services delivered by public or private sector provision. Organisations with a clear vested interest in the promotion of the practice are significant voices in this debate, including for-profit businesses such as the SERCO Institute, a public policy advocate within the SERCO transnational services contracting group, and equally, not-for-profit organisations who are major recipients of outsourcing contracts, particularly in the delivery of human services. Equally vocal, though less wealthy opponents include public sector unions and social advocacy groups. What Hodge describes as the challenge of evaluating privatisation applies equally to outsourcing: ‘Solid evidence is sparse here and, when published, it is inevitably controversial given the policy rhetoric and salesmanship usually surrounding privatisation activities’ (Hodge, 2004: 38). Though the global fad of public sector fiscal austerity may itself be an arbitrary and ideologically motivated policy, the challenge of delivering public services with dwindling resources is a real challenge for public sector managers on the ground, forcing them to economise and raise the cost effectiveness of service delivery. The promise of significant cost savings through outsourcing made consideration of this approach inevitable, particularly in the light of claims that savings of 20 per cent were possible without loss of service quality (Domberger & Hall, 1995). These results have subsequently been difficult to confirm, particularly with relation to outsourcing services with greater qualitative complexity than, for example, the garbage collection and hospital ancillary services, in regard to which the claims of its effectiveness were made. The emerging consensus is that outsourcing public services generally delivers reduced costs, depending on the specific characteristics of the services in question, though cost increases are also not unknown (Kakabadse & Kakabdse, 2001; Boardman & Hewitt, 2004). Hefty transaction costs, market concentration and a lack of competition are most regularly cited as undermining cost savings (Quiggan, 2002, Bel, et.al, 2010). Determination of cost effectiveness is hampered by the ambiguity of quality comparisons, given the value judgements entailed in making them, with doubts raised as to why and how outsourcing achieves its savings, whether this is socially desirable, and whether savings persist over time. The principle argument for private sector efficiency is that exposure to competition drives efficiency and innovation. However, private sector firms engaged in supplying public services are generally delivering services to non-paying ‘customers’, and thus operate in ‘quasi markets’ which generate different incentive structures than when firms deal with paying customers. Periodic competition for contracts does not subject firms to the same scrutiny of value for money as do daily transactions with paying customers. Competitive pressures in public service contracting are largely confined to periodic bouts of tender writing and re-negotiation with contract managers, making significant resource allocation and

Draft Report 143 innovation in performing these tasks a rational strategy, but which only adds to the overall transaction costs of managing public services this way (Plantinga, et al, 2008). These conclusions derive from a critique of reports by the Western Australia Office of Custodial Services on the operation of that state’s first privately managed corrections facility, the Acacia Prison, contrasting with the assessment of English, et al (2010) that the method of audit was effective.

Box 5.1 WA Acacia Prison: Accounting for ‘superior’ private sector cost-effectiveness. Acacia Prison was opened in 2001. The Government-owned facility was designed with a ‘campus community’ layout for 750 medium security prisons, to be managed by a private contractor as WA’s first privately managed prison. The first contractor, Australian Industry Management Services, a subsidiary of Sodexho, was replaced by Serco in May 2006, after consistent reports of its poor management by the Office of the Inspector of Custodial Services (OICS)(OICS, 2008). Interestingly, Sodexho and Serco have been joint partners in defence support contracts since 1993. Serco have evidently produced a better result at Acacia, under a more tightly-written contract, which has also entailed a higher operating cost. English, et al (2010) argue that Acacia, being now considered one of the two best prisons in the state, demonstrates that private sector and public sector prisons can be both good and bad, that Acacia operates at lower cost than public sector prisons, and that with proper accountability mechanisms the profit incentive need not over-ride quality considerations.

The accounting methodology used consistently by the Office of the Inspector of Custodial Services (OICS) as the basis for claiming superior cost effectiveness of Acacia prison over public prisons. In November 2003 the Minister condemned the poor performance of the prison management, in not living up to claims of it being ‘the market leader in correctional practice. The previous government said at the time that it would provide proof that its privatisation policies would work ...we have seen the result has been a lot different from the rhetoric’ (PPRI, 2003). The Director General stated in the 2002-3 annual report ‘the department provides a monitoring team with almost as many senior and experienced staff as it would take to run the prison if it were in public ownership’ (PPRI, 2003). By the next report in 2006, the OIC acknowledged the poor quality of the understaffed AIMS operation, recommending that: ‘(t)he new contract must – whoever is the successful bidder – be more prescriptive about the extent and range of human inputs, and if this drives the costs up to a point nearer to public sector costs, so be it’ (OICS, 2006:iv). The government supplied AIMS with staff to develop its operating systems, provide health (eg dentists) and education services, yet only charged the contractor for some of these. The OIC Report of 2008 declared that the new contractor (Serco) had improved the performance and that, ignoring cost differences arising from the differences between prisons, after including departmental overheads the daily cost per prisoner: ‘for Acacia is $163 whereas the ‘average total cost in the public sector is around $255 per prisoner per day’ (OICS 2008:7). Although the report did not outline the nature of the overhead allocations to Acacia and the comparison of these two figures may distort these figures.

Draft Report 144 Yet the 2011 OICS report declared the Serco-managed prison well-run, claiming (as English et. al, 2008, support) that this dispelled criticisms of the private-run prisons, since while of comparable (if not better quality) than public prisons, it had lower operating costs. Again, the differences in the nature of prison facilities and functions are ignored by the method of comparison. The role of accounting is pivotal in legitimising outsourcing, because it emphasizes cost rather than quality, can usefully be deployed to make some measures of value visible while leaving others invisible, and sanitises a policy argument of its politics and ideology because of the implied objectivity and accuracy of numbers. Sources: English et al., 2010; OICS, 2006, 2008; PPRI, 2003.

Empirical studies of public sector outsourcing have largely relied on drawing comparisons based on private sector efficiency criteria. Noting the application of private sector measures of efficiency (eg., ‘net profit before interest and tax’, ‘return on assets’, ‘sales margin’) being applied in past comparative studies of the public sector, King and Pitchford (1998) made the point: Efficiency should be measured relative to the objectives that the firm is trying to achieve, If public sector managers are provided with different incentives and objectives to their private sector counterparts, then measuring public sector performance by private sector benchmarks will provide little useful information. In fact, where both private and public sector managers have similar incentives and objectives, performance differences are less obvious (King & Pitchford,1998: 314-5). As Cordella and Willcox (2010) note, the drivers of public service value creation are indeed not the drivers of private sector value creation. In democratic states, the role of the public service is to render the processes of government impartially and equitably to all citizens, faithfully adhering to the directions laid down by democratically elected officials. Private sector value creation, by contrast, entails the realisation of profit through the most efficient use of economic resources. These fundamentally different objectives require fundamentally different processes and organisational structures in order to be achieved, including different sources of staff motivation. A significant number of studies have emerged since the early 1990s that seek to measure and understand a widely observed Public Service Motivation (PSM), whereby personal emotional and psychological rewards and satisfactions arising from doing work one believes is important to society, or which supports a group one considers merits support, eg. people with disabilities, motivates high standards of performance and commitment (Perry & Wise, 1990). These ‘low-powered’ and ‘intrinsic’ sources of motivation stand in contrast with the ‘high- powered’ ‘extrinsic’ economic rewards and penalties (eg., higher pay and threats of the sack) that are the sources of motivation within private sector organisations. These studies highlight the error of assuming universal applicability of private sector management strategies, and point to situations where they are likely to have a negative impact on cost effectiveness. The introduction of high-powered rewards are shown to displace (low cost) normative sources of motivation and to induce self-interested behaviour, necessitating increased surveillance and performance monitoring in the face of rational self-serving strategies, such as ‘quality shading’ (See below) (Perry & Wise, 1990; Mintzberg, 1996; Francois, 2000).

Draft Report 145 But the champions of ‘New Public Management’ that have driven public sector ‘reform’ since the 1980s were poorly placed to appreciate these qualitative differences given their assumption that from a management perspective the private and public sectors are not dissimilar and should be managed on the same (private sector) basis (Hoque and Moll, 2001:305). This assertion fundamentally misconstrues why the public service operated as a rule-governed bureaucracy in the first place. It also explains why objections to the dismantling of the public sector, viewed by some as social vandalism, are frequently trivialised as ‘resistance to change’. With the rise of ‘managerialism’ - the importation of private sector practices into the public sector – much of the positive distinctive qualities of the public service have been eroded, blurring the differences between the two sectors, and thus diminishing the extent to which cost reductions can be achieved by outsourcing, without resort to plain exploitation of staff. Despite an absence of robust evidence of a net cost-benefit to society, outsourcing massively expanded throughout the 1990s on the assumption that private sector provision was obviously more efficient. Surprising deficiencies were revealed in the HR skills of external managers engaged in a National Health Service outsourcing exercise in the U.K. that was later reversed. In relation to the contractors industrial relations skills, a public sector HR Director remarked ‘you would have thought they would have been good at that’ (Grimshaw, et. al, 2002:494). Evidently the public sector decision makers didn’t appreciate the skill their managers had acquired over years working in the complex hospital I.R. environment (Grimshaw, et. al, 2002). Young (2007a: 319) reports similar consequences for similar reasons in a Victorian health sector outsourcing case study. Wide ranging international surveys of public sector managers have also revealed that those public sector managers engaged in the process of delivering services in this way are unconvinced it has led to improved performance, with a high proportion believing it has had a negative impact on the functioning of public service organisations (Kakabadse & Kakabadse, 2001). It is well to seek efficient ways of delivering public services, and to view the private sector as a potential source of organisational strategies from which public sector managers can learn. Nevertheless, ill considered public sector emulation of private sector practices, where crude notions of economic efficiency override fundamental standards of fair and equitable service, or undermine the intrinsic incentives that underpin conscientious public service, need to be seriously challenged (Plantinga, et at, 2008;Canton, 2005).

5.4 Potential problems with outsourcing To better understand the circumstances where outsourcing is appropriate, researchers have explored the strategic dynamics of purchaser-provider relationships inherent in the mechanics of the process. The challenge for public sector officials charged with outsourcing a service lies in the difficulty of comprehensively specifying what is to be purchased from the external provider, what price should be paid for it, and how to verify that what is purchased is delivered. As cases of outsourcing successes and failures accrue, analysis of the vexed questions of quality specification and verification of performance have become commonplace concerns in the literature, some deriving from studies of problems encountered in private sector outsourcing. A clear message is that the complexity of anticipating the transaction and other costs entailed in outsourcing a public service have proven difficult to estimate, and numerous cases have occurred where outsourcing has costed more and delivered less than public sector delivery methods (Boardman & Hewitt, 2004). Among the challenges to achieving cost effectiveness are:

Draft Report 146 Quality shading: since it is largely impossible to specify or verify performance of all aspects of a contracted service, particularly in the more subjective aspects of ‘quality’, the profit maximising service provider has an incentive to concentrate their effort into those aspects of service delivery that are specified in the contract and can be monitored, to the neglect of those that cannot. While some have argued that quality shading may be a matter of better contract specification, this ignores its persistence and the incentive for contractors to do it, given the unavoidable antagonism of economic interests between buyers and sellers.2 ‘The higher the complexity of the service characteristics under consideration, the more difficult and more costly it is to effectively monitor service delivery’ (Plantinga, et al., 2008 4). Hold up: The inability to specify every element of a service in advance, particularly where a contract may be in force over many years, leads to provisions in contracts that allow for future adjustments to service specifications and associated fees over time. As the need for these arise, the government purchaser may be at some negotiating disadvantage should the contractor demand an exorbitant price for a necessary variation, particularly if the cost of replacing them is excessive. In this way the cost of a service can significantly rise over the life of a contract (Jensen & Stonecash, 2005). Reduced potential competitors: There may be few locally established firms with the experience of delivering a service that is being outsourced, particularly if it is complex and is required to be delivered on a large scale. As contracts increase in scope and complexity, commensurate with the services being outsourced, the cost and complexity of the tender process also reduces the field of competitors, to the point that contracts may end up being let to the same handful of large, often transnational providers (eg, Boardman and Hewitt, 2004). This situation lowers the level of competition at the bid stage, and aggravates the possibility of ‘hold up’ during the course of the contract (Grimshaw et al., 2002) Asymmetrical vulnerability to loss of reputation: Governing parties are likely to be more sensitive to public perceptions of their competence, ethics, and capacity to meet public expectations, than a contracting firm that may or may not be seeking further contracting opportunities. Firms can rebrand, and individual company operators can establish new firms in other locations, with little risk of past poor performance of a contract significantly affecting them. This contributes to a power imbalance that may engender official collusion to overlook poor contract performance, lest the public become aware of it, or undermine the government’s capacity to demand performance improvements (Grimshaw et al., 2002) Illusory Risk Transfer: An important consideration in the negotiation of outsourcing contracts is how risk is to be managed. Ideally, risk is allocated to the party that can best manage it, so that the impact of poor performance is borne by the entity that had most direct responsibility for ensuring it didn’t happen. The capacity for governments to transfer risk (for an appropriate financial consideration) is cited as a positive advantage of outsourcing for governments. Dollery, et al (2008) demonstrate, however, that complex outsourcing arrangements can lead to false understandings as to where risks lay, particularly where the private sector contractor operates through a shell company that holds few assets, so that even the prospect of subsequent litigation for contractual failure is unlikely to be a meaningful sanction. In essence, the public sector is implicitly the guarantor of an outsourced service, regardless of what may be contractually agreed to, because of its statutory responsibility, and thus bares the full risk of contract failure despite a risk premium often being paid to the contractor for nominally assuming it. Reductions in transparency and accountability: Remarkably, advocates of outsourcing have argued that by virtue of the need to specify and monitor an outsourced service in greater detail than has traditionally occurred in relation to public sector provision, outsourcing leads

Draft Report 147 to greater transparency and accountability. This is contradicted by the commercial sensitivities routinely cited to justify withholding critical facts from public scrutiny, thereby undermining democratic accountability (Barton, 2006). Champions of privatisation, such as the Victorian Kennett Government, fought legal battles for years to prevent the disclosure of agreements with private sector contractors, citing commercial confidentiality. After the contracts were disclosed it emerged that though their contents were fairly innocuous, it was the government, not the contractors, that had wanted them kept secret, possibly because, according to an audit reviewer, ‘process in terms of consultation, doing studies to see whether a project would be effective, economically viable and environmentally viable and so on, those sort of things were cut short’ (ABC, 2000). For example: …when Treasurer Stockdale wished to appoint some consultants to handle the electricity privatisation, he told the purchasing board that a tendering process would be 'unnecessarily costly and time consuming and unlikely to present government with a real alternative'. That's for a $20.5-million contract that later blew out to $30.16- million. So although there was a requirement for Councils to competitively tender at all times, this didn't always apply to the Treasurer himself and his own department (ABC, 2000). International surveys of public sector managers reveal significant disillusionment with outsourcing on this point: Public service managers feel that accountability to the public has been undermined by the disruption arising from what they regard as unnecessary outsourcing of non- critical processes and activities which nevertheless still have a significant effect on the functions of the host organisation (Kakabadse & Kakabadse, 2001). Members of the public may have well established rights of redress when public services fail them, but as they are not parties to the agreements governments have with providers of outsourced services, they generally have no right to legal recourse when negatively impacted upon by poor quality service. The Administrative Review Council reported: The delivery of government services by contractors, and the consequent ‘privatising’ of the relationship between service providers and members of the public, has the potential to result in a loss of the benefits which the administrative law system provides for individuals. In turn, this may affect the efficiency and quality of government administration. Further, since a contractor’s connection with government will be governed by contract, the accountability mechanisms traditionally provided by ministerial responsibility and Parliamentary oversight may no longer be as effective (ARC, 1998). This concern has led to the establishment of complaints mechanisms of varying effectiveness, and requirements that documentation contractors produce in their provision of government services be subject to FOI obligations. Nevertheless, ‘commercial in confidence’ has remained a constant justification for non-disclosure (as discussed in Chapter 6, Box 6.7 regarding the Victorian Desalination Project). Furthermore, so long as a service provider complies with the terms of their contract, such complaints mechanisms can do little to protect the citizen in the multitude of conflicts of interest that arise between them and contracted service providers, particularly where the service provider has discretionary control over the level of resources and support a citizen receives, and where support withheld accrues as revenue to the service provider. By what means are individual citizens to understand the nature of their relationship with a service provider, if only one of the parties to the relationship holds a copy of the voluminous

Draft Report 148 contract governing their behaviour, determining the service provider’s incentives and obligations? Only rarely, and often only after lengthy FOI battles, are detailed service agreements of politically sensitive outsource arrangements released to the public un-redacted. The citizen becomes an object that the service provider is processing and managing as profitably as they can, according to undisclosed rewards and penalties written into their contracts. If it is in their power and more profitable to withhold expensive services from citizens, and to shift citizens rapidly off their books on any pretext available to them, for example, that is how citizens are treated. When topical scandals emerge of poor service standards such as to cause electoral damage, as when contracted aged care providers were revealed to be washing elderly citizens in kerosene baths, or when poor hygiene standards of schools and hospitals are exposed, contracts are reallocated, public relations consultants are hired, the public reassured that new measures are in place to ensure no repetition, and the system continues. The steady general degradation in service quality resumes, to which the public becomes steadily habituated over time. When government services are delivered by public servants who have security of tenure, and recourse to processes of appeal and review, the public is afforded considerable protection from oppressive government in that those public servants with insight and a conscience may be more prepared to oppose and publicise things governments do that are not for the public benefit compared to job-insecure and manipulable private sector workers. Employment effects. Where cost comparisons between private and public provision do show significant savings, the question of how these savings are made becomes significant. Often the transfer of a function to a private contractor produces a polarisation of income for those engaged in delivering the service, whereby the senior management positions attract higher remuneration, while lower level workers experience cuts to wages and conditions. While euphemisms for less job security, such as ‘more flexible working arrangements’ attempt to make the process seem innocuous, there is little effort to disguise the expectation among its proponents that outsourcing provides an opportunity to redraw the rates of remuneration and conditions of employment of those affected (Quiggan, 2002). Even when it is noted to have occurred, cuts to working conditions are seldom openly acknowledged as the way superior ‘efficiency’ has been achieved. With the outsourcing of government services, governments are now setting the pace in driving down, rather than lifting the standard of living of working people. Outsourcing requires the combined cost of (a) the worker’s remuneration, (b) the non-labour operational and financing costs and (c) the entrepreneur’s profit to sum to something less than what public sector provision would cost, and in most cases, less than what other entrepreneurs believed they could do it for. While introducing new technology and streamlined processes may deliver productivity gain, driving the workforce harder through increased job insecurity is a seldom overlooked strategy. The consequences of job insecurity for worker health and well being has been extensively documented around the world. Quinlan (2007) provides a very comprehensive survey of the literature on this point, summarising the findings of dozens of studies (Abridged from Quinlan, 2007:385-387): . contingent work arrangements (like temporary agency work, subcontracting and home-based work) are associated with significant adverse effects on worker safety, health and mental-wellbeing. . More recent research has confirmed these findings as well as pointing to other effects such as a connection between job insecurity and common infections and health complaints.

Draft Report 149 . the combination of job strain (the imbalance between demands and control at work) and job insecurity – both characteristic effects of downsizing – resulted in markedly higher odds of mental and physical health problems. . Further, studies comparing the health effects of job insecurity to the job insecurity effects of poor health have found the former to be by far the dominant effect. . the serious long-term consequences of job insecurity require significant policy interventions, including reconsidering the social benefit of increasingly flexible jobs and labour market structures. . a recent longitudinal Australian study based on panel data from two surveys (each containing responses from over 7,000 households and 13,000 individuals) found a significant relationship between job insecurity and mental health outcomes. . Some studies have found the anxiety experienced by workers facing the prospect of job loss is at the same level of those actually losing their jobs. . highly committed workers faced with restructuring/job insecurity are more likely to report distress and negative attitudes. . Researchers have also begun to look more closely at whether there is an association between job insecurity and suicide. . Downsizing can also produce stress by affecting the level of collaboration and other relationships between different professions or groups in the workplace. . Studies have found that downsizing and job insecurity can lead to more work/family conflict and burnout, including crossover burnout. . threats to job security and an over-riding climate of cost control encouraged presenteeism or excessive and often unpaid hours at work and failure to take recreation leave (with a consequent risk of premature burnout) and discouraged workers from taking sickness absence, joining health promotion, reporting OHS problems or taking part in OHS committees. . taking tasks or work pressures home can also adversely affect work/non-work balance. A survey undertaken by the Australian Bureau of Statistics found that the proportion of persons taking at least some work home increased from 20 to 24% between 2000 and 2005 and over 36% stated they did this to catch up on tasks not completed at the office . the adverse health effects of poor quality jobs, entailing high insecurity and job strain could match those of unemployment . staff cuts and volatility may curb the capacity of homecare providers or those assisting informal carers to engage in discursive exchanges that are critical to assessing risks to all concerned . the pessimism and negativity associated with downsizing led not only to more mistakes by healthcare workers but also a tendency to cover them up The savings appearing on state government balance sheets as a consequence of outsourcing, are matched by these increased physical, mental and emotional costs that outsourcing imposes on the lives of working people, their families and clients. It is only by making these costs invisible in their accounting of the cost-benefit of outsourcing, that governments have justified their embrace of it.

Draft Report 150 5.5 What has been outsourced by state governments? Outsourcing commenced in earnest in the late 1980s and accelerated from the 1990s and has largely been a bi-partisan policy. Outsourcing began with the outsourcing of non-core functions in the 1980s as a way of shrinking the public sector and reducing budget deficits (Harland et al., 2005; Teicher, Van Gramberg and Holland, 2000). As explained by the Victorian Government: The recognition that there may be a number of potential providers of a service gives Government greater choice, enabling it to secure more cost effective outcomes (Budget Paper 2, 1998: 158). The 1990s brought widespread adoption of outsourcing at both the federal and state levels of government. Over time, state governments issued policies on outsourcing. The Victorian competitive tendering policy issued in 1992 gave preference to outsourcing over in-house provision by favouring outsourcing if the private sector firm could provide an equivalent service at a competitive price. In 1994 local governments were required to use competitive tendering for 30 per cent of expenditure and 50 per cent by 1996-97 (Domberger and Hall, 1996). The South Australian Government showed an ideological commitment to private sector delivery when it introduced competitive tendering guidelines in 1992 by stating that the public sector should ‘only directly provide those services for which markets do not exist or cannot be created’ (Figgis & Griffith, 1997: 80). Western Australia and NSW adopted competitive tendering policies in 1993. The NSW government principles for outsourcing required all services to be considered for market testing and outsourcing. The Carr Government continued the policy when it was elected in 1995 but opened up the market testing process to in-house bids. In 1997 the government included preference for companies that offered comparable employment to displaced public sector employees. The competitive neutrality principles agreed between the Commonwealth and state governments at COAG in 1995 forced government agencies engaging in significant commercial activities to do so without obtaining any net competitive advantages over private sector competitors. At the national level, the incoming Howard Government established a National Commission of Audit in 1996 which recommended a greater emphasis on effectiveness and efficiency in the delivery of public services and a separation of policy formation and service delivery within government departments (MacDermott, 2008). Outsourcing has encompassed a wide range of functions that were previously delivered by public servants including activities related to the functioning of agencies and services delivered to clients. These have included: communications and information technology (CIT); administrative services such as management of car fleets; property services; building maintenance; cleaning; gardening; legal services; laundry services; catering; library services; prisons; recreation services; accounting services; road construction and maintenance; disability services; child protection services; mental health; drug and alcohol; aged care. housing services; biosecurity; car parks; medical imaging; pathology; pharmacy; allied health; court reporting; prisoner transport; public transport; technical and further education and more (Domberger and Hall, 1996; Figgis & Griffith, 1997; Victorian Auditor-General, 2010). A comprehensive analysis of all outsourcing by state governments is outside the scope of this research. This section reviews outsourcing by state governments in Australia to provide a

Draft Report 151 flavour of the types of services that have been transferred, in whole or in part, from the public sector to the private sector.

5.5.1 Information and Communications Technology (ICT) One of the major functions that has been outsourced, both in the private and public sector, is Information and Communications Technology (ICT). Outsourcing ICT functions provides organisations with an opportunity to utilise the specialist skills and knowledge of contractors in the development and maintenance of ICT systems. The other major benefit relates to expected cost savings. However, Department of Communications, Information Technology and the Arts (2007) points out that there are also potential risks with outsourcing that need to be managed. A fundamental risk is a reduction in the security of data if appropriate security standards are not implemented. Also, the organisation’s reputation and business operations are at risk from any system failure. Furthermore, the loss of expert internal staff may make it difficult to monitor service delivery. Outsourcing of ICT functions is widespread in the public sector in Australia at both the Commonwealth and state level. Thomsett International (2010) report that estimates of public sector outsourcing of ICT are around $7 billion for the Commonwealth Government, and around $500 million for both South Australia and Victoria. According to Domberger and Hall (1996), South Australia was an early adopted of outsourcing for ICT, using a tender for provision of IT services for all govt agencies. Kakabadse & Kakabadse (2001) stated that the Australian Government outsourced most IT services by 2000 but some objectives were not achieved since investigations by the Auditor- General found that 3 contracts worth $732 million did not achieve the projected savings, cost three times as much as the original budget and were delivered 2 years late. Government have also considered or engaged in the offshoring work. For example, Aurora Energy in Tasmania announced in January 2012 that it is investigating outsourcing IT jobs to HCL in India which will affect 5 Aurora Energy staff and 35 contractors in Hobart (Killick, 2012c). The remainder of this section will provide examples of some of the risks involved in outsourcing coming to fruition in Australian states. The Western Australian public sector spends over $600 million annually for ICT goods and services including temporary employment of contractors (Western Australian Auditor General, 2011). Box 5.2 details recent reviews of ICT contracts in Western Australia.

Box 5.2 ICT outsourcing in Western Australia The Western Australian Auditor General conducted a review of ICT procurement in the Department of Health and the Department of Training and Workforce Development. The Department of Health relied on contractors and preferred to buy whole ICT systems from external suppliers and rely on them to develop and service the systems. The Auditor General found that the Department of Health performed poorly, having committed to a system in 2009 that will not be operational until 2014 in the metropolitan area and 2018 in regional areas. Governance arrangements were found to be unstable and poorly defined. The Department failed to promote open and effective competition. The Department did not test the market, does not have a formal contract, inadequately monitored contract delivery and performance, and some contracts lacked performance criteria. Recordkeeping was inadequate since the Department ‘could not provide adequate, and in some cases any, records for key milestones and decisions. This reduced transparency and accountability’ (Western Australian Auditor General, 2010: 7).

Draft Report 152 In a subsequent review of ICT procurement in six agencies in Western Australian the Auditor General found that only one agency managed all aspects of procurement well (Auditor General of Western Australia, 2011). Deficiencies in the other agencies included: lack of comprehensive ICT plans; failure to develop business cases; establish contract management plans; seek appropriate approvals; lack of competitive tendering for some contract arrangements; potential conflicts of interest were not effectively recognised in 3 cases. One agency: ‘…could not demonstrate that the procurement process for a contract originally valued at $380 000 included competitive tendering. Subsequent variations to the scope of this contract increased total payments to over $3 million’ (Auditor General of Western Australia, 2011: 6). ‘…obtained ministerial approval for a $38 million contract arrangement as required, then reduced the scope of this work to $21 million. It subsequently entered into further arrangements, including some work beyond the original scope, valued at over $30 million and did not obtain ministerial approval’ (Auditor General of Western Australia, 2011: 6).

Source: Western Australian Auditor General, 2010, 2011

A review of the outsourcing of IT functions by five NSW public sector agencies concluded that there was no evidence that the agencies realised the objectives and were ‘not able to demonstrate that the actual costs of outsourcing matched the expected costs (AONSW, 2002). Box 5.3 provides a specific example of inadequate contract management.

Box 5.3 Outsourcing of IT contracts by Roads and Maritime Services (RMS) (previously the Roads and Traffic Authority) The NSW Auditor-General investigated complaints of waste and mismanagement in RMS’ management of IT contracts that involved total expenditure of over $28 million per annum. 1. Rebates were not collected for the contractor failing to meet performance levels. Investigations revealed that there was no process for calculating, reporting or payments of the rebates so that ‘it left the contractor responsible for judging its own performance…RTA had not previously addressed this issue and had not required the contractor to provide all the relevant technical information to assess its rebate entitlements’ (p. 36). 2. RTA paid for services that were not provided. It was alleged that a contractor continued to submit monthly invoices which were paid by RTA for a period of two years after the expiration of the contract. The RTA responded that the contract had been extended but was unable to provide supporting documentation or advise when the contract finished. The two contracts involved: (a) provision of services for a fixed price and additional services; and (b) additional services with separately negotiated scope and price. The RTA was locked into using these contractors for the additional services. In 2010-11 expenditure on additional services was $5.0 million or 22.5 per cent for one contract and $4.0 million or nearly 63 per cent for the other. Source: NSW Auditor-General, 2012

Draft Report 153 Similarly, an investigation by the Ombudsman Victoria (2009) found breaches of procurement policy and inadequate record-keeping as outlined in Box 5.4

Box 5.4 Contracting of information technology services by Victoria Police The Ombudsman undertook an own motion investigation of operation of IT tenders, procurement, contact management and governance issues within Victoria Police in 2009. The investigation was launched after complaints were lodged with the Ombudsman. Previous investigations (external reviews, internal audits and criminal investigations) had concluded that: (1) expenditure commitments by the Victoria Police Business Information and Technology Services Department (BITS) exceeded funding by $39 million over three years; (2) there had been breaches of financial delegations and procurement guidelines; and (3) BITS management had accepted offers of hospitality and entertainment from IT vendors. The Ombudsman’s findings included very serious breaches: 1. Inadequate record-keeping including documents relating to multi-million dollar contracts that Victoria Police had not kept or could not locate. 2. Disregard for procurement and contract management processes. Internal audits found 56 breaches of procurement policy and one instance included awarding a contract valued at $27.2 million that was $15 million above the approved expenditure. Source: Ombudsman Victoria (2009) Own motion investigation into the tendering and contracting of information and technology services within Victoria Police, Ombudsman Victoria, Melbourne.

5.5.2 Health There have been two major mechanisms for the transfer of the delivery of health services to the private sector; outright outsourcing of services and underinvestment in the public health system that has resulted in the use of private health facilities for public patients. The 1998- 2003 Australian Health Care Agreements (AHCA) provision that public hospital services may be provided in “any appropriate environment” facilitated treatment of 98,527 public patients in private hospitals in 2002-03 (AIHW, 2004). Victorian public patients are transferred to private hospitals for intensive and coronary care when beds are unavailable in the public system (Department of Human Services, 1998). In April 2005 the NSW government announced that 2,591 of 4,500 patients waiting longer than one year for elective surgery would be treated as public patients in private hospitals. In addition, expenditure on private hospital treatment for veterans increased from 16.7 per cent of total Department of Veterans Affairs hospital expenditure in 1992-93 to 32.4 per cent in 1996-97 (Sperling and Parslow, 1999: 88), due to the increase in the number of private hospitals providing services to DVA patients, from 192 in 1991-92 to 275 in 1996-97 (Productivity Commission, 1999: 22). NSW introduced competitive tendering for health services from 1988, followed by Victoria and Western Australia in 1994 and South Australia in 1995 (Industry Commission, 1998). State governments outsourced provision of non-core services such as cleaning, maintenance, gardening, food services, car parks and engineering (Young, 2007a). More recently, competitive tendering has been introduced into core services. Individual services that have been contracted to the private sector include: some maternity services,

Draft Report 154 ophthalmology, medical imaging, and pathology Tasmania; urology services in Illawarra NSW; and public day surgery, step-down care and cardiac catheterisation in Flinders Medical Centre, South Australia (Forwood, 1997). Ambulance communications have also been outsourced (Young, 2007a). The use of PPPs has resulted in most hospital services for the affected hospitals being outsourced to the private sector partner as is the case with the new Fiona Stanley Hospital in Perth. In the past WA Health has only contracted out single services in the hospital system the contract with Serco Australia is to deliver 28 services at the Fiona Stanley Hospital but does not include clinical services. The benefits are expected to be financial savings and innovation. The services outsourced include: audio-visual; cleaning; electronic records management; energy and utilities; estate; external transport; grounds maintenance; health records management and clinical coding; help desk and communications; human resource management; information communications technology (ICT); internal logistics (orderlies etc); linen; managed equipment service; management and integration; patient catering; patient entertainment; pest control; pre-operational; property management; reception; safety and incident management; scheduling and billing; sterilisation; supplies management; transitional (pre commencement); vehicle and traffic management; and waste management. The contract is worth up to $4.3 billion over 20 years (Department of Health, 2011).

5.5.3 Prisons, justice and security services In the corrective services sector there has been extensive outsourcing that has included operation of prisons, court services and prisoner transport. By the 1990s a number of prisons in Australia were privately operated, either through PPPs or outsourcing processes. These included Junee Corrections Centre in NSW; the Metropolitan Women’s Correctional Centre, Fulham Corrections Centre and the Men’s Metropolitan Prison in Victoria; Borallon and Arthur Gorrie in Queensland and Mt Gambier in Tasmania. (SCRGSP, 1997). Various reasons were given for the decision to outsource these services: . NSW: the growth in prisoner numbers, the desire to achieve workplace and industrial relations reform in the public sector, and the desire to reduce budget outlays through efficiency driven by competition. The Department of Corrective Services also contracts non-core services such as payroll, catering, legal services, IT, maintenance, and management of vehicles. . Victoria: to reduce ongoing cost by increased efficiency; improve the quality of services to prisoners; and establish competition. . Queensland’s motivation was to reduce costs and to leverages changes in industrial relations and work practices in public prisons. . South Australia sought to introduce innovation into prison management and thereby improve practices in public prisons, reduce budget outlays and reduce public debt through lower cost private management (SCRGSP, 1997). Court Security and Custodial Services are contracted out in Western Australia (Department of Corrective Services, 2011). Major under-performance by the previous contractor G4S Custodial Services (see Chapter 7 for further information) resulted in more stringent provisions for the new contract with Serco from June 2011. The emphasis was on; . Duty of care especially for people in custody;

Draft Report 155 . Greater requirements for training and qualifications - every officer employed to have a minimum of a Certificate III by the end of the first year of the Contract; and . A higher level of monitoring by the Department through the employment of 3 additional monitoring officers. In 2012 Serco was also awarded a five year contract to operate the Murdoch Rangeview Remand Centre in Western Australia (Holben, 2012). In Queensland, NGOs deliver the Offender Reintegration Support Service and Ozcare is funded to deliver the Supported Parole Program .

Box 5.5 The GEO Group Australia (GEO) operation of the Melbourne Custody Centre GEO has operated the Melbourne Custody Centre (MCC) on behalf of Victoria Police since 1998. The Ombudsman Victoria (2007) conducted an Investigation into the use of excessive force at MCC in response to a complaint by a prisoner regarding his treatment by GEO staff. The Ombudsman identified systemic issues at MCC including the fact that prisoners are not permitted to make phone calls, were held for up to 28 days despite the fact that there is no fresh air or daylight. In relation to the specific allegation of assault by GEO staff, the Ombudsman found that excessive force was used and was unwarranted. He also noted that it constituted a breach of the Charter of Human Rights and Responsibilities Act 2006. Police officers interviewed in the course of the investigations stated that there was no indication that the prisoner attacked MCC staff. They further stated that the actions of MCC officers was not consistent with Victoria Police standards or operating procedures, and that actions by MCC staff were indicative of poor training and a lack of understanding of proper procedures. Of particular concern was the lack of effective oversight of MCC staff by GEO or monitoring of contract performance by Victoria Police. ‘It would appear that the MCC operates with only limited oversight by both GEO and Victoria Police. I am of the opinion that the system in place to monitor incidents is unsatisfactory. The staff member from Fulham Correctional Centre charged with this task is not qualified for the complexities of the role and is months behind in his reviews. He is also without authority and he simply reports any concerns back to MCC management.’ ‘Victoria Police has a role in overseeing Incident Reporting but they are largely reliant on the unsatisfactory internal processes of GEO to ensure the veracity of the reporting system and identify matters requiring further action.’ Source: Ombudsman Victoria (2007) Investigation into the use of excessive force at the Melbourne Custody Centre, Ombudsman Victoria, Melbourne.

State Governments expenditure on these services is significant. The cost of custody transport services, court custody and court security in Western Australia was almost $30 million in 2010-11 (Department of Corrective Services, 2011). In 2010-11, supplies and services related to custodial operations in Queensland totalled $170,213,000 (Department of Community Safety, 2011). The GEO Group receives around $80 million per annum for operating the Junee and Parklea Correctional Centres (Department of Attorney General and Justice, 2011). The Victorian Government outsourced Infringement Management and Enforcement Services to Tenix in 2007. The contract was worth around a quarter of a million dollars in 2009-10

Draft Report 156 (Department of Justice, 2010). In the same year, Serco received over $200,000 for Traffic Camera Services (Department of Justice, 2010). Other security services that have been outsourced include security patrols on public transport. This has not always been a successful option as shown by the outsourcing of Cityrail patrols in NSW show (Box 5.6).

Box 5.6 NSW Rail Security: Establish, downsize, privatise, re-establish, downsize… The saga of how to provide security to passengers on NSW rail services begins with the establishment of the Railways Investigation Branch in the 1930s, which evolved into a State Rail Authority Transport Investigation Branch, whose Transit Officers were special constables who undertook the standard training of NSW police (RBTU, 2011). In 1988, these 300 positions were transferred from the State Rail Authority Transport Investigation Branch to NSW Police as Transit Police, special duties police whose role was to reduce the level of crime and violence on public transport and to increase passenger confidence in its use, thereby increasing patronage and revenue (RBTU, 2011). Following this move there appears to have been a substantial increase in violence and theft during the 1990s. The problem appears that police in these positions were subsumed into normal police operations with railway security just one of their responsibilities. In August 2002, for example, the NSW Audit Office reported that the Transit Police were operating with 196 officers. NSW Police informed the Auditor General that Transit Police activities were supplemented by general duties police patrolling and responding to incidents on trains and stations, though could not provide any data on the extent of this additional coverage (AONSW, 2003). In 1998, amid rising public apprehension of the security of rail travel, more on stations than on trains, Chubb Security Australia Pty Ltd were contracted to supply security guards to patrol CityRail trains after 7.00 pm until services ceased at around 3.00 am. The contract entailed 214 two-person teams operating Monday to Friday while 119 teams operated on weekends. An additional 35 teams operated between 2.00 pm and 7.00 pm weekdays patrolling high risk services. Security guards on trains cost $23.9 million in 2001-02 representing around 50 per cent of CityRail’s annual budget for security initiatives. The guards had no authority to issue infringements notice or make arrests (AONSW, 2003). Prior to the NSW Auditor General handing down a report on the effectiveness of rail security, the SMH reported in Feb 2003 on internal documents released under FOI that indicated: 1. Security guards patrolling CityRail trains at night were absent from their posts 239 times in a five-week period, according to confidential internal reports. 2. With the NSW Auditor-General due to release his own report this morning into the effectiveness of CityRail security on its trains and platforms, the documents show that a company contracted to provide security guards broke operating rules 340 times between the last week of August and the end of September… 3. In 45 cases, trains were left unpatrolled because staff could not be found to cover the shift, or a two-person team was stood down because one of the pair was not at work… 4. There were failures to properly patrol the train. This either meant not moving around enough or not using the correct greeting when entering a carriage. On up to 67 nights guards were detected failing in this part of their job.

Draft Report 157 5. A CityRail spokeswoman said of 340 breaches, nine were considered serious, and 13 had been dismissed after investigation (Kerr, 2003). Although Minister Carl Scully told the SMH that the Chubb Security guards had been a success, the 43% reduction in violent crime he cited as evidence may have also been consequent on the introduction of security cameras on stations. The emerging view was that the contracted guards, lacking the authority to issue infringements, had contributed little to addressing crime. In 2002, a Transit Officer position was re-introduced, with powers to issue infringement notices and other functions (not special constable functions) including a 6 month training program. The force was built to around 600 supplemented with 28 State Transit Authority Revenue Protection Officers. In February 2012 the O’Farrell Government announced that police will again take over the Transit police function, again disbanding the dedicated Transit Police function, saying that by 2014 a Police Transport Command will have a force of 610 officers. This means hiring another 309 police officers to add to the 301 already in the commuter crime unit who will transfer to the new command. RailCorp's current transit officer division of 600 will be reduced to 150 revenue protection officers. Premier O’Farrell explained "Transit officers will continue to do their fare evasion and other minor compliance work, but their activities will be extended from the rail system across the bus and ferry system as well," (Saulwick & Patty, 2012). Source: AONSW, 2003; Kerr, 2003; RTBU, 2011; Saulwick and Patty, 2012

5.5.4 Vocational education and training (VET) Queensland, NSW, Victoria, South Australia, Tasmania, and the ACT established competitive tendering arrangements for training programs in 1996 and 1997 and the public sector share of VET has declined since that time. The situation in Victoria is more advanced than in other jurisdictions. The Labor Government introduce demand-driven system for vocational education and training: The Victorian training guarantee gives an as-of-right position for somebody who wishes to undertake training subject to certain eligibility criteria. In that way anybody who meets those eligibility criteria and seeks a training position in Victoria is guaranteed it. As I said, that is a system that I have inherited. As population grows and demand for training increases, that is accommodated with that uncapped, demand- driven funding system (testimony of Mr P. Hall, Minister for Higher Education and Skills to the Public Accounts and Estimates Committee, 2011: 4) As a result of the reforms the non-TAFE registered training organisation (RTO) share of funding increased from 14 per cent in 2008 to 36 per cent in 2011. Box 5.7 provides some insight into the risks of outsourcing training.

Draft Report 158

Box 5.7 Potential downside of the introduction of contestability for government VET funding Claims that two RTOs were misusing Government VET funding were reported in The Age in December 2011. The allegations included: 1. The Opposition skills spokesperson Steve Herbert alleged that the Australian National Institute of Business and Technology offered Narre Warren Fire Brigade members free training worth $3500 and a donation to the Brigade for each enrolment. The company denied the allegation, saying that students were charged a tuition fee of $190 and no donation was made to the Brigade. Skills Minister, Peter Hall confirmed that the company was one of four companies being investigated by Skills Victoria (subsequently renamed the Higher Education and Skills Group). 2. The Vocational Training Group was also being investigated over allegations that it offered sports clubs $1000 for members who participated in an outdoor education course and that each participant also received a $500 “scholarship”. Source: Chadwick (2011)

In relation to developments in Victoria, the NSW Minister for Education said: I am not sure that is the outcome we would want from a training system, that we end up seeing a lot more people being training in professions where there is not necessarily a skills shortage. The other thing is that it has seen a couple of TAFE education institutes in Victoria threatened in terms of their viability. Those are regional TAFE facilities, and as a regionally based Member of Parliament……that is certainly something I would not like to see happen in New South Wales (testimony of Mr Adrian Piccoli, Minister for Education, to the General Purpose Standing Committee No. 2, 2011a: 22-23) The results of full contestability provide lessons for other jurisdictions. This experience has demonstrated that allowing the market to decide on the types of courses that are run can have extremely detrimental impacts on the wider economy and precludes any rational approach to skill formation to meet the needs of business and students. Moreover, there are questions relating to the potential for fraudulent activities that are suggested by the newspaper report in Box 5.7. Of particular concern is the possible decline in the quality of services, especially in the provision of additional supports for students with disabilities. These supports have been a feature of state run TAFE systems but are generally not available through private sector RTOs. Increased competition will make these addition services more difficult for public training institutions to provide despite the fact that they are essential for success for some students and the achievement of wider government objectives such as social inclusion.

5.5.5 Other services Child protection and family services are extensively outsourced to NGOs in Australia. These services are predominantly provided by not-for-profit organisations and include OOHC, residential care, early intervention and family services designed to prevent children and families entering the statutory child protection system. For example Victoria funds more than 40 NGOs that employ 1,200 staff to support OOHC placements including residential

Draft Report 159 care (Protecting Victoria’s Vulnerable Children Inquiry, 2012). OOHC services include the recruitment and training of carers, placement of children removed from their families, and, in some cases, case management. In NSW responsibility for all OOHC services is being transferred to NGOs over the next five years or so. The expansion of early intervention services in all states in recent years has resulted in substantial growth for NGOs who have assumed responsibility for the majority of these services. For example, the new Early Intervention and Placement Prevention (EIPP) Program in NSW provided new funding of $11.2 million for 117 service providers through a competitive tendering process (FACS, 2011) EIPP will have an annual budget of $64.2 million. In some states residential care has largely been outsourced while, in others, it is provided by both the public sector and NGOs. In South Australia the latter situation is evident. In 2009-10 Families SA had seven residential care units and 20 transitional accommodation houses and there were 15 more residences operated by NGOs (Guardian for Children and Young People, 2010). NGO delivery of disability services is also widespread as shown in the following section. Since March 2011 all disability services in Tasmania are delivered by NGOs (SCRGSP, 2012). Group homes for people with disabilities are provided by both the public and private sector. In NSW at the turn of the century the Department of Community Services operated 259 groups homes while NGOs operated 344 (AONSW, 2000). In addition community services, ranging from assistance in the home for the elderly to the operation of emergency relief funds, are predominantly provided by NGO. Emergency relief assistance to people in crisis situations is provided by around 700 community organisations at 1,340 locations throughout Australia (ACOSS, 2011). In South Australia Community Recovery Centres are being transferred to NGOs reducing departmental expenditure by over $2 million in 2012-13. Outsourcing has been common for road maintenance. The rationale for outsourcing is that the private sector if more efficient which will deliver substantial savings and the risk associated with maintaining roads is transferred to the private sector. Western Australia contracted out maintenance of Main Roads between 1999 and 2002. As shown in Box 5.8 the expected benefits of outsourcing were not realised. The cost of maintenance was far higher than the contract price, the roads deteriorated due to insufficient maintenance as a consequence of incomplete contracts. Moreover, the risks were not transferred to the private sector. Of considerable concern is the fact that the task of remedying the situation is complicated by the fact that the government has also lost control over information on the extent of maintenance and the condition of roads.

Box 5.8 Outsourcing of road maintenance in Western Australia Maintenance of Main Roads in Western Australia was outsourced in the period 1999 to 2002 through eight contracts that lasted 10 years. The outsourcing was designed to achieve significant cost savings while maintaining the standard of roads. A report into the outcomes of maintenance of the State Road Network under the outsourcing model was completed by the Western Australian Auditor General (2009) in 2009. The findings included: * The condition of the road network has deteriorated since the maintenance was contracted out. Planned maintenance has not been adequate as evidenced by the fact that

Draft Report 160 it declined over the past 10 years – resurfacing by 30 per cent and rebuilding by 80 per cent. The estimated cost of eliminating existing overdue maintenance may exceed $800 million. * The contract costs have increased. Expenditure under the 10 year contracts is likely to be $467 million (59 per cent) greater than estimated in 1999. * Addressing the overdue planned maintenance will be expensive and effectively targeting any restoration will be difficult for Main Roads due to a lack of some key information about the condition of the road network. Such information is essential for deciding where, when and what type of maintenance is needed to ensure optimal cost effectiveness. * Planned maintenance has declined, mainly because the road maintenance contracts did not adequately specify road condition measures that would deliver the necessary planned maintenance. * Responsibility for any deterioration in the road network was not effectively transferred to the contractors; there is a risk the state will bear the cost of any work to restore the network to its previous condition. Source: Western Australian Auditor General (2009)

In NSW road maintenance is undertaken by Roads and Traffic Authority staff, contracts with councils in rural areas, a long-term contract in northern Sydney with Downer EDI and other contracts. In Tasmania, the Retirement Benefits Fund (RBF) manages superannuation for public servants. In early 2011 the RBF announced that 85 of a total of 190 jobs would be outsourced to Mercer (Australia) Pty Ltd. Around half of the affected staff were to receive redundancy payments, while the remainder were contract staff. The outsourcing of maintenance of public housing has also been outsourced providing high-value contracts to the private sector. An example is the letting of contracts worth $200 million to Transfield have been criticised due to allegations that claims were submitted for that work that was not carried out (CPSU/CSA, 2012).

5.6 The extent of outsourcing Estimating the extent of outsourcing presents insurmountable difficulties for researchers external to governments in that available data sources are incomplete, descriptions of contracts are not sufficient to interpret what is being purchased, they are not classified in ways that enable new and traditional procurement activities to be distinguished, nor can they be related to the areas of public sector provision they displace. Some attempts to provide meaningful data were undertaken in the 1990s, but were not maintained. Contracting by Victorian government departments (excluding service agreements with the Department of Human Services) rose from $650 million in 1995-96 to $840 million in 1996-97 and almost $1 billion in 1998-99 (1999-2000 Budget). The contracts were evenly split between services to the community and services provided to agencies and over 90 per cent were with the private sector. By 2011-12, general government expenditure classified as “other operating expenses” totalled $16.3 billion or up to 56 per cent of expenditure by individual departments (Public Accounts and Estimates Committee, 2011). The Committee noted that:

Draft Report 161 The budget papers provide relatively little information about what this expenditure consists of, other than to identify that it is mostly the purchase of supplies, consumables and services. The Committee considers that this category should be broken down in more detail in future budget papers, annual financial reports for the State and departmental annual reports (Public Accounts and Estimates Committee, 2011: 170). Surveys of the contracting of services by NSW Treasury found the annual value of contracts (not including consultancies, public works and contracts worth less than $50,000) was $540 million in 1993, $1.07 billion in 1994 and $1.48 billion in 1995 (Domberger and Hall, 1996; Figgis & Griffith, 1997). Around 80 per cent of contracts were in the areas of health and welfare ($547 million), transport ($352 million), property ($255 million), training and education ($197 million), and IT ($85 million). The 1997 survey of 62 public sector government agencies, focused on contracts over $50,000 or more for services, excluding contracts for capital works, procurement of goods and materials, consultancies, employment and grant allocations. It reported 23,382 contracts for 1996-7, of which 35 per cent were for building and property services. Contracts totalled $2,73 billion with $1,52 billion spent that year. Agencies reported 69 per cent of contracted expenditure and 49 per cent of the number of contracts were in core areas of their organisation, with tendering accounting for 63 per cent of expenditure and 32 per cent of the number of contracts. 69 per cent of contracts were with the private sector, 18 per cent with other government agencies, and 13 per cent with in-house teams. The survey was conducted annually from 1993, and required each department to classify the contracts they were managing according to their nature. The survey appears to have been discontinued after 1998 (CTC, 1998). By way of rough comparison, The NSW government commenced 3502 contracts in 2011 alone valued at $7,266 billion, including 1097 contracts for ‘management and business professionals and administrative services’ valued at $470 million and 746 contracts ‘public sector utilities and public sector related services’ valued at $2080 million (NSW e-Tender ‘contract award notices’). These figures do not convey much meaningful information, given the lack of specificity of descriptions. If the NSW system is comparable to the Victorian system, it is likely that many contracts are omitted. In 2010, the Victorian Auditor General reported on departmental compliance with the direction to publish their contracts, summarising: Collectively across all 11 departments, about 1 900 private sector contracts valued at around $31 billion are disclosed on the CPS. As at 1 January 2010, six departments had not disclosed on the CPS the text of 43 of 144 contracts valued at over $10 million, as required by the disclosure policies. The total value of these contracts was around $3 billion, which is 10 per cent of the total value of all contracts on the CPS. (Victorian Auditor-General, 2010b: viii) Without governments taking the initiative to provide a meaningful analysis of what has been contracted out, it is not possible for any accurate picture to be developed. While lists of contract titles and estimated and actual values are provided in various formats on government tender websites, it is not possible to determine whether they constitute an outsourced service, as such, merely a continuation of past procurement practices, or whether published data is complete.

5.6.1 Western Australia In Western Australia outsourcing contracts totalled $365 million (Domberger and Hall, 1996). The government publishes details of government purchasing in an annual publication,

Draft Report 162 Who Buys What and How. In 2009-10 contracts worth $5.09 billion were created for tenders for goods, services and works with a total of 4,367 contracts and 4,980 suppliers (Government of Western Australia, 2010). Table 5.1 shows the cost of services provided by 10 agencies in Western Australia for human services for the period 2009-10 to 2012-13 and the NGO share. Table 5.1 Cost of services and outsourced share, 2009-10 to 2012-13 Payments to Agency Total Cost NGOs NGO share $m $m % Department for Child Protection 1573 593 37.7 Department for Communities a 209 84 40.4 Department of Health b 22194 3107 14.0 Education agencies 18491 1700 9.2 Department of Corrective Services 2396 225 9.4 Housing authority 4232 732 17.3 Department of Culture and Arts 556 145 26.1 Department of Sport and Recreation 255 148 58.0 Disability Service Commission 2169 1475 68.0 Department of Indigenous Affairs 124 10 7.7 Total selected agencies 52200 8218 15.7 Selected agencies (% of total GG) 61 Notes: a Net of Redress WA and Seniors' Rebates b Includes grants to non public schools under the State Government's discretion, but excludes grants to non public schools passed on from the Commonwealth Source: Economic Audit Committee, 2009. The Auditor-General (2011) examined procurement practices of agencies including adherence to the principle public reporting of all awarded procurement contracts valued at over $20,000. The investigation revealed that three agencies consistently reported publicly on contracts over $20,000 but four did not which reduced transparency and suggests that data on outsourcing is understated (Auditor General Western Australia, 2011).

5.7 Outsourcing to the not for profit sector Over the past few decades there has been a fundamental shift in the operation of sections of the NFP sector. In the postwar period government services were predominantly delivered by the public sector (with some exceptions where delivery entailed a mixture of public and NGO provision, such as aged care). The NFP sector typically provided services where needs were not being met or not being met adequately by the public sector or the for-profit private sector. While some programs were self-funded through donations and the like, others were funded by direct grants from governments in recognition that the program was socially valuable. As governments sought to increase competitiveness in service delivery and constrain expenditure they increasingly sought to change the relationship with the sector to provide funding for services identified by the government, funded by the government and delivered by NFPs on terms dictated by the government. Within this environment NFPs were motivated to engage in competitive tendering to obtain funding and, more and more, adopted the role and ethos of social entrepreneurship which has been defined as:

Draft Report 163 …any business venture created for a social purpose–mitigating/reducing a social problem or a market failure–and to generate social value while operating with the financial discipline, innovation and determination of a private sector business (Alter, 2006: 5). As Cook et al (2008: 84) point out: The development of for-profit activities by the non-profit sector has blurred the division between the private and third sectors. While the transformation to social “enterprises” through more market based activities enhanced financial resources (surpluses or profits) for NFPs that could be utilised for other activities, significant dangers were introduced such as the danger that organisations may prioritise the bottom line, lose autonomy and stray from their original mission (for a more extensive discussion of these issues see, (Cook et al, 2008). The tension between delivering quality services to the public, particularly vulnerable groups, and acting as a business enterprise is further explored in Section 6.8.2.

5.7.1 The contribution of the NFP sector The NFP sector makes a significant contribution to the Australian economy. In 2006-07 the sector consisted of 41,008 organisations that generated gross value added of $41 billion, employed 889,919 workers and had 2,182,476 volunteers. Of the employees, 41.4 per cent were employed on a full-time permanent basis, 24.3 per cent were permanent part-time employees and 24.3 per cent were employed on a casual basis (ABS, 2009). Around one quarter employees worked in social services and a further quarter worked in education and research. Labour costs accounted for 46.8 per cent of total expenditure. Total government funding to the NFP sector has increased dramatically in recent years; from $10.1 billion in 1999-200 to $25.5 billion or 33.5 per cent of total income in 2006-07 (ABS, 2009). The Productivity Commission (2010) reported ABS estimates that social services NFPs relied on governments for 55 per cent of income, while ACOSS put the figure at 75 per cent of total funding for community and welfare services in 2007-08. A survey of Commonwealth and state government agencies providing human services by the Productivity Commission (2010: 300) revealed that: …for 46 per cent of these public sector agencies, NFPs accounted for 75 per cent or more of the value of government funded services delivered by external organisations. For a further 19 per cent of public sector agencies, NFPs account for between 50 and 74 per cent of these services. Further the Productivity Commission (2010:301) reported that: . NSW funds around 2350 human services NGOs over $1.5 billion annually for community services; . Queensland provided $1.067 billion for grants and $163 million in capital grants to NFP organisations in 2008-09, with several large organisations receiving more than $100 million per year. Between 2003-04 and 2007-08 funding to NFP organisations increased by 40 per cent; . NFP Community Housing Organisations manage 6000 accommodation units as well as 2000 in Aboriginal communities; . In 2009 SA Health provided more than $60 million to over 130 NFPs. Funding for mental health grew from $3.4 million in 2001-03 to $23 million in 2008-09.

Draft Report 164 . Total funding of $170 million (about 10 per cent of the total DHHS Budget) was paid to 240 NFPs by Tasmania’s Department of Health and Human Services in 2008, for 114 different service types under 4400 service agreements. The Victorian Auditor-General (2010) noted that 800 NGOs received around $1.7 billion for the Departments of Human Services (DHS) and Health (DH) in 2009-10 to provide a wide range of services including, housing, child, youth and family, disability, mental health, drug and alcohol, aged care and other social services. This represented a significant 11 per cent of the total budget for these departments. In Western Australia state government funding to the NFP sector was estimated to be around $8.2 billion or 16 per cent of total human services expenditure in 2009-10. The Economic Audit Committee (2009: 54) noted that: Western Australia outsources proportionately more health and disability services to the community sector (in terms of funding) than other States, but outsources fewer child protection, community development, Indigenous affairs and housing services. Governments have privileged NFPs through the provision of exemptions relating to taxes and charges. In addition to the direct government funding discussed above, governments provided tax expenditures (exemptions from taxes in earnings, payroll tax, stamp duty, land tax and rates) that amounted to billions of dollars in 2010-11 consisting of $3.3 billion in quantifiable amounts and a similar volume of unquantifiable tax expenditures (Australian Charities and Not-for-Profits Commission, 2011). Moreover, governments are increasingly providing direct financial support to the sector as well as indirect support for development and capacity building. In 2011 the Commonwealth announced funding of $53.6 million over four years to establish the Australian Charities and Not-for-Profits Commission that will provide support to and regulation of the sector (Australian Charities and Not-for-Profits Commission, 2011). There are various supports and funding at the state level. For example, in a speech opening the Western Australian Council of Social Services Conference (WACOSS) in 2010, the Premier, Colin Barnett announced support for the sector (Barnett, 2010). He outlined $2 million annual funding for a Social Innovation Grants Scheme and establishment of a $10 million Community Development Investment Fund to provide low interest loans to community organisations to improve infrastructure such as accommodation, IT or vehicles. Similarly, the NSW Government provided $25 million for sector development and industry building in ageing and disability services (General Purpose Standing Committee No. 2, 2011b). Governments provide other support to facilitate the growth of the NFP sector. The Victorian government established the Office for the Community Sector in 2008. The purpose was to support the future sustainability of the NFP sector by reducing accountability and compliance requirements and supporting the sector to build organisational capacity to respond to need of the population (Protecting Victoria’s Vulnerable Children Inquiry, 2012). These types of developments signal that the level of accountability and transparency for outsourced services, which is already lower than for publicly-delivered services, is likely to decline further over time. It must be acknowledged that the name not-for-profit belies the nature of many organisations that are large business enterprises, making surpluses or profits from their commercial activities such as the delivery of human services on behalf of governments. These businesses have very concrete commercial interests, especially in relation to further outsourcing on public sector functions. They use opportunities ranging from sitting on government advisory bodies to inquiries and investigations to promote further outsourcing to the sector. For

Draft Report 165 example Baptcare stated that it ‘has ambitions to build its capacity to influence government policy and decision making’ (Baptcare, 2010: 13). Despite the obvious vested interest for policies that provide direct financial benefits for these organisations this conflict of interest is rarely raised in the public arena.

5.7.2 Homelessness and Disability Services Comprehensive data on the size of NGO participation in all service areas is not available. For example, in 2009-10 homelessness services funded under the NAHA were provided by 1559 agencies, mainly composed of NGOs but also including some local government agencies (SCRGSP, 2012). Separate data is not available for NFP organisations. This section takes advantage of data on NGO involvement in the delivery of specialist disability services - funded under the National Disability Agreement (NDA) - provided by the Review of Government Services (SCRGSP, 2010). Figure 6.1 shows the proportion of disability services provided by NGOS in 2003-04 and 2009-10. There are two trends evident; there is a slight decline in the proportion of services provided by NGOs in Victoria, Queensland, Western Australia and South Australia. Conversely, there is a large increase in Tasmania and an even larger increase in NSW where the proportion of services delivered by NGOs increased from 79.2 per cent in 2003-04 to 88.1 per cent in 2009-10. Tasmania had the largest proportion in 2009-10 with 92.5 per cent. However, the Tasmanian public sector has since totally withdrawn from provision of disability services, with the outsourcing completed in March 2011. All services that were previously delivered by the public sector in Tasmania are now delivered by NGOs. These services include adult centre-based respite services, respite options for children and young people that include non-centre based respite options such as recreational and holiday programs (SCRGSP, 2012). Figure 5.1 Disability services provided by NGOs, 2003-04 and 2009-10 (per cent)

95

90

85

80

75

provided by NGOs providedby 70

65 Proportion of Disability serivces 60 NSW Vic Qld WA SA Tas

2003-04 2009-10

Source: SCRGSP, 2012 Table 14A.13 Disability services provided by non-govt sector. In order to consider the dynamics of NGO provision of disability services we present further data on accommodation suppor tand respite services (Figure 5.2) and community support and community access (Figure 5.3).

Draft Report 166 Figure 5.2 NGO share of accommodation services, 2003-04 and 2009-10 (per cent)

100 90 80 70 60 50 40 30 20 10

0

04 10 04 10 04 10 10 04 10 04 10 04 04 10

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2003 2009 2003 2009 2003 2009 2009 2003 2009 2003 2009 2003 2003 2009

Proportionof services provided by NGOs NSW Vic Qld WA SA Tas Aust

Accommodation support Respite

Source: SCRGSP, 2012 Table 14A.13 Disability services provided by non-govt sector. Figure 5.2 shows that the proportion of accommodation support was smaller than respite for all states with the exception of Tasmania in both 2003-04 and 2009-10. At the national level the proportion of both services provided by NGOs grew over the period. In 2009-10, more than 80 per cent of accommodation support services were provided by NGOs in Queensland, South Australian and Tasmania. More than 80 per cent of respite services were provide by NGOs in Victoria, Queensland, Western Australia and South Australia. The NGO share of respite services contracted in Tasmania between 2003-04 and 2009-10. Figure 5.3 NGO share of community support services, 2003-04 and 2009-10 (per cent)

120 100 80 60 40 20

0

04 10 04 10 04 10 10 04 10 04 10 04 04 10

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2003 2009 2003 2009 2003 2009 2009 2003 2009 2003 2009 2003 2003 2009

Proportionof services provided by NGOs NSW Vic Qld WA SA Tas Aust

Community Support Community Access

Source: SCRGSP, 2012 Table 14A.13 Disability services provided by non-govt sector. Figure 6.3 shows the proportion of community support services for people with disabilities provided by NGO in 2003-04 and 2009-10. At the national level there was a small decline in the proportion of community support services delivered by NGOs and virtually no change in community access services. However, there were significant differences in the trends exhibited by states. The share for community support increased only in NSW and Tasmania.

Draft Report 167 Community access shares increased in NSW, Queensland and Tasmania. At the beginning of the period Victoria had the largest share for community support but had been overtaken by Tasmanian by 2009-10. The vast majority of community access services were provided by NGOs throughout the period.

5.7.3 Issues with outsourcing to NFPs The outsourcing of service delivery to the NFP sector encompasses a complex relationship between governments and NFP organisations that is characterised by interdependencies, conflict, and the utilisation of relationships, knowledge and expertise to influence policy. In the first instance government agencies that outsource services to the private sector (NFP or for-profit) have a vested interest in ensuring that the outsourcing is successful in terms of delivering the quantity and quality of services required. However, difficulties arise in circumstances where the services are substandard, since the agency risks their reputation if this information becomes public and they may not have viable alternatives for service delivery, having eliminated their in-house expertise. Whereas historically, NFP organisations identified community needs and developed programs and services to meet those needs, the shift from grant funding to contracting has privileged the government which now, more than ever, determines the range and characteristics of services that are delivered. However, the extensive outsourcing that we have witnessed over the past few decades has gradually wrought fundamental changes to the relationship between governments and contractors, particularly the larger organisations that gain the majority of funding. These organisations embody the “expert knowledge” regarding service delivery and are included in consultative groups close to government. NFP organisations have significant financial incentives to maintain or extend their contracts. As mentioned previously, these groups have a vested interest in utilising their position on these high level policy panels to advocate for policies such as outsourcing. The displacement of such grants with contracts to deliver prescribed government functions, allocated in competition with for-profit companies, has transformed the community sector. Agencies that once were at the forefront of advocacy for their clients rights and quality of life may now have more funding, but invariably at the loss of the mission for which they were formed. They may be less inclined than previously to advocate for client groups or criticise policy (Cook et al, 2008; Productivity Commission, 2010). Commercial competitiveness now prevents interagency openness, information sharing and support, and because they are subject to the same high-powered incentives, the services offered are focused on the same narrow band of activities. Moreover, where government policies are punitive, the NFPs effectively become the enforcers of such policies as required by the contracts. Agencies once renowned for their compassion and advocacy for the poor have become feared instruments of government, as in the case of the charitable agencies now deriving millions from their harsh policing of welfare entitlements. Altruism and ethical practice are often casualties when such organisations become subject to the greed and fear that drives markets (Eardley, 2003; Abello & MacDonald, 2002; MacDermott, 2008). As a consequence of the material conditions in which NFPs operate as social entrepreneurs, including the professionalisation of these organisations, there is a real risk that they will suffer “mission drift” or fail to advocate effectively for clients due to the danger of losing funding (Cook et al, 2008; Productivity Commission, 2010) . The threat of the withdrawal of

Draft Report 168 funding, whether real or perceived, has serious implications for NFPs who must consider the future of the organisation and the employment security of staff. The burden of administration and compliance with contract requirements has long been identified as an impediment in the delivery of effective services since a large proportion of staff time is devoted to these functions at the expense of direct interaction with clients (Protecting Victoria’s Vulnerable Children Inquiry, 2012). Services delivered to clients may differ from services delivered by the public sector. Capacity constraints in terms of the resources, the qualifications and experience of staff or inadequate governance arrangements may impact adversely on the quality of services delivered to clients (Protecting Victoria’s Vulnerable Children Inquiry, 2012). While outsourcing is praised for the flexibility of services provided through innovation and close association with the client group (Productivity Commission, 2010), there is an issue that is rarely considered. When services are delivered by public sector organisations with bureaucratic rules and regulations there is likely to be significantly greater consistency of the amount and quality of services received by clients. With outsourced services there are a number of variables that influence these outcomes so that individuals in similar circumstances with similar needs may have vastly different experiences.

5.8 Conclusion Over the past few decades the range and proportion of government funded services that are provided by the private sector (for-profit organisations and NFPs) has increased continually. Outsourcing has encompassed a wide range of functions that were previously delivered by public servants including activities related to the functioning of agencies and services delivered to clients. These have included communications and information technology (CIT), administrative services such as management of car fleets, property services, building maintenance, cleaning, gardening, legal services, laundry services, catering, library services, prisons, recreation services, accounting services, road construction and maintenance, disability services, child protection services, mental health, drug and alcohol, aged care. housing services, biosecurity, car parks, medical imaging, pathology, pharmacy, allied health, court reporting, prisoner transport, public transport, technical and further education and more. This chapter has provided an overview of the issues involved in the outsourcing of public services. While an in-depth analysis of all outsourcing was outside the scope of the current research, we note that outsourcing has become pervasive to the point that it assumes an air of “normal practice”; it is no longer viewed as novel or unusual. Transparency and accountability would seem to demand that governments have a responsibility to inform the public of the details of outsourcing, including the main beneficiaries. However, it is difficult to obtain comprehensive data on the extent of outsourcing of public services. This research has provided a flavour of the types of services that have been outsourced and pointed to instances where outsourcing has not achieved the stated service provision objectives or has failed to deliver promised cost savings. Major beneficiaries of the project to outsource services include large companies, frequently multi-nationals and large NFP organisations, both groups wielding significant influence over governments, along with a plethora of smaller organisations. Increasingly, when Australians are dealing with their government at any level, they are actually dealing with an employee of a profit seeking firm, or an agency that behaves like one. The real possibility of this having a qualitative bearing on what they experience, including what justice they receive, what care they are given and what dignity they are left with as a result, has been inadequately considered in the rush to dismantle the public sector

Draft Report 169 and what it stands for. Despite the significant risks to the quality of public services, the potential for corruption and conflicts of interest within the intersecting commercial interests of public - private sector executives, politicians, corporations and other business entities, the political system has not afforded any effective opportunity to the electorate to challenge this agenda. Deep misgivings, evident throughout the community over these developments, have not blunted the axe that governments are taking to the public service. Whelan (2011) reports how: Secretary of Prime Minister and Cabinet, Terry Moran recently drew attention to attitudinal research showing “the Australian public welcomes an active role for government”. Moran referred to polling by Quantum demonstrating strong and consistent support during the last two decades for government playing an active role in both business and “taking care of people who can’t help themselves”. About 85 per cent of Australians support this proposition and the Quantum survey reveals an interesting paradox. Reforms shifting the role of government and increasing the influence of markets have continued, despite community attitudes and values which favour a strong role for government in the Australian economy and in Australian society. Moran asks “how has this been allowed to happen?” (Whelan, 2011:30) It has happened because wielders of great economic power have decided it will happen. They have influenced political parties, marinated the public in free market hyperbole, and by colonising and bonding with the public service elite, they have elicited their complicity in forcing this agenda on a public that never asked for it, never welcomed it, and whose interests were seldom considered at any point in its implementation. The public and the people they rely upon to frame and explain what is happening to them in the aggregate, have not understood what it is that is being taken away from them when the services that governments once solely controlled become increasingly conjointly controlled by profit seeking institutions, including transnational corporations. Governments are supposed to be answerable to the people through the ballot box. With transnationals increasingly running prisons and immigration detention centres, communication and transportation systems, hospitals and care facilities, processing government interactions with citizens, acting as consultants in every Ministry, controlling the supply lines to armies in the field, and even paid to advise on what to outsource and privatise next, the extent to which their economic interests are governing our lives constitutes a serious risk to the democratic sovereignty of citizens. Along with the Commonwealth, the current generation of state governments are gearing up for a further acceleration in outsourcing. The Lambert Report in NSW recommended that “All government departments continue investigation opportunities for market testing and contracting with the private sector and NGOs for services” (Lambert, 2011: 31). Similarly, the vision of the Economic Audit Report (2009: 1) in Western Australia included “The public sector will increasingly act as a facilitator of services, rather than a direct provider, with all areas of service delivery opened to competition.” Both reports envisage an increased role for NGOs with reduced administrative burdens that may further reduce transparency and accountability. The Western Australian government established a funding and Contracting Services Unit in 2011 to implement the Delivering Community Services in Partnership (DCSP) Policy that will greatly increase the proportion of services delivered by NGOs over time.

Draft Report 170 Gary Sturgess, recently director of the SERCO Institute, now advisor to the NSW O’Farrell government on its infrastructure renewal agenda, told the Menzies Research Centre in 2006 of his vision for the future: I believe that a much more fundamental shift in mindset will take place in the years ahead. • A ‘delivery’ model of public services will replace the traditional policy model. • Government will increasingly pay for results rather than just for good intentions. • Public services will be recognised as one of the most important – and most neglected – sectors in the economy. • Governments will replace the industrial monoliths that have characterised this sector for the past century with a vibrant public service economy. • Much greater emphasis on how public services are commissioned, with politicians and public servants taking the side of the consumer in demanding higher standards of provision. • New forms of public service provision will emerge that we cannot yet imagine. – public service companies, social enterprises, quasi-public enterprises and public-private-voluntary sector hybrids. • And government will become increasingly customer-centric. The consumers of public services will demand that services are organised around them, rather than being structured so that they make sense to politicians and public officials (Sturgess, 2006). As Ponomariov and Kingsley (2008: 254) note ‘Though in the public sector the evidence of positive effects of outsourcing is mixed...the trend toward outsourcing is unlikely to slow’.

1 In a BOOT arrangement, a consortium (comprising for example: a construction firm, bank, service provider and coordinating consultancy) are contracted to build a piece of infrastructure such as a hospital or bridge, and recoup their investment by providing contracted services (eg., cleaning, maintenance, security, or other ancillary service provision, or toll collection) over a defined period of time, e.g. 35 years. At the conclusion of which the asset transfers to public ownership (Jensen and Stonecash, 2005). 2 For example, repeated efforts to redesign the specifications of the outsourced Australian public employment services appear to have made little ground in preventing claims for payment without rendering any service, with a recent official investigation finding after 14 years of contract management and system make-overs, only 43% of claims for payment were legitimate (Besser, 2012). Having weeded the altruistic people and agencies from the system, and drawn in those willing to treat the unemployed whichever way will make the most money, effective quality shading probably preoccupies the management of contracted service providers.

Draft Report 171 Chapter 6 Public Private Partnerships

6.1 Introduction As the previous two chapters demonstrate, from the 1990s there were extensive programmes of “privatising” at both the federal and state level that included the sale of government business enterprises and the outsourcing of services to the private sector (for-profit and not- for-profit). Public Private Partnerships (PPPs) are increasingly being used for social and economic infrastructure delivery. The term PPP covers a wide variety of collaborations between the public and private sector. PPPs offer the government and society a hybrid model for public investment in infrastructure and services. PPPs seek to harness the benefits of a competitive market as well as private sector expertise and innovation. In theory, the involvement of the private sector allows the public sector to transfer the risk associated with delivery, obtain “value for money”, and allows increased provision of public infrastructure compared to traditional public sector provision. Advocates of PPPs maintain that access to services and utilities remains equitable and that positive benefits associated with the asset continue to flow onto society. In practice however, there may be major deficiencies in accountability and private acceptance of risk. A PPP is a contractual partnership between the public sector and the private sector to finance, construct and / or operate projects which would normally be the responsibility of the public sector. There are various forms of PPPs: a) Build, Own, Operate (BOO), where the private operator retains ownership after the contract expires; b) Build, Own, Operate, Transfer (BOOT), involving private construction and operation, followed by ownership transfer to the public system after the contract expires; c) Build Own and Lease Back (BOLB) involving private construction and ownership with the government leasing and operating the asset. In essence, PPPs have characteristics associated with both privatisation and outsourcing. They straddle these two other methods of “privatising” since the private sector partner typically finances, constructs and owns the asset and then is privately owned and controlled for a number of years. In addition, as is the case with outsourcing, the firm receives regular fees from the government for providing the service. This relationship is very similar to outsourcing which was the subject of the previous chapter. Moreover, the use of PPPs does not allow governments to shift accountability to the private sector as completely as in the case of outright privatisation. Citizens using PPP services that are funded by the public sector are likely to hold governments to account if the quality of services deteriorates. This chapter explores the use of PPPs in Australia. Section 6.2 explores the arguments in favour of PPPs and the downside risks involved. The remainder of the chapter examines the use of PPPs to deliver various types of economic and social infrastructure ranging from roads and public transport to hospitals and prisons.

6.2 Pros and cons of PPPs The proponents of PPP arrangements argue that they offer value for money which in the literature is an efficiency concept entailing: (1) Lower construction costs; (2) Lower operating costs; and (3) Higher quality services. Specifically, PPPs provide a wider funding option, allow the provision of infrastructure within shorter timeframes than would otherwise be possible in budget constrained environments, factor in the whole-of-life maintenance and operational costs and encourage competition (Public Accounts and Estimates Committee, 2006).

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Opponents of PPPs argue that there is a loss of accountability, there are higher borrowing costs, there is a loss of flexibility for governments due to the long-term nature of the contracts, there are additional transaction and monitoring costs, it is difficult to specify contracts precisely and risks are not effectively transferred to the private sector (Public Accounts and Estimates Committee, 2006). Lambert (2011: 1-27) outlined the circumstances where PPPs - referred to as privately funded projects (PFPs) – may provide benefits over traditionally delivered projects: . large-scale projects valued at more than $50 million; . measurable outputs exist so performance standards can be specified in contracts; . non-core services where there are significant operating costs; . complex projects that encourage innovative solutions; . where there are potential cost savings from introducing new technology; and . when appropriate risks can be transferred to the private sector. Another attraction of PPPs is that they are less visible since they can be designed to be “off balance sheet”, as expressed in the recent Schott Report (NSW Commission of Audit, 2012: 148 in NSW: Infrastructure NSW and Treasury should investigate options to optimise risk transfer arrangements for future toll road PFPs, with a view to ensuring that associated infrastructure remains off the Government’s balance sheet and encourages private sector participation.

6.2.1 Efficiency Evidence on the efficiency of PPPs compared to traditional procurement is difficult to obtain since there is a dearth of data on both PPPs and traditional procurement. Evaluations are also constrained by the lack of counterfactuals. Once the decision has been made to use a particular method of providing infrastructure we are not able to accurately predict what the outcome would have been if an alternative method had been chosen. The outcomes of particular projects is also likely to be influenced significantly by the characteristics of the project and the proficiency of the consortium undertaking the work. This section reviews some of the international evidence of the outcomes of PPPs. An Australian study of 21 PPP projects and 33 traditional projects in Australia found that PPPs were more cost effective and were more likely to be completed on time: PPPs demonstrate clearly superior cost efficiency over Traditional procurement, which can range from 30.8 percent when measured from project conception, to 11.4 percent when measured from contractual commitment to the final outcome (Allen Consulting Group, 2007: 1). The study also found that PPPs were ‘far more transparent than Traditional projects, as measured by the availability of public data’ (Allen Consulting Group, 2007:1). The Public Accounts and Estimates Committee (2006: 61) pointed to the need to use public sector delivery due to the cheaper cost of finance since: Whilst the cost of private sector provision of infrastructure may initially appear cheaper than public sector provision (according to the public sector comparator), over the long term period of the agreements the private sector looks to a rate of return on private equity of around 11 per cent or higher.

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Gaining clarity in relation to outsourcing is hampered by both a lack of explicit data and by the subtle technical accounting complexities under which explanations of differences in performance are often buried. In relation to Fitzgerald’s (2004) report on PPPs in Victoria, Hodge (2004) notes that the results of the cost-benefit analysis are sensitive to the discount rate. Using a more realistic discount rate (reducing it from 8.65 per cent to the Commonwealth Bond Rate of 5.6 per cent), meant that the expected savings from PPP procurement evaporated so that there were either very small savings for some PPPs or additional costs for several PPPs (Hodge, 2004:39).

6.2.2 Budget constraints One of the justifications for using PPPs rather than traditional methods is that the assets will be delivered in a shorter time frame because the private sector pays for the project in the first instance and then is reimbursed over time. This presupposes that the public sector is financially constrained and would not be able to fund the project otherwise. Governments have used this line of argument in situations where PPPs have been chosen despite being more expensive than traditional funding. For example, the South Australian Government used a PPP to build schools. Redmond (2009: 12) notes that the six schools built under the schools PPP cost $9.2 million or 3 per cent more than traditional procurement but ‘the Government chose the option because the schools would be built faster.’ There is no economic logic that state government borrowing is bad. The argument that a state government has to run a surplus to maintain an AAA rating is nonsensical in the context of a ideologically-driven unwillingness to use that rating to borrow on favourable terms which maximise social advantage. There is nothing efficient about surpluses that both accompany the run-down of social infrastructure and the higher cost provision of essential infrastructure and services. The role of government is to maximise social welfare rather than maximising private welfare. When we discuss the efficiency of a particular activity within the context of resource allocation we should always focus on the maximisation of net social benefits rather than the maximisation of net private benefits. Generally, PPPs have failed to meet this performance benchmark and typically compromise social interests in favour of private interests. Government should use its fiscal power to: (a) ensure full employment; and (b) to maintain high quality public infrastructure. In relation to this second role, governments face two questions: (a) What is the best way to provide for the rising demand for public infrastructure; and (b) What is the best way to gather the resources necessary to guarantee this provision? There is a strong economic case for Government to provide public infrastructure because of market failure considerations – the existence of public goods, externalities and such does not support sufficient private returns from user charges to ensure the private provider will remain profitable. The classic case is of the railway system. Further, the presence of natural monopolies will generate excessive prices and returns should a private supplier be present. Finally, public infrastructure services typically generate benefits across time and beyond the immediate users (schools, hospitals, sewage, etc…) which means that it is not an excludable good and therefore not appropriate for private provision. Public infrastructure investment also promotes productivity and economic growth. It provides a fundamental training ground for skilled labour (for example, a national apprenticeship capacity), and, beyond its economic contribution, public infrastructure provides a social fabric and hence social benefits.

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6.2.3 Risk transfer PPPs are also promoted as a vehicle for the efficient transfer of risks from the public to the private sector and that critics are ignorant of this “risk transfer” argument. Proponents of PPPs argue that governments have lower borrowing rates because they will use further public money to bail out a failing project. The gains are alleged to arise from the private sector being better able to manage risk – largely because they have a higher incentive to do so – private profit. The real problem with the PPPs in this regard is that it is a falsehood that the risk shifts from the public to the private sector. Who ultimately bears the risk? The risk premium in private financing is based on the fact that a private entity can become bankrupt with its product and service exiting the market. With an essential public service it is a fantasy to say that the PPP contract transfers risk to the private sector. If the private partner defaults, the public always has to pick up the pieces. There is no real risk transferred. There is substantial empirical evidence, particularly from the UK that shows that PPP partners in the private sector profiteer from the “risk” transfer component built into the contract payments. The private provider aims to minimise financing costs over the life of the contract by early repayment and refinancing existing loans at lower interest rates. The risks are typically high in construction phases and drop to near zero once service operations begin. The private partner reduces costs by refinancing at lower rates once construction is completed. The private partner captures these gains at the expense of the social good. The PPP contract may be able to prevent this from happening, but then it reduces the incentive of the profit-seeking private provider to enter the contract. Citing the example of the Latrobe Hospital, the Public Accounts and Estimates Committee (2006: 55) noted that private sector companies may choose to walk away if they were not making a profit or were facing bankruptcy, making risk transfer incomplete or illusory: The Victorian Government has been paying a premium for the transfer of risk to the private sector, but as experience has shown components of risk can revert to government. In reference to the outcome of a contract dispute between the Victorian government and the PPP consortium undertaking the Southern Cross Station project, the Victorian Auditor- General (2007: 41) noted: The agreement resulted in some risks being allocated to the State that were not consistent with the desired risk allocation, namely: . payment of $8.5 million for settlement of non-contractual claims by the developer for which it did not admit liability; . relieving the concessionaire from paying damages for not meeting construction milestones; . provision of a $20 million non-cash benefit to the concessionaire resulting from the SCSA agreeing to pay the capital core service payment component backdated from the original scheduled completion date, rather than from the date works were actually completed.

6.2.4 Value for money assessments The rule of thumb regarding comparisons between traditional methods of procurement and PPPs is that the latter can be justified if they provide better value for money which is

Draft Report 175 generally measured by the comparative cost of the project under these funding methods. The cost of the PPP is compared to the Public Sector Comparator (PSC) which estimates the cost of traditional delivery. However, the PSC is generally adjusted upward by a certain percentage to allow for an optimism bias ‘which assumes a tendency to unwarranted optimism in cost estimates under traditional public procurement’ (Select Committee on Economic Affairs, 2010: 13). The practice of using the optimism bias for traditional projects but not for PFPs has been criticised in the UK as well as the size of the optimism bias. Evidence before the Select Committee on Economic Affairs (2010: 14) indicated that optimism bias is capable of tipping the balance in favour of the private finance option: Optimism bias has been a crucial contributor to the PFI net present value being lower than the public sector comparator net present value in a very large number of cases we have looked at. Indeed, what we have tended to see as a general rule is two numbers clustering quite close together so if you took the optimism bias out of one of them it would make the public sector comparator lower. Sperling and Parslow (1999) insisted that assessments of potential savings must include bargaining costs, costs of disputes, transaction and monitoring costs. Moreover, they argued that ‘Governments must retain the capacity to provide comparable services or to engage alternative providers if they are to ensure value from contracts with private operators’ (Sperling and Parslow, 1999: 82).

6.2.5 Contract specification PPPs are used to deliver complex and expensive infrastructure projects. The development of expression of interest and tender documents requires a thorough consideration of what the project will deliver. Since the successful consortium will be required to adhere to the contract over an extended period, perhaps decades, these requirements must be comprehensive to eliminate the need to modify contracts to include additional services, which could become costly due to hold up. International evidence points to the importance of contract specification and the sometimes dire consequences when contract specifications are not rigorous enough. This has also been an issue in Australia (see Box 6.9 Joondalup hospital). In response to problems arising from insufficient rigour in contract specification the Allen Consulting Group (2005) provide a list of suggestions for attempting to avoid these types of problems in the future. These include: clear specification of outputs; improvements in assessing and dealing with risk; including public interest issues; increased transparency and efficiency in the bidding process and evaluation of bids; and building in flexibility to facilitate changes.

6.2.6 Monitoring problems The introduction of PPPs imposes an increased need for independent assessment of outcomes in regard to the relevance, effectiveness, efficiency, feasibility and sustainability of the tendering process and outcomes of the partnership. English (2007) challenges the scope of the monitoring and evaluation frameworks that auditors are using to draw their conclusions. Of concern is the distinction between audit methods, which Pollitt et al. (1999 cited in English, 2007: 319) refer to as systems-based or substantive. Systems-based evaluations focus on procedures or best practice frameworks, and in the case of Australia have focused on the pre-contracting stage of a PPP by ensuring that steering

Draft Report 176 mechanisms are implemented appropriately and that objectives can be achieved effectively through adherence to best practice procedures. Alternatively, substantive evaluations consider efficiency in terms of core activities and ‘the quality of service experienced by users against externally-derived criteria’ (English, 2007: 319). Substantive investigations involve critiquing and questioning government policy, and also challenging the effectiveness of outcomes verses the processes and strategies employed to derive those outcomes. English (2007: 331) further notes that only, ‘two auditors-general have investigated the achievement of anticipated risk transfer and the “value for money” in the operating stages’ of PPPs in Australia – which are core motivations for engaging in PPPs. Both of these audits occurred prior to 2000, one of the Joondalup Health Campus in Western Australia and the other of the New Prisons Project in Victoria. The procedures that the Auditors-General follow raise questions about the degree of scrutiny to which PPPs are exposed. In the absence of appropriate monitoring and evaluation systems, who ensures that PPPs are accountable, responsible and performing in the best interest of the public? Evaluations of PPPs have also been undertaken by bodies such as the Victorian Parliamentary Accounts and Estimates Committee and NSW Public Accounts Committee. Both the NSW Public Accounts Committee and the NSW General evaluated the pre- contracting phase of the Cross City Tunnel project. In a report on the Southern Cross station, the Victorian Auditor-General (2007: 1) pointed to deficiencies in specifying outcome measures that prevent effective performance measurement, noting that: Overall the audit found that the allocation of risks during the construction phase, and resolution of a dispute, was reasonable, given the circumstances. The audit also found that ongoing contract management is being effectively performed, within a difficult to measure key performance indicator regime. We have recommended that the identified problems with the performance management regime need to be resolved, so that expected levels of contracted performance are able to be measured and enforced.

6.2.7 Other issues Lock-in effects The Lambert Report (2011: 8-9) noted that: Once a social infrastructure PFP contract is signed, capital expenditure by the private party and state repayment over the term are fixed under a PFP. In contrast, capital expenditure and repayment under alliancing and traditional procurement can be varied relatively easily, allowing for flexibility in accord with volatile budget receipts and expenditures. This issue has been prominent in the UK in the current period of fiscal austerity. Several analysts have pointed to the fact that budget cuts must be achieved while honouring PPP commitments. The loss of options for governments seeking to cut expenditure means that other services will be cut which could result in worse social outcomes than if governments retained the flexibility to spread budget cuts over areas covered by PPPs and other areas. Public interest issues A constant problem with PPPs, is that Government monitoring and evaluation systems are designed to ensure contract requirements are met but the details of PPPs are often suppressed as “commercial in confidence” so that public scrutiny is curtailed. The key elements of successful PPPs are transparency and effective monitoring and evaluation systems to ensure

Draft Report 177 that the deliverables are consistent with expectations of quality, timeliness, utility and public interest. In other instances the conditions of PPPs may constrain governments in the provision of better services. PPP contracts pertaining to roads may include clauses that mean the government would have to compensate them for revenue losses if additional public transport was provided. The Joint Select Committee on the Cross City Tunnel noted the submission from Mr Tony Harris, the NSW Auditor General (2006b: 120). Another disadvantage from private ownership is that the government loses control of the design of public transport. Private developers are correct to be concerned that additional public transport and additional alternative roads can reduce their traffic and revenues and profits. Accordingly, they require government to provide compensation for any action that reduces traffic. While understandable, this constricts government action of the design of public transport for the life of the deal. Had the government developed the road, it too would suffer a loss in the value of an asset from the development of alternative public transport facilities. But that loss would not require negotiations – with all of their costs to government – and cash compensations.

6.3 PPPs in Australia Over the past decade states developed frameworks relating to PPPs, which was extended to the national level by the development and endorsement of the National Public Private Partnership Policy on 2008. Under the policy governments consider PPPs for projects with capital costs over $50 million. There is an inter-departmental National PPP Working Group, with membership from the federal, state and territory governments, that has been established to facilitate the development of expertise in managing PPPs. The early adopters of PPPs were Victoria, with $4 billion of PPPs contracted by 2005 and NSW although the other states had developed PPP policies and most had used PPPs for at least one project (Allen Consulting Group, 2005). Victoria and NSW still lead the other states. Nevertheless Lambert (2011) observes that PPPs remain a minor method of providing infrastructure and are only used for around 11 per cent of infrastructure procurement in NSW. PPP projects in Australia were estimated to have reached a total of $20 billion (Joint Select Committee on the Cross City Tunnel, 2006b). While definitive information on the value of PPPs is difficult to obtain, the data reported here is primarily drawn from the Infrastructure Australia website, with some amendments after verification with state authorities. The value of PPPs has grown to around $53.503 billion1 As Figure 6.1 shows, NSW is the state with the highest value of PPPs to date $18.617 billion (or 34.8 per cent of the total), followed by Victoria with $17.987 billion (33.6 per cent). Queensland has contributed $11.021 billion (20.6 per cent). The other states have much lower values committed to PPPs which account for 10.0 per cent of the total value of PPPs. PPPs span several sectors of the economy, having been used for the provision of roads and public transport, hospitals, schools, water projects and more. A familiar model that has been used frequently in Australia since the early 1980s involves provision of infrastructure such as toll roads which is argued to provide infrastructure more quickly than by public provision which is subject to government-imposed budget constraints. This arrangement ultimately transfers the cost of infrastructure to users with associated negative distributional impacts.

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Figure 6.1 Value of PPPs by state

20000 18000 16000 14000 12000 10000 8000

Value of PPPs ($m) 6000 4000 2000 0 NSW Vic Qld SA WA Tas

Source: Infrastructure Australia, 2012. Figure 6.2 shows the value of PPPs entered into by state governments in Australia by sector. Roads have been the dominant sector to date, accounting for 40 per cent of the total. Health has the next highest proportion of spending with 16 per cent followed by water with 14 per cent and rail with 13 per cent. Justice (courts and prisons) each accounted for 3 per cent of the total value. Other projects such as cultural and entertainment centres, port facilities and the Olympic and Commonwealth Games villages accounted for the remaining 10 per cent. Figure 6.2 Value of PPP by sector

Other 11% Water Roads 14% 40% Justice 3%

Health 16% Rail Education 13% 3%

Source: Infrastructure Australia, 2012. This section explores the extent to which PPPs have been utilised by Australian states and the problems that have been encountered by some PPPs that demonstrate instances where the potential risks described in the previous section have come to fruition.

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6.3.1 Roads Table 6.1 details road projects that have been contracted to be delivered by PPPs and a new project that is currently being negotiated. NSW has had the greatest number of PPPs with several motorways (M4, M2, M7, M5, and the Eastern Distributor) and tunnels (Sydney Harbour Tunnel, Cross City Tunnel and Lane Cove Tunnel). The M4 was the first motorway to reach maturity and was handed back to the government in 2010. Victoria has used PPPs for Eastlink, Peninsula Link and Melbourne City Link (see Box 6.1 below). The Brisbane Airport Link is the largest PPP in Australia and is owned and operated by BrisConnections with a 45 year concession commencing in 2008. The Clem Jones Tunnel is operated by RiverCity Motorway Group which entered administration and receivership in February 2011. KordaMentha was appointed as Receivers and Managers having previous experience with the Cross City Tunnel (Box 6.2) in Sydney. Table 6.1 Roads and tunnels delivered using PPPs

State Project Value $m Projects awarded NSW Sydney Harbour Tunnel 750 M4 246 M2 496 M2 widening 546 M5 South West Motorway 315 Westlink M7 Motorway 2230 Lane Cove Tunnel 1160 Cross City Tunnel 672 Eastern Distributor 700 Vic Eastlink 2600 Peninsula Link 849 Melbourne City Link 1810 Qld Airport Link and Northern Busway 5600 North South Bypass Tunnel (Clem Jones Tunnel) 3200 Total 21174

New Projects NSW M5 widening New Project The NSW Government announced the widening of the M5 South West Motorway from two lanes to three and has reached an in-principle agreement with Interlink Roads. The private sector owners will pay for nearly all the $400 million project (NSW Govt paying $50m) to widen the M5 (Infrastructure Partnerships Australia, 2011).

Lessons from past experience This section examines some of the problems that have been encountered by PPPs or limitations they impose on government decision-making. There have been a number of major issues with PPPs involving roads and tunnels. One of the issues identified in the previous section related to contract clauses that limit future expansion

Draft Report 180 of the road network or public transport due to the requirement to compensate road owners. This was an issue in both Victoria and Sydney. Box 6.1 deals with public interest concerns due to the contract provisions of Melbourne CityLink.

Box 6.1 CityLink in Melbourne The CityLink PPP in Melbourne involved building, operating and maintaining a freeway, tunnels and bridges for a period of 34 years (with a possible extension to 54 years) and then transferring the asset back to the state. The Audit Review of Government Contracts (2000: 18) noted that the process was deficient since ‘no comprehensive economic assessment or environmental effects statement was prepared prior to the contract being signed.’ Detrimental impacts on local traffic flows causing congestion and longer travel times resulted from the construction of CityLink: ‘Some public roads have been closed or are to be narrowed pursuant to the State’s contractual obligations. Residents of some local areas are experiencing traffic congestion, and significant delays to tram services have been ascribed to traffic diverting from the freeway to avoid tolls. Higher traffic volumes in these areas will undoubtedly lead to higher levels of noise and air pollution in nearby communities. So there is an important issue as to whether this level of diversion is sustainable’ (Audit Review of Government Contracts, 2000: 21). Of concern were other contract clauses that preclude future government enhancements of the transport system. The Public Transport Users Association (2010) noted that there were a number of government actions that would trigger “Material Adverse Effect” clauses that may require the government to compensate Transurban, such as: 1. The introduction of “free or near-free” public transport; 2. Failure to treat Citylink on equal terms with other Melbourne freeways when managing traffic flows, or failure to maintain the arterial roads that feed traffic to Citylink; 3. Connecting another road to Citylink that removes traffic from it; 4. Removing any of the “Agreed Traffic Management Measures”: a package of lane closures, clearway removals and traffic calming on roads parallel to Citylink that encourage motorists to use the tollway instead; 5. Introducing car parking restrictions with the objective of reducing traffic in inner Melbourne (apart from in the CBD itself); or 6. Introducing new roads or public transport services that have “a detrimental effect” on Citylink's financial performance. Source: Audit Review of Government Contracts, 2000; Public Transport Users Association, 2010

Similar issues arose in relation to the Cross City Tunnel in Sydney. However, these concerns were only one problem in a crisis prone project. The development and operation of the Cross City Tunnel is discussed in Box 6.2.

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Box 6.2 The case of the Cross City Tunnel (CCT) in Sydney In 2002, the government of Bob Carr awarded Cross City Motorways the $680 million contract to build, own, and operate an east-west tunnel underneath the Sydney CBD. The Cross City Tunnel is a 2.1 km-long tunnel linking Darling Harbour on the Western fringe of the central business district to Rushcutters Bay in the Eastern Suburbs. The Cross City Tunnel was a PPP between the Roads and Traffic Authority and the CrossCity Motorway Consortium (Bilfinger Berger AG, Baulderstone Hornibrook Pty Limited and Deutsche Bank AG) to finance, design, construct and operate a cross city tunnel in Sydney and associated roadwork in nearby roads. The contract was to operate from 18 December 2002 to 18 December 2035. There were two stages to the construction: (1) the Cross City Tunnel; and (2) associated surface works. Construction work for the cross city tunnel commenced in January 2003, and the tunnel opened in August 2005. The associated road works were completed in April 2006. The road changes were highly contentious and were widely viewed as a funnelling mechanism to force people to use the tunnel. They caused major congestion on surface roads and significantly increased travel times for private vehicles and public transport There were a number of reviews established in 2005 to investigate the CCT PPP. 1. On 15 November 2005 the Joint Select Committee was established. The Committee took submissions and conducted hearings although the Labor Premier and Ministers refused to participate. 2. The Auditor-General decided to conduct a performance audit on the Cross City Tunnel to investigate a $96 million upfront payment from the consortium to the RTA, and the RTA decision making process regarding the road closures. 3. An ICAC investigation into the leaking of Cabinet minutes outlining the costs of relocating the tunnel’s ventilation stack in Darling Harbour to the Consortium. ICAC found that a consultant engaged by the Sydney Harbour Foreshore Authority leaked the document to an employee of Baulderstone Hornibrook (part of the consortium). The ICAC report in April 2006 found there was no criminal conduct. Controversy over the project and the price of the toll discourage usage and the original estimates of demand were overstated. Original estimates of daily usage were that an initial level of 35,000 daily trips would grow to 90,000 per day after one year. A few months after the tunnel opened, Cheung Kong Infrastructure wrote down the value of their investment by $102 million due to lower than expected toll revenue. CrossCity Motorway Pty Ltd replaced their Chief Executive in February 2006. The first report of the Joint Select Committee, released in February 2006, recommended a reduction in the toll for a period in a bid to boost usage, and also recommended reversing some of the road closures. After discussions with the company the government announced that the toll would be halved for 3 months from 5 March 2006, some road changes would be reversed and there would be further negotiations with CCM regarding additional road changes. The situation was complicated by the fact that some of the road changes exposed the RTA to Material Adverse Effect (MAE) relief which left the government open to penalty payments if some of the road closures were reversed. Draft Report 182

The second report of the Joint Select Committee (May 2006b) recommended that the toll should not revert to the original level after 3 months but to a lower level. After the toll was reduced there was an 18 per cent increase in usage, to 33,500 vehicles per day. However, the Committee noted that: ‘the slow rate of increase is further evidence to suggest that the figures relied on in the base case financial model were overly optimistic’ (Joint Select Committee, 2006b: 19). and there was a cost to the community: ‘The Committee re-iterates the comments made in the First Report that while the transfer of patronage risk has resulted in no direct financial cost to the NSW Government, the community is continuing to pay the price of congested surface roads during construction of road changes and associated inconvenience, as well as the monetary price of the toll.’ (Joint Select Committee, 2006b: 19). The consortium was placed into receivership in December 2006 when it was unable to make interest payments on the $560 million debt (Barlow, 2006). In September 2007 the tunnel was sold to a consortium led by ABN Amro and Leighton Contractors for $700 million. In 2012 a dispute about the payment of $60 million stamp duty for the transaction was continuing between the consortium and the office of State Revenue and the business was in danger of being placed into receivership for the second time (Saulwick, 2012b). Souce: Auditor-General, 2006a; Joint Select Committee on the Cross City Tunnel, 2006b; Barlow, 2006; Saulwick, 2012b.

6.3.2 Public transport Table 6.2 shows the PPPs that have been awarded for rail and light rail projects in Australia. The largest projects are for electric rail carriages in NSW and the light rail Gold Coast Rapid Transit program. PPPs have been used most extensively in NSW to provide rail and light rail infrastructure encompassing rail lines, and train carriages as well as train stations, transport interchanges and ticketing systems. Victoria used a PPP arrangement for the construction of Southern Cross station. More recently, Queensland has entered into PPPs for the Brisbane Airport Rail Link and the Gold Coast Rapid Transit project. New Projects The Sydney Light Rail Expansion was announced in February 2010 to provide an additional 10 kilometres of track. The project will be completed in two stages. Stage 1 will cover the extension from Lilyfield to Dulwich Hill and Stage 2 involves the CBD extension. Negotiations are in progress with the owner of the Light Rail concession, Metro Transport Systems.

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Table 6.2 Public transport (rail and light rail) PPPs

State Project Value $m Projects awarded NSW Sydney Airport Rail Link (New Southern Railway Stations) 673 Sydney Light Rail 66 RailCorp New Electric Suburban Rail Carriages 3600 Chatswood Transport Interchange 361 Parramatta Transport Interchange 110 Public Transport Ticketing System 398 Vic Southern Cross (Spencer Street Station) 309 Qld Brisbane Airport Rail Link 223 Gold Coast Rapid Transit 1100 Total 6840

New Projects NSW Light Rail Extension - Lilyfield to Dulwich Hill Lessons from past experience There have been some spectacular failures with PPP rail projects. The case of the Reliance Rail Waratah Train project in NSW, outlined in Box 6.3 demonstrates that the transfer of risk to the private sector was illusory. Issues with the project included: . failure to deliver train carriages within the timeframe specified in the contract; . the government was exposed to a termination payment even if Reliance defaulted; . the financial structure of the project was very risky because it was almost entirely financed by debt (only 6 per cent equity financing); . the government was forced to take over responsibility for the project in 2012 at a cost of $175 million; . the company engaged to build the trains, Changchun Railway Vehicles, had never undertaken this type of contract before and was unable to deliver; and . the project was 18 months behind schedule.

Box 6.3 Reliance Rail Waratah Train contract – illusory outsourcing of risk. On November 11 2006, the Iemma Labor Government of NSW awarded an $8 billion contract to build and maintain Sydney’s passenger rail carriages for 30 years, dubbed ‘an historic shift of government spending towards private sector service providers’(Washington & Baker, 2006). The Reliance Rail consortium - made up of engineering firm Downer EDI, AMP Capital, ABN Amro and Babcock & Brown defeated the Star Transit consortium of United Group and Mitsubishi Electric in a tender process that commenced in August 2004. The contract was expected to generate revenue for the consortium of $400 million per annum from 2008-9. News of the contract sent Downer EDI’s share price up (Ooi, 2006). Financiers paid themselves a $50 million up front success fee (Saulwick, 2012a). By January 2011, the capacity of the consortium to deliver was being questioned after Downer EDI halted trading prior to an announcement about the projects future, having missed a

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December 2010 delivery date for the first train that was extended to April 2011. While the government had maintained that regardless of the consortium’s fate, the taxpayer would not be exposed to extra costs, Smith and Butler (2011) reported ‘contracts signed between Reliance and RailCorp stipulate that if Reliance defaults, the government would make a termination payment to Reliance investors’. ‘Reliance Rail fears a coalition of banks might cancel $357 million in loans the company was counting on. In its 2010 annual report, filed in October, Reliance Rail said the banks could pull out if the two US companies that insured the project's main funding, $1.9 billion in bonds, went to the wall. The insurers, FGIC and Syncora, are struggling after backing large swathes of the toxic residential mortgaged-backed securities’ (Smith & Butler, 2011). In February 2011 Downer EDI was hit with a class litigation action on the allegation that from February to June 2010 the company engaged in misleading and deceptive conduct and allegedly breached its continuous disclosure obligations, which saw the share price fall more than 27 per cent in one day, wiping out $1.1 billion in market value (Ferguson, 2011). By April, the company was again delaying train delivery. By June, NSW Treasurer Baird informed the Parliament that the Waratah Train project was at “serious risk”: ‘The Reliance Rail project included an extraordinarily complex and risky financing structure, including an extreme level of debt. Reliance Rail seems to have set the record for least use of equity, with only 6 per cent of the capital, or less than $150 million being equity. That is, of the $2.4 billion of capital $2.25 billion was debt’. ‘The financing structure put simply was too aggressive, and too complicated. It was too leveraged, provided no reasonable contingencies and accordingly it is no surprise that the project is now in serious risk’ (AFR, 23/6/11). When the official announcement came in February, that the government would assume full equity in the company in 2012, Downer EDI price shares rose sharply. Jacob Saulwick (2012a) summarised the situation thus: ‘* The whole point of public private partnerships is for the private sector to take on the risks, and also some of the reward, for building major infrastructure. But today's bailout of Reliance Rail elegantly undermines that logic, lumping the taxpayer with a $175 million bill because the project - to build and maintain 78 trains - had been botched so completely. * It is easy to blame the former Labor government for this mess, and that blame would be deserved. But consider also what role the bankers who put together Reliance Rail, and the main company behind it, Downer EDI, played. * They aggressively pitched for a lucrative government contract, under-bidding other interested manufacturers. They won the contract, and the financiers paid themselves upfront success and other fees of $50 million. And then they were incapable of filling the order. * The financial crisis blew up Reliance's debt-heavy financing model. And the subcontractor they got to build the shells of the trains, Changchun Railway Vehicles, had never taken this type of order before’ (Saulwick, 2012a). A few weeks later Downer EDI won an $85 Million contract in Victoria and a $177 million contract in New Zealand for road construction and facilities management.

Sources: Ferguson, 2011; Ooi, 2006; Saulwick, 2012a; Smith and Butler, 2011; Washington and Baker, 2006; AFR, 2011.

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The Sydney Airport Rail Link encountered similar problems with financial viability (see Box 6.4). The project was originally intended to be fully funded by the private sector. In effect private sector finance was a small proportion of the total cost, the private sector partner was insolvent within 6 months of the train line opening, there was a protracted dispute settlement process that resulted in RailCorp incurring liability for penalty payments to ALC. Moreover, the lack of patronage due to the high cost of using the privately owned stations resulted in the government paying the station access fee for passengers using Mascot and Green Square stations, a substantial ongoing cost.

Box 6.4 The Sydney Airport Rail Link In answering a question in relation to the Airport Link settlement in 2005, John Watkins, Minister for Transport, outlined the history of the financial arrangements for the project (NSW Parliamentary Debates, 2005). He stated that when the Coalition Government initiated the project in 1991 it was to be completely funded by the private sector but this subsequently changed to a combination of public and private funding. In March 1992 the public contribution was to be $60 million; by January 1994 it was to be $130 million and by August that year it had increased o $240 million and eventually cost the public $700 million. In August 2000 the Minister for Transport, Bruce Baird is quoted as saying ‘It is a first rate project-we are taking none of the risk and all the project’s profits are at a capped level’ (NSW Parliamentary Debates, 2005: 18616). RailCorp entered into a PPP with private sector partner, the Airport Link Company Pty Limited (ALC) – consortium consisting of Transfield Holdings Pty Limited, Bouygues SA, Transfield Construction Pty Limited and Airport Link Company Pty Limited (ALC) owned by Transfield Holdings Pty Limited and Bouygues SA. The PPP involved the private sector partners designing, constructing, financing, leasing and operation of four train stations – Green Square, Mascot, Domestic and International Terminals – as well as designing and constructing the public sector component – Wolli Creek station, tunnels. tracks, signalling and communication systems. Passengers paid a Station Usage Fee to use the private sector stations which was a surcharge on the usual fare. The contract was to run from June 1995 to May 2030 and the rail line commenced operation in May 2000. The cost of the project was split between the public sector ($542 million) and the private sector ($131 million). The train line commenced operation in May 2000 but failed to meet the patronage forecasts. By November 2000 ALC defaulted on loan repayments and the ANZ Bank appointed Receivers and Managers on 30 November 2000, exposing the government to costs of around $800 million. The shortfall in performance resulted in ALC and subsequently the receivers making performance claims and default notices on RailCorp and commenced the termination process. RailCorp disputed these claims. The Minister for Transport in 2005 described the performance benchmarks in the original agreement as: ‘The performance benchmarks agreed to by Opposition members were set impossibly high and were impossible to achieve. The benchmarks were imprecisely defined, extraordinarily complex and, even on their most logical interpretations, too difficult to meet on the complex CityRail network. Compounding these difficulties, the Opposition had also agreed to disproportionate compensation and termination provisions, subjecting the taxpayers of New South Wales to unnecessary compensation liabilities’ (NSW Parliamentary Debates, 2005: 18616).

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By 30 September 2001 RailCorp agreed to pay ALC a capped amount of $80 million by using 85 per cent of the fares that would be payable to RailCorp until the net present value of the full amount was recouped. The Restated Stations Agreement 2005 set out the obligations of both parties. RailCorp is subject to reliability and punctuality performance benchmarks and penalty payments where performance falls below benchmarks. ALC was required to maintain the stations to the RailCorp operating standard. To ensure that the stations were in good order at the end of the period ALC was required to provide a bank guarantee in 2025 ‘to the value of replacement and refurbishment works to be undertaken during the final five years of the Operations Term’ (NSW Treasury, Contracts Summary, 2005: 13). RailCorp is required to make termination payments if the agreement is terminated even if the contract is terminated due to default by ALC. In March 2011 the NSW Government announced that it would cover the cost of the station access fee at Green Square and Mascot to encourage commuters to use the train line. The government expected that the subsidies would result in an increase in patronage of around 15 per cent costing around $4 million per annum. However, patronage increased by 70 per cent in the first three months of the subsidy (with around 50 per cent attributable to the subsidy). The annual cost of the subsidy is around $8 million. Sources: Saulwick, 2011; NSW Parliamentary Debates, 2005; NSW Treasury, 2005.

6.3.3 Prisons and Justice Table 6.3 lists PPP projects for infrastructure for prisons and justice in Australian states. Victoria has made the most extensive use of PPPs in the prison and justice systems using a variety of arrangements. The Correctional Facilities PPP involved a 285 year agreement for the design, construction and maintenance of the Marngoneet Correctional Centre and the Metropolitan Remand Centre. The centres are operated by Corrections Victoria. Other arrangements involved the private sector financing, building and management of prisons. The Fulham Correctional centre has a finance lease for the provision of prison facilities for 20 years while the Port Phillip Prison has a similar arrangement for 15 years. The County Court project included the design, construction and management of the centre for 20 years. Total PPP operation and maintenance commitments for 2010 were $531,087 (Department of Justice, 2010). Western Australia and Tasmania have also used PPPs to provide prison infrastructure. NSW, Victoria, South Australia and Western Australia have entered into PPPs for courts and police infrastructure projects. The South Australian Government’s plans to use a PPP arrangement for the New Prisons and Secure Facilities Project were cancelled in the 2009-10 Budget after the onset of the GFC. The cancellation was estimated to have reduced debt by around $500 million with the largest impact in 2013-14 when the men’s and women’s prisons and forensic mental health facility were due to be commissioned.

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Table 6.3 Prisons and justice sector

State Project Value $m Projects awarded NSW Parramatta Police Headquarters 190 Vic Ararat Prison Project 394 Port Phillip Prison 60 Fulham Correctional Centre 55 County Court 195 Correctional Facilities 275 Correctional Programs Centre 40 Melbourne Magistrates Court 30 Metropolitan Women's Prison (Dame Phyllis Frost Centre) 21 SA Regional Police Stations & Courts Administration Authority Facilities 45 WA CBD Courts Complex 235 Acacia Prison 126 Fremantle Justice Centre 17 Tas Risdon Prison Redevelopment 100 Total 1783

New Projects Vic Male Prison at Ravenhall WA Eastern Goldfields Regional Prison New projects There are two prison projects in the pipeline. In April 2011, the Western Australian Government announced the call for expressions of interest to build and operate the Eastern Goldfields Regional Prison (Porter, 2011). The project involves the design, finance, construction and maintenance of a 350-bed all security, mixed gender prison at Kalgoorlie to be operational by 2015. In October 2011 three consortia were short-listed: . Assure Partners – Capella Capital Pty Ltd, John Holland Pty Ltd, Pindan Contracting Pty Ltd, and Honeywell Limited; . The Aurum Partnership – Leighton Contractors Pty Ltd, Broad Construction Services (WA) Pty Ltd, Programmed Facility Management Pty Ltd, and Bilfinger Berger Project investment; . EG Pathways – McConnell Dowell Corporation Limited, Spotless Facility Services Pty Ltd, RBS Group (Australia) Pty Ltd and John Laing Investments Limited. In the 2012-13 Budget the Victorian Government announced the development of a 500-bed men’s prison to be built using a PPP arrangement. The project involves the design, construction, maintenance and all aspects of operation, including custodial services. Lessons from past experience Victoria was an early adopter of PPP arrangements for the provision of prison infrastructure. An investigation by the Victorian Auditor-General revealed some shortcomings in the contracts that exposed the Government to risk (Box 6.5).

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Box 6.5 Private prisons in Victoria – incomplete contracts expose the State to risk The Victorian Auditor-General (2010) examined PPP arrangements for prisons. The contract for the Fulham Correctional centre was signed in October 1995, construction commenced in November 1995 and the prison commenced operation in March 1996. The second PPP commenced the following year. Contracts for the Port Phillip Prison were signed in July 1996, construction commenced in August 1996 and the prison opened in August 1997. A number of problems have been identified with the contracts: 1. The contracts expire in 2017 but unlike more recent PPPs, these prisons do not automatically revert to the state when contracts expire. 2. There is no guarantee that the prisons will be in good condition when ownership reverts to the state and the early repayment of the capital costs by the State reduce the incentives for the operator to maintain the facilities: ‘The contracts for the pre-2001 PPPs are silent on the standard of facilities when they are returned to the state. In addition, the full payment of the debt services component by 2012 for Port Phillip Prison and 2017 for Fulham Correctional provides a reduced incentive for the contractor to maintain the quality of the buildings beyond these dates’ (Victorian Auditor- General, 2010: 46). 3. Service Delivery Outcomes (SDOs) measure the performance of the prisons. However, the Audit Review of Government Contracts (2000) noted: ‘The Auditor-General was highly critical of the SDO regime for the prisons, arguing that the measures were too short-term in focus, too quantitative in nature, and did not reflect all key aspects of operator performance.’ Source: Victorian Auditor-General, 2010; Audit Review of Government Contracts, 2000

6.3.4 Education All states except Tasmania have used PPP to deliver educational infrastructure and/or student accommodation. Table 6.4 Education

State Project Value $m NSW New Schools Project 137 New Schools Project 2 178 Vic Partnerships Victoria in Schools 255 Monash University College of Pharmacy 60 Qld SEQ Schools 280 Southbank Education & Training Precinct 550 SA Education Works (6 schools) 193 WA Edith Cowan University Student Accommodation 39 Murdoch University Campus Living Villages 27 Total 1719

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Lessons from past experience A review of the NSW New Schools Project was generally favourable, but was critical of limitations in the methodology for assessing value for money and the lack of adequate transparency and disclosure. The Auditor-General (2006b) also warned that future risks would need to be managed over the term of the contracts to ensure that the anticipated benefits were realised (Box 6.6).

Box 6.6 New Schools Privately Funded Project (PFP) – Monitoring and more transparency needed The NSW Department of Education used PPP for the New Schools Project for a two stage process to deliver new schools. Stage one involved 9 schools that were delivered for $137 million, while Stage two delivered another 10 schools for $178 million. The contracts entailed private sector responsibility for building, financing, owning and maintaining the schools. The Audit opinion was that the contracts appear to have the potential to delivery value for money. There was a clearly defined business case that included the faster supply of schools than by traditional methods that may deliver cost savings and simplified services management. The tender process was sound and maintained competitiveness. Effective monitoring and reporting systems were established that would enable intervention in the case of underperformance. However the Auditor-General (2006b) noted that there were ongoing risks that would need to be monitored, noting that the contracts: ‘…are at an early stage of their 30 year lives and the savings and other benefits are not guaranteed. The contracts will need to be carefully managed over the 30 year period to ensure that benefits are realised and that costs do not escalate beyond expectations’ (Auditor- General, 2006b: 2). ‘Savings and other benefits do not automatically flow from a PFP. Whatever the estimated value for money of such a contract when it is first signed, any subsequent poor management can result in higher costs, wasted resources, impaired performance and public concern’ (Auditor-General, 2006b: 5). He states that there should be more transparency and disclosure and that the methodology for assessing value for money was ‘not supported by comprehensive financial and economic analysis of all the alternatives’ (Auditor-General, 2006b: 4). The report also noted that: ‘The public sector comparator is very sensitive to the assumptions made. We found that, whilst on the whole they seemed reasonable, some of the assumptions could reasonably be questioned’ (Auditor-General, 2006b: 5). Source: Auditor-General, 2006b

6.3.5 Water PPPs have been extensively used for water and sewage projects in Victoria and NSW and have also been used in South Australia and Western Australia (see Table 6.5).

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Table 6.5 Water and sewage PPP projects

State Project Value $m NSW Rosehill Camellia Recycled Water Project 130 Blue Mountains Sewage Transfer Tunnel Illawarra/Woronora Water Treatment Plants 182 Macarthur Water Treatment Plant 124 Prospect Water Treatment Plant 285 Vic Ballarat North Water Reclamation Scheme 52 Ballarat Water Treatment Project 50 Campaspe Water Reclamation Scheme 40 Victorian Desalination Plant 5720 Wodonga Wastewater Treatment Plant 32 Barwon Water Biosolids Management 78 Aqua 2000 project (Coliban Water) 80 Castlemaine Water Treatment 25 Eastern Irrigation Scheme 30 Grampians Growth Corridor Water Project 18 Yan Yean Water Treatment Plant 25 SA Riverland Water (10 filtration plants) 115 Victor Harbour 20 WA Mundaring Water Treatment Plant 360 Mindarie Regional Council Waste Treatment Plant 186 Total 7552

Lessons from past experience The Victorian Desalination Plant has been by far the most expensive and most controversial project. Box 6.7 outlines the history of this project, the issues around lack of flexibility for the Government and the deficit of public accountability and transparency.

Box 6.7 The Victorian Desalination Project - Public accountability and flexibility. The lack of transparency and accountability in the development of the Victorian Desalination Plant in Wonthaggi has been criticized throughout its life by the media, Opposition parties and environmental groups. Instigated by the Brumby Labor Government, the rationale for its development was an anticipated sharp decline in water catchments, based on a regression analysis of three preceding drought-affected years. Subsequent analysis based on a ten year sample seriously undermined the rationale for the project (Davidson, 2008). Davidson notes that advocacy for the project was a consequence of a 1992 decision: ‘The rot was established innocently enough with the decision of the Cain government to break up the Melbourne Metropolitan Board of Works on the grounds that it was an unaccountable QANGO. This was the de facto planning authority for Melbourne. It decided where the most expensive infrastructure (sewerage and water) went and the developers were forced to follow.

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‘When the MMBW was split up into Melbourne Water and three retailers, its engineering and planning skills and its corporate memory were blown away and the planning function was in effect transferred by the politicians to the developers and the big end of town’(Davidson, 2008). The Public Private Partnership contract was awarded in July 2009 to the Aquasure consortium, comprising: * Suez Environment/Degrémont — specialist in reverse osmosis desalination technology; * Thiess and Thiess Services — an engineering, tunnelling and civil contractor; * Macquarie Capital — a global investment, advisory and securities firm (Aquasure, 2012). The government and the Aquasure consortium reported that: ‘The total maximum net present cost to the Government over the 30 year contract term of the project is $5.72 billion which equates to a cost of $1.37 per one thousand litres of water in net present cost terms. This includes construction, financing and operating costs, and using 150 billion litres of water every year for the next 27.75 years (the full contract operation period)’ (Aquasure, 2012). The “public sector comparator” was cited as demonstrating that had the project been undertaken by the state government, it was: ‘…estimated to have cost $6.7 billion in net present cost terms. This means that the cost of delivering the project as a PPP with AquaSure is about $1 billion less than what it would have cost had the project been delivered by the Government’ (Aquasure, 2012). However, from the outset doubts were raised as to whether this reflected the actual cost of the project to Victorians. Firstly, Kerr (2009) reported in December 2009 that the government had not disclosed its purchase at commercial rates of large tracts of land and their subsequent peppercorn leasing to the consortium: ‘The $1 land fee belies a compulsory acquisition process that saw the Victorian Government negotiate financial settlements with a host of often devastated landowners. The Age understands that around 263 hectares of farm land, residential land and tourist accommodation was purchased by the Government at costs deemed to be ''market rates'' by the valuer-general’ (Kerr, 2009) As the opposition leader (now Victorian Premier) Ted Baillieu pursued the question of the actual costs of the project the following year, Premier Brumby’s standard response was: ‘…in relation to any individual payments to the company, we have consistently said that they are commercial in confidence and they will not be released.’(Question time, Legislative Assembly, 2 September 2010). On winning office the following year Baillieu released details of the contract that indicated that instead of the $5.7 billion project cost: ‘Figures compiled by PriceWaterhouseCoopers for the Coalition government show the plant will cost as much as $23.9bn in nominal terms over the next 30 years if the maximum annual amount of 150 gigalitres is bought by the state's water authority. ‘If no water is bought from the plant's owners and operators, Aquasure, the state will still have to pay $19.37bn for "annual service" payments in nominal terms over the same period.

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‘These controversial payments - which the former Brumby government refused to make public, claiming commercial-in-confidence - start next year at $654 million for no water bought, and reach $763m if the maximum of 150 gigalitres is purchased’ (Rout, 2011). As for the superior flexibility of conducting government through such ‘market based’ mechanisms, Premier Baillieu explained: ‘Mr Baillieu said the state was stuck "with a very expensive white elephant" because breaking the contract with Aquasure would cost billions of dollars in legal fees and the sovereign risk for the government would be too high. ‘He warned against breaching contracts becoming a habit, as "no one would seek to enter into a contract with that state in the future without factoring in enormous premiums". ‘Mr Baillieu said the only way the state could save money was to not buy any water from the Wonthaggi plant.’ "We contemplated almost every possible change and the view is there is no feasible material savings available under the contract," he said (Rout, 2011). Source: Davidson, 2008; Aquasure, 2012; Kerr, 2009; Rout, 2011

6.3.6 Health UK private finance initiative (PFI) experience, which has been the primary vehicle for most new capital investment since 1992, provides insight into issues involved in PPPs with respect to hospitals. Gaffney et al. (1999) contend BOOT arrangements failed to provide an efficient lower cost option, claiming that costs have exceeded public finance options and ‘required a diversion of hospital budgets from staffing to capital payments and have led to major downward revisions in the planned capacity of hospitals’ (Gaffney et al., 1999: 51). For example, average beds available in 11 NHS trust areas are expected to fall from 8063 in 1995-96 to 5583 under PFI, a fall of 30.8 per cent (Pollock et al., 1999). Also, national capital planning based on population needs has been replaced by delivery of facilities according to local affordability (Pollock et al., 1999). On balance the evidence suggests that the promised benefits of PFI have not occurred. Table 6.5 lists PPP projects in the health sector. State governments have engaged in various forms of PPP to operate public hospitals, and / or provide infrastructure off balance sheet. The rationale includes: claims of higher productivity and greater innovation in the private sector; necessity due to public sector funding constraints; negation of more generous public sector employment conditions including security; and the transfer of risks associated with construction (Steering Committee for the Review of Commonwealth/State Service Provision, 1988; Forwood, 1997: 87). New Projects There are a number of new PPP projects in the pipeline. In Queensland the Sunshine Coast University Hospital is expected to cost around $2 billion and will involve the design, finance, construction and maintenance of the hospital for 25 years. Queensland Health will provide all medical services, catering and cleaning. Expressions of Interest were called in April 2011. The hospital is expected to open with 450 beds in 2016 and future expansion will provide 738 beds by 2021 (Bligh, 2011). The Premier also announced that the government had signed a contract with Ramsey Health Care to develop a co-located private hospital due to open in 2013 with 200 beds which would deliver up to 110 beds for public patients from 2013. (Bligh, 2011).

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The New Bendigo Hospital is expected to cost around $630 million and will open in 2016. An announcement in February 2012 indicated that two consortia have been shortlisted for the project – Intecare (John Laing, Thiess, RBS, Theiss Services) and Exemplar (Capella, Lend Lease, Siemens, Spotless Services) - and will be invited to lodge full tenders. The successful consortium will design, finance, build, maintain and provide services such as help desk, security, cleaning, catering, orderly services, waste management, grounds and garden maintenance and car park services. The medical services will be provided by Bendigo Health. The successful bidder may also have an opportunity to provide services to other Bendigo Health facilities through outsourcing contracts (Government of Victoria, 2011). The greater degree of privatisation of health care delivery in Western Australia is evident in the development of the Midland Health Campus which will replace the Swan District Hospital and is due to open in 2015. This hospital will be financed by the state and federal governments but will be designed, built and operated by St John of God Health Care, including medical services. The hospital will be developed in stages with the first stage consisting of a 307 bed public hospital combined with a 60 bed private hospital. In the second stage the hospital will grow to 464 public beds by 2021 and the private beds will be moved to a new private hospital.

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Table 6.6 PPPs in the health sector

State Project Value $m Projects awarded NSW Port Macquarie Hospital 40 Bathurst, Orange and Associated Health Services PPP Project 256 Long Bay Prison and Forensic Hospitals 130 Newcastle Mater Hospital Redevelopment 200 Newcastle Community Health Centre 36 Royal North Shore Hospital Redevelopment Stage 2 1160 Hawkesbury Hospital 47 Liverpool Hospital Car Park Randwick Hospital Car Park St George Hospital Car Park Vic Casey Community Hospital 120 Royal Children's Hospital 946 Royal Women's Hospital Redevelopment 364 Victorian Comprehensive Cancer Centre Project 1000 Berwick Community Hospital 87 Latrobe Hospital 56 Mildura Hospitals 37 Mildura Base Hospital 211 Qld Noosa Hospital 20 Robina Hospital 48 SA New Royal Adelaide Hospital 2900 Mt Gambier Public Hospital 22 Port Augusta Hospital 23 WA Queen Elizabeth II Medical Centre Car Park 140 Joondalup Health Campus 70 Joondalup Health Campus -ED and 55 bed upgrade Peel Health Campus Tas Burnie Public Hospital 30 Royal Hobart Hospital 500 Total 8443

New Projects Vic New Bendigo Hospital Qld Sunshine Coast University Hospital Children's Hospital WA Midland Health Campus

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Contract disputes are an inherent risk with PPPs due to the complexity and the long-term nature of contracts. A recent dispute between Infashore and the NSW Department of Health demonstrates the dangers for the delivery of quality services when such disputes arise (see Box 6.8).

Box 6.8 Contract dispute at North Shore Hospital, NSW

In 2007 the Infashore Consortium (consisting of Theiss Services and ISS Health Services) won the $1.1 billion contract to rebuild the North Shore Hospital and run maintenance, security and patient services until 2036. This includes managing NSW Health employees but the company must adhere to NSW Health workplace policies. Infrashore took over management of cleaning, portering, food and laundry services in April 2010 and manages 243 ancilliary staff in total. Infrashore claimed that patient intake rose dramatically after the contracts were signed as the number of beds increased from 600 to around 740 which meant increased demand for portering and cleaning. NSW Health was unwilling to renegotiate the contract. In 2012, the company claimed that the situation was “untenable” and slashed the workforce from 80 to 45. As a consequence of this action patients were forced to wait hours for admission. In April 2012, the NSW Industrial Relations Commission ordered the company to employ at least 20 additional cleaners as an interim measure. According to Robotham (2012): ‘The contract stipulates that monthly payments to the consortium can be adjusted if the workload rises or falls by 5 per cent or more, and lets NSW Health make deductions if Infrashore fails to meet specified performance measures.’ Source: Robotham (2012)

The Joondalup Hospital PPP (Box 6.9) illustrates the susceptibility of PPPs to adverse impacts on the quality of services delivered. Insufficient specification of the services and the quantities and quality of services create perverse incentives for private sector operators whose primary motivation is the derive profits from business activities. Specific risks included: . Reduced flexibility for the government to vary the quantity of elective surgery; . Inappropriate early discharge of patients and the transfer of costs to other health services; . Adverse impacts on the operation of the health system as a whole due to unwillingness to accept patients transferring from other hospitals; . Uncertainty around cost savings.

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Box 6.9 Joondalup Hospital, Western Australia In 1996 the Coalition Government awarded a PPP contract to build and operate a $50 million hospital at Joondalup. The project involved Health Care of Australia (HCoA) a division of Mayne Nickless Limited, redeveloping Wanneroo Hospital into the Joondalup Health Campus which was three times larger (265 public beds and 70 private beds), making it the third biggest hospital in Western Australia. Importantly, the project incorporated private patient facilities. The hospital commenced operating in early 1998, providing: intensive care and coronary care; day surgery; an endoscopic unit; paediatric unit; psychiatric unit; restorative care and day hospital for the aged; day oncology; renal dialysis; a medical centre; community health centre and hydrotherapy pool. The government purchased public hospital services through contracts negotiated on an annual basis and was to repay the capital cost in two instalments per annum for 20 years (to finish in January 2018). After 20 years the public component transfers back to the state and the private component will transfer to the state after 40 years. A performance by the Auditor General in 1997 found that there was no ‘reliable information to establish that the contract would provide net tangible benefits to the State relative to the public sector alternative from either services or facilities’ and ‘there are risks to the State related primarily to reduced flexibility, ensuring that the quality of services, selective treatment of patients and cost shifting’ (Auditor General Western Australia, 1997: 5). There was no guarantee that the Department of Health would obtain lower cost services which was dependent upon annual contract negotiations in an environment where the contract precluded switching to another provider and all changes to the contract were to be by mutual agreement. Moreover, the contract: ‘…does not contain a clear obligation on the Operator to provide elective surgery or other services up to the quantities sought by the Department. It is possible therefore for the Operator to seek to limit the quantity of services provided where, for example, the Operator considers it not to be in its commercial interests’ (Auditor General Western Australia, 1997: 43). ‘…there is a risk that the Operator might seek to discharge some patients inappropriately early. This practice could have a negative effect on the overall quality of care for the patients concerned and could increase the cost of community health services funded by the Department…It could also shift costs to Commonwealth funded General Practice services and to community members providing any additional care to the patient at home’ (Auditor General Western Australia 1997: 43) In relation to the estimated cost savings the Auditor General Western Australia (1997: 29) said: ‘…the estimate of savings for the facilities component of the project is not considered to be reliable, so that a meaningful assessment of overall project costs relative to the public sector alternative is not available.’ A follow on investigation to examine the operation of the hospital noted that the contract guaranteed the purchase of a minimum quantity of services, exposing the State to risk. HCoA increased the level of Intensive Care/Coronary Care above what was required under the contract and demanded that the Government fund the additional services or the services

Draft Report 197 would be reduced. The government eventually agreed to fund the additional services and made a retrospective payment. Similarly, ‘payment responsibility for non-coronial post mortems was not covered by the original contract but has been resolved through negotiation (Auditor General Western Australia, 2000: 10). The contract with HCoA introduced risks for future planning of hospital services since the Government would not be able to introduce changes if it could not reach agreement with HCoA. The Auditor General of Western Australia (2000) noted that increased throughput of public patients was supposed to be at a lower cost than in benchmark hospitals but the way that the contract was worded cast doubt over the enforceability of the clause. The estimated saving for using HCoA services compared to the costs of delivery by a public hospital were estimated to be between ($0.3 and $0.4 million) in 1999-2000. Performance measures showed that: 1. JHC emergency department waiting times could not be compared to other hospitals because JHC used incorrect measurement techniques, but there was some evidence that waiting times had increased. 2. Readmission rates for patients were well below benchmarks indicating good performance. 3. JHC had higher levels of complaints than benchmark hospitals. 4. Some risks with potentially significant consequences were not being monitored. 5. There were problems with transfers of patients from other hospitals to JHC since the contract did not require JHC to accept transfers. The Metropolitan Health Services Board (MHSB) testified that: ‘JHC would not accept ‘step down’ patients ostensibly due to the payment arrangements in place. This results in bed blocking in inner city hospitals and cancellation of elective surgery’ (Auditor General Western Australia, 2000; 23). Significantly, benchmark hospitals accepted 30 times more patient transfers than Joondalup. The contract arrangements were being renegotiated. 6. Post implementation comparisons with benchmark hospitals, found patient satisfaction ratings for Joondalup were inferior in all areas except food and surroundings. The greatest discrepancies were for availability of staff, continuity of care and being kept informed. Source: Auditor General Western Australia, 1997, 2000.

The Port Macquarie Hospital in NSW exemplified many of the pitfalls of PPPs. The hospital failed to deliver the projected cost savings for the state. The public sector comparator was found to be deficient in that it overstated the costs of traditional procurement and understated the costs of the PPPs by omitting some costs. The government was exposed to significant financial risk and the private operator was to retain ownership of the hospital at the expiration of the contract. The project failed and the hospital was repurchased by the state government.

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Box 6.10 The failure of the Port Macquarie Hospital PPP The NSW government contracted Health Care of Australia (HCoA) to construct, operate and own (BOO) the Port Macquarie Base Hospital (PMBH), with projected savings of $46 million over the 20 year contract period. While the hospital was built on land owned by the Hastings Council it would remain in private ownership at the end of the contract period. In addition, the contract included core services in addition to ancilliary services and could treat private and public patients. Collyer’s (1997) analysis of the PMBH development raises many issues that have been considered in the British context. First, the project was promoted on the basis that public finance was not available due to Commonwealth constraints on global borrowing. Secondly, cost comparisons purporting to demonstrate the private option was less expensive in both construction and operation phases were challenged by a Parliamentary Accounts Committee (PAC) inquiry that suggested public sector construction costs could be substantially lower, while estimates for the private option were understated due to the omission of insurance, debt servicing and maintenance costs (Collyer, 1997). Chung (2008) also contends that the financial risks were not transferred to the hospital and requests to the Department of Health for disclosure of the contract were refused on the basis of “commercial-in-confidence” considerations. The PMBH privatisation failed to produce the estimated cost savings, and contract omissions necessitated significant additional payments (Collyer, 1997). Similarly, the NSW Auditor General claimed the government would pay twice for the cost of capital construction, in the annual availability fee and through fee-for-service payments, but would own neither the land nor the buildings. Collyer further claims that associated administrative, legal and oversight costs plus government liability for costs of leave for employees for the first year were omitted from cost comparisons. The sale of PMBH to Affinity Health Care in 2003 provoked a long- running dispute with the State government, culminating in the 2005 purchase of the hospital by the NSW government. Collyer (1997: 35) concludes: ‘The increasing support for privatisation, despite its poor fiscal outcome to the state, can best be explained with recourse to the theory of privatisation as a prevailing, pervasive discourse which favours the interests of powerful groups and institutions – particularly financial corporations and the political arm of the state ... and it hides the fact that privatisation is actually a transfer of public wealth to the private sector.’ A lengthy battle between the state government and the Mayne Group over Mayne’s plans to sell the hospital (along with its of other hospitals) to Affinity Health was finally settled when the government purchased the hospital in 2005 (Chung, 2008). Source: Collyer, 1997; Sperling and Parslow, 1999; Chung, 2008.

6.3.7 Other PPPs PPPs have been used in a range of other infrastructure projects as shown in Table 6.6.The use of PPPs to provide major cultural and sporting complexes has been widespread – the Olympic and Commonwealth Games villages, Stadium Australia, the Sydney SuperDome, Melbourne Convention Centre, Docklands Stadium, the Royal Melbourne Showgrounds, the docklands Film and Television Studio and the Perth convention Centre. Housing projects for university

Draft Report 199 accommodation and redevelopment of public housing have been prominent in NSW. Other projects have included research centres, communications networks, gas pipelines, waste facilities, car fleets and communications projects. Table 6.7 PPPs in other sectors

State Project Value $m Projects awarded NSW Bonnyrigg Living Communities Project (Social Housing PPP) 368 Olympic Village 590 Stadium Australia 690 Sydney SuperDome 200 Eastern Creek Alternative Waste Technology Facility 70 Stevedores Port Botany Expansion 1000 Colonga Gas Pipeline 90 Sydney Opera House Car Park Sydney University Village Project 40 UNSW High Street Housing Project 129 University of Western Sydney Student Accommodation 22 Vic Commonwealth Games Village 400 Biosciences Research Centre Project 288 Emergency Alerting System Project 100 Melbourne Convention Centre 367 Mobile Data Network 140 Mobile Metropolitan Radio 120 Royal Melbourne Showgrounds Redevelopment Project 108 Docklands Film and Television Studio 70 Docklands Stadium 450 Enviro Altona 20 WA Government Vehicle Fleet 150 Perth Convention and Exhibition Centre 220 Total 5632

New Projects NSW Airds Bradbury Renewal Project The Sydney International Convention, Exhibition and Entertainment Centre Precinct

New projects Two major new projects are progressing in NSW. The Airds Bradbury Renewal Project for a large public housing estate in the south-western outskirts of Sydney was announced in November 2011. A call for expressions of interest closed on 2 May 2012 and the announcement of short-listed bids is expected in July 2012. The Sydney International Convention, Exhibition and Entertainment Centre Precinct will include the design, financing, construction, maintenance and management of the

Draft Report 200 entertainment precinct. Following an EOI, Infrastructure NSW invited three entities to submit a full tender (O’Farrell, 2012b). The three consortia shortlisted are: . Destination Sydney comprising AEG Ogden Pty Ltd, Lend Lease Project Management and Construction, Spotless Facility Services Pty Ltd, Lend Lease Developments, Capella Capital Pty Ltd and InfraRed Capital Partners Ltd; . Key Partners comprising Laing O’Rourke Australia Construction Ltd, John Laing Investments Ltd, Macquarie Capital Group Ltd, GL Events and Honeywell Ltd; and . VeNuSW comprising Plenary Group Ltd, Brookfield Multiplex P/L, Brookfield Multiplex Services Pty Ltd and Suntec Int. Convention & Exhibition Services Pte Ltd. The result of the tender process will be announced later in 2012.

6.4 Conclusion Public Private Partnership constitutes a hybrid form of private sector asset creation and outsourced service delivery designed to generate flows of wealth to private consortia from the public sector for long periods of time. Often driven by Commonwealth state agreements, their complexity has proven on many occasions to be too much for government negotiators to manage, in that they have clearly failed to protect the public interest when negotiating them, and yet governments keep signing up to them. The dominant players in this area have so far been NSW and Victoria, with Western Australia showing more interest of late, particularly with the Fiona Stanley Hospital PPP with Serco. Tasmania, and South Australia less so. The complexity of these arrangements coupled with the vested interests associated with their promotion, such as various corporate accounting firms and consultants, leads to divergent estimations as to their cost effectiveness, with corporate accounting firms and other directly interested parties generally barracking for them, and auditors-general often uncovering many shortcomings. No general assessment of their worth is very meaningful, and those made on a case by case basis need to take into account many obscure factors. Their justification, apart from claims that they constitute a cost effective way of paying for the construction and operation of public facilities, has been that they enable required infrastructure to be purchased without borrowing or amassing debt, given fiscal constraints and Commonwealth restrictions to State borrowing. We have previously challenged such constraints as ideological constructs, arbitrarily imposed by the Commonwealth, contrived to drive the hollowing out of the state and the enrichment of private corporations. It is the claims as to their cost effectiveness which require the greater scrutiny. The complex nature of these contracts, seldom given full public exposure at the time they are struck, obscured so often behind declarations of ‘commercial in confidence’, hide a multitude of assumptions that significantly affect the calculation of real potential cost to the State. For example, inflating the estimated cost of borrowing to the State as a factor in the ‘public sector comparator’ inflates the perceived benefit of private arrangements over traditional public provision. Other practices, such as paying a premium for the transfer of risk to the private sector are hard to fathom, given that governments can seldom avoid responsibility for preserving a service if the private provider withdraws. As we saw in the previous chapter on outsourcing, the cost of drawing up these complex contracts, monitoring performance and enforcing contract compliance, particularly if governments take this responsibility seriously, often adds enormously to service delivery costs, though is not always taken into account when considering the cost of provision. The Draft Report 201 cost of service provision through PPPs is far more than just the money paid to the service provider. The contractual obligation on governments to preserve the income of the service provider can severely limit a government’s capacity to act in the public interest, as in times requiring fiscal tightening when the PPP cannot be made to make cuts comparable to those inflicted on the public service, or where policies to improve public amenity are made more expensive by the need to compensate for a ‘material adverse affect’, as when new public transport routes threaten to divert traffic from a PPP toll road.

1 This understates the total value since the value of some projects is not available. These include: NSW-Blue Mountains Sewage Transfer Tunnel and the Sydney Opera House Car Park; and in WA-the Joondalup Health Campus upgrade and the Peel Health Campus.

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Chapter 7 The adequacy of public services

7.1 Introduction Previous chapters have traced the development of state government policies in Australia over the past few decades. Governments have predominantly pursued policies that fit within the rubric of neo-liberal policies that privilege “fiscal responsibility” that involves providing funding and staffing resources for core services and withdrawing from non-core areas, and a shift from “rowing to steering” through the transfer of functions to the private sector through privatisation, PPPs and outsourcing. The adoption and promotion of New Public Management has also impacted on public sector organisations through major reforms such as: National Competition Policy; corporatisation of, competitive tendering and contracting out; organisational change such as policy-provider splits; and workplace reform at both the federal and state level that has changed the balance of power between governments and public sector employees (Hoque and Adams, 2008; Cook, 2006; Cook et al., 2008). This chapter attempts to examine the impact of these policies on the delivery of a range of services by state governments in Australia; to assess the adequacy of services in terms of access, equity, the quantity and quality of services. This is a difficult undertaking due to the complexity of service delivery, the lack of objective measures of the quality of services, and differences between jurisdictions in both the composition of services and data definitions. Comprehensive data is not readily available to determine the parameters of service delivery and variations across space that affect access and equity. The transfer of aspects of service delivery to the private sector (both for-profit and not-for-profit) introduces further complications regarding variations in the standard of services and less transparency due to commercial arrangements which are frequently not publicly disclosed. An examination of changes in public services within the retrenchment framework outlined in Chapter 1 facilitates an understanding of specific policy developments in relation to improvements/deterioration of services. In summary, retrenchment strategies include: . Programmatic retrenchment: imposing spending cuts and reshaping programs; and . Systemic retrenchment: defunding the welfare state, undermining public support, and modifying institutions There are a number of impediments to the retrenchment of services. First, widespread public support poses political risks (Pierson, 1994; Mishra, 1984). Secondly, powerful interest groups, including service users and public servants, are capable of mounting organised resistance to retrenchment policies. Breaking the power of groups who support the welfare state is considered essential for successful retrenchment (Pierson, 1994; Giddens, 1998). Viewed in this light, successful privatisation policies not only return functions to the private sector but also destroy organised opposition by public sector workers, thus making further retrenchment possible (Ferrera and Rhodes, 2000). Policy legacies, such as the perception of entitlements and expectations of future benefits, constitute the third factor restricting possibilities for successful retrenchment. To overcome these obstacles, governments attempt to mask the true nature of reforms by making it difficult for the public to indentify connections between policy changes and adverse consequences. Successful techniques may include freezing spending in an environment of rising costs, altering indexation rules so that savings accrue automatically over time or incremental cuts to programs. Governments may offer compensation to those Draft Report 203 affected or implement “divide and conquer” tactics to reduce the possibility of organised opposition, by targeting changes to particular groups, or introducing means tests to split consumer groups. Previous chapters have outlined major developments in Australia over the past few decades that have impacted on the delivery of services. These include: (1) the fiscal stance of governments that has determined the quantity of public spending within self-imposed budget constraints; (2) policy decisions on the relative priority of specific services; (3) the commitment to transfer activities to the private sector through privatisation, PPPs and outsourcing. The chapter is organised as follows. Section 7.2 discusses the components of quality services. Section 7.3 details some Australian data sources that provide insights into the adequacy of public services. The remainder of the chapter examines specific services to identify the adequacy of services to meet demand generated by: needs related to increased population and demographic changes; or, the failure of the market to provide people with the resources necessary to meet needs due to labour underutilisation or low rates of pay.

7.2 Measuring the adequacy of public services Attempting to measure the adequacy of the quantity and quality of services delivered to the community is a complex undertaking that is hampered by the lack of comprehensive data. Indeed, Cuganesan and Lacey (2011: 458) state that ‘there is general consensus that deficiencies exist in performance management practices within the public sector’ and point to the focus on ‘financial measures that result in a pre-occupation with efficiency and are inappropriate to the public sector; (Cuganesan and Lacey, 2011: 460). This research is concerned with the adequacy of public services from the viewpoint of users of services rather than efficiency per se. We would ideally like to measure the adequacy of the supply of services and also the quality of services. In relation to the quantity of services, we would like to compare accurate measures of the level of demand for services to the level of service provision to ascertain whether governments have provided a sufficient quantity of services to satisfy need. Demand may fluctuate over the economic cycle so that in times of economic contractions more people are forced to seek assistance from welfare services due to insufficient income from market sources. Services need to be able to meet the ebb and flow of demand. Services also need to anticipate changes in demand due to demographic changes or to identify and respond to new areas of need. While it is difficult to compare the adequacy of the quantity of services in relation demand, it is a much more onerous task to make assessments regarding the quality of services. We may be able to look at statistics that measure the demand for elective surgery and determine whether the supply of services is adequate to satisfy demand by looking at the time patients spend on the waiting list before having the surgery. However, it is much more difficult to know whether the quality of treatment measures up to the standards expected by the community. Was the operation performed to a high standard? Was the patient provided with a high quality of care while recouperating? Did patients feel they were treated with respect? Humphreys (1998) explores the components of quality public services. He notes that the OECD (1987) defined the key components of quality service delivery as: timeliness; volume or amount of services; accessibility and convenience; availability; accuracy; safety; appropriateness or suitability; pleasantness and simplicity. For public services as distinct from private services, equitable access and allocation of resources according to need are important characteristics (Humphreys, 1998). Public services that are responsive to client needs imply that clients are consulted and informed about the level and quantity of services Draft Report 204 they are entitled to receive, that the services are delivered and that there are avenues for complaint if clients are not satisfied (Humphreys, 1998). While performance measurement provides a range of information on the services delivered, Verlet and Devos (2008) outline a number of possible detrimental impacts. The first issue is that quantifying performance measures encourages organisations to concentrate on these particular measures to the detriment of other objectives such as quality. Similarly, there can be a pre-occupation with achieving short-term objectives at the expense of poorer long-term outcomes. Another perverse outcome of performance measurement is that data can be misrepresented, such as delaying entry onto elective surgery waiting lists in order to improve statistics on waiting times. Other adverse impacts can result from organisations “cream- skimming” or “parking” by providing a disproportionate amount of services to clients with greater prospects of success in order to achieve targets. An important factor to be considered in the development of performance indicators is the relevance of the measure. For example, Bullen (1999) observes that using unit costing is likely to be appropriate for administrative functions but problematic in human services or community development. If we consider the cost of education per student, housing per household, or corrective services per inmate there are a range of explanations for the performance data. A lower unit cost for a given level of service quality indicates that services are being delivered more efficiently and would be viewed favourably. However, the measure provides no information about quality and therefore a lower unit cost could be obtained by reducing the quality of the service provided. For human services involving complex interactions with clients with different needs that require varying intensity and length of service delivery it is necessary to use a wide range of assessment strategies to determine the quality of the service provided (Bullen, 1999). Ideally these should include information on client’s satisfaction although this is a vexed issue since many clients, particularly the most disadvantaged, have very low expectations of services.

7.3 Australia Data Sources There is no comprehensive framework that allows us to assess the adequacy of service provision. In this research we utilise data from a number of sources. National data sources include the annual Report on Government Services produced by the Steering Committee Review of Government Service Provision (SCRGSP) and COAG reports on the performance of National Partnerships. While these frameworks attempt to provide performance data from all states and territories, many of the performance indicators are still in the development process and differences between jurisdictions limit our ability to compare performance. Similarly, changes within jurisdictions make comparisons of performance over time difficult in some instances. RoGS is an annual publication that commenced in 1993 to examine the effectiveness and efficiency of government services with a view to identifying areas for improvement: The RoGS primary purpose is to provide comparative information to governments about the equity, effectiveness and efficiency of government services (SCRGSP, 2012: 1.11). These services – early childhood, education and training, justice, emergency management, health, community services, and housing homelessness - impact significantly on the quality of life enjoyed by community members and are valued at over $164 billion per annum which is equivalent to 12.5 per cent of gross domestic product (SCRGSP, 2012). RoGS reports on major public services, each of which has an evaluation framework that identifies output

Draft Report 205 indicators for equity, effectiveness and efficiency (cost effectiveness), but does not assess outcomes on the wellbeing of the community, noting that: While the aim of the Review is to focus on outcomes, they are often difficult to measure. The RoGS therefore included measures of outputs (which are often easier to measure), with an understanding that there is a relationship between those outputs and desired outcomes, and that the measures of outputs are in part, proxies for measures of outcomes (SCRGSP, 2012: 1.18). This approach is supported by the international literature that notes the difficulty of determining outcomes is compounded by uncertainties in assigning outcomes to the influence of particular programs or services (see, for instance, Verlet and Devos, 2008). The COAG Reform Council (CRC) provides annual reports on performance against National Agreement benchmarks for the National Agreements in health, school education, skills and workforce development, disability services, affordable housing and Indigenous reform, using data prepared by SCRGSP. In the remainder of this chapter we utilise these data sources along with other data and information to gain some insights into the adequacy of public services in Australian states.

7.4 Health According to the Productivity Commission (2008: E.21) ‘Government involvement in health services is predicated on the desire to improve the health of all Australians and to ensure equity of access.’ In recent years COAG has provided the framework for the delivery of health services in Australia through the National Health Reform Agreement for funding and delivery of health and aged care services, as well as the National Partnership Agreement on Improving Public Hospital Services. This section considers the quality of health services delivered in Australia. Governments attempting to rein in health spending, operate in a complex environment where savings are difficult to achieve. It is difficult to reduce labour costs for the delivery of health services which are labour intensive. The demand for health services has been increasing more rapidly than population growth due to a number of factors including population ageing and the increase in the rate of chronic disease and ‘we can expect these demand drivers to accelerate over time, adding pressure across the entire health system’ (Australian Government, 2011: 3). In NSW a report by PricewaterhouseCoopers analysing the reasons for the significant budget overrun attributed it to a number of factors, including those that were outside the control of health administrators – increasing complexity and higher demand from an ageing population that was not matched with funding (NSW Commission of Audit, 2012).

7.4.1 Public hospitals There is widespread community concern regarding the capability of the public hospital system throughout Australia to provide care in a timely manner. Population increase and demographic change have combined with other factors to produce increased demand in the system as exemplified by statements by the Special Commission of Inquiry: Acute Care Services in NSW Public Hospitals (2008), known as the Garling Inquiry, shown in Box 7.1.

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Box 7.1 NSW public hospitals Increasing demand ‘There are several developments which support this view. More people are using the public hospital system than ever before - more than can be accounted for by population growth alone. Among these are increasing numbers of elderly patients with complex, chronic conditions which require longer stays in hospital and more specialist teams to treat them. The young also are presenting to public hospitals in greater numbers than was anticipated, especially to the Emergency Departments. Of them, a significant proportion may have mental health problems along with drug and alcohol dependence’ (Garling, 2008: 2). ‘Demographic changes mean that Australia has an ageing population which will require proportionately more care as the age groups survive through their 70s and well into their 80s. In 2006-07, one-third of all public hospital patients were aged over 65 years, although that group made up only 13.5% of the state’s population. By now, those aged over 65 years make up 45%, nearly one-half, of all public hospital patients’ (Garling, 2008: 2). ‘The costs of treatment are also rising along side the number of patients. Technological advances have made available expensive diagnostic tools such as colonoscopy, magnetic resonance imaging, computed axial tomography, surgical procedures such as angioplasty to unblock blood vessels and hip and knee replacements, expensive medications and much else’ (Garling, 2008: 3). Lack of funding ‘Already NSW Health has made advances in introducing electronic medical records and digital systems for calling up medical imaging results. For budgetary reasons, however, these are spasmodic and patchy across the areas, and even within the hospitals’ (Garling, 2008: 7) Patient care ‘In the course of my report, I have referred to cases where patients under the care of junior clinical staff have died, with all the burden of grief for the family and friends of the deceased, and the burden also carried by the inexperienced staff who were inadequately supervised, have failed to pick the signs of danger’. (Garling, 2008: 14). ‘I mention later that where possible a clinical pharmacist ought be included in the ward rounds. This derives from evidence of the high incidence of adverse results from medication errors. The coronial inquest into the death of Vanessa Anderson pointed to a clear medication error. It was not an isolated incident. I heard evidence that 26% of the 27,000 hospital related incidents reported on the Australian Incident monitoring Systems to 2002 were medication errors’ (Garling, 2008: 16). Along with medication errors, hospital acquired infections cause a great many deaths and illnesses within our hospitals. The estimates as to the cost in lost bed days in NSW in 2004-5 was 629,600. The worst of these infections are from Methicillin Resistant Staphylococcus Aureus (MRSA). It is fatal for 35% of patients infected with MRSA in their bloodstreams. It is a ticking time- bomb and strong measures are needed. NSW has a very poor record of controlling this disease: Western Australia has 1.1 cases per 100,000 patients, Queensland 3.4, Victoria 6 and NSW 7.4 (Garling, 2008: 16). Source: Garling, 2008

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Elective Surgery The National Partnership Agreement for Elective Surgery provides funding of $800 million over five years (2010-11 to 2014-15) to improve access to elective surgery in public hospitals. The National Elective Surgery Target (NEST) that commenced in 2012 aims to ensure that 100 per cent of Urgency Category patients receive elective surgery within the clinically recommended time (COAG, 2011a). Figure 7.1 shows the proportion of patients receiving elective surgery within the target times in 2010 (does not show the ACT or NT which are outside the scope of this study). No State has achieved the National Elective Surgery Target of providing surgery within clinically recommended timeframes for all Categories. Patients in Category 2 had the worst outcomes. Figure 7.1 Proportion of patients receiving elective surgery within target waiting times, 2010

100 90 80 70 60 50 40

% of target % met 30 20 10 0 Category 1 Category 2 Category 3

NSW VIC QLD WA SA TAS

Source: Australian Government, 2011; Tables 2-4. Performance varied significantly between jurisdictions in 2010. Tasmania had the lowest proportion of patients receiving elective surgery within optimal target waiting times. Victoria and NSW had the best performance for Category 1, while Western Australia and South Australia performed better in relation to Category 3 patients. Considerable improvement is required for states to achieve the target waiting times. Another measure of the effectiveness of service delivery is the actual excess waiting time for those patients who have waited longer than the target time. This data at 31 March 2011 is shown in Figure 7.2. Patients in Victoria and Tasmania have the longest excess waiting times, with Category 3 patients in Tasmania waiting an excess of one year.

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Figure 7.2 Excess elective surgery waiting times, 2010

400 350 300 250 200 150 100 50

Days in Days excessof recommended time 0 NSW VIC QLD WA SA TAS

Category 1 Category 2 Category 3

Source: Australian Government, 2011; Table 5. While these data indicate that elective surgery is subject to unacceptable waiting time in some states, deficiencies in the data mean that waiting times actually appear to be shorter than they are. The expert Panel explained why this is the case: Currently, entry onto elective surgery waiting lists is determined by access to an appropriate specialist or surgeon, often seen in public hospital outpatient clinics. There was a consistent message across all jurisdictions that while there is no national reporting of these waiting times, these ‘hidden’ waiting times vary between surgical specialties and geographical regions and can be twelve months or longer. We are greatly concerned that elective surgery waiting lists may significantly underestimate the demand and need for elective surgical services, as well as the true length of time patients wait for services (Australian Government, 2011: 53). The current situation of cuts to health funding and associated staffing levels in some states suggest that service standards are likely to deteriorate further. The large cuts to health funding in Tasmania will add to the crisis situation that already exists in that state. Expenditure savings announced in the 2010-11 Mid Year Financial Report and the 2011-12 Budget totalled around $1.4 billion. The Government acknowledged that the savings would impact on services: Achieving these savings will not be simple and it will not be painless. It will impact on public sector staff and, where it is unavoidable it will impact on some services they provide to Tasmanians (Budget Speech 2011-12) The Department of Health and Human Services (DHHS) was required to find savings of just over $100 million in 2011-12. The Department claimed that it was able to identify cuts of $70 million without affecting frontline services but was required to include reductions in elective surgery in order to achieve the remaining $30 million savings. As part of cuts to health of $150 million over four years, spending on elective surgery will be cut by almost $60 million over three years to 2013-14 (DHHS, 2011)1. In July 2011 there were 7732 people on the elective surgery waiting list, of whom, 4035 or over 52 per cent had been waiting longer than the clinically recommended time (Richards, 2011). Draft Report 209

The federal Health Minister, Tanya Plibersek expressed concern that the Tasmanian Government was cutting elective surgery while the Commonwealth planned to spend $2.5 billion over 10 years. She stated: ‘The withdrawal of effort in elective surgery is very bad for the people of Tasmania’ and declared that she would be ‘all over the Tasmanian Government like a rash’ checking on how Commonwealth funding was spent (Kempton, 2012). Box 7.2 provides indicative assessments of some of the adverse health impacts that may occur as a result of the cuts.

Box 7.2 The impact of health cuts in the ailing Tasmanian health system Submissions and evidence to the Legislative Council inquiry into The Cost Reduction Strategies of the Department of Health and Human Services provided insights into the implications of the cuts for the Tasmanian population: ‘From our point of view, our instructions were that we needed to make substantive changes. That involved closing one of our wards, and there are about 26 beds on a ward. We only have two surgical wards, so it is 50 per cent of our surgical wards that were closed. We were asked to reduce our activity in theatre and that meant a 17 per cent reduction of elective theatre lists’ (Testimony of Dr Scott Fletcher on 30 March 2012 to the Legislative Council Government Administration Committee A, 2012). ‘I fear the elective surgery cuts do have an impact on the health of the population….. People want and need their operations now so they can continue to live well and to be independent within the community. With elective surgery you do get a bit of a skewed thing where you have surgeons doing some minor stuff to clear lists when the bigger-ticket stuff is just not being done’ (Testimony of Assoc Professor Couser on 9 March 2012 to the Legislative Council Government Administration Committee A, 2012 ) ‘Gall-bladder surgery might be put off but a person can get a really nasty complication having an inflamed gall bladder. A person can develop pancreatitis which, as an ICU nurse in the past you know, is a life threatening complication that can mean that person winds up in ICU with all sorts of nasty morbidity and a significant mortality associated with it so in the end a much more expensive episode of care……. Probably the more important common ones - although that is important enough - is large joint… It certainly seems to me that my overwhelming experience is that the people have waited too long. They have had to wait too long because we just do not have a system that is able to move people through that elective surgery in a timely way and when the operation is done, the orthopaedic surgeons will tell you that it is technically more difficult’ (Dr. Nicklason on 9 March 2012 to the Legislative Council Government Administration Committee A, 2012). Source: Legislative Council Government Administration Committee A, 2012.

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Figure 7.3 Waiting times for elective surgery in public hospitals

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0 Decile Decile Decile Decile Decile Decile Decile Decile Decile Decile Waiting times times Waiting for electivesurgery (days) 1 2 3 4 5 6 7 8 9 10

50th percentile 90th percentile

Source: SCRGSP (2010a) National Agreement Performance Information 2009-10 National Healthcare Agreement; Table NHA.34.8. Figure 7.3 shows the waiting times at the 50th and 90th percentile by Socio-Economic Indexes for Areas (SEIFA) based on the ABS Index of Relative Socio-economic Disadvantage where decile 1 is the most disadvantages and decile 10 is the least disadvantaged. This allows us to make some judgements regarding equity of access. If access is equitable we would expect that the waiting times would be fairly constant over the SEIFA distribution. The data show that access to elective surgery is not equitable. There is a gradient in the waiting times for elective surgery, with residents of lower socioeconomic areas waiting longer on average than residents of higher socioeconomic areas. Waiting times at the 50th percentile range from 27 days for decile 10 (the least disadvantaged) to 38 days for decile 1 (the most disadvantaged) and decile 4. Similarly, waiting times at the 90th percentile range from 170 days for decile 10 to 263 days for decile 3, and the longest waiting times are for the lowest four deciles. Emergency Departments The other important function of public hospitals is the provision of emergency department services. The National Partnership Agreement on Improving Public Hospital Services also includes funding of up to $500 million to achieve the four hour National Emergency Access Target (NEAT) (COAG, 2011a)2 The proportion of emergency department patients treated within national waiting time benchmark is shown in Figure 7.4 for various triage categories in 2009-10. In total NSW (73 per cent) and Victoria (71per cent) had the highest proportion of patients attended to within the waiting time benchmarks. The other states ranged from 60 per cent in Western Australia and Tasmania to 66 per cent in South Australia. Almost all category 1 patients were treated within the timeframe. Between 84 per cent and 89 per cent of category 5 patients were treated on time. A lower proportion of triage category 3 patients were treated within the national benchmark, ranging from only 49 per cent in Tasmania to 70 per cent in Victoria.

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Figure 7.4 Emergency Department patients treated within national waiting time benchmarks, 2009-10

100 90 80 70 60 50 40 30

Within benchmarksWithin (%) 20 10 0 Triage Triage Triage Triage Triage Total category 1 category 2 category 3 category 4 category 5

NSW Vic Qld WA SA Tas

Source: SCRGSP (2010a) National Agreement Performance Information 2009-10 National Healthcare Agreement The inadequacy of the current situation with elective surgery and emergency department services was highlighted by the Expert Panel Review of Elective Surgery and Emergency Access Targets (Australian Government, 2011) as summarised in Box 7.3.

Box 7.3 How adequate are public hospital services? Access to care is a core element of health care quality. The Australian Charter of Healthcare Rights, adopted by all Australian governments, identified access as the first of seven essential rights for patients and consumers when using the health care system (Australian Government, 2011: 15). However, the Expert Panel Review of Elective Surgery and Emergency Access Targets stated that: ‘For close to a decade, almost one in six elective surgery patients and one in three people attending emergency departments have been waiting longer than the clinically recommended time for treatment. The public is as familiar with the stories as we are. Some patients wait for hours in ambulances queued outside emergency departments, or on chairs and makeshift beds inside emergency departments. Some patients wait too long to receive surgery that will significantly boost their well-being and quality of life, returning them to a healthy and productive lifestyle.’ (Australian Government, 2011: 3). Past strategies to improve access to the public health care system have sometimes adopted elective surgical blitzes to deal with longstanding waiting list problems. Stakeholders advised that although these can help clear a backlog of patients and result in short term improvements in access, they are often more expensive and difficult to manage than regular surgical activity because of the need to mobilise resources rapidly to meet activity surges. Such strategies are not conducive to sustainable change and are not recommended as a long term solution. We believe that, in addition to efficiency gains, a sustainable strategy requires planned increases in available resources, carefully targeted for maximum effect against expected increases in demand. (Australian Government, 2011: 11) Source: Australian Government (2011)

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7.4.2 GP services In Australia, access to primary health services is through General Practitioners (GPs). Shortages of GPs has been an ongoing issue for several years, with significant variations in access to services according to area of residence. According to the Productivity Commission (2008) the measures taken by the federal government in the 1990s to limit supply of GPs by restricting Medicare provider numbers impacted on accessibility to primary medical care. There is evidence of continuing major disparities in the availability of GP services and access to bulk billing between urban and rural areas. Compared to rural areas, there were more GPs per 100,000 people in urban areas in all states except Queensland and bulk billing was lower in rural and remote areas than in urban areas (Productivity Commission, 2008). This concentration of GPs in major metropolitan centres means that residents of some rural and regional areas experience difficulty consulting a GP when they are sick. In 2009 the proportion of people able to access GP services within four hours for urgent conditions increased with distance from major cities. While 63.5 per cent of people residing in major cities could access services within four hours, this fell to 58.6 per cent in regional areas, 53.1 per cent in outer regional areas, and 60.9 per cent in remote areas SCRGSP (2010a). Similarly, a higher proportion of people outside major cities waited longer than 24 hours for an urgent GP appointment, with 19.4 per cent in outer regional areas in this category. Figure 7.5 Waiting time for urgent GP appointments

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0 Waiting time time Waiting for urgent GP appointment NSW Vic Qld WA SA Tas

Within four hours Four to 24 hours More than 24 hours

Source: SCRGSP (2010a) National Agreement Performance Information 2009-10 National Healthcare; Table NHA.14.2 Figure 7.5 shows waiting times for urgent GP appointments by state. On average, over 60 per cent of residents in Queensland, NSW and Victoria could obtain an appointment within four hours compared to only 49.2 per cent in Western Australia and 51.8 per cent in Tasmania. TIN Western Australia 21.8 per cent of patients waited more than 24 hours, on average, for an urgent GP appointment, as did 15.0 per cent in NSW.

7.4.3 Mental Health This section provides data on the limited data available on access to mental health services, the quality of services and outcomes. Figure 7.6 shows the number of people accessing clinical mental health care by state and sector in 2006-07 and 2008-09 which provides an Draft Report 213 indication of the change in access following implementation of the National Action Plan on Mental Health 2006-11. At the national level the number of persons accessing services declined by 0.7 per cent over the two years and there was an increase in the private sector share from 6.1 per cent to 6.8 per cent. Figure 7.6 Number of people receiving clinical mental health care, 2006-07 to 2008-09

140000 120000 100000 80000

60000 Persons 40000 20000

0

State State State State State State

Private Private Private Private Private Private NSW Vic Qld SA WA Tas

2006-07 2008-09

Source: COAG, 2011b At the state level there were significant differences in performance. Total access increased in South Australia (by 13.0 per cent), Tasmania (10.2 per cent), Western Australia (5.5 per cent) and NSW (1.6 per cent), but declined in Queensland (13.7 per cent) and Victoria (3.8 per cent). The data on private sector numbers has been suppressed for South Australia and Tasmania to preserve hospital confidentiality. For the other states there was an increase in the proportion of care provided by the private sector in Queensland (1.4 per cent), Western Australia (0.8 per cent) and NSW (0.5 per cent). The only state where the private sector share declined was Victoria where it fell by 2.3 per cent. Victoria and Queensland had the largest private sector shares in 2008-09 (9.9 per cent and 7.8 per cent respectively). As with most services involving complex human interactions, it is difficult to measure the quality of service provision. For mental health there are two measures that provide some insights into quality of care. The first is the number of patients who receive a community mental health care follow up within seven days of discharge. The second indicator is the rate of readmission within 28 days of discharge. Figure 7.7 shows the proportion of mental health patients followed-up by community mental health care within 7 days of discharge for 2005-06 and the first 9 months of 2008-09. Community mental health contacts included face-to-face or telephone contacts by state public mental health services but excludes follow up by private psychiatrists or GPs. Therefore the data reported may understate the actual proportion of patients who receive assistance. Data issues also meant that the rates for Tasmania and South Australia may be understated. Victoria and Western Australia have achieved the highest rates of follow-up throughout the period. The objective of the National Action Plan for Mental Health 2006-2011 was to increase the proportion of patients receiving follow-up community mental health care after separation. Figure 7.7 indicates that this objective has been met in most states. The most dramatic improvements have occurred in South Australia and Tasmania, the states with the

Draft Report 214 lowest performance at the beginning of the period. The only states where this indicator deteriorated were NSW and Queensland (although Queensland performed better in 2006-07 and 2007-08 so the result for 2008-09 may not be indicative of overall performance). Follow- up has declined continually in NSW, falling from 41.5 per cent in 2005-06 to 33.1 per cent in 2008-09. Figure 7.7 Community mental health follow up

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Source: COAG, 2011b Figure 7.8 shows the proportion of patients who are readmitted within 28 days of discharge from state mental health facilities for 2005-06 and the first 9 months of 2008-09. The rates of readmission of mental health patients have dropped for NSW, Queensland, South Australia and Tasmania, suggesting that the quality of hospital and community care may have improved outcomes in these jurisdictions. The most significant reductions occurred in the two states with the poorest performance in 2005-06, Tasmania and Queensland. In Victoria and Western Australia the rate of readmission increased somewhat, suggesting that those states were not achieving the objective of reducing readmission rates.

Figure 7.8 Proportion of patients readmitted within 28 days of separation, 2005-06 to 2008-09

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Source: COAG, 2011b

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The National Partnership on Mental Health has provided more resources for mental health services as the example in Box 7.4 demonstrates, however the demand for services exceeds supply by a long margin.

Box 7.4 A boost for community mental health services: a start but more needed The $200 million National Partnership Agreement on Mental Health has expanded support for people leaving hospital but needing ongoing care under the Housing and Accommodation Support Initiative (HASI) plus to provide 16 to 24 hours of daily support for people at risk of cycling in and out of institutional care. Other funding will enable mothers with mental illness to access community treatment programs where they can stay with their children. The NSW Health Minister, Kevin Humphries stated that the initiatives ‘target some of the most marginalised and vulnerable in our community’ who were previously in the “too hard” basket. However, Corderoy (2012) notes expert opinion that ‘the money will only begin to fix some of the worst problems in the system.’ The initiatives are expected to have flow on benefits to the hospital system by relieving access block. Source: Corderoy, A. (2012)

The legacy of de-institutionalisation is still being felt decades later. Many of the people released from mental health facilities, or those who would have been housed there in the past, are impoverished, socially excluded and in poor health. In the absence of secure affordable housing, low income earners and particularly those with mental illness who are the most vulnerable will continue to live in inappropriate housing situations that fail to meet basic needs such as personal safety, amenity and support. Box 7.5 outlines the ongoing situation with licensed boarding houses in NSW.

Box 7.5 NSW Ombudsman report on boarding houses – vulnerable people NSW Ombudsman had conducted three investigations as well as an inquiry into ADHCs activities with licensing and monitoring boarding houses since 2002. The majority of residents of these boarding houses have mental health conditions that require ongoing treatment and support. The Ombudsman noted that there have been reports of physical and sexual assault, intimidation, bullying and harassment of residents by staff and other residents. Specific incidences were outlined in the report 1. A resident died in a boarding house in squalid conditions 3 months after hospital staff identified the resident as being at high risk of malnutrition. Official Community Visitors to the boarding house raised concerns with the Ombudsman’s office about domestic duties not being attended to; smoking indoors and the sale of cigarettes on the premises, broken windows, medication left in the kitchen and limited access to the bathroom and dining room. ADHC stated that legal advice indicated they did not have the power to enforce some of the licence conditions. The boarding house subsequently closed. 2. Two elderly residents of boarding houses with chronic schizophrenia died in 2009. The Aged Care Assessment team (ACAT) had assessed them as eligible for high level residential care every year for the past three years. They were also assessed as requiring assistance with

Draft Report 216 most everyday activities including health and personal care and mobility. They did not receive any support despite the fact that the ACAT assessed that they needed formal support services. They did not receive services such as the Boarding House Reform Program. The NSW Ombudsman (2011: 16) concluded: ‘Our work clearly illustrates the longstanding and ongoing issues experienced by people living in licensed boarding houses, including human rights violations, and inadequate support and protections to safeguard their safety, health and welfare. This situation will not change without significant reform, including legislative change, higher standards, and a more rigorous monitoring and enforcement system’

Source: NSW Ombudsman, 2011

7.4.4 Other health services State governments provide dental services for low income groups. In 2005 there were around 7 public dentists per 100,000 people in Australia but these were disproportionately located in major cities (Productivity Commission, 2008). There were no public dentists in remote and very remote areas of Victoria or Tasmania, or inner regional areas in the ACT. The services are notoriously underfunded and involve long waiting times that result in increased hospitalisations and significantly reduce the quality of life for some people. A national dental survey conducted in 2008 found that affordability and financial hardship restricted access to dental services (Stewart and Ellershaw, 2012). Of those who had used public dental services, 25 per cent waited between 1 and 2 years and 32 per cent waited 2 years or more. Moreover, only 25 per cent of low income earners (with healthcare cards) visited a public clinic on their most recent visit. Cardholders were less likely to have had a check-up at their most recent visit. A 2009 National Health and Hospitals Reform Commission review found that early intervention for dental conditions prevent 50,000 hospital admissions per annum (Stark, 2010). Box 7.6 reports on the situation for low income people requiring dental treatment in Victoria.

Box 7.6 Public dental care, Victoria In 2010 the Brotherhood of St Laurence assisted a number of low income people to access dental care. Peter had been waiting for more than four years to have 12 broken teeth repaired when he was accepted into the program. He stated that he got a lot of infections and that ‘I’ve lived with the pain so long I’ve got used to it’ (Stark, 2010). The Australian Dental Association stated that the Victorian Government has only increased funding by 1.3 per cent in the 2011-12 budget despite the fact that inflation was 3.3 per cent and the population was increasing at a rate of 1,500 people per week. The average waiting time for public dental care in Victoria is 17 months, but it is up to 30 months in Broadmeadows, Frankston, Berwick, Cranbourne, Sunbury, Hastings and Rosebud (Jefferson, 2012).. Source: Jefferson, 2012; Stark, 2010.

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7.5 Housing and Homelessness The Australian Bureau of Statistics (ABS) Survey of Income and Housing 2009-10 identified 8.4 million households in Australia, where ‘household’ is classified as ‘a person living alone’ or as a group of people who usually live in the same private dwelling (ABS 2011). Of these households, 68.8 per cent owned or were purchasing their own home, 23.7 per cent rented in the private sector, and 3.9 per cent rented from public rental accommodation. The Australian Government influences the housing market through a number of direct and indirect mechanisms including regulation and taxation policies (including negative gearing), assistance for home purchase, Commonwealth Rent Assistance (CRA) and funding for social housing. The National Affordable Housing Agreement (NAHA) is the COAG agreement governing the joint funding and provisions of housing assistance in Australia. The objective is to ensure that citizens have access to affordable and sustainable housing, including through the provision of social housing. Government expenditure on housing totalled $8.2 billion in 2010-11. State governments spent $5 billion while the federal government provided $3.1 billion. In addition the federal government also spent $2 billion on National Affordable Housing SPPs. State governments are responsible for the administration of social housing (public housing and community housing), provide assistance to people renting in the private rental market and may also assist home purchasers. This section examines some of the evidence relating to the extent to which the NAHA objectives are being achieved in Australia. Housing services provided by state governments are considered in more detail in the companion report The Impact on Community Services of Staff and Service Reductions, Privatisation and Outsourcing of Public Services in Australian States: Case Studies of Biosecurity and Primary Industry, Child Protection and Housing.

7.5.1 Housing issues Housing Supply and Demand The National Housing Supply Council produces an annual report on the demand and supply of housing in Australia. Between 2001 and 2010 the estimated gap between underlying demand and supply showed a cumulative shortfall of 186,800 dwellings (National Housing Supply Council, 2011). There was a dramatic deterioration in 2008-09 when the gap increased by 80,500 but this moderated to 28,200. At the state level the cumulative gap between 2001 and 2011 was greatest in NSW where the gap reached 73,700 dwellings. All other states experienced gaps with the exception of South Australia where there was an excess of supply over demand of 4,500 dwellings over the period. The housing shortfall was 61,900 dwellings in Queensland, 28,000 in Western Australia, 17,600 in Victoria and 400 in Tasmania. Figure 7.9 shows the cumulative gap between supply and demand in Australian states from 2002 to 2009. Positive numbers represent a situation where demand is greater than supply, whereas negative numbers indicate that supply is greater than demand. For all states except Victoria there has been a consistent undersupply of housing and this has become more severe in NSW, Queensland and WA over time. Queensland has experienced the greatest gap, which has increased steadily to reach 56100 in 2009. The situation has deteriorated markedly in NSW and Western Australia 2009, with the gap increasing to around 57,600 in NSW and 30,200 in Western Australia. Victoria had an excess of supply over demand until 2007 but this situation has now been reversed and Victoria has a shortage of

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22,700 housing units in 2009. The failure of the market to provide sufficient housing for the needs of the population suggests that there is a role for governments to correct the undersupply. Housing affordability Housing stress is one of the most commonly used indicators of housing affordability. Households are generally described are being in housing stress if they are in the bottom two income quintiles and are paying in excess of 30 per cent of equivalised disposable household income. Figure 7.9 Proportion of low income households in housing stress. 2007-08

50 45 40 35 30 25 20

15 Housing stress (%) 10 5 0 NSW Vic Qld WA SA Tas Aust

Rental stress Mortgage Stress

Source: SCRGSP, 2010b Figure 7.9 shows the proportion of low income households in housing stress in 2007-08 – the blue columns represent those in rental stress and the red columns are mortgage stress. At the national level 37.0 per cent of low income households were in rental stress and 36.0 per cent were in mortgage stress. This means that more than one-third of all low income households experienced housing stress. NSW had the highest proportion in rental stress (45.7 per cent), followed by Queensland (37.4 per cent). More than 40 per cent of low income households in NSW and Queensland were in mortgage stress. In Victoria around one-third of low income households experienced housing stress. Tasmania had lower levels of housing stress with less than one-quarter in rental stress and less than 15 per cent in mortgage stress. The shift in Commonwealth housing assistance from social housing to private rental assistance through Commonwealth Rent Assistance (CRA) impacts on housing affordability for those assisted. In 2010-11 there were more than twice as many people assisted by CRA as social housing (1,138,000 obtaining CRA compared to 419,663 in social housing) (SCRGSP, 2012)3. While social housing guarantees housing affordability because rent subsidies limit rents to 25 to 30 per cent of income, there is no similar mechanism for those in receipt of CRA. In 2010-11 over 40 per cent of CRA recipients remained in housing stress even after CRA was taken into account (SCRGSP, 2010). Moreover, the situation has deteriorated from 2006 when only around 65 per cent of CRA recipients were in housing stress. Therefore, the policy shift from direct provision of public housing to subsidising rent in the private market is an inferior strategy for achieving housing affordability and there is an urgent need for a large increase in the public housing stock to alleviate housing stress

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7.5.2 Social Housing The objective of social housing is to assist people to obtain secure, affordable housing. At the time of the 2006 Census there were only 3.6 per cent of households in public housing and 0.7 per cent in community housing (Productivity Commission, 2008). In 2007-08, 4.5 per cent households lived in public housing. States with higher proportions in public housing were South Australia (7.7 per cent), Tasmania (6.9 per cent) and NSW (5.0 per cent) (SCRGSP, 2012). Only 2.8 per cent of Queensland households lived in public housing. There are three types of social housing: . Public Housing (PH) – provided by state and territory governments. PH can be owned or leased by state housing authorities; . State Owned and managed Indigenous Housing (SOMIH) owned and managed by state housing authorities and rented to Indigenous Australians; and . Community Housing (CH) owned and/ or managed by Community Housing Organisations (CHOs) and rented to low or moderate income earners. Table 7.1 shows the size and distribution of social housing in Australia in 2011. In total there were almost 390,000 social housing dwellings in 2011. Public housing accounted for 83.4 per cent of the total dwellings; 2.5 per cent were SOMIH and 14.1 per cent were in the community housing sector. The proportion of social housing in the public housing sector has declined from almost 88 per cent in 2007 and can be expected to fall rapidly in the next few years in line with the COAG objective of increasing the share of community housing. Currently, the community housing share is highest in NSW (17.4 per cent), Queensland (15.0 per cent), Victoria (14.0 per cent) and Western Australia (13.2 per cent). It is around 10 per cent in South Australia and slightly above 5 per cent in Tasmania. Table 7.1 Social Housing in Australia, 2011

Public Housing SOMIH Community Housing Total Social Housing NSW 111 448 4 233 24 298 139 979 Vic 62 928 .. 10 225 73 153 Qld 51 262 3243 9 647 64 152 WA 32 519 .. 4 945 37 464 SA 39 876 1 749 4 557 46 182 TAS 11 132 339 635 12 106 ACT 10 836 .. 604 11 440 NT 4 907 .. na 4 907 Australia 324 908 9 564 54 911 389 383

Source: SCRGSP, 2012 All state governments prioritise access to social housing to greatest needs groups through segmenting their waiting lists, although definitions of need and the mechanics vary across jurisdictions. Some states have implemented common waiting lists to integrate the allocation process for all forms of social housing. In 2010-11 a total of 20,853 new households were assisted into public housing. This is a small fraction of the 192,832 households on waiting list and suggests that there will be long waits for most households (SCRGSP, 2012).

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New tenants belonging to the “greatest need” category accounted for almost 75 per cent of new public housing allocations. However there was considerable variation between states. Allocations were highly targeted in Tasmania (96 per cent), Queensland (92 per cent) and South Australia (80 per cent). Western Australia and NSW had the lowest proportion of greatest need allocations (61 per cent and 66 per cent respectively). In a severely supply constrained market, prioritising those in greatest need means that these household may be assisted earlier but at the expense of others who are forced to wait for very long periods of time or will never be held. While NSW did not target placements to those in greatest need to the same extent as other states, Box 7.7 provides an insight into the poor prospects of general social housing applicants in NSW for obtaining public housing.

Box 7.7 Access to social housing in NSW The Minister for Family and Community Services, Pru Goward released details on expected waiting times for social housing for general housing approved applicants on 29 March 2012. Figure 7.10 shows that the number of households entering social housing in the year to October 2011 was a small proportion of those on the waiting list. In the Sydney metropolitan area, households obtaining housing comprised 14 per cent of the total waiting list in Greater Western Sydney and 17 per cent in central Sydney. Outside Sydney a greater proportion of those on waiting lists were housed during the year; 24 per cent in the Northern Region and around 32 per cent in the Southern and Western region. Figure 7.10 Social housing data for NSW to October 2011

60000 50000 40000 30000 20000 10000 Properties/Households 0 Greater Southern Central Western Northern and Sydney Sydney Region Western Region Region Region Properties 37871 54638 31746 25602 Waiting List 12767 21797 12703 8789 Housed in last year 2207 3123 3077 2869 Itemised waiting lists by area and housing type showed that general applicants on the housing list were likely to experience very long waits. In the Sydney metropolitan area the only opportunity to obtain housing within two years was for persons wanting studio accommodation and the only location where this was available was Mt Druitt. Studios were likely to be obtainable within 2 to 5 years in a number of suburbs including some in the Central Sydney Region. Other properties with an expected waiting time of 2 to 5 years in Sydney were for 4 bedroom accommodation in the Eastern Suburbs; studios in several outer suburbs; one bedroom accommodation in Campbelltown, Camden and Wollondilly; two bedrooms in Campbelltown and Wingecarribee, and three bedroom accommodation in Campbelltown and Wollondilly. Other accommodation involves waiting for either 5 to 10 years or more than 10 years. Source: FaCS (2012) Supplement –NSW Housing Register expected waiting time general housing approved applicants.

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The role of community housing in the housing sector is expanding, driven primarily by changes in government policy that encourage the sector to play a larger role in the provision of affordable housing (Productivity Commission, 2010). Community housing organisations are working in partnership with the Australian, State and Territory governments, and the private sector, to increase the supply of affordable housing, and many of the new dwellings constructed under the NRAS and other Australian Government social housing initiatives are or will be owned or managed by community housing organisations. According to 2010-11 data housing allocations are somewhat less targeted in the community housing sector than in public housing. Nationally, greatest need allocations were around 72 per cent however, there were significant differences between states (SCRGSP, 2012). As was the case with public housing prioritisation of those in greatest need was evident in Tasmania (91 per cent). The degree of targeting for public housing and community housing was also similar in NSW and Western Australia. There were significant differences in Victoria, Queensland and South Australia. In Victoria targeting was tighter in community housing than in public housing (87 per cent compared to 73 per cent). The opposite situation was obvious in Queensland where only 73 per cent of community housing allocations were from the greatest need group (compared to 92 per cent for public housing). In South Australia the results the share of greatest need clients was almost halved from community housing (42 per cent compared to 80 per cent for public housing. The quality of social housing While the performance framework for the Review of Government Services includes dwelling condition as an indicator of the quality of public housing, there is no data for public housing or community housing (SCRGSP, 2012). Data for SOMIH defines dwelling condition as the proportion of dwellings in poor condition and in need of major repairs or replacement. In 2006 almost one-quarter of SOMIH dwellings were in need of major repairs and a further 7.2 per cent were in need of replacement (23.4 per cent). Any attempt to measure the quality of social housing should include the views of clients or potential clients. Figure 7.11 shows the proportion of public housing tenants who were either satisfied or very satisfied in 2010. Nationally, 73.1 per cent of public housing tenants were either very satisfied (27.2 per cent) or satisfied (45.9 per cent). Queensland and South Australia had the highest levels of overall satisfaction (84.4 per cent and 81.6 per cent respectively). The lowest levels of satisfaction were in NSW and Tasmania (64.2 per cent and 68.0 per cent respectively). AIHW (2011b) reports that: . of the tenants who indicated that the size of dwelling was important, 84 per cent felt that their dwelling met their needs; and . of those needing to be located near community and support services was important, 87 per cent said that their needs were met.

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Figure 7.11 Satisfaction with public housing, 2010

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Very Satisfied Satisfied

Source: SCRGSP, 2012 Box 7.8 reports on research conducted by Shelter NSW into tenants view on accessing public housing and the quality of public housing and the local neighbourhood.

Box 7.8 What do tenants think of public housing? Shelter NSW conducted focus groups in five locations in NSW to examine the experiences of public housing tenants on access to housing and the quality of housing and neighbourhoods. They found that: 1. Some high needs tenants gained access quickly and this was important for them to address other issues. Others commented that they had to wait for extended periods of time despite being homeless. 2. Some tenants commented that the increasing proportion of new tenants with high needs caused stress due to increased neighbourhood disturbances, demands for support from other tenants and a social divide between new and longer term tenants. 3. A common theme was the view that it is difficult to live in neighbourhoods where everyone is disadvantaged. Those in mixed tenure neighbourhoods experienced less disruption but felt stigmatised because they were public housing tenants. 4. Tenants supported public housing and wanted greater supply, but would prefer to live in mixed neighbourhoods where they were accepted by neighbours. This could include expanding the income range of tenants to reduce the stigma of living in public housing areas. 5. Tenants wanted to be treated respectfully and given better and more customised service; better responses to maintenance issues; and improved support services that met the needs of tenants Source: Eastgate, Rix and Johnson (2011)

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There is a crisis in social housing in most states as a consequence of long-term policies that have residualised the sector by failing to increase the supply to meet increased demand and undermining the funding base by restricting eligibility and targeting housing to the most disadvantaged who cannot pay market rates. The simultaneous application of funding constraints dictated by fiscal policies to produce budget surpluses has resulted in the deterioration of the housing stock. The crisis situation in Victoria outlined in a recent report by the Auditor-General apply equally to other states (Box 7.9).

Box 7.9 The crisis of social housing in Victoria A report on public housing by the Victorian Auditor-General (2012) outlined the unsustainable situation for the public housing sector: ‘The situation for public housing is critical. The current operating model and asset management approach places the long-term provision of this vital public service at risk. Despite a growing need for housing support in our community, DHS has not set overarching direction for public housing or taken a strategic, comprehensive approach to managing this $17.8 billion property portfolio’ (Victorian Auditor-General, 2012: vii). ‘The operating model for public housing, with costs increasingly exceeding revenues, is unsustainable. By using short-term strategies, such as reducing acquisitions and preventative maintenance, the division is deferring the problem. However, this cannot continue indefinitely. The seriousness of the situation is expressed in a 2011 report, for the Minister for Housing, that forecasts cash running out in 2012–13 and the division in deficit (Victorian Auditor-General, 2012: viii) The report identified two factors as undermining service delivery and sustainability: 1. Restricting revenue by setting rents at a maximum of 25 per cent of income while prioritising those in greatest need; 2. Increasing operating costs. The Auditor-General noted that despite the fact that 10,000 or 14 per cent of properties were nearing obsolescence and did not meet tenant’s needs, there was ‘no asset management strategy…and the division lacks basic information, such as accurate property condition data’ (Victorian Auditor-General, 2012: viii). The financial performance had deteriorated over time with costs exceeding rental income by 30 per cent in 2002 and rising to 42 per cent by 2011. Forecasts indicated that all cash reserves would be spent in 2012-13. The report was critical of short-term strategies that compounded the problem, such as reducing acquisitions and deferring preventative maintenance. The failure to expand the supply of housing and the poor condition of a large number of houses must impact negatively on the quality of life of tenants and prospective tenants who are unable to access public housing. Source: Victorian Auditor-General, 2012

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7.5.3 Homelessness In addition to periods of homelessness due to crisis situations, prolonged periods of homelessness are a consequence of the shortage of affordable housing. Homelessness reduces the quality of life of those affected and has flow on effects that restrict opportunities for economic and social participation. At the time of the 2006 Census there were 105,000 people who were homeless in Australia which is around one in every 190 people (SCRGSP, 2012). A White Paper on Homelessness: The Road Home was released in 2008 and the National Partnership Agreement on homelessness was signed in April 2012. The objective of homelessness policy is to halve the rate of homelessness by 2020 and offer supported accommodation to rough sleepers by 2020. The turn away rate measures unmet demand and is a primary performance indicator for access to homelessness services. It is defined as the proportion of people requiring new accommodation, or the number of people requesting immediate accommodation, that could not be accommodated relative to the total number of people who require accommodation4. In 2010-11, recurrent government expenditure on homelessness services reached $482.3 million (SCRGSP, 2012). The turn away rate on a given day was 53.4 per cent. Another measure of the success of services is the longer-term housing experience of clients. In 2009-10, clients from 84.4 per cent of closed cases achieved independent housing that consisted of: 40.7 per cent in private rental; 20.1 per cent in social housing; and 15.7 per cent in boarding houses. The majority of clients had only one support period during 2009-10, with only 8.7 per cent assisted with accommodation more than once. Figure 7.12 New applicants for homelessness services turned away

Note: Data for Victoria for 2008-09 and 2009-10 are not available Source: SCRGSP, 2012, Table 17A.7 Figure 7.12 shows the turn away rate for homelessness services for Australian states between 2004-05 and 2009-10. NSW has performed better than other states and managed to reduce the turn away rate significantly. Tasmania has the highest turn away rates, reaching 70 per cent in 2009-10. The data from Victoria is incomplete, however, there was a significant improvement in 2007-08. In both South Australia and Tasmania the turn away rate has increased over the period suggesting that access to services has deteriorated. In Queensland and Western Australia there was an initial deterioration followed by an improvement, although turn away rates remain higher than in 2004-05.

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7.6 Education Australian governments partner in the delivery of school education. The states are responsible for delivering education to all children of school age. The Commonwealth provides funding to government and non-government schools though the national Schools SPP. Government recurrent expenditure on school education was $41.8 billion in 2009-10, of which government school expenditure constituted 78.7 per cent (SCRGSP, 2012). While the Australian Government provided funding of $3.55 billion to government schools and $6.51 billion to non-government schools. High needs students are concentrated in government schools. For example, 5.9 per cent of students in government schools in 2010 had a disability compared to only 3.1 per cent in non- government schools. In total, 78.4 per cent of students with disabilities and 85.3 per cent of indigenous students attended government schools (SCRGSP, 2012). This section examines access and equity performance indicators for education: participation, attendance and completion rates. Participation and attendance are essential to achieve the objective of providing all citizens having the opportunity to develop to their full potential to take advantages of further education and employment opportunities. Figure 7.13 Participation rates, 2010

120

100

80

60

Enrolled(%) 40

20

0 NSW Vic Qld WA SA Tas

14 year olds 17 year olds

Source: SCRGSP, 2012; Table 4A.98, School participation rates, all schools, 2010 Figure 7.13 shows participation rates for youth aged 14 years and 17 years by state in 2010. Between the ages of 14 and 17 the participation rate drops in all states and there are significant differences between jurisdictions. At age 17 the highest participation rate is in Tasmania (83.5 per cent), followed by Victoria (80.2 per cent) South Australia (78.3 per cent). The lowest enrolment rates are for Western Australia (44.1 per cent) and Queensland (51.1 per cent). NSW enrolment rates lie between these extremes with 70.5 per cent of 17 year olds participating in school. The second measure is the attendance rate by those enrolled in school. Regular school attendance is an important determinant of results. Attendance rates are expressed as the number of FTE student days attended as a proportion of the total number of possible student days.

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Figure 7.14 Attendance by school type

100 90 80 70 60 50 40 30

Attendance Rates (%) 20 10 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Government Independent Catholic

Source: SCRGSP, 2012; Table 4A.110, 4A.112 and 4A.114 Figure 7.14 shows the attendance rate for government, independent and Catholic schools for each year of education. Data is not presented by state due to data inconsistencies. Independent schools consistently achieve higher participation rates. Government and Catholic schools have similar participation rates for primary students but the relative performance of government schools declines in high school so that by Year 10 the participation rate for government schools is 77 per cent compared to 82 per cent in Catholic schools. The fact that Catholic and independent schools have the ability to select students may contribute to these outcomes. Figure 7.15 Year 12 completion rates by SES level, 2010

90 80 70 60 50 40 30

20 School completionSchool rate (%) 10 0 NSW Vic Qld WA SA Tas

Low Meduim High

Source: SCRGSP, 2012: Table 4A.105, completion rates, year 12, by SES, all schools Finally, retention rates are measured as the number of Year 12 completions relative to the potential Year 12 population (the estimated resident population aged 15-19 divided by five) are shown in Figure 7.15 by the SES level (low, medium or high) of the place of residence5. The national Year 12 completion rate was 66 per cent in 2010 but ranged from 58 per cent in Draft Report 227 the low SES group, to 64 per cent for the medium SES groups and 77 per cent for the high SES group. Tasmania’s performance was significantly below that of other states, with completion rates of 33 per cent, 50 per cent and 57 per cent for the low, medium and high SES groups respectively. NSW had the highest completion rates for the low SES group (63 per cent). Queensland, Western Australia and South Australia achieved the best result for the medium SES group. For the high SES group Victoria and Western Australia achieved the highest completion rates, closely followed by NSW. Differentiated performance by SES group is evident for all states although the effect is more muted in some states and between some groups. In most states the difference is between the medium and high SES group is much larger than the gap between the low and middle group. Another indicator that is prominent in the literature is the ratio of students to staff. Interpretation of student-to-staff ratios is somewhat tricky since it relates to both efficiency and quality of education. If the ratio is increasing it indicates increased efficiency on the condition that quality does not suffer. This is because the same educational outcomes are being achieved with a smaller number of teachers. However, increased student-to-teacher ratios can are not unambiguously good as pointed out in by SCRGSP (2012: 4.37): While a low or decreasing student-to-teacher ratio may reflect decreasing efficiency, it may also reflect a higher quality education system, if a lower ratio leads to better student outcomes… In 2010, the student-to-teacher ratio for government primary schools was lower than for non- government schools (15.4 compared to (16.5). However, non-government schools had lower ratios for secondary schools – 11.7 compared to 12.3 for government schools. It is difficult to make judgements about the impact of student- to-staff ratios. Educational outcomes are influenced by a wide range of factors that include SES levels, personal characteristics such as disability or membership of disadvantaged groups, economic and social disadvantage. Changes in resources for education are also important especially for those students who are unable to exit the government education system to access schools with higher levels of resources. The potential impact of budget cuts in schools in Tasmania as a result of the 2011-12 Budget cuts is discussed in Box 7.10.

Box 7.10 Impact of budget cuts on education in Tasmania The 2011-12 Tasmanian Budget included total expenditure cuts of $877.7 million between 2011-12 and 2014-15. Education spending is being cut by a total of $189.8 million over this period. The Government indicated that around half the savings would be achieved by reductions in employee costs. In the first six months of 2011-12 staffing levels in the Department of Education fell by 273 FTE equivalents or 3.1 per cent of the June 2011 level (DTF, 2012). Some of the decline may be attributed to fluctuation in staffing over the course of the year as fixed term positions are terminated at the end of the school year. However, 235 staff left after accepting Workforce Renewal Incentive Program (WRIP) packages. The Government’s plan to close up to 20 schools to save $23.8 million by 2014-15 was thwarted due to a public backlash. However, the School Viability Reference Group (SVRG, 2012) established by the Government provided criteria for establishing whether schools were viable and processes to be followed in order to close schools in the future, including the number of students.

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A recent report in the Hobart Mercury revealed that in the year to February 2012 the number of teachers had declined by 145 and the number of teachers assistants fell by 113. Staffing reductions could be attributed in the elimination of above-quota staff and the take-up of WRIPs. The impact of the budget cuts and reductions in staffing include larger class sizes in line with the lifting of maximum class sizes of 25 students which was also a feature of the last budget. Over four years the cut to funding for class size reductions will total $36.5 million. Education funding faces further significant reductions in the future, including the prospect of school closures using the criteria determined by the SVRG. Source: Hobart Mercury, 2012; DTF, 2012; SVRG, 2012.

7.7 Disability services This section examines National Disability Agreement performance data for disability accommodation support, community support and community access services. Figure 7.16 shows the proportion of the potential population aged to 64 years using specialist disability services in 2008-096. The national level of access is 20.8 per cent (not shown) for total services but there is significant variation between the states. The highest level of access to total services is South Australia with 30.9 per cent followed by Victoria with 28.8 per cent of the potential population accessing services. Queensland has the lowest proportion at 13.9 per cent. For all states access to community support services is higher than community access and accommodation support. Figure 7.16 Access to State/Territory delivered disability services, 2008-09

35

30

25

20

15

10

5

0

NSW Vic Qld WA SA Tas Proportionof potential population (%)

Accommodation support Community Support Community Access Total

Source: SCRGSP (2010c) National Agreement performance reporting 2009-10: National Disability Agreement Figure 7.17 provides an estimate of unmet need for people aged 0-64 years. This represents the potential population who have attempted to get more formal assistance but still require more assistance in 2009.

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Figure 7.17 Unmet need for disability services, 2009

Soruce: SCRGSP, 2012 Table 14A.27 The estimates of unmet need are provided with a lower and upper bound as well as the estimate to indicate the range of the estimate. Tasmania has the lowest estimated unmet need at between 7.5 per cent and 17.7 per cent. Western Australia’s unmet need is between 11.6 per cent and 21.6 per cent. Unmet need is much closer for the other states where estimates range from around 16 per cent to 25 per cent. Notwithstanding the relatively lower estimate of unmet need in Tasmania, the situation deteriorated in 2011 as explained in Box 7.11

Box 7.11 Disability services in Tasmania – unmet need DHHS publish a Progress Chart which shows that: 1. The number of people with a disability urgently waiting for a supported accommodation place increased by over 15 per cent, from 59 in December 2010 to 68 in 2011. 2. The number of people waiting for a community access placement increased by over 28 per cent in 2011, from 49 to 63 persons.

Source: DHHS (2012) Your Health and Human Services Progress Chart, March 2012

7.8 Home and Community Care (HACC) The Home and Community Care (HACC) program commenced in 1985 as a joint Commonwealth/state program designed to assist people with disabilities and the elderly to remain at home through the provision of a range of support services including, nursing and personal care, home modification and maintenance, transport, meals and domestic assistance. Access to Home and Community Care (HACC) services is essential to improving and maintaining the quality of life of the elderly and people with disabilities residing in the community and ultimately to the fulfilment of individual desires to remain in the community rather than move to an institutional setting. Evidence on HACC suggests that services are inadequate, fragmented and difficult to access.

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Figure 7.18 HACC clients, assistance type by hours of service received, 2009-10

100 90 80 70 60 50 40 30 20 10

0 Porportionof services (%)

<13 hours 13-52 hours

Source: Australian Government Department of Health and Ageing 2010. Figure 7.18 shows that the proportion of HACC clients that received services for less than 13 hours or between 13 and 52 hours in 2009-10 by the type of assistance. The data show that the proportion receiving, on average, less than one hour of assistance per week (less than 13 hours and 13-52 hours) ranged from 41 per cent for Centre-Based Day Care to over 99 per cent for: allied health care; assessment; case management; client care coordination; and home maintenance. The average amount of service per client varied between the six states. While the average number of hours of centre based day care for Australia was 135 hours in 2009-10, this ranged from 100 hours in Queensland to 174 hours in NSW. Similarly domestic assistance ranged from only 18 hours in Tasmania to almost 36 hours in NSW. There was less variation in the number of meals delivered; from 99 in Queensland to 116 in Tasmania. Other care services exhibited large variations between states: personal care ranged from only 22 hours in Queensland to 118 hours in NSW, while respite care ranged from 58 hours in Queensland to over 100 hours in NSW and South Australia. The value of home modifications averaged $592 nationally with no expenditure for Victoria and an average of $1132 per client in WA. The demand for HACC services is expected to grow rapidly from the 900,000 clients in 2009-10 due to the ageing of the population, particularly the growth of older age groups in the population over 65 years. The ABS survey on Disability, Ageing and Carers (ABS, 2003) found that 41 per cent of people aged over 60 years required assistance with health conditions or daily activities, due to disability or age, but the rate increased from 26 per cent for those aged 60-69, to 84 per cent for those aged 85 years or older. In addition to the effects of population ageing, growth in the demand for community care is driven by the preferences of older people to remain at home and the availability of informal support provided by relatives and friends. In 2003, of the Australian population needing assistance with daily activities such as mobility, showering, meal preparation and housework, 79 per cent received assistance from family and friends while 53 per cent were assisted through formal community care (ABS, 2003). There is substantial evidence of unmet need for community care services. Research into HACC services in Melbourne by the Brotherhood of St Laurence (2001: v) indicated that due to insufficient services, elderly people needed to prove that they were incapable of

Draft Report 231 undertaking activities such as showering and meal preparation and were forced to ‘advocate strongly and demonstrate a significant need in order to receive a service’. The ABS Survey found that 25 per cent of those self-identifying a need for assistance with everyday activities felt that their needs were not being fully met, including 50 per cent of those with a profound limitation (ABS, 2003). Box 7.12 provides further information on HACC services in NSW and Victoria

Box 7.12 The inadequacy of HACC services NSW An insight into the extent of unmet need for HACC services in NSW is provided by the Auditor General’s (2004) report that stated only 53 per cent of eligible clients were assisted in 2002-03 and this fell to only 26 per cent in 2003-04. The reduction in client numbers was attributed to the prioritisation of those with complex needs requiring more hours of assistance, combined with a policy of replacing only one of each 4 clients exiting the programme, to prevent budget overruns (NSW Auditor-General, 2004).

Victoria The Victorian Auditor-General (2009) found that in 2007-08 clients received on average less than one hour of service per week. In addition to the inadequacy of total funding the Auditor- General (2009: 1) found that the distribution of funding was inequitable both within and between regions so that ‘where individuals live directly affects both access and level of service.’ He reported that calculations by DHS indicated that an additional $11.6 million in funding would be required to achieve equitable funding.

Source: Victorian Auditor-General (2009), (NSW Auditor-General, 2004).

7.9 Child Protection Protecting children from harm or neglect is a prerequisite for providing them with the opportunity to reach their potential. Important factors to measure the effectiveness of child protection services include (SCRGSP, 2012): . The response times to commence and complete investigations; . The substantiation rate; . Stability of placement; . The proportion of children under 12 years in home based care; . Placement with extended family; . Continuity of care workers; . Client satisfaction. While these measures have been identified for evaluating the effectiveness of the child care and out-of-home care performance indicator framework, some measures are yet to be developed.

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The response time to commence investigation is the time in days between notification and the commencement of an investigation. This measure provides an indication of the timeliness of response. However, the data are not directly comparable across jurisdictions and are incomplete. In general, the majority of investigations are commenced within seven days of notification. The response time to complete an investigation is a measure of effectiveness that measures the number of days between notification and the completion of the investigation. Nationally, almost one-third of investigations were completed within 28 days, slightly more than one-third between 30 and 90 days and almost one-third in 90 days or more. The substantiation rate is the proportion of finalised investigations where harm or risk of harm was confirmed. This indicator is being developed to overcome variations in definitions of substantiations across jurisdictions. Stability of placement is important for children and young people to have an opportunity to achieve quality outcomes in out-of-home care. Extensive research findings have established that children with multiple placements have poorer outcomes than those with stable placements. This indicator is measured as the proportion of children who are on permanent orders and who exit care during the reporting period who had 1 or 2 placements during a period of continuous out-of-home care. For children exiting care after less than 12 months in 2010-11, 83.2 per cent had 1 or 2 placements. Those in OOHC for more than a year tended to have more placements; the proportion with 1 or 2 placements was 48.7 per cent (SCRGSP, 2012). In June 2011 around 97.4 per cent of children under 12 years in OOHC were in a home based care situation which is seen as the most appropriate arrangement of the majority of children at this age. There are a number of indicators of positive outcomes for children in OOHC. Placement with extended family is viewed positively since it enables family bonds to be maintained. Similarly, local placement of children in OOHC allows children to continue at the same school and maintain social networks. This indicator is not available at present. Placement with siblings is seen as desirable although this indicator has not yet been developed. A higher proportion of children with a case plan is viewed as desirable as an indicator of service quality, although the quality of individual case plans is difficult to measure. The client satisfaction indicator is yet to be developed. However, there are some indications of levels of satisfaction with a number of state programs that have been developed in the program evaluation process: . In NSW the evaluation of the Brighter Futures program included a survey conducted from August 2007 to June 2009. Respondents reported a high level of satisfaction with the quality of services provided by Brighter Futures. . A survey in Victoria in 2001 found that child protection improved the safety and circumstances of young people. . In Queensland children in out of home care are surveyed every two years by the Commission for Children and Young People to ascertain satisfaction with services and placements. . A survey of foster carers in Western Australia in 2008 revealed that 63 per cent of carers felt their needs were met. Additional assistance that would have been beneficial to carers included mentoring by experienced carers and better access to case workers. . Interviews conducted by the Office of the Guardian for Children and Young People in South Australia found that children in out-of-home care value having a positive Draft Report 233

relationship with their case worker. A Foster Carers’ Relation Survey conducted in South Australia in 2009 revealed that 60 per cent of respondents were satisfied with their interactions with Families SA and 70 per cent were happy with the service of support agencies; and . The Commissioner for Children in Tasmania initiated a child visitor’s program to evaluate the out-of-home care experience. In addition to these types of formal programs, surveys and evaluations, NGO service providers are required to conduct evaluations of satisfaction as part of their funding requirements. Unfortunately, the results of these evaluations are not in the public domain and cannot be included in this research. Numerous inquiries have been held into child protection services in Australian states. The findings have indicated that child protection services are underfunded, under-resourced, have failed to protect vulnerable children from neglect and abuse and have failed to provide adequate, high quality services for children in OOHC and young people transitioning from OOHC to independence. Outcomes for children in the child protection system have been found to be inferior in relation to health and wellbeing, education and employment outcomes. Young people who have been in the system are more likely to engage in risky behaviours, experience periods of homelessness, and girls are more likely to have children at a young age. This section provides summaries of inquiries held in some states. Child protection issues are considered in more detail in a companion report ‘The Impact on Community Services of Staff and Service Reductions, Privatisation and Outsourcing of Public Services in Australian States: Case Studies of Biosecurity and Primary Industry, Child Protection and Housing’.

7.10 Corrective services The objectives of corrective services are to protect the community by providing safe, secure and humane custodial facilities and to provide assistance to prisoners to minimise the risk of re-offending (SCRGSP, 2012). The identification of performance measures of the quality of services, effectiveness and efficiency is difficult task in relation to corrective services (Auditor-General of Queensland, 2011) The quality of service provision can be measured by indicators such as time out of cells, participation in employment, education or training or assaults while in custody. Efficiency measures include costs per prisoner, prisoner to staff ratios and prison utilisation. This section reviews some of these statistics by state along with literature on corrective services. Table 7.2 presents corrective services data for Australian states for 2010-11. Real net operating expenditure per prisoner ranges from under $200 per day in Queensland, South Australia and New South Wales to more $323 per day in Tasmania7. Capacity utilisation is a measure of the annual daily average prisoner population as a proportion of total beds. While higher utilisation rates are indicative of higher levels of efficiency, it is necessary to maintain some spare capacity. Capacity utilisation of over 100 per cent in NSW (102.6 per cent) and Western Australia (134.9 per cent) indicates overcrowding. The imprisonment rate which is defined as the number of adults imprisoned per 100,000 varies significantly between jurisdictions. Western Australia has the highest rate of 261 followed by New South Wales with 179 per 100,000. The lowest rate is in Victoria with 105 per 100,000. However, the rate is likely to increase in future due to policy changes that include the Victorian Government’s commitment to expand capacity by 500 beds over four years. The safety of prisoners in custody is indicated by the rate of assaults and deaths from apparent unnatural causes per 100,000 prisoners. Serious assault rates are higher in Queensland, Victoria and South Australia while total assaults were significantly higher in Draft Report 234

NSW than the other states. The rate of deaths from apparent unnatural causes is at or below 0.10 per 100,000 prisoners in all states. The amount of time prisoners have out of their cells is a measure of the quality of treatment with a greater number of hours per day that prisoners are not locked in their cells indicating better performance. In this regard, Western Australia performed the best with an average of 12.1 hours per day, NSW and Queensland were around the national average of 11.4 hours, and South Australia and Tasmania had inferior performance at 9.5 hours. Data was not available for Victoria. Participation in employment, education and training provide an opportunity for prisoners to prepare for economic participation and reintegration into the community upon release. Rates of participation in employment were generally high, ranging from around two-thirds in South Australia to 87 per cent in Victoria. Nationally 35 per cent participated in some form of education or training which was concentrated in vocational education. More than half the prisoners participated in education or training in Tasmania and just under half in South Australia. The lowest rates were in Queensland (27.8 per cent) and New South Wales (30.3 per cent). Table 7.2 Corrective services data, 2010-11

NSW Vic Qld WA SA Tas

Real net operating expenditure a 199.46 257.35 187.86 244.00 193.99 322.85

Capacity utilisation 102.6 na 82.8 134.9 na 76.0

Imprisonment rate b 179.2 105.4 157.4 261.0 153.6 121.3

Serious assault 0.13 0.92 1.32 0.35 0.86 0.63

Assault 13.06 7.63 3.25 5.68 8.35 9.07

Deaths from apparent unnatural causes 0.10 0.04 0.05 0.02 0.10 –

Time out of cells 11.4 na 11.2 12.1 9.5 9.5

Employment c 81.1 87.2 75.5 84.2 74.6 66.2

Education and training (total) d, e 30.3 40.4 27.8 36.3 48.9 52.5

Pre-certificate Level 1 courses 2.9 3.9 5.8 – 5.8 8.9

Secondary school education 12.2 0.2 2.6 0.1 0.4 22.7

Vocational Education and Training 20.0 35.1 19.0 35.2 50.3 19.9

Higher education 0.6 2.7 3.4 1.8 0.3 1.0 Notes: a. Calculated from net operating expenditure, which excludes payroll tax and is net of operating revenues from ordinary activities. b. Rates are based on daily average prisoner, periodic detainee or offender populations, calculated against adult population figures for people aged 17 years or over for Queensland and for people aged 18 or over in all other jurisdictions, reflecting the age at which people are remanded or sentenced to adult custody. Male/female and Indigenous/Non-Indigenous breakdowns are calculated against the relevant population, that is, per 100 000 male, female, Indigenous, and Non-Indigenous adults respectively. Total population data relate to 31 December so that Estimated Resident Population (ERP) at 31 December 2010 is used as the denominator for 2010-11. Calculations of rates for the Indigenous population are based on ABS Experimental Projections, Aboriginal and Torres Strait Islander Draft Report 235

Australians. In the absence of estimates of the Indigenous population for 31 December, rates in this table are calculated using derived estimates based on averaging estimates for the preceding 30 June and the following 30 June. Calculations of rates for the Non-Indigenous population are based on data derived by subtracting Indigenous population projections from Total population estimates and should be used with care c. Data for Victoria, Tasmania, South Australia and the NT are based on the number of prisoners employed at 30 June and are calculated against the number of prisoners in custody on that day. Percentages for all other jurisdictions are based on an average of the number of prisoners employed on the first day of each month, calculated against the daily average prisoner population. d. Figures for NSW, Victoria, WA, Tasmania and the NT are based on the number of prisoners in education on the last day of term preceding 30 June, calculated against the number of prisoners in custody on that day. Other jurisdictions use a monthly count of prisoners in education averaged over the 12-month period, calculated against the daily average prisoner population e. Percentage of total prisoners in education may not equal the sum of percentages for each education category, as an individual may be participating in more Source: SCRGSP, 2012 There has been a bipartisan approach to law enforcement in Australia in the past couple of decades. Election campaigns have included what could almost be described as bidding wars to win the mantle of being “tough on crime”. Truth in sentencing legislation has resulted in longer sentences and higher prison populations and overcrowding as discussed above. The serious deficiencies in the quality of service provided to prisoners are exemplified by comments by Kevin Foley, then Treasurer of South Australia as shown in Box 7.13

Box 7.13 Overcrowding in South Australian prisons The Independent Weekly reported that the South Australian Government’s law and order agenda was causing prisoner numbers to rise without a corresponding increase in accommodation. The Weekly claimed that South Australia had the worst prison system in Australia as evidenced by ‘a dismally failing rehabilitation program, the nation’s longest jail terms and the worst overcrowding in the country’. Page 3 Gout (2008) states that the Government responded stating that they would triple the number of prisoners in one person cells because they didn’t deserve better treatment. The Treasurer, Kevin Foley stated: ‘What we’re making very clear is that if we’ve got to rack ‘em, pack ‘em and stack ‘em we will.’ … ‘If some civil libertarians get upset then tough luck.’ A Civil Liberties Council spokesperson stated: ‘The government treats human beings worse than animals. You really wouldn’t treat animals like that.’ … ‘Australia signed those treaties [international treaties on humane treatment]. You can’t treat people like this in the 21st century – there’s an obligation, a duty of care.’ Source: Gout, H, 2008

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7.11 Conclusion This chapter has presented a necessarily brief survey of available data on levels of public service provision and the extent to which it is meeting public need in several policy areas. A recurring pattern of inadequate provision due to public sector retrenchment and fiscal austerity is discernible across a wide spectrum of service areas. More comprehensive analysis is provided in the companion volume to this report examining the state of child protection, social housing and biosecurity / primary industries research – each of which reveal a failure to invest in our nation’s future, a failure of governance and the abandonment of equity as a core policy principle. We observe the paucity of information governments provide as to the quantity and quality of service provision, relying as we do on the government agencies themselves to collect relevant data and report on their own performance. Though they report how long people are on elective surgery waiting lists, we are not told how long people had to wait to get on those lists. They may report how many unallocated child protection cases they have as of the 30th of June, but not how many were taken off the list on the 29th of June to hide the extent of their neglect. This highlights the crucial importance of preserving the independence and resources of auditors-general, and other scrutinising bodies, without whose reports the little that we do know of the state of public service provision would almost certainly remain hidden from public view. We also observe that while governments are aware of the suffering and neglect of the most vulnerable and disadvantaged Australians, be it due to their geographic location, the socio- economic status of their parents, or crises they have encountered in their lives, their race, disabilities that they were born with or have acquired, governments have applied insufficient resources to their care and inclusion. Platitudes about building the ‘fair-go’ society, mouthed by political leaders to gain electoral support, are exposed for the hollow rhetoric they are where we see the poor waiting years with rotting teeth and gums, people needing help with basic daily care receiving little or none, individuals and families without secure shelter, children left in the hands of abusers, and State Treasurers hailing prison overcrowding as a good thing. Our progress in building a decent, modern, civilised society, is not measured by the standard of living of the richest Australians, so frequently paraded before us, but by that of the poorest among us, of whom we hear so little. In the past thirty five years of public sector retrenchment, social progress has been very slow and we are falling behind on many fronts. In understaffed and ill-equipped health systems, we see inadequate degrees of access compromising the health of patients and severely impacting on the quality of their lives. We see States such as Tasmania performing badly by national standards and still cutting health funding. Insufficient GPs are being trained and deployed to non-metropolitan regions, creating wide disparities in standards and costs of health services according to geography. If, as a society, we need people to live outside metropolitan areas, for agricultural and other purposes, we cannot justify compromising their access to basic services like health for doing so. People with mental illness are living in slum conditions, despite the neo-liberal promises of 25 years earlier that communities would be provided with the resources to care for them outside of institutional settings. Hundreds of thousands of new dwellings are needed to meet the need for secure accommodation and redress the extent of homelessness, and they have not been built by reliance on the market alone. There needs to be a substantial increase in investment in public housing in every state of Australia.

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For Australians to be able to compete in the 21st century we know we will have to invest more than we do, not less, in our public education systems, to raise the retention and performance of our young people with high quality education. This entails lowering teacher- student ratios and investing in more specialist support and professional development for the teaching workforce, which requires they be given the time to access it. Instead we have States, particularly Tasmania, that are cutting teachers and teaching assistants for want of sufficient funding to pay for them, and elsewhere cuts to crucial support functions. After 35 years of public sector retrenchment we see little evidence that the supposed efficiencies, cuts to services, have freed resources in order that they be invested where they are most needed, as has been repeatedly claimed as the justification. We see cuts to services that needed more resources, and falling levels of public provision in so many areas, while wealth has accrued to the wealthiest, most politically powerful sectors of society. We have underutilised our human and other productive resources across the country for decades, denying training and employment to hundreds of thousands of people who were available to provide these services, under the spurious assertion that it is efficient to do so, and left a trail of suffering and unrealised potential in our wake as a consequence. Surely it is time for us to question the policy framework that has produced this result? Are we seriously saying we cannot afford to employ the people needed to provide these services when our federal government is the sovereign issuer of a fiat currency, and therefore can mobilise any amount of unutilised productive resource it desires? What real resource constraints are stopping Australians from providing even the poorest among us with the best standard of living in the world?

1 Elective surgery savings will be over $21 million in 2011-12; $19 million in 2012-1; and over $18 million in 2013-14. 2 The NEST target is for 90 per cent of all patients seeking treatment at emergency departments to leave the department for admission to hospital, be referred to another hospital or be discharged within four hours. 3 The Australian Government expenditure for CRA in 2010-11 totalled $3.1 billion. 4 The total number of people who are seeking accommodation include those requiring new accommodation or those who were seeking to continue their accommodation from the previous day. 5 Low socioeconomic status is the average of the three lowest deciles, medium socioeconomic status is the average of the four middle deciles and high socioeconomic status is the average of the three highest deciles 6 Access to NDA specialist disability services is defined as the number of people using a particular NDA specialist disability service divided by the ‘potential population’ for that service. The potential population is an estimate that broadly indicates the number of people with the potential to require specialist disability services at some time. 7 The daily cost of managing a prisoner/offender, based on operating expenditure net of operating revenues divided by the number of days spent in prison or detention by the daily average prisoner population.

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X, Y & Z

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