Commentary on The Role of government in Queensland (2006)

• Launch
• CPDS Comments
• Report Outline

This commentary outlines, and offers comments on, the main themes of the report. A more detailed outline of the report itself is included below.

In brief this commentary suggests that:

• The Role of Government report is a useful starting point for developing a much needed practical sense of direction for government in Queensland, but may not provide the best solution;
• simply maximizing the private sector's role in delivery of public services and the economy generally may be a less appropriate guide to reform than ensuring appropriate usage of market and administrative processes;
• overly simplistic support for private sector participation in government service delivery has been one of the factors in serious deterioration in administrative competences - which have translated into escalating costs;
• the potential for future budget difficulties in Queensland has been apparent  for many years;
• improving the productivity of Queensland's economy requires more effective strategy, not simply more support for the private sector;
• more private sector involvement in services delivery is not the only option for overcoming the looming budgetary gap, and may not make more than a marginal contribution to bridging the gap.

Commerce Queensland would like to see government spending in Queensland (and thus taxation) reduced. The Service Delivery and Performance Commission is a positive start in achieving this, and Des Moore's report will be discussed with the Commission. Des Moore was commissioned to undertake this project because of his earlier analysis of options to rationalize federal government spending.

Presentation by Mr Des Moore (A New Vision for Queensland Governments, 4/5/06)

On 10 February 2006 the Council of Australian Governments (COAG) agreed to a new national reform agenda - which emphasized increased competition

There is a need to put an end to any dying cause - and government has become like this. But Queensland should not have to wait for intergovernmental agreement. It can act alone to apply increased competition. This requires a government intent on maximizing the private sector's role.

The dividing line between the public and private sectors is unclear - as the private sector can provide public goods (eg security services in Iraq).

Such arrangements can benefit consumers both economically and socially - and there is bipartisan support for such a shift. Even the ALP now sees effective regulation / competition as more important than public ownership.

Increases in the private sectors role can lead to reduced taxation.

There is value in adopting proposals for a clear purchaser-provider split as recommended by the 1996 Commission of Audit. Services could be funded by government and delivered by the private sector. This could start with hospitals - by contracting out services. Victoria has used PPPs for hospitals, while NSW has used the private sector for construction and 30 year operation of 9 schools (with considerable savings). Clear performance standards need to be defined for such contracts.

The community has accepted greater private participation in schools despite the additional costs incurred in fees on top of taxes - and there has been an increase in private school student from 28% to 30% over 10 years. There has been an even more dramatic increase in support for private hospitals in Queensland (up from 36% to 47%) with a resulting $2bn saving to taxpayers. The Queensland Government decided to get out of financial services', after the Commission of Audit had pointed out that government was not efficient in business activities.

Queensland's budget outlook is deteriorating - and capacity to finance expansion is being reduced. Increases in recurrent spending now make it difficult to provide recurrent funding for capital works. Forward budget projections assume 4% pa revenue increases - though gross state product (GSP) will increase 7% pa and past revenue growth has been 7% pa. Thus there must be a slowdown in spending growth of around 3% pa. Goods and Services Taxes (GST) have grown 10% pa since 2001, but in future will only grow 4% pa. Projected budget revenues of $30bn for 2008-09 are $30bn - which is $2bn down on the amount that would have been available if past growth had continued. The GST bonanza is over.

The shortfall can only be made up by the private sector. The private sector's contribution to total final demand in Queensland is below that in 3 large states.

While Queensland has had the fastest economic growth, in per capita terms its performance is not good. Over the past 7 years there has only been a very slight improvement in Queensland's relative GSP / capita status.  An appendix to the Role of Government report (by Michael Cunningham) showed that Queensland's productivity performance has been comparatively poor. In 2003 Treasury produced a report on The Drivers of Economic Growth which sought to identify state-based policy interventions which might lift productivity. Cunningham's analysis suggests that a more broadly-based approach would be preferable.

Deregulation would be useful. There is a need for a review of Hotspots for Regulatory Reform, and perhaps a shift of responsibility from State Development to Treasury.

Queensland's convergence with national productivity levels should have been faster. Better results would be achieved by encouraging the private sector - though not by trying to pick winners (such as the magnesium smelter which resulted in losses for many investors). The quality of economic activity is critical. Government should encourage the private sector across the board - both in government activities and in the broader economy.

A 1/5 to 1/7th reduction in tax is proposed - amounting to around 4% of state spending. Such reductions could be defeated by negative reactions from those affected by corresponding spending cuts, unless there is strong support for tax cuts. At present Queensland's taxes are 14% below the average for Australian states, and this could become 30% below.  These cuts could be financed by (a) reducing concessions in various areas (eg for exploration) (b) amalgamating departments (c) eliminating government printer and public works functions (d) reducing growth in public service employment (to 1% pa cf 3% in the past); enhancing the private sector's role in government functions (eg through non-government schools; private hospitals; and various services).

Comprehensive support should be announced for the role of the private sector.

$22bn in public assets should be sold. Electricity generating assets earn a below average rate of return on capital. Non-government schools and private hospitals should be encouraged (eg by low interest loans, and ready accreditation).

There could be an inquiry into establishing an upper house of parliament as a house of review - to get better accountability. This should not require any overall increase in numbers of members of parliament.

The main challenge is to allow individuals to decide for themselves.

Comments and Questions

• Based on experience with the Crime and Misconduct Commission, it seems that establishing an upper house is critical, as CMC has had to try to fulfil this role.
• How would tax changes be phased in? ....  Government would need to assure delivery of services
• There seemed to be problems when public transport in Melbourne was sold. What went wrong? ..... Nothing. There was no real problem
• Proposals seem to be focussed on what government should NOT do and on changes at the margin, rather than suggesting how serious deficiencies in government competence and machinery can be overcome. Also private sector involvement in public sector activities can give rise to difficulties (eg in clearly defining performance requirements; in distorting political / policy process to serve private interests). ..... The state needs a clear sense of direction, and currently does not have one
• There is a great deal that is written in theory about government. It is good to see a practical proposal

There is no doubt that there is an urgent requirement for practical proposals and a clear sense of direction to overcome very real deficiencies in government performance (and potential financing difficulties) in Queensland.

The Role of Government in Queensland is a useful starting point for achieving this. It has, for example, highlighted:

• potential financing difficulties in the state budget;
• the smaller private sector role (and thus greater public sector role) in Queensland's economy in comparison with Australia as a whole;
• relative weaknesses in the productivity of Queensland's economy - and the slow rate of convergence with national averages;
• the role of both the private and public sector in provision of health and education services - and the rapid increase in private health services in particular;

However the Report's proposal for an increased private sector role in the economy generally and in public services delivery in particular can not in itself be sufficient to deal with presenting difficulties.

In relation to various points raised during the launch of the Report, it is noted that:

• there is little doubt that governments are in serious difficulties (eg see Australia's Governance Crisis). However this is a reason to reform, rather than put an end to, them. Failed states are neither happy nor prosperous places - and unless the system of government is repaired this is a not-impossible long term outcome of past and present efforts to destroy the effectiveness of governments. It is reportedly being discovered in third world countries that as government influence is withdrawn (eg due to financial constraints) its place is taken by local 'Dons' who recreate feudal forms of power [1];
• the shift in demand from public to private (mainly church) educational institutions even in the face of substantially greater cost has frequently been suggested to reflect differences in the value systems they espouse;
• COAG's new national reform agenda seemed less about more competition than about giving more priority to social / human capital issues. Moreover there are doubts that COAG's agenda can be adequate (see Comments on New National Reform Agenda) because, for example:
  • economic competitiveness can't be ensured simply by market liberalization (ie this increases the incentive to compete but does not necessarily result in the capabilities required to do so successfully);
  • improving human capital can not ensure better economic performance unless the economic system can become much better equipped to make productive use of such inputs; and
  • the agenda does not address the decline in effective governance that has resulted from political abuse / neglect and the 'one-size-fits-all' application of competition principles to functions that can't be coordinated that way. The problem could be that COAG has not considered what role governments actually need to play;
• simply maximizing the private sector's role in public service delivery seems a less appropriate guide to reform than using both market and non-market (ie administrative) mechanisms where they are most appropriate. For example:
  • Queensland had long history of 'state corporatism' (eg traditional agrarian socialist institutions for agriculture; and the financial institutions Treasury created in the 1980s) whereby the private sector was regarded as a virtual extension of the state to be coordinated through administrative rather than market mechanisms. Such arrangements historically have often been associated with fascist governments (especially in Europe). They demonstrate the fact that support for the 'private sector' does not necessarily mean the same thing as having market's to ensure that firms are accountable;
  • involvement of the private sector in the provision of true public services (ie those in which there are complex public-interest concerns so privatisation is unrealistic) can give rise to difficulties, eg distortion of the public policy process to suit private interests; and making it difficult to manage those systems as a whole (see Second Best Alternatives). Such difficulties (which impose costs in contract management and raise risks of systemic failures) seem inherent in functions that have been undertaken through PPPs;
  • governments' most critical role in society involves managing the relationships between things which can not be properly coordinated through market mechanisms (eg ensuring security, creating frameworks for social and economic interactions, and provision goods and services subject to market failure). In recent years their ability to do this has been seriously compromised. This can not be corrected by private sector participation, but requires restoration of effective machinery and professional competencies within governments themselves. Rate of return on capital is an appropriate guide to resource allocation in areas which can be adequately coordinated through market mechanisms, but is inappropriate as a sole criteria where this is impractical. A market economy will tend to maximize (or at least increase) return on capital, but a key role of government is to alter the outcomes that will result from a free market. Unless governments do this the social and environmental dysfunctions that can emerge from an unconstrained market economy would lead to political instability;
• it is not possible to meaningfully propose changes to the role of government without an analysis of the challenges that government currently faces. Some suggestions about these are offered below;
• there certainly has been bipartisan support for a shift to private participation in public functions. Unfortunately changes have been made without serious consideration of how governments could continue to perform their primary roles, so this (together with the effect of politicisation) seems to be a major factor in the deterioration in effectiveness of public administration - and, in Queensland, this seems to be translating into escalating costs;
• the poor productivity performance of Queensland's economy reflects a lack of economic development (ie the lack of an environment which effectively supports private sector activity). Correcting this requires not only endorsement of the private sector but more effective strategy (eg see Queensland's Economic Strategy  and Commentary on Smart State). This has potential budgetary implications because not only would savings be possible by eliminating incentives to attract investors, but also by eliminating programs which involve 'assistance' to individual firms, as direct government 'assistance' is the opposite of development of the economy (ie developing the ability of business and the community to provide such support);
• the potential for future budget difficulties in Queensland has been apparent for many years - and seems to be associated with (a) escalation of capital spending financed by running down GOC assets (b) creative capital accounting at times to show a 'balanced' budget (c) ineffective resource usage (d) launching large new spending programs supposedly to achieve (politically perceived) strategic goals or to cope with rapid population growth and (e) constant efforts achieve savings in existing programs which, at times, have been counterproductive by rendering those efforts ineffective;
• more involvement of the private sector in public service delivery is not the only option for overcoming prospective budgetary constraints. Alternatives include (a) more effective government (b) increased taxes or (c) creation of a stronger tax base. Moreover:
  • simply involving the private sector in service delivery may not cover the prospective budgetary gap because:
    • privatising functions such as the government printer will not eliminate the cost of printing - and (at the very best) would provide a marginal gain through increased efficiency;
    • increasing the private sector's role in (say) health and education service would primarily shift the cost from taxpayers to service users - who would thus have reduced resources to pay taxes. The net cost to the community could again at best be reduced marginally;
    • the involvement of the private sector in the provision of public goods and services is at best marginal (eg it is often estimated that Public Private Partnerships could never be suitable for more than 10% of public projects);
    • marginal cost savings may not ensure an overall cost saving. It is feasible to have a 20% increase in efficiency in (say) 20% of government activity (ie an overall gain 4%) swamped by a 10% decline in the efficiency of the remaining 80% (ie an offsetting loss of 8%) as a result of inducing incompetence in mainstream public administration through a 'one-size-fits-all' approach to reform.
  • there may be far more effective ways to reduce costs. For example, health care costs are escalating mainly because of the increasing impact of chronic degenerative diseases (such as cancer, cardiovascular diseases, and diabetes). These are all 'diseases of civilization' which not all populations suffer to anything like the degree Australia does, and they might be more effectively be attacked by preventative nutritional and lifestyle improvements rather than by medical treatment of diseases after they are established. Thus re-arranging the way medical services are provided may not be the best way to cut these costs (see Commentary on Directions for Health Reform in Australia)
• Queensland's corporatisation model for government owned corporations is likely to be financially unsustainable in any truly competitive environment (because the political accountability of GOC boards to interest groups is likely to make them less effective in responding the market demands on which their profitability depends). There is thus  a need to choose between privatising them (as suggested in The Role of Government report), or restoring a more traditional institution form in which competition is restricted. Which option is most appropriate should depend on the degree to which the function is entangled with real market failures;
• reducing government regulation is not a trivial undertaking - and can not be achieved by simply seeking to identify regulations to eliminate (as demonstrated by the experience of the Savage Committee in the 1980s) because (a) much regulation is supported by the interest groups who are those most affected / benefited by it, and thus most likely to be consulted and (b) new regulation can be generated faster than it can be eliminated as the political system seeks to solve new problems. Alternative apolitical methods for managing conflicting requirements within society must be put in place if regulation / legislation is to be genuinely reduced;
• the creation of machinery through parliamentary committees that were fairly independent of government would improve executive accountability and reduce the abuses and dysfunctions that currently emerge. However little can be achieved unless the Parliament gains more competent support from (a) civil institutions and (b) an apolitical public service (see The Upper House Solution: A Commentary). Gaining the power to force executive governments to answer questions must have limited benefits unless one knows what are the most important questions to ask.

The key challenge is not to increase private participation at the margins of government, but rather to rebuild competence in mainstream public administration.

There seem to be serious challenges that need attention by governments, and realistic proposals for the role of government should be based on identification and analysis of these (rather than on theory). 

A review of Queensland's challenges at the start of the 21st century identified problems such as:

• severe social stresses;
• potential political instability resulting from poor management of pressures for economic change;
• ineffectual strategies for economic diversification, and increasing requirements for economic adjustment;  
• government administration that required fundamental overhaul because:
  • Parliament had often behaved with juvenile abandon;
  • a 'rorting' culture existed in the political establishment;
  • the  Public Service  lacked professional credibility;
  • administration had been degenerating into a shambles; and
  • serious financial difficulties were emerging
• the failure of policies of major political groups to address such challenges

Currently, in addition to prospective budgetary constraints mentioned above, challenges affecting government in Queensland arguably include:

• poor strategic economic positioning (see Queensland's Economic Strategy for an analysis that has national parallels). The latter refers to:
  • dependence on a global economic boom that must be unsustainable due to its inbuilt financial imbalances;
  • a productivity slowdown which the new COAG reform agenda seems unlikely to correct;
  • increasingly intense competitive pressures;
  • poor support systems for innovation which is critical to profiting from change;  and
  • heavy economic and fiscal reliance on commodity exports that have inherent boom / bust characteristics;
• a very large infrastructure investment program that is being undertaken through machinery that has been rendered unreliable by:
  • loss of skills;
  • fragmentation of responsibility;
  • centralized planning;
  • the complexity of PPPs; and
  • privatization of some monopoly services;
• apparently defective policy frameworks and programs in many important areas. Future potential crises can be identified in a significant number of areas where this risk is not yet publicly recognised;
• increasing social dysfunctions and structural inequality (eg see Is the Smart State a Just State, [1] and Notes on Minimizing Poverty);
• unbalanced regional development which has apparently led to problems in some areas [1];
• profound difficulties that face Australia's machinery of government generally because of:
  • growing complexity and globalization which erode the the credibility / effectiveness of democratic institutions;
  • loss of knowledge and skills as a result of purely politically driven 'reforms';
  • federal fiscal imbalances that encourage buck-passing and duplication;
  • potential politicisation of the crown in ways that could make representative government unworkable; and
  • erosion of interpersonal morality that is vital for a legal / governance system that assumes individual liberty; and
• exposure to rising powers in East Asia whose methods of exerting international influence are unfamiliar in Western societies and potentially corrosive;

To improve prospects of meeting such challenges, institutional reforms along the lines suggested in Improving Public Sector Performance in Queensland could be considered, as a complement to a more effective (rather than merely a bigger) role for the private sector in Queensland's economy generally. 

Queensland's Service Delivery and Performance Commission does not seem to be focusing on options that would be likely to achieve significant outcomes.

Introduction:  Report focuses on period since 1998, and argues for a shift in emphasis to more private sector role in provision of 'government' services. Little progress has been made on Commission of Audit proposal for purchaser / provider system. While Queensland has grown faster than other states, it remains bebind 3 others in per-capita incomes and convergence has been slow. A larger private sector contribution to total expenditure would help - though there have been improvements the private sector's role is relatively small. A larger private sector role is in government / community interest, and would improve budget.

Developments in the Role of Government: Government role has declined in most OECD countries since 1990s - more so in Australia than in Europe and particularly in education. This reflects: greater ability of individuals to manage their own affairs; recognition of adverse effects of taxation; increased protection for individuals from a more competitive economy; importance of private sector driven technological change; skepticism about role of government. There has been bipartisan agreement not to increase taxes to expand size of government - and COAG agrees on the need for more competition-driven and regulatory-reducing reforms. Options include: privatization with competition regulation; PPPs and contracting out; greater encouragement to private sector for involvement in 'government' services. Opposition to this has been based on distrust of private sector's profit motives, and fear of reducing political power - and there seems little substantive basis. Communities already are increasingly using private sector services (eg in education /health) - and there is support for government financial assistance to allow people to use private services.

Existing Roles of Government and Private Sector in Queensland: While Queensland has been slow to recognise increased efficiency resulting from privatisation of services and PPPs in Victoria, governments have been willing to use private sector enterprises as providers of 'government' services. Since 1997-98 business investment has been main driver of growth and now comprises 75% of total investment. The much slower growth in public investment raises questions about the latter's adequacy. Though private employment has grown faster, Queensland's public sector employment is high by interstate comparison. Union membership is much higher amongst public sector employees. General government spending is relatively low by national standards - though some items are higher. Queensland's tax rates are 14% below the national average. GST revenue has allowed self-raised revenue to fall to about 50%.

Performance of the Queensland Economy: Rapid population growth has been the main cause of Queensland's faster economic growth - though there has been a 0.7% pa closing of the gap in GSP per capita. Slow rate of convergence does not reflect retirees or low workforce participation - but rather reflects industrial structure involving sectors with low employee incomes. Reduced regulation of higher income industries might reduce per capita income differences.

Queensland's Budgetary Outlook:  Increased spending for health is likely to eliminate projected future budget surplus. Strong balance sheet allows considerable scope for borrowing but budget should be in surplus. However revenue projections suggest deteriorating capacity to finance spending growth. Revenue growth to 2008-09 (4% pa) is below 7% growth of both GSP and past growth of all revenue. Main reason for this is lower contribution form GST - as GST 'bonanza' is over. This reinforces desirability of increasing private sector role in providing government services.

How the Private Sector's Role can be Increased: A competitive framework for supply of 'government' services provides the choice preferred in educated societies - as illustrated by greater use of private services even where costs are greater. Greater accountability imposed by market framework explains this. Re-establishing an upper house of parliament might improve accountability. There should not be a two tier system with lower standards for public services to those on low incomes, but rather subsidies which private firms can compete to gain. Such an approach could be used for non-government schools (eg by more state grants; low interest loans; easy accreditation; minimal curricula requirements; ignoring existing schools; allowing 'profits' if these are spend on school; giving non-government schools preference in new areas; rationalising under-used government schools; and now reducing student / staff ratios in government schools. Under competition schools would have greater parent / family involvement.  Great increase in private hospital patients results from increased federal government assistance.  Liberalisation of state policies would assist this eg involving: general policy support and cooperation; reduction in public hospitals; 12 month waiting times for privately insured patients in public hospitals; and low interest loans. Despite $55bn 'additional' infrastructure program, investment is likely to fall over the next three years. Given rapid growth in private investment there is a need for clarification how 'public' infrastructure to balance this is to be provided. This could involve: general endorsement of PPPs; and general endorsement of privatisation not only of much of electricity industry but also of most of the $22bn in public corporation assets. The government's decision not to proceed with the sale of all electricity assets can be challenged (eg because of lower rate of return on capital being achieved relative to cost of capital for companies).

A Package to Lower Taxation and Regulation: Despite worsening budget position state taxes could be reduced $1-1.5bn - compared with $7bn state revenue. This requires giving priority to reduced taxes over marginal programs (eg petroleum subsidies, concessional electricity tariffs, 'general public services', savings by Service Delivery Commission, government printer, centralised public works maintenance, business incentives, reducing public service growth, amalgamating departments) and encouraging private sector involvement in government functions. Sale of major public corporations would allow reduction in gross state debt, and thus reduce recurrent spending. Savings would result from more private provision of health and education services. These initiatives would need to be accompanied by major efforts to reduce business regulation. DSD's 'Hot Spots for Regulatory Reform' has not yet produced a comprehensive reform program. As with tax reductions, the question is whether it is better to get benefits to community generally or to benefit a few.