13 February, 2006

Mr Mike Nahan,
Institute of Public Affairs

Taxpayers Cheated by Incompetent Governance

I should like to offer feedback in relation to suggestions in your recent article about problems in public service delivery, and potential 'competition policy' solutions to those problems.

My interpretation of your article: Prime Minister and premiers should bring choice and competition to services. States have had an easy time because of economic reforms and GST. This has allowed reform to be abandoned. But if don't reform state services picture will be bleak - with high taxes; infrastructure failure. Productivity Commission report shows little cause for optimism. Government spending on hospitals increased 11.4% pa over 5 years - which went mainly into staffing while waiting times increased. States failed to change structures. Public hospital administrators have had their hands tied. Competitive tenders have been less used. Patient to staffing ratios have been reduced. States have invested heavily in schools while Commonwealth increased non-government school funding thus reducing the need for public system. Retention rates have improved, but literacy and numeracy has not. Despite heavy investments, people vote with their feet to leave state system. Despite claims of investing in front line services - the greatest investment has been in bureaucracy - despite reductions in some administrative functions. Growth has been driven by: reduction in contracting out; increasingly complex regulations; and expansion of central agency control. Replacing state bureaucracy with federal bureaucracy would achieve little. Responsibility for reform can't reside with states as they merely spend without need for revenue raising. Solution lies in application of vigorous competition policy. Commonwealth has already stated this with employment services, TAFE and aged care. This needs to be extended to education and health. (Nahan M 'Taxpayers cheated by bureaucracy', Australian, 2/2/06).

Your article is undoubtedly correct in highlighting:

• deficiencies in the provision of public services;
• increasingly ineffective government activity; and
• the community's inability to rely on states to lead reforms because they are not under financial pressure to be responsible.

Based on the example of Queensland (with which I am most familiar) it seems clear that the state government has become less effective in recent decades, and especially over the past 15 years. In addition to evidence such as has been quoted by the Productivity Commission many indicators are available that the state administration is now crisis prone and dysfunctional (see Evidence of Dysfunctions).

However your suggested solution - vigorous application of competition policy - can not be an effective way to deal with such problems because:

• governments' core function (governing) can not be undertaken competitively - and the requirements to 'govern' effectively have simply been ignored in promoting competitive service delivery; and
• public services tend to be those that are subject to market failures (ie service delivery roles of governments tends to be in areas in which various problems intrinsically arise if they are undertaken in a competitive market environment).

Attempts to apply business-like methods to governments' non-business-like functions, as well as politicisation to force through inappropriate 'reforms', are arguable the major source of the systemic incompetence which now cripples governments (see Neglected Side Effects in Review of National Competition Reforms: A Commentary). While states have had an easy time in terms of the availability of revenue in recent years, they have had a very difficult time in terms of using that revenue constructively because of the institutional difficulties that have been induced (eg see Institutional Problems for an account of this that, once again, focuses on the case of Queensland). The latter refers, for example, to the serious damage to machinery for planning and development of infrastructure that has resulted from: loss of skills; fragmentation of effort; increased complexity; and privatisation of monopoly assets.

Determined efforts to redevelop competent governance are now vital. For example, in Queensland's case this seems likely to require:

• restoring professional competence as a serious consideration in Public Service staffing;
• creating more realistic government machinery especially related to: cabinet; agency management and planning; and the state budget;
• encouraging civil institutions to make more sophisticated inputs to policy debates.

Further attempts to ensure better public services through greater involvement of private competitors would be an inferior option. Numerous examples are now available demonstrating the types of problems that this can give rise to (eg see Second-best Solution).

I would be interested in your reactions to my speculations.

Regards

John Craig