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Email sent 19/1/09

Julie Novak
Institute of Public Affairs

Fixing State Governments

I should like to comment on your contribution to the debate about improving the effectiveness of state administrations ('In a State of Dysfunction', Australian Financial Review, 14/1/09). My interpretation of your argument is that:

  • state governments are economically important but suffer from inefficiencies and financial difficulties that are largely self-inflicted; and
  • a possible solution is for the private sector to undertake many state government service delivery and infrastructure functions.

While you are raising important issues, I have to submit that the situation is more complex. In particular:

  • governments' importance is due more to their influence on social and economic relationships than to the amount of money they spend on public goods and services;
  • 'reformist' state administrations in the 1980s-1990s sought efficiency in the provision of goods and services on the assumption that private sector methods were the 'answer'. Their neglect of governments' real contributions partly explains the many deficiencies now apparent in state governments;
  • such self-inflicted wounds are not however solely responsible for current problems - as broader causes include: the legacy of history; resource wealth; fiscal imbalances; politicisation; and increased complexity;
  • poor performance and budgetary stresses affect other levels of government as much as states;
  • the global financial crisis is increasing the importance of governments relative to the private sector.

The above argument is presented in slightly more detail below.

John Craig


My interpretation of your article ('In a State of Dysfunction', Australian Financial Review, 14/1/09) is as follows:

  • state / territory administrations remain important - because of the money they spend and their resulting economic impact;
  • they none-the-less have a credibility problem - because of infrastructure deficiencies and inefficiencies;
  • states are coming under even more pressure - because of the effect of the financial crisis on revenues;
  • in response some states are increasing taxes, or deferring scheduled abolition of nuisance taxes;
  • taxes will grow in excess of inflation over the next few years, but spending is likely to increase even more;
  • long-servings states have an over-spending habit, which will create severe problems if economic conditions worsen;
  • states and territories need to reduce spending - as this currently exceeds the levels that economists regard as appropriate for collective action;
  • 22% of state spending is on core functions (law and order, justice and administration, interest on debt and superannuation liabilities);
  • there are private sector alternatives for everything else (eg not-for-profits schools; private hospitals; private infrastructure). Universalised services that make people pay twice for the same service are not needed. Privatising social services for those on medium-high incomes can provide tax relief. Waste and inefficiency should be eliminated. Fiscal responsibility programs need revitalization. A constitutional / legislative framework should be introduced requiring balanced budgets. Spending growth should be less than GDP growth (or the total of inflation and population growth);
  • states' fiscal predicament is self-inflicted, though it is portrayed as due to adverse global economic conditions.

Your article raised very serious issues - but unfortunately dealt with only part of the problem.

The Roles of Government

State governments are important, not only because they spend money and have an economic impact, but even more because they are part of Australia's system of government. The core function of government is 'governing' (ie creating a framework for social and economic activities within the community). Governments also have vital secondary roles in relation to the provision of 'public' goods and services (eg those which can't satisfactorily be undertaken within a market framework - because of (say) their monopoly character or externalities that can't be dealt with by any simple price mechanism).

In both their core and secondary roles, governments' main contribution involves managing social and economic relationships (see also 'Governing is not just Running a Large Business').

Governments' Contribution to Public Goods and Services Matters

In functions where governments have traditionally spent large amounts and involve true public goods and services, outcomes can't necessarily be improved simply by examining the goods and services provided and envisaging more efficient private sector provision, while ignoring what is needed for government to continue effectively influencing those functions to (for example) counteract the effect of market failures.

Alleged 'reform' of government in recent years has done a great deal of damage to governments' performance by trying to promote 'efficiency' in service delivery while ignoring the need for ongoing effective performance of government's core and secondary roles. For example:

  • Public-Private Partnerships for Infrastructure refers to the internal complexity and cost that arises in trying to manage goods and services which are subjected to market failures as 'private infrastructure'. These internal difficulties are entirely ignored by proponents of PPPs, who consider only the production of the goods and services. Similarly an attached email ('Smarter Infrastructure') refers to the adverse effects of attempts to 'reform' state administrations to make them more business-like in the performance of their intrinsically non-business-like functions;
  • Improving Public Sector Performance in Queensland suggested that machinery set up to try to promote efficiency in a state government would be unsuccessful because it reflected the prevailing narrow concern with the efficient production of goods and services. An obsession with the 'trees' resulted in neglect of the 'forest' (governing effectively), though the latter offered the greatest scope for truly improving performance.

Even if private production of various goods and services is more cost efficient, the community is not necessarily better off. In the first place, more complex / costly internal arrangements within government are likely to be needed.

However the biggest costs are likely to result from displacing the understanding of complex social / economic / administrative / legal systems and the practical experience that are vital for effective government. Unfortunately this is just what 'reformist' state governments (eg those of Kennett, Greiner and Goss) achieved, because of the populist idea that private sector methods must be the 'answer' to what ails government .

Added later: In the present writer's opinion the key to effectiveness and efficiency in government operations lies in coherence (ie people willingly and openly talk to one another) and a strong and shared sense of meaningful purpose. It is then in the administration's corporate interest to seek out value for money. Effectiveness and efficiency can be damaged by (for example): competition - which destroys communication; politicisation - which results in witch hunts and unconvincing goals; or rigid / centralised control control and procedures - which destroy initiative, communication and sense of purpose.

In other words, because the complexity of the issues that any government has to address, effectiveness and efficiency depend on the 'spirit' of the public sector (ie a sense of cohesive purpose) and anything that damages this will tend to be counter-productive - as perhaps best illustrated by the unfortunate Goss Government in Queensland..

Deficiencies in State Governments

As your article realistically implied there are and have been serious deficiencies in the performance of state governments. However, contrary to your suggestions, these are not entirely self-inflicted (ie problems are not solely due to the naive 'reformist' governments of the 1980s and 1990s, or their successors). Rather they have much more complex causes.

One attempt to provide an account of these is in Is our System of Government in Queensland Working? This refers to a diversity of factors including:

  • the legacy of history and Australia's natural resource wealth. The community inherited a sophisticated system of government from Britain, but did not also inherit a broadly-based understanding of what was required for its success. Moreover the 'lucky country' tended not to have much economic need to take such matters very seriously - so independent institutions able to make realistic and up-to-date contributions to policy debates have been limited;
  • federal fiscal imbalances (whereby the states have many responsibilities but a weak tax base). As a result, particularly since the 1970s, states have (a) been rendered incapable of taking real responsibility or being held democratically accountable for their functions; and (b) been forced to concentrate on lobbying the federal government, rather than on the effective performance of their functions;
  • the elimination of the ideal of non-political professional public services and thus of much of the accumulated but unrecognised knowledge and skill base required for effective government, in a political search for unquestioning compliance and narrowly-conceived efficiency;
  • the challenge of increasing complexity - which now requires even stronger supports to the community's elected representatives from civil institutions and public services.

State Governments are Not Alone in Inefficiency

Poor performance is not limited to state administrations (see Australia's Governance Crisis, and Populism Trumps Electoral Victory).

For example, Infrastructure Australia was envisaged as a key element of the present federal government's 'solution' to Australia's infrastructure crisis - yet central planning through such a body is no more likely to work for infrastructure than in any other area of the economy (see Infrastructure Magic?). Moreover, as others have argued, this arrangement was not only intrinsically inadequate, it has been derailed by the global financial crisis (see O'Neil P. Why our infrastructure is failing, Business Spectator, 5/1/09).

State Governments are not Alone in Financial Trouble

Budgetary stresses are not confined to state governments. For example, the federal government also seems likely to face severe constraints, and these will not just be in its inability to intervene decisively to overcome infrastructure backlogs, because (for example):

  • Financial Review, 11/12/08) and these are likely to be much reduced in a post-global-financial-crisis future;
  • the capital gains revenue bonanza was returned to community in the form of reductions in other taxes and increases in diverse transfer payments. The latter 'bought' political popularity, and also compensated for the income inequalities that would otherwise have arisen as a result of the deregulation of (financial / labour and other) markets in the 1980s and 1990 to speed economic change and allow aggregate economic growth.

The resulting challenge for the federal government in unwinding entitlements will be just as long-term and structural as the states' financing problems. And unfortunately the new budgetary pressures on both federal and state governments that have been revealed by the global financial crisis are also likely to be structural and long term - because, for reasons suggested in Global Financial Crisis: The Second Test, that crisis has undermined much of the past basis of economic globalization.

One option to consider for reducing these pressures might involve strengthening the tax base through the creation of apolitical machinery to accelerate economic development. While deregulation and competition create incentive, more could probably be done to improve the capacity of enterprises and regional economies to compete successfully in high productivity endeavours (see Defects in Economic Tactics, Strategy and Outcomes).

The Growing Importance of Government

Finally it needs to be recognised that the global financial crisis is having a significant impact in terms of the respective roles of the public and private sector. Whilst the investment capacity of the public sector is constrained, that of the private sector seems even more so. In terms of spending to stimulate recovery from the global financial crisis, it is public sector (for good or ill) that is being required to take the economic lead. Moreover, questioning of the extent of economic deregulation is arising and valid, because (for example) reasonable doubt exists about whether ungoverned financial markets actually tend towards equilibrium (eg see Soros G., "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means").

As noted above, the questions your article posed are vitally important. However I submit that the solution must involve much more than simply privatising many non-core public functions of state governments.

Smarter Infrastructure

Email sent 10/1/09

Phillip O'Neill
Urban Research Centre
University of Western Sydney

Smarter infrastructure

I should like to offer some feedback concerning your useful speculations about improving Australia's infrastructure systems (Smarter infrastructure, Business Spectator, 9/1/09).

There is no doubt that attempting to privatise infrastructure to date has been clumsy d for the reasons that you suggested.

However the resulting problems have not been confined to infrastructure services. Involving the private sector in ownership and control of infrastructure (rather than in a contracting role) has been part of broader efforts to reform government administration to increase its political responsiveness and productive efficiency - but the result has been politicisation (which eroded the knowledge and skill base) and the loss of governments' ability to 'govern' through the application of 'business-like' methods to governments' intrinsically non-business-like functions (see Decay of Australian Public Administration, 2002). As noted in Infrastructure Constraints on Australia's Economy (2005), attempts to introduce competitive service delivery within government resulted in the first instance in a fragmentation of responsibility between providers / purchasers / regulators which made it impossible for anytone to plan, while transforming infrastructure projects into PPPs created huge difficulties because of the intrinsic complexity of true 'public' goods and services.

Your article was useful in identifying the importance of externalities in relation to infrastructure. However goods and services can have a 'public' character not only because of positive externalities, but also because of negative externalities or natural monopoly - all of which make it impossible for price mechanisms to provide an effective basis for competition in service delivery. I doubt that it is practical to set up administrative processes such as you suggested to competently supervise the allocation of rewards / punishments related to the externalities an / or monopoly character of particular infrastructure services. The potential for corruption would be enormous, and the public sector is a mess as a result of poorly considered past 'reforms' . As far as I can see, infrastructure constitutes the capital component of particular functions (eg transport / education / health) which are usually true 'public' goods and services - and (as illustrated by the current mess in the public sector) separating control of the capital component in the hope of gaining production efficiencies merely compounds the complexities which leads to production inefficiencies when the capital component is controlled by the public sector.

Your idea about clever networks is excellent. The question is how this could be managed. The challenge can be illustrated by the probable requirements for transformation of transportation systems as a result of the looming global peak oil event - eg a step function increase in public transport and a phasing down of current emphasis on road / freeway systems, combined with significant changes to urban form. Infrastructure Australia seems to have an interest in this issue. But how can it be managed both in a policy sense, and also in terms of the physical arrangement of networks that your suggestion has focussed on?

I fear that my comments are complicating the scene as far as your proposals are concerned. However unless such complexities are taken into account progress can't be achieved,

John Craig



... on the issue of private provision of services, I am generally an advocate of moving in that direction, but at a sensible pace. Lets do that according to what makes sense, not according to blind faith.

Current transport-related problems in Queensland have a lot to do with a) constraints of capability within the public sector, but also b) over-reliance on private sector players, namely high-priced consultants, who are often appallingly under-qualified and incompetent themselves. Don't get me started on the drag that certain "transport planning consultants" of limited capability are currently playing - charging phenomenal hourly rates to provide rubbish input.

Would be great if there were competent, productive, effective strategic planning (or delivery) capabilities available in Queensland's private sector for government to access, but at the moment its just another disaster.

My feeling also is that the ideological commitment to the idea that the private sector is inherently more efficient has run out of legs. Once again, I would be glad if that were the case - but having seen the inside operations of a few major corporations, I more often wonder how they survive at all, let alone make money...

Chris Hale

A major aim of state politicians nowadays is to get media exposure eg don a safety helmet and try to look as if you are contributing something. In addition they recognise that the best and most continuing way to  get exposure by far is to spend on infrastructure so we therefore have one of the reasons for the push for lots of new infrastructure

the private sector has found that there is no money in investing in (eg toll road) infrastructure so government is now left with the problem. this works well with the politicians as they now get even more coverage as it is their project!!!

The demands on taxpayers will only get worse as things get more expensive and complex in the major cities.

As I have said for a long time we need a new decentralisation policy that will achieve the demands of the pollies but keep costs down for taxpayers in general.

The push into Queensland by southerners has been fuelled over the years by lower costs here and high costs elsewhere eg Sydney This has changed recently so a new initiative is needed otherwise Queenslanders will go down under a mountain of debt

the decentralisation model thus seems to have no downside. I would suggest targeting Bundaberg as a starter

Have not heard any word on decentralisation from the Qld opposition, but I could be mistaken