“INSIDE THE QUEENSLAND COMMISSION OF AUDIT –

THE PROCESS, MAIN FINDINGS AND IMPLICATIONS”

Mark GrayAdjunct Professor of Economics, University of Queensland

Chief ExecutiveQueensland Commission of Audit

UQ Business SchoolBrisbane6 May 2013

THE PROCESS

2

ESTABLISHMENT

• Pre-election commitment of the incoming Government

• Commission announced 29 March 2012, and Terms of Reference issued

3

CommissionersHonourable Peter Costello, ACProfessor Sandra HardingDr Doug McTaggart

TERMS OF REFERENCE – OBJECTIVES

• Comprehensive – two pages of text• Review Queensland Government’s current and

forecast financial position, and make recommendations on:– strengthening Queensland economy– Improving State’s financial position, including

regaining AAA credit rating– ensuring value for money in delivery of front-line

services

4

TERMS OF REFERENCE – SCOPE

• Terms of reference interpreted broadly by Commission– any matters relating to functions/activities of the

Queensland Government

5

Key issues• Financial position• Improving the State’s financial position• Service delivery• Government commercial enterprises• The economy

TERMS OF REFERENCE – TIMETABLE

6

15 June 2012 Interim Report covering state of the Government’s financial position

30 November 2012 Interim Recommendations28 February 2013 Final Report delivered to

Government1 March 2013 Executive Summary of Final Report

released30 April 2013 Full Report and Government

Response released

OTHER COMMISSIONS OF AUDIT

7

Victorian Commission of Audit 1993

National Commission of Audit, Commonwealth Government

1996

Queensland Commission of Audit 1996

New South Wales Commission of Audit 2012

Victorian Commission of Audit 2012

WHAT IS A COMMISSION OF AUDIT?• Comprehensive review of the role, functions, activities of

government– Focus on efficiency, effectiveness and value for money

• Not an “audit” in the formal sense– not a “financial audit”

– not a “performance audit”

– but contains elements of both

• Unique perspective– view from “the outside looking in”, not an inside view

• Opportunity only arises infrequently– often with a change of government

– Rarely instigated by incumbent governments

8

KEY FEATURES

• Independence

• Transparency

• Not bound by government policy

• Opportunity

– to challenge the status quo

– to consider innovative solutions (e.g. for service delivery)

– to propose strategic objectives/direction for government

– to set agenda for change over period of 10-20 years

9

PROCESS

• Secretariat established to support the Commission– small group: primarily public service officials seconded from

Queensland Government agencies– some limited use of external consultants– Secretariat organised into teams to review key topics– worked under the direction of the Commission

• Extensive powers of investigation available to the Commission

• Funding provided from internal savings in Queensland Treasury and Trade

10

PROCESS cont….• Submissions from all core Government departments and

Government Owned corporations (GOCs).• No public submissions

– some unsolicited submissions received and considered• No public hearings

– Commission met with Chairs and CEOs of all GOCs• Secretariat had extensive ongoing contact with

departments and limited contact with external parties

• Secretariat undertook research and analysis of issues, prepared papers for Commission’s deliberations

– papers formed basis for Reports

11

MAIN FINDINGS AND IMPLICATIONS

12

OVERVIEW OF FINAL REPORT• Focus of the Report is renewal in the public sector to provide

better front-line services• Most comprehensive review of Queensland Government

functions ever undertaken

13

• 155 recommendations across four major headings (Front-Line Service Delivery, Public Sector, Financial Management, and Government Commercial Enterprises)

• 39 separate sections• 1,000 pages of analysis• 247 charts• 127 tables• 36 diagrams• 47 case studies / illustrations

GOVERNMENT RESPONSE

118 accepted (76%) )7 accepted in principle )6 accepted in part ) 96%13 noted )5 for further consideration )6 not accepted

14

ECONOMIC AND FISCAL CHALLENGE

The challenge for Queensland is to lift its productivity performance to sustain the economic growth which will improve living standards for its citizens.

15

16

ECONOMIC AND FISCAL CHALLENGE cont …Multifactor productivity growth, trend (a), 1985-86 to 2011-12

(a) Trend estimates are derived from original MFP data using an 11-term Henderson-weighted moving

average.

Source: Queensland Treasury and Trade

-2

-1

0

1

2

3

1986-87 1991-92 1996-97 2001-02 2006-07 2011-12

%Queensland Rest of Australia

17

ECONOMIC AND FISCAL CHALLENGE cont …

‘Business as usual’ – Projected fiscal deficit

-20

-16

-12

-8

-4

0

4

2015-16 2050-51

% o

f GS

P

Fiscal deficit as a share of GSP

Lower growth Higher growth

• Pressure on fiscal position– Lower economic growth expected in future– Ageing of the population– Increased demand for government services

• Changes in service delivery to maintain stable fiscal position– Productivity improvements of 1% year after year– Costs to be reduced by one-third over 40 years

• This would lift GSP growth by 0.5% pa (extra $8,320 per capita pa in today’s dollars by 2050-51)

18

ECONOMIC AND FISCAL CHALLENGE cont …

19

SIZE OF GOVERNMENT

State Government expenditure as share of GSP

8

9

10

11

12

13

14

15

16

17

18

1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08 2011-12

% o

f GS

P

NSW Vic Qld WA SA

20

ROLE OF GOVERNMENTPrivate provision of public services

Key principles to manage and deliver services

• Focus on core services• Facilitate contestability in service delivery• Better demand management• Greater workforce flexibility• Capacity building• Lower overhead costs• Strengthen financial management• Build productive capacity

21

ROLE OF GOVERNMENT cont …

The Government must achieve better value for money in service delivery. ‘Business as usual’ is not a sustainable option. The primary responsibility of the Government is to ensure services are delivered, not necessarily to be the agency that actually does the delivery. It needs to be the ‘enabler’, not necessarily the ‘doer’.

22

FRONT-LINE SERVICE DELIVERY

FRONT-LINE SERVICE DELIVERY cont …

23

State public sector wages: Queensland relative to all-states average

90

95

100

105

110

1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08 2011-12

%

FRONT-LINE SERVICE DELIVERY cont …

24

Cost of service provision by state, 2010-11

NSW

Vic

Qld

WA

SA

94

96

98

100

102

104

106

108%

of n

atio

nal a

vera

ge

FRONT-LINE SERVICE DELIVERY cont …

25

Queensland public hospital expenditure and activity trends

90

100

110

120

130

140

150

2007-08 2008-09 2009-10 2010-11 2011-12

Inde

x: 2

007

-08

= 10

0

Recurrent expenses Weighted activity units

FRONT-LINE SERVICE DELIVERY cont …

26

Cost per casemix-adjusted separation, 2010-11

4,000

4,200

4,400

4,600

4,800

5,000

5,200

5,400

NSW Vic Qld WA SA

$ pe

r cas

emix

-adj

uste

d se

para

tion

Australian average

FRONT-LINE SERVICE DELIVERY cont …

27

• Find more innovative and efficient ways of delivering services– reduce the high costs of service delivery– drive higher productivity

• Greater role for non-government providers in owning assets and delivering services (e.g. through contestability)

FRONT-LINE SERVICE DELIVERY cont …

RECOMMENDATIONS

Areas for greater involvement of non-government sector• clinical, clinical support and non-clinical services in public

hospitals• mental health and community health services• residential aged care facilities• disabilities• child safety• corrective services• social inclusion• public housing services

28

FRONT-LINE SERVICE DELIVERY cont …

RECOMMENDATIONS cont …

Education• improved student performance through increased devolution,

autonomy and accountability at individual school level.

VET• independent industry-led skills authority• competitive market• asset ownership to be separated from TAFE

Police and Emergency Services• more flexible risk-based resourcing• greater co-location of facilities to provide better integrated emergency

responses and better asset utilisation

29

THE PUBLIC SECTOR

The goal for the public sector must be to achieve the highest standard of excellence and ensure that Queensland is the best administered state in Australia.

30

PUBLIC SECTOR ARRANGEMENTS

31

Employing legislation• PS Act• 15 other acts

Awards• 50 Awards• 50-60 Certified Agreements

Variability, anomalies and inconsistencies

Classification framework• 250 levels• 750 pay points

Unnecessary complexity and rigidity

Increased costs and complexity in administration of payroll, HR and IR systems

Health Payroll• 10 Awards• Multiple industrial agreements• 200 different allowances• 24,000 different pay

combinations

THE PUBLIC SECTOR cont …

RECOMMENDATIONS

• Rationalise and consolidate core public service employment conditions

• Consolidate and simplify awards and certified agreements

• New flexible broad-banded classification system for public service

• Appointment of employees to broad-banded levels (not agency specific positions)

• More effective performance management system

32

THE PUBLIC SECTOR cont …RECOMMENDATIONS cont …

• ‘ICT as a service’ strategy– Source software, hardware and infrastructure as a service from

private providers– Government should not own and manage ICT assets

• CITEC role to be discontinued within 2 years

• Reduce overhead administrative and corporate costs e.g. contestability of corporate services

• Queensland Shared Services (QSS) operate on contestable basis (not mandated)

33

There is an urgent need to restore the highest standards of financial management to public administration – with an enhanced long term financial planning framework, improved budget, cash and asset management, and greater transparency and accountability.

FINANCIAL MANAGEMENT

34

FINANCIAL MANAGEMENT PRACTICES

Relationship between the elements of the Appropriation Bill 2012

2010-11financial year

2011-12 financial year

2012-13financial year

2013-14 financial year

Supplementary Appropriation for Unforeseen Expenditure(retrospective) 

Supplementary Appropriation for Unforeseen Expenditure1

(retrospective)

Appropriation sought for budget (vote)(prospective appropriation) 

Supply(interim appropriation)

35

RECOMMENDATIONS

• Intergenerational Report• State Infrastructure Plan• Simplified appropriation framework• Improved budget, cash and asset management• Charter of Budget Accountability• Greater role for private sector in infrastructure

investment• Queensland Productivity Commission

FINANCIAL MANAGEMENT cont …

36

FISCAL REPAIR STRATEGY

• Commission’s recommended strategy (Interim Report)- arrest deterioration in State’s financial position and

stabilise position- pay down debt

• $25-30 billion debt reduction necessary to restore financial strength and provide buffer for adverse events

- Will also restore AAA credit rating

• Debt reduction of this magnitude can only be achieved by releasing capital from the State’s balance sheet

37

38

39

40

41

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

0%

20%

40%

60%

80%

100%

120%

140%

Trigger range for AAA credit rating

Actual Projection

Total Government debt to revenue ratio

Source: Treasury

42

Total Government gross debt, share of GSP

Source: Australian Bureau of Statistics 5512.0, State Budgets and Mid Year updates, Treasury

0%

5%

10%

15%

20%

25%

30%

2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15

Queensland

New South Wales

Victoria

Western Australia

Actual Projection

43

Source: Treasury

Actual

FISCAL REPAIR STRATEGY

• Commission’s recommended strategy (Interim Report)- arrest deterioration in State’s financial position and

stabilise position- pay down debt

• $25-30 billion debt reduction necessary to restore financial strength and provide buffer for adverse events

- Will also restore AAA credit rating

• Debt reduction of this magnitude can only be achieved by releasing capital from the State’s balance sheet

44

The Government must make better use of its balance sheet, by releasing capital locked up in mature assets to pay down debt, lower interest costs and free up funds for investment in new infrastructure (for example, flood prevention).

GOVERNMENT COMMERCIAL ENTERPRISES

45

GOVERNMENT COMMERCIAL ENTERPRISES

46

Commercial assessment tests

1. No need for government to own assets that compete with private services in workably contestable markets

2. No need for government to own commercially sustainable businesses

3. Where government remains responsible for services:• deliver through own agency or non-government providers• deliver through contestability

GOVERNMENT COMMERCIAL ENTERPRISES cont ….

Australian Electricity Market Operator / Australian Energy Regulator

Transmission3

Generation 2

Retail 5

Distribution4

Origin Energy (multi-region)

AGL (multi-region)

TRUenergy (multi-region)

Inter-national Power

(Vic & SA)

Other Generators

CSE & Stanwell (Qld)

AETV &

Hydro Tas

Snowy Hydro

(Vic & NSW)

Delta & Mac Gen (NSW)

AGL Energy (multi-region)

Origin Energy (multi-region)

TRUenergy (multi-region)

Other Retailers

Ergon (Qld)

Aurora (Tas)

ETSA (SA)

Ergon (Qld)

Endeavour (NSW)

AusGrid (NSW)

Transend (Tas)

SP Ausnet (Vic)

Electranet (SA)

Powerlink (Qld)

Transgrid (NSW)

Powercor, SP AusNet, United, CitiPower, Jemena (Vic)

Energex (Qld)

Essential (NSW)

a

Public Ownership Private Ownership Public (planned to be privatised)6,7 Actew AGL Public- Private JV

Ownership patterns in the National Electricity Market – by indicative market share

a Aurora Energy distribution

47

GOVERNMENT COMMERCIAL ENTERPRISES cont ….

48

Key events for energy sector GOCs

Source: Commission of Audit

1 July 2012

1 July 2013

1 July 2014

1 July 2015

1 July 2016

1 July 2017

1 July 2018

Fixed price carbon tax Market carbon permit cost

Current Powerlink pricing period

Current Ergon and Energex pricing period

New Powerlink pricing period

Increasing LNG demand

New Ergon and Energex pricing period

• Dispose of businesses operating in commercial markets, when conditions favourable:– Energex ($9.2B)– Ergon ($7.7B)– Powerlink ($5.3B)– CS Energy ($0.9B)– Stanwell ($1.7B)– Gladstone Ports Corporation ($1.2B)– Townsville Port Authority ($376M)– Queensland Investment Corporation ($18M)

GOVERNMENT COMMERCIAL ENTERPRISES cont ….RECOMMENDATIONS

49

OTHER GOC RECOMMENDATIONSTransport Services• Bulk Ports North Queensland to have supply chain coordination role.• Mount Isa rail freight line integrated with Townsville Port Authority• Passenger rail and bus services to be restructured to be delivered

through:– contestable contracts– franchise and lease arrangements

Reform of GOC governance model• Single shareholding Minister model• Improve efficiency of GOCs

– Reform restrictive workplace practices– Remove unnecessary policy restrictions– Make transparent full cost of Government policy requirements

GOVERNMENT COMMERCIAL ENTERPRISES cont ….

50

“BUSINESS AS USUAL” IS NOT SUSTAINABLE

• High cost of delivering services

• Low productivity

• Ageing population and workforce placing pressure on financial position

51

Expenses expected to rise faster than revenues

Unlock scarce capital and free up resources for debt reduction and new investment

52

Innovative service delivery (including greater use of non-government sector)

Improved public sector flexibility and efficiency

Greater productivity and better resource use including use of capital

More front-line services (with stable fiscal position)

STRATEGIC BLUEPRINT

VALUE OF COMMISSION OF AUDIT PROCESS

• Independent, objective, arm’s length view• No “baggage”• Fresh look at the way things are done• Valuable input from the bureaucracy• Long term strategic perspective• Opportunity for renewal and reform• Decisions are a matter for government

53