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Focus: Queensland Government responds to Costello audit report

9 May 2013

In brief: The Costello Commission of Audit Report and the Queensland Government's response last week could transform the State's economy by recasting the way the Queensland public sector interacts with the private sector. Partner John Greig (view CV) examines the main recommendations and the Government's response.

How does it affect you?

  • In its response, the Queensland Government has accepted 122 of the 155 recommendations made in the Final Report. Only six recommendations were rejected outright, with the balance being either marked for further consideration, accepted in part or accepted in principle.
  • These recommendations have the ability to restore the State's financial position and transform its public sector, and place the State on a more sustainable platform for the medium to longer term.
  • There was much speculation that the Final Report would have many recommendations as to sales and outsourcing. The Final Report does not disappoint, but far more recommendations have been accepted for outsourcing than for sales. These provide many potential opportunities for the private sector.

Background

The Costello Commission of Audit was established to provide advice as to Queensland's current and forecast financial position and to recommend strategies to strengthen the economy, restore the State's financial position and to ensure value for money in service delivery.

The Final Report contains 155 separate recommendations, of which only six have been rejected outright. Of the balance, 122 were accepted outright with a small number of recommendations slated for further consideration, being accepted in part or accepted in principle and with a few noted. Those noted predominantly related to recommendations as to emergency services, where the Government prefers to await the outcomes of the separate Keelty Review into the Queensland Police Service, Queensland Fire and Rescue, Queensland Ambulance Service, Emergency Management Queensland and Queensland Corrective Services before considering further the recommendations from the Costello Report.

The recommendations

Of greater interest is how the 155 recommendations might be characterised or grouped. The table below characterises the recommendations and how the Government has responded to each of them.

Not Accepted Accepted For Further Consideration Accept in Part Accept in Principle Noted Total
Transparency 13 1 14
Regulatory Charge 1 13 2 16
Governance 3 8 2 13
Sale 1 6 5 1 1 14
Exhort 1 46 47
Outsource 27 1 1 5 34
No Change 1 1
Advocate 8 8
Misc 7 8
Total 6 122 5 5 4 13 155

It can only be of benefit to taxpayers, business and the electorate alike if recommendations as to transparency are implemented (eg the preparation of an annual report showing all community service obligations and other non-commercial policy objectives that government-owned corporations are required to perform at the direction of Government;1 the production of an inter-generational report covering a 40-year horizon to be produced every five years to outline long-term demographic, economic and financial trends and likely implications for Queensland).2

Similarly, the recommendations as to governance are uncontroversial (eg that the Government Owned Corporations Act be amended to provide for a maximum term for the Chair and the members of GOC boards of no more than 10 years3; Government to ensure school autonomy is balanced by an accountability framework that places emphasis on improved student outcomes and promotes a culture of performance evaluation).4 That the Government did not accept three governance recommendations5 should not in our view be seen as a sign that the Government is not in favour of good governance but rather an acknowledgment that there can be genuine differing views as to what constitutes good governance in particular circumstances.

All but one recommendation6 as to regulatory change has been accepted, or accepted in principle, by the Government. High on the list of note here are the recommendations that all pricing reviews be conducted by the Queensland Competition Authority under its own legislation (rather than through separate legislative or administrative processes) and that that legislation be modernised, including providing for a price determination power similar to that which applies with the New South Wales Independent Pricing and Regulatory Tribunal.7

There was much speculation that the Final Report would have many recommendations as to sales and outsourcing. The Final Report does not disappoint, but with far more recommendations accepted as to outsourcing than for sales. Indeed, in relation to sales, fewer recommendations for sale were accepted outright than flagged as requiring further consideration or only accepted in part or in principle at this stage. The assets the subject of further consideration were the larger assets – namely the electricity generators8, the commercial operations of the Gladstone Ports Corporation and Port of Townsville9 and the divestment of Queensland Investment Corporation10). Importantly, any sales of those assets would not be pursued without an electoral mandate.

Perhaps surprising was the response as to the recommendation that the electricity distribution and transmission businesses (Ergon, ENERGEX and Powerlink) would not be divested and nor would the Government seek a mandate to do so at the next election.11 With the New South Wales Government being understood to be willing to consider the sale of its equivalent assets following its next election, if implemented, that would leave Queensland alone in the mainland National Electricity Market as the holder of electricity distribution and transmission assets.

A key issue when considering disposing of assets of this type is for Government to be satisfied that there is a suitable market or regulatory regime which ensures that the assets are appropriately available to service demand (including increased and changing demand over time). In the case of the electricity generators, there is already a well developed National Electricity Market that treats State-owned and privately-owned generators without differentiation. Ensuring that port assets are made available to, and developed in a timely manner in order to serve the legitimate needs of, customers is more difficult (given their monopoly-like status) but there has been means of managing developed, as evidenced by recent port divestments.12

The Government adopts virtually all of the recommendations as to outsourcing. This covers a range of activities (outsourcing of management activities; provision of health services; move away from the Government being the owner and operator of significant business assets (eg IT) and moving towards being the acquirer of services (rather than being the owner and operator of assets that provide those services)). The most significant task will be for those Government agencies outsourcing activities ensuring that they have robust systems for testing and assessing contestability (that is, being able to efficiently and accurately assess whether the private sector provision of a particular service is more cost-effective and efficient than the service being provided by Government in-house), procurement and contract management.

The depth of the market as to the particular products or services being sought will be an important factor in determining the extent to which competitive tension can be engendered - not only as to price but also as to quality of provision of those products and services. Recognising that some services/products lend themselves to longer-term arrangements (eg the provision of a whole of government IT solution is not something that can be done every couple of years), there will be a natural tension between wanting to contract for a short period against a tendency to favour longer-term contracts.

Some advantages for shorter term contracting:

  • allows regular re testing of the market as to pricing and conditions;
  • provides a circuit breaker should a buyer find that the commercial or contractual terms to which it has agreed in any particular contract are sub optimal.

Some advantages for longer term contracting:

  • reduces recurrent procurement costs;
  • encourages suppliers to invest in their own delivery systems to enhance the product and services that it can provide to Government.

Surprisingly, more than a third of the recommendations suggest that the Government either advocate for a particular outcome (eg the Queensland Government and the Australian Government should delineate the specific health functions for which each level of government is responsible 'with each Government fully meeting its obligations')13 or that various parties (government departments, GOCs and the like) be exhorted to strive to do better (eg for the period that they remain in government ownership, the electricity generation businesses be required to achieve higher rates of return through increased efficiencies, better capital management and operational cost savings)).14 Each of those 54 recommendations accepted by the Government are positive and the Final Report itself provides, in many cases, useful insights into particular practices or initiatives that might be pursued in order to achieve those outcomes. However the recommendations are, on one view, but the outworkings of an underlying theme from the Final Report, recognising quite sensibly, that there is no magic bullet to address the State's financial position. Rather, it is for the whole economy to look for and achieve and enhance outcomes.

Conclusion

If the Queensland Government achieves its outcomes, not by the magic bullet of significant asset sales or outsourcing for the sake of outsourcing, but rather obtaining the best from contestability, the lifting of standards, the introduction of greater flexibility and greater innovation within both Government and the public sector more widely, it will have not only achieved the restoration of the State's financial position but also will have transformed the State Government sector, and the way in which it interacts with the private sector, to one which is placed on a more sustainable platform for the medium to longer term.

Footnotes
  1. Recommendation 4.
  2. Recommendation 39.
  3. Recommendation 3.
  4. Recommendation 85.
  5. Recommendations 1, 2 and 91.
  6. Recommendation 32.
  7. Recommendations 37 and 38.
  8. Recommendation 7.
  9. Recommendation 20.
  10. Recommendation 31.
  11. Recommendation 8.
  12. Dalrymple Bay Coal Terminal; Port of Brisbane; Abbot Point Coal Terminal No 1; Port Botany and Port Kembla; Port of Portland.
  13. Recommendation 64.
  14. Recommendation 10.

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