Preventing Government Failures

Much has been made of recent real and imagined government failures.

Government failure is the equivalent to market failure. This is when government intervention causes a more inefficient allocation of goods and resources than would be the case if the market had been left to its own devices.

Some would also argue that the government's failure to intervene in a market failure that would result in a better outcome is “passive Government failure”. The examples of this kind of distortion of the market are many, including pork barrelling, distorting the outcomes of grants programs, and so-called “crowding out”.

Crowding out is said to occur when the government expands its borrowing to finance increased expenditure or tax cuts,  reducing the availability of funds to the private sector and putting upward pressure on interest rates. Opponents of the Rudd Government’s response to the GFC used both these arguments to criticise the government – wrongly in my view.

Much has been said about the Home Insulation Program, which was funded by the Government to promote activity in the economy and to reduce the production of greenhouse gases by households. The program subsidised householders who insulated houses that had no insulation. It seems that the program was rorted by unscrupulous operators: inferior insulation was used; insulation was installed improperly or even unsafely; and sometimes, in collusion with householders, no work was done but a subsidy was claimed anyway.

The program was eventually terminated in response to these problems and to some deaths and fires that were attributed to the program. The Government then had to initiate another program, at taxpayers’ expense, to “provide reassurance to households that had insulation installed under the now discontinued Home Insulation Program”.

A similar case has been made by the Opposition against aspects of the Building the Economic Revolution (BER) program, focusing on construction activity in some schools that has been funded by the Australian Government. This is what the Leader of the Opposition, Tony Abbott, has been reported as saying in a recent news report:

Julia Gillard managed to waste as much as $8 billion on school halls while deputy prime minister and there was no reason to expect she would be any different as prime minister, Opposition Leader Tony Abbott says.

Mr Abbott said that funding for the Building the Education Revolution (BER) program should be immediately suspended.

We do not have the space here to consider all the evidence for and against this bold assertion. However, the assertion itself demonstrates the risk that a government takes when it intervenes in areas of policy or economic activity it has not traditionally owned or managed.

For an example overseas, consider the oil spill in the USA.

This spill resulted from activity managed by private sector organisations conducted for private purposes, in an area where the prime regulator is a state government. Yet, the accusations of failure are largely being levied against the federal administration and particularly against President Obama himself. The accusation is that the federal government should have dealt with the crisis directly, instead of leaving it to BP to fix the leak. We had a similar situation in Australia last year with a leaking oil platform in the Timor Sea.

The recent ANAO report on the roof insulation program has established that the public service was less than competent in its management of the program and that the advice provided to the minister and the government was lacking in quality.

This is not surprising, because the public service has few people who understand strategic procurement and contract management. These are skills that are not valued in the modern public service, where policy experience, whatever that means, is all that matters – and the only policy experience that matters is in the central agencies.

I have devised a simple, step by step guide that will help any public servant who is asked to devise a program such as the roof insulation initiative. Here it is:

1. Understand the industry/market. Don’t hire expensive communication or other consultants – they will generally tell you stuff you already know at twenty times the price they charge anyone else – the people in the industry will tell you anything you need to know…just make sure you don’t always listen to the usual suspects…engage with the industry mavericks also.
2. Set a few (no more than five and preferably fewer than three) easily understandable objectives for the program – objectives that make sense to all stakeholders and that can be easily explained and measured. If this is not possible, re-consider the decision to proceed, because if you don’t know where you are going, you are likely to end up nowhere good.
3. Engage industry in the design of the program, at least insofar as standards of performance and compliance are involved – and in policing them.
4. Map risks and keep reviewing the risk profile – every week at least – and adapt to changing circumstances.
5. Set price boundaries for any large scale procurement program, boundaries agreed with industry and tailored to local circumstances. If people deliver for less, let them keep the savings – provided quality is there – if they deliver for a higher cost…tough luck.
6. Monitor closely what is going on – meet with trusted people in the industry regularly and always listen for scuttlebutt and rumours – often where there is smoke, there is fire.
7. Be prepared for failure – have a team ready on stand-by to deal with emergencies. Nominate a spokesperson at the outset of the program and devise scripts for scenarios pointed to by your risk assessment. If something goes wrong, take immediate steps to disclose it before anyone else does – always control the agenda. If the failure looks terminal, kill the program before anyone asks for that to be done and have a story to tell.
8. Learn from other people’s failures, as well as your own.
9. Develop a sense of humour.

Patrick Callioni is a former senior public servant, with the Queensland and Australian Governments, and is now the Managing Director of consulting company, Enterprise Intelligence Pty Ltd, which specialises in helping business to do business with government and vice-versa. www.enterpriseintelligence.net.au His books Compliance Regulation and Financial Services & Waves of Change: Managing Global Trends in the Financial Services Industry are available at Amazon