CHAPTER 1
INTRODUCTION
In the 1995-96 Annual Report of the Commonwealth Ombudsman, concern was expressed that:
as a direct result of these new contracted arrangements, the Ombudsman's office has
been receiving a new range of complaints from suppliers of contracted services and the
consumers of those services. [1]
The examples of complaints cited in the Ombudsman's report suggest that key elements of
successful contracting, as identified by the Industry Commission in its 1996 report, Competitive
Tendering and Contracting by Public Sector Agencies, namely responsibility and
redress, were not being satisfactorily addressed in many contractual arrangements.
Typically, complaints to the Ombudsman involved situations where members of the public
suffered some loss at the hands of a private contractor and their efforts to seek redress
were frustrated as the contractor and the contracting government agency each sought to
avoid responsibility for the problem. Other cases involved the absence of adequate
arrangements on the part of an agency to monitor performance and act on complaints. There
were also disputes over the tendering process and the management and termination of
contracts.
These concerns were noted by senators and, on 4 November 1996, the Senate referred to
the Finance and Public Administration References Committee for inquiry and report, aspects
of the contracting out of government services to private contractors. The reference was
extended on 27 May 1997 by a further clause relating to the contracting out of information
technology (IT) services. The full terms of reference for the inquiry are at Appendix A to
this report. On 10 November 1997 the committee tabled a first report specifically on the
IT reference. [2] In this second report, the committee addresses
the broader issues associated with outsourcing generally.
To assist it in its inquiry, the committee sought written submissions from interested
parties. Fifty-four organisations and individuals responded, many on several occasions. A
complete list of submittors is included as Appendix B. The committee also took into
consideration the evidence presented to it in the course of seven days of public hearings
in Canberra, Melbourne and Sydney. The committee's public hearings program is included as
Appendix C to this report. As well as sharing their own views and experiences with the
committee, many submittors and witnesses introduced to the committee elements of the
extensive and rapidly growing literature on the subject of outsourcing. The committee
acknowledges the considerable assistance it has received from so many people and
particularly thanks those ministers who encouraged their departments and agencies to
assist the committee.
In its first report the committee cautioned against adopting an ideological position on
contracting out. The subject really has to be examined on a case by case basis. The
difference between good examples and unsuccessful examples of contracting out will largely
come down to the extent to which good practice has been followed from the initial stages
of making a decision to contract out a service through all stages of the process. If this
is not done, in the words of the Auditor General,
There is clear evidence that, if poorly managed, competitive tendering and contracting
can result in higher costs, wasted resources, impaired performance and considerable public
concern about the waste of tax payers funds. [3]
The ability of agencies to address satisfactorily the potential problems should be
central to decisions to contract out. If agencies do not have that capacity, they should
seek to acquire it, either by training their existing staff or by recruiting appropriately
qualified persons. In its guide to managing contracts, the MAB/MIAC report stresses that
agencies need to be prepared for a wide variety of contingencies, such as poor performance
by the contractor or a change in the circumstances or expectations of the key
stakeholders, and must `retain the capacity to take back the function outsourced, at least
in the short term, until an alternative provider can be found'. [4]
In the committee's view, the need to ensure minimum disruption to the provision of
government services is crucial. If such a need cannot be met, or if privacy or
accountability cannot be adequately secured in a contracted out environment, then that
should be a persuasive argument against proceeding with the process.
The committee's general concerns in this second report were stated succinctly by the
Industry Commission in its 1996 report on competitive tendering and contracting:
while CTC may provide governments with new options for providing programs and services
more cost-effectively, greater flexibility to meet individual needs may also entail more
discretion. This raises questions about who is accountable, to whom, and for what. [5]
The Industry Commission went on to identify the key elements of the relationship
between the government instrumentality and the contracted service provider, the
principle/agent relationship:
- for each principle-agent relationship, it is clearly established who is responsible for
different aspects of the service;
- sufficient information is readily available so that the performance of the various
principle-agent relationships is transparent; and
- there is opportunity for redress where substandard performance is identified and a
capacity for that to be corrected or sanctions to be imposed. [6]
A healthy principal-agent relationship will depend on open consultation to ensure that
both parties are completely conversant with, and agree upon, all aspects of the
relationship. Reliance on unspoken assumptions by either party will potentially undermine
the contractual relationship.
This committee's report seeks to consider in practical terms some of the issues in
relation to the allocation of responsibility between agent and contractor, access to
information and opportunities for redress where problems emerge.
Responsibility for contracted services
In a recent article the Commonwealth Auditor-General noted that contracting out of a
service `does not equate to contracting out the responsibility for the administration of
the service or the program'. He summarised the essential elements that must be part of any
contract:
the agency must specify the level of service delivery and quantitative and qualitative
service standards in the contract. It must also ensure that an adequate level of
monitoring of the service delivery is undertaken as part of the agency's contract
administration responsibilities. The inclusion of access provisions within the contract
for performance and financial auditing is also very important in maintaining the thread of
accountability. This is a case of managerial prudence, not of restrictive bureaucratic
processes. [7]
This view was widely supported in evidence to the committee. In chapter 4, the
committee expands on its belief that, where public money is expended on the provision of
services, the responsibility for that expenditure remains with the government agency
contracting the service.
The Ombudsman's responsibilities
The Commonwealth Ombudsman noted that many of the problems brought to the Ombusdman's
office resulted from inadequacies in the rules governing contracting – they were
`muddy, contradictory or not yet written'. More broadly the complaints to the Ombudsman
suggest that at that time contracts and service agreements had failed to deal adequately
with the protection of the right of the parties to the contract and the recipients of the
service. Thus the committee's reference directs it to examine how best to protect the
interests of the various parties to a contract both through the tendering process and the
contract itself. [8] Defining and protecting the interests of
the various parties may involve the use of specific clauses in contracts, extension of
existing Commonwealth legislation such as the Privacy Act or the jurisdiction of agencies
such as the Ombudsman or the Administrative Appeals Tribunal to cover new service delivery
arrangements.
The Commonwealth Ombudsman also commented on the limitations of the Ombudsman's
jurisdiction with regard to contracted out services in the 1995-96 report. The committee
will deal with this more fully in chapter 4. In deciding whether the jurisdiction should
be extended it was suggested that there was a need to have regard to:
whether the agency is administering or providing entitlements and whether the agency
administers or enforces statutory powers or regulations. … the nature of the agency's
clientele; the agency's community service obligations; safety; and … the management
of public assets. [9]
Public sector awareness
Governments have historically contracted the procurement of goods and, for the most
part, this has been relatively uncontroversial. Carefully developed rules and guidelines
governed such procurement. Similarly the `contracting in' of routine services required by
government agencies - office cleaning and maintenance, courier services, printing,
training etc - is widespread and largely uncontroversial. These are all services where the
purchasing agencies' requirements can be clearly defined, performance is easily monitored
and outcomes are measurable. They are also activities where, generally, competitive
markets for their provision exist, imposing discipline on costs and protecting agencies
against `capture' – dependence on one supplier in the absence of practical
alternatives.
Contracting out represents a significant change, however, when it is applied to
services such as unemployment assistance, where the nature of the service makes it
difficult to define or measure performance. Instead of direct provision by public service
agencies the Commonwealth enters into contracts or other arrangements with the private
sector, non-government organisations, corporatised public bodies or even with
`commercialised' in-house providers from the agency itself.
The committee noted in its first report that there is no lack of awareness in the
Commonwealth public sector of the factors which need to be considered when approaching
contracting out or of professional guidance on how to `do it' successfully. In fact the
Department of Finance and Administration (and its predecessors) is to be congratulated on
the effort that has gone into providing written guidance, training and support for
agencies market-testing services or contracting them out.
Difficulties arise when agencies for a variety of reasons or in response to other
pressures do not give proper weight to those factors or seek to take shortcuts with the
processes. It is also important to appreciate that getting contracting `right' will rely
heavily on experience. In evidence to the Industry Commission, the Australian Customs
Service noted with regard to the Coastwatch contract:
History indicates that with each successive renewal of the contract we have
strengthened our knowledge and understanding of the provision of the service,
progressively improving outcomes for the government. [10]
The Commission received similar comments from other agencies. This progressive
improvement in skills over time and the development of experience suggests a number of
conclusions: that a phased introduction of contracting to allow agencies to draw on their
own and others' experience is preferable; and that initial contracts for any service are
likely to carry the highest element of risk. At the same time it should be acknowledged
anything new will have teething troubles. These can be minimised, however, by good
contract management.
As the committee discusses in chapter 2, inexperience is not the only source of
problems. There are many well-documented examples of processes being bypassed or distorted
in an attempt to achieve a preferred outcome.
Accountability
It would be nave to claim that the `traditional' public sector provision of services
is by definition readily accessible and accountable to the public and the parliament, or
that it is more sensitive to the needs of the individual than the market driven private
sector.
The importance of making the public sector transparent and accountable has been a
continuing theme of public administration and the parliamentary process for many years. In
the last thirty years we have seen the rise of the parliamentary committee system, the
expanding role of the Auditor-General and the development of the administrative law
including agencies such as the Ombudsman and the Administrative Appeals Tribunal, and the
Freedom of Information legislation, all directed to improving accountability. The
committee wishes to ensure that these advances, sometimes dragged out of a less than
willing public sector, are not undermined.
There is real concern that the progress that has been made may be threatened as
significant areas of public expenditure are subject to contracting out and operational
responsibility is transferred from the public to the private sector. Recent trends in
public administration, particularly the corporatisation of public sector agencies and the
use of contracting out, combined with an increasing focus on the outcomes of public
programs as the sole measure of their efficacy, have generated fears that agencies may be
less accountable for the manner in which they discharge their responsibilities.
It is reassuring that bodies such as the Industry Commission unequivocally support full
public accountability:
whatever method of service provision is used, a government agency remains accountable
for the efficient performance of the functions delegated to it by government … [11]
This view was generally supported both in evidence to the Industry Commission's inquiry
and to this committee. For example the Commonwealth Attorney-General's Department noted in
its submission to the committee that:
The Attorney-General's Department believes that there is not and should not be any
lessening of accountability for government services as a consequence of contracting out
the provision of the services. [12]
Of particular concern to the committee has been the accountability implications of the
provision of services to the public on behalf of the Commonwealth by private contractors,
for example the replacement of the repatriation hospitals directly owned and operated by
the Department of Veterans' Affairs by contracted services in `ordinary' hospitals or the
replacement of the Commonwealth Employment Service with private sector providers.
Secondly, very large contracts for the supply of services to Commonwealth agencies, such
as information technology, raise questions of the agencies' capacity to retain control
over their own responsibilities. These types of contracting also have significant
employment, funding and industry implications. [13]
The committee recognises that contracting out has the potential to improve performance
and accountability in a number of ways. All Commonwealth agencies are now required to
examine their own requirements and the services they provide to the public to assess which
services could be provided more efficiently and cost-effectively under contracting out
arrangements. This, coupled with budgetary pressure, provides the threshold incentive for
agencies to put their functions under close scrutiny. Where an agency decides that a
service may be suitable for contracting out, the imperatives of the process will require
the agency to
- analyse programs so that they can be clearly defined in terms of service levels,
outcomes, costs etc;
- encapsulate the service requirements in a tender document;
- put the program out to competitive tender; and
- let the market determine the most efficient and cost effective way of providing the
service, thus saving the taxpayer money and improving the quality of service to the
citizen.
The contracted out service should be subject to clearly stated performance measures
against which its outcomes can be assessed. Much of this process will be carried out in
public. The recent example of the tendering for, and awarding of, contracts for the
provision of employment services clearly demonstrates this. There has been much public
scrutiny and comment on the suitability of the successful tenderers. They have been
examined by community groups and unsuccessful tenderers for their relevant experience and
understanding of the particular region in which they will operate. It can be assumed that
their performance will also be watched closely.
Common to both public accountability and the opportunity for redress is access to
information. The Freedom of Information Act is a key part of this. Contracting out will
lead to information previously held in public agencies being collected by the private
contractor. The application of the FOI Act to this type of information is considered in
chapter 4.
The importance of process
While excessive concentration on process at the expense of outcomes has, legitimately,
been criticised in the past, the committee believes that process cannot be neglected.
Parliament needs to be able to assure itself that, for example, tendering has been
conducted in a equitable way and that funds appropriated from the revenue are properly
expended. The outcome of a project is not the only measure of whether it was successful or
not. The Auditor-General commented on this in a recent report:
sound administrative processes and effective management are also critical for efficient
effective and sustainable delivery of programs. This is a facet of public administration
which does not always receive the profile or attention that it should. Yet sound
processes, determined by the application of risk management, are the essential foundations
upon which efficient and accountable administration and cost effective outputs and
outcomes are delivered. [14]
The areas of tendering, drawing up and managing the contract are crucial not only to
getting contracting out `right' but also to ensuring that the public, contractors and
agencies are fairly treated. In the agency's annual report for 1996-97 the Commonwealth
Ombudsman raised the issue of `process corruption'. This was defined as a situation where:
the desire for a certain outcome can result in a culture of “rough justice”,
which focuses on the efficiency of getting results but where the process is readily open
to misconduct or corruption. [15]
Thus while a more enterprising and risk-taking approach to public sector management may
be desirable, it must not be at the expense of proper control of public expenditure. Nor
does the committee believe that reliance on the claimed disciplines imposed by the market
can be an adequate substitute for established public processes.
Commercial-in-confidence
To realise the potential benefits to accountability that contracting out can offer it
is important that the improved information be readily available to the public. It is of no
benefit if the information generated by the contractual process is not made public on the
grounds of `commercial-in-confidence' or indeed that the criteria within a contract
against which performance is assessed are not published for the same reason. The possible
application of commercial-in-confidence extends beyond the details of tendering processes
or contracts and obviously includes the day-to-day activities of an agency or contractor.
It is also important that the relevant, publicly funded parts of a private contractor's
activities be subject to public scrutiny, particularly by the Auditor-General.
The Industry Commission report called for the publication of as much information as
possible and identified `information on the specifications of the service, the criteria
for tender evaluation, the criteria for the measurement of performance and how well the
service provider has performed against those criteria' as being of particular importance. [16]
The committee deals with the use of commercial-in-confidence claims to deny public
access to information in chapter 5. Commercial-in-confidence is a legitimate basis on
which to restrict information. However it should have very narrow and clearly limited
application. In evidence to the committee, the New South Wales Auditor-General expressed
the view that once a tendering process was complete and a contract was finalised there was
relatively little information in a contract whose release would genuinely materially
damage the relevant commercial interests of either party to the contract. [17] It is that test that must be applied in determining the merit
of a claim. Relevant interests do not include a desire to avoid scrutiny or political
embarrassment. There have been a number of examples in various state jurisdictions of
whole contracts being withheld on the grounds of commercial-in-confidence while contracts
for similar services have been published in other states. This cannot but lead to an
apprehension that the contracts are being withheld for other reasons.
Commercial-in-confidence should not be confused with public interest immunity. [18] However the same principles must apply. Public interest
immunity applies to particular documents or classes of material, records of cabinet
deliberations or those with security implications for example, whose release would not be
in the public interest. In acknowledging the legitimacy of claims for this immunity the
then Chief Justice of the High Court, Sir Anthony Gibbs, noted that the immunity is
available to:
[e]nsure the proper working of government, and not to protect Ministers and other
servants of the Crown from criticism, however intemperate or unfairly based. [19]
The Parliament, while acknowledging the various forms of privilege claimed to prevent
the provision of material to it, does not accept these claims as established rights. Thus
claims should be dealt with on a case-by-case basis.
In chapter 5, the committee considers the approach which puts the onus on a person
making a claim to justify that claim; it also considers the desirability for confidential
scrutiny by an independent arbiter of the documents for which the claim is being made.
While information can be received in camera by most parliamentary committees their ability
to protect that information is limited and thus the parties to a contract may be
legitimately unwilling to provide information to them. In chapter 5, the committee
canvasses the option of giving the Auditor-General the role of examining the merit of
commercial-in-confidence claims.
Privacy
The committee remains concerned that contracting out has the potential to reduce the
privacy protection of personal information held on behalf of the government. At present a
person has limited rights of access to the Privacy Commissioner with regard to the
collection or use of information about the individual held by a private agency. In chapter
4, the committee considers means of ensuring the protection of personal data held by
private contractors providing services to government.
Terminology
With the advent of corporatised public bodies and privatised service provision it is
common to see the users of the services variously described as a `clients', `customers'
`consumers' and so forth. The use of these terms is presumably meant to encourage a
`business-like' approach to service provision. Such an approach is to be encouraged where
it implies efficiency, quality of service or sensitivity to the service user's needs. The
committee notes that the use of terms such as `client' has become widespread. Overuse of
these terms, however, can give a misleading impression of the nature of the relationship
between service users and providers. Public services are provided to people as citizens
and, particularly in areas such as health, employment and education, they are provided
from the taxes paid by citizens.
The provision of such services is not, and should not be considered as, analogous to
buying a car or some other consumer product. In many cases the users of the service will
not have an alternative to which they can turn if dissatisfied with the service; they will
be coming to the service out of necessity (or even legal compulsion) not choice and often,
particularly in areas such as employment services or health, will be relatively powerless
when compared with the service provider. As the Ombudsman stated:
Whether you are a DSS client seeking an entitlement to meet basic needs or a tax client
meeting your obligations, there is a broader public interest in how the Government uses
its powers. The citizen's relationship with government is very different to that of the
consumer in the market place. [20]
The relationship between service provider and service user emphasise the need for high
levels of accountability.
Similarly, the committee has elected not to use the expression `competitive tendering
and contracting' or as the public service jargon prefers, `CTC'. The committee believes
that the expressions `contracting', `contracting out' or `outsourcing' are less cumbersome
and can be readily understood to encompass situations where the service is provided by an
in-house team after a competitive tendering process.
Footnotes
[1] Commonwealth Ombudsman, Annual Report 1995-96, p.
9.
[2] The report, Contracting out of Government Services:
First Report – Information Technology, is available on the Internet at
https://www.aph.gov.au/senate/committee/fapa_ctte/outsourcing/index.htm.
[3] Mr Pat Barrett, in Australian Public Eye, 24 March
1998, Issue 264, p. 10.
[4] Management Advisory Board/Management Improvement Advisory
Committee, Before You Sign on the Dotted Line, MAB/MIAC Report No. 23, Canberra,
1997, p. 50.
[5] Industry Commission, Competitive Tendering and
Contracting by Public Sector Agencies, Report No. 48, January 1996, p. 81.
[6] ibid., p. 82.
[7] Mr Pat Barrett, in Australian Public Eye, 24 March
1998, Issue 264, p. 10.
[8] The committee has used the term `parties to a contract' to
include not only the parties who actually enter into the contract but also those directly
affected by it – the users of the services. The law of contract may provide the
parties to a contract with means of redress where a dispute arises. However those
utilising a contracted out service such as employment placement or health care will not be
parties to the contract. Thus provision must be made to protect their interests and
provide avenues of redress.
[9] Commonwealth Ombudsman, Annual Report 1995-96,
(Canberra 1996), pp. 16-17.
[10] Industry Commission, Competitive Tendering and
Contracting by Public Sector Agencies, Report No. 48, January 1996, p. 326.
[11] ibid., p. 87.
[12] Commonwealth Attorney-General's Department, in Senate
Finance and Public Administration References Committee, Inquiry into the Contracting
Out of Government Services: Submissions, Vol. 2, p. 383 [hereafter referred to
as Submissions].
[13] See, for example, Senate Finance and Public
Administration References Committee, Contracting out of Government Services: First
Report, Canberra 1997, chapters 4 and 5.
[14] Commonwealth Auditor-General, Audit Report No. 36, Summary
of Audit Outcomes, July-December 1997, Canberra, 1998, p. 9.
[15] Commonwealth Ombudsman, Annual Report 1996-97,
(Canberra, 1997), p. 2. The Ombudsman had, in turn, borrowed this concept from the report
of the Wood Royal Commission into the New South Wales police force.
[16] Industry Commission, op. cit., p. 95.
[17] Mr Tony Harris, in Senate Finance and Public
Administration References Committee, Inquiry into the Contracting Out of Government
Services: Hansard, p. 381 [hereafter referred to as Evidence].
[18] Public interest immunity is also referred to as crown
privilege or executive privilege.
[19] Quoted in Odger's Australian Senate Practice, 8th
ed., (Canberra, 1997), p. 454.
[20] Commonwealth Ombudsman, 1996-97, op. cit., pp. 1-2.
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