Think Globally, Reform Locally: Why State Governments Need To Disrupt Their Back Office

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Think Globally, Reform Locally: Why State Governments Need To Disrupt Their Back Office

Speaking at the Centre for Independent Studies Leaders Lunch in Sydney (October 25).

Introduction

I saw an ad on TV the other day for customised number plates.

It got me thinking about the number plates on cars back when I was a kid here in NSW.

There were no fancy colours or words – black and yellow for everyone.

On the bottom of every plate it said “NSW – The Premier State”

And I do remember thinking: I live in the best state in the nation.

That Statement showed confidence.

And we had it in spades here in NSW, trickling down even to kids like me.

Of course I – and everyone else – then had the misfortune of growing up under 16 years of successive Labor state governments.

It’s no coincidence that as the fortunes of the state declined, those plates were phased out also.

Stepping back from the politics though, and just looking at the results, I think it is fair to say that after 16 years of one party rule, NSW had ground to a halt.

Our economy was the worst performing in the nation.

The big projects that we needed, to end congestion or build public transport, had all but stopped.

And there was a real sense of cynicism and disillusionment about whether the government could even hold on to a leader for 5 minutes, let alone run the affairs of state.

We had lost our way.

Fast forward to 2016.

After 5 years of a reformist government, things are very different.

Our economy is the engine room of the nation.

Unemployment is at 4.9% – the lowest in the country.

The state’s net debt position is zero.

We have a budget that is in surplus to the tune of $4.7 billion dollars.

There are more cranes in the sky than any other city except Dubai.

Consumer and business confidence is surging.

And we have a $73 billion infrastructure agenda that is transforming almost every corner of the state.

Judging just on these results – NSW is once again the Premier state.

How we’ve done it

At a macro level, we have achieved our current position by making a series of bold decisions and pursuing difficult reform.

One of these was leasing the poles and wires, to make our infrastructure dreams a reality.

Our decision for a long term lease of these assets was taken to the election.

At the time, it was seen as a huge political gamble.

Many had tried – all had failed.

But as recent Galaxy research shows, 61 per cent of people support asset recycling once they were made aware of the benefits, with just 9 per cent opposed. And support was even higher among my generation of millennials.

So we were very clear with the electorate that the proceeds would go to specific projects – building roads, rail, schools and hospitals that we desperately needed.

With the lease of Transgrid for $10.3b late last year and Ausgrid for $16.2b just last week, the gross proceeds currently stand at over $26b – with one more asset still to come.

These reforms are important because a strong economy and a good society are two sides of the same coin.

The former without the latter is soul-less. The latter without the former is a cruel mirage.

Disrupting government

But it’s the work inside government that I really want to talk to you about today.

While we have had wins across the board by thinking big, for the past two years we have been pursuing a series of reforms to my own patch – the Department of Finance, Services & Innovation.

Compared to mega-departments like Health and Education, DFSI is relatively small at around 6,000 people.

But we have pioneered a number of key changes that have seen us fundamentally transform the back office of government.

I believe these can serve as a template for how a modern government should operate.

In just a little over two years we have:

  • Exited our technology business, shutting down ServiceFirst and engaging IT experts to run our IT
  • Exited our fleet management business, dissolving StateFleet with their 25,000 cars
  • Exited our construction business, transitioning NSW Public Works to a strategic advisory group
  • We are exiting the operations of Land & Property Information in conjunction with the Treasurer, but keeping regulatory control
  • Commercialised the old WorkCover bureaucracy into iCare, the largest insurer in the southern hemisphere
  • Shutdown numerous old style government storefronts, replacing them with Service NSW one stop shops
  • Absorbed the functions of the old Sydney Harbour Foreshore Authority into Property NSW
  • Reformed our procurement model, returning nearly half a billion dollars to the bottom line
  • We have also applied asset recycling to our property portfolio, including
    • Selling $400m of CBD office blocks to fund new housing supply
    • Raising $200m for new social housing by selling off old stock at Millers Point
    • Hypothecating the proceeds from SHFA assets to a $200m facelift for Circular Quay
    • Opening up the regal Sandstones buildings on Bridge St by earmarking them as luxury hotels, boosting the visitor economy
    • And relocating over 2,000 bureaucrats to Sydney’s West, leading the biggest decentralisation out of the CBD in our history

By my calculations, the sum total of these reforms to just one small department in has resulted in

  • Over $750m in opex savings
  • Over $1bn of capex savings
  • And over $1bn of assets recycled

And while every single other government department has grown, DFSI has seen numbers reduce by around 15% – and yet is delivering more services in more agile and efficient ways than before.

This is more than just reform.

This is has been a deliberate disruption to one government department that has yielded significant results for our citizens.

Reform Lessons

Many of you here would be in business and would know first hand that making change is hard work.

Let me assure you in government it is harder.

We have learnt a number of valuable lessons on how government should function that I also want to share with you today.

Lesson #1 – Relentlessly focus on the essentials

The first is to relentlessly focus only on what we should be doing – and get out of everything else.

This means we shouldn’t be running IT companies, managing car fleets or operating construction companies.

Our core business is service delivery and that’s where we should be focused.

There is also a growing public awareness that while governments are accountable for services, they are not always best placed to deliver them.

For example, the government provides a ferry service for Sydney commuters.

But the actual delivery of that service is run by the private sector.

We now have a better service delivered at a lower cost to taxpayers.

My view is that if there is a well developed private sector capability in a mature market that can do it better than we can – then so they should.

Our role is to provide the best services at the best value for our citizens.

Lesson #2 – Develop new models for service delivery

Now while it makes eminent sense to me that commodity functions of government should be done by others, I am no privatisation ideologue.

There are certain things for the public good where I believe governments should take a leading role – such as maintaining our shared heritage.

One of the small ways we contribute to this in my department is running our own team of stonemasons, due to our special maintenance needs and limited availability of this unique skill.

We have recently increased their funding and expanded their program of work to ensure that our precious Sandstone buildings can be enjoyed by generations to come.

There are also certain roles and functions of government that have a social component – where a public service ethos, not a profit motive, must be present.

For example, the government has an obligation to provide insurance for those who are injured at work or affected by dust diseases.

When the bureaucracy was failing to deliver this in the old Worker’s Compensation scheme, we didn’t move to privatisation.

Instead, we created iCare – a ‘social insurer’ – which is publically owned, but commercially run.

While we are doing things more efficiently, the public sector ethos is retained.

We are not running for profit – we are running for people.

The iCare model shows public service delivery does not have to be a binary choice between inefficient bureaucracy on the one hand and outright privatisation on the other.  

This model of a ‘commercial mind and social heart’, is something I would like to see extended to other parts of the public service, such as Service NSW, to deliver more benefits for citizens

Lesson #3 – Put the citizen at the centre

The third lesson is what a difference it makes when government is redesigned around the needs of our citizens – not legislation, process or bureaucracy.

While to the outside world, we may look like one united entity called ‘government’, internally this is a very different story.

I would go so far as to say the biggest enemy of making progress in government are silos that exist – and are defended – between different departments.

We need to focus more on people, rather than agencies.

This is where technology comes in.

In many ways, it is one of most effective battering rams in breaking these silos down.

When it comes to technology, government shouldn’t necessarily be on the cutting edge, where the risks are highest – but we should be fast followers, using and applying what works.

Using technology to break down silos is our aim behind rolling out Service NSW, accompanied by its flagship digital program.

But we are also applying this thinking – with the help of the Customer Service Commissioner – to things as diverse as mining subsidence claims or the land acquisitions process.

Lesson #4 – Make your assets work for you

The next lesson we have learned is how important it is to liberate capital from balance sheets.

I have still yet to meet anyone who can explain how it makes economic sense that government agencies should come cap in hand asking for millions in new capital expenditure – while sitting on hundreds of millions of dollars in dormant assets.

I said at a speech last week that asset recycling has been the ‘secret sauce’ to our financial success. And in many ways it has.

Asset recycling means we don’t have to borrow money or raise new taxes – instead we are making better use of what we have – and the result is more cranes in the sky.

Lesson #5 – Measures outcomes, not inputs

Another thing governments tend to do is talk up the numbers, as if a bigger investment automatically implies better results.

Now when it comes to some things – like infrastructure – more spending does indeed signify more activity.

But this does not necessarily apply to all government services.

Too often now, elections become spending contests, where the only measure of success is how much money you’re throwing at the problem. If it were that simple, all our problems would be solved.

The reality is we cannot measure policies by their intent, their inputs, or by how they make us feel.

We can only measure policies but only by their outcomes.

This is why the Premier has listed 12 priorities for the state to focus on – things like creating jobs, reducing homelessness and fast housing approvals.

These are all specific outcomes that can measured and tracked.

Lesson #6 – Get the right people on the bus

It’s also vitally important to get the right people on the bus to drive these reforms.

The Secretary of DFSI, the Customer Service Commissioner and the CEOs of iCare, Property NSW and Service NSW have all come from the private sector.

Because they are not ‘traditional’ public servants, their new ways of thinking have challenged the old ways of doing things – and have been a key ingredient in making our reforms works.

In my experience, the vast majority of public servants are dedicated and passionate about what they do – but they are held back by old processes and dated structures which we must change.

The future model of government

This then is the model of government that I believe we should be pursuing.

  • It must be relentlessly focused on the essentials.
  • It must move beyond the binaries of bureaucracy or privatisation, employing new models for delivering services with ‘a commercial mind and a social heart’
  • It should be designed around the needs of citizens, using technology to break down silos
  • It must only retain assets essential to service delivery, recycling the rest
  • It must measure the outcomes, not the inputs
  • And it must have right kind of strategic leadership in place

This is the model of a 21st century government that can deal with 21st century problems.

Now that we have done this in DFSI, we should look to extend this model across the rest of government.

This is why we have set up a Commissioning and Contestability Unit to define, analyse and implement service delivery reform opportunities in areas like health, education and transport.

I want to emphasise that there is one reason that governments should do all of these things.

Or in fact, there are 7 million reasons.

And those reasons are you and me and the 7 million other people who call NSW home.

These reforms are the best means – and I believe the only means – for establishing a government that does precisely what it needs to do.

To empower citizens to live their lives to the fullest, to share in the prosperity that is on offer, and to freely live their lives in community with one another.

The current model of Federation

I feel it necessary to point out that the Opposition have stood against every single one of our reforms.

While the job of Oppositions is to oppose, this goes well beyond that.

It is my belief that the Labor party is structurally wedded to the old and dysfunctional model of big government.

While we see the model as broken and want to fix it, their instinctive reaction is to protect it.

They have become the praetorian guard for preserving the status quo.

In this new world, Labor are the backward conservatives defending legacy big government.  

It is noteworthy that while the private sector union involvement has declined to just 11%, union membership among public servants is just shy of 40% – and they continue to donate exclusively to parties on the political Left.

This explains why Labor protests so stridently at any attempt to rein in public sector spending.

They have a vested interest in running a protection racket for dysfunctional government because it secures their financial and political future.

If we have battled the opposition for years just to close down ancient motor registries, I can only imagine how difficult it would be to even attempt reform of health, education or welfare at a federal level.

Now reform is hard work and we wear our political battle scars with pride.

So after taking all the tough decisions – we will now be penalised by having more GST funding handed out to non-reforming states.

We are building the infrastructure of the future while other states are dithering.

We are not doing it with our hands out, we are doing it by making better use of what we have.

But while we are taking action, other states are benefitting off the back of our tough reforms.

In South Australia, the Labor government has put its ideological zealotry for green politics above the practicality of actually keeping the lights on.

In Queensland, the Labor Premier who didn’t know the rate of the GST has hired over 10,000 bureaucrats in 12 months, and allowed unions to use government resources for recruitment work.

Meanwhile in Victoria, when not paying $1bn to not build a road, Daniel Andrews is rolling out a social engineering program so radical and extreme it makes Joan Kirner look like Margaret Thatcher.  

While we claim a mandate to get practical things done, Labor claim a mandate to change the social fabric of society – all funded by our tax dollars.

As Greg Sheridan put it recently, “This is what you get from modern centre-left governments — identity politics, green gestures, economic failure. “

The current GST carve-up does not reward political reform.

Under the principle of horizontal fiscal equalisation – where all citizens can expect to have access to equal standards of government services – non-reforming states are being rewarded for their their inaction.

As Judith Sloan has written: “The states that receive relative shares greater than one are those that have pursued anti-growth policies and have bloated public services.”

Clearly the bigger you are, the more ideological you are, the more incompetent you are – the more money you end up getting.

This is like a cash for clunkers scheme gone bad –  where we are actually paying to keep the old clunkers on the road.

Now the federal government does already provide incentives for the right kinds of reform behaviour.

For example, under its asset recycling initiative, states receive 15 per cent of any asset sale as a bonus payment, if the money goes into new infrastructure.

Why then wouldn’t we extend this model to other areas?

Should states receive bonuses and incentives for delivering key services against key outcomes? Things like measuring citizen satisfaction, maintaining a streamlined public service ratio or reducing taxation?

It is clear that something has to change, since there are not enough incentives for state governments to embark on tough reform at their own political expense.

Conclusion

Ladies and Gentleman, reform is important because the problems governments are facing are only going to get worse.

Despite the best efforts of central bankers, below trend growth seems here to stay.

At the same time that budgets are tightening, demand for services and infrastructure is increasing.

Our population is going to grow substantially – 2.1m more in NSW alone – but so too is our ageing demographic.

Meanwhile, the lessons of Europe show us exactly where big government, high taxation, uncontrolled spending and heavy regulation has led.

And as I have written before, the generation known as the millennials are coming.

I can assure you they will have no patience for backward models of government that should be consigned to the distant past.

These challenges make the reform imperative even more pressing.

The journey to a brighter future has to be funded from the actions of today.  

Reform is not just about making changes but creating solutions… and that this is what this government actually does – we are proactive in delivering better services to our citizens.

I believe strongly that calls for more funding, more taxes and more borrowing by governments should be treated with an attitude of suspicion.

We should as state be asked the question: Have you reformed inside first?

To paraphrase my good friends at Greenpeace, state government must ‘think globally but act locally’ and make the tough decisions to reform.

Watch full speech

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