Modern Government: Less Can Be More

On Monday 29 February 2016, NSW Treasurer The Hon Gladys Berejiklian MP addressed The Sydney Institute with a speech outlining the way ahead for NSW to continue its record breaking economic progress. Under the O’Farrell and Baird Coalition governments since March 2011, the state of New South Wales has rebounded economically to be the fastest growing government in Australia. But all is not perfect. With NSW state government income 40 per cent dependent on federal government payments, the state must cut costs and develop efficiencies if growth is to be sustained.

MODERN GOVERNMENT: LESS CAN BE MORE

GLADYS BEREJIKLIAN  

It is always an honour to address The Sydney Institute as this is a unique forum where elected representatives are able to flesh out the vision behind their decision making.

This evening, I want to argue the case for smaller governments – governments that are more efficient and maintain their focus on their core business. The greatest challenge facing governments is that resources are limited. This makes it impossible to meet each and every one of the community’s demands and expectations. Therefore, governments need to be efficient, innovative and flexible to ensure the very best outcomes for their citizens.

I will argue that in the era of ever advancing technological development, “less can be more”. Governments can, and should, work smarter to maximise community benefits and return on every dollar that they spend. This is not code for reducing the services or infrastructure that governments provide or generate – quite the contrary. I will argue that it is an opportunity for governments to generate more services and infrastructure from limited resources.

To provide context for this discussion, we need to consider the purpose and core business of government in the modern era. We must ask: Why do governments exist? In 1776, Adam Smith, the father of modern economics, wrote about what he saw as the three legitimate functions of government: i) The defence of the nation;
ii) The administration and enforcement of legal rights;
iii) And the delivery of certain public works and institutions.

Two and a half centuries on and the importance of these functions remains paramount. The question for modern governments becomes one of scope and method. Where do the responsibilities of government start and end and how should government exercise its functions?

To answer this, I refer to John Stuart Mill’s view of liberalism: that governments should allow individuals to live freely as long as they do not impinge on the freedom of others and that governments should provide equality of opportunity for individuals and communities to be their best.

I believe Smith’s basic but important scope, coupled with Mill’s view on equality of opportunity and individual rights, provides a sound context for determining the role of modern government. Within this framework, I want to outline what I believe are three key principles of modern government. These are:

1. Regulating with a light touch. Governments should regulate without inhibiting the work of Smith’s ‘Invisible Hand’.
2. Ensuring the delivery of services and infrastructure. Governments should be agnostic as to who provides a service within the operating environment they regulate, while still supporting growth in those markets. In the delivery of infrastructure, we should adopt global best practice using varied funding models and sources – and never adopt a one-size-fits-all approach.
3. Enabling and growing opportunity. Governments should be as efficient as possible so that resources can be dedicated to supporting the service requirements of the community and to boosting economic growth. This ensures that governments can also allocate resources compassionately to ensure that every citizen maintains the right of equality of opportunity.

Allow me to expand on these points and demonstrate that at the core of each is the concept of “less can be more” – that smaller government is good government.

The first: regulating with a light touch

Governments should be as small as possible to ensure innovation can flourish and not be thwarted by onerous regulatory regimes. Governments should regulate and generate growth but in the modern era, regulation needs to be a “light touch”. This allows for nimbleness and flexibility when coping with rapidly advancing technology and an ever changing environment.

To use a recent example, the entry of Uber has caused government to shift the regulatory environment of point-to-point transport services. If governments are serious about driving innovation, they must ensure there are no competitive disadvantages for any new entrants in a given market.

Future regulation needs to consider flexible systems to allow for the entry and adoption of new technologies and industries that may not exist yet. For instance, Opal electronic ticketing is an “open system” which means one day it could be scaled up to allow customers to use credit cards or mobile phones.

Driverless cars are another example. Clearly governments could not have anticipated when drafting the road rules that one day it would be safe for people to travel around at high speed in a car without a driver. Yet we may find in a few years’ time that travelling in a driverless car is actually safer as it eliminates the risk of human error. As governments, we need to be nimble in making sure we enhance, not inhibit, technological change.

The need to be nimble and flexible brings me to my next example of reform we are undertaking in financial management across government. The Financial Management Transformation (FMT) Program will deliver a world class financial management framework for NSW. It involves a change in the structure of the budget and financial practices across the NSW public sector. This will eventually allow monitoring of the State’s financial position in real time.

Transformation of government financial practices is long overdue. Currently, financial modelling, forecasting and analysis are captured in IT systems that are some 20 years old – this is clearly inefficient.

Having cleaner, clearer information at our fingertips will enable government to make the best use of public resources in a sustainable way. The FMT Program will also provide greater insights into the results being delivered by government – not just the expenses of the government, but also balance sheet management. We are working hard to have Treasury’s new IT system ready in time for the 2017-18 Budget.

The second: ensuring the delivery of services and infrastructure

Governments should be agnostic as to who provides a service within a regulated environment. Citizens are increasingly placing a higher value on the quality of service they receive and are becoming less concerned about the source of the service.

Government will always regulate the provision of the core service – but the service provider should be the entity that can provide the best quality and the best value for money. In some instances this may be government or the community sector –increasingly it will be the private sector. To put it simply: if the private or non- government sector can do better, the government needs to step back.

A good example of this concept is the franchising of Sydney Ferries, which has resulted in services that are more frequent and higher quality. Government continues to regulate the service through fares and route selection. It is unlikely that passengers care that the actual provider is a private company.

Customers are happier, the taxpayer is protected through the provision of a fixed contract which costs less than the public sector comparator and the private sector gets involved in a public activity from which it was previously excluded.

Another innovative way we are involving the private and non-government sectors in service delivery is social impact investment. The NSW Government is the first government in Australia to implement social benefit bonds. This concept is about generating positive outcomes for the community alongside financial return for investors and government.

Social impact investments bring together capital and expertise from the public, private and not-for-profit sectors to tackle a range of social issues. By harnessing the innovation and capital of the non-government sectors, we can deliver better outcomes for the most vulnerable people in our communities. This is a big shift from how governments traditionally fund services – and we can be sure that taxpayers’ money is put towards programs that make a positive, meaningful difference to people’s lives.

The Newpin program is a great case study in social impact investment. Newpin aims to restore children in out-of-home care to their families and the results have been amazing. The NGO running the support service has had a success rate of 65 per cent in restoring families – compared to 25 per cent that government achieves. Private sector investors received returns of 7.5 per cent and 8.9 per cent in the first two years. As well as this, taxpayers got a better deal as less was spent to achieve a greater outcome. Most importantly, government was able to better support the most vulnerable in the community.

We have committed to two new areas of social impact investment every year and the opportunities are endless. This is opening up the frontier in areas which were previously regarded as the sole domain of Government.

The digital age also provides enormous opportunities for innovative service delivery as well as smaller, more effective government. You can already experience how the NSW government is embracing technology simply by walking into any Service NSW centre. Service NSW is an excellent example of how cutting edge technology can be used to deliver better services while making the taxpayers’ dollar go further.

Customers have a one-stop shop where they can conduct more than 800 different types of transactions. Taxpayers get a better deal with huge savings made in back- office processing. By 2019, the NSW Government wants to see 70 per cent of all transactions conducted digitally.

Now to infrastructure delivery, where the aim should always be global best practice and never a one size fits all approach. To illustrate this, I will use the examples of the North West Metro, the Northern Beaches Hospital and WestConnex: three very different projects with three very non-traditional funding models.

The North West Metro is comprised of three major contracts – the first two being traditional design and construct contracts and the third being the Operations, Train and Rail Systems contract which was procured as a PPP with an availability payment mechanism. The successful tenderer, MTR (which runs the Hong Kong metro network) will operate that new rail line which incidentally will have driverless trains – a first for Australia. The government sets the fares and makes payments to the private sector, which takes risk on the operation performance.

The WestConnex financing strategy involves a mix of public and private finance. For the initial WestConnex stages, State equity is co-investing alongside private debt. The State’s equity investment in these initial stages will be sold and recycled to fund investment in the latter WestConnex stages

For the Northern Beaches Hospital, the State has employed an operator-led delivery model. The operator is responsible for building and operating the facility and will receive ongoing performance-based payments. This unique funding model reduces the up-front capital burden on the State, with a total State capital contribution of approximately $360 million for the $600 million facility.

These examples demonstrate that governments need to be flexible when it comes to funding essential infrastructure the community needs. In NSW, record spending in infrastructure is occurring not only because we have been open to new and emerging funding models but also because asset recycling has freed up billions in upfront capital to re-invest in productive infrastructure.

While understandably so much focus of the government’s economic management is on the General Government Sector – that is the State Budget, which is in the order of $70 billion dollars a year – the State’s Total Sector balance sheet is in the order of $300 billion dollars. We believe there are big opportunities to better manage this.

And the third and last principle: enabling and growing opportunity.

Governments should be as small and as efficient as possible to ensure resources are dedicated where they are needed most. This allows for governments to focus on their core business and do that well – rather than venture into areas best left to others. A case in point is job creation. Good governments focus on stimulating the economy to grow jobs – not on growing the public service.

To use an example from my former portfolio, one of my priorities was reforming the bureaucracy that delivers transport in NSW. There were 10 disparate, siloed transport agencies that were all doing their own separate planning and policy work. This was reduced to one main agency responsible for planning and policy functions in the State, which could deliver instructions to delivery agencies. This meant the operators could focus on their core business of providing world class public transport services. When I left the Transport portfolio, there were 2000 fewer back office staff in Sydney Trains and NSW Trains than there were in RailCorp when I arrived. At the same time there were well over 1100 extra services and customer satisfaction had increased.

It is not necessary to grow the public service in order to stimulate employment growth. I am proud that NSW is creating more than half the jobs in the nation and has done so for more than a year. And we haven’t done this by growing the public service – far from it.

We have achieved this through economic growth, stimulating both business and consumer confidence and taking advantage of the opportunities that a diverse economy such as ours has during a commodities market downturn. No doubt growth in the housing market and our infrastructure spend are part of this story.

But there is still more to do in increasing efficiency and reducing duplication across government. You may be surprised to learn that currently there are about 870 NSW government entities, including departments, agencies, state owned corporations, boards, committees and trusts. I know this because I recently tasked an expert panel to audit the structures within our government and present recommendations on how to make our processes leaner and more efficient.

Many of these identified bodies overlap in terms of the functions they perform. There is opportunity here to reduce this number. Not for the sake of it – but because it will reduce waste, streamline decision making and make government work better.

To give you an example of some of these bodies: there are 76 separate Crown Land Trusts managing assets on behalf of local communities. One of them manages a tennis court centre in Newcastle. Another manages a small historic pumping station near Maitland. While the government is yet to decide its exact course of action, the panel has recommended that these should not be separate trusts and should be merged into one.

Over decades, these bodies may have been established for a specific purpose, which no longer exists or is no longer important. Yet they have remained as part of the machinery of government, either because they were established without sunset clauses or they were simply overlooked – something we will rectify for new bodies established in the future.

The intention of this reform is to streamline administration and governance arrangements and consolidate government agencies, bodies, boards and committees. This process could deliver significant savings, which could be poured back into essential services.

But this is about more than simply saving money. It is about improving the delivery of services and infrastructure to the people of NSW by reducing regulatory burdens and strengthening lines of accountability. And it is about ensuring that government focuses on its core business.

Conclusion

In NSW, our government has come a long way in getting back to the core business of good government – and focusing our energies and resources on what is most important. By managing our resources better we have generated economic growth, supported the most vulnerable and worked collaboratively with the community and private sector to make this happen.

Much reform has been achieved – but there is much more to come. We will continue to be an enabler for economic growth, a good and responsible regulator, and a compassionate and efficient provider of quality services and infrastructure.

I hope I have effectively illustrated to you that when it comes to modern government, less can be more. Governments are nothing if they do not protect, deliver and build. It is not the size of government that determines success in achieving these noble objectives, but the way government collaborates and operates.