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Harnessing federalism: the missing key to successful reform

21 November 2012

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The Sir Roland Wilson Foundation was established in 1998 with donations from ANU and the Wilson family estate to advance the study and development of public policy and management within Australia and internationally.

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Good evening and thank you for this opportunity to deliver the Sir Roland Wilson lecture.

I speak to you this evening in my capacity as the Chairman of the COAG Reform Council, a role which I will leave next month after six years as its founding head. It is, therefore, a particular privilege for me to give this lecture as what will be, in some respects, my parting address.

As I move on to new responsibilities of a more commercial bent I thought it may be useful to sum up my thoughts on the state of the COAG Reform Agenda, which I have observed - with more than a passing interest - since its inception.

I cannot think of a more fitting occasion for an address about the future of Australia’s economic and social wellbeing than this prestigious event in honour of a man whose contribution to Australian society may be unknown to many but whose footprint is still evident in the strong and stable economy Australia enjoys today.

Sir Roland Wilson was not defined by his humble beginnings, nor by his chosen career path.

But his belief that service to the public was a vocation – not just a job – did define his legacy.

He was a man whose great intellect could have afforded him the luxury of better paid ambitions but he believed that there was no greater purpose than to be at the heart of government policy making - although he would have pulled me up on that and said politicians do the policy making, public servants do the policy advising.

When you read about Sir Roland, you get the impression he was a bit like the Energizer bunny. Apart from setting the bar high on his career very early with his appointment to the role of Commonwealth statistician at the age of 32, and going onward and upward from there.

We can glean a fair bit about Sir Roland’s approach to life in general from his time outside work. Whereas most people might list gardening or reading or playing tennis as a hobby, Sir Roland - in Who’s Who no less - listed cabinet-making (of the wooden kind) and engineering. He even buildt, from scratch, his own electric car to overcome wartime petrol rationing! I believe this was more a determination to avoid riding a bike to work than a desire to take advantage of the wartime delay to Holden’s car production plans - and if you see pictures of the car you would know Holden had very little to worry about.

With hindsight, we can see that Sir Roland’s thinking, motivation and leadership - that won him the respect of his peers and staff - were shaped by some Australia’s, and the world’s, most momentous events.

He witnessed, as a young boy, the first World War, lived the personal and public effects of the second; he stood on the threshold of our current history in 1945 as a participant in the San Francisco conference that saw the birth of the United Nations, and then went on to ‘ghost write’ some of the most significant chapters of Australia’s economic story.
Sir Roland was a man who believed that every waking moment was to be filled and luckily for us, he channelled his professional energies into initiatives that benefitted many – as Head of Treasury, among other things.

I’m sure Sir Roland would barely recognise the Treasury that Martin Parkinson oversees, nor that of Martin’s predecessor, Ken Henry.

Where in Sir Roland’s day much of Treasury power and time rested on their role as guardian of the fiscal gate, its core role today is to provide the thought-leadership that is demanded by a long-term and complex policy agenda - where are we now, where do we want to go, how do we get there?

To use a phrase of Tony Blair’s, Treasury is called on to ‘challenge the givens’.

When I spoke with Treasury Senior Executives just a few weeks ago, I made the point that it is the department with the lead mandate to deal in ‘what ifs’.

And it does this all within the context of unchartered 21st century economic, social and environmental circumstances and against the backdrop of the complexities forecast in the third Inter-generational Report.

Sir Roland’s feats of fiscal fearlessness and economic élan are well known to this audience, and therefore there is no need to restate his biography tonight. I will draw from his legacy, however, in seeking to speak with some of the candour that was Sir Roland’s trademark.

And I will share with you my thoughts on Australia’s federation from a position of intimate knowledge of its workings and a genuine desire for, and belief in, its ability to deliver this nation the future it deserves.

Premise of the speech
In his touching eulogy at Sir Roland’s funeral, his great friend Ian Castles quoted two lines of verse which were particular favourites of Sir Roland:

Each age is a dream that is dying,
Or one that is coming to birth.

I wonder what Sir Roland would make of the age in which we now live.

A different age - certainly a very different economic age.

An economic age in which we find ourselves part of a globalised economy, where fatal flaws in economic policy on one continent can cripple the economy of countries on another.

The age where Australia’s national economy, through swift and measured action and with the backing of 30 years of solid economic  management, was a success story of the Global Financial Crisis but now throws down the challenge of transformation that is happening at a rate and magnitude which we have not witnessed before.

An age where the strategic and economic rise of Asia will allow unprecedented opportunity for a country which has long battled the tyranny of distance but now finds itself with what has been termed the advantage of adjacency and if, Ken, I may quote from the White Paper on Australia in the Asian Century, ‘ the prospects of proximity’.

But, as we rightly savour the optimism and opportunity, it must be tempered by the realisation that if we are to exploit them, then we have some work to do.

Martin Parkinson pointed out in a recent speech that: ‘the slowing economic growth, rising expectations of  government, and a constrained revenue base, are likely to force an explicit debate about the size and scope of government, both at each level of government and between the levels of government’.

My lecture this evening focuses on the structures and settings of our national governance in this era of transformation.
Are they strong enough to support such change?

Are they flexible and mature enough to drive the reforms that are this generation’s obligation to the next?

In my view the answer to both those questions is – quite simply but quite emphatically - no.

And my reason for this view is that we are neglecting the unavoidable avenue to success of any Australian vision - our federal system of government.

A vision for the future is necessary and aspirations are admirable. Especially at a time when economic transformation promises much to many but also casts a long shadow on others in a society, an aspiration to a better future can galvanise and motivate. 

But, when the means to those ends are indefinable, faith in the future can be lost.

And this was starkly reinforced by Griffith University’s Constitutional Values Survey results I’m sure we all saw on the weekend - and I might add I wondered if I had been gazumped by Professor AJ Brown when I read the press coverage but it is in fact heartening to see the issue being given such prominence. This is the national conversation we must have.

The survey showed that two thirds of those surveyed do not believe that the federal and state governments are working well together.

There is a growing very real crisis of confidence in our system of government out in the community, but the truth is, we have been wringing our hands about the problems of intergovernmental relations for decades.

Let me read you this quote: ‘In clashes between federal and state governments a search has to be made for legalistic and other devices which will enable the rigidity of the Constitution to be overcome and the frigidity of financial relations to be thawed somewhat.’

That was written in 1945 by Professor GL Wood, a longstanding member of the Commonwealth Grants Commission.

We know this is a vexed issue for which no group of political leaders,  no generation, has been able to find a workable solution.

So I ask you - is this the generation to say ‘enough!’?
Background on federal financial arrangements
Let’s go back for a minute and see where the complexities of our current system were born.

Our Constitution did not imagine or allow for close and comprehensive collaboration between the Commonwealth and States.

The levels of government were envisaged as operating largely independently of each other, so there was no provision in the Constitution for the overlap that now occurs and has increasingly put pressure on intergovernmental relations and the funding that accompanies it.

Alfred Deakin, writing anonymously in 1902 while Attorney-General in the Barton Government, described the Constitution as leaving the States ‘legally free, but financially bound to the chariot wheels of the central Government’.

The chariot was the revenue-raising powers of the Commonwealth which today make up more than 80% of total government revenue in this country.

The paradox is the States and Territories are left with most of the service provision for the big ticket items like education, transport and health.

As my own Deputy Chairman of the COAG Reform Council and Constitutional expert, Professor Greg Craven wrote recently, ‘the founders were great statesmen and excellent constitutionalists, but by and large, dreadful accountants’.

The story since Federation is one of the centralisation of power and responsibility.

This was aided by several factors, including the Commonwealth’s superior fiscal position and the High Court’s expansive interpretation of the Commonwealth’s powers.

Sir Roland would have witnessed this during his time when the High Court ruled on the two Uniform Tax cases, the practical effect of which was a huge transfer of money and power to the Commonwealth.

More recently though, there have been interesting developments in High Court rulings with the Pape and Williams cases reflecting what Professor Brian Galligan described as a ‘more balanced constitutionalism’.  In a recent article on fiscal federalism, he went on to sum up the Pape case as ‘a timely reminder that the Commonwealth is a government of limited powers, and that the High Court sets the limits.’
In essence, and in both cases, the Court found the Commonwealth could not simply spend money on anything it chose - if it could, the Court argued, the practical authority of the states in the areas over which they had constitutional power would be diminished.

These findings do not challenge the fiscal imbalance that drives the Commonwealth’s practical dominance. But, they do remind us that our system is built on sovereign states with discrete mandates and responsibilities. This highlights the continuing and growing importance of, and need for, cooperative relations between the Commonwealth and the States.

While this has long been the case, the transformation of the past 40 years - in the way the federal system works - means that the number of areas of shared responsibility is now astounding. The rollcall of the National Agreements – Health, Education, Training, Housing, Disability, Indigenous disadvantage - gives just a flavour of the overlap which today spreads into almost every corner of public policy.
Australia’s current policy agenda puts a further premium on collaboration - shaped as it is around such enormous tasks as the National Disability Insurance Policy, the implementation of the Gonski review, the challenges presented by the findings and aspirations of the Asian Century White Paper and the fiscal imperative to tackle the size and scope of government.

The weakness of the current model is that this enormous overlap is not matched by any real commitment to strengthen the institutions which are the foundation of a melded system.

And we cannot continue to see our current model as a separate entity that we can blame for all our woes, thus absolving us of all responsibility.

Political leaders must address its weaknesses if we are to have any hope of achieving real reform across such complex social issues.

Without equivocation, the current model must be untangled or rethought.
The Intergovernmental Agreement
The importance of clear responsibilities and accountabilities is, of course, not a newly discovered concept, and it could be argued it was paramount to our founding fathers when writing the Constitution. The last serious attempt at reform was in the early months of the Rudd government.

As part of his election commitment to promote ‘cooperative federalism’, former Prime Minister, Kevin Rudd did seek to untangle and rethink federal financial relations - hence the birth of the Intergovernmental Agreement on Federal Financial Relations in 2008.

The IGA was said to represent ‘the most significant reform of Australia's federal financial relations in decades’.

It aimed to improve government services by reducing prescriptions on the States - giving them flexibility to provide local solutions to local problems.
It also aimed to clarify the roles and responsibilities of the Commonwealth and States and linked this with accountability for better outcomes, which the Victorian Government noted was ‘the first time in Australia’s federal history, intergovernmental transfers of public funds take place within an agreed policy and administrative framework.’

The success of this framework is underpinned by a set of principles for collaborative federalism which governments agreed to uphold – a rule book of sorts for intergovernmental relations.

Part of this framework is public accountability - the mission with which the COAG Reform Council has been charged.

But, has this accountability for which the council is in part responsible been effective?

The practical test for this is – has the council’s measurement and reporting of results influenced government action and, in turn, improved performance?

Clearly that was COAG’s intention.

Governments would rarely endure the pain of contributing to reports on their own performance if they did not intend to use the results, but as Professor Paul Thomas has said: ‘Utilisation has been the Achilles heel of performance measurement and performance reporting.’

Reflecting on my six years at the council, I would say that our reports on the National Partnership Agreement to Deliver a Seamless National Economy are the stand-out success of accountability.

Without a doubt the Seamless reports meet the test of effectiveness.

COAG has responded to our findings and recommendations - our reports have influenced government action which in turn has improved performance and progress.

The reports have also engaged both the media and key business organisations, particularly the Business Council of Australia, who have relied upon them when urging continued momentum on regulatory reform.
Granted, there are still some areas of concern - not the least of which is that some reforms won’t meet their targets by the December 2012 deadline – but the tangible victories to date have imbued in stakeholders a sense that the reforms will not stop just because the agreement reaches its shelf life.

As a matter of fact, a recent keynote event held by the COAG Reform Council on the Seamless National Economy agreement heard from senior representatives of government and industry, including David Tune, Gary Banks and Jennifer Westacott, and there was agreement that in general the reforms are a success and that the implementation and accountability arrangements worked well.

I also believe the Business Advisory Forum created and chaired by Prime Minister Julia Gillard as an adjunct to COAG meetings is an important innovation that has significantly strengthened these arrangements.

Giving major stakeholders a direct line of communication with our political leaders is key to formulating practical microeconomic reform and gives a sense of shared ownership.
In fact, the success of the Seamless reforms are reminiscent of the success of the National Competition Policy agreed between the Commonwealth and States in 1995 - which Gary Banks called ‘a landmark achievement in nationally coordinated reform’.

I might add that COAG really stepped up with these reforms because it was motivated by the economic circumstances at the time.

The economic circumstances of our time beckon the same level of response.

Commentators agree that the success of the competition policy included:
• agreement between governments on the need for reform and reform priorities
• a solid conceptual framework to guide policy directions
• financial incentives, and
• strong governance, with independent monitoring and highly effective procedural and institutional mechanisms to implement reform.

To a reasonable degree, the Seamless National Economy agreement shares these factors of success.

Both Seamless and other National Partnerships are more in the tradition of conventional specific purpose payments - something the Commonwealth and States have been negotiating and navigating for decades.

But in my view, the really radical parts of the reworked funding arrangements under the IGA are the National Agreements which are associated with the transfer of billions of dollars from the Commonwealth to the States.

In return, the States - and the Commonwealth Government where there are joint responsibilities - are held accountable for high-level outcomes.

It is much harder to judge if the council’s National Agreements reports influence government action, which in turn improves progress towards outcomes.

We refer to our National Agreement data as ‘catalyst data’.

We do not explain why there is a difference in performance between jurisdictions – we’re not asked to – or why there has been no change over time in the data.

Rather, the data should prompt debate…lead governments to search for answers…to take action.

And there are instances where data of this kind has led to action. A good example being when the first NAPLAN results for literacy and numeracy of primary school students were released – they showed Queensland languishing, unexpectedly, near the bottom of the list.

Because it is very clear that education is a state government responsibility, there was a strong reputational risk with inaction. So Premier Anna Bligh immediately ordered an inquiry to find out the ‘why’ of the results.

To cut a long story short, the data led to the Queensland Government introducing new education measures and turning around its NAPLAN results in primary school. That is performance reporting doing what it is meant to do.

But ,this example also illustrates the correlation between clear responsibility and the impetus to take action.

Unfortunately, it is also a rarity. There is not a lot of evidence that governments are improving their performance in response to the council’s findings in the National Agreements reports – a weakness the council has highlighted since we first began.
We have argued that performance monitoring of the kind contemplated in the National Agreements takes time and consistent political focus - it needs the governments themselves to champion the system, and this has not happened.

More significantly, COAG has not only failed to champion the National Agreement model, it has in fact moved away from the outcomes model of the National Agreements.

The National Healthcare Reform Agreement shifted from fully flexible funds with performance assessment against high level outcomes, to funds for services and activities associated with local level as well as high level performance assessment.

We would expect agreements for funding of the NDIS and Gonski to also break away from the model of the National Agreements.

So if we think of the success of the National Competition Policy and Seamless National Economy, where is the National Agreement model lacking?

Well, the incentive for the outcomes of the National Agreements is not monetary – there’s no penalty involved here - but reputational.

Is potential reputational damage too weak an incentive to spur governments into action? Or is it that accountability for high level outcomes is not strong enough to drive improvements? 

Perhaps it is because the focus on state-level data obscures the clarity we need to make improvements and to innovate. Or that it takes too long to assess change in outcomes?

Or is governance at the core of the problem and how COAG is supporting – or not supporting - the IGA which it agreed was a good idea?

COAG has agreed to the outcomes of the National Agreements.

It has agreed to a set of measures to monitor progress towards the outcomes, and COAG has agreed to the independent COAG Reform Council assessing governments’ performance and annually reporting on progress.

But COAG has yet to consider seriously the findings of the council’s reports and reflect on the degree of progress being made towards the outcomes of the National Agreements.

It may be that it is thought too early to have this discussion.

It may be that the data is not considered strong enough to draw conclusions.

To my mind though, it is because COAG has not developed processes that one would expect to be part of a comprehensive approach to accountability – processes that ‘close the loop’ and provide for COAG to regularly consider the findings and reflect on their implications for government action.

After all, the IGA emphasises that the National Agreements have a ‘rigorous focus on the achievement by all levels of government of mutually agreed objectives and outcomes that improve the well-being of Australians’. A noble principle upon which to base the agreements, but the problem is that COAG has no agreed processes for considering and responding to the findings of the accountability reports on the amount of progress being made.

Let me say again, these National Agreements are about health, education, Indigenous reform, disability, housing and skills.

Which makes the real shame in the lack of response the fact that they are not properly serving the people they were designed to help - our most vulnerable Australians - people with a disability…the disadvantaged…the marginalised.
How can COAG support the new policy agenda
I have used the analogy before that COAG could be viewed as similar to a board with the first ministers its directors.

I have also used the example that it would indeed be questioned if a board of a major company like BHP met irregularly – sometimes only once a year - and declared the BHP governance structure sound, simply by virtue of its continuity, with meetings unchanged since the days when the company operated just the one mine.

And if the board only considered new projects as they did not have the time or processes to review any ongoing activities, and that they couldn’t report on the board’s strategic planning cycle because there wasn’t one, then I suggest a call from ASIC would be imminent.

It will not be lost on this audience that I could have just described COAG.

It meets irregularly, its governance structure is the same as it was in 1992 and yet its scope has broadened from a focus on competition and regulatory reform to include reform agendas in the major policy areas I’ve mentioned - as well as federal financial relations.

If we want to see this very worthy and wide-ranging reform agenda through, we need to take action because the current structure will not support it.

Nor can we look to Constitutional change to solve the problem for us – despite the fact that 30 per cent of respondents to the Griffith University survey think we should abolish the States the reality is, it is not feasible - if for no other reason than Australia’s historic aversion to Constitutional change as evident in our poor track record with the ‘yes’ vote in referenda.

And while the federal system has its failings, we must acknowledge that it also has it strengths, the most obvious being the strong and stable democracy we enjoy and an acknowledgment that our country is as diverse as it is vast and the unique needs of any region should be addressed by those who live its reality.

We have a federal system and I will make the bold prediction -that will not change in our lifetime.

So that leaves us with only one option, and that is to make it work.

We must find a way to successfully collaborate.

Which brings me to the things we can change and they are the processes that drive any system. And the way to make this system work is through governance, accountability and ambition.

The Hon Chief Justice Robert French recently wrote that the harsh economics of global markets are: 'Transforming the local to the national across a variety of fields of human activity. The responses which they demand test the ability of a constitution, based upon a division of legislative powers, to accommodate national approaches to subjects not directly under Commonwealth legislative competency'.

The problems with current COAG arrangements have been summed up by intergovernmental relations specialist and member of the Commonwealth Grants Commission, Jenny Menzies, who says that ‘It is the constant churn of  these soft factors – personality, partisanship and the political cycle -  which leads to much of the tension and dysfunction of our present system of intergovernmental relations'.
Menzies also points to the over-dependence on ‘actors and relationships’:
• Are the States in a cooperative or obstructionist phase?
• Is the Prime Minister of the day interested in Commonwealth/State relations?
• Will a change of federal government mean all bets are off and all funding must be renegotiated?

On top of the uncertainty that different personalities and changes of government bring, there is also the reality that irregular and ad hoc arrangements bring out the worst of summitry behaviour - such as grandstanding and stonewalling for political gain.

As I said earlier, the Constitution did not create mechanisms to manage intergovernmental relations because it had no idea there would be a need for them. But, Professor Cheryl Saunders recently wrote that ‘The time has come to accept that intergovernmental arrangements and practices in Australia now represent a distinct mode of governance for which more structured provision should be made’.

The governance arrangements of COAG, even though devised more recently than the Constitution, need to be revisited.

Today’s monumental reform agenda calls for more than the ‘summit meeting’ model - you only have to look at the Asian Century White Paper to see that the opportunities listed overwhelmingly require collaborative and consistent action. 

A reformed COAG with a permanent institutional base could do longer-term work, called for by Ross Garnaut and others, to resolve issues on roles and responsibilities and imbalance.

Garnaut even proposed that governments should put fundamental reform aimed at addressing federal financial problems on the table for discussion now, for resolution and implementation by 2020 – thus removing the impact on governments’ current political fortunes and perhaps circumventing the slavery to the electoral cycle.

While I recognise that developing and agreeing new governance arrangements would be difficult, I am hoping that the significant policy challenges the nation faces – which demand effective federalism - will provide the incentive.
As Paul Keating once said, the role of the politician is to interpret the future to the present and that is a task today’s political leaders must take seriously because community support is a crucial factor in the success of reform.

Before concluding these thoughts on an improved governance structure, let me make a comment on ambition.

The COAG Reform Agenda is unashamedly ambitious - as it should be.

COAG has not lacked ambition or aspiration and I do not for a second believe that our political leaders want to see reform fail - that there is not a genuine desire for change.

But, the weakness is in the governance structure to support and drive action to secure reform.

Where to from here? 
So, I guess the question is - where to from here?

As outgoing Chairman of the COAG Reform Council I have been spending some time reflecting on my tenure.
I was appointed by John Howard, reappointed by Kevin Rudd with predominantly Labor premiers, and have now served under Julia Gillard with what have become predominantly Liberal premiers. So I have seen every combination of COAG make-up.

When I and my fellow councillors started on this journey we decided that the council would not only produce reports as required by COAG, but we would also champion the cause of effective federalism. In many speeches since those early days I have sought to contribute to the debate about how that should be achieved. Regardless of political persuasion, I have always encouraged our leaders to create and articulate a vision for how our federation should work.

Some years ago former Victorian Premier John Brumby, outlined his blueprint for a reformed COAG which included an Intergovernmental Agreement that required regular meetings of COAG, an independent Secretariat, the right for States to put items on the agenda and an IGA which, among other things would:
• reflect the equal partnership between all levels of government
• have a strong emphasis on joint accountability and direct all Australian governments to meet high performance benchmarks
• provide flexibility for COAG to adapt and evolve
• make COAG transparent to the community, and
• drive the cultural change required to support a mature federalism.

Whilst I have spoken at some length on the governance arrangements of the federation, I suspect that the key to new thinking is John Brumby’s last point and something that I called for in my earliest speeches on this topic - and that is a genuine change of culture with good faith and good will as its cornerstone.

This is a challenge for officials as much as politicians.

My observation from the time I have been involved is that, sadly, I believe we have gone backwards.

Do the players really understand each other, have they got to know each other and understand their respective talents, experiences and perspectives? Do they train together, think strategically together, spend any time together beyond what is required to do today’s tasks?

Or is this great collective effort of leading Australia - which is shared by all our governments - a hostage to the electoral cycle, marked with cynicism, suspicion and lack of respect? And if so, is this a failure of the individuals involved - or a product of the failure of leadership to provide a clear set of principles where this culture could flourish?

Clearly if Australia’s reform agenda is to be realised, then COAG members must commit to it.

If they agree - again - that the more flexible, less prescriptive IGA is the way forward, then they must commit to that too.

And if they believe that COAG is the best vehicle to realise the reforms we have on the table today - and to be frank they must because what is the alternative? - then I feel they should commit to a new style of governance.

And if COAG members commit to all these elements and decide it is the right way for Australia’s future then they must own and actively promote the agenda and show a genuine desire for intergovernmental relations to reach a new level of understanding and maturity.

The silence of COAG members on the matters I’ve just brought up is telling.
We talk about grand visions - and we are standing at the precipice of some of the grandest visions in our nation’s history - but we are neglecting the vehicle that will deliver us to our destination; the federal system.

We must harness it to exploit its strengths and overcome its weaknesses.

We have in COAG an institution that has the potential to be the catalyst for great change.

I am not here tonight to deliver my own blueprint for the reform of the federal system; it has never been the role of the COAG Reform Council to be prescriptive.

But, based on my observation and experience, I will leave you with a couple of challenges.

To academia and the media, I challenge you to bring to the fore a balanced and sensible national conversation on reforming our federal system - we must stop putting it in the ‘too hard’ basket and acknowledge it as the centrepiece of any plans for this nation’s future.

To the political parties who compete to govern our Commonwealth and states, that between now and the next federal election as you develop your policies, that you give a central place to federalism policies, a clear set of principles on what you expect from the different levels of government and how you will achieve them.

Then I challenge the commentators and interest groups, and ultimately the community, to read any policies that are impacted by the federal system – including health and education, disability and indigenous disadvantage, housing and training – in light of that federalism policy.

If they are not in harmony, put a serious discount on the lot!

If our politicians knew that this accountability was real we would change the face of the debate and do much for the future of this extraordinary country and its citizens.

Thank you.

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Updated:  25 November 2020/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Team