The flag-fall money trap in outsourcing: lessons from the VET debacle

By Paul Roberts-Thomson

July 24, 2017

Abacus with multi colored beads – concept for education or calculating

There are two key principles in government outsourcing and privatisation which need to be met to ensure a reasonable probability of long-term success, and, importantly, need to be very carefully managed if found not to be compliant.  These are most easily framed as questions:

  1. Will there be a proper market?
  2. Can the government directly purchase the outcome it is seeking?

It is especially in the area of negative responses to both questions that there is room for serious debate about the wisdom of outsourcing.

“The prime area of difficulties involve the government funding a service but pretending that the citizen or business beneficiary is the only customer.”

On the issue of markets, privatisations of government assets or services to monopolies such as Sydney Airport or “poles and wires” sales without adequate consumer safeguards always carry a high risk of business behaviour adverse to consumers in the form of risk aversion or excess, and excessive profiteering.

Purchasing outcomes is easy when the product is something simple like nuts and bolts.  Purchasing many human services outcomes is much more difficult.  Sometimes, it is not possible to directly purchase the outcome such as in “Caring for Vulnerable Children”.  Sometimes it is possible to directly purchase the outcome but successive governments and bureaucracies seemingly do not want to. This is the situation in Vocational Education and Training (VET) where governments could purchase the desired outcome, training, through various forms of external examination but instead choose to rely, despite 20 years of frequent failure, on auditing of Registered Training Organisations.

A key feature of the Hawke-Keating competition policy was government outsourcing and privatisation.  Along with other reforms, it has delivered substantial productivity improvement and financial gain to significant sectors of the Australian economy. However, in the last decade especially, there have been enough instances of unintended outcomes and quality issues from outsourcing and privatisation to warrant a close look at the overarching drivers of success and failure in this vital area of government policy. We now live in a country where vast amounts of the federal and state budgets are outsourced and servicing government has become a “honey pot” for a very significant part of the private sector.

A proper market has some simple key elements. The first is that there must be clearly defined buyers and sellers. Secondly, there must be at least two and preferably three or more significant players selling products or services. Thirdly, the customers of the market players must be buying the services with their own money. Meeting these three criteria generally results in very defensible market outcomes.

It is not possible to have market forces operating efficiently if the customer is using a service funded by government either directly or through some synthetic concept such as vouchers. Certainly, this is the case unless the government acknowledges its role as a customer in itself and properly engages in the market relationship. Apart from problems involving outsourcing to monopolies, the prime area of difficulties and failure involves the government funding a service but pretending that the citizen or business beneficiary is the only customer. Market signals cannot flow efficiently or effectively in this environment.

Of course, it is naïve to expect that all markets can be even close to perfect. The problem for outsourcing becomes critical when a poor-quality market is combined with an inability or unwillingness to purchase a desired outcome.

The move into large scale privatisation and outsourcing of services in the last 25 years has coincided with adoption of an auditing-compliance framework for management and monitoring of the process combined with flag-fall payment events. Auditing-compliance regimes are generally more concerned with “inputs” than outcomes. Inputs are defined in this instance as all the parameters that go into producing the outcome such as staff training, record keeping, health and safety and, inevitably, the safety and carpark for the auditor in the workplace in question. Outcomes are, as in the previous example, the desired result such as “Caring for Vulnerable Children”. There is no guarantee of care for the example vulnerable child simply because the private operator has an appropriate qualification, a police check and high-quality paperwork.

In VET, the input auditing is combined with flag-fall payments from government to the Registered Training Organisation (RTO) in, for example, a traineeship, at the start and finish of study.  In the VET-Fee Help debacle, the flag-fall event was simply being enrolled on a starting census day. The poorly aligned payment system in 20 years of competitive VET was made far worse with the 100% winner-takes-all start-up payment in VET-Fee Help.  Importantly, in neither case is the payment event well aligned with the desired outcome, namely training. Starting students and issuing final qualifications and successfully negotiating RTO audits does not necessarily involve vast quanta of high quality training and may involve virtually none. Combined with a very imperfect market in VET involving variously government, state and federal, students, employers and RTOs with, at times, different and conflicting motives, the poorly aligned flag-fall payments and vastly inefficient quality management through input auditing has produced a very flawed and significantly failing VET system in Australia for the last 20 years.

As noted, direct purchase of the outcome is not always possible.  In the current era, this problem is generally managed through some form of auditing-compliance regime which is inevitably input focussed.  In the past, there may well have been a similar amount of government effort rather differently applied through inspection rather than auditing.  Inspection has the advantage of focussing more on outcomes and may have something to offer to current dilemmas.  However, admittedly, the age of inspectors was in a very different litigation environment, which may be a significant driver of emphasis on process rather than outcomes.

There is a disturbing lack of concern among politicians and bureaucrats about the massive waste of taxpayer money in outsourced provision of services.  This is currently leading to the re-emergence of favourable debate about the role of the state in service provision and some political opinion tending to drift to the left.  However, it is only 25 years ago we found that governments are generally not good at efficient service delivery and privatisation became a mantra. Before embarking on massive and expensive appropriation of services back to the state, there is an excellent opportunity to honestly question the market framework, quality control and payment events to significantly realign public payments to desired outcomes and stimulate quality private provision while penalising, and hopefully eliminating, the worst operators that continue to give private provision a bad name.

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Anon Coward
Anon Coward
5 years ago

The question is not working. Government is hiring staff to compete against suppliers, because it’s easy to grab another body from the marketplace, but crazy hard to deal with suppliers.

In almost every case, “build instead of buy” is a major failure and rapidly covered up or “spun” into a fake success story.

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