Business The economy Public service

Why the PwC scandal is tip of the

iceberg
Colin Kruger and Rachel Clun
May 20, 2023 — 5.00am

The relentless slashing of Australia’s public service over the past decade was
sold as an efficiency dividend for taxpayers, but instead delivered a
multibillion-dollar bonanza for consulting firms such as PwC, along with a raft
of conflicts of interest.

When Labor outlined plans to cut government spending on consultants and

contractors by $3 billion before last year’s election, it was based on the party’s
growing suspicion that then-prime minister Scott Morrison’s brutal cuts to the
public servants were merely transferring the costs to private sector consultants
at inflated prices.
Finance Minister Katy Gallagher says it was a shock when the $20.8 billion cost of
public service outsourcing was revealed. ALEX ELLINGHAUSEN

“This privatisation of the APS [Australian Public Service] by stealth is not only
costing Australian taxpayers more – it is condemning tens of thousands of
public sector workers to the risks and stresses of insecure work,” Labor senator
Katy Gallagher said at the time.

Underlining his government’s position weeks later, Morrison said that if the
Coalition was re-elected, it planned a further $3.3 billion cut to the public
service to fund fresh election promises.
“That is something that is entirely sensible and, frankly, taxpayers would be
demanding that these types of sensible efficiencies are achieved, and that is
part of the process of managing a good budget,” Morrison said in May last year.

A year on, the Albanese government dropped a bombshell this month when it
revealed the results of an audit to find out, for the first time, how much was
being spent on what turned out to be an army of private consultants.

In the final year of Morrison’s government, nearly $21 billion was spent on
privately owned businesses providing Commonwealth government services.
This shadow public service equated to just under 54,000 full-time workers,
compared to an APS workforce of about 144,000.

“Until we did this work, nobody really understood the extent of it across
government, nobody had asked about it,” Gallagher, now the minister for
finance and public service, said.

“It shocked the people when they actually did it to understand the extent of it,
and the price … $20.8 billion on external labour costs in 2021-22 alone, is a
quarter of all departmental expenses.”

‘It is simply false to suggest that the appropriate use of

contractors and consultants increases government
expenditure.’
Opposition public service spokeswoman Jane Hume

A cap on public service numbers, and Coalition government indifference to its

own bureaucracy, opened the floodgates to the private sector, which
increasingly handled core government work but without the safeguards against
conflicts of interest that are embedded into the public service under the Public
Service Act.

“To them [the Coalition], as long as the work was being done, they didn’t care
if it was EY or PwC or some of these other ones. It didn’t matter,” Gallagher
said.

Opposition public service spokeswoman Jane Hume denies this, and said that
under the former Coalition government, departmental funding provided to
administer government services fell as a proportion of total government
spending.

“It is simply false to suggest that the appropriate use of contractors and
consultants increases government expenditure,” Hume said.

“The Commonwealth has and must maintain its world-class public service,
which is an integral part of policy development and administration. However,
we need to ensure government costs are as low as possible without impacting
the delivery of essential services or policy development.”

Nevertheless, clearing up some of this financial wastage has been a

straightforward exercise.
In some cases, contractors were earning less than the public servant working
alongside them despite costing the government department much more. The
department would be paying a fee of up to 30 per cent of that worker’s salary
to a labour hire firm, or consultancy with no additional benefit – other than the
fact it circumvented the cap on hiring public servants.

Gallagher said Labor made additional savings in the recent May budget by
putting more than 3000 labour-hire workers who were already doing full-time
hours on the government books.

The big four accounting firms.

“We know that there was a saving generated from four agencies from just the
first 3000 that we have converted in this budget that have gone through that
process,” she said.
The next stage, she said, would be keeping an eye on what people were using
consultants for.
“People are getting the message that this government doesn’t want,
essentially, government by consultancy,” she said.

Just before the release of the report, a Senate inquiry into the consulting
industry highlighted the inherent dangers of this shadow public service –
beyond the $21 billion financial shock that was later revealed.

In the words of experts brought before the Senate committee last month, there
is enormous scope for conflicts of interest when highly secretive organisations
such as the global consulting firms work so closely with the government while
servicing corporate clients that are affected by government decisions.

The inquiry was told that government spending on the large consulting firms
had grown from about $400 million in 2013 to $3 billion as of 2022.

That number may not capture the full

extent of the spending. The recently
completed government audit report
shows the various government
departments spent about $5.5 billion
on consultancies and contractors.

The Senate inquiry was triggered by

two recent PwC scandals: the burying
of a million-dollar robo-debt report
that the former Coalition government
did not want to see, and the tax
scandal where PwC partners were
involved in marketing confidential
government plans to combat tax
avoidance to the global companies
being targeted.

Acting PwC chief Kristin Stubbins on

behalf of PwC Australia and Global
said: “We recognise we need to
rebuild trust … And will engage
Dr Erin Twyford appearing before the
openly and transparently as we move
Senate inquiry.
forward.”
Dr Erin Twyford, a senior lecturer at Wollongong University – and a former
employee with one of the major firms – told the inquiry that PwC’s behaviour
was consistent with a broad corporate culture of conflict of interest, as the
global firms sought to secure fresh business with private sector clients that
provide far more business than the consulting for government.
“There is a disincentive to providing advice that might adversely affect key
clients and industries, even where this is the appropriate course of action to
achieve government goals or to benefit society,” Twyford said.

“At the same time, having that seat in government decision-making also
presents a potential source of influence and information for future clients.”

The latter point has also been highlighted by examples brought before the
inquiry.

Michael Tull, the assistant national secretary of the Community and Public
Sector Union, told the committee of the situation in the Aged Care Quality and
Safety Commission accreditation program, which has been largely outsourced
to third parties, including consulting firms such as KPMG.

“KPMG, as well as providing people to do the assessment of aged care

residential facilities, also has a business line providing advice to the providers
of those facilities,” Tull said.

He was not suggesting that KPMG was acting unethically, just pointing out the
potential conflict.

Greens senator Barbara Pocock highlighted other contracts where the

Department of Industry, Science, Energy and Resources spent more than $15
million on consultants to help administer and assess government grants.

‘They all do it. PwC, EY, KPMG and Deloitte. They

design and administer programs for government and
they also help private sector clients chase government
grants.’
Ken McAlpine, former Victorian government staffer
That contract meant consultants had the potential to advise private clients
how to win grants while the consultants’ own staff were part of the apparatus
approving them.
Ken McAlpine, who was a policy adviser and a chief of staff in Victoria’s
Brumby government, tweeted this week how widespread the practice is.

“They all do it. PwC, EY, KPMG and Deloitte. They design and administer
programs for government and they also help private sector clients chase
government grants. They’ve been doing it for years,” tweeted McAlpine, who
now works as a lobbyist.

“The pressure to share this information must be intense.”

The Defence Department is one of the biggest sectors when it comes to

outsourcing, with sections where contractors outnumber permanent staff.

“As the strategic review found, what that leads to is a situation where
contractors are essentially hiring contractors,” Tull said.

Professor Andrew Podger, an ANU academic and former bureaucrat who has
worked in Defence, said it was getting to the point where government
departments lacked the expertise to even manage their external contracting.

“How can you be an informed buyer of external expertise if you don’t have
some considerable expertise yourself?” he told the Senate inquiry.

While motivations differ in some respects, Pocock said the inquiry into
consulting services had united the major political parties, which should send a
shudder through the entire consulting sector.

“The Senate inquiry which I instigated, which is currently looking into the
management and quality assurance of consultants working for the
government, will be asking more questions, not just about PwC, but the whole
consulting industry, to determine the extent to which we should be using their
services and under what terms.”

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Colin Kruger is a senior business reporter for the Sydney Morning Herald and The Age.
Rachel Clun is an economics correspondent for The Sydney Morning Herald and The
Age, based at Parliament House in Canberra. Connect via Twitter.