Serious breaches of conflicts of interest by consulting giant PwC are just one result of Australian governments’ increasing reliance on external consultancies, according to concerns raised by a raft of experts and stakeholder groups.
The Senate Finance and Public Administration References Committee inquiry into the management and assurance of integrity by consulting services has already issued one report describing how PwC used confidential information on government tax plans to advise corporate clients on how to avoid being penalised by the planned new laws. It is due to provide a final report to Parliament on 30 November 2023.
Evidence provided to the Committee demonstrates the broad and pervasive impact these firms are having on Australian governments, building on previous concerns raised about the influence of the “Big 4” consultancy firms (PwC, EY, Deloitte and KPMG) by a number of commentators, including the Australia Institute and Michael West Media.
The concerns have important implications for health policy and health reform, writes Croakey editor Jennifer Doggett. In a related article, Charles Maskell-Knight presents an analysis of trends in consultant use by the Department of Health and Aged Care.
Jennifer Doggett writes:
Consultants are used by governments worldwide but Australia’s reliance on external consultants has risen dramatically in recent years and is out of step with global practices.
According to the Australia Institute, Australia’s consulting industry (public and private) is the fourth largest in the world with spending per capita on consultancies greater than that of any other country.
The Australia Institute’s analysis shows how spending on consultancies in Australia has tripled between 2010 and 2020 to over $1 billion with the five largest consultancies securing $2 billion in contracts in 2021–22.
Evidence provided to the Senate Inquiry suggests there are many reasons for the dramatic increase in governments’ use of consultants. These include public service staffing caps and restrictions on internal promotions, along with an increased politicisation of the public service and a changed relationship between ministers and their public service advisers.
Contributors to the Inquiry say there are often valid reasons for the use of consultants but also identify a range of negative impacts when there is an over-reliance on consultancies by governments.
Undermining the public service
For example, consultants can undermine the capacity of the public sector by preventing public servants from developing knowledge and skills needed by government.
This creates a vicious circle as the government becomes more dependent on consultants as time goes on, exacerbated by the fact that capable public servants leave their roles to work in consultancy firms, recognising that they are doing the more interesting and challenging work.
As in-house expertise declines, bureaucrats become less able to manage contracts effectively, leaving governments more vulnerable to exploitation by consulting firms.
In a public hearing of the Inquiry, former secretary of the Department of Health and APS Commissioner, Andrew Podger, told the Committee:
“How can you be an informed buyer of external expertise if you don’t have some considerable expertise yourself? It’s a bit of a two-edged sword in that you are buying expertise you haven’t got inside but you want to be good at buying it. You are going to have to have some expertise in order to be an informed buyer.”
In its submission, the Australia Institute outlined the wide-ranging impacts of an over-reliance on consultants by governments:
“The over-use of consultancies has corroded Australian democracy. It hollows out public sector capacity and leads to bad government decisions…..The Australian Government has become overly-dependent on consultants to guide and justify its decision-making.
“This dependence is corrosive to Australian democracy in two ways: it hollows out the capabilities and skills of the public service and it leads the government to make decisions based on advice that can be poor, compromised or self- interested.”
The Australia Institute identified other problems arising from the over-use of consultants, including that they may be more likely than public servants to provide self-interested advice to ministers, in order to maximise their change of being re-engaged.
They used the example of PwC to illustrate how consultancy firms can also have the interests of their corporate clients in mind when providing advice on matters of public policy and regulation, arguing that this can lead to poor decision making and undermine the integrity of government.
Lack of transparency and accountability
Also providing submissions to the Senate Inquiry were Emeritus Professor James Guthrie, Professor Jane Andrew and Dr Erin Twyford – accounting academics concerned about conflicts of interest, the culture of consulting services firms, and the apparent lack of transparency and accountability for consulting arrangements.
In their submission they argued that the work of consulting firms is often rife with conflict of interest, due to an “entrenched relationship exists between the consulting industry, hollowed-out and risk- averse governments, and shareholder value-maximising firms.”
They also point out that professional bodies, such as the accounting and legal professional associations, take limited action about the misdemeanours of members who are partners at Big 4 consulting firms, which means that it has been left to whistle-blowers and investigative journalists to reveal conflicts of interest and unethical behaviour.
Progressive thinktank, Per Capita, argued in its submission that the overreliance on private consultants who operate in an environment requiring less accountability and transparency than their counterparts in the APS is damaging to the public service and to public trust in government.
“The Australian people have a right to ask why so much of their money, in direct payments and foregone taxation revenue, is being swallowed up by these big advisory firms,” the Per Capita submission said.
“They have a right to ask why public money is going to the shareholders of private companies as profits or dividends and used to pay high executive salaries, especially when this money would otherwise be retained in government revenue to pay for public services.”
Per Capita’s submission cites a $660,000 contract between the Department of Health and McKinsey Pacific Rim to provide vaccine and treatment strategy advice, which did not appear to result in any written documents.
“COVID-19 was a matter of public health, and measures to stop the spread affected every single Australian. It is incredible that the public is unable to know the specific advice that informed government decisions and, in turn, affected how we all lived, worked and moved during this health crisis.
“Australians deserve to know that the public services they rely on are being delivered efficiently, fairly, with best value for taxpayers’ money, and without conflicts of interest that could compromise policy and service delivery or put private interest about the public’s interest.”
Founder of Michael West Media, journalist Michael West has covered this issue over many years and in his submission stated that “the entire business model of the Big 4 is predicated on financial treason”.
He said that PwC, EY, KPMG and Deloitte “actively and deliberately prey on the Australian government to deliver profits for their foreign multinational clients” through advising them on how to avoid paying tax, thus depriving Australia of funds for hospitals, roads, police, schools, nursing homes and other public benefits.
West questioned the efficiency of the widespread use of consultants arguing: “It is now a billion dollar a year business – federal government consulting income alone – yet nobody seems to have stopped to ask: how can it be efficient to take work from a public servant who knows what they are doing and give it to an external consultant whose charge-out rate is $1,000 an hour?”
Health departments around Australia use consultants for a wide range of functions, including policy and strategy development, consultation management and report writing.
For example, in the past year, the Commonwealth Department of Health has hired Big 4 consultants to undertake work in key policy and program areas, including:
- a review of the Rural Health Workforce Support Activity program (KPMG)
- an analysis of findings from suicide prevention trials (KPMG), residential aged care quality indicators and the development of quality indicators for in-home aged care (PwC)
- a Rapid Review of proposed Quality Use of Diagnostic, Therapeutics and Pathology Program Budget Measure (Deloitte)
- an evaluation of the Specialist Dementia Care Program (Deloitte).
In response to Croakey’s questions about the role of KPMG now that submissions have closed, a Department of Health spokesperson has advised that KPMG’s role in this process is to provide “additional support” to the Department’s National Health, Sustainability and Climate Unit “including supporting project management and supporting a number of workshops conducted as part of the consultation process”.
The spokesperson stressed that the Department is responsible for the overall development of the strategy, due to be released in late 2023.
“Officials from the department have attended every consultation process conducted to inform the strategy and officials from the department are responsible for analysing input and developing the strategy. A Chief Medical Officer Expert Advisory Group, formed by persons with a particular expertise in health and climate are also supporting the development of the Strategy.”
Broader conflicts of interest
Questions are also being asked about broader structural and cultural factors that contribute to the potential for conflicts of interest to arise in dealings with government.
This includes the dual roles the Big 4 play in providing both advisory and tax/auditing services, often to different clients working in the same area.
For example, recent media reports have revealed that, in addition to conducting safety and quality audits of aged care facilities, KPMG has a division within the firm which simultaneously charges providers for advice on audits and accreditation.
At a hearing of the Senate Inquiry, KPMG argued that it had robust internal processes to effectively manage any potential conflicts of interest but Greens senator Barbara Pocock expressed her scepticism about how effective these processes are: “I get the picture that you are trying hard. I am unconvinced.
“I think there are some structural factors built around how big you are and how many pies your fingers are in –KPMG, clearly PwC and others as well…Structurally, it makes me very concerned about how well in such large conglomerate organisations we can really sort out conflicts of interest. I am interested in the larger regulatory picture which means the Australian public can be confident that they can trust the integrity of these organisations.”
Another potential area for conflict is when representatives of consulting firms sit on boards and similar advisory groups in areas in which their firms have an interest.
A recent NSW Government inquiry into the use of consulting firms heard that around 660 consultants with PwC sit on up to 900 public boards across the country.
Journalist Jeremy Knibbs describes how inquiry chair, Abigail Boyd, questioned acting PwC CEO Kristin Stubbins about her role on the board of South Eastern Sydney Local Hospital District at the time that PwC won a significant contract with them.
“[It works by], first of all, redesigning a health structure – which I know PwC had had quite a hand in – to devolve it into this board structure, to then put consultants onto boards, who are then critical in terms of giving work to other consultants while on those boards, building that relationship and then having a steady flow of income once they go back to their practices.”
Knibbs writes that most of the big consulting firms have “variations of the same theme going on” of networking with the right people in government, or working in the places that are being targeted for contracts by these groups.
“If you start multiplying all this activity out by the big four accounting consulting firms plus the big three strategy firms, and then outwards a little more for some of the specialist groups, the math on how systemically corrupted our healthcare consulting ecosystem might be starts to become mind-boggling.”
Evidence from submissions to the Senate Inquiry suggests that government departments are not aware of the potential for consultants to undermine the independence of the policy and funding decisions they make.
For example, the Department of Health’s submission to the Senate Inquiry downplays the potential for these conflicts of interest to arise.
“The department is serious about ensuring the integrity of its operations, preventing, detecting, and countering fraud and corruption, and identifying and managing conflict of interest,” the submission says.
It goes on to describe the APS Values and Code of Conduct which consultants must adhere to, including being accountable and impartial, and not being influenced by personal interests or greed.
The department stressed its commitment to ensuring consultants perform their duties in a fair and impartial way, and personal interests, private affiliations, or the likelihood of personal gain or loss do not influence performance of their duties, citing its Conflict of Interest Policy which outlines the department’s requirements and protocols for conflict of interest and requires real or apparent conflicts be identified and managed in a transparent and accountable way.
Notably, the new Secretary of the Department of Health and Aged Care, Blair Comley, has considerable experience of working in consultancies, as well as government, as previously reported by Croakey.
Public health perspectives
The department’s confidence about the integrity of its processes is not shared by many experts in the health sector, including academics Dr Julia Anaf and Professor Fran Baum, who argued in their submission that there are significant health and health equity impacts arising from the growing use of consultancies in public sector roles.
These include the conflict arising when private firms advise governments on taxation matters, while concurrently offering advice to corporate clients on ways to minimise their taxation liabilities.
Anaf and Baum referenced their earlier research into health inequities to highlight the ways in which changes to the public sector from the adoption of New Public Management and managerialism by both state and national governments has reduced public sector capacity to respond to economic and social challenges, while ‘hollowing out’ state capacity in ways that are likely to have increased health inequities. They argued that as the public service is cut, it becomes more reliant on consultants and loses its focus on equity in policy making.
“Public servants need to recognise the scope of conflicts of interest that can undermine assurances of integrity by consulting firms, including those leading to the de-skilling of public servants and loss of institutional memory,” they said.
“Governments and the public sector may become highly dependent on a few large consulting firms, which may not be appointed under a transparent process or demonstrate clear expertise. Even though consultancy fees are high, these firms are not responsible for failures associated with the implementation of their advice.”
Concerns about the impact of consultancies are being raised outside of Australia with some commentators arguing that the Big Four have become so powerful and pervasive that they are now posing a risk to the world economy.
George Rozvany, a former employee and now critic of the Big 4, has argued that the lack of transparency and self-discipline among these corporate giants poses a serious threat to the stability of the global economy.
“Governments across the major Western economies need to enforce transparency, integrity in financial reporting and create appropriate competition.
“ The Big 4 self-insure and likely have insufficient capital; yet they audit 99 per cent of large multinational companies. As a result, there is a substantial risk that lawsuits could trigger a domino effect of collapse and another global financial crisis.”
In response to the concerns being raised in the media and by governments, the Big 4 firms are taking pro-active action in some areas.
PwC announced that it would ban political donations. Deloitte and KPMG declined to follow PwC’s lead but KPMG has launched an internal review to address concerns about potential conflicts of interest.
The Albanese Government has expressed concerns about the increased reliance on consulting firms and is talking up its commitment to strengthening the public service, as one way of reducing the need to use consultants. Pressure is being exerted by the cross-bench with Greens Senator Barbara Pocock leading the charge in the Senate Inquiry and Independent Kate Chaney planning to introduce a private member’s bill to ban big Commonwealth contractors from making political donations in order to “reduce financial influence, improve transparency and level the playing field among candidates in federal elections.”
However, experts and stakeholder groups are calling for more to be done to increase transparency and reduce their influence on government.
The Australia Institute made a number of recommendations to the Senate Inquiry including establishing public service guidelines on the use of consultants and abolishing public service staffing caps. They also suggest developing a clear and strict revolving door policy for public servants and improving the usability of the AusTender website.
To increase the accountability of consultants, the Australia Institute asked the Senate to consider whether consulting firms could be called before Senate Estimates when they have taken government work.
It has also raised the broader issue of conflicts of interest within government agencies, in particular in relation to appointments to the Climate Change Authority.
Guthrie et al recommended establishing a statutory authority that takes a whole of government approach to procuring consulting services in Commonwealth agencies and reports annually to parliament to provide transparency and make recommendations.
They also suggested introducing some regulatory a taxation principles to guide the use of consultants by government, one of which would preclude companies from providing both taxation and audit services.
Per capita recommended increasing public service resourcing and reducing staffing caps. In addition, it suggested extending the Freedom of Information Act to include private sector bodies that are contracted to provide services or functions to the public on behalf of the government, so that FOI requests can be utilised to obtain documents that relate to the provision of those services and any conflicts of interest that firms or consultants may have, or appear to have.
Other recommendations from Per Capita include implementing political donation restrictions on firms eligible for contracts to provide services or functions to the public on behalf of the government; and eliminating the use of commercial-in-confidence provisions in government contracts by requiring tenders to prohibit their inclusion unless there is unassailable, independent advice provided to government proving that such measures are necessary.
See Croakey’s archive of articles on conflicts of interest