The perils of privatisation and outsourcing.

Aug 24, 2020

Waste of government money is the inevitable consequence of government’s funding the private sector to deliver a public good.

In the eighteenth and nineteenth centuries a “privateer” was a licenced pirate, a warship with a government sanction to capture, loot and sell vessels of other countries, usually under the cover of war.

In the twenty-first century, many citizens would see a straight line from “privateers” to “privatisation”, only under privatisation, they see the prey as the public of the home country.

In the 23 July edition of Pearls and Irritations, in discussing the impact of years of privatisation of government services, Noel Turnbull wrote: “In Australia the effective privatisation of technical training, largely driven by a Labor Minister, resulted in poor quality courses, unemployable graduates and huge costs to the economy, the budget and students.”

As Turnbull’s article – and the evidence of recent years demonstrates, you could substitute many other government programs after “privatisation” and claim the same catastrophic outcomes. Currently, it is aged care. As with some more recent contributions, this article will explore aspects of the privatisation of technical training as a case study, but it is also important to correct the record in regard to some of Turnbull’s details.

The “reforms” he mentions were implemented under Julia Gillard when she was Minister for Education, but the unchecked rorting of public monies and destruction of quality took place under Abbott’s Ministers. And to be completely fair, the real dam-breaking moment – the decision in 2012 to remove the requirement for university articulation for courses to qualify for VETFEE-HELP (VFH) funding (this was getting rid of free-market inhibiting red tape, of course) – occurred under Chris Evans, after Gillard became Prime Minister. Further, this was never a program “driven” by ministers. This was a program driven by technocrats in the senior levels of the public service (federal and state) and academia. Ministers and their responsible staff either fought to slow or dilute the reforms, or were completely out of their depth in dealing with them – especially under the Liberals, who had a revolving door of responsible ministers after 2013.

When it was finally shut down at the end of 2016, the scheme had been a fantastic success – if the benchmark was getting money out the door (and in Senate Estimates, this view was offered by officials from the administering federal Department of Education and Training.) In 2009, the Program had allocated just $25 million in loans; by 2015, this figure was $2.9 billion.

The ANAO later estimated that $1.9 billion of these loans had been issued inappropriately and were not recoverable, while a further $1 billion would not be repaid as the recipients would not meet income repayment thresholds.

In its Report on the Program, the ANAO said:

“The VFH scheme was not effectively designed or administered. Poor design and a lack of monitoring and control led to costs blowing out even though participation forecasts were not achieved and insufficient protection was provided to vulnerable students from some unscrupulous private training organisations.”

Commenting on the Program, former ACCC Chair Graeme Samuel (Age 22/12/15) said waste of government money is the “inevitable consequence of government’s funding the private sector to deliver a public good. From the home insulation debacle to export market development grants, film industry tax incentives, health and education subsidies…these things have been happening as long as I’ve been alive.”

“Business is much smarter than governments, and business knows how to exploit and you can’t deal with that using people sitting in Canberra or Spring St. The rogues – and they’ll be there in any industry – they say with glee, all the way to the bank: ‘Come in spinner’!”

Where did the $2.9 billion go and what did the public get in return (apart from becoming sadder and more cynical, if not wiser)?

One indicator was provided by Forbes Magazine (6/9/2015) which reported that the Australian for-profit VET sector had profit margins of around 30%, twice as much as the three most profitable industries in the USA (accounting, real estate and car rental). Further detail was provided to Senator Kim Carr, the Shadow Minister for Higher Education at the time, by the Department of Education in Senate Estimates in 2015. The Senate was asked for detail about outcomes from the Program and provided a table which included the following gems about the performance of the privatised providers:

· ACTE P/L (Evocca) had 26,848 students undertake a Diploma of Digital and Interactive Games at an average debt of $9,319 per student and generating a quarter of a billion dollars ($250 million) in income for the Company. Just 4% of the students graduated (1,053).

· Australian Institute of Personal Trainers had 2,299 students undertake a twelve month Diploma of Business at an average debt of $9,058 per student and generating $20,825,049 in income for the Institute. Not one graduated.

· Franklyn Scholar had 623 students undertake a nine month Diploma of Management at an average debt per student of $19,675 and generating more than $12 million in income for Franklyn ($12,257,286). Not one graduated.

· Australian Careers Institute (Sage) had 808 students undertake a twelve month Diploma of Early Childhood Education and Care at an average debt per student of $14,881 and generating $12 million in income for Sage. Not one graduated.

(Source: Senate Committee: Education and Employment Q on N No.AQ15-000668)

As well as providing fat sitting ducks from the public purse for the “privateers”, the reforms to TAFE seem to have made a substantial contribution to wrecking higher education and skills training in Australia. Partly this was the result of forcing TAFEs to compete for funding from the same pool of funds as the privates and to be competitive, emulate them in a drive to the bottom – quality and standards were the first things sacrificed. And as with most reforms, Departments of Finance demand they generate a “save” to outlays, so in 2014 funding to VET was cut by $416 million. In 2005 VET was funded at $16.64 per student hour; in 2014 this had fallen to $11.40 (Productivity Commission, quoted in the Australian 10/02/16).

As VETFEE-HELP then, and privatised aged care (and COVID hotel quarantine supervision) now demonstrate, business operates first and foremost to make a profit. Everything else is subordinated to this end – and becomes even more subordinate when remuneration for staff such as financial incentives and bonuses are attached to the profits. If government wants business to provide services on its behalf, it is critical that the activities are monitored closely and regularly (as the Auditor-General pointed out) and the KPIs and expectations clearly spelt out. Obviously this was not the case with VETFEE-HELP and with aged care services.

Now as we look at ways of restoring the economy post COVID, reform to skills training is being touted (rightly) as a key ingredient in any recovery. While it is critical to return the main elements to public provision, it also critical to get the policy settings and on-going operation right. The public service is not immune from botching service delivery.

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