The crisis in which PricewaterhouseCoopers finds itself is a useful illustration that the problem of politicians and bureaucrats becoming lobbyists, and of the revolving door syndrome are far from the only ones besetting integrity in public administration. The widespread use of supposedly independent consultants, many with deep and intractable conflicts of interest, is undermining good government, and costing taxpayers extra billions they should not have to be paying.
But the two problems are closely related, or, as a Twitter correspondent on a similar topic put it last week, different cheeks of the same arse. It is not a matter of a few bad apples, of the sort to be found in every bank, regiment, police force or judicial bench. It’s pretty much systemic by now, having corrupted the spirits and the actions of many of the institutions and the professions. It shouldn’t be surprising anyone. A few years ago, we had the Hayne Royal Commission into the Australian banks. Many were surprised to discover that the pursuit of profit and slight competitive advantage had stripped from most of our most senior bankers, and their boards, almost all concepts of honour, decency, honesty and ethical behaviour. Among the knowing participants on banking and superannuation boards were many of the great captains of industry, commerce, culture and the arts, flush with postnominals for their public service, intimacy with politicians, influence and that sense of public duty which underwrites the political donation system.
We were, supposedly, deeply shocked. Political party leaders vied with each other to declare they would adhere to each one of the recommendations made by Justice Ken Hayne. Four years on, not a single person has faced the courts or any professional bodies over their plain misbehaviour, and not a single recommendation has been adopted in its spirit or, really, its letter. Not a postnominal disappeared from a coat jacket. The dirty and bloody assassination of the report was done behind closed doors well out of the public eye – and by the usual suspects. By the malefactors themselves, very few of whom remained long publicly disgraced, over intimate dinners with politicians and public officials, some of whom had been excoriated for their failures of regulation and supervision. And by well-heeled lobbyists acting for profit. Some in full-time employment acting to promote the public image and the commercial interests of banks, and well trained in the arts of distraction, de-emphasis, diminishment and denial. Others were freelancers, people who, like barristers, will act for any client willing to pay, and put on their behalf any argument they think might serve to get the result that they need.
Many of either class were former politicians, with intimate knowledge of the personalities, predilections and partialities of those still in politics who would be making decisions on behalf of the public. By chance the royal commission report came just before an election campaign, and there was a flurry of activity, promises to learn the lessons and set a steady program of reform. Ministers, from the prime minister Scott Morrison down, who had fought valiantly against any idea that there was a fundamental problem and a need for an inquiry recognised (or at least insisted) that they had been deceived by their mates at the banks. Now they were affecting anger and determination for action. Treasurer Josh Frydenberg – like Malcolm Turnbull, Joe Hockey, Mathias Cormann, and Morrison – a catspaw for acting in the banks’ interests, were now, we were given to think, on the public’s side. They were being invigilated by attacks by senior Labor spokesmen, who at that stage looked like winning the election. They were even more suspicious of any idea that the chronic misbehaviour had been some sort of aberration by women and men who deserved forgiveness after a short sharp purgatory. In a year since gaining power, they do not appear to have taken up any of the promises they made in 2019 or used Hayne as any sort of agenda for long-term reform. It’s ancient history now – a notion that by itself is a triumph for the lobbies and the marketeers, and those, on either side of mainstream politics with little appetite for interfering in the marketplace, demanding social responsibility or social dividends, or expecting that business would ever do anything other than grab for profit.
The PwC affair has a host of features in common with the banking scandals. Indeed, most of its worst features overlapped in time with the worst excesses of the banks, including decisions to charge dead people for the passive management of their bank accounts. A PWC partner sat on a committee to advise government about its future tax plans, including intentions for international co-operation to close a wide array of multinational avoidance and evasion schemes. At the committee, participants were given details about both proposed arrangements and the proposed timetable. The information was explicitly confidential.
The partner, with other senior partners and managers at PwC saw a commercial opportunity for the firm in improperly exploiting this inside knowledge for its own profit.
It could work nationally, but, even better internationally, particularly among high-tech companies engaged in large-scale tax evasion by transfer pricing, arranging transactions so that profits were made in very low tax centres. Business – for example the sale of millions of Apple computers, or advertising arrangements on vehicles such as Google, would have the appearance of being conducted at a loss, at least after licensing and management fees, and supply arrangements from fees and operations, were factored in. There were always some nations which operated as tax havens, now there were others, such as Ireland and the Netherlands, actively soliciting big multinationals to base their operations in their country and providing favourable tax conditions.
PwC people working in the tax area could approach such tax avoiders with inside knowledge of the international and Australian plans, and suggestions for ways of organising affairs to minimise the impact of the new arrangements. The phrase they themselves used was of “monetising” the confidential information – by selling it to those not in, or allowed to be in, the know. The clients or would-be clients would not be directly told about the source of the information, but by the wink wink nod nod system would know it was likely to be very reliable. It allowed them to be a part of the insider club.
It appears that most of the partners in the tax area – perhaps 50 of 900 partners – and most, if not all, of the senior managing partners knew all about the plan. Some cannot deny some knowledge but say they had no idea that it involved improper (and probably criminal) exploitation of confidential information. The problem with this is that PwC has form in this area and has been pinged (if not properly punished) before. Among those who never learn, apparently are folk in Treasury and in some of the financial regulatory agencies. They thought, and now, apparently think again, that the banks and the financial advising industry, were much the same. It is not necessarily a matter of old school ties and friends of friends. It is also a matter of blind faith in markets, despite the risk that markets can be rigged, disrupted by insider trading, or played with by people who are ignorant of the accepted decencies of “chaps” or who, being chaps, treat rules with contempt.
Many conspiracy theories have in their foundations the belief that insiders have privileged access to the system that ordinary people don’t.
It is an idea encapsulated by Donald Trump’s promise to drain the swamp. Experience with lobbyists and consultants in Australia would reinforce the idea of insiderness. For many of them, the world is divided between buyers and sellers, regulators and “stakeholders”, with only a limited regard for any sort of abstract public interest, or the community at large. Consultants buy and sell knowledge and expertise, sometimes as advice, sometimes in managing some project. The advice is rarely disinterested in any sense. The consultant knows what the buyer wants. There is often bargaining about the nature of the advice, and what will be left unsaid, or phrased differently. As the Robodebt scandal demonstrated, advice which ends up being unwanted can be disappeared, or given in another form. A $1 million consultancy on Robodebt ended up merely as a Powerpoint presentation, able to be quickly forgotten, even though a report is said, by then, to have already been written.
There is nothing wrong in seeking external advice. One might be seeking expertise that the public service does not have and could not be expected to nurture. Sometimes one wants to seek external advice by way of testing public service advice, or seeing if there are alternative ideas on a subject, perhaps in other jurisdictions. In either case, we expect that the advice is independent, focused first and last at the public interest, and is, in the classic sense frank and fearless. The consultant’s advice and report must compete in the marketplace of ideas, preferably in the open.
Universal use of consultants invariably undermines the public service. Lots of people will lobby ministers, each with a dog in the fight. Young and ambitious minders may have their own dotty ideas. But the public service ought to be the repository of relevant information and advice that is independent and not pushing a barrow for a particular interest or individual. Departments have been letting their policy advising functions wither and handing it to consultants and others who are not independent and, often, not working in the public interest. They have outsourced most of their central thinking and are neither saving money nor promoting efficiency in the long run. Often their reflex responsiveness to a government’s whims serves the government as badly as the public, as the Robodebt scandal shows. Down the track, moreover, agencies lose the capacity to engage properly in the decision-making process and may well be accentuating the very political shift in power away from the public service towards politicised ministerial offices, not wedded to accountability, transparency, good record keeping or explicit reference to the public interest.
The Covid pandemic had a doubly dire effect on the public service. The Treasurer was determined that it should not be the excuse for its expansion, one that would be difficult to undo once the pandemic was over. That is why many of the extra or new functions of government were let out to the public sector, including the big consultancies, often without any pretence of compliance with tender standards. It also saw consultants rush in to fill the gap on policy advising.
The explosion in consultancies, now slowed but by no means stopped.
The past decade, particularly under Morrison, saw public expenditure on consultants increase by a factor of 10, with most of the money going to the Big Four. PwC was paid more than $600 million. It was also, at the same time, and often with the very same people consulting to rich private sector clients, many of them multinational, about how to win the attention of the public sector and ministers, how to win contracts from government, and how to keep them. Mostly they were acting for big business, not strugglers. People who already had more access than anyone else, in part because they also hired former politicians who were friends of ministerial decision making, or bureaucratic insiders with expertise in pulling the strings.
To say that PwC and other big consultancies were playing both sides of the street might suggest to some that sometimes these consultants were working in the public interest, and at other times, they were working for private interests. A better way of putting it is that the public, and the public interest, rarely came into it. The PwC view of the world is a narrow one, almost invariably full of contestable ideas, such as the superiority of private sector methods compared with the public sector, and the virtues and values of privatisation, contracting out. The prime beneficiaries of such advice, whether going to government or against it, are people like themselves. Not the economy at large. Nor the population at large. At times indeed, the very existence of a report from outside consultants may help to dress up bad policy and bad decisions by giving them an appearance of a special objectivity, independence or inevitably, when the contrary is the case. They are being used to legitimise decisions that suit a government’s political interests, but which are hard to justify or explain if coming through the system.
I argued, two weeks ago, that former ministers and former senior bureaucrats should be banned altogether and indefinitely from acting as lobbyists or as for-profit advisers to government. I do not mean by that that a former insider with expertise must be lost to further public service. I am not opposed to diplomatic, judicial or quasi-judicial appointments where they are on merit rather than political payoff. I can see retired bureaucrats being directly recruited to advise agencies or ministers on special matters or with problems, including inquiries. I have no problem with a federal public servant advising state minister or departments in their fields of expertise, even as employees or temporary recruits of consultancies. And vice versa. But I think it wrong that expertise and experience accumulated while ostensibly serving the public interest should be allowed to be “monetised” and used against one’s former colleagues, or departments. Or to extract a higher price, or a particular order, from the taxpayer on behalf of third parties. I also think that the risk that public servants moving towards retirement will angle their decisions around post-public-service opportunities is far too great. Indeed, I think that in some areas, such as in Defence, the risks have been realised.
I dispute that “inside” knowledge has no value after a 12 months or 18 months separation. Insiderness can prevail forever, even after changes of government and senior personnel. But the impoverishment of public administration over the past decade or more has meant that the notional rules are scarcely being policed or enforced, even in high-risk areas such as defence and law enforcement. At ministerial level, codes have been generally ignored, or rationalised away to virtual non-existence by other insiders.
Some of those who would squeal pretend that this would be an unreasonable burden on their right to have a post-retirement income. It would not be an undue sacrifice and would not much cut the opportunities. Even in Canberra, the home of government, fewer than 0.5 per cent of the population are engaged in lobbying and consulting, and Australia-wide, it would be fewer than one in a thousand. I accept that many have been entirely ethical, but the risks are too great.
PwC is not transparent and many of its reports are never seen by the public. Its reports are short of much financial information because they are partnerships not companies. Some partners – the 95 per cent not involved in tax advice, for example – plead they should not be punished for breaches of duty by the tax partners because it would be unfair. Yet the very essence of legal partnership, and the reason why so many professionals have them, is shared income and risks, and opaque external accountability about economic relationships between partners. There’s a lot of blather and false advertising about “Chinese Walls” and internal protections against conflicts of interest. But one should see, from the tax case, what happens in practice. And one should also understand that the courts have no real respect for the idea, and do not believe that conflicts inside a partnership can be resolved by Chinese walls.
This suggests that the firm should be fined in the tens of millions, with any known to have participated in, or knowing about, the monetisation of confidential information being shown the door after extra fines, and probably criminal prosecutions. Some other consultant firms – McKinseys for example – have been required to pay penalties more than $1 billion for bad conduct in the US, with all partners having to pay. Ernst and Young may well find itself in similar problems – if not misbehaviour in the scale of PwC or McKinseys – over grossly negligent audits in Germany. No doubt the lobbyists are hard at work suggesting that token slaps on the wrist will send the message out and be enough. No one not an insider will agree.