Australian Government underestimated consulting spend by billions

26 February 2018 Authored by Consultancy.uk

Official probes into the consulting spend of Australia’s Federal Government have revealed a number of systemic failures in the Federal Government’s attempts to track its contracting spend. Government departments previously classified Big Four firms EY and PwC as ‘SMEs’, while the Department for Finance could not deliver a clear definition of consulting work to the probe, something which has likely led to its underestimation of public spending on consultants.

Australia’s consulting market grew by more than 5% to a value of $4.6 billion last year. A large factor in the success of Australian consulting has been significant public sector expenditure. Public sector consulting uptake accounts for an estimated 18% of the market currently, having been boosted by current Prime Minister Malcolm Turnbull’s reform agenda, raising governmental spending on external expertise by 8.2% to $845 million last year.

This agenda has seen digital adoption become an important driver across both government and the education sector. The Australian government’s spending on consulting has not been without its detractors though. In 2017, Turnbull – a former lawyer, merchant banker, and venture capitalist – and his embattled coalition Government came under increasing fire for an AU$5 billion consultancy bill (spanning several years), including an AU$180 million spend on Australia’s new National Disability Insurance Scheme over just 16 months.

Australian Government underestimated consulting spend thanks to flawed definitions

Late in the year, the pressure increased when a report from the Auditor General estimated that the Government had wildly underestimated its spend, and had actually poured AU$47 billion into contracts last year. Following this revelation, a new parliamentary probe was launched into the Government’s heavy consulting spend, with an aim to examine the volume and value of the spend and the way agencies conducted procurement.

Chair of the Public Accounts Committee and Liberal senator Dean Smith said Government contracting was an area of spending that deserved close and constant scrutiny, stating, "Effective procurement contract behaviour is vital and transparency in contract reporting is critical so that the Government can assure itself and the Australian public that entities are achieving their objectives in an efficient and cost-effective manner.”

Nadine Flood, National Secretary of the Community and Public Sector Union, said the inquiry was a long overdue examination of the cost, effectiveness and lack of transparency involved "when private interests are invited in to profit from public services.”

Revelations

As inquiries into the public spend on consulting continue, PwC and KPMG are the only two of the Big Four firms to have made submissions to the inquiry, while EY and Deloitte are yet to do so. The Big Four have earned close to $2 billion in taxpayer funding on consultants since 2013, while the Australian Electoral Commission released data in February showing the gang of four had emerged as some of the biggest political donors in the country, contributing up to $800,000 to the Labor and Liberal parties since 2016. This latest revelation is likely to fuel further scrutiny of the sector, and the close ties it has with the Federal Government.

Since the launch of the Parliamentary probe, numerous flaws in the Federal Government’s contract-tracking system have also been reported. Earlier in February, Australia’s Department of Finance seemed to refuse to clarify its definition of consultancy to the probe. In its initial submission to the inquiry, the Department offered up a bewildering explanation, that work considered ‘consultancy services’ by the firms involved may not be classified as ‘consultancy work’ within its contract-tracking system.

The Department of Finance explained that, "'management advisory services' and 'information technology consulting services' categories cover a broad range of services, many of which would not meet the definition of consultancies", before providing an example of "a contract to map business processes in an existing government IT system" that "may be recorded as 'information technology consultation services' but it may not meet the definition of consultancy."

Effective procurement contract behaviour is vital and  transparency in contract reporting is critical so that the Government can assure itself

The inconsistent nature of the advice may be one partial explanation for a finding by the Australian National Audit Office that the use of the consultancy tag for contracts by federal departments seems to under-estimate the level of external advisory work across the government by hundreds of millions of dollars a year.

Further to this, however, the National Audit Office also disclosed that the tracking of federal government tender data is so poor that Big Four accounting firms EY and PwC, among others, had been inadvertently classified as small and medium-sized enterprises (SMEs). The review of government agency tender processes revealed that significant flaws in the way contract suppliers are recorded could also be skewing the numbers about who is winning contracts.

The Federal Government had previously set a target for Commonwealth agencies to grant at least 10% of contracts by value to SMEs, or companies with fewer than 200 employees. One example of a contract that the Audit Office uncovered was $636,000 for work to be completed for the National Health Funding Body. PwC completed the contract and was classified as an “SME” supplier.

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