Federal Government underestimated consulting spend by billions

The Australian Federal Government’s spending on consulting has blown out to over $4.6 billion last year according to official probes. The consultancy spending bill has revealed a number of systematic failures at a federal level for the government to track its contracting spend. Big Four firms EY and PwC have previously been classified as ‘SMEs’ by some government departments, a term reserved for companies with less than 200 employees. The Department of Finance has not delivered a clear definition of consulting work and attempted to shift the definition to exclude some public expenditure which likely led to an underestimation of public spending.

The consulting market in Australia rose upwards of 5% in the past year, partly due to public sector contracts. A large factor which has contributed to the success of the Australian consulting industry are contracts awarded by the Australian Government. Currently, an estimated 18% of the consulting market consists of public sector expenditure which has been attributed to Prime Minister Malcolm Turnbull and his Liberal Government’s reform agenda. Under the Turnbull Government, spending on external expertise has raised by over 8% to a total value of $845 million last year alone.

An important driver of this growing trend, both in the education sector and across the government is digital adoption. The Turnbull Government’s outsourcing agenda has not been without its criticisms however. In 2017, Turnbull and the Coalition have come under fire for their consulting bill over the past 4 years which has reached $5 billion. Particularly in the spotlight is the $180 million bill that the government spent on the National Disability Insurance Scheme in only 16 months.

The pressure increased after the release of a report by the Auditor General who estimated that the government had actually underreported or underestimated their spending habits. It turned out that the Coalition Government had actually put $47 billion into contracts in 2017. In the wake of the information becoming public, a parliamentary probe was launched into the governments spending consulting spend. The aim of the probe is to examine the volume as well as the value of public spending and procurement processes.

Liberal senator Dean Smith, the Chair of the Public Accounts Committee and Liberal senator believes that public spending on contractors is an area which requires constant scrutiny. He commented on the matter, “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.”

National Secretary of the Community and Public Sector Union, Nadine Flood 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

PwC and KPMG are the only two of the Big Four firms who have submitted to the probe. Just under $2 billion in taxpayer funded contracts have been awarded to Big Four firms since the beginning of 2013. Further exasperating the situation, it has emerged that together, the Big Four have made over $800,000 in political donations to both Labor and Liberal parties since 2016. The information which was released by the Australian Electoral Commission in February will only fuel public scrutiny of the ties that the Federal Government has with the sector. EY and Deloitte submit to the enquiry.

The enquiry into public spending has outlined multiple flaws by the Federal Government especially in relation to the way it tracks the contracts which it awards. Australia’s Department of Finance refused to clarify its definition of consultancy earlier this year during its submission to the probe. In its initial submission to the inquiry, the Department of Finance admitted that services which the firms considered ‘consulting services’ may not be actually classified as ‘consultancy work’ by the governments contract-tracking system and thus, would not be correctly reported.

The department 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”. They went on to provide an example: "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.”

Thanks to the lack of definition of what actually constitutes consultancy spending, the findings of the Australian National Audit Office show a high level of underrepresentation of government spending in the industry. This may be one partial explanation for hundreds of millions of dollars a year gap in under-estimated contract reporting.

Beyond definitions, information has also come to light that two of the Big Four firms, EY and PwC, among other consultancies have been incorrectly classified by the government as SMEs. Targets set by the Federal Government specify that some Commonwealth agencies must grant at least 10% of their contracts to SMEs (companies with fewer than 200 employees). This identifies just how poor the government’s tender data is and raises questions about the way that contracts are supplied, won and recorded.