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JOINT COMMITTEE OF PUBLIC ACCOUNTS AND AUDIT - 19/09/2008 - Effects of the ongoing dividend on smaller public sector agencies

CHAIR —Welcome. Thank for agreeing to come together in a roundtable. We appreciate that. I know you all have individual interests but there are some collective ones that you all agree on. Would anyone like to present a brief statement supplementary to their submission?

Prof. Durant —I have an opening statement.

CHAIR —Please.

Prof. Durant —Firstly, thank you for the opportunity to appear before the inquiry and contribute to the discussion. I have to say at the outset that, technically, Questacon is a division within the department of innovation. We are not a small agency but a semi-autonomous business unit within the department and I think that technicality is important. Having said that, we operate as a discrete agency supported by the department. As a business division within the department since December last year, we have shared the experience and impacts of the efficiency dividend with the other divisions and agencies in the portfolio and with the other national institutions in the Parliamentary Zone. At a previous hearing of this inquiry, my national institutional colleagues outlined the impacts of the efficiency dividend. I would like to endorse their collective comments, and note that it is the cumulative effect of the efficiency dividend and those increased costs over which we have little control that are creating severe management challenges and reducing activity levels.

Questacon’s move to Innovation under the machinery-of-government changes is the organisation’s third change in portfolio in five years. Absorbing the costs incurred through machinery-of-government changes as well as adjusting to the different ways the different portfolios apply the dividend is an example of the additional pressures faced by Questacon in seeking ongoing annual efficiencies. We celebrate our 20th anniversary this year. We have operated as a highly efficient organisation delivering science communication activities across Australia. Successive reviews confirm the efficiency and effectiveness of the organisation. We focus on maximising resources to deliver programs to reach as wide an audience as possible and that does mean delivering programs across Australia as well as overseas.

With a national agenda to deliver and an iconic institution to run which operates 364 days a year, often from dawn to dusk, Questacon places a high degree of emphasis on identifying annual efficiencies to ensure our audience reach is maintained and that we continue to deliver high-quality innovative programs and exhibits. Our current funding model also drives a continual focus on improving efficiency. Uniquely within the Parliamentary Zone, Questacon is required to generate non-appropriation receipts to meet operating costs, representing 43 per cent of annual revenue. Revenue is generated through various measures such as charging admission to visit, shop sales, overhead on sponsorships. In order to manage the increased costs, Questacon has to pass on a proportion of those costs to the general public under an increased admission charges.

For Questacon, the principle of efficiency is one that is a daily ongoing operating role. Questacon management is conscious of the need to deliver efficient and effective programs and services and is supportive of the objectives of the efficiency dividend. But while Questacon’s principal outputs have been increasing year on year the budget has been declining in real terms. The increased efficiency dividends are resulting in some unintended consequences and moving Questacon well past the point of generating efficiencies into forcing program reductions and reducing intellectual capabilities through staff loss. This problem arises when the application of an initiative such as the efficiency dividend does not reflect the operating variables and ends up cutting into the very public programs that it should seek to maximise through an efficient public service.

Questacon has undertaken a wide range of measures to absorb the impact of the efficiency dividends in an attempt to avoid cutting into programs and staffing. Historically, measures have included limiting marketing initiatives and relying on natural staff attrition together with highly focused business planning to apply the efficiency dividend. I say historically because over the past few years the application of the efficiency dividend has coincided with Questacon’s needing to absorb increased operating costs. For example, in this financial year, in a year when Questacon is required to deliver 3.25 per cent efficiency, the organisation must also absorb new costs arising from machinery-of-government changes, increased energy costs, increased service costs and increased depreciation expense. It is the cumulative impact of the efficiency dividend and the imposed cost increases that reduces the activity levels. For example, 50,000 fewer students in rural, regional and remote Australia will experience a Questacon Smart Moves program this year, and other programs have been affected.

I mentioned earlier that Questacon management is supportive of the principle of efficiency, but I am concerned at the broad application of the dividend across all operating costs without delineation between discretionary and nondiscretionary operating costs. It means that the dividend is applied to areas where there is limited potential to improve efficiency. For example, Questacon receives $11.125 million post-application of the dividend in appropriation, $3.2 million of which is depreciation through which no efficiencies can be gained. In some respects, Questacon’s need to generate revenue allows for some consideration funding being brought through the door to cover costs of the dividend, as I mentioned earlier, in terms of admission costs. But we are currently catering to maximum visitor numbers and admission prices must reflect what the market can bear. Admission prices must also reflect what is appropriate in the context of equal access and social equity. So Questacon finds itself in a position where cutting costs to meet the efficiency dividend becomes a function in itself which is both time-consuming and has a deleterious impact on staff morale and efficiency.

The application of the dividend is also impacting on the capacity to innovate. For example, Questacon could potentially direct the quantum of the efficiency dividend to funding the development of digital outreach programs to support our outreach across Australia and investing in such digital capability is becoming an increasing priority for cultural institutions like Questacon, who are trying to engage with young Australians in their own communities to meet their needs and capture their interests. Yet the broad application of the dividend excludes the capacity to quarantine funding for such future developments.

Questacon has an unsustainable funding model and this was recognised earlier this year when Minister Carr implemented a departmental review of Questacon, which was released yesterday. Organisations such as Questacon ought to be recognised for being efficient, supported to deliver important national agendas and encouraged to attract talented staff to explore new ways of doing business and create inspiring new public programs. In a rapidly changing world, Australia’s national institutions need to be moving forward, serving and inspiring the whole country and innovating. Any reduction in resources diminishes this capability. I thank you for the opportunity to outline some of those key challenges for Questacon, as we try and manage the impact of the efficiency dividend.

CHAIR —Thank you. As a former school principal in a non-capital city, I know your service and product very well. On behalf of educators and student recipients of that service, it is one that is highly valued and which we would not like to see diminished. Does anyone else want to make a contributing statement?

Ms McClusky —I would like to.

CHAIR —Please proceed.

Ms McClusky —Thank you. I just wanted to highlight that the department coordinated a response on behalf of our portfolio agencies, and that Questacon and the National Measurement Institute are divisions of the department of innovation and, as such, are not small agencies in their own right. That being said, Questacon and the NMI have some unique operating activities, and they have a degree of autonomy in the management of their activities, but they do operate within the frameworks of our department. I just wanted to make that clear for your information. I think Dr Besley would like to make some comments.

Dr Besley —The National Measurement Institute, NMI, is an operating division, as Melissa has said, of the Department of Innovation, Industry, Science and Research. I also have the role of Chief Metrologist, which is a role defined in the National Measurement Act 1960. In that role I have the responsibility conferred upon me by the secretary of our department to deliver a number of measurement related functions to the nation.

Amongst those are to deliver to Australia the measurement standards that relate to units of measurement in our country, to assist industry in a number of measurement related techniques, to promote best practice in measurement in industry and the community in general, to provide a series of measurement services to industry, scientific organisations and government bodies, including the measurement of physical, chemical and biological quantities, providing calibration services and examining and approving patents for measuring instruments under our legal metrology processes in Australia. We also provide expertise in support of other bodies that support Australia’s measurement standards and performance infrastructure—groups like the National Association of Testing Authorities, NATA, Standards Australia, and organisations of this type. We also have to promote uniformity in national trade measurement, and that is a new function which will be absorbing in the next two years by agreement between the states, territories and the Commonwealth, and facilitating international trade to the extent that measurement issues are involved, and that is becoming increasingly common at the moment. Also, we need to fulfil Australia’s international obligations with respect to measurement and conformity with international systems. Lastly, but by no means least, we conduct research in measurement related issues.

I thank you for the opportunity to make some input on a number of these issues. First, let me give you some general background information. Our charter is addressed by a situation in which about half of our annual budget of about $60 million is provided by appropriation funding from the Commonwealth through our parent department, and the other half we actually earn by sale of our services. We earn another roughly $30 million through fees charged by NMI to the various clients for the services that we deliver to them. Like all agencies, we are experiencing major increases in our fixed costs, principally in unavoidable operating costs and in staff salaries. Like all other Commonwealth agencies, we do not receive budget supplementation to address these increases, but are expected to find efficiency savings to address them. We have been doing that, but in my view such efficiency savings have now been virtually exhausted, and we are resorting to savings methods that are not really sustainable for the future. Our only source of additional appropriation funding is through new policy proposals, in which we have been quite successful in recent years, but those by their very nature demand that NMI delivers more services and more capability rather than reduces the services that we offer.

The inevitable result of these processes is that two things can occur: NMI can either reduce the range of services it offers to the Australian community or it can increase the risk that the Australian government will not be able to deliver effectively the scope of services that we have on our books. The impost of an efficiency dividend of course compounds this problem. For NMI in the past year, it has basically meant that we have $1 million less in our appropriation money; in practice, this has meant that we have had to pare back our support systems and put on hold any plans for upgrading the services we currently offer.

In historical terms, the major part of NMI’s appropriation funding was associated with what used to be called the CSIRO National Measurement Laboratory which, prior to its absorption into NMI in 2004 was actually exempt from efficiency dividend procedures. One of the measures we have taken to return a balanced budget to our parent department is to postpone the implementation of much needed succession planning processes for our staff. This leaves us much less well prepared in the future and very exposed to the risk of having key technical resources no longer available to us to address our core tasks. In addition, we have adopted some savings practices which we would not want to continue into the future. For example, we have produced a saving of about $250,000 for this financial year by requiring our staff to use only economy class travel, both domestically and internationally. We do a lot of international travel because of our international responsibilities in this area. While this saves money, it renders our long distance international travel much less effective. Our staff are subjected to additional discomfort and are less able to use their travel time for business purposes while they are actually getting to where they are planning to go.

The efficiency dividend imposed on other arms of government also has a secondary effect on NMI. We derive some 30 per cent or about $9 million a year of our external revenue from services provided to other government agencies. This year we can expect that, because of the efficiency dividend situation, these other agencies will be forced to reduce their reliance on our services, and that the revenue we will get from these sources will be under severe pressure. NMI has already experienced one very significant example of this flow-on effect in our relationship with the Australian Sports Anti-Doping Authority who currently contract NMI to provide them with nearly $2 million of routine measurement services for sports drugs testing. That is one example where we are under pressure. Loss of revenue of this type will, of course, increase the pressure on us to reduce our expenditure in other areas.

The effect of the efficiency dividend is likely to have an impact on NMI’s ability to attract and retain quality staff. Already our staff members are registering their dissatisfaction with NMI’s financial situation. We did a staff survey in May 2008 in which one of the major concerns to staff was ‘that they did not available to them sufficient resources to meet the requirements of their job.’ At the very least I would suggest and request that the NMI’s research and education activities be exempted from the efficiency dividend provisions. Currently some 60 per cent of our appropriation funded activities would fall into this category. Secondly, I would request that annual funding supplementation be provided to NMI so that we can adequately maintain the level at which we address our statutory responsibilities under the National Measurement Act. This core funding has not increased since the formation of NMI in 2004, and in fact was reduced significantly in the preceding decade, particularly with the physical metrology activities. We would still seek additional special funding for new initiatives, but supplementation for unavoidable increased costs such as energy and costs in lease payments would allow us to at least maintain the level of service we are providing to Australia at present. Without such supplementation, the scope of our activities mush be reduced with significantly bad consequences for Australia. Thank you very much for the opportunity to air these issues with you.

CHAIR —Are there any further submissions? Thank you, everyone. Ms McClusky, all these and several other submissions that we will deal with at different hearings or have dealt with at different hearings came through the department.

Ms McClusky —That is right.

CHAIR —Can you explain why that was chosen to happen that way?

Ms McClusky —They are part of our portfolio, so we coordinated on behalf of the portfolio.

CHAIR —So you encouraged them to put forward submissions?

Ms McClusky —We gave them the opportunity that, if they wanted to, they could, and we would coordinate a response on their behalf.

CHAIR —They are all within that department. Are there any—

Ms McClusky —Questacon and NMI are part of the department of innovation. The ARC is part of our portfolio, as is CSIRO.

CHAIR —Yes, but autonomous?

Ms McClusky —Autonomous and CSIRO; the Australian Institute of Marine Science is part of our portfolio but an autonomous body, as is ANSTO.

CHAIR —With respect to Questacon and NMI, would you like to see your structure changed in any way?

Dr Besley —It is an interesting question. I will answer on behalf of NMI, not on behalf of Questacon, because they have their own views. We considered this when it became likely that a change of government was going to occur in Australia, towards the end of last year. We considered what the NMI management’s attitude would be because, at the time of formation of NMI in 2004, some alternative governance structures were discussed, ranging from a statutory authority at one end to being a core part of a government department at the other. At the moment, management’s view is that being part of a government department directly gives us some advantages in access to other government departments. You have to realise that a core part of our activity is interaction with other government agencies, and we see ourselves really as a whole of government resource, not only a resource for the department of innovation. Certainly being part of the department of innovation has opened doors for us to get access to other departments, and I think that has been very useful in having high level discussions with other groups about the sorts of services we can offer groups like the Department of Climate Change, the department of the environment, Australian Water Commission, and so on. Our preferred position at the moment is to remain a core part of the department of innovation.

CHAIR —Thank you for that. We are pleased that you have considered that and explained it to us. Questacon?

Prof. Durant —The situation at the moment is we would like to be a strong Questacon within the department, but the issue of governance was one of the issues looked at by the recent review to which I alluded earlier, which was released yesterday. As part of that review process, several different governance models were examined, including the status quo, independence with legislation, and the possible integration into CSIRO. The review panel came down with a view that the preferred option would be to look to become a statutory authority. If that were not possible, we would consider an option of integrating into CSIRO, which could be made to work with certain safeguards. Those issues are being considered by the government at the moment.

CHAIR —Thank you. The CSIRO is not a small agency. Fortunately we do not ever want you to be a small agency, but you made a submission on particular grounds. Did you want to elaborate on those?

Mr Gaukroger —Yes, thank you. CSIRO felt it was important enough to make a submission, although it was targeted specifically for small agencies, because I think there are some fairly unique characteristics with the CSIRO. The nature of its business means that we have been under particular cost pressures over the years. The cost of scientific equipment and infrastructure increases at a rate greater than what we would get under indexation. There is certainly pressure on our scientists, with an increasing scarcity of scientists and the costs associated with recruiting them. Also, we have actually undertaken a number of initiatives over the last five years. We are trying to do what we can to redirect what we can by way of corporate funding into the science related areas, and we have made a number of gains over the last five years. Our corporate services have been relatively flat in nominal terms; in real terms, they have decreased by some 15 per cent. We have already made a number of gains in that area, and I guess our concern is with the cumulative effect of the efficiency dividend, particularly the additional efficiency dividend in the last budget which has just put additional pressures on the CSIRO, not only with delivering on the science but also with the support areas in being able to deliver on the science. That is the basis on which we made the submission.

CHAIR —One of the things you note in the submission is the closing down of regional placements or regional facilities, and you have mentioned outsourcing your service delivery to regional Australia. One of the trends that has come through the submissions is that one of the ways to make the efficiency dividend savings has been to reduce services to regional Australia. I must say that the member for Capricornia has already expressed to me this week her distress at the loss of research capacity in her area. As someone who identifies with that, there does not seem to be enough understanding or recognition that those high tech jobs are the job creators in regional Australia, that they create many more jobs that are lower level jobs, and that flow-on effect is such an important one and so difficult to replace. What is your opinion of that decision on closing down regional facilities?

Mr Gaukroger —It was a very difficult decision for the CSIRO to make. We have a science investment process where we look at all the priorities and delivery of the science over the next 12 months, and also over the two years after that. In order to mitigate the impact on our staffing, we took the decision to look at where we could reduce fixed costs. It was looking at a number of those regional centres where we could make some savings in those fixed costs and, where possible, redeploy the scientists that we had in those areas to other operations. It was a very difficult decision for us to make, but in the circumstances, one that we felt we needed to.

CHAIR —The opportunity cost is not quantified in terms of the impact of that decision, either. As a member of parliament, it seems to me a great pity that the opportunity costs, the loss of that facility in a region is not costed and therefore put forward as a counter measure for some of those. Do you ever do that within the department particularly?

Ms McClusky —We did not consider that in terms of our response to the efficiency dividend in the department of innovation.

CHAIR —It is not your job, I suppose; it should be someone’s job to measure capacity and capacity building and the impact on that when a capacity is withdrawn from an area.

Mr ROBERT —A question for the panel. This efficiency dividend has been with us like a really bad tie since 1987. We are in our 20th year and our fourth government of finding efficiencies. At what stage does this become no longer an efficiency exercise but just a cut?

Prof. Durant —About 10 years ago, I would say. It is a cumulative effect, and there is a limit to what you can absorb year on year without impacting on programs.

Dr Besley —I would agree with Graham. It is roughly of that order of 10 years that we started to feel that the changes we were making to our operations were not increasing efficiency but were simply reducing our effectiveness in what we were doing. It is eating into our capacity annually.

Mr ROBERT —Any other comments? My understanding of the efficiency dividend is that it is based on the premise that says that you will not find any efficiencies unless we take some punitive action. Is there a better way that government can encourage the continual looking for efficiencies within departments rather than placing a punitive dividend on departments?

Prof. Durant —Again if I may speak from a Questacon perspective, it is certainly important to continue to make some efficiencies and we have no difficulty with the principle. It is just the application if it is across the board, untargeted, means that you have a lot of perverse outcomes that reduce efficiency rather than increase efficiency. If I understand correctly the efficiency dividend was originally applied to reduce administration costs across government, and in those areas at a time when computers were appearing, you can see that there was potential for efficiency in the way things were done. But over the years, it really has become harder. Even now, those efficiencies are probably false economies insofar as you have high level officers who are doing their own letters and administration, so technically costs have gone down, but your outputs will have been affected as well.

Mr ROBERT —When Bob Hawke brought the efficiency dividend into the House in late 1986, the second reading speech talked about the government having a obligation, and departments also, to return to the people some of the benefits of the productivity improvements that were coming from departments. It was probably a fair enough rationale at the end of 1986, considering the range of productivity improvements that came through and of course the great literature at the time with respect to triple bottom-line accounting and all those other great things that came in. Have we moved past that? Are we at a point where we need to actually think seriously about another better approach to encourage further productivity improvement?

Mr Gaukroger —I think there has to be a long term approach. There are only so many years that you continue salami slicing when something starts to give—

Mr ROBERT —We have done it for 20 now.

Mr Gaukroger —That is right.

CHAIR —That is a lot of slices.

Mr Gaukroger —I think a more targeted look at individual programs is probably a better way to go. We are looking at what is higher priority, what is lower priority. The one-size-fits-all approach with the efficiency dividend is just making it, particularly in CSIRO’s circumstances, increasingly difficult to deliver right across the board now and in the future, if that efficiency dividend continues to operate.

Mr ROBERT —Any other thoughts on what the future should look like?

CHAIR —ARC might like to comment on that earlier question.

Mr Marsden —I will certainly comment in a whole-of-government sense and bring it down to a small agency level. Obviously to look at it across the board, it would be just too much resource and effort to go and look at the balance sheet of all agencies and drill right down into that level of detail. The simpler way for tackling that issue would actually be to do it at the front end. So, as agencies put up new policy proposals, really scrutinise those proposals, because I notice that, in some of the submissions that you have received, the difficulty that small agencies have is because they do not have programs moving in and out, and in department it is resources obviously moving in more than out, whereas departments do have that flexibility. Having run corporate areas in big departments for many years, I can say that it is actually quite easy for big departments to cope with those dividends. Agencies do not have those new policies, so you are slicing and slicing and slicing into the agencies through the dividends.

Mr Gaukroger —The additional pressures of pay rises, because they need to be offset with productivity increases as well, so not only do you have the efficiency dividend, it is also being able to absorb pay rises and being able to continue to pay our scientists on a competitive basis.

Mr ROBERT —My understanding is the CSIRO generally in the past had the efficiency dividend only put on a portion of its business. Is this the first year that it has gone on the total?

Mr Gaukroger —To my knowledge, yes, it is.

CHAIR —Could you comment on whether you think that was a considered decision or an uninformed decision, or was it a deliberate choice, et cetera?

Mr Gaukroger —That is a matter for the government to answer. It is not for me to provide an opinion on that.

CHAIR —I would like to know from the department; was it a recommendation to the minister? Were any recommendations made regarding—

Ms McClusky —No recommendations were made along those lines to our minister.

Mr ROBERT —You did not recommend to the minister to take away a further two per cent?

Ms McClusky —I would just like to comment on one of Len’s comments. I do not think I necessarily agree that it is easy for large departments either to absorb an efficiency dividend.

CHAIR —We are not going to accept that evidence. Of course we are really interested—

Ms McClusky —I know that you are focusing on small, but just for the record, I do not think that large agencies, either, are at the point where they can continue to absorb.

CHAIR —We are not inquiring into that.

Ms McClusky —I just wanted to mention that for the record.

CHAIR —That is quite all right.

Prof. Durant —If I can follow on from that point, it certainly affects the department’s ability to support small agencies under their care.

CHAIR —Could you quantify for us just how much has been lost in agencies or units within your portfolio?

Ms McClusky —I actually do not have the details for the portfolio, but for the department of innovation, the one-off two per cent efficiency dividend I think was a magnitude of about $4.5 million for our agency in 2008-09. I think the ongoing dividend is about $3 million.

Mr ROBERT —In the budget papers, it is $681 million for this year and $1.8 billion over the forward estimates.

Ms McClusky —That is just for our department. I am sure that each of the agencies would have those figures, but I do not have them with me.

Mr ROBERT —With CSIRO, you said that you were not informed, and Ms McClusky has made the point that you did not ask the minister—I am surprised by that—to, first, have the extra two per cent but, more importantly, move from the portion of about 30 per cent to the full 100 per cent. Can I assume then that it was a shock, and ask what you did, considering that the last 20 years everyone else has been wearing it, but substantially you have only been wearing a portion of it, notwithstanding that you are a large agency?

Mr Gaukroger —It was unexpected.

Mr ROBERT —How have you coped with the unexpected surprise?

Mr Gaukroger —We have a comprehensive science investment process where we look at where we are putting money into science over the next 12 months, and over the next three years. So we went back to that process that had been completed and looked at where our lower priorities were. That is not to say that they are not important priorities, but somewhere you have to take action, so we had another look at that, and that led to the additional decisions that were being made by CSIRO that will impact on our 2008-09 and beyond.

Mr ROBERT —If all things had remained equal, that is, you now have 30 per cent of the 1.25 per cent dividend, would you still have closed those regional centres?

Mr Gaukroger —The regional centres were a direct impact of the second round that made a decision on the efficiency dividend. We did have a further efficiency dividend that was announced in the additional estimates, I think, and we factored that into our science for 2008-09, which led to reduced effort in some areas. In other areas, we had other higher priorities such as energy, where we put more effort. But certainly the second round had the impact on the regional centres.

CHAIR —Has the cost to CSIRO in terms of the efficiency dividend been offset by the new moneys for energy research and climate change related research, or is it still just all absorbed?

Mr Gaukroger —In the last 2008-09 budget, we had $668 million coming in appropriation. The new policy proposal increases of $12.2 million was made up of climate adaptation, energy transform, niche manufacturing and minerals down under, and there was also some for the square kilometre array measure. We also got indexation of $7.4 million, but that was offset by almost $15 million in efficiency dividends. In those areas of the flagships, we are continuing to put the other money in there, which means that we have to look at offsets elsewhere.

Senator LUNDY —How was the decision made by the department of innovation to determine that the two per cent had to apply equally across all parts of the department?

Ms McClusky —From the department’s perspective, we looked at our activities and determined that the most effective way to do it was apply it across the department. Our minister has lots of priorities that we need to deliver on, so that was the most effective way to do that.

Senator LUNDY —We are certainly aware as a committee that not all departments made that same decision, that many of them corralled specific areas for whatever reason. Can you elaborate on the reasoning behind that decision?

Ms McClusky —I think I just did say that. We have lots of priorities in the department, so a decision was made to apply it across all our activities.

Senator LUNDY —Was that a decision of the department or a decision of the minister?

Ms McClusky —It was a decision of the department.

Senator LUNDY —With respect to the impact of the 1.25 per cent efficiency dividend, Mr Roberts made the point that that has been applying for some time. From the department’s perspective, can you outline how you applied that in the past?

Ms McClusky —In the past I guess it was just taken off the top of what our budget position is, and we allocate out the money accordingly.

Senator LUNDY —Was it done with the same principles—equally applied to all aspects of the department?

Ms McClusky —I could not comment historically on the department, but in the years with which I am familiar, which is just the last couple, we have looked at our activities that we need to deliver and our priorities, and then allocated our resources out accordingly.

Senator LUNDY —So in the years that you have been involved, how did you apply the 1.25 per cent efficiency dividend?

Ms McClusky —We actually do not look at it as a single element. We have said that we have particular activities that the government has decided to fund, and they are the activities that are funded via NPPs, and then we have an element of our funding which is our base funding, so we allocate that out according to the priorities of the department.

Senator LUNDY —I interpret that as you have in the past corralled certain areas if they are a priority of government?

Ms McClusky —We probably have, but not this time with the one-off.

CHAIR —With respect to the NPP, could you all comment on your success or non-success of gaining new policy proposal funds, whether you have applied or not applied, and whether they have been successful?

Dr Besley —NMI had a very welcome input of capital funding two years ago. We are entering the third year of that funding scheme.

CHAIR —Was it over three years?

—It was, and it enabled us basically to refresh our capital base largely in terms of instrumentation for scientific measurement by various sorts. You talked about the effect of the efficiency dividend in past years; one of the results of that is that we had not been able to put sufficient investment into our capital base over a number of years, so it was lagging behind. I guess this was a way of addressing that particular issue.

CHAIR —What was the total?

Dr Besley —The total was about $23 million or something of that order over three years; I have forgotten the exact figure.

CHAIR —Did you have to get that approved by your department?

Dr Besley —Yes. That went through the official department channels as an NPP process.

CHAIR —Have you had any others that you were not successful with?

Dr Besley —We have had other initiatives that have been combined with other parts of the department, for example, in biotechnology and nanotechnology. Some of those were actually affected by decisions made by the government.

CHAIR —I am very, very sad that nanotechnology’s funding has been cut.

Dr Besley —So am I.

CHAIR —It has great promise.

Dr Besley —But we will be making renewed efforts to try to persuade the government that this is a really important area to invest in for the future, and that funding should be supplied, not only to the measurement aspects of it but also to many of the other enabling technology aspects of that area and the biotechnology area.

CHAIR —By putting it in together, is that because of the limit or because of the operation and function that was going to be served?

Dr Besley —I think it is both—to get the size of the activity up to a level where it is going to be effective and linking across a whole range of different parts of the activity. There is that aspect to it. Also, I guess, our experience in the past has been that if relatively small amounts of money are requested, the department is basically told to try to find that money from its present allocations rather than seek new funding to do it.

Ms McClusky —The department of innovation will coordinate our budget preparation and processes for the department, and then we coordinate the portfolio as well. Any NPPs for NMI or Questacon come through as a department’s request.

CHAIR —What is the situation with new policy proposals for the Australian Research Council?

Mr Marsden —There were two measures announced in the budget just past. One was the future fellowships, and that had operating costs attached to it that passed to the ARC. The other measure was the research quality framework which took away operating costs and capital costs.

CHAIR —So with respect to new functions for which you requested additional funds, were you successful?

Mr Marsden —In relation to future fellowships, yes.

CHAIR —Questacon?

Prof. Durant —Our last NPP was an equity injection. We had a successful bid in 2005-06 when we were part of the DEST portfolio for support for our 30-year building asset renewal program, and we got some support for our exhibition capital assets.

CHAIR —Are they over several years?

Prof. Durant —Yes, that is over a four-year period.

CHAIR —And CSIRO?

Mr Gaukroger —CSIRO was formerly under a triennium funding agreement. In the 2007-08 budget and the quadrennium funding agreement, we had an additional increase in funds there targeted at the development of some new national flagships which were the climate adaptation, niche manufacturing, minerals down under. We also had a new policy proposal with the square kilometre array project, but apart from that, to my knowledge there has been very little if anything by the way of any NPPs over the years.

CHAIR —In many cases, in the submissions we have received, and given that there is a major push between industry and research partnerships, have each of you had capacity to increase revenues through commercialisation, either a product or service, or through commercial partnerships, and what has the trend been? Have you been successful in increasing revenue to your area through those initiatives in any way, or just fee-for-service recovery of costs?

Mr Gaukroger —The CSIRO relies a great deal on its external revenue. Something like 37 per cent of its total appropriation funding comes from external revenue sources. Over the past three years, there has been a slight gain in those year on year, but certainly nothing of the magnitude that would help offset the cost pressures that we are experiencing elsewhere in the organisation.

CHAIR —Is it growing, static, plateau?

Mr Gaukroger —Last year it grew by about $5 million on a base of around $380, so a fairly modest increase.

CHAIR —You will not be expecting it to soar in the next 12 months either, I would not think, given the global situation?

Mr Gaukroger —It is certainly a difficult environment to achieve that. We have some ambitious targets on our external revenue, but it remains to be seen as to how we achieve those.

CHAIR —Would anyone else like to comment?

Dr Besley —If I can speak on behalf of NMI, as I mentioned before, we get about $30 million or about half of our budget from the sale of our services. This is increasing every year. I am not sure of the exact figures, but probably of the order of about five per cent per year. We are restricted to some extent because we are subject to competitive neutrality provisions in those areas where we are competing with the private sector for the delivery of those services. In areas which are governed by regulation, which also cover part of our activities, our earning capacity again is limited by the provisions that apply to the services in that area which are sometimes specified in regulations of acts of parliament, et cetera. Having said that, we do quite a bit of contract research as well, including for customers outside Australia, that largely we do either to develop our skills base or to increase our financial flexibility by earning money from sources which are perhaps not subject to the other restrictions that we face.

CHAIR —Would ARC and Questacon comment in terms of their external revenues?

Mr Marsden —By the nature of our service, there is limited opportunity, but from time to time other departments and agencies come to us because of our expertise in grant administration to either assist them or run programs. For example, we are in the process of doing a selection advisory committee for a groundwater research centre within Australia, a national centre. That is with the National Water Commission. They are providing the funding to us to provide one fulltime equivalent position to administer that.

Prof. Durant —From a Questacon perspective, there are two dimensions: the earned income is largely through visitor income, shop sales, exhibition hire, and there are challenges with that. The shop sales are doing very well, and with respect to the exhibition hire, the market is a bit of a challenge, particularly in regional Australia where getting exhibitions into those areas where they cannot afford a hire fee is a bit of a challenge because of the transport costs. In terms of working with industry, we have good relations with a number of industry partners who support the cost of our outreach programs. Shell’s support has been running for 24 years to support the Shell Questacon science circus. Tenix has been supporting the maths outreach program; Raytheon have been supporting exhibition costs; NRMA have been supporting a science of road safety program. We have lesser sponsorship, but the sponsorship market is very difficult in Australia at the moment. It is very challenging. We also work with a number of government organisations, including the National Water Commission, with whom we are doing a joint education project about water initiatives. We work with Emergency Management Australia promoting awareness of tsunami warning systems. We work with the Bureau of Statistics. We also have support from the NMI for one of our exhibits in our latest exhibition.

CHAIR —Has the efficiency dividend changed the relationship between agencies and units, and if so, in what way? Has it made you charge each other more for cost recovery? Has it got to the point where we get rid of all of that cost recovery because it has become such a major part of your operations and a distraction from your bottom line?

Ms McClusky —Just to clarify, we do not really have interdepartmental cost recovery.

CHAIR —No, across agency or across departments. Are you more competitive? Has it changed the relationships anywhere in any way?

Mr Gaukroger —For CSIRO, it is a case of continuing to comply with the Commonwealth’s cost recovery guidelines, so in terms of charging, that is still the same. I guess it is how well or otherwise we will get to securing external sources of revenue.

Mr Marsden —In relation to the ARC, it is more in the activities and how we support other agencies and departments. For example, with masses of data on research being funded across the nation, be that students, post-docs as well, and also research courses and disciplines that are supported, our ability now to extract data from systems that are very, very labour intensive is very, very limited now, so we actually cannot provide all the information we used to provide.

Mr ROBERT —With the efficiency dividend, it is designed for organisations to search their soul and find efficiencies. Can you give the committee some idea of the efficiencies you have found in the last few years? What have you actually done that has made the department more efficient and returned the money to the people? The efficiency dividend has a point: it either works or it does not.

Mr Gaukroger —From CSIRO’s perspective, one of the key ones over the last five years is centralising a number of our corporate services. For example, the Finance team are all under the single reporting umbrella and that enables us to better utilise the resources across the network. The same applies to human resources. The IT was at one stage decentralised; it is a more centralised operation, and the same with our property services as well. There have been some significant reductions in staffing in each of those areas over the last five years which has reduced the cost pressures on the organisation. At present, we have just implemented a new financial system, and the purpose of that is to further focus on standardising some 100-odd business systems around the organisation into a standard way of doing things.

Mr ROBERT —Is it working?

Mr Gaukroger —It has some implementation issues, as any new implementation does. But I think now as we go further down the track, we will start to see some benefit coming out of that with further standardisation of processes across the organisation.

Mr ROBERT —Ms McClusky, what has your department done?

Ms McClusky —We have done similar to the CSIRO, which is look at a lot of our corporate and ICT support activities and how we can streamline those. Where we can automate a process, we have undertaken to try to automate the process as effectively as we can.

Mr ROBERT —In the current financial year, what have you earmarked to become more efficient in?

Ms McClusky —We have a process at the moment of looking at all our corporate systems and our support systems to see how we can get more bang for our buck out of those, I guess, is how we could define it, and looking at our staffing levels across the department for various activities. I think we would be like most departments; we do not have many lower level staff at the APS 1, 2, 3, and 4 level anymore.

Mr ROBERT —So you cannot sack the tea lady?

Ms McClusky —We cannot sack the tea lady, that is right, or the tea man. For a start, a lot of those support activities are now undertaken by more senior officers.

Mr ROBERT —There is a line out of Yes, Minister.

Ms McClusky —I am not familiar with it.

Mr ROBERT —You are not familiar with Yes, Minister?

Ms McClusky —No. It was before my time. I am familiar with it in the history of time.

CHAIR —You missed a bit of Yes, Minister this morning with the department of finance. I did not say that.

Mr ROBERT —We will move on. How have other departments sought and implemented efficiencies?

Mr Marsden —With the ARC it has been a little bit different for us because our lifespan has not been that great. We came into existence in July 2001. At that point in time, the then Department of Education, Science and Training supported the ARC. I came in a year and a half or so after that, and it was very clear to me that the department had not been exposed to the previous outsourcing provisions of the then government. It had no idea about charging for those sorts of services, so in the absence of giving an efficient service or a cost effective service, we actually started to take functions in-house and outsource functions where it was strategic to do so. For example, in IT we were paying to then DEST about $1.2 million so we outsourced that, and it was $800,000 a year, so that was a saving that we could then put back into our operations. The HR side of things was $247,000 a year. We outsourced that and it is $57,000 a year, so we have been chipping away progressively but our funding base was very, very small from day one, so things like electronic document and records management system, we do not have the ability to finance to put one in place, so we built an Access system and that sort of thing.

Mr ROBERT —You built an Access system, as in using Microsoft Access?

Mr Marsden —Yes, that is correct. When you have limited funds, you innovate. With respect to our grant systems, when I arrived at the ARC, there were four separate systems, and none of them interfaced, let alone integrated. Our first step was to at least get them to interface. If you speak to any researcher, it was clear that none of our systems could survive under any load in any major grant round, so we have progressively been replacing those. We tested the market quite thoroughly and spoke to 74 different organisations, did a big industry briefing, spoke to 12 overseas research councils to see what was out there. There was nothing out there that could actually do the job. Most research councils had a front end but nothing behind it. So we reluctantly started to build in-house, because it was the only way to get a decent system. Since July 2006, we have actually had phase one of that fully operational. That phase does all of our selection meeting processes.

Mr ROBERT —Can you sell that to the other 74 organisations?

Mr Marsden —We have interest already, but I have no interest at this point in selling until we actually finish the system. We have had approaches already, but we have not marketed that at all.

Mr ROBERT —Specifically this financial year, what is your cunning plan for finding the extra two per cent?

Mr Marsden —Our plan this coming time was to restructure our SES. We actually chopped SES, so basically as people go, we do not fill the SES positions,

Mr ROBERT —So what you are doing is just not refilling staff that leave?

Mr Marsden —Yes, so then we put more load on to the remaining SES and some middle managers as well.

CHAIR —In your submission you did have an international graph to compare your administration costs, and you came up very favourably on that. How was that achieved?

Mr Marsden —Because we had a low base to start with. Basically, how that graph is calculated, it was done independently of us by the UK Research Council. What they did was look across international bodies in research areas that they thought were similar to them and looked at the overall what we call administered expenses and compared that to what we call the overall operating expenses. As a proportion of the administered expenses, obviously we are down the bottom end. If you look at that, just for cost reasons, you could say that obviously we are the most efficient in that international study. But obviously, reduced cost does not necessarily translate to efficiencies.

Senator FEENEY —I have one question for the CSIRO. If you have already addressed this issue, I apologise at the outset; I did arrive late. To what extent is commercialising IP realising fabulous new rives or gold for the CSIRO by OTA and other issues of attracted media attention from time to time? I have a general question as to what extent those revenue streams will grow in importance?

Mr Gaukroger —There has been quite a number of investments in those areas over the last five years. The purpose is to sell them off as and when we can. We did have one significant one in the last financial year, carbon energy, where we sold our share of that in Medex Resources. That yielded a significant profit, which is on paper, because there is a 12-month escrow period involved with that. Certainly a lot of volatility with the share price. My recollection is that CSIRO sold it at 71 cents a share. It went down to 37 cents; I think it is up around 50 or thereabouts at the moment. That is a significant one that has had a positive effect for CSIRO. As to others over the next 12 months, it is really on a case-by-case as we can sell those organisations and yield some revenue in our IP. In our IP we budget including the royalties for around $38 million a year, which is already embedded in our science projects, so we do rely on those returns to be able to fund our science each year.

Senator FEENEY —Then presumably you have some forecasts about how that revenue stream grows, and presumably business cases to show that selling those entities is the way to realise the most money from the IP?

Mr Gaukroger —Any decision to sell goes through our commercial committee, which is a subcommittee of our board. There is a fairly rigorous process involved with that. In terms of what the future looks like, we have been budgeting for around a flat $38 million each year, which comprises any IP sales and royalties that we get on our intellectual property.

CHAIR —Thank you. I am just writing some advice to myself for a possible recommendation. I think I asked you if you have quantified the loss to the department, and you did give us those figures, did you not?

Ms McClusky —Yes.

CHAIR —The brave new world is not looking quite so brave and new and shiny without the effort in science and research that we would demand. So, thank you very much for your submissions today. We very much appreciate your contribution and your cooperation in appearing before the committee today.

Resolved (on motion by Mr Robert):

That this committee authorises publication, including publication on the parliamentary database, of the transcript of the evidence given before it at public hearing this day.

Committee adjourned at 3.40 pm