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Select Committee on the Reform of the Australian Federation
05/05/2011
Reform of the Australian Federation

ENGLISH, Mr Dominic, First Assistant Secretary, Department of the Prime Minister and Cabinet

FITZPATRICK, Ms Mandy, Manager, Commonwealth State Relations Division, The Treasury

PERRY, Mr Ronald Thompson, Assistant Secretary, COAG Unit, Department of the Prime Minister and Cabinet

VROOMBOUT, Ms Sue, General Manager, Commonwealth State Relations Division, The Treasury

CHAIR: Welcome, ladies and gentlemen. Thank you for appearing before the committee this afternoon. We have not received submissions from either the department or portfolio areas. Does anybody wish to make an opening statement?

Mr English : No, we are happy to respond to questions.

CHAIR: I might begin with some of the evidence we received this morning and it relates to Treasury, I suspect. I do not know whether you were watching this morning's evidence from the Commonwealth Grants Commission, but they kind of dumped you in it.

Ms Vroombout : Yes, Ms Fitzpatrick was watching.

CHAIR: Could you to clarify the nature of the review being undertaken of the Commonwealth Grants Commission's responsibilities. I would be grateful if you could also outline the timetable and who is doing it.

Ms Vroombout : The review is being conducted by an independent panel. Former Premiers Brumby and Greiner and Mr Bruce Carter has been appointed to conduct the review. A terms of reference for the review were issued and were part of both the Prime Minister and the Treasurer's press release for the review. They defined the scope of the review. The review is not considering whether we should have horizontal fiscal equalisation, rather it is considering the form of horizontal fiscal equalisation and the terms of reference outline a set of principles that the review panel should have regard to in considering the form of horizontal fiscal equalisation, and they go to efficiency, equity, simplicity of the arrangements, predictability and transparency. They are the key principles. In terms of timing of the review, the review panel is to provide an interim report to the Treasurer in February next year, with a final report in September next year which will then be considered by COAG, with a view to a final decision being taken before the end of 2013.

CHAIR: Will the review decide on its processes or do you anticipate that it will proceed in what might be regarded as the normal way—in other words, it will seek submissions and conduct public hearings and things of that kind?

Ms Vroombout : The first meeting of the review panel is tomorrow and the review panel will be considering those sorts of issues. The terms of reference do talk about the seeking of submissions from the public.

CHAIR: In terms of the support that the review will receive, the secretary of the Commonwealth Grants Commission explained that he anticipated some of his staff would be co-opted to the review—is that correct

Ms Vroombout : A secretariat to support the review panel is being established within Treasury. It will have a number of members from The Treasury itself, a number of secondees from state treasuries and a couple of secondees from the Commonwealth Grants Commission. That is the intention.

CHAIR: Perhaps you could explain the context in which this review arose—in other words, what is the rationale for the review? Why does the government think it is needed and why now?

Ms Vroombout : I think the terms of reference outline the context and background to the review around significant structural changes in the economy. So we have the commodities boom and the rise of China and India. We have demographic change. We have a growing population and we have changes in technology. All of these impact on the states and territories in different ways. They impact differently across the different states and territories. I guess the intention of the review was to have a look at how the arrangements for horizontal fiscal equalisation work in the context of the changing structure of the Australian economy.

CHAIR: So there will continue to be, as you have said, a fiscal equalisation formula of some kind?

Ms Vroombout : Correct.

CHAIR: Do you anticipate that it could be radically different to that which exists now? Or is that something that you do not propose to speculate about?

Ms Vroombout : It is not something that I have a particular view on. I guess that will be a matter for the review panel to consider as part of its deliberations.

Senator MOORE: I am interested in the secondees from the states. I think the whole thing is based on COAG and states being engaged as well as the federal level. At this stage have they agreed on the processes? Will it be states determining who will be their representatives or will it be certain states representing a group of states? Has that kind of detail been worked out yet?

Ms Vroombout : The head of the Commonwealth Treasury wrote to his colleagues at the state and territory treasuries to invite nominations. I guess the states collectively agreed on two nominees to be seconded to the secretariat.

Senator MOORE: Two representing eight?

Ms Vroombout : Yes.

CHAIR: I will just go PM&C for a moment. I am not sure how much you have followed the work of this committee and the evidence that we have received but, just put it in context, we have received quite a lot evidence for the view that there ought to be a greater level of institutionalisation in relation to COAG. From my personal perspective I would just like to get a bit of information about the kind of resources that COAG currently consumes or how you are situated so I can evaluate the virtue of some of those recommendations we have received. Can you just put COAG in context for us from a Commonwealth perspective and from an institutional perspective from within PM&C?

Mr English : The core of what we do to support COAG is the provision of a secretariat service, which is managed by Mr Perry's unit and takes about 10 to 12 people at any given time. It works on a range of issues around supporting meetings, planning for the meetings for the Prime Minister as the chair and coordinating the Commonwealth's contribution to COAG. So at its core there is a relatively small unit that looks after what might otherwise be seen as the sort of activities that would be considered in an independent secretariat, if that is what people have argued for.

My perspective would be that it is a coordination activity across a wide range of areas across the Commonwealth and the states. The network that operates between premiers' and chief ministers' departments and the Prime Minister's department through our central COAG unit is quite significant. Within the Department of the Prime Minister and Cabinet at any given time you may find up to a third of the organisation has activities within its remit that are relevant to COAG. Chairing COAG and bringing that leadership to the Federation is an inherent part of being the Prime Minister and the department supports that through any number of activities. In the social policy reform area, for example, our social policy divisions contribute to both advising the Prime Minister on COAG and working with the states and territories on matters that come forward. On the national security side, likewise, there has been a significant agenda in antiterrorism and harmony type issues going back some time.

In terms of the ability to define something that is a discrete function that relates to COAG that you would have in a different organisation, I guess from my perspective the connections that exist across PM&C to support COAG are substantial and, likewise, extensive through the rest of the Public Service in Canberra. Treasury's leadership on elements of that, particularly on the federal financial relations framework, is substantial as well. We would see leading COAG as a major part of the Prime Minister's job, and that is what the department aims to support.

CHAIR: There are 10 to 12 officers, Mr Perry?

Mr Perry : In my unit, yes, there are 12 people.

CHAIR: Is that a relatively stable number? Has it been consistently that?

Mr English : At the moment it is probably a little higher than you would consider to be the ordinary establishment because we are responding to the review of the heads of Treasury's work on the financial framework process, so we have created some extra capacity. It vacillates around that 10 number, depending on priorities.

Mr Perry : And, historically, on the influence or the importance that successive governments have given to COAG work. For a period during the previous government at one stage probably one person dealt with COAG issues in a coordination sense within a department; then over time it grew to three or four; and now, as Dominic has said, we have got up to 12 people who are performing that role. In our counterparts in the states and territories there might be units of eight to 10 people and within the smaller jurisdictions there may only be four or five working in the COAG space in a coordination sense, but they work very similarly to what we do: those people coordinate their government's involvement.

CHAIR: Each of the premiers departments, I assume, has a COAG unit of some kind.

Mr Perry : An intergovernmental relations unit.

CHAIR: So an intergovernmental relations unit is code—and I do not mean that subversively in any way—that reflects their commitment to COAG as a process. Is that right?

Mr Perry : Yes.

CHAIR: Did you say somewhere between four and eight officers as part of that process is typical?

Mr Perry : In my experience, yes.

CHAIR: COAG meetings take place on and irregular basis; I think I am right in saying that. Perhaps you could explain to us how or when a COAG meeting actually takes place. What can you tell us about the reasons why a meeting of COAG might be called? They are not set down as regular, are they? They take place at somebody's behest, but not at a set time of the year or, indeed, years.

Mr English : Not unlike a whole swag of committees, the chair, at the end of the day, will determine the timing of a given meeting. The aim we have is to be regular, to allow the business of COAG to be transacted, but there are a range of constraints that require balancing in considering when to have a meeting. For example, when we say that 'late in the year' we are having a COAG meeting we will inevitably try to avoid caretaker periods as a matter of course, we will try to balance parliamentary sitting periods and we will also try to look at when the work that has been commissioned by COAG will be available in a meaningfully prepared shape.

Each time COAG finishes there is usually an expressed intent about when the next meeting will be. In February the meeting concluded with the intent that there would be a mid-2011 meeting that would, amongst other things, take forward the commitments to further work that were given at that meeting around health, mental health, disaster preparedness and the like. At the moment we are working within the department to prepare some advice to the Prime Minister that would show when the best time of the meeting would be, given those factors and what we know about the availability of the states, parliamentary sittings and the like.

CHAIR: Is there a COAG operating manual of some kind or a list of protocols? In whose corporate memory is COAG located?

Mr English : I am very pleased you asked, because we have recently re-issued the COAG protocols, which I am sure we can provide.

CHAIR: Are they on the public record?

Mr English : Certainly they are freely available to the jurisdictions.

CHAIR: That is not what I am thinking about.

Mr English : Certainly we are happy to make them available to the committee. As I say, we have shared them with the jurisdictions relatively recently as an update. I do not think we publish them electronically in a public way. They are rather bureaucratic by their nature. We should be able to make them available to people who are interested. But I do not know that they are necessarily the most exciting of reading, personally.

CHAIR: You would be surprised what turns us on!

Mr English : I very much appreciate your interest—I shall leave my comments at that.

CHAIR: You say you have revised the protocols. I am trying to get a sense of procedure and process here and how institutionalised the COAG process is within the context of the department?

Mr Perry : Previously we had had what we call a set of business rules about how meetings would be called, the sorts of things that might go on the agenda, who could put things on the agenda, how we would then proceed into a meeting, the nature of the process surrounding the development of the communique after the meeting and records of particular matters within the meeting. We had business rules up until the beginning of this year and, as Dominic has indicated, we have just recently put together a whole set of new protocols around the operation of COAG, which the states and territories have agreed to.

CHAIR: What significance should we attach to the difference between business rules and protocols?

Mr Perry : I think the protocols now go to several pages, whereas previously business rules went to one page.

Mr English : What was the trigger for the most recent update though, if I can expand a bit, is that we found that the processes around preparing papers and having clear documentation to support decisions at COAG warranted another look. We were ending up with folders that, frankly, the average human being could not carry into the room, and that was dissuading ministers and prime ministers and chief ministers from reading the papers in any great detail. They were increasingly reliant on briefs from their departments and offices. So we were of a mind to try to get a clearer, simpler structure for the papers together—the sort of learnings that all governments have gone through in recent years about making cabinet processes work better, and taking those lessons through about getting decision-ready documents prepared for meetings. As we were putting that out we updated the expectations around how the meetings would be prepared for. That was the trigger for revising—

CHAIR: Mr English, your proposition to us is that, to simplify, you have become more bureaucratic?

Mr English : One could characterise it that way.

Senator MOORE: Who actually did that? Who did the work on the protocols?

Mr Perry : PM&C.

Senator MOORE: Did you engage with the states while you were doing it or only after you finished doing it and put it out for comment?

Mr Perry : Someone has to always produce a first draft, whether it is the states or us. On this occasion we took the lead, prepared the first draft and then got comments back from the states.

Senator MOORE: Just as a comment, Chair, I feel really strongly that this stuff should be public. Certainly in the health field, where I do a lot of work, there is genuine interest in the way COAG operates, because so many things that have happened have come out of COAG and we are asked consistently: 'How does it work? Who puts things on the agenda?' We will wait until we see it in case it is written in another language, then we will go from there. As a general principle, the guidelines on how organisation operates I truly believe should be completely transparent.

Mr English : I think their provision is unlikely to warrant any particular concern. Given they have been prepared after consultation with the COAG senior officials group, which is the first ministers and secretaries of first ministers' departments, I would feel obliged to let them know that we were going to provide them to you. We will provide them to you as soon as we can after that.

Senator MOORE: On notice, can we find out whether anyone in the consultation group thought they should be public and whether it was an issue of discussion?

Mr English : The discussion that concluded these protocols was a meeting I was present for of the senior officials group in either January or February in preparation for the last COAG meeting. I do not recall that that issue was raised at that point.

CHAIR: I would be grateful if you would take advice on that because I agree with Senator Moore's position on that. I think it should be made available, and we will make it available on our website.

Mr English : Yes. I anticipate no challenge; it is just protocol for the way we handle these documents with senior officials.

Senator BACK: The Commonwealth Grants Commission representatives this afternoon kindly went through again with us the process by which the recommendation is made to the Treasurer for the division of GST funds to the states and territories. They spoke of the averaging concept et cetera. The question I asked was: in that whole process, where is the motivation for each of the states and territories to actually, in a sense, maximise their revenue and contain their expenditure so that for the overall good nationally the drain on the national purse is reduced or at least minimised? They said it was not their role to actually make that determination. I am just wondering: whose role is it? I ask the question in the background of a statement made by one of the state premiers recently about the fact of another state becoming the nation's national park. The obvious suggestion by that premier was that this other state could perhaps be doing more in terms of its revenue base. The premier felt that it was not. I am not necessarily agreeing or disagreeing with what he said. I am just asking: whose role is it to actually, in a sense, keep the states and territories honest in terms of maximising their revenue and containing their expenditure as it relates to GST funding?

Mr English : We would start with the premise that the ultimate accountability for states and territories for the way they raise their revenue and use that revenue is with their electorates. Not COAG, the Commonwealth or the CGC process can be a substitute for that primary accountability. What we have in the horizontal fiscal equalisation arrangements is, at its basis, an attempt to try to distribute that pot of money, which needs to go from the Commonwealth to the states because of vertical fiscal imbalance, in a way where there is the opportunity for states and territories to deliver equivalent services to equivalent standards. But, at the end of the day, I do not think you could presume that a formula will achieve what is really a role for the electorate.

Ms Vroombout : And the Grants Commission process is intended to be a policy-neutral one that neither encourages nor discourages particular actions from the states and territories. As Mr English has said, it is ultimately a matter for the states and their electorates around what particular policy they choose. The intention of the process is that it is a policy-neutral one that, as I said, neither encourages nor discourages particular activity on the part of the states. The terms of reference for the review of GST provide an opportunity for the issue of whether the Grants Commission process should provide particular incentives or not, so the review provides the opportunity for that issue to be considered.

Mr English : I do want to add marginally to that comment before to say that, notwithstanding the basic framework as I have described it, the Commonwealth has pushed this agenda along as much as any other member of COAG has. It has sought to define through the national agreements process a range of benchmarks for the level of outputs and outcomes that services will achieve for constituents that jurisdictions are then publicly held to account against. The CRC reporting process is designed to give an independent source of information for the electorate to assess whether jurisdictions have upheld the ambitions of those agreements. It is based on electorates holding their jurisdictions to account but, by consensus and by agreement, states and territories and the Commonwealth have defined areas in which they agree that we all need to work together to achieve a certain standard of output and outcome for communities and that there will be transparency around the achievements of that through the reportings of the CRC. So there is a sense of some voluntary acquiescence, if you like, to that framework for accountability around the key service delivery areas of health, education, housing and the like.

Senator BACK: So in a sense you are saying that COAG is the most appropriate forum in the event that one or more premiers feel aggrieved at the activities of their colleague or colleagues. You feel that COAG is the most appropriate venue or medium through which that sort of robust discussion might take place. Is that what you are saying?

Mr English : Certainly the intent we have in supporting COAG is to make sure that nationally important and significant issues jurisdictions need to address would be dealt with there. If it were simply a matter of a few jurisdictions with a debate between themselves, then those jurisdictions no doubt have avenues to pursue that amongst themselves. The states have the counsel of the Australian federation whereby they can similarly pursue issues that do not necessarily involve the Commonwealth. So there is a range of layers, and it would depend on the issue. Certainly, if there were some sense that national economic performance was being held back by decisions in particular areas, subject to the chair's agreement and jurisdictions raising this issue for discussion, there is the opportunity for those things to be pursued.

Senator BACK: I think the secretary of the commission made a very valid point when he said that on the expenditure side benchmarking across state and territory boundaries would form a very useful tool. For example, in the per capita delivery of health services or education services, if one jurisdiction is doing it very well one would expect that the others would be watching closely, learning from them and improving. I think that was a very valid response. It is more towards the revenue and the opportunities for revenue that I was probably directing my question. As I said, the Grants Commission was at some pains to say that it is not their role at all. I can understand that, but it did beg the question of whose role it is. When you speak of the electorate, I can understand that within an individual state or territory the people who make up the electorate would say, 'We're very happy with such and such a circumstance, just so long as we keep getting sufficient funds to live a lifestyle to which we have become very accustomed.' I do not think you can answer the question any further.

Mr Perry : From my experience, particularly on the expenditure side, the state treasuries do have regard to the massive amounts of data that go to the Grants Commission. They are always combing through that data to see whether some jurisdiction is doing something better than them—delivering at a lower cost per unit or whatever. Then they will go and ask the hard questions of their agencies.

Senator BACK: I would certainly expect in a robust economy that that is exactly what we would be seeing. My other question is in a totally unrelated area, but you may be able to assist. We have had representation from the Australian Local Government Association strongly supporting an amendment to the Constitution to recognise local government. My question to you is: how might the current arrangements for funding from the Commonwealth, either through the states to local government or directly to local government, change those relationships in the event of local government successfully lobbying for the Constitution to be amended? For example, I look at the Australian Local Government (Financial Assistance) Act 1995, which speaks of the process by which funding goes from the Commonwealth to the states, who then distribute the funds to local governments in accordance with recommendations of local government commissions, having regard to the seven national principles. Pape obviously came up in these discussions but it is not clear to me why it would be automatically the case that local government would do better in terms of its funding from the Commonwealth in the event of a change of constitution. Again, I am not asking for an opinion; I am simply asking for what would be the mechanism or the process that local government would understand so that it would enjoy better access to the purse.

Mr English : I have to confess it is not clear to us either, that without a further decision by government to make financial arrangements subsequent to such recognition that it would make a material difference.

Senator BACK: You are not aware of the barrier currently that would be broken down in the event of such a move being made.

Mr English : Taking into account the implications of the Pape decision, the Commonwealth remains able to make grants under its general powers in the Constitution as well is make payments to the states for purposes relevant to their responsibilities, which do include local government currently. So it is not clear that we are wanting for lack of opportunity to pass funds to the councils via one mechanism or the other and without further commitment from the budget and some savings to offset it we are not necessarily in a position where would be looking to make further contributions.

Senator BACK: At the moment, the answer given to me this morning by the Grants Commission secretary was that the commission does not take into account local government needs per se in determining its recommendations to the Treasurer for the GST carve up each year. Is it the case that the review being undertaken by Brumby, Greiner, Carter, as part of its terms of reference, to have a look at local government financing needs?

Ms Vroombout : That is not part of its terms of reference, so it is focusing on the current arrangements which could address horizontal fiscal equalisation in payments to the states and not local governments.

Senator BACK: Yes, but nothing would prevent local government, presumably, from putting in a submission. Are public submissions going to be invited of the review panel?

Ms Vroombout : The terms of reference make it clear that there will be a public submission process.

Senator BACK: So they could in fact represent their case. Thank you.

CHAIR: On the question of Commonwealth grants to local government, the Commonwealth still makes grants directly to local government of the Roads to Recovery kind, for example, does it not?

Ms Vroombout : Yes.

CHAIR: What view have you taken about the implications of Pape for your capacity to continue to do that?

Mr English : To date the approach we have taken is that current arrangements will continue unless subsequent decisions by the court suggest that a particular activity should not. So at this stage we do not expect that Pape has taken away the ability to make those payments.

CHAIR: Have you sought the Attorney's advice on the subject?

Mr English : That is consistent with the Attorney's advice—that we should continue with current arrangements unless a demonstrated need arises to change them.

CHAIR: Is that advice available publicly?

Mr English : That is probably something we would have to put to government because it was legal advice to the government.

CHAIR: Perhaps you could do that, because we are getting somewhat inconsistent evidence about this matter. There is a view that Pape has created a problem with regard to direct grants to local government and this needs to be addressed in some fashion. I understand that the direct grants continue, which suggests, obviously, that you have formed a view that it is not illegal or not unconstitutional to do that. But I would be interested to know the basis upon which you have made that decision. I presume you have an interpretation of Pape but particularly why—

Mr English : Government gave Pape serious consideration but it was determined that that did not need to extend it to a revocation of any particular program at this point in time.

CHAIR: Mr English, have you formed a view that you can continue to do that, or whether you need to be more cautious about the way in which you make grants to local government as a consequence of Pape, or do you think that the area is untrammelled constitutionally so that if someone presented you with a proposition to send money directly to local government in relation to housing or aged care or something of that kind you could do that, or have you not taken those considerations into account?

Mr English : We have formed the view that on payments to other jurisdictions that we need to be mindful at all times about the constitutional basis on which we would be pursuing that payment—state, local government or not. In some cases the payments will proceed under the Commonwealth's ability to make payments to, say, territories. In some cases it will be on our general capacity to make grants off the Commonwealth's own authority, and to my knowledge we have not especially isolated payments to local government in that process. We have not felt the need to particularly isolate local government in that discussion.

CHAIR: So you have not discontinued a process of grant as a result of Pape in relation to that, okay.

Mr English : No.

Mr Perry : But as Dominic said, we went through a very extensive review in the light of Pape of all of our payments to make sure that we could justify them constitutionally.

CHAIR: I see. I do not think that Pape raised it. In fact it is inconceivable that he could given section 96 of the Constitution and the right to make grants to the states for particular purposes et cetera. Just in relation to that course, what if any expectations does the Commonwealth have about money directed to local government via the states to the extent to which states extract some kind of cost for their administration of a grant? Or are we safe in assuming that any time you give a Commonwealth grant via 96 then all the money that is appropriated for that particular purpose will end up in the hands of the local government?

Ms Vroombout : I think that generally speaking I would say yes, unless the states negotiate as part of the particular arrangement for administration costs to be covered. But if the arrangement does not provide for that, then we would expect that the full amount of the funds as part of the arrangements would flow to local government.

CHAIR: Is it a typical practice for states to negotiate some administrative cost in relation to their administration of those funds?

Ms Vroombout : Not that I am aware of, no.

Mr English : In the simple passing of funds there seems to be little cause for an arrangement that would divert resources to the states and territories. It is a bit different, for example, from the situation for the construction of capital around schools where we did have a particular agreement around a small amount which would be committed to project management and the rest was to be used for the actual construction costs. In those circumstances, you would seek an agreement, but the simple funding of funds is still a procedure—

CHAIR: I do not want to raise the whole debate about BER and so on except in so far as the administrative cost is the same across the Commonwealth. I assume it is. In relation to that, for example, could states negotiate different kinds of management costs with the Commonwealth under the BER?

Mr English : I would have to go back and check my facts on that. Whether the rate was the same across jurisdictions, I cannot recall.

CHAIR: There is a constitutional provision of course against differential grants to states. I am wondering whether it applies to these kinds of management fees et cetera.

Mr English : I should take that on notice.

CHAIR: Would you do that, Mr English? I suppose the question is: have states negotiated different management fees in relation to BER and on what basis have they actually done that? Do I take it from your remarks here that you do not see any impediment if you are passing funds to local government for any particular purpose for the Commonwealth to say: 'Here is the funding. We will pass it through the states and the total quantum of it is to go to local government. We are not permitting any kind of administrative costs'—or whatever the phrase might be—

Senator BACK: Leakage.

CHAIR: Are you confident about the capacity to be able to send money directly via the states to local government and they will get all that has been allocated?

Mr English : Yes.

Ms Vroombout : Yes.

Mr English : It would require a specific agreement for that—

CHAIR: Does the Commonwealth see any advantage in sending it directly as a grant as distinct from sending it via the states?

Mr English : We have payment arrangements that contemplate any number of circumstances. Some of those are designed to be consistent with our constitutional powers. To be fair, these days it would be difficult to make a strong case in either direction based on the practicalities of the payments—

CHAIR: Then do you have any kinds of principles or guidelines as to when you might decide to allocate funding to local government directly such as the Roads to Recovery program or send that money via the states to ultimately end up in the hands of local government?

Mr English : No, I think it would be more of a case by case decision-making process than—

CHAIR: So you do not have preferred processes in relation to areas of Commonwealth or state activity or in relation to particular circumstances that might arise? It is a case-by-case basis?

Mr English : Certainly under the federal financial relations intergovernmental agreement we have agreed that all payments to a state or territory would be provided under those arrangements by treasuries in a single payment that would then be disbursed with the jurisdiction by the Treasury. So national partnerships and SPPs get provided that way. Beyond that, if we were doing a program aimed at meeting a need in local government, we would consider on a case-by-case basis the most effective way of disbursing the funds that recognised either the fact that this was generalised support and could join a generalised support stream or that it was targeted at particular needs like Black Spot funding, which would be more targeted and therefore disbursed in a slightly less bulk way, if you like. It is a payment to the states for the purpose of them to pass on to local government to support their activities as in effect a state government instrumentality then that would bring it under the FFR agreement. That would be my expectation.

Ms Vroombout : That is right.

Mr English : And it would be fed through Treasury.

CHAIR: With what consequence if you bring it under federal financial relations? What follows from that? If you put it in that particular box, what does that mean for the grant?

Ms Vroombout : I guess the key thing it means for the particular grant is that it is a payment from the Commonwealth Treasury to the state's Treasury and then, if it is to be paid to local government, it is from the state Treasury to local government. If it is a payment direct to local government, it would go from the relevant Commonwealth portfolio agency to the relevant local government in the jurisdiction.

CHAIR: I see. So it is an appropriation for a particular portfolio—is that right—

Ms Vroombout : Yes.

CHAIR: as distinct from coming out of Commonwealth general Treasury revenue?

Ms Vroombout : Yes, generally speaking.

Mr Perry : To elaborate on what Sue was saying, if it is under a national partnership agreement, the Commonwealth agency has administrative responsibility for the payment, but the payment is actually made by the Treasury.

CHAIR: Mr Perry, does administrative responsibility mean that the Commonwealth has a capacity to audit that particular grant? Is there an audit trail following either means of doing business?

Mr English : The audit implications are no different under either model. The Commonwealth Auditor-General's role extends to the audit of the use of funds within the Commonwealth. So, once either the Treasury pays it to a state Treasury or the department of transport pays it to a particular council, it means it has left the Commonwealth and it is no longer within the purview of the audit function of the Commonwealth. Therefore it comes under the ordinary arrangements that apply in that jurisdiction. I believe, for most local governments, they are audited by state auditor-generals.

CHAIR: Since it is Commonwealth money to start with, has the Treasury looked at the question of following the audit trail beyond the point at which it arrives in the hands of another level of government? In other words, have you ever given consideration to, or recently given consideration to, the possibility that the Commonwealth's audit powers might extend beyond the point at which it extends now?

Ms Vroombout : There have been a number of suggestions that the Commonwealth Auditor-General's powers should extend beyond their current purview. The joint committee on public accounts has made a recommendation to that effect. Both we and PM&C have been considering that recommendation.

Mr English : Which I think remains without a response from government to date. At the moment the situation remains as it is.

CHAIR: I am not on that committee and I do not—

Senator BACK: I chair the references committee. That is a recommendation—

CHAIR: I think we are talking about the joint public accounts committee. How long ago was that reference made?

Mr English : At the beginning of this year—in January 2011. The report was finished in the last parliament and then released at the first opportunity under the new parliament.

CHAIR: Even I would not be too hopeful about getting an answer in that period of time.

Mr English : That is fortunate because we do not have an answer at this time.

Senator MOORE: Just in terms of the audit process, the recommendation—this is my understanding from the joint public accounts committee—was that it was looking at federal grants and the ability to audit federal money, and that came out of a number of different things. Any decision, though, in terms of extending the federal auditor's powers to follow that money would necessarily, I would think, have to engage negotiations with states.

Mr English : Absolutely.

Senator MOORE: So I would think the ability to say yay nor nay to such a recommendation would need to have a process back through the states and the COAG model to come up with an agreement. Would that be correct?

Mr English : Absolutely.

Senator MOORE: That was following on from the next step, to double-check.

Ms Vroombout : To avoid a double audit—yes.

Senator MOORE: That is right. Extending the ability of the federal auditor to follow the money trail, which is fair, would mean that they would have to have some agreement with their state or territory counterpart, to go into the expenditure in that area. I just wanted to get that clear in my mind.

Mr English : You have that entirely correct, as I understand it.

Senator MOORE: All these details we are talking about—giving grants, how they would operate, the links between grants and them then going onto local government—are they all covered in the Intergovernmental Agreement on Federal Financial Relations? I have not read this document and I do not think that I will. To begin with, I am not sure I would understand it. But I would have thought that the Intergovernmental Agreement on Federal Financial Relations, which is the blueprint, I would have thought, would have had clauses in it that covered the kinds of questions that Senator Trood was asking. Is that not true?

Ms Vroombout : No. The agreement covers payments to and through the states, but it does not cover payments directly to local governments. It is confined to the Commonwealth's relationship from a financial perspective directly with the states.

Senator MOORE: Would there be a paragraph in that document that looked at issues of the transference—the responsibility of the state to transfer money onto local governments, NGOs or any other bodies? Somewhere in the current agreement would we find that it says, 'If a grant is going to the states for the purposes of transferring onto anyone, this is how it should work?'

Ms Vroombout : There is a clause. My recollection is that it says if a payment is made to a state to pass on to somebody else then they must do so as soon as reasonably practical. But that is as far as the clause goes.

Senator MOORE: It does not go into any of the particulars we talked about in terms of needing to negotiate admin fees?

Ms Vroombout : No.

Senator MOORE: So there is none of that. It just says that it is a timeliness issue.

Ms Vroombout : Yes.

Senator MOORE: I know timeliness in the past has been a major concern where money gets transferred but does not get transferred on for a long period of time.

Ms Vroombout : Yes. Then any of those other things that we have spoken about would be covered off in the agreement for the particular payment. So if you wanted particular rules to apply in respect of a particular payment then you could handle that in the agreement for that payment.

Senator MOORE: And that could cover national agreements or any of the national partnerships?

Mr Perry : No. It would be covering national partnerships principally.

CHAIR: It would be covered in the particular national partnership in relation to that area of activity?

Mr Perry : Yes.

Ms Vroombout : Yes, it would be covered in that particular national partnership.

CHAIR: Do they follow a formula or are they essentially negotiated for every particular partnership? Is there a standard?

Ms Vroombout : There is a standard template that is used for them. Each of them, depending on the particular subject matter, will look and feel slightly different, but there is a standard template that is to be used for the negotiation of them.

CHAIR: Can you tell me whether the standard template is one that has been created for the purposes of these partnerships, which are relatively new, or whether it is based on other mechanisms which have been longstanding for passing money from the Commonwealth to the states? Have we reinvented the wheel here? Have we done something innovative, creative and new or have we basically taken something that we have been using for decades and said, 'We will rebrand it'?

Mr Perry : No.

CHAIR: That is not a criticism; I just want to understand the extent to which we have really thought through this whole process by which we pass on funds from the Commonwealth to the states.

Ms Vroombout : I would say that we have created something new. The federal financial relations framework that commenced at the beginning of 2009 is quite new and different in the way that it makes payments between the Commonwealth and the states, and national partnership agreements are a new form of agreement intended to be less prescriptive and focused on outcomes rather than input controls. The template has been designed in the context of the new federal financial relations framework rather than the quite detailed funding deeds that existed prior to that framework commencing.

Mr Perry : It is quite a deliberate process—

CHAIR: Mr Perry, you look like you are itching to say something.

Mr Perry : No, I was just agreeing with Sue. In the early days, we had experience with line agencies that thought that nothing had changed, so they went into old-style agreements and we had to say, 'No, there's a new world here and you've got to reconfigure your agreements.'

Mr English : As a postscript to that discussion, there is a publicly available document, which is the principles for the national partnership agreements which are on the Treasury's federal financial relations website.

Senator MOORE: Yes, I have seen it.

Ms Vroombout : It is the NP circular.

CHAIR: We have the COAG Reform Council, which is overseeing some part of this process. Perhaps the answer to my question is the National Reform Council, but please provide me with some clarity about my thinking here. Since this new process was introduced, has there been an audit, consideration or review of it in any way? It was supposed to be a more effective and efficient way of delivering funds to the states et cetera, so I suppose the question is: has it turned out to be more efficient and effective?

Ms Vroombout : Over the course of last year, heads of treasuries conducted a review of all of the agreements under the new framework, and they reported at the end of last year to the Ministerial Council for Federal Financial Relations, who then passed that report on to COAG. COAG considered the report in February this year. So, yes, there has been a look at how we are going with the new framework.

CHAIR: But that is a report undertaken by some of the principals involved: the party principals, in other words—the people who were actually intimately involved in negotiating the arrangements.

Senator MOORE: It is an internal review as opposed to an independent one.

Ms Vroombout : It is internal to government, but we did consult with portfolio agencies within both the Commonwealth and the states to get their perspective on how the new framework was going, and we consulted extensively between the Commonwealth and the states as to how it was going.

Mr English : In parallel, the COAG Reform Council also published its first progress on reformreport, which is commissioned under the new framework, and in that it makes an assessment of the institutional arrangements under the reform agenda that COAG has put in place. It also reported for the first time in late 2010, and it similarly found that good progress had been made; that the focus on outputs and outcomes was an opportunity for states to pursue reform within jurisdictions in a meaningful way intended by the framework; and that we were still, I guess, part way down the path of achieving the goals of the Reform Agenda overall. A focus is needed on cultural change to get all parts of government working in a way that focuses more on outputs and outcomes. That was an independent view. It was, I think, a view formed with possibly not as extensive a process as the Treasury's one was, but it was given as an independent piece of advice that was consistent with the findings of the work that Ms Vroombout has described.

Senator MOORE: Does the Intergovernmental Agreement on Federal Financial Relations have a review mechanism built into it? Does the agreement itself have a clause that talks about how it is going to be reviewed?

Ms Vroombout : My recollection is that the agreement itself does not, but there is a clause in there about review of the funding arrangements and the adequacy of funding under the agreement, and that clause says that such reviews should be conducted at least every five years.

Senator MOORE: So it is a five-year period. They vary. So this is a five-year one?

Ms Vroombout : Yes.

CHAIR: So the review that was undertaken and that Mr English has referred to was because someone said, 'Maybe we ought to have a review of this,' was it? Was it a serendipitous review, if I can use that adjective?

Mr English : Under the intergovernmental federal-state relations the CRC is commissioned to produce every year a report on progress of reform. Within that tasking it has defined that one of the things it will report on, and governments have agreed to this, would be the institutional structure that the FFR agreement has put into place. As well it looks at progress on implementing the other reform agendas that are embedded in the national agreement for the national partnerships.

Senator MOORE: That would be an annual review.

Mr English : Yes, that is an annual report.

Senator MOORE: Built into the general reform process it has been established there will be an annual review of how these agreements are going. So how it is going is agreed and then within the framework agreement there will be a formal review of adequacy and process every five years. So we have got two mirroring review processes for this particular process.

Mr English : Yes.

CHAIR: Does it mandate the kind of review that should take place, or just says a review?

Mr Perry : In which respect, Senator?

CHAIR: Of the five-year process.

Ms Vroombout : It does not set down the particular process, it just talks to there will be at least every five years a review of funding adequacy. The other point I would make is that the intergovernmental agreement tasks what will now be the standing council for federal financial relations with the ongoing monitoring and oversight of the federal financial relations framework. I guess at each meeting of the standing council they give consideration to how things are going, and that was what I guess created the impetus for the heads of treasuries review, so it was the ministerial council in its monitoring and oversight role that decided it was timely to step back a year after the framework had commenced and have a look at how it was going. I envisage that over time they may do that in addition to the reviews of funding adequacy.

CHAIR: I know that the COAG reform material is available on its website and the review they had done of the national partnership they have completed which has a reference to process in it. What about the rest of this review process you have been referring to? If I was interested to know what actually has been said beyond what you have told the committee today, where would I go to find out the nature of those reviews and the conclusions they reached, if anywhere?

Ms Vroombout : At the moment they are not publicly available. The heads of treasuries review report has not been made public. It was provided to COAG and there was reference to COAG's decisions in respect of it in the COAG communiqué, but at this stage it has not been made publicly available.

CHAIR: Is that a result of a decision not to make it publicly available or you just have not addressed that issue?

Mr English : I do not think we have had the specific request for it to date. However, in keeping with normal practice, if there was a need felt to release the report we would need to—

CHAIR: It is not so much a need as the fact, and I think Senator Moore made this point, that a lot of this activity takes place and most of it is not transparent. We have spent half an hour this afternoon trying to drag out some of the details because we are interested and we are doing a specific inquiry to understand the process. But other people and organisations may well have a strong interest and as a matter of good public policy, unless there is an argument about the need to maintain confidentiality—and, frankly, from what you have said you have not persuaded me that there is—then as a matter of good public policy these documents and these reviews ought to be made available on your website or at least in a fashion which allows public access. I am pointing to the culture of this process, which seems to me to need some attention.

Senator MOORE: The decision maker on whether this review is public, would that be the new title of the ministerial council or standing committee for federal—

Ms Fitzpatrick : No, it would actually be COAG.

Senator MOORE: So it would be the heads of government.

Mr English : Heads of government.

Senator MOORE: So a decision on that would have to go back to COAG to make that determination.

Mr English : Certainly until the point decisions are made, we do try to operate in a manner consistent with the cabinet conventions. This is clearly not a cabinet process, but in our view governments need the capacity to have considerations and make decisions in a way that allows issues to be aired and frank advice to be given. Certainly the convention has long been that COAG documentation remains COAG-in-confidence until such time as a decision has been taken, then a decision is taken about the publication of the matter.

Senator MOORE: So it is a two-part decision: it is a decision on the issue and then a decision about whether it is going to be made public.

Mr English : That is usually the way it goes. It is not fixed in stone by any stretch. COAG has from time to time put out material of a deliberative nature to try to generate a response on the process it has created underneath COAG. In this case this report was prepared for COAG and taken to COAG and therefore we treat it in that way until we get a decision from COAG to the contrary. It is not unusual for material of that nature to be put out from COAG. Frequently some of the analytical work that we do is retained within government for the time being so that the continuing work is informed by it and not necessarily distracted by debate around material that was deliberative and not final. So what COAG has put out is the final review on the review, and there will be actions which we are all taking to follow up on it, which is COAG giving expression to the outcomes from the review. In this case my recollection is that there has not been a specific decision to release it, so we will not release it until we get that decision.

CHAIR: Do we have a COAG protocol that relates to transparency?

Mr English : I think I just enunciated the COAG protocol on transparency.

CHAIR: Is that written down in the protocols?

Mr English : I believe we did document the fact that COAG documentation would remain COAG-in-confidence until such time as there was agreement to release it. We have documented that much.

CHAIR: I have a couple of other matters before we finish. In relation to COAG and the setting of agendas, who does that? Who can set the agenda? Is there a difference between the business rules and the protocols in relation to setting the agenda?

Mr English : No, the business rules and the protocols continue the established pattern across prime ministers that the Prime Minister, at the end of the day, will set the agenda as chair of the meeting after a process of consultation with states and territories to garner their views about the issues that should be taken forward to the next COAG meeting. Typically we give effect to that by providing the Prime Minister with a letter some time in advance of COAG to sign to her colleagues to say: 'I am planning a COAG meeting for a particular date and the things I plan to put on the agenda at this stage are listed below. If you have other issues you think should be raised, now is the time to write and talk about it.' So it is collaborative but formally it is with the chair, as with most committee processes.

CHAIR: So the protocols make it clear that states can inscribe or suggest items for the agenda, do they?

Mr English : Yes.

CHAIR: But also acknowledge that the Prime Minister has the final determination on the content of the agenda. Is that also correct?

Mr English : I believe that is consistent with the language, yes.

CHAIR: In relation to these suggestions that there ought to be a more institutionalised COAG—in other words, not just your dozen people, Mr Perry in the department. There are various forms of agency, obviously. There is a full Commonwealth agency and a quasi-agency, with various consequences in relation to budgets and things of that kind. You are obviously working under the present arrangements. Is it obvious to you, or are there reasons why, we should be cautious about changing the structure that exists at the moment? Do you see any consequences, adverse or otherwise, that would follow from a more institutionalised foundation for COAG?

Mr English : We should say in advance of these comments that, if the government of the day took a decision to go with institutionalisation, we would work with that.

CHAIR: I understand that.

Mr English : In my experience the advantage that the current arrangements give is that COAG's work is inherently connected across the business of government and across the priorities of the Prime Minister in her domestic agenda, primarily, through the people who are working on the domestic agenda within the Prime Minister's department and, then, through that work, to the rest of the Public Service, most particularly Treasury but other elements as well.

I think an issue we would have to address in a more distinct institutional structure would be how to achieve that high level of integration that we currently have between the way an agenda is brought together and coordinated and the content of that agenda. All secretariats face that challenge. We have just been through a review of ministerial councils and their secretariats for COAG. It was not universally consistent across structures but it found that certainly those with small, dedicated secretariats suffered from being less engaged with the strategic issues confronting the ministerial council than those that had secretariats embedded with the policy people working on the issues that were to be considered by the council. That would be a challenge, for sure, and it is certainly one of the things that the current arrangements enjoy.

In terms of the level of effort that goes into looking after COAG, we try to exhibit quite a bit of organisational flexibility and make sure that what is needed is provided. I have at my disposal a division of between 40 and 50 people and, at times, we have moved people across the unit barriers, if you like, to ensure that COAG support was available. Again, it is one of the advantages of being part of a larger organisation, which in the case of PM&C is a few hundred people broad. So either arrangement would have its advantages, I suspect, but the move away from what we do currently would have that challenge to address.

Similarly, as a member of the department's senior executive my engagement with other members of the executive allows me to stay abreast of the whole of the government's agenda and how that has ramifications for COAG and things that the Prime Minister might have to take on. That would be harder for me to do if I were the head of an independent secretariat outside of Prime Minister and Cabinet. But, as I say, we would obviously support whatever direction government took.

CHAIR: I appreciate your position. Thank you, that is helpful. Does Treasury have a view about this?

Ms Vroombout : I guess we would share the same view as the Department of Prime Minister and Cabinet. We provide secretariat support for the Standing Council for Federal Financial Relations in the same sort of way as PM&C does for COAG, and we run it in a very similar way that PM&C runs COAG.

CHAIR: And how many people do you have dedicated to the task?

Ms Vroombout : There are probably about five, but within a division of about 30 and with support from the policy areas within Treasury. So I guess it is a similar sort of structure to the one that PM&C uses.

Mr English : To slightly extend the discussion, this is one of the challenges that confront the discussion around structuring and institutionalising the COAG agenda, support and timetable in that COAG is not a decision-making body of governments. It is a council of consensus so it reacts to the priorities that sovereign governments are dealing with on a day-to-day basis and its nature evolves over time with that. There is absolutely no question that there are many ways we could skin the cat in supporting COAG, but I think the experience of the 20 or 30 years of this brand of federalism we have been under suggests that you have a structure that evolves with the priorities facing COAG, and that works pretty well. Over time, COAG's focus has moved from, frankly, a fairly strong economic focus in the nineties. At the beginning of this century a broader range of issues around national security and the like came to the fore. Social policy issues have also come along over time. So to say that there is a business agenda that needs to be transacted every three months and that that must go forward come what may, regardless of the state of elections around the continent and the like, ignores the fact that this is a council by consensus. Therefore, we do our best to try and roll with the priorities that face governments as they come along.

Mr Perry : I would say too that COAG has shown itself to be quite nimble footed. I will give two illustrations of that. When we encountered the global financial crisis, at several days notice we brought on a COAG meeting in February of 2009 to consider the Nation Building and Jobs Plan. Then after the London transport bombings in 2005 it was the Victorian government that actually suggested to the then Prime Minister that we should have a COAG meeting to reconsider our counterterrorism arrangements and, again, that was brought on at very short notice.

Senator MOORE: I have a question that picks up a bit from your last comments. We had evidence from a witness this afternoon that, in his opinion, there was a discernible change in the dynamic of COAG after 9-11; that the way the states, territories and federal government got together and responded to the security issues of 9-11 and made changes provided a dynamic that has flowed on to, as you described it, Mr Perry, the nimble-footedness of the organisation. I know it is impossible for you to give an opinion, but I am interested to know whether within the COAG members there was a confidence that things could move more quickly and reach agreement quickly in matters of urgency, as put forward by this witness this afternoon.

Mr Perry : I guess I could respond, because I have been around it longer than some. I would agree with that judgment or assessment, that 9-11 did focus COAG quite heavily at that time on counterterrorism and terrorism issues and the way in which we operate nationally. That led to changes, as you know, in legislation and a whole host of arrangements. Again, the unfortunate shooting at Monash University in Melbourne where a young student killed several other students led very quickly to the heads of government getting together and considering handgun controls. So there has been a great deal of impetus through the last decade in COAG.

Senator MOORE: Thank you.

CHAIR: I think we have exhausted ourselves! Thank you very much for your attendance before the committee today. It has been very helpful to our deliberations and we are grateful for the time you have given us. If we have any further questions we might send them along to you. You have taken a couple of matters on notice, Mr English, and if you can reply as soon as you can we would appreciate it.

Mr English : Of course.

CHAIR: Thank you very much.

Committee adjourned at 16 : 54