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Managing cuts



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MANAGING CUTS:

TO RESIST OR NOT TO RESIST - OPPORTUNITIES AND THREATS

The focus of this conference is on how to manage cutbacks in government, rather than why have them.

In summary, the central theme of my remarks today is that government cutbacks mean the removal of unnecessary rules and regulations which impede investment and trade, as well as reductions in public spending. These cutbacks require managers re-assess their priorities, establish new goals, determine the new and different resources required, discover more efficient ways of getting the job done, and develop more effective means of evaluation. '

It is nonetheless appropriate to begin with a very brief comment about why there are cutbacks in government and why there is a need for more efficiency in the way we do things. Understanding the reason for doing something provides a sense of purpose to the process of reform. A fundamental rule of management - as I'm sure you are aware - is that the motivation to get things done stems importantly from

knowing why they are being done and then being committed to the outcome.

Most Australians now realise that for many years we have been living beyond our means. We have been spending more than we earn. We have financed our lifestyle by going deeper and deeper into debt. We have also been wasteful - another word for inefficient - in the way we do things. We are now faced with the reality that we must

either lower our expectations of life or become much smarter in producing and delivering the things we want. That's where better management comes in.

Taking a national perspective, the opportunity is that Australia has enormous potential for growth and higher living standards.

The threat is that we will slide into third world status because we are ossified with a myriad of specific, carefully designed, deliberately imposed, man-made structures and rules which have been built up over many years. In one way or another they raise costs and erode productivity. Together they contribute mightily to Australia's inability to compete effectively on world markets.

In essence, we have arrived at the point where, because of poor productivity, we cannot generate enough income to service our debts without either selling part of

the farm or taking a drop in living standards.

The key to overcoming this problem is to raise productivity by radical change from the present anti-business climate to an economic environment which is open, competitive, fosters entrepreneurial skill, innovation and rewards performance.

The cost burdens and forgone productivity are not inherent, but are imposed by government. The good news is that government action can remove the cost burdens and create a climate which encourages productivity growth.

What do cutbacks mean?

When I talk about cuts in government I mean removing the government-induced and government-controlled arrangements which, directly or indirectly, prevent competition in the provision of goods and services or are the cause the unfortunate

government-knows-best mindset which saps productivity growth.

^These cuts include reducing the role of government to its core’functions of setting and enforcing a few basic rulesj The government's job should be to provide simple, transparent, consistent, non-arbitrary rules that ensure property rights and reduce the transaction, information and compliance costs of doing business. It should aim to make Australia an attractive place in which to invest. It should set the rules - and even umpire - but it should not tiy to be a player as well.

However, cutsiri government do not necessarily mean'that services We'withdrawn or wound down. In many cases the services will continue, although the agencies may change as the provision of those services is corporatised, privatised or contracted out in the search to prpvide better services more efficiently? The form of the services is also likely to change, taking on attributes which reflect the demands and values of the users of the services rather than the providers.

In these cases the opportunities and rewards will go to those who are innovative in raising productivity and finding new ways to meet client needs.

(i) Removing impediments

Some well-intentioned government programs are thwarted because the government has failed to remove road blocks in the path of change.

For example, under the new training program called Jobskills there are at present

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over 1,000 jobs available in Victoria, but unable to be taken up, because a couple of unions are blocking the necessary award variations in the Industrial Relations Commission. The union responsible for preventing the training and employment of at least 1,000 people is the Municipal Employees' Union which, ironically, is headed by the ALP Victorian President, Paul Slape. It is almost incomprehensible that an

official of a Party that claims it is trying to implement a program to reduce unemployment, is the one who is preventing that program from working.

Another example of a government program being impeded is the attempt by the Victorian Government to improve the urban tram and rail system by installing automatic ticket selling machines, only to find that as a result of established work practices and the power of the union to protect its 'hard won' conditions, the machines still have to be operated by railway employees.

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Australia desperately needs fundamental reform in its industrial relations and work" practices. Some recent progress has been made in allowing enterprised-based agreements, but the power of the union movement and the Industrial Relations Commission is still backed by legislation. We must remove the decades-old rigidities and allow new life, new initiative and opportunity to flourish.

As to whether greater flexibility in terms and conditions of work is seen as an opportunity or a threat, that depends on where we see our future.

If we are genuine about arresting Australia's slide in living standards relative to the rest of the world, if we are concerned about our massive foreign debt and the cost of servicing it, if we are concerned about continuing high unemployment and the need to radically change our attitudes to competition and productivity, and if as managers we thrive on the challenge of doing a better job, then allowing the participants in an enterprise freely to contract with each other - without interference

- and to reward each other according to performance will be seen as a great opportunity.

However, if it were our desire to insulate ourselves from change, or seek statutory power to protect institutions such as unions, employer organisations, the Industrial Relations Commission and all the privileges which go with these institutions, then we would see removing the strictures from the labour market as a threat.

(ii) Cutting expenditure

Substantial savings in public expenditure can be madb by:

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better targeting of programs to those who need them;

achieving greater efficiency in the way programs are managed, and the way services, benefits and assistance are delivered;

reducing or eliminating programs where there is duplication of other services or where provision of benefits or services by government is no longer appropriate; and

greater cost recovery by charging for commercial services and encouraging private sector funding of some programs.

Across the spectrum of government spending there are clearly so'me cuts which should be made because there are programs which are a blatant waste of public funds. For example, over $30' million 'of taxpayers' funds has" been handed ito:t.he trade union movement by the Hawke Government since it come to power in 1983. This type of funding is used to shore up political support, f

Similarly, there is no justification whatsoever for the Government raiding the public purse of $2 million to fund its political propaganda unit, the National Media Liaisoiv Unit. < ■

I would expect there is no d i s a ^ ^ n g ^ ||^ 5 ^ a M g m W £ ^ m 8 m m i ( i t l S , business organisations and lobby groups should be'-"cut totally." If those organisations feel threatened by that prospect, then that should not be of the slightest concern to anyone who believes in better targeting and efficiency in the use of public funds.

Turning to programs where the aim is to achieve greater efficiency in delivery rather than withdrawal of the program, the burden of excessive cost has arisen because, over many years, governments in Australia have moved into the provision of goods and services which could be more effectively carried out by the private sector in a competitive environment. The contracting out .of these services provides a clearer definition of the service provided and enables more direct targeting of the service. Through being more responsive to costs, the process of contracting out indicates the level of, and need for, community service obligations and is more efficient. Overseas evidence indicates that about 20 per cent can be saved in the costs of delivering a service when it is contracted out - on competitive terms, of course - to the private sector.

Privatisation is an effective means of achieving productivity gains in the delivery of

services. It may be seen as a threat to those who are not willing to give up a feather­ bedded lifestyle at the expense of taxpayers, but at the same time it opens up tremendous opportunities for people who are challenged by the prospect of reward from finding ways of meeting the demands of new markets, quite apart from the benefits to users who get a better choice of services at lower prices.

The experience of the UK since 1979 is that virtually every organisation privatised has increased its turnover, its profit, its investment and its productivity. Industrial relations have also improved because every one involved has a stake in the profitability of the enterprise.

Stakeholding, or commitment to the health of the enterprise, is‘enhanced by widespread ownership of privatised enterprises. There are now 11 million shareholders in the UK - one in every four adults. That is three times as many as in 1979.

Since 1979, two thirds of the nationalised industries, >and about half the employees, have transferred to the private sector. This has meant a net loss’in"empl0yment, but that cannot be avoided if overstaffing and restrictive work practices are eliminated to achieve higher productivity and lower cost services to the public.

Importance of the management environment

The scenario for productivity growth at the level of the firm having to respond to competitive rivals is in marked contrast with the operating and decision making environment of state authorities and departments.

The inherent problem with firms owned by the state is that they cannot be bought and sold and that they usually lack adequate competition. Moreover, the 'owners' of the government firm who are entitled to the income from the assets are widely dispersed and ineffective in placing performance demands on the firm because of the generality of the nature of government. Governments have many objectives. Getting re-elected is an important one. It certainly attracts a great deal more attention than the politically unrewarding task of monitoring managers and trying to see that resources are being used effectively.

The absence of a .mechanism by which performance is reflected in asset values - and the fact that government business can't go broke - causes owners and managers of government businesses to face less rewarding incentives, less specific incentives and less demanding sanctions than those faced by their counterparts in the competitive

private sector.

The" characteristics of the more traditional core public service are evendes&ilikglyfto'' stimulate productivity improvements. Many government departments suffer from confusion due to the mixture of commercial, social, regulatory, and policy advisory functions, with no effective way of knowing how well they are performing. This lack of direction and purpose is compounded by uniform and inflexible conditions of employment, over-centralised management in the personnel and financial areas, uncertain lines of accountability, administrative problems arising from excessive layers of management and undue amounts of paperwork, and a generally over regulated environment.

In fact, given the environment, it speaks wonders for the many dedicated and competent people who work in this environment that government departments work as well as they do.

In order to make the delivery of services provided by the public sector much more efficient, the task is to tap the inherent capabilities and enthusiasm of managers and workers by providing an environment which stimulates productivity growth. That environment is one which rewards performance, which encourages people to seek change rather than frustrate it, which encourage people to be adaptable and flexible, and to be innovative and adventurous rather than seeking protection and an illusory certainty.

The challenge to managers

Productivity growth is all about finding better ways of doing things.

At the enterprise level, productivity growth depends primarily on the way people behave when presented with problems and opportunities - hence the importance of the subject of this conference.

The government sector is learning that, as far a possible, the management of its organisations should emulate that of successful private firms. It is therefore instructive to see how successful companies operating in highly competitive environments have responded to the challenge of rival firms.

What have the best performing companies done? Although the solutions are different for each company, product/service and market, the common features are:

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authority and responsibility is decentralised, with each operating unit making its own decisions about the best way to structure itself to meet the needs of its customers. In particular, operating autonomy extends to the setting of targets, to personnel and to budgeting;

a strong corporate culture, with owners and employees participating in the development of core values, a common purpose and commitment to the aims of the firm;

development of personal skills and flexibility to perform several tasks;

personal identification with the product or service and with the future of the enterprise; and '

a high degree of accountability at the operational level, matched by an appropriate system of rewards and sanctions.

Public sector institutions have great difficulty achieving these attributes because of ’ the output does not face a competitive market and the greater difficulty in setting objectives and measuring performance. Moreover, the incentives faced by managers send the wrong messages. Public service officials naturally have bureaucratic values

to protect. Bureaucracy is characterised by pyramid structures and central control systems. Procedures are often seen as more important than results. Yes Minister1 is testimony to that.

I can't leave politicians out of this. Minister want to be protected from liability when things go wrong, so officials are encouraged to erect protective procedures, even though they may stultify flexibility and performance.

However, that is no reason to give up. There is still much that can be done to advance productivity by decentralising authority, granting more autonomy to management and rewarding productivity improving innovation. At the same time, the people responsible for each activity or area, as well as having the freedom to run it according to their best judgement, should be fully accountable for their performance.

In this connection I would see a considerably strengthened role for the Auditorf General in the monitoring of, and reporting on, government programs. With responsibility goes accountability, and it is absolutely essential that the freedom of managers in the public sector to manage is matched bygreater accountability to the

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public on whose behalf they are providing services. Where the performance of an organisation is not reflected in its profit, or return on capital or asset price, its effectiveness must be closely scrutinised by an independent 'watch dog' according to other performance indicators which show how closely it comes to delivering the service it was set up to do.

To the managers of these non-market organisations I would say, Your major challenge is to ensure that the features of successful private sector firms which I have outlined above also characterise your group, or division or department.'

Management has much to do with making the most of opportunities. Government cutbacks are necessary to eliminate waste and to ensure that programs are delivered as efficiently as possible. As a result, more and more programs in the future will be contracted out or the public sector organisations currently responsible for the programs will be privatised. Good and innovative managers will thrive on those changes. More importantly, the users of the services will get a better deal.

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