Mazzucato calls for govt consultants to disclose conflicts of interest

Influential economist Mariana Mazzucato has urged Australia’s Parliament to introduce new disclosure requirements for consulting companies working for government, warning of widespread conflicts of interest at global firms that win billions in government contracts while capacity within the public sector is being eroded.

The conflicts of interest can be extensive with consulting firms often having clients with opposing goals and access to privileged information.

But with little oversight or enforcement mechanisms, they are difficult for governments to identify, harder to manage, and almost impossible for others to scrutinise, according to the expert, who has written influential books on public investment and governments’ growing reliance on consulting firms.

Australian experts will on Tuesday join her in giving similar warnings to a Senate inquiry into consulting services sparked by the latest scandal.

According to Professor Mazzucato, global management consultancies like McKinsey, Bain and Company and the Boston Consulting Group, as well as ‘Big Four’ accounting firms Deloitte, KPMG, EY and PwC, have “infantilised” governments around the world.

Management consultants’ government work leapt in Australia during the pandemic, with lucrative deals at both the state and federal level for everything from the vaccine roll out to core public service work.

The Australian government is spending more than $1 billion annually with just a handful of the firms, including around $1 million every day each to two favoured suppliers KPMG and PwC. At the state level, the NSW government spent another $1 billion over five years with consultancies.

The reliance on consultancies came under fresh scrutiny earlier this year when it was revealed a PwC partner had leaked information from confidential government briefings on tax law reform to other partners, staff, and clients.

The incident helped trigger an inquiry by the Senate’s Finance and Public Administration References committee into the “management and assurance of integrity” by consulting firms.

In a submission to the inquiry with the co-author of her latest book, Professor Mazzucato and Rosie Collington warn the risks of conflicting interests in governments contracting management consultants is an “underexplored challenge within most government settings”.

Professor Mazzucato and Ms Collington point to three forms of when the conflicts of interest arise.

Firstly, when the consulting firms providing governments with financial advice stand to benefit directly from the advice. For example, McKinsey’s investment arm was fined by US regulators in 2021 after it found inadequate controls were in place to prevent partners from misusing inside information they accessed through their consulting work.

The McKinsey partners’ fund was investing hundreds of millions of dollars in companies that McKinsey was advising at the time, while some of the partners overseeing it had access to material non-public information from their consulting work.

Around the time that fine was imposed, McKinsey was under scrutiny in Australia for its input on the then-Coalition government’s widely criticized net-zero climate plan.

As revealed by InnovationAus.com, the firm was paid $6 million by the government, which had bypassed its own science agency in the tender. McKinsey’s climate advice came as leaks showed it had advised 43 of the world’s top 100 polluters.

Professor Mazzucato told the Senate inquiry the incident is an example of the conflict of interest that can occur when consultants are contracted to provide “policy advice that benefits or can be seen to protect the material interests of their clients”.

Finally, she said conflicts of interests arise in a third way when information derived from providing government contracts may be “considered material by the consulting company”.

While the PwC incident revealed earlier this year is at the heart of the inquiry, it is not unprecedented.

Professor Mazzucato directs the inquiry to a similar incident from 2013 when consultants were seconded to the UK Treasury to provide input on tax law.

In one area there were four times as many outside consultants as Treasury officials. In another the KPMG consultants used their involvement in developing tax law as a marketing tool, highlighting to potential clients their role in developing the legislation and how they could help clients pay less tax.

Consultancies have argued their internal procedures can manage the conflicts of interest, but there is little oversight, according to the UK experts.

“Individual management consultants are subject, of course, to domestic laws governing criminal and fraudulent activity,” Professor Mazzucato’s submission said.

“However, unlike in other professional services of auditing and law, management consulting is not a protected or regulated profession. Despite attempts in the twentieth century to introduce governing standards and norms for management consultants, there remains no international binding standard.

“As a consequence, unlike in auditing, for example, management consultants cannot formally be stripped of their title in case of unethical behaviour. Auditing firms and individuals can be sanctioned by regulators for failing to meet the standards required for an audit, but this is not the case in consulting.”

The lack of enforcement options contributes to the challenge of government’s identifying and managing the risk of contracting consultancies, while the “qualitative and ambiguous nature of consulting services” mean breaches of contracts are difficult to manage.

The “interactive nature” of the service can also make it hard for government clients to “convincingly pinpoint blame”.

The University College London professor and PhD candidate, co-authors of The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies, propose new disclosure measures to help manage risk, including avoiding the engagement altogether if too high.

“In democratic societies, it is important for citizens and government organisations to know about the potential conflicts of interests that another organisation has when it enters into a contract with them. This is so that they can be addressed and mitigated, if that is possible,” the submission said.

The experts propose Australia permanently adopts the more proactive disclosure of information about consulting and procurement contracts that was introduced in the UK during the pandemic and has helped add external scrutiny.

“We suggest that a similar platform could be expanded to cover all consulting contracts in government. We also propose that companies providing consulting advice could be mandated to disclose conflicting interest risks to clients.”

Professor Mazzucato has been cited by Treasurer Jim Chalmers and her book on public investment, The Entrepreneurial State, is recommended reading of Prime Minister Anthony Albanese.

While the Senate inquiry is examining the integrity of consulting services, Professor Mazzucato urged it to also consider the intertwined issue of eroded internal capacity from an overreliance on the firms, at extreme levels even impacting the tender evaluation.

“… [It can] undermine the evolution of capacity internally within organisations, which can render it more challenging for them to adapt in response to evolving policy challenges.”

“Crucially, it may also undermine capacity for evaluating the claims of tendering consultancies and managing contracts with them.”

The Albanese government has pledged to slash the government spend on consulting services and has asked departments to develop a proposal for an internal consulting service ahead of this month’s budget.

The Senate inquiry will on Tuesday hear from Australian experts who have made similar warnings on conflicts of interest and capacity in earlier submissions to the inquiry.

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