Federal departments have slashed their spend on outside consultants in the Albanese government’s first year, as an audit reveals the cost of external labour ballooned to nearly $21 billion during the Morrison government’s final year.
Nearly $2 billion of the external labour spend last year was for ICT and digital solutions, but the tech spend is likely much larger with Defence unable to provide the audit with a breakdown of exactly where its spend went.
Defence has been unwilling to provide a Senate inquiry into consultants with similar data, while other departments and agencies are forecasting a significant drop on their consulting spend in 2022/23.
An employment audit of 112 Australian Public Service entities released on Saturday found the Coalition was outsourcing more than a quarter of public service operation in 2021/22 at a cost of $20.8 billion.
Nearly 54,000 full time equivalent staff were employed as an external workforce. The direct employment of public servants in the 112 agencies in the same period was 144,300.
“The Morrison government maintained its artificial cap on public servant numbers, promoting a mirage of efficiency, but were at the same time spending almost $21bn of public money on a shadow workforce that was deliberately kept secret,” Finance and Public Service minister Katy Gallagher said.
The employment audit was launched last year to help the Albanese government determine how exactly it would achieve an election commitment to reverse “privatisation by stealth” and save $3 billion on outsourcing and expenses.
The audit was released on Saturday, finding, “around one in every four dollars spent by agencies for departmental purposes was on external labour services.”
Around 65 per cent of the external labour is within the defence portfolio, with 26,199 outsourced service providers, 8,311 contractors and 370 consultants. The Social Services portfolio had 10 per cent of the total, while Agriculture had five per cent.
The Department of Veterans’ Affairs had the largest use of external labour as a percentage of its total workforce at 41 per cent, with the Defence portfolio at 26 per cent.
The actual spend on external labour was concentrated to five departments: Defence, Social Services, the Australian Taxation Office, Agriculture, Water and the Environment and Home Affairs. The five were responsible for almost 90 per cent of all expenditure on external labour, with Defence responsible for 76 per cent of the total reported expenditure on external labour for 2021-22.
$1.9 billion of the total audited expenditure went to ICT and digital solutions. Most of this ($1.3 billion) was spent on contractors, followed by outsourced service providers ($429 million) and labour hire ($146 million).
The Albanese government earlier this month committed to reshaping the use of contractors by the biggest outsourcer, the defence portfolio. It agreed to a recommendation in the Defence Strategic Review to meet a 60:40 ratio split between APS or ADF staff and contractors for the Chief Information Officer Group (CIOG) workforce.
The Commonwealth Public Sector Union said a “shadow workforce” had emerged under the former Coalition government’s “ideological and arbitrary” staff caps.
“Instead of engaging APS employees, the previous Government set up the shadow workforce where the only winners were labour hire companies and consulting firms,” CPSU national secretary Melissa Donnelly said.
“The financial cost of this rampant outsourcing might be $21 billion, but the true cost is seen when you look at the adverse impacts this has had and is having on workplaces and public service delivery every single day.
“It is increasingly difficult to understand what the argument is for maintaining this reliance on an insecure and external workforce in the APS.”
The use of consultants was a focus of the audit, with the Albanese government planning to not only slash spending but also use the findings to help develop its own on-house consulting model.
There were nearly 1000 FTE consultants engaged last year at a cost of $563.4 million – more than half-a-million dollars per consultant per year.
Academic experts, a thinktank, a former Public Service Commissioner and the public service union last week all warned about the trend towards an overreliance on consultancy firms.
They joined global experts in recommending more transparency and disclosures to manage conflicts of interests while capacity in the Australian Public Service is rebuilt and the reliance is reversed.
Some of the firms have told the inquiry their internal processes already manage the conflicts and when the risk is too high the companies forego the government work.
But experts rejected the claim, saying external scrutiny is needed amid soaring government spend on consultants and a series of integrity scandals.
In evidence to the inquiry, large departments last week forecast a significant reduction in consultant spend.
The Industry department told a Senate inquiry into consulting services it plans to spend around $25 million less this year, while the Finance department forecast a $13 million drop.
Around a dozen agencies have told the inquiry that the advice and reports consultants provide them with are rarely released to the public.
In the case of Defence, only 123 of the 969 reports it is provided with from consultants is ever released publicly, according to its evidence.
Unlike most departments providing evidence, Defence declined to forecast its spend on consultants this year, telling the inquiry it would be “very difficult” because of the intermittent nature of engagements.
Defence spent more than $154 million on consultants in 2021/22, with its annual report indicating around a third of this going to just five suppliers led by BCG and KPMG
It refused to answer a question on if there had been any instances in the last decade where the consultancy had not fulfilled their contract or whether any contract had been terminated, saying this information is “commercial in confidence”.
It could not identify any contracts that had been the subject of legal disputes.
Fellow large consultant spender, the Department of Home Affairs also declined to forecast if its $7.6 million annual consultancy spend will change in 2022/23 — although it appears to be headed for a similar total.
None of the 46 reports provided by consultancies to Home Affairs over the last three years have been released publicly.
The Department also told the inquiry it would be unreasonable for it to try and identify any instances of consultants not fulfill contracts or disputes arising from nearly 700 deals over the past decade, but told the inquiry disputes and litigation are to be expected.
“A significant number of contracts will have been the subject of dispute or legal action because that is a normal part of contract management including disputed invoices, issues around scope of deliverables, milestone payments, timeframes and so on, as well as more significant actions such as litigation,” the department said.
Professor Andrew Podger, a former Australian Public Service Commissioner and now honorary Professor of Public Policy at ANU told the inquiry there have been “serious erosions” of the capability of the public service over the last two decades, in part due to “excessive” use of consultancies.
“The public service then doesn’t invest in its core activities as much if governments and they become over reliant on consultants.”
He said political pressure had also been a factor and consultancy firms may have an incentive to provide advice that helps them land future contracts.
“The issue when you become reliant on consultants, and the consultants also want to continue to get business, is that they may tailor their work in order to ensure that they get future business. And they won’t necessarily be as independent as you would desire and really want,” Professor Podger said.
“I think this does occur from time to time.”
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