The Public Sector Informant

Senators, save the public service from its crazy, decades-old, pay-fixing scandal

The bureaucracy's IR policy is among the most serious problems in public administration today.

How sweet it is that a parliamentary committee is now examining the public service's crazy, irrational, industrial relations policy, which has been this column's favourite topic for more than a decade.

The Senate's education and employment references committee is taking up the gauntlet, the reference being made to it on October 13. It's now too late to make a submission, as the deadline was October 27. The committee's report is due on November 30.

That's not a lot of time to do justice to so vexed a problem. Moreover, the slant of the committee's terms of reference is limiting. They require examination of things like the failure of most government agencies to conclude new IR bargains within three years, and the effects on "the vulnerable", those in "regional Australia" naturally, agency productivity, staff morale, and rights and conditions. The committee will also consider a "possible" wider role for the relevant minister. It's wide enough now but Employment Minister Michaelia Cash seems incapable of action.

It might have been better if the committee's primary concern had been whether the current policy makes any sense and if there are better alternatives. The short answers to those questions are the policy makes no sense whatsoever, this is the root cause of the present malaise and that an obvious and far superior alternative is readily available. Indeed, it has been tellingly and intelligently outlined in three royal commission reports in Britain (Tomlin, Priestley and Fulton) and one in Australia (Coombs). No doubt others in New Zealand and Canada have presented similar views. In short, there's no need to dream anything up: a solution can be plucked from the shelf.

The minister and the Public Service Commissioner, John Lloyd, should be able to provide the relevant references to these reports, with which they should be intimately familiar. If they can't or won't, they should be asked further questions about what they think they're up to. Mind you, in its recent report on industrial relations, the Productivity Commission ignored these royal commission sacred texts and, as a result, stuffed up its analysis of public sector IR and, in a pathetic display of intellectual weakness, failed to make a single recommendation about it.


The fundamental cause of the present farce is that increases in public service remuneration (except for ministers, parliamentarians, departmental secretaries and agency chiefs) must be 100 per cent offset by productivity gains. This is the rotten core at the heart of the policy. The unavoidable fact is that productivity (that is, units of output per hour worked) simply can't be measured in just about all public service agencies. Thus, meaningful negotiations are impossible and the policy can't be implemented in its own terms other than by cheating. Worse, the widespread disenchantment the policy seems to have spawned at all levels of the service is likely to have reduced productivity rather than increased it.

How did things get to such a lamentable state? Let's recap the history.

The Keating government introduced agency-based pay-fixing in the early 1990s as part of its campaign to promote enterprise bargaining in the workforce as a whole. It was also hoped this would give agencies a chance to use IR to make operating improvements that couldn't be achieved through centralised bargaining for the Australian Public Service as a whole. Pay increases were to be funded by savings made as a result, but with an elaborate mechanism that would even up pay disparities after a short period.

While not expressed with great explicitness, it wasn't intended that this devolved system would last for more than one or two pay rounds. Indeed, the last APS pay increase under the Keating government was done via a centralised agreement.

After the 1996 election, the Howard government took the public service back to agency-based bargaining, where increases in remuneration were supposed to be offset by savings, although these calculations were opaque. The scope of the bargaining was also extended to include conditions of employment and other matters.

If the Moran report on the public service, Ahead of the Game, was anything to go by, the Rudd-Gillard government seemed not to be entirely happy with the bargaining arrangements it had inherited from its predecessor. But it never got around to doing much about them apart from minor tinkering.

The unavoidable fact is that productivity simply cannot be measured in just about all public service agencies.

The Abbott government and its remarkable industrial relations minister, Eric Abetz, stretched the bargaining policy a further step in the wrong direction, insisting that any increases in remuneration be 100 per cent offset by productivity gains. To repeat: this policy can't be implemented logically and the minority of agencies that have settled agreements have done so on the basis of what must be false pretences. It's therefore little wonder that the Public Service Commission has refused to disclose the detailed productivity justifications for agency bargains it has approved – because these couldn't by any stretch be consistent with the policy. And a media report says a Fair Work Commission authority that is now hearing related bargaining disputes suspects there's been unevenness and inconsistency in the application of the policy. That's not a surprise; it's an inevitability.

No organisation in the private sector should require staff remuneration to be 100 per cent offset by internal productivity gains. It would be economically ruinous for them and unhelpful for the well-being of the economy. It would encourage the creation and saving-up of restrictive work practices that could be used as bargaining chips over the longer term. Further, productivity gains often come in fits and starts – high at times and low to non-existent and even negative at others. While the capacity to pay is always a consideration for private firms, linking remuneration to productivity is likely to give high increases at some times and low or even decreases at others. It's a recipe for failure. That is, it can't be pretended that current APS policy is anything like best practice in the private sector.

While the Abbott-Turnbull governments may take a more niggardly attitude to the public service than some of its predecessors, that isn't the basic cause of the present shambles. Moreover, heart-string union whinging about "mum and dad" public servants not having had a pay increase for three years ignores the main problem: the stupidity of a policy whose internal contradictions mean it can't be implemented in its own terms. The unions and some others who should know better seem to be complaining about the symptoms, not the causes. The unions should press for a change in the policy rather than try to squeeze more generous pay increases from the current one. It's the horribly flawed policy that should be the key focus of the Senate committee, together with a consideration of the infinitely better way that has been repeatedly set out by wise royal commissions in Australia and overseas.

So what did these commissions say?

The Priestley commission said the interests of the community, heads of departments and staff would be kept in a "correct balance ... only if the primary principle of civil service pay is fair comparison with the remuneration of outside staffs employed on broadly comparable work, taking account of other conditions of service".

The Coombs commission said the "primary wage-fixing authorities in government employment should continue to determine pay rates and conditions of employment on the basis of fair comparison with the private and state sectors".

Although these short extracts don't do justice to the sophistication of the detailed rationale of these commissions, especially Priestley, their implications are clear. The first step in fixing public service remuneration should be judgments about where different occupational groups in the public service might best be placed in the wider labour market. These judgments should then be refined by other considerations, including internal pay relationships that have been almost entirely neglected for decades, allowing different remuneration for staff at the same classification level, recruitment and retention pressures, and the frequency of pay adjustments. Adoption of this wholly sensible policy would have significant implications for existing institutional arrangements.

First, bargaining would need to be centrally organised for the public service as a whole. Agency bargaining based on market comparisons would make no sense, as each of the 100 or so agencies would be doing essentially the same thing.

Second, bargaining would be undertaken on an occupational category basis, allowing the needs of each category to be taken much more closely into account, whereas, at the moment, all staff in an agency are bundled together and given more or less the same remuneration adjustment. Occupational category bargaining is not cheap but it would be infinitely cheaper than the agency-based variety that, in the past 25 years or so, would almost certainly have incurred transaction costs alone of hundreds of millions of dollars more than service-wide negotiations.

Third, departments and agencies would lose the power to make decisions about changes in the structure of remuneration. But what a terrific loss. This job has been a millstone around their necks and, in more recent years, it has done much to poison relations between staff, agency heads and senior managers. While agencies are usually reluctant to have powers taken from them, the prospect in this case should be the cause of unrestrained celebration.

Fourth, a market-based approach to pay and conditions fixing would imply a gradual evening-up of pay and conditions across the public service. That might not be entirely palatable for those who, usually for fortuitous reasons, are getting more than others; those who have lagged behind might think differently. However, the current mishmash of pay and conditions has trashed the notion of "One APS", reduced inter-agency staff mobility and created wrong incentives for it, corrupted classification standards, played havoc with staff promotions and transfers, and made the re-allocation of functions between departments as a result of machinery-of-government changes much more fraught. These are serious problems for which there has been little or no compensating benefits.

The Senate committee has an important opportunity to press for the adoption of a market-based approach to fixing remuneration and the necessary consequent supporting institutional arrangements. It must concentrate on what is so blatantly and inherently wrong with the current policy. It must realise that a market-based policy, something the current government should find attractive, is a far superior means of promoting the efficiency, effectiveness and productivity of the public service. The current policy and its consequences are the most serious problems affecting public service management. It's to be hoped the committee, unlike the Productivity Commission, doesn't fluff it.

☆ ☆ ☆ ☆ ☆

Finally, it would be remiss not to review the predictions of several "experts" and "insiders" who stuck out their necks on the recent ACT election.

  • Professor John Warhurst: "the Liberals might ... get to 13".
  • Gary Humphries, a deputy president of the Administrative Appeals Tribunal and former ACT chief minister: Labor will "win just 10 of the 25 seats".
  • Michael Moore, the chief executive of the Public Health Association of Australia and a former ACT minister, predicted 10 for Labor and 12 for the Liberals.

But the gold medal goes to former ACT Labor minister John Hargreaves, who thought it might be 11 Labor, 11 Liberal and one Green, with the last two deciding the election. Well done, sir: you could teach some of your fellow pundits a thing or two.

Paddy Gourley is a former senior public servant.


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