The federal government should consider a takeover of employment service delivery in the ACT as part of a plan to rebuild the failing system, a committee has recommended.
The recommendation comes from a damning parliamentary committee report into the state of employment services in Australia, which concluded that the outsourced system was placing jobseekers into unsuitable roles and pushing away employers.
It called for the public sector to be brought to the core of employment services as part of a major system overhaul.
Labor MP and committee chair Julian Hill said the Employment Department was "largely detached" from regional labour markets and "the day-to-day reality of supporting unemployed people back into work".
"They're like the puppet masters sitting way up in the rafters, jerkily pulling the strings, trying to control things way below on the stage," he said.
"They need to be closer to the action."
At the same time, he noted that proposed changes could face resistance from the public service.
"Numerous experts have told us that the biggest obstacle to system reform is likely to be resistance by the Australian Public Service given a decades-long belief in full outsourcing, a lack of experience in delivery and the sheer convenience of being able to blame and punish contractors for systemic failures," he said.
Since being privatised in the 1990s, employment services have become one of the government's largest procurements, second only to Defence.
More than $9.5 billion will be spent on the system over the next four years.
The committee stated after decades of outsourcing, the public sector had "little corporate memory or experience of the complexities of service delivery".
The committee suggested the ACT could be used to trial a Commonwealth takeover of employment services delivery "in the relatively short term".
But its report notes that the territory be among a small number of places where the government might consider doing this.
To boost the role of government in the employment services sector, the committee also recommended the creation of two entities.
These include Employment Services Australia, a digital-hybrid service provider for jobseekers within the Employment Department and an Employment Services Quality Commission, a regulator that would be responsible for workforce standards.
But the proposal has been denounced by a Liberal member of the committee, who released a dissenting report criticising the recommendation to transfer some employment service functions to the public sector.
Aaron Violi said it raised concerns about "increased bureaucracy, cost and red tape and the presupposition that government institutions are better placed to deliver these services than the private sector".
"Involving the Australian Capital Territory as the trial site for launching this transition from private to public sectors attests to where the Government wants to go in the future," he said.
"Observers couldn't be faulted for construing this to be a part of a wider effort to set the foundation in stone for the old Commonwealth Employment Service (CES) model."
Meanwhile, the Community and Public Sector Union, the main public sector union, which has been campaign to re-nationalise employment services, welcomed the report.
"This would rebuild capacity and capability within the APS," said CPSU National Secretary Melissa Donnelly.
"It would allow the Commonwealth to play a direct role in shaping labour market changes and responding to immediate and future policy challenges and economic priorities, and it would rewrite the relationship between government and job seekers, which is hugely overdue."
However, Ms Donnelly said the "report falls short in failing to recommend the abolition of mutual obligations".
The committee heard scathing evidence against mutual obligations, which require jobseekers to complete certain tasks to get income support, including that in some cases these hurt a jobseeker's employability.
But it recommended mutual obligations be reformed rather than scrapped all together.
The committee recommended that the government publish a transition plan for the rebuilt Commonwealth Employment Services System by the end of next year.