The Pleasures and Sorrows of Neoliberalism

Over the past four decades the world's wealthy nations, including Australia, have been undertaking a vast social and economic experiment.  Whether you think this experiment has been a success, or a colossal failure, depends on how rich you are.

This experiment is generally called 'neoliberalism' by progressive people like me.  More conservative people are more likely to call it 'free market economics' or the more fuzzy 'economic reform'.  The core idea that drives this experiment is that markets are the most potent and efficient way of organising production and consumption of both good and services.

This has several implications for the way governments should act.

• They shouldn't compete with private sector entities, and should sell any government entities that do so.  Hence the wave of privatisations around the globe.
• They should keep their regulation of market activity to a minimum, as this interferes with the 'free' operation of markets.
• They should keep taxes as low as possible, as businesses being able to keep most of their profits gives them more incentive to keep doing what they do.
• Governments are inherently less efficient than competitive private business, so government services should be outsourced to private sector providers who compete to provide the service.

This, at least, is how neoliberal economists and business sector advocates describe their ideas.  If you dig a little deeper you find that, as the song says, 'it ain't necessarily so'.

I recently read a great book by Australian academic Mark Considine called The Careless State: Reforming Australia's Social Services. Considine is the Redmond Barry Distinguished Professor of Political Science at the University of Melbourne, and has written and published widely on Australian social policy.  He doesn't use the term 'neoliberalism' but he describes the process and outcomes of neoliberal policies in five key areas of social policy - employment services, vocational education and training, aged care, childcare and disability.  By way of contrast, he describes two policy areas where governments have continued to operate through older-style direct service provision, workers health and safety and maternal and child health.

In each of these five areas, government policy has moved from an approach dominated by direct government provision, with in some cases supplementary provision by charitable or not-for-profit organisations, to one where governments pay private sector organisations to provide the service.  The predominant model is based on user choice - rather than a blanket payment from government to a provider, governments allocate a 'package' to each eligible service user who then gets to choose their own provider.  

The theory behind this shift is threefold.

• A competitive market system will reduce costs as opposed to government provision, because private entities are more efficient.
• Competition between providers will drive innovation both to provide better services (to attract customers) and keep prices low.
• A variety of providers will provide more choice to consumers, who can choose a service that best meets their individual needs.

How does the practice stack up against this theory?  The jury is still out on the NDIS, which is the most recent of these reforms, but for the other four, the results are a long way from matching the rhetoric.

Cost-Savings?

It's hard to give a definitive answer on the question of costs, since there isn't any reliable number to compare with.  Certainly, all five sectors subject to 'marketisation' have seen their costs increase as a proportion of government spending except VET.  Aged care went from 2.77% in 2000-01 to 3.48% in 2020-21, child care from 0.77% to 1.53%, employment services from 3.3% to 4.47% and disability services from 4.56% to 4.97%.  By contrast the two sectors which remained government run saw decreases - workers compensation from 8.88% to 7.53% in Victoria and 9.93% to 3.68% in NSW, and maternal and child health from 0.28% to 0.15% in Victoria.  So much for government being less efficient!  But all sorts of things happened in the population and in policy during that time that could also have influenced this.  What we do know is that costs and expenses in these sectors are constant political issues, with efforts to rein costs in alternating with concerns about service viability which lead to calls for more spending or increases in user charges.

One thing that this policy shift did enable was the injection of private capital to expand services in capital intensive sectors, particularly child care and aged care.  The argument goes that government could not have mobilised capital on this scale, although the 'could not' is political rather than technical - governments can in fact raise more money at less cost than private sector entities, but this shows up as government debt which neoliberal economists say is bad.  We also need to remember that government ultimately does pay for this capital spending, it just does so thought the ongoing subsidies it pays for the service.  The difference is that the government no longer has a direct claim on the assets, which the owner (which may not be the same company as the operator) can choose to re-purpose at any point if there is greater profit to be made.

Quality?

What about the claims around innovation and improved services?  Well, it turns out that shifting to a market model did generate innovation, but not necessarily the sort the reformers promised.  If you use profitability as a driver for innovation, the innovations you get are directed at how to make money, which isn't necessarily the same as improving services.  The managements of private sector providers have put a lot of effort into working out how to rake in the most money while spending the least on providing the services.

Some of the ways they do this are entirely predictable.  For instance, they pay their staff the lowest rates they can get away with (which, particularly in the case of aged care and child care, are very low indeed!) and this means they attract the least qualified and experienced staff.  This doesn't mean the staff don't do their best to deliver a good service, but it often means they move to better-paying jobs as quickly as possible.  Similarly, companies will spend the least they can possibly get away with on other aspects of services.  During the Royal Commission into abuse in aged care we learned that many facilities were feeding their residents on as little as $6 per day and malnutrition was rife.  

Other innovations are more intricate.  A classic set is from the employment services sector.  Services are paid for supporting jobseekers on a sliding scale based on their level of disadvantage, and receive a certain amount just for having them on the books and then a larger amount for finding them employment that lasts for six months or more, or for placing them in accredited education or training.  The theory is that the higher payments incentivise services to get people into work but in practice services have learned that the best way to get money is to focus most of their energies on those who are easiest to place, while taking the sign-on fee for high-need jobseekers and then largely ignoring them.  Hence, there will be a rapid throughput of 'work-ready' job seekers while those who experience serious barriers to work will find themselves, say, sat in front of a computer and told to apply for jobs via Seek.  If the provider were to put a significant effort into finding these high-need job-seekers work, they would be providing a better service but make less money because of the time and effort this would take.

But wait, there's more!  Many of our largest employment providers also have training arms, or run temping or labour hire services.  This enables them to double-dip - their employment arm can place people in training run by their training arm, which attracts a subsidy via the (also privatised) VET system, or else find them a job in their temping service, taking a job placement fee plus raking in a wage subsidy for taking on an unemployed person and profiting from selling their services.  At the end of six months regrettably they will not be able to find them a permanent position, creating space for another subsidised employee.  

As such unintended consequences become clear, the government will often respond by increasing regulation of the sector.  For instance, the revelations of the Royal Commission into aged care abuse prompted the government to mandate a minimum number of registered nurses on shift at any one time.  The theory is that having more qualified staff will lead to better quality care, and this may be correct.  It also may not, since there is no guarantee that a person with a nursing degree will be better at providing the sort of care frail older people need, but qualifications are easily verifiable, while quality care is not.  In the meantime, more qualified staff means a higher wages bill, which means that either governments or users (or both) will have to pay more.

This is not to say all the services are uniformly bad.  There are excellent services all around Australia.  The point is that this excellence is not guaranteed by the market-based model and is not particularly incentivised by it.  Rather, excellent providers are motivated by other things - religious or social conscience, personal relationships with the people concerned, lived experience.  These factors would have motivated them whether or not the market model was in place, and in fact many of these agencies were already delivering services prior to marketisation.  

Often it's not the glossy, high profile ones who provide the best service, but the small local ones.  Many of the best are not-for-profit services which put all the income into service provision rather than creaming off profits for owners and shareholders, but this is not universally the case - some not-for-profits can be appalling and some for-profits can do a great job.  

Choice?

What about the final justification - that privatisation provides choice?  The theory is that instead of a single government provider you can either take or leave, service users can shop around for the one that best suits them.  It's true that, at least in larger urban communities, this policy approach does lead to multiple providers.  How does this competition actually play out?  

First of all, for the choice to be real choices need to be available to the client at the time he or she is looking for a service.  This is not always the case in these systems, because service providers have limited capacity and clients may struggle to find a vacancy.  In aged care, frail older people can sometimes wait months in hospital for a vacancy to open up.  In this situation, they or their families are likely to take the first vacancy they are offered.  Similar shortages occur in child care, where parents can list their child at multiple centres and have to end up accepting a place far from either home or work as their only option.  

Secondly, for choice to be real clients need good information about the choices on offer.  How can clients find out how good a child care centre, aged care facility, college or employment service is?  How can they find out if it fits their particular needs?  Of course in a local community it's possible to sound out other locals about the quality of various services and this at least gives a sense of the service's reputation.  Aside from that, for most of these services there is no reliable way to know what sort of service you receive.  A service visit will give an idea of the physical environment but not of the care on offer, and visiting multiple services can be quite onerous.  In none of these sectors is there any reliable detailed performance data which potential clients can use to compare services.  Nor is there a public register of complaints which might provide a warning of potential problems.  Clients are largely flying blind.

Another precondition of choice is that the services actually need to be materially different.  Yet as these systems mature, what tends to happen is that government regulations become progressively more detailed and specific and this tends to homogenise the services.  Your choices can all end up being much the same.

A final thing you need is for there to actually be multiple providers.  In smaller regional and rural communities there is often only room for one.  Even in urban communities, the tendency over time is for the number to gradually contract, with smaller ones either going out of business or being swallowed up in mergers.  Considine provides an example in the employment services sector.  In 1998, when the Howard Government completed the privatisation of this sector through the creation of the Job Network, 223 agencies were granted contracts.  Only 205 were still bidding for contracts a year later, and a decade or so later there were fewer than 50.  Similar processes have taken place in child care, aged care and VET.  Only in disability are we still seeing the proliferation of new providers, but the NDIS has injected massive amounts of new money into disability support and the scheme is still relatively new.  

So what now?

The analysis above presents a fairly bleak view of the systems created by outsourcing government services.  They can be enablers of good service provision but they are a long way from having the delivered the kind of dynamic, efficient, user-centred services the policies promised.  They have, however, made some people and companies very wealthy.

How can we build systems that reward and build on excellent service?  This is likely to be the next challenge for reform in these sectors, but it is easy for it to be drowned out by more mundane concerns like the competition between government cost-cutting and providers desire (and sometimes need) for more money.  My sense is that it is time to admit that marketisation of services is a failure and move to a more performance-oriented system which rewards and builds excellence.  This requires a number of things.

• Centering service users - there is a lot of rhetoric in these systems about being focused on service users, but in fact they tend to be the last people asked their opinion about service design.  While providers have well-resourced associations, strong relationships with government up to and including ministers, and research capacity to craft detailed proposals, user organisations struggle along on the smell of an oily rag and are often outsiders to the system, and they frequently find themselves blamed for systemic faults.  This needs to change, and service users need to be in positions of power and control over the system which is supposed to benefit them.
• Ditching competitive tendering - the idea of arms-length tendering has come to be holy writ in public sector management, but it is just not delivering results.  It favours large, well resourced organisations with marketing savvy, while excluding small, consumer-oriented organisations.  It also encourages secretive practices where innovations in service delivery are treated as 'commercial in confidence' even though they are developed using public money.   Instead we need a more active, collaborative approach to service development which promotes quality.
• Focusing on outcomes - instead of specifying a large suite of processes and compliance requirements, service accountability needs to focus on outcomes, and these need to be measured rigorously.  The responsible departments then need to focus their efforts on helping services to improve, sharing information and models across the system and fostering shared learning and open communication.

These shifts would not guarantee improvement, but they would make it a lot more likely.

What's stopping us?

There are many reasons why our governments have stuck to this model.  One is, of course, that powerful people are making a lot of money out if it.  But another is that neoliberalism is a trap.  Part of its agenda involves purposefully shrinking government, and this means that government capacity for good management, never mind large-scale reform, is extremely limited.  We have seen this in two recent Commonwealth Government scandals - the misconduct of PWC executives, and the Robodebt debacle.

'Robodebt' involved using an automated system to compare Centrelink recipients' payment histories with their tax returns, and identify discrepancies which were then converted into estimates of amounts owing from overpayments.  Recipients were then sent notices of these presumed debts and asked to either prove the debts weren't owed, or pay up.  This scheme had numerous problems - the algorithm used to calculate debts was obviously flawed, the reversal of the onus of proof unjust, and the result was people paying the government around a billion dollars they didn't actually owe.  But for my purpose here two things stand out:

• Centrelink relied on an automated process because staff caps meant they didn't have the staff to manually investigate each debt.
• Multiple people pointed out the obvious flaws in the system, but Services Australia refused to listen through a stunning mix of political subservience and incompetence.

The PWC scandal was a different type of revealing.  The initial issue was that PWC had been paid to help the government devise new tax rules for overseas corporations, and then used their insider knowledge to advise corporate clients.  However, the scandal also threw light on the wider issue of the use of consultants in the public sector.  It turns out that in 2023 the Commonwealth government had a 'shadow workforce' of 54,000 contractors and consultants, alongside around 170,000 Commonwealth public servants.  

This is the other side of the incompetence that marked Robodebt.  Lots of core government work - policy-making, reviews of programs, evaluation and so forth - is outsourced to large consulting firms such as PWC, Deloitte or KPMG.  The risk of conflicts of interest is obvious, but more insidious is the way this de-skills our public service, which is shifted from policy making and content expertise to procurement and contract management.  

This is exactly the same issue we see in these marketised social services.  The government departments managing aged care, child care, disability and so forth are no longer actively engaged in the fields they manage, and their contracting relationship forces them to stay at arms length from those doing the work to avoid conflicts of interest.  This makes it extremely difficult for government to enact any meaningful reform that is not just another version of procuremnt and contracting.  No doubt their first step in the reform will be to hire a big consulting firm to provide them with advice on reform options.  We've seen this movie before.

The signs of hope

For me, the big source of hope in this environment is that we seem to be reaching the end of the road for this form of governance.  The pile of expensive, failed programs is mounting up.  The level of disillusion with 'politics as usual' is growing.  

This is shown clearly in Australia in the decline of support for the major parties and trust in governments, which is mirrored in most countries that have adopted neoliberal policies.  What we often see of this in our overseas news is the rise of the far right, but we are also seeing the rise of genuinely progressive movements.  In Australia we have seen the steady growth of the Greens at State and Commonwealth level, and we have also seen the rise of a loosely-allied set of independents from wealthy seats.  Although they describe themselves as 'economic conservatives' these independents have often been more progressive than Labor, for instance on climate change, government accountability, generosity of welfare measures and the rights of women.  In Europe we have seen green or progressive parties take control of local governments in cities like Barcelona and Paris.  What drives all these things is a level of grassroots engagement powerful enough to overcome the hold of corporate media on voters' perceptions.

These progressive forces seek to build, to unite and to conserve, to redistribute resources from the rich to the poor.  They are mostly rooted in traditions of non-violence and inclusion.  The right-wing nationalists, on the other hand, are comfortable with violence and intent on tearing down what remains of our inclusive, democratic infrastructure.  It will not do to see the two as bookends - 'extremists of the right and left' - because the two movements are fundamentally different.

Our centre-left and centre-right parties find themselves sandwiched between these different forms of protest, but their reactions have been very different.  Centre-right parties, including the Liberal/National Coalition here in Australia, the UK Conservatives and even more so the US Republicans, have responded by adopting large parts of the program and rhetoric of the far right.  The centre-left parties have instead tried to fend off progressive forces.  It often seems like the ALP is more intent on fighting the Greens than fighting the Coalition, such is their fear of losing heartland seats.  

This strategy will only get the Labor Party so far.  Indeed, they have already had one term of government where they had to rely on Greens support.  They bore it with ill grace, and ever since have been blaming the Greens for their own policy and political failings.  But the Green vote continues to grow.  What will they do next time?  

What I hope they will do is allow the Greens to drag them in a more progressive direction.  This will have to include rebuilding government capacity and undoing many of the key neoliberal reforms because this is necessary for a number of other priorities - rebuilding the public housing system, rapidly decarbonising the economy, shifting our transport system away from a 'cars-first' approach, rebuilding grass-roots organisations and local democracy.  

These are changes that are long overdue - let's no leave them for another round of scandals and system failures.