On Monday 15 December the Australian Government announced its 'Efficiency through Contestability Programme', as part of the Mid-Year Economic and Financial Outlook. Under the Programme the current functions of all Commonwealth entities will be reviewed, and some may be subjected to 'contestability' with a view to achieving better value for money.

The Programme sits under the Contestability Framework previously announced in the 2014 Budget, and is part of the government's broader reform agenda of 'smaller, more agile and better integrated government'.

Firstly, what is contestability?

Contestability in the Commonwealth context is about improving efficiency and effectiveness through the prospect of competition in public sector functions - considering the costs and benefits of alternatives, and determining the most efficient and effective option in the circumstances. Contestability is also about cultural change; shifting the focus from the function to the desired outcomes, as well as encouraging different approaches to government service delivery.

The Contestability Programme

The Programme establishes a process for considering how best to perform existing public sector functions in the future, including who should be performing those functions. It involves:

  • Portfolio Stocktakes: a review of all functions within a portfolio to identify those most suited to contestability;
  • Contestability Reviews: deciding how to best deliver the identified functions, including through alternative means or by an alternative provider; and
  • Functional and Efficiency Reviews: aligning functions with priorities, and identifying operational improvements and efficiencies.

The pilot phase is expected to be completed in early 2015 with Portfolio Stocktakes to commence in 2015, and Contestability Reviews and Functional and Efficiency Reviews to follow from 2015 through to mid-2017.

If a function is to be contested, what are the options?

The Programme refers to a spectrum of options for a public sector function that may flow from its process including:

  • systemic improvements: improving systems, processes, requirements and products/services;
  • the engagement model: payment by outcomes, social investment bonds and inbuilt incentives; and
  • market mechanisms: building a market, partnering with others, GBEs, public sector mutuals, privatisation and outsourcing.

Many of these options have been used to varying degrees within the Commonwealth over the years. More innovative models, such as public sector mutuals and social investment bonds (a number of which have been implemented in the United Kingdom) may have merit in some circumstances.

Key legal issues in implementing contestability

Contestability implementation is outside the scope of the Programme but prior experience suggests that it may occur through a mix of changes to existing administrative arrangements and agreements - either with another Commonwealth entity or a third party in the private or not-for-profit sectors.

Specific legal issues will depend on the contestability option but likely issues include:

  • how best to test the existing model and the market;
  • assessing what types of alternative delivery models may be available;
  • making any approach to the market attractive and commercially clear;
  • the bundling of functions and description of government requirements in a way to achieve the best outcome;
  • identifying the right contestability model following a review;
  • whether or not any legislative changes may be required to implement change;
  • the role of private investors in alternative delivery models (such as social investment bonds);
  • ensuring the requirements of the PGPA Act and any other relevant laws are met;
  • determining the mechanisms to achieve the desired outcomes (for example KPIs, painshare/ gainshare, payments linked to outcomes rather than inputs);
  • how to deal with change after implementation – eg, change of policy etc;
  • managing any HR/IR implications and costs associated with any staffing changes;
  • developing appropriate performance management and incentive regimes;
  • ensuring flexibility and continuity, including transition in/out and there being competitive options available in the future;
  • the governance framework for the delivery model;
  • how to deal with any Government-furnished materials, equipment and facilities or jointly used assets; and
  • managing any privacy, confidentiality, intellectual property and national security issues.

More information

The Department of Finance will be leading the implementation of the Programme, and further information is available at:http://www.finance.gov.au/contestability/