Saturday, February 10, 2007

Advice from Dr Ken Henry: Think very carefully before saving the public money.


The head of Australia's Treasury Dr Ken Henry writes the best speeches in public life. And there can be no doubt he writes them himself.

Friday's had the intriguing title of Political Awareness. It was delivered to an International Project Managers Symposium at the Australian Defence Force Academy Canberra. I cycled there on my way to work.

I begin my report in today's Canberra Times this way:

The head of the Treasury has bleak advice for Australia’s public sector managers. Think long and hard before attempting to save the public money.

Here are some highlights from an amazing and impressive speech that is still banging around in my mind a day later, the way a good movie does:


. “If you do something that saves the taxpayer a bucket of money, don’t expect any external praise. But if you do something that costs the taxpayer any amount of money, expect criticism, and expect that you are going to have to devote a lot of valuable time and effort in responding to that criticism. “

. “Your performance may be judged, by your political masters, according to how well it plays in the media, or how well it would play if it became a matter of media interest.”

. “What matters is not whether the story is true or false, accurate or misleading. What matters is whether the story is positive or negative, complimentary or critical, supportive or hostile.”

. “As a general rule, the more complex the subject, the easier it is to criticise, and the more difficult it is to defend. There is a fair chance that anything you say will be construed as a cover-up.”

. “If you have managed half a dozen projects, meeting all criteria relating to timeliness, scope and cost, and then have one, even relatively small, project that fails against one of those criteria, you will find that in the public consciousness that failure will – for some time at least – represent your entire biography
.”


Below is my 700 word article in today's Canberra Times:


The head of the Treasury has bleak advice for Australia’s public sector managers. Think long and hard before attempting to save the public money.

Dr Ken Henry told a conference of international project managers at the Australian Defence Force Academy yesterday that he had arrived at that conclusion after a “baptism of fire” working as the Treasury’s Deputy Secretary responsible for the Office of Financial Management in the late 1990’s.

He was in charge of a program of currency swaps that over 16 years saved the public around $800 million. But at a time when the market was moving against the Treasury he was photographed while shopping in Queanbeyan and written up in Sydney’s Sun Herald newspaper as ‘Australia’s $7 billion loser’.

“The only time any commentator or politician, other than the Treasurer, took any interest in the policy was when it looked like it was going wrong,” he said.

His message was that “while there may be many things that public sector project managers could do that they would have good reason to expect might save the taxpayer some money, that doesn’t necessarily mean they should do them”.

“If you do something that saves the taxpayer a bucket of money, don’t expect any external praise. But if you do something that costs the taxpayer any amount of money, expect criticism, and expect that you are going to have to devote a lot of valuable time and effort in responding to that criticism. So, if there is something you can see to do that, from a project management perspective, has an expected cost saving, but would involve some risk of cost increase, think long and hard before proceeding.”

Dr Henry said that when a complex government project came under attack, and most of them were complex, it could be almost impossible to defend. “The defence will always involve a level of complexity far higher than the often simplistic criticism. And complexity is very easily interpreted as obfuscation. There is a fair chance that anything you say will be construed as a cover-up,” he said.

The Treasury Secretary warned that what mattered the most to the politicians to whom public servants reported was not the success or failure of a program, but how it was reported by the media. “What you think of as ‘project management’, your political masters may well think of as ‘issues management’. You may well have formed the view that all media stories are wrong. Well, believe it or not, that is beside the point. In the political environment in which you operate, what matters is not whether the story is true or false, accurate or misleading. What matters is whether the story is positive or negative, complimentary or critical, supportive or hostile,” he said.

At a personal level Dr Henry had found that one way to stop bad stories developing a life of their own was to build up good long-term relationships with reporters and commentators. “You can not really survive in the political environment for a couple of decades at a reasonably senior level without having pretty good relationships with at least senior journalists,” he said.

“But that doesn’t mean that they are always in a position to help you out. The more time you have spent with them in advance of a crisis the more likely it is that they will be in a position immediately to make the story go to water. But of course once the story gets running; well - what’s their advice to the editor: ‘I’ve got a clever idea to stop selling newspapers’? It would be absurd to expect that of any journalist no matter how good your relationship.”

Dr Henry said many of his observations happened to be backed up by research in the new field of behavioural economics. “Events in the short-term time horizon are overvalued relative to events at a distance. If you have managed half a dozen projects, meeting all criteria relating to timeliness, scope and cost, and then have one, even relatively small, project that fails against one of those criteria, you will find that in the public consciousness that failure will – for some time at least – represent your entire biography.”

“Had we understood these lessons of behavioural economics back in the late 1980s we probably would not have embarked on the cross-currency swaps strategy, even had we known with certainty that it would end up saving the taxpayer almost $800 million. At the very least, we would have devoted a lot more resources to ‘framing’; to the conditioning of public expectations,” the Treasury Secretary said.


Memories:

The $6 Billion Loser
By Fia Cumming,
Political Correspondent
SunHerald
3 March 2002

MEET Ken Henry, the Treasury boss in the middle of a political storm brewing over the loss of $6 billion of taxpayers' money.

The Opposition has identified DrHenry as the key player in the disastrous cross-currency swap policy that continues to cost the country billions of dollars.

And when Parliament resumes next week, Treasurer Peter Costello will be quizzed on whether he approved a promotion and performance bonus for Dr Henry.

Treasury officials have reluctantly revealed that between July 1997 and July 2001 they lost $4.875 billion on the foreign currency deals.

But the cross-currency swap from Australian to US dollars is expected to cost a further $1 billion over the next year bringing the total to almost $6 billion.

Dr Henry and other Treasury officials have refused to answer anyquestions about the currency swap.

When The Sun-Herald tried to ask him questions at a Canberra shopping centre yesterday, Dr Henry sped off in his salary-package SS Commodore.

``There has to be a question mark over the Treasury official who helped Mr Costello preside over this scandal,'' Opposition finance spokesman Stephen Conroy said yesterday.

Treasury and other government departments refuse to disclose details of the performance bonuses regularly paid to their top officials.

As Treasury secretary, Dr Henry is eligible for bonuses of up to $50,000 a year on top of his $305,000 annual salary package.

Dr Henry was Mr Costello's right-hand man on the GST tax reforms and Mr Costello holds him in such high regard that he was awarded the top Treasury job last year when he was just 43.

The currency swap, which traded interest payments in Australian dollars for payments in US dollars, went massively wrong when the Australian dollar dived compared with the greenback.

Before taking over as Treasury secretary in May 2001, Dr Henry was head of Treasury's economic group from October 1998, where he had oversight of the Australian Office of Financial Management (AOFM).

When the AOFM, which looks after government debt, became a separate agency in July 1999, Dr Henry was the Treasury representative on its advisory board. The AOFM and Treasury continued the currency swap despite a warning from the Auditor-General in 1999 that it was risky and should be reviewed.

In November 2000, they took an even bigger gamble when they abandoned the policy guidelines specifically designed to limit losses.

The guideline said that only 15pc at most of the Government's debt should be held in US dollars.

Treasury and the AOFM have done their best to hide the resulting losses. The latest loss figures were buried on page 80 of the AOFM's most recent annual report.

When Treasury and AOFM officials were questioned at recent Senate estimates hearings, they had to correct their evidence three times before admitting the scale of the losses.

But Dr Henry still denied there was a problem, insisting that the losses did not matter because they were not yet ``realised''.

Senator Conroy said Treasury and Mr Costello should have quit the swapped loans and accepted the losses long ago.

``But they continued to speculate and it's cost taxpayers $6 billion,'' Senator Conroy said.

Senator Conroy said Mr Costello was as much to blame as Dr Henry, despite his attempts to disown the policy.

``The buck stops with the Treasurer,'' he said.

HOW TO LOSE A FORTUNE

* Trying to reduce the cost of the Federal Government's $62 billion debt, Treasury took advantage of low US interest rates. It speculated in financial derivatives known as cross-currency interest rate swaps. In effect, the Government swapped future interest payments due in Australian dollars for payments in US dollars, exposing it to adverse currency movements.

* Between 1988 and 1999, Treasury cross-currency swaps generated benefits of about $140 million a year.

* Treasury exposed 15 per centof the government debt tocurrency fluctuations.

* Although the Australian dollar (US60cents in mid-2000) was expected to gain in value, it fell to US47-50cents (2001). Instead of the debt cost being reduced, the foreign currency exposure climbed to 20pc by June 2001.

* As payments had to be made in US dollars, the value of these obligations increased as the Australian dollar fell. For every 1pc drop in the dollar's value, we lost $200 million.

* Treasury has revealed that between July 1997 and July 2001 we lost $4.875 billion. The swap is likely to cost another $1 billion.