Tuesday, February 13, 2007

Tuesday Column: Ken Henry's public service survival tip - think long and hard before doing good things that might look bad.

As a public servant you probably think it’s your job to save the public money, to manage things well.At a junior level that is what most public servants do. But not at the top.

Australia’s top bureaucrats listen to the radio, read the papers, watch Parliament and think all the time about how what they are doing will make them and their Minister look should it get out.

Their behaviour goes beyond having political awareness. It extends to vetoing good ideas on the ground that they might be perceived badly.

Don’t believe me? That’s the truth as seen by the man at the very top of the public service, Australia's Secretary to the Treasury...

In an address to project managers at Australian Defence Force Academy on Friday Dr Ken Henry made explicit what Australia’s top mandarins have until now only hinted at. He gave the impression that he wasn’t particularly happy about the reality he was describing, but he wanted to stress that it was reality, and that senior public servants ignore it at their peril.

The Treasury Secretary’s number one rule for surviving at the top: If you come across an idea that you expect to save the taxpayer money, but that carries with it a small risk of an embarrassing cost blow out, “think long and hard before proceeding”.

The reason is what Dr Henry refers to as an ‘asymmetry between penalty and reward’: “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,” he says.

Government ministers believe they face an even more extreme asymmetry. That’s why according to Dr Henry “with some notable exceptions, ministers usually appear to have a tolerance for risk that is close to zero”.

Ministers know that they will get beaten up by the press and by the Opposition if something little goes wrong. If something big goes right it will be ignored. So politically, it is often better not to undertake a program that will usually work well in order to avoid the risk of it occasionally working badly. At the Ministerial level perception is often more important than reality.

As Dr Henry puts it: “I am sure you have heard people say that you shouldn’t believe anything you read, watch or hear in the media. Most people working in government would be aware of instances of highly inaccurate media report of things in which they are expert. You may well have formed the view, by extension, 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.”

The problem according to the Treasury Secretary is that when negative publicity starts it is almost impossible to turn around, especially for the sort of complex projects that he has been responsible for.

“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.

Dr Henry learned this the hard way, although I am not at all sure that he learned the right lesson.

In March 2002, just short of one year into the top job, a photographer snapped him shopping in Queanbeyan on a Saturday morning. The headline in the next day’s Sydney Sun Herald read “The $6 Billion Loser”. The report began: “Meet Ken Henry, the Treasury boss in the middle of a political storm brewing over the loss of $6 billion of taxpayers' money.”

Ken Henry had inherited responsibility for a program that was set up in order to save taxpayers money.

In the 1980’s the Hawke-Keating government decided to stop borrowing overseas. All borrowing had to be in Australia. The decision played well politically, but was expensive. In 1987 it cost 14 per cent to borrow in Australia and only 7 per cent to borrow in the United States. So some conscientious Treasury officials discovered a way to borrow within Australia at US interest rates. It was what was known as a cross-currency swap. It carried with it a risk that if the Australian dollar collapsed the repayments would soar, but that risk was no greater than applied to actually borrowing in US dollars. To keep the risk acceptably low $US swaps were limited to 10 to 15 per cent of borrowings.

By mid-1997 the strategy saved the taxpayer a lot of money, around $3 billion according to the Treasury’s calculations. But then after the outbreak of the Asian financial crisis both the Australian dollar and the Australian-US interest differential collapsed. By 2001 what had been a $3 billion gain turned into a $2 billion loss. It was possible to claim that Ken Henry, by then in charge of the program had squandered $5 billion. Add another billion, as the Sun Herald did, you could label him “The $6 Billion Loser”.

In order to kill the story the Treasurer Peter Costello killed the program. By the end of 2003 the swaps had been unwound.

By then the Australian dollar had risen enough to put the program back in the black. Looked at over its entire 16-year life the program actually made around $800 million, a fact Ken Henry says has until now gone almost entirely unreported.

He notes as well that had the program not been cancelled in response to the bad publicity it would by now have made several billion of dollars. “This might strike some of you as ironic”, he told his audience.

There are two potential take home messages to draw from Dr Henry’s experience. One is that the Treasurer and Dr Henry should have ignored the clamor of the media and the Opposition and continued to do what they believed to be right.

As he sees it, we would have all been better off for it.

The other is that it is probably not worthwhile attempting to save the public money if you know it’ll expose you to political embarrassment.

Dr Henry told his audience on Friday that if he and his colleagues had known then what they know now “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”.

It is the more depressing of the two potential messages and it is the one taken to heart by Australia’s number one economic bureaucrat.

He softens its impact only slightly by saying that it might be possible to do the right thing if you prepare the public for it ahead of time by using the media.

It’s a brutally honest if unsettling conclusion from the man who on Australia day received the Order of Australia for service to the development and implementation of economic policy.