The Canberra Times: Preparing for hard times [Public Policy: Stephen Bartos]

EXTRACT: There are techniques to enable organisations to plan for the unknown. Possibly the most well-known is scenario planning, credited with helping Royal Dutch Shell get through the 1970s oil price shocks and making it one of the world’s richest companies. The company had considered scenarios where a range of what were then considered unlikely events were actually contemplated and it then developed strategies for dealing with these. Insiders from Shell have since disputed how much scenario planning actually affected decision-making, but the technique itself has been used widely in many other industries to great effect.

(ADDED BY ShellNews.net: Wonder if anyone forecast a situation where over half of the main board of directors of Royal Dutch Shell are named as fraudsters in a multibillion dollar class action lawsuit – which Shell has already earmarked $500 MILLION to settle.)

THE ARTICLE

Stephen Bartos
Tuesday, 1 August 2006

IT IS CONSIDERED rather impolite to suggest to current Howard Government ministers that the present economic boom times will ever end. After more than 15 years of continuous economic growth, it is hard to imagine a recession, and few public servants are prepared even to speculate on the “r” word in public. But if we do have a downturn, how prepared is our public service and public policy more generally to deal with its effects?

At the last Senate estimates hearings we heard from Treasury’s Martin Parkinson that his department was at least considering this issue. He noted that “the last recession was in the early 1990s. Periodically, we will have a training exercise of saying, ‘Were the economy to look like it was turning down, what might be the way to think about responding to that?’ This reminds people of issues around recognition lags, determining what would be appropriate policy responses, implementation lags and the like. They are periodic exercises …”

Senator Sherry seems not to have quite understood this, or maybe wanted to hear it repeated, so asked, “Are we having recession training, are we?”

Parkinson replied, “It would be negligent of us as leaders of an organisation like Treasury were we not to engage the staff in a bit of blue-skying about how the world might look.” He hastened to add, “It is no different from the sorts of exercises we do all the time …”

The sorts of budgeting and policy decisions that need to be taken in economic hard times are very different from those we have seen lately, where for the Commonwealth at least there seems to be a continual oversupply of funds. (Locally the ACT Government does not face nearly as happy a prospect , but that’s a different story.)

Among ministers, only the Prime Minister has hands-on knowledge of policy-making during times of economic downturn. Most of Cabinet will have to rely heavily on public service advice were a recession to happen. For the public service to be able to provide useful advice in this situation it will either need to call on public servants who have actual experience (increasingly a diminishing number) or do as Treasury has done, and prepare for the unknown through contingency and scenario planning.

The problem for a department like Treasury is that a high turnover rate means that over time there is a considerable loss of corporate memory. Again from Parkinson , “… in the department as a whole probably only about a quarter of the staff would have been around at the time of the last recession”.

It is even worse in the other key budget advisory department, Finance and Administration. The official departmental turnover rate is 22 per cent, but that hides the distribution of the turnover among groups in the department; unofficially, the rest of the public service (but apparently not the public) knows that the situation is much worse in the core Budget Group of that department. It has turnover rates closer to 50 per cent, that is, a net loss of half the staff every year. The worry is that it will be this Budget Group that has to provide incisive, well-informed advice to ministers on how to manage the budgeting challenges thrown up in the event of a recession. A similar high staff turnover has occurred in state treasury and finance departments, so we cannot rely on them to provide sage advice from the sidelines either.

The lack of institutional experience leaves us with the prospect that one or other level of government will make policy mistakes in dealing with an economic downturn. Economic management is comparatively easy off the back of 16 years of growth; but in a recession, policy-makers have to walk a knife edge between over- and under-reacting, either of which could cause markets to lose confidence in the Government’s economic management capacity, and exacerbate any recession. Moreover, they cannot simply apply the same policies that worked last time, because there will be other structural changes in the economy and society that will need to be taken into account.

A recession will affect not just the economic departments. Economic hard times will affect large numbers of other agencies, Centrelink in particular, due to its role in payment of pensions and benefits, but many others as well.

Centrelink has the comparative advantage of already having an ongoing network of offices geared to assessing claims and systems in place to make payments to eligible recipients, due to the many millions of Australians already in receipt of social security payments of one form or other (there are aged, disability, family tax benefit, and numerous other categories of assistance besides youth and Newstart allowances for the unemployed).

It is not immediately apparent from the public record how integration with the new Human Services department will affect its financial agreements with other departments – hopefully that will be outlined in forthcoming annual reports – but to date Centrelink has operated under various formulas that allowed expenses to be adjusted up and down depending on demand (eg, for services to the unemployed, which would undoubtedly rise rapidly in any recession). This automatically gives Centrelink more certainty in planning for, and dealing with, any downturn.

The situation is very different in labour market programs, where there is now an outsourced Job Network – how would that cope in the event of a recession? The honest answer surely has to be that nobody knows. Dealing with rapidly rising unemployment through an outsourced jobs network is entirely unprecedented, not only here but in any other country. The situation is complicated by the relationship with other parties outside of government, although public servants within the Department of Employment and Workplace Relations are almost certainly aware of the need to plan for the future, to provide for contingencies and to investigate scenarios, it is hard to be confident that the same applies throughout the provider network. At the very least, the department’s contract-management skills will be put to the test in the event of a rapid rise in unemployment.

There are others who will need to reassess their programs. Industry departments will not only need to determine whether their programs are appropriate for an economy that is declining rather than growing, but also whether to scale down longer-term programs (in the event a recession continues into a depression) or keep them on hold (in the event of a short-term downturn). Education provision becomes even more vital in the event of a downturn; patterns of usage of health services change; immigration programs are frequently reassessed (even though this may be just short-term knee-jerk politics) – the implications go widely.

There are techniques to enable organisations to plan for the unknown. Possibly the most well-known is scenario planning, credited with helping Royal Dutch Shell get through the 1970s oil price shocks and making it one of the world’s richest companies. The company had considered scenarios where a range of what were then considered unlikely events were actually contemplated and it then developed strategies for dealing with these. Insiders from Shell have since disputed how much scenario planning actually affected decision-making, but the technique itself has been used widely in many other industries to great effect. This is only one of many modelling and planning techniques available; in fact, probably the most useful thing public servants might do at present is at least dare to raise the unspeakable “r” word in conversations internally and with wider audiences as strategies are developed.

This planning work may not be in the least necessary if we never again see a downturn. There is dispute among economists on this point, and one view is that business cycles would not even exist in the absence of government interference with markets (especially interest rates). However, we know the Government itself believes in business cycles – its own target set out in the budget papers is “to maintain budget balance, on average, over the course of the economic cycle”. Given the Government still believes that there are economic cycles, it also must believe that as well as an upwards curve, at some time the economy has to come down. Whether the public service can cope when that happens depends vitally on whether it is prepared to think about it now.

Stephen Bartos is director of the National Institute for Governance, University of Canberra.