Editor's note to readers
Welcome to the fourth edition of Human Capital Matters (HCM) for 2016—the digest for leaders and practitioners with an interest in human capital and organisational capability. Human Capital Matters seeks to provide Australian Public Service leaders and practitioners with easy access to the issues of contemporary importance in public and private sector human capital and organisational capability. It has been designed to provide interested readers with a guide to the national and international ideas that are shaping human capital thinking and practice. The inclusion of articles is aimed at stimulating creative and innovative thinking and does not in any way imply that the Australian Public Service Commission endorses service providers or policies. It is intended that the articles are accessible for the general reader, do not require subscriptions to specific sites and, where possible and appropriate, editions of HCM have been reviewed by topic specialists to provide range and currency on topical issues.
A new feature, based on feedback from 2015, is the inclusion—where possible—of additional hyperlinks/references for those with librarian support or access to specific, user-pays sites.
Thank you to those who took the time to provide feedback on earlier editions of Human Capital Matters. Comments, suggestions or questions regarding this publication are always welcome and should be addressed to: humancapitalmatters [at] apsc.gov.au. Readers can also subscribe to the mailing list through this email address.
This edition looks at the topic of integrity, often cited as an essential principle driving decisions and behaviour in the public sector. Acting with integrity is at the heart of proffering frank and fearless advice; merit-based selection; independent and evidence-based decision-making; efficient and effective resource management; ensuring trust among stakeholders; and, openness and transparency.
The articles range in scope from the high-level, APSC-sponsored article linking integrity to the central role it plays in the Westminster system of government, through to the audit report in December, 2015 on the East West Link and the perceived failure of the state public service departments to act with integrity.
Integrity then is measured by actions that speak of integrity—acting to ensure trust is not abused or betrayed, maintaining respectful relationships and being open to scrutiny. It is commonly measured in organisational surveys by perception of two things: prevalence and seriousness of misconduct. It is in regard to measuring integrity that the results of the KPMG Integrity Survey in 2013 have also been included. The survey reports the common perceptions about failures of integrity, and their causes, across functional groups and organisational settings.
The articles are:
The first article is the APSC document about reinvigorating integrity and accountability between the APS and Government. It sets the scene for exploring the notion of integrity in the public sector by underscoring the high profile it is given in the drive to reform the public service. The article builds on the comments made by the Hon John Faulkner as Special Minister of State in 2008 about re-establishing a relationship between the public service and the Government underpinned by a comprehensive framework of ethics, professionalism and transparency. Strengthening integrity and accountability is clearly identified as a key Government expectation of the APS and is one of seven elements identified in a document dated 30 April 2008 by the then Prime Minister as necessary to reform the public service.
The second article is the report from KPMG's Forensic's Integrity Survey 2013, the most recent one available. It is based on a survey of over 3,000 US employees and identifies some core issues about integrity in organisational settings: measurement, types of misbehaviours, causes and mediating factors. The issues and drivers for misbehaviour in organisational settings appear common across the western business world and are particularly pertinent given the findings presented in the article on the audit of Victoria's East West Link Project.
The third article is the Auditor-General's Report on Victoria's East West Link project (EWL), signed by Dr Peter Frost. In his opening comment Dr Frost states the purpose of the report was to examine whether the state had effectively managed the EWL. He concluded that the project had been mismanaged, that there was no sound basis for the government's decision to commit to the investment and that key decisions during the project phases were driven by an overriding sense of urgency to sign the contract before the November, 2014 election. This—'do whatever it takes to deliver results'— is identified in the KPMG report, also included in this edition of HCM, as the most common driver for misconduct. Public servants providing advice to the project were also found to be wanting. Dr Frost concluded that advice to government by public servants did not meet the expected standards of being frank and fearless highlighting a risk to the integrity of public administration. The report recommended that the Department of Treasury and Finance provide guidance for development and delivery of major projects and that the Department of Premier and Cabinet clarify requirements for frank and fearless advice from the public sector. These recommendations were rejected by both state departments. This edition of HCM includes a large chunk of the audit report because it speaks directly to issues of integrity in the public sector, reflecting on the principles and guidelines from the earlier articles and graphically demonstrating the way integrity is measured by actions that have impact on core values like trust. Contraventions of integrity are highlighted in the audit report alongside possible drivers for what could be termed misconduct or at the very least, poor judgement.
Australian Public Service Commission. Reinvigorating the Westminster tradition: Integrity and accountability in relations between the Australian Government and the APS. Australian Government, updated 15 Dec 2015
The tenets of the Westminster system require that public servants, among other things:
- Are committed to the provision of a high standard of independent, evidence-based advice to Government and to the efficient, effective and ethical implementation of Government decisions
- Avoid making any statement or action that could reasonably lead to perceptions that standards of advice or implementation are affected by political factors.
The system also requires of public servants and government employees:
- Mutual respect that allows a free flow of ideas and information and one that accepts the responsibility of ministers and managers to make policy decisions
- A career structure for public servants which is based on merit and independent of political and other forms of patronage
- Stakeholder confidence that decisions by public servants are not affected by their personal, financial, political or other interests or those of their relatives or friends.
The document spells out 'action to reinforce tenets of integrity and accountability' by outlining case-studies and—where appropriate—various Standards, Codes of Conduct, reporting requirements, Freedom Of Information (FoI) and Electoral reforms, guidelines for the appointment of agency heads and statutory office holders, advertising campaigns, involvement in public information and awareness initiatives, public interest disclosure protection and details about an Ethics Advisory Service.
The REFLECT model for ethical decision-making, although dated 2009, is included in the document. The REFLECT model is:
- RE: recognise a potential issue or problem—sometimes there is tension between two or more values
- F: find the relevant information—legislation, policies, guidelines, rights and responsibilities, precedent decisions
- L: linger at 'the fork in the road' and consult widely at all levels, reflect
- E: evaluate options including applying the accountability test (would this stand up under public review
- C: come to a decision and record it
- T: take time to reflect
KPMG KPMG Forensic Integrity Survey 2013. KPMG.com
The KPMG Integrity Survey 2013 provides an inside look into corporate fraud and misconduct from the perspective of over 3,000 employees in the USA. It builds on insights gained from similar surveys conducted every four or five years since 2000.
The key findings were:
- Seventy three percent of employees reported that they had observed misconduct in the 12 months prior to the survey. Over half (56%) reported that what they had observed could cause 'a significant loss of public trust if discovered'. This was a 'marked increase' from earlier results in 2005
- One of the most common drivers for misconduct is attributed to the need to 'do whatever it takes' to meet business goals. Other common drivers included disregard for the organisational code of conduct, rewarding results above all else and fear of job loss for failure to meet targets
- Employees reported increased willingness to report misconduct to an ethics hotline but also reported increased willingness to look the other way and do nothing
- Formal ethics and compliance programs do make a difference
The authors noted that 'experience tells us that integrity risks are not neatly segmented and in fact, at any given time, the nature of misconduct risk can be as diverse and fluid as the business itself'. Survey respondents were asked to select from among 42 examples of misconduct that might undermine an organisation's reputation for integrity. The 42 examples fell into six general categories: compromising customer or marketplace trust; compromising supplier trust; compromising shareholder/organisational trust; compromising public or community trust; compromising employee trust; and, a general category which involved violating company values and principles and engaging in fraudulent or illegal acts.
The survey looked at the most common types of misconduct according to job functions. The most commonly reported misbehaviours in general management and administrative functions were: wasting, mismanaging or abusing organisational resources; mishandling confidential or proprietary information; engaging in activities that pose a conflict of interest; stealing or misappropriating assets and falsifying or manipulating reporting information. For operations and service functions, the common misbehaviour was also waste and mismanagement of resources. Other commonly reported misbehaviours were: breaching employee privacy, mishandling confidential information and falsifying time and expense reports.
The survey also asked about familiarity with organisational policies, laws, regulations, code of conduct, values and principles. It was reported that generally there was a high level of familiarity with the standards and that they had been well communicated including through training. Over ninety percent of the US employees reported that training had provided an effective tool in guiding individual decisions and behaviours at work.
The authors conclude with some suggestions for organisations to 'cover the basics' in regard to the management of organisational integrity. After ensuring the basics are covered they suggest questions to address emerging organisational challenges in prevention, detection and responses to possible misconduct.
KPMG Forensic is a global practice comprising multidisciplinary professionals from KPMG member firms. The KPMG network was formed in 1987 when Peat Marwick International and Klynveld Main Goerdeler merged.
Victorian Auditor-General's Office. East West Link Project PP No 108, Session 2014-15, 9 December, 2015.
The Victorian Auditor-General's independent audit report into the East West Link highlights the role and conduct of the public service in providing frank and fearless advice before decisions are made (emphasis added), irrespective of which political party is in power. The Acting Auditor- General, Dr Frost, noted in his comments '… it is not sufficient for the public service to avoid providing advice or recommendations simply because they believe the government of the day does not want to hear them'. Lack of complete and impartial advice from the state departments involved in the project is seen as a contributing factor in the project's mismanagement and ultimate failure and has become the target of public and media scrutiny in which it has been suggested that the Victorian public service had become timid and diffident.
The background and conclusions about the project have been taken directly from the audit report.
The East West Link (EWL) was to be an 18 kilometre cross city road connecting the Eastern Freeway at Hoddle Street to CityLink, the Port of Melbourne precinct and on to the Western Ring Road at Sunshine West, with a range of associated works. It would have been one of the largest transport infrastructure projects ever undertaken in Australia, and significant in terms of its impact, complexity and cost.
The government considered a business case for EWL in April 2013 and decided to go ahead with the project, with the eastern section being commenced as Stage 1 of the project. The government decided to deliver the eastern section as a public private partnership (PPP), and following a competitive tender process finalised a project contract with East West Connect (EWC) to finance, design, construct, operate and maintain the road.
The contract was signed before the caretaker period leading into the November 2014 state election, just after the then Opposition indicated it would not proceed with the project. There was also an unresolved legal challenge to the planning approval for the project at the time. The Opposition had also indicated that if it formed government after the November 2014 election it would not defend the legal challenge to the planning decision.
Following the November 2014 election, the incoming government suspended work on the project and by June 2015 had reached agreement with EWC to terminate the project.
This audit assessed whether the state effectively managed the EWL project and related costs by assessing the:
- total costs of the project, including ongoing financial implications and risks associated with terminating the EWL project
- appropriateness of advice supporting key project decisions that influenced the project's outcomes and total costs
- lessons for future major projects.
While the advice to government examined in the audit was considered generally comprehensive, in some critical instances it was seen to have fallen short of the required standard of frankness.
In his findings the Acting Auditor–General stated that:
The bedrock of our system of public administration is that the public service is apolitical, impartial and has a fundamental obligation to provide frank and fearless advice to the government of the day. Frank and fearless advice should (be) complete—it is not sufficient for the public service to avoid providing advice or recommendations simply because they believe the government of the day does not want to hear them. Doing so is at odds with the Public Administration Act 2004 and the Code of Conduct for Victorian Public Sector Employees, which require the public service to act impartially and seek to achieve the best use of resources.
This is an important matter and vigilance and leadership is required to protect the best traditions of the Victorian public service.
The report concluded:
- If it had proceeded to completion, the entire EWL project would have cost in excess of $22.8 billion in nominal terms. Limitations in the business case meant there was little assurance that the prioritisation of significant state resources to this project was soundly based.
- Key decisions during the project planning, development and procurement phases were driven by an overriding sense of urgency to sign the contract before the November 2014 state election. The significant risks arising from this situation were further compounded by legal challenges to the project and by the absence of comprehensive advice on the potential benefits of deferring the signing of the contract.
- Signing the contract in these circumstances was imprudent and exposed the state to significant cost and risk. The risks associated with this decision were increased when the state agreed to amend the contract to provide additional compensation to EWC if the legal challenge to the project planning approval succeeded. The available evidence suggests that the state knew at the time that there was a significant risk that this would happen.
- These circumstances demanded comprehensive advice to government on its options and the best course of action for the state. However, advice to government in the lead-up to signing the contract fell short because it did not sufficiently assess the benefits of delaying finalisation of the procurement and contract to mitigate the risks posed by the unresolved judicial review. Instead, achieving the government's desired time line for contract signing was given disproportionate emphasis despite the risks and implications for the state.
- The amount payable by the state under the termination settlement negotiated by the new government with EWC was substantially lower than the cost of terminating under the project contract. However, the decision to terminate was made without full consideration of the merits of continuing with the project. Failure to properly assess the benefits of termination against revised costs and benefits of continuing the project means the government was deprived of comprehensive advice to assure it that termination was the best use of public funds.
- Further, the validity of project costs reimbursed by the state could not be fully verified because the state accepted EWC's refusal to allow access to the financial records of its related party contractors. This created a risk that EWC's related parties had a windfall gain.
- Terminating the EWL project involved the expenditure of hundreds of millions of dollars for little tangible benefit. Following final settlement of outstanding costs, the state will have incurred costs in excess of $1.1 billion. This includes costs for the acquisition of properties which the Department of Treasury & Finance estimates can be resold for around $320 million. Pre-construction activities including design and geotechnical work and elements of the complementary projects may provide some value in the future.
- Over the life of this costly and complex project, advice to government did not always meet the expected standard of being frank and fearless. This highlights a risk to the integrity of public administration that needs to be addressed. Action and leadership is required from government to reinforce these standards and the related expectations for public servants.