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10.4 Outsourcing of the Government Payments System

The Department of Human Services delivers over 200 different services for more than 20 Commonwealth and State agencies and is responsible for the payments system they use.

The payments system is governed by laws, rules, procedures and standards that inform assessments of eligibility for welfare, study, aged pension and other payments that comprise entitlements or grants. Once eligibility for the entitlement or grant is established, the Government Payments System transfers funds electronically, by cash or by cheque to the recipient.

The Government Payments System requires a capacity to:

  • assess eligibility of entitlements or grants, in respect of relevant laws, rules and standards;
  • review eligibility when the circumstances of the recipient change;
  • maintain records of recipients and make them available to appropriate agencies as required;
  • approve payments from government account to individual clients; and
  • report outcomes to the Commonwealth.

The Department of Human Services managed total payments of $149.4 billion on behalf of government in 2012-13. Each working day it disburses more than $400 million in payments by way of transfers to individuals’ bank accounts through its payment system (the Income Security Integrated System).

The Department of Human Services also shares data from the system with a range of other Commonwealth agencies to prevent fraud.

The Income Security Integrated System was developed to calculate and administer social welfare payments nearly 30 years ago. It is written on now defunct information technology codes, is inflexible and expensive. The system adds significant costs for processing payments, maintaining the ICT system, producing letters and responding to appeals and reviews, and it increases the need for debt recovery.

The current ageing system poses a significant risk to a core function of government.

The Department of Human Services was given authority in the 2013-14 Budget to determine a replacement strategy for its Income Security Integrated System. It is expected that a replacement system will cost around $1.2 billion to $1.5 billion. The Commission sees little option but to make this kind of investment for such an important and complex IT infrastructure project.

Three key considerations in the development of a new system are:

  • whether the complicated web of government payments can be simplified in parallel with the introduction of a new IT system – this is a question of both policy and administration;
  • delivering a design that allows welfare policy changes to be incorporated into the payments system more easily and without the risks that come with the existing Income Security Integrated System; and
  • how to achieve the best blend of private and public sector expertise in the development and management of a very complex IT system.

The complexity of the current system arises from a multitude of policy decisions about the structure and goals of the welfare system and ad hoc changes to payments over decades. Many of them are enshrined in legislation. According to the Department of Human Services, the largest driver of complexity in technology and cost is the system’s magnitude, which has 34 payments and 38 add-on payment types.

The complexity of the payments architecture and interactions between payments creates customer confusion, errors and rework, and requires a highly knowledgeable workforce to provide support.

The Commission supports the view of the Department of Human Services that welfare payments should be simplified, recognising the challenge this poses for tight targeting of assistance.

Even with a more simplified payment structure, redesigning the IT system is a significant undertaking that will require expertise from across the public and private sectors.

The Commission considers that the Government should appoint a highly credentialed business technology expert to oversee the new system design, working with experts from the Department of Human Services.

Outsourcing of the payments system could also be considered on the basis of prospects for the services to be delivered more efficiently and effectively and at a lesser cost than is the case now. However, the need to redesign such a complex IT system in parallel with the simplification of welfare policy, complicates any decision about outsourcing.

Specialist outsourcing providers prefer high volume, low complexity stand-alone activities because they are generally low risk and can be managed relatively easily. Experience also indicates that outsourcing works best where the required service can be easily specified and monitored and where a competitive market of potential suppliers exists independently of government patronage.

Other factors that influence the success or failure of outsourcing arrangements include: the need for appropriate safeguards to protect the rights of citizens; the quality of the scoping of the requirement being outsourced; and the management of the contract and contract variations.

Outsourcing does not exempt government and ministers from responsibility for failures.

There is market interest in the provision of payment systems. For example, Australia Post has prepared a proposal to deliver of a range of government services currently provided by the Department of Human Services.

Under the Australia Post proposal there would be a physical integration of service points for the Department of Human Services within Australia Post’s network of retail outlets. The proposal would envisage 334 Centrelink service centres, as well as 126 rehabilitation centres and 139 standalone Medicare offices amalgamated into Australia Post’s network.

The Commission recognises outsourcing of the payments system arrangements would be a substantial and potentially high risk undertaking. It requires very careful consideration.

This would include a judgement on whether the assessment of entitlements is an appropriate activity for outsourcing; whether outsourcing should be confined to the development and maintenance of the replacement for the Income Security Integrated System, or whether the payment mechanism only should be outsourced.

The Commission does not support the outsourcing of assessment of entitlements.

However, there may be merit in testing the market for the delivery of other aspects of the payments system. A scoping study should be developed, informed by the advice of a business technology expert.

Recommendation 60: Outsourcing of the Department of Human Services payments system

The Department of Human Services delivers over 200 different services for more than 20 Commonwealth and State agencies and is responsible for the Government Payments System. The system's supporting IT infrastructure is obsolete and arrangements are being made for its replacement. The Commission recommends that the Government:

  1. appoint a highly credentialed business technology expert to oversee the development of the new government payments IT system in collaboration with the Department of Human Services;
  2. establish a policy process to review and simplify the structure of welfare payments in parallel with the design of the new business information technology system; and
  3. develop a scoping study on options for outsourcing part or all of the Department of Human Services payments system.