Abject failures of Finance will blight a generation

 

OPINION:The Department of Finance has been central to all that has gone wrong – yet it remains blind to its failings, trapped in a bubble of dysfunction, writes EDDIE MOLLOYPart I of two articles

WHILE MUCH may never be known about the root causes of what the National Economic and Social Council calls “Ireland’s Five-Part Crisis” (banking, public finances, national reputation, competitiveness and social fabric), there are two documents on the Department of Finance website that are a must-read for those interested in what went wrong.

The first of these documents, the Annual Outputs Statement for 2009, sets out the department’s “central role in the economic and financial management of the State and the overall management and development of the public sector”. Five “High Level Goals” are identified, with corresponding “Impact Indicators”, as follows:

1. An efficient, high performing public service, and improved levels of service to the public.

2. Value for money from public expenditure and improvements in public capital investment and infrastructure.

3. A regulatory structure securing public confidence, financial stability and a viable and globally competitive financial services sector in Dublin.

4. Continued effective functioning of the banking system and supply of credit to business and personal customers.

5. Budgetary sustainability . . . a price environment consistent with competitiveness, and a climate conducive to employment growth, combined with a fair, efficient, broadly-based taxation system, yielding receipts that are sufficient to meet the Government’s budgetary plans.

If anyone wanted a comprehensive, succinct list of everything that has catastrophically gone wrong, there it is.

The statement goes on proudly to declare the department’s outputs with regard to each of these matters. According to its self-assessment, it “delivered” on every item– on economic growth, sustainable employment levels, Ireland’s competitiveness, and so forth.

Anyone who doubts that this is how the department evaluates its own performance may read it for themselves – but read it very carefully, because one word on the top left-hand corner of page 12 clarifies what is really meant. The Department of Finance delivered the “advice” to Government. If that is all it is claiming to have delivered, ie the advice, then it begs a question about the quality of its advice – and another about whether the Government acted on it.

The Taoiseach helpfully answered the second question some weeks ago in a television interview when he was pressed by Bryan Dobson to apologise for his part in creating the financial and other crises: “I acted on the best advice,” he said – advice delivered by Finance. He adopted the same defence when challenged regarding his role in the Dublin Docklands Development Authority scandal, and his decision to include Anglo Irish Bank in the bank guarantee.

The Department of Finance, in addition to its failures in regard to the public finances, competitiveness, taxation and banking, hosts the personnel directorate for the whole public service. In this role it has provided “best advice” that has delivered bloated public service staffing, unsustainable pay and pensions, massive upward grade drift, system-wide rigidities, abuse of flexitime, high rates of absenteeism, and weak management. To this we may add the degradation of the capacity of the public service through decentralisation, which against all reason it is still pushing through; utter failure to deliver on the long-promised reform of the public service; a set of guidelines which provided cover for the scandalous exit package for Rody Molloy; and most recently, the ill-advised reversal of pay cuts for assistant secretary grades.

As the corporate finance function of the public service, the department has presided over a situation where there is a chronic shortage of economics and financial accounting expertise throughout the whole public service, including in Finance.

The annual reports of the Comptroller and Auditor General reveal a litany of waste and financial mismanagement on a vast scale. Some small and medium enterprises making widgets have more highly qualified finance functions, and are subject to tighter financial controls than government departments and agencies with multibillion-euro budgets. The Department of Finance is ultimately responsible for this scandalous skills deficit and absence of financial discipline.

In summary, the department has abjectly failed in the performance of its vital national mission, in its “central role in the economic and financial management of the State and the overall management and development of the public sector”. It has failed more than any bank, more than Fás, more than the much maligned HSE and more than the Central Bank, and because of its “central role” the consequences will blight the lives of every citizen for at least a generation.

However, having determined to its own satisfaction that it has delivered on all fronts in 2008-09, what’s next on the agenda? Well, according to the Capacity Review, July 2009, which is also on the department’s website, it should be given primary responsibility for modernisation of the public service; for leading e-government; co-ordinating the State’s response to all spending proposals emerging from social partnership; supporting the development of a sustainable pension system; ensuring the maintenance of financial stability and long-term viability of the banking system; and the reform of financial regulation.

The executive summary of the Capacity Review – also carried out by the department upon itself – says: “The department is widely acknowledged to be a professional and effective organisation with dedicated and highly skilled staff.” To coin a phrase, “the fundamentals of the department are sound”.

In a powerful address to the MacGill Summer School this year, Brendan Tuohy, a former secretary general of a department, quoted the Bible, “You can’t put new wine into old wineskins”, to make the point that reform cannot be led and achieved through the structures and senior people who have been central to causing the problems. In his Renewing the Republic piece in The Irish Times(March 29th), Tuohy called for a full cabinet ministry for the public service reform.

Any hope of self-renewal was jeopardised when secretary general David Doyle retired over Christmas only to be replaced in a seamless handover to the next-in-line insider, Kevin Cardiff. Just compare the deafening silence about this succession process with the weeks of media outrage and heated debate in the Dáil when it became clear that AIB was about to appoint an insider, Colm Doherty, to replace Eugene Sheehy.

The concern was not so much that Doherty might lack the technical competence to run the bank, but that “he was there” when the bank was lending wildly to developers: he shared collective responsibility for the catastrophic failure of the bank. Did he, to quote Bishop Moriarty on his resignation, “challenge the prevailing culture at the time”?

Of course, conscientious objectors get sent to jail or shot. In 2004-2005 the boards of the main banks were urging their senior executives to “increase their risk appetite” to stop Anglo “eating our lunch”. Any chief executive who refused to follow the crowd would have been fired, and so they were under severe personal pressure to follow what Warren Buffett calls “the mindless imitation of industry peers who are rushing lemming-like assuredly to the sea”.

Senior civil servants do not face the ultimate sanction of losing their livelihood if they conscientiously object. Their almost absolute job security is designed to facilitate independent thinking and to pre-empt collusion with mad political directives. Yet the Department of Finance, with its embedded senior management culture, is incapable of leading reform: more than any other department or agency it needs to be radically reformed itself.

Like the Catholic Church, the problem is deep and goes right to the top. The high priesthood of the Civil Service has its own moral code and an even greater facility than any bishop for using mental reservations to obscure the truth. They are all intelligent and decent people, but they are trapped in a disastrously dysfunctional bubble, blind to their own shortcomings and failures.

The various inquiries into the collapse of the banking system and any other investigations into the causes of Ireland’s five-part crisis must look closely at the role of Finance. Quite apart from its role in causing these crises, this department sets the standard for corporate accountability and governance in the Civil Service – and the OECD has pointed out the pervasive weakness of these systems, as just illustrated with the department’s meaningless Annual Outputs Statement 2009. Measured on outcomes, which is the proper standard, their performance had been disastrous.

Eddie Molloy is a consultant in strategy and large-scale change. He is director of Advance Organisation and Management Development Ltd. He has worked with numerous government departments including the Department of the Taoiseach, the Department of Public Enterprise and the Revenue Commissioners. He has also worked with companies such as Diageo, and with IDA Ireland and Dublin City University

Tomorrow: Proposals for action

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