when policy goes wrong: the problem of transmitted risk

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When Policy Goes Wrong: The Problemof Transmitted RiskJenny Stewart a & Kathleen Mackie aa University of New South WalesPublished online: 16 Feb 2012.

To cite this article: Jenny Stewart & Kathleen Mackie (2011) When Policy Goes Wrong: TheProblem of Transmitted Risk, Australian Journal of Political Science, 46:4, 669-682, DOI:10.1080/10361146.2011.623662

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When Policy Goes Wrong: The Problem of

Transmitted Risk

JENNY STEWART AND KATHLEEN MACKIE

University of New South Wales

Why do policies fail? There are many answers to this question, andmany waysof answering it. In this paper, we use the tools of policy framing and systemsthinking to investigate two recent Australian examples of public policyfailure, each involving a different policy milieu and time-span. We show that,in both these cases, unintended consequences arose because governments lostcontrol of the implementation process while remaining politically accountablefor the outcomes. We develop the concept of transmitted risk to show howthis occurred. We argue that governments expose themselves to this kind ofrisk when they make policy decisions involving a combination of excessiveincentives and poorly controlled third parties.

Keywords: ABC Learning Centres; Australia; Home Insulation Program; policyfailure; policy-making; policy risk; risk management; transmitted risk

Whether or not a policy is considered to have failed is a political question,involving both values and expectations (Bovens and t’Hart 1996, 146). Never-theless, failure in the political sense is very real to governments – adverse mediacoverage, disappointed clients and sackedministers are not what governments, orvoters, want from public policies. While all public policies carry, to varyingdegrees, this type of risk, of greater concern to government is that of policyfailure, which is defined for our purposes as the production of significantunintended consequences. Worse still is if policy failure is exposed to the public.We selected two recent examples of policy failure from the Australian federal

arena to explore the problems involved: the collapse of ABC Learning childcarecentres in 2008; and the Home Insulation Program (HIP) (‘roof batts’)imbroglio of 2010. We ask: how did these policy failures arise; what do theyreveal about the ways in which risk is constructed by policy-makers; and,finally, how might standard forms of risk assessment and management beadjusted to lessen the likelihood of these kinds of failures?We chose these particular examples, first because both employed policy

instruments which led to a change in the type of risks involved as

Dr Jenny Stewart is Professor of Public Policy in the School of Business, University of NewSouth Wales at the Australian Defence Force Academy. Kathleen Mackie is a Visiting Fellow inthe School of Business, University of New South Wales at the Australian Defence ForceAcademy.

Australian Journal of Political Science,Vol. 46, No. 4, December 2011, pp. 669–682

ISSN 1036-1146 print; ISSN 1363-030X online/11/040669-14 � 2011 Australian Political Studies Association

http://dx.doi.org/10.1080/10361146.2011.623662

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implementation took place. Second, both involved serious inadequacies in themanagement of risk. Third, the dynamic of change varied between the twocases: in one, the changes that led to failure developed slowly, over a number ofyears; in the other, the changes took place rapidly. Comparing the two casesnecessitates a research design of some substance. This is because, if a commonexplanatory factor can be found for the observed failures, we have penetratedbeyond the surface perception of risk, to a deeper understanding of the ways inwhich risk affects public policy.

Analytical Approach

The analysis of policy failure is intricately related to the analysis of policy itself.How we think policy fails is a function of how we think policy works (Boinet al. 2005). A rational-comprehensive view of public policy would have it thatpolicies fail, either because they are poorly designed and/or because they arepoorly implemented (Weimer 1993). On the other hand, we know that, inreality, public policies evolve in ways that are difficult to predict, let alonecontrol. In the case of ABC Learning, the policy evolved incrementally overmany years. In the case of the HIP, a solution became joined to a problem, in asequence that occurred very rapidly. We chose, therefore, to view each case exante as an evolving pattern of events, whose characteristics were determined bycomplex interlinkages between actors. To examine these situations, we used twoanalytical tools to structure the cases: first, the idea of policy framing; andsecond, the concept of systems thinking.First employed in policy contexts by Schon and Rein (1994), ‘framing’

enabled us to capture the role of values and judgments in determining whatpolicy and political actors could and could not see as events unfolded aroundthem. In this sense, we use the interpretivist approach, advocated by Bovensand t’Hart (1996), to the understanding of risk.We also needed a way of understanding the events themselves. Systems-based

approaches have been employed in policy sciences in a number of contexts –most notably in the identification of ‘sub-systems’, which identify arenas inwhich policy and societal actors interact (Howlett and Ramesh 2003). Systemsthinking however goes to a somewhat different issue – the identification oflinkages and relationships that are set in train by policy itself. By using theterms ‘systems thinking’ we mean to create an analogy between public policyand the basic idea of a system, which is ‘a construct or collection of differentelements that together produce results not obtainable by the elements alone’(International Council on Systems Engineering 2006, 1). Our approach isholistic, rather than reductionist in character, meaning that we are concernedwith the overall properties of the imagined system, rather than with oneparticular aspect of it (White 1995).In analysing policy failure, therefore, our approach rests upon the perception

that by (unwittingly) creating policies that fail, policy-makers are, in effect,creating systems that behave unpredictably. When they behave predictably,these systems perform work by setting up relationships and resource flows thatgenerate results (outputs). Thus, the childcare ‘system’ (which includesgovernments, parents, children and providers) generates an output (childcare)by channelling resources and people into centres where ‘childcare’ is undertaken.

670 J. STEWART AND K. MACKIE

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The home insulation ‘system’ provided householders with home insulationproducts, initially (prior to the introduction of the Home Insulation Program)with very little federal government involvement. These policy systems are notself-contained, but are open to numerous influences and forces. Over time,whatever design elements they contain are inevitably overtaken by amultitude ofother events and effects, some the result of the original decisions, others flowingfrom more general change.Basic systems theory gives us ways of characterising these interactions. A

relatively simple, cybernetic system (for example) is based on the exercise ofcontrol through negative feedback – as when a central bank damps downinflation by raising interest rates. But as systems become more complex,controls of this kind may cease to be effective and new ones will have to bedevised. Sometimes, governments destabilise systems they themselves havecreated by introducing policy changes (typically incentives) that producepositive feedback (that is, the system starts to run out of control, as moreproviders enter, more incentives are paid and still more providers enter). Atother times, changes in other manmade or natural systems create unprecedentedproblems for regulators (as when changes in the types of feed given to cattlecreated conditions for the spread of BSE – bovine spongiform encephalopathy –in the UK and Europe in the 1990s: see Beck, Asenova and Dickson 2005;Hardaker, Fleming and Lien 2009).The ideas of framing and those of policy systems (as employed here) are inter-

related, in the sense that people working within these systems will ‘frame’ theproblems they confront in particular ways, based on their individual values,political imperatives and organisational situation. The crucial point for riskassessment is that the frames these actors generate may not sufficiently reflectthe potential for adverse change in the events unfolding around them. From theperspective of hindsight, it is possible to see these complexities unfolding inactual policy situations.

Case Study One: Childcare Provision and the Collapse of ABC Learning

When the private sector provider ABC Learning went into voluntaryadministration in 2008, thousands of working parents found their childcarearrangements had been disrupted. This sudden failure in a politically sensitivepolicy area meant that there were major implications for the federal governmentas well. Why and how did this occur? The development of the sector from theearly 1990s through to 2008 provides a longitudinal study of a policy systemthat underwent profound change (including rapid growth) over the period,before encountering a tipping point.

Background

Prior to the 1970s, the care of very young (pre-school-age) children was seen asprimarily a family responsibility: long day care centres were limited in numberand operated largely by owner-operators (Brennan 1998). From the early 1970s,as women began to enter the workforce in rapidly increasing numbers, thedemand for long day care centres that would cater for children from soon afterbirth to the beginning of the school years began to grow significantly. Parents

THE PROBLEM OF TRANSMITTED RISK 671

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constituted a major component of the response to this demand, by bandingtogether to found and operate community-run childcare centres. In 1972, theMcMahon government passed legislation enabling the Commonwealth to makecapital and recurrent grants to non-profit childcare providers (SenateEducation, Employment and Workplace Relations References Committee2009, 69).By the early 1990s, childcare centres in Australia consisted of two types –

community-run centres, and for-profit centres. A support payment for eachchild, based on means-testing of parental income, was paid direct to thecommunity-run centres by the federal government. Parents sending theirchildren to non-community-run centres received no subsidy. This situationchanged in 1991, when parents of children using for-profit centres becameeligible for fee relief.Through the 1990s, efforts were made to continue to expand the number of

places, and to rein in the costs involved. In 1994, a childcare cash rebate wasintroduced, with caps placed on the total amount that could be paid.Nevertheless by June 1997, the number of private places had risen to 121,600(up from 109,700 the previous year). In 1996–97, levels of both childcareassistance and fee relief were frozen for two years. In this budget, operatingsubsidies to most community-based centres were discontinued. In the followingbudget, the number of new places in the for-profit sector was capped at ninethousand per year (McIntosh and Phillips 2002). The number of for-profitplaces appears to have stabilised under this regime at around 130,000 by June2000 (Family and Community Services 2000, Table 58).Further substantial change came in July 2000 with the introduction of

childcare benefit, which formed part of Family Payment. As childcare benefitwas effectively uncapped, the number of available places once again started togrow. By 2005–06, the total number of childcare places (including after-schooland family day care) was 588,000 (Family, Community Services and IndigenousAffairs 2006, 193). In 2006, the number of after-school places was alsouncapped, facilitating further growth in the sector.

ABC Learning Centres

ABC Learning listed on the Stock Exchange in 2001 and entered a period ofmeteoric growth. By the end of 2003, the company accounted for 53,000 (24 percent) of the 229,000 long day care places available in Australia (Davey 2008,321). Most of the Australian growth occurred as a result of ABC taking oversmaller, for-profit centres. (Substantial investments were also made in theUnited States.) ABC Learning was well connected politically: in 2004, formerChildren’s Minister Larry Anthony (who had lost his seat in the election thatyear) joined the Board as a non-executive Director.Unfortunately for the company and its customers, this growth proved

unsustainable. In November 2008, ABC was unable to meet margin calls onits loans and went into voluntary administration, causing major politicalproblems for the Rudd government. Soon afterwards, the Receiverrecommended that 720 of the centres should continue to operate into 2009(the ABC1 group), while a further 55 were found to be unviable and wereclosed. This left over 200 centres (subsequently known as the ABC2 group)


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that were transferred to a Court-appointed receivership. The government keptthese centres operating through direct financial assistance until buyers couldbe found.By the beginning of 2010, 520 centres of the ABC1 group had been

transferred to not-for-profit consortium GoodStar (which received AU$15million from government to facilitate the sale). According to the MyChildwebsite, over two hundred of the ABC2 group were eventually sold to a total of78 different operators by early 2010 (Australian Government 2010).In retrospect, the advent of an aggressive for-profit company whose market

was partly underwritten by government, added considerably to the risk of thechildcare policy system. Government had lost the direct control it hadpossessed pre-1991, while still retaining political accountability for theoperation of the sector. How did this occur? Two factors seem pre-eminent:first, the powerful framing effects of politics; and second (following from thefirst) an administrative framing that did not represent the realities of theexpanded system.

The Role of Politics

At least potentially, childcare raises issues that are politically and ideologicallycontroversial. Social conservatives question the intrusion of government intothe lives of very young children, while social democrats favour a more proactiverole, for reasons of both social equity (because disadvantage begins from birth)and in order to support women wanting to work outside the home. Therelationship of Australian federal governments to the childcare sector was,however, overwhelmingly pragmatic. Women wanted to work and governmentsof both political persuasions were disposed to support them to join the labourforce.The policy question (which raised a number of values in itself) was how to

provide the funding to support the growth of the sector. The policy thinkingof the Hawke–Keating Labor governments (1983–96), and in particularFinance Minister Peter Walsh, should be identified here. Walsh was anavowed economic rationalist, and a vehement critic of the way in which theprivate sector providers were discriminated against, not only through thedenial of fee relief but also through their ineligibility for direct operatingsubsidies and capital grants available to the community sector. This stance, ashe saw it, was a form of middle-class welfare. The centres that were availablewere predominantly in middle-class areas and the operational subsidieswere going mostly to families where both parents were working (Walsh 1995,224–25).Walsh believed that by opening up the sector to competition (by making

subsidies available to parents using for-profit centres) the supply of placeswould expand, and greater competition would also lead to lower prices. As aresult, subsidies were extended to all parents (no matter which form of childcarethey used), in the form of a cash rebate on fees. Later, parents using after-school care also became eligible for support. Thus, the values of successivegovernments, and their perceptions of political advantage, paved the way forthe entry of for-profit centres into a system that (through the subsidisation ofdemand) encouraged their rapid growth.


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Risk Management of Childcare Support

From 1991 until the mid-2000s, the administrative framing of childcare supportshaped the way in which risk management was undertaken. The thenDepartment of Social Security (DSS) had become the main agency involvedwhen, in 1989, it took over assessment of parental income for fee reliefpurposes. (The childcare centres had previously been responsible for this.) Theactual payments to centres were made on behalf of the then Department ofHealth, Housing and Community Services (Department of Social Security1991). When Community Services joined with the Department of SocialSecurity to become the mega-department of Family and Community Services,the new department became the sole site of responsibility for childcareassistance payments. While (from the mid-1990s) the Organisation forEconomic Co-operation and Development (2001) began to move towards aneducational framing of early childhood policy the Australian context remainedfirmly family oriented. As successive portfolio budget statements made clear,the payment of childcare benefit formed part of the government’s support forfamilies, rather than for education.The Howard government made further changes to this framework, with the

clear political objective of shoring up (and gaining votes) from families withchildren. The Prime Minister was keen to ensure that stay-at-home mums werenot disadvantaged. But, as a consummate political pragmatist, he did not wantto disadvantage those who chose to, or who had to, work. But the familyframing remained constant. Childcare benefit was classified as part of familypayment. This was further entrenched when the new tax system was introducedin 1999–2000.By 2007 when Labor returned to office, childcare was defined by the desire of

successive governments to boost the number of subsidised childcare places, andadministratively defined by the mechanics of making those payments. ABCLearning Centres had assumed a greater salience than the community-runcentres they were increasingly out-competing.The key period of change related to the time of very rapid growth of

ABC Learning Centres (from 2001 to 2006). While the relevant minister wasbriefed during this period about the extent of ABC’s growth, FaHCSIA (theDepartment of Families, Housing, Community Services and IndigenousAffairs) did not recognise the level of the risk that this growth potentiallyrepresented.1 Public servants were more concerned by the risk of fraud – withhalf a million families receiving the benefit of the subsidy, it was clearlyimportant to ensure that only those entitled to it received it and, moreover, thatthey received the correct payment.2

Even if governments had been alert to the danger, there was little they coulddo to avert the collapse of ABC Learning, or the effects it would have. As a for-profit centre, ABC was ‘constructed’ as part of the market sector, and themarket sector was held to be responsible for its own risk. Governmentshowever, continued to bear the political risk of the system breaking down.

1Confidential interview, 25 August 2010.2Beginning in 1996–97, performance indicators for Childcare Assistance feature ‘Control ofincorrect payment and fraud’ (Department of Social Security Annual Report 1996–97).


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By 2010, the lesson had been learned: don’t let one provider dominate. As theMychild website put it: ‘The unprecedented collapse of ABC Learning hasdemonstrated how vital it is that the childcare market is stabilised anddiversified through a balanced mix of not-for-profit and for-profit providers’(Australian Government 2010).How, though, might this lesson have been learned earlier? For our purposes,

the key elements of the story involved the way in which policy objectives were‘framed’ both politically and administratively; the impact over time ofsubstantial government incentives; the movement of risk (via ABC Learning)from the financial system to the political system; and the failure by policymanagers to read and act upon the warning signals.

Case Study Two: The Home Insulation Program

The Australian Federal Government Home Insulation Program broughtintensive domestic and some international media attention from late 2009through to February 2010 when the program was finally and abruptlyterminated. The media attention focused on the deaths of four insulationinstallers and over a hundred house fires arising from faulty installations. Thecompliance inspections completed up until March 2010, reported that 18.5 percent of installations had quality issues such as incomplete or inadequateinstallations. Following the early termination of the program on 19 February2010, remediation costs were estimated to be at least AU$424 million (seeAustralian National Audit Office [ANAO] 2010, 30–1).Much of the blame for the disaster was sheeted home to the then minister

(Peter Garrett) and DEWHA (the Department of Environment, Water,Heritage and the Arts). On 25 February 2010, the Prime Minister announcedthat responsibility for winding up the insulation program had shifted fromMinister Garrett to the newly appointed Minister Combet. Prime MinisterRudd positioned himself as ultimately accountable for the problems, and atthe same time held Minister Garrett to account. Rudd stated in his mediaannouncement, ‘there’s absolutely no use sugar-coating the facts; there havebeen some problems in the implementation of this program, problems that asPrime Minister I have taken responsibility for and problems that I’m thereforeresponsible for taking action to fix’ and ‘there’s no point sugar-coating this; thisdoes mean a different range and reduced range of responsibilities for MinisterGarrett. Let us simply acknowledge that fact’ (Rudd 2010).

Background

Before the introduction of the program in February 2009, the home insulationindustry in Australia was small and relatively unregulated. The uptake ofceiling insulation into existing homes was estimated to be 65,000 to 70,000homes a year (Insulation Council of Australia and New Zealand [ICANZ] 2009,11) with around 200 companies doing retrofit installations (ICANZ 2009, 10).As the installation market was considered to be of small scale and value, anyonecould become an installer or employ others to do installation work. Contractorsand installers were not required to be registered or hold any OccupationalHealth and Safety certificates or training.


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The outcomes of installation work were also largely unregulated. There wereno mandatory minimum product performance levels or product standards, norany requirements to install insulation to the existing Australian InsulationInstallation Standards (ICANZ 2009, 12). While state governments typicallyoffered subsidies to householders wishing to install insulation, the programswere low-key, with payments of the order of AU$300–$500 per household(ICANZ 2009, 10).The policy setting changed dramatically in February 2009 when the Home

Insulation Program was announced by the then Prime Minister as part ofthe Government’s AU$42 billion Nation Building–Economic Stimulus Plan,designed to avoid the worst of the 2008–09 Global Financial Crisis. TheAU$2.7 billion component of the Plan aimed to see insulation installed into anestimated 2.2 million Australian homes and was expected to run from 3February 2009 until 31 December 2011, or until the funds ran out.The program provided assistance of up to AU$1,600 (reduced to AU$1,200

in November 2009) to install ceiling insulation, thereby making homes moreenergy efficient, boosting the economy, and supporting jobs during the GlobalFinancial Crisis. At the time the program was terminated on 19 February 2010,program uptake had outstripped forecasts, with ceiling insulation installed inover 1.2 million Australian homes at a cost of approximately AU$1.5 billion inrebates (Senate Environment, Communications and the Arts ReferencesCommittee 2010, 18). At its peak, in November 2009, there were over tenthousand registered installers.

The Role of Politics

Although there was a strong environmental justification for the HomeInsulation Program, its primary rationale was to stimulate the domesticeconomy, as one element of the AU$42 billion Australian government responseto the 2008 Global Financial Crisis. The government required a very rapid roll-out so that stimulus funds quickly entered the economy. These initial decisionsincluded: to roll the program out over a two-year timeframe; to provide therebate direct to installer businesses from 1 July 2009, to make the installationfree to the majority of participating households; and to have a very lowstandard of entry for installer businesses. The objective of quickly injectingfunds into the small business sector to support the broader stimulus objectivesof the government influenced each of these program design decisions.In its report on the Program, the ANAO found that: ‘In large measure, the

focus by the department on the stimulus objective overrode risk managementpractices that should have been expected given the inherent program risks’(ANAO 2010, 27).3 The audit report went on to note that the design of thedelivery systems was ‘strongly influenced by the clear riding instruction fromthe Coordinator-General4 to reduce red tape and commence work on projects

3The report does acknowledge that the program was developed with a sense of urgency by theDepartment of the Prime Minister and Cabinet with limited consultation with the environmentdepartment (ANAO 2010, 26).4The Coordinator-General was responsible for the oversight of program implementation acrossthe federal government.


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as soon as possible, in keeping with the stimulus objectives of the program’(ANAO 2010, 28).

Risk Management of the Home Insulation Program

Overall responsibility for the implementation of the Home Insulation Programwas allocated to DEWHA. The department relied on state and territoryauthorities to pursue and address fair trading and workplace health and safetyissues (Department of Environment, Water, Heritage and the Arts 2009, 26).This approach to risk management, however, was poorly thought through andmanaged. The ANAO observed that the expectation by the federal governmentthat disputes in regard to quality between the householder and installerbusinesses would be resolved through existing state/territory consumerprotection processes was unrealistic, particularly as no additional resourcingwas given to the relevant state agencies despite the scale of the program (ANAO2010, 34).The policy structure meant that installer businesses (or householders) bore

any risks relating to installing insulation in ceilings in existing private homes,while state and territories dealt with the matters for which they hadconstitutional responsibility: Occupational Health and Safety; training; andfair trading issues. In this way, (or so DEWHA believed) implementation riskshad been ‘outsourced’ by the federal government to state agencies (forOccupational Health and Safety matters; quality of work issues) or to theinstaller businesses (safety of workers).Six weeks after the program was announced, in mid-March 2009, DEWHA

commissioned a private firm, Minter Ellison, to undertake a risk assessment ofthe program. The key outcome of this was a ‘Risk Register and ManagementPlan’ (Minter Ellison Consulting 2009) which was received by the Department inearly April 2009 (Senate Inquiry 2010, 3.39). The risk assessment prepared byMinter Ellison listed 19 extreme and serious risks and recommended mitigationmeasures and the tracking of action against the risks. These risks ranged fromlimited time to implement the program properly, the quality of installationsincluding safety issues, the potential for fraud, inadequate state regulatoryframeworks, and limited DEWHA and industry capacity to deliver the program.On 8 April 2009, the Department belatedly established a governance

framework for managing program delivery and risk. An inter-departmentalcommittee called the ‘Project Control Group’, comprising representatives fromthe Department of Prime Minister and Cabinet, the Department of Education,Employment and Workplace Relations, Medicare Australia and the AustralianTaxation Office was set up (DEWHA 2009, 22). The Project Control Grouphowever became formula driven – noting and reviewing the risk register ratherthan taking decisions to manage the risks catalogued in the risk register (SenateEnvironment, Communications and the Arts References Committee 2010,3.45). The broad representation on the Group from central agencies and otherdepartments served to diffuse accountability so that ultimately it was difficult toassign responsibility for the taking or not taking of decisions.The Senate Inquiry concluded that DEWHA and the responsible government

ministers received written and oral warnings of the serious electrical, fire andsafety risks posed by the program prior to its ramp up from July 2009, but


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failed to act upon these warnings (Senate Environment, Communications andthe Arts References Committee 2010, 3.59). Further, Minter Ellison’srecommendation to defer the starting date by three months to allow time toaddress the risks identified in their risk assessment process was not acted on bythe government (Senate Environment, Communications and the Arts Refer-ences Committee 2010, xiv, 26). Finally, the decision by government to use adelivery model from 1 July 2009 where payments were made directly to theinstallation businesses, exacerbated the scope for fraud.Key factors that influenced risk levels and risk management included: the

overwhelming political imperative to boost economic activity; the rapid impactof generous incentives on the installation industry; low levels of departmentalskill and capacity to manage risk; the program design (central control inCanberra; delivery by many small agents in the private sector); and the impactof a culture in the Renewables and Energy Efficiency Division and later theEnergy Efficiency Taskforce, which mitigated against providing ‘bad news upthe line’. For example, the original Minter Ellison risk assessment and theweekly risk register were not provided to the Minister until February 2010(Senate Environment, Communications and the Arts References Committee2010, 39, 31).Overall, the HIP case showed the same key elements as that of ABC Learning

Centres: the effects of the political and administrative framing of policyobjectives; the impact of overly generous incentives and the movement of riskfrom installer businesses into the political system; and the failure by policymanagers to read and act upon the warning signals.

Risk Management as a Policy Issue

The issue of risk lies at the heart of both case studies, although it manifested itselfin different ways. In the early childhood sector, the probability of failure built upgradually over time, before the sudden collapse of ABCLearning Centres ‘tipped’the sector into political and practical difficulty. In the case of the Home InsulationProgram, the risk manifested itself quickly and dangerously.In the ABC Learning Centres case, if policy advisers had been able to alert

decision-makers (ministers) to potential problems ex ante or in the course of theimplementation of a program, remedial action could have been taken, and thecrisis averted. In the Home Insulation Program case, the risks related to safety,quality, fraud and capacity were identified but action to manage the risks cametoo late.In theory, according to the ANAO, risk management should be undertaken

at the policy design stage, with risk revisited on a regular basis over time. TheAudit Office has been critical of departments and agencies that have failed to dothis. In its audit of the administration of climate change programs, the ANAOobserved that: ‘There was no evidence that a formal risk assessment wasconducted by responsible agencies at the design stage of the programs’ (ANAO2010, 46). In its performance audit of the Home Insulation Program, theANAO identified poor management of risk as one of the five primary factorsleading to the failure of the program (ANAO 2010).In practice, general cost–benefit analyses are difficult to perform in public

sector contexts, let alone risk-related assessments of costs and benefits. In both


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our case studies, what risk management strategies there were, failed tocomprehend in practical ways the interdependencies that were being created bydecision-makers. In the ABC Learning Centre case, policy advisers saw thebenefits of the rapid growth of childcare places, and not the potential costs. Inthe Home Insulation Program case, the overriding driver of the stimuluspackage meant that while some risks were identified at the outset, inadequaterisk treatments were put in place (see ANAO 2010, 33).

The Concept of Transmitted Risk

We can see that, in both our examples, relatively stable, easily controlled policysystems were transformed by policy decisions into much more complex andturbulent systems with significantly raised levels of risk. Generous incentivesproved to be powerful policy instruments that changed behaviours, andbrought new actors into the original system. Governments thought thatregulatory structures would be sufficient to deal with the increased risk, butwhen this proved not to be the case, political risk escalated. This transmittedpolitical risk resulted from policy design decisions that transformed the originalsystem into one that was far more volatile.In the case of childcare, in 1991, the original system was essentially linear,

in that public subsidies were limited by the extent of growth in the communitysector. In turn, the growth of the private sector was constrained by the lack ofpublic support. These forms of negative feedback acted as a form of systemcontrol. The decision to make subsidies available to parents using the privatesector removed these controls, and allowed for rapid growth to occur. Butthis growth was in turn facilitated by the resources available to the privatesector from a financial sector in which easy credit had become the norm. Inthis way, large amounts of financial risk were transmitted into the childcaresector in ways that were difficult for administrators and policy advisers to‘see’. The warnings of the community-based sector were overlooked because‘they would say that, wouldn’t they’.5 While the policy appeared to beworking well, governments were effectively blind and deaf to rising levels ofrisk.Similarly, in the case of the Home Insulation Program, massive government

subsidies caused a relatively small, stable industry to grow so rapidly that whatregulatory apparatus there was, was completely overwhelmed. Positivefeedback loops (i.e. incentives) replaced negative feedback loops (i.e. price-based market signals). At the same time, the political risk created by this loss ofcontrol flowed into the federal political sphere. Unfortunately, the implicationsof regulatory failure were not acted upon at the time, because of the politicalimperatives dominating the attention of decision-makers.As a result, warnings from licensed electricians and, later, from consultant

risk-assessors were not acted upon until it was too late. While the programwas ‘delivering’ (in the form of small business activity, jobs and [some] happyhouseholders) no one wanted to be the bearer of the potentially bad news thatwas beginning to surface in the media and in compliance and audit reports.

5Confidential interview, August 2010.


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How Might the Risk be Better Handled?

The academic literature on managing policy-related risks suggests a processthat is technically astute, wide-ranging and also reflective: that is, risk managersshould be aware of the values and judgments that are bound up in policy(Corbellec 2010). In (partial) contrast, the practitioner-oriented literaturedescribes a more managerial, and organisationally focused process.The Auditor-General considers risk management is the cornerstone of good

corporate governance. It results in better service delivery, efficient use ofresources, better project management and helps to minimise waste, fraud andpoor value-for-money decision-making (see McPhee 2005). Risk is measured interms of a combination of the consequences of an event and their likelihood.Where uncertainty is present, consequences and/or likelihood may not beknown. The elimination of risk is generally not a practical goal, but risk can bemanaged and mitigated by various treatments.The technical literature on risk emphasises that a sound risk management

system involves identifying the key strategic, operational and financial risks;assessing the possible effects the risks could have on the organisation; agreeingon and implementing appropriate responses to the identified risks; putting inplace a framework of assurance from different sources to show that the riskmanagement processes including responses are working effectively; reportingpublicly on the effectiveness of the risk management system; and making it clearthat the governing body carries the ultimate responsibility for the riskmanagement system (see for example ANAO 2009; Drennan and McConnell2007, 45; Management Advisory Board’s Management Improvement AdvisoryCommittee 1996).Risk assessment and management systems of this type, however, do not

address the kinds of problems that are encountered by childcare support andhome insulation programs. This is in part because politically dominated andbureaucratically controlled systems have an innate tendency to ignoreinconvenient danger signals because they are often fixated on achieving onetype of policy objective. But it is also because the organisational focus ofconventional risk assessment and management is too narrow to encompass thepolicy-making process itself.The concept of transmitted risk suggests a way forward. We have seen from

the case studies that problems arise when:

(a) implementation is reliant upon private sector actors who are able to accessopen-ended incentives; and

(b) regulatory systems are unable to cope with the associated changes.

We acknowledge that the realpolitik of policy may make it difficult foreffective action to be taken ex ante, even when these conditions are identified.Nor does their presence mean that uncontrollable political damage willnecessarily ensue. But (we would argue) awareness of the markers oftransmitted risk is a valuable addition to the repertoire of risk assessment, inthat it provides a way of recognising the dangers posed by systemicinterdependencies. This type of policy-related risk is not fully captured bystandard models of risk assessment.


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Conclusion

As policy worlds become more complex so, too, do the risks that they contain.While the risk implications of outsourced forms of policy delivery arereasonably well understood, there are forms of implementation that lead, overtime, to substantially increased, but largely unacknowledged, levels of risk forgovernments. Governments may be less attuned to these risks, because theirpolitical interests lead them to focus only on beneficial change. But they mayalso be less attuned because standard forms of policy analysis do not registertransmitted risk – that is, risk imported from one type of system into another.As a result, these risks may not be observed, let alone acted upon, until negativeconsequences are all too apparent.It is the identification of these specific kinds of policy-related risk that is the

distinctive contribution of our analysis. Practical implications are alsosuggested. A heightened awareness of, and greater transparency in, the valuesinforming a new national policy, along with recognition of the need to refine arisk analysis when modes of implementation change, would give policy-makersbetter chances of avoiding policy failure.

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when policy goes wrong: the problem of transmitted risk

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