Having spent over 25 years in Management Consulting, Private Equity and Investment Management, I have always felt the acute gravity of reciprocating the trust that clients and investors have placed in me. When people pay or invest money, they deserve a return. At the very least, they expect you to do your best to do what you said you would do and report on strategies and outcomes so they can decide whether they should persist in letting you take or keep their money.

In contrast, when I was a boy and my parents gave me pocket money, I didn’t think about what return they were looking for. There was no expectation other than an expression of love, societal norms, and the development of my sense of independence. There were unspoken expectations. They didn’t expect me to throw the money away or spend it illegally or immorally. That would have been a breach of trust. But beyond that, I was free to spend the money as I pleased.

I’d argue that paying tax belongs in the category of investment rather than pocket money. And while we can decide to vote a government in or out, imagine a fund manager that took your money and then remained silent on the strategies and outcomes of your investment. However, too often, that is what paying taxes feels like.

Three experiences have shaped my strong belief that it would greatly assist both government and the voting public to develop a mechanism to better measure and report the application of public funds. Specifically, how can we measure the return on taxpayer funds invested? These stories are as follows:

I once worked on a budget review project for a government department that provided a monopoly service with 100% penetration. Their marketing budget for this service was larger than a big four bank and four times larger than a national airline. When I asked why so much I was told this was the budget upon service launch, and if they didn’t spend it they would lose this budget and they never knew when it might be needed. As a taxpayer, I remain unhappy with this reasoning.

Over lunch, a sitting MP reflected that he had completed a Master of Public Administration degree at one of the most prestigious universities in the country and Return on Investment was not a topic covered in the course. As a citizen, I am concerned by this.

I once delivered a supplier-efficiency program for a government department where our team achieved an annualised repeatable year-on-year procurement benefit of $30m for a one-off fee of $3m. I reflected to the client that it was enormously satisfying to deliver a net benefit to the taxpayer of $27m. The client looked at me alarmed and said with some assertion that this was a benefit for the Department, NOT the taxpayer. As a citizen, I am confused and dissatisfied with this response.

Please. Do it for Sam and Daisy!

Imagine this scenario. Sam inherits $100,000 from a kind Aunt and he asks Jo, a colleague at work to introduce him to anyone who can help him invest this money. Jo sets up a meeting with two friends who operate separately as independent financial advisors, Anna and Tim, whom she knows from university. The next day they meet at their office. Anna arrives wearing a professionally tailored business suit, accompanied by her long-standing friend Tim, who is more casually dressed in a grey cardigan and well-worn faded jeans. They each represent financial management companies. After some friendly banter and a recital of their qualifications, they each ask Sam to invest some of his money. What is the minimum information Sam would need to help him decide?

At a minimum, it would be logical to ask:

1. What will they invest the money in?
2. What would be the expected benefits of making such an investment?
3. How do they expect to achieve these benefits?
4. What are the risks and consequences?
5. What is the track record of this investment as a validation of their pitch?
6. Why is it in Sam’s interests to invest?

Anna tells Sam that money makes money, and to combat inflation and grow your wealth, she thinks Sam should invest in joining a syndicate to enter a horse race. There are two horses in the race. It costs a million dollars to enter the race and the prize money is $100,000. One horse is a Shetland pony, and the other owned by her company is a thoroughbred from a long line of winners of prestigious races. They have raced once a year for the past 5 years, and the thoroughbred has never lost, normally finishing the race before the Shetland pony has reached halfway. For every $1 Sam invests and the thoroughbred wins, her company will pay him 10c at the end of the race and return Sam’s capital of $1. In the unlikely event the thoroughbred loses, Sam loses his entire investment.

Tim says suggests that while financial returns are great, we all have a responsibility to make the world a better place. He shares he is a devoted Christian and quotes Galatians 6:2 “Bear ye one another's burdens, and so fulfil the law of Christ”. He points out Sam seems like a good person and wants him to invest in his company’s faith-based pension fund that has returned an average of 5% per annum for the past 10 years. The fund invests in listed equities of the world’s most benevolent companies. It distributes the first 5% of profit to investors and re-invests all profits above 5% to charitable causes run by the fund. Over 10 years the charitable re-investment has been between 1% and 7% of the fund value and has always achieved the 5% distribution to investors. In the event the fund does not achieve 5%, any shortfall is carried forward until the fund achieves the 5% per annum average. He invites Sam to visit some of the previously homeless people the fund has housed, some sick people they provide care for, and disadvantaged people they educate to see the genuine difference the fund makes. He claims the fund is growing and every year they invest in more social programs, so investors’ impact is always increasing, whilst earning Sam 5% per annum on his capital.

That evening at home while sharing dinner with his spouse, Daisy. Sam decides to invest the entire amount split between both opportunities, but they both have different views on how much to apportion to each. Both investments have very different objectives. Anna’s opportunity offers up to $10,000 in financial return on investment with very little apparent risk, although there appears to be no real return to society. Tim’s proposal offers half the financial return but has a very compelling social return that could change the lives of people in genuine need. They decide to make a chart based on the minimum information for a decision. It looks as follows:

Figure 1: Anna’s and Tim’s options

Having reviewed this table, Sam and Daisy decide to split the investment between the two opportunities 50/50 and review their portfolio mix at the end of the year.

In the background, the TV is covering the forthcoming State election. A well-known and experienced politician named Beau wearing a navy suit and red and blue striped tie seeking re-election announces a new policy to increase spending on education by 7.5%. Beau points out this increase is 2.5% higher than the opposition’s policy, and that his Party cares more about education. The program then cuts to the opposition spokesman, Naomi, in a Fuchsia-coloured dress standing outside parliament house, who denounces the policy saying that only last week her party announced the breakthrough policy of 5%, and Beau was just trying to one-up her policy. As her policy was announced first, it is her party that deserves recognition for caring more about education, and Beau is being irresponsible in spending funds that the budget cannot afford.

Sam and Daisy discuss this policy issue, and how their investment decision framework might apply to this proposal. Sam points out that as a taxpayer, he is unsure what he is investing in, other than the fact that Naomi wants to spend more money on education, and Beau wants to spend even more than Naomi. Daisy agrees and says that voters don’t have the sufficient attention span to listen to the policy detail, but it seems overly simplistic and even dangerous to conclude that because Beau wants to spend more than Naomi, he cares the most about education. Both Beau and Naomi are offering to invest more public funds in education, but for what return?

Sam thinks that the numbers have become meaningless, and the budget has not been in surplus for over a decade, so politicians make promises to spend public funds without reference to outcomes, and then in the future, they pick and choose which outcomes to highlight to demonstrate their Party’s success or point out the opposition Party’s failures.

As taxpayers, both Sam and Daisy both feel their contribution is unappreciated and the choice between Naomi’s policy and Beau’s policy does not respect the large amount of money they contribute in taxes to the government each year. “If only there was a way to hold politicians to account” Daisy cries in frustration. “You should run for office, Daisy!” Exclaims Sam. Your slogan could be “Only a government that delivers more for less can be trusted with your money”.

So what?

This simple story highlights many challenges with our current system. I count the following, but I am sure you can come up with a few more:

• We have more transparency and empowerment when we make investment decisions with our own money than governments do with public funds
• The public feels disconnected from the quantum of funds being spent by the government
• There is no consistent measuring stick to compare government outcomes against public funds spent
• Without such a measurement, governments are not sufficiently recognised, incentivised or rewarded for efficiently creating value that optimizes cost and benefits

What is the solution?

Developing a quantitative, unambiguous, and meaningful scorecard for key government services such as Education, Transport, Healthcare, Law and Order and Infrastructure that measures Return on Taxpayer Investment is complex but not impossible.

If we consider the following example where the major indicators of success (i.e. returns on investment) in school education are:

1. Retention: The percentage of school children remaining in high school
2. Attainment: The percentage of students achieving a high-school graduation certificate by the age of 19
3. Naplan performance: The percentage of students achieving a top-three band score (one above the state minimum standard) for years three, five, seven and nine
4. User satisfaction: Parent and student ratings of the quality of education and the resources provided

The taxpayer investment we measure these returns against are:

1. Funds paid by the state government
2. Funds paid by the federal government

Our model applied to Victorian Schools would look something like this:

Figure 2: Victorian public school KPIs

Just like Sam and Daisy’s investment, a one-year result is far more meaningful and informative when we can compare performance over multiple years. Many investment cases take time to yield results, and only by comparing results over an extended period can we truly gauge relative performance. Below is how we might apply this measure over successive years:

Figure 3: Worked Example – Victorian Schools

Just like Sam and Daisy’s investment, a one-year result is far more meaningful and informative when we can compare performance over multiple years. Many investment cases take time to yield results, and only by comparing results over an extended period can we truly gauge relative performance. Below is how we might apply this measure over successive years:

Figure 3: Worked Example – Victorian Schools

In the example above, a 5.7% increase in educational outcomes in 2016 compared with 2015 came at an additional cost of $635m, or a 5.4% increase in funding. This is then offset by population growth, so the cost per citizen increased by $56.47, or a 2.9% increase in cost per citizen. It is then up to the public to judge if a 5.7% increase in outcomes is a good return on the 2.9% increase in cost, but at least they are more informed than simply evaluating the total dollars spent.

If outcomes went up whilst spending went down, then the performance would be significantly improved, whilst if outcomes went down but spending went up, then this would be a poor return on taxpayer funds, for which the government should be held accountable.

Surely that is a bit simplistic?

When sharing this idea with decision-makers, I tend to receive overall support, but the following legitimate concerns:

1. These might not be the right measures
2. Nobody will understand the calculations
3. This just replicates what the Productivity Commission does
4. Bureaucrats will just manipulate the numbers to suit themselves

No measurement is perfect, but at least a Return on Taxpayer Investment (RTI) model provides increased transparency, debate, and accountability. Just like the Consumer Price Index, most don’t understand the calculation and even fewer calculate it, but we all have a reaction when it rises from 3% to 8%. In the same manner, the RTI calculation is complex and indicative, but at least it is digestible and directionally helpful.

The Productivity Commission does a thorough and rigorous job, and perhaps the natural place for such measurement and tracking is the Productivity Commission. However, if you were to ask the average voter how helpful they feel the Commission’s findings have assisted the public, they may struggle to come up with an answer. In my experience, the rigour of the commission provides a density that is not easily digestible beyond senior bureaucrats and academics, which perhaps is its target audience.

Whether or not the government, or an independent body such as a think-tank or accounting firm, is best placed to develop such a measure is unclear. Regardless, the media would no doubt be most interested in the idea of increased transparency and measurement on which to highlight government performance in a manner that can be more easily digested by the public.

Regardless of these challenges, any measure that holds decision-makers accountable for spending public funds beyond “the party that spends the most, cares the most” is a step in the right direction. We shouldn’t abandon measurement because it’s not perfect, otherwise, we’d abolish weather forecasts. Even an imperfect measure would focus voters and decision-makers. Surely our taxpayers deserve some sort of feedback on how their investments have performed. It’s a matter of trust.

Robert Holt is a Managing Director in the Public Service sector at Accenture and has previously worked in strategy consulting, private equity, finance and law.