Mr Freeh was addressing a function in Sydney on Monday night where the Minister for Home Affairs Peter Dutton, NSW Police Force Assistant Commissioner Karen Webb and the Former Deputy Commissioner for NSW Police Nick Kaldas were also present.
He spoke of his experience responding to the September 11 attacks on the World Trade Centre, saying authorities learnt a key lesson.
"I think today the lesson learned is that in all areas government is behind," he said.
"They're behind because in the government - the bureaucracy, the amount of time it takes not only to agree but then to implement is not as fast as we need it to be. We need to be much more agile and responsive."
"We have to be smarter, we have to harness not only the information - but the trust - of the public and private sector.
"Whether it is adjusting encryption, that information needs to be directed to intelligence agencies, but also needs to be amendable to trade secrets, and the ability for the private sector to do business."
He praised what he called the "Australian model" of tackling terrorism.
"One of the things of the Australian model is the notion that we're going to take a century-and-a-half of public service experience and apply that to solving problems in the private sector."
"The question is how prepared are we and to affect change and manage risk."
Importance of working with business
In his address, the Home Affairs Minister Peter Dutton thanked the business sector for assisting in intelligence gathering to thwart terrorist attacks.
"Islamic terrorism is a primary security issue of our age," Minister Dutton said.
"And although ISIL has suffered significant losses on the battlefield in Syria and Iraq they continue to use social media to inspire terrorist acts."
Minister Dutton said the Bourke Street terrorist attack underlines the importance of working with the business sector and Muslim community.
"Whether is a tip-off from wife, brother or imam - that is the only way realistically (to intercept an attack) unless that person is under constant surveillance. That is why the engagement is crucial," he said.
"The agencies have stopped 14 attacks, but seven have got through."
'An intelligence blackout'
He said the key focus for Australian authorities is intercepting communication between those planning terrorist acts.
"We need to make sure we address emerging threats," he said. "Encryption enhances our cybersecurity but it also impedes national security investigation."
He said currently 90 per cent of those on terrorist watch lists are using encryption, with the number expected to rise to 100 per cent by 2020.
"That is the equivalent of an intelligence blackout," he said.
He said ensuring the passage of Australia's encryption bill (Assistance and Access Bill) would be critical in law enforcement's fight against terrorism.
"It allows us to keep pace with emerging technology to keep us from harm."
He insisted no additional powers are being granted to law enforcement officers, rather it is levelling the playing field.
"Ten years ago a handwritten note left prior to an attack... by way of warrant that evidence could be gathered by police. The exact same detail communicated by WhatsApp is not discoverable by police because of encryption."