INTOSAI Working Group on the Audit of Privatisation
Tenth Meeting, Prague, 9 and 10 June 2003 Proceedings
- Meeting objectives
- Main conclusions
- Theme 1 – Experiences in the audit of privatisation
- Theme 2 – Lessons learned during the Working Group’s first 10 years
- Theme 3 – Training in the use of the Working Group’s guidelines
- Theme 4 – Draft guidelines on best practice in the audit of risk in Public-Private Partnerships
- The INTOSAI Working Group on the Audit of Privatisation held its 10th meeting in Prague on 9thand 10thJune 2003. The meeting was attended by representatives of 29 Supreme Audit Institutions (see Annex 1 for a list of participants).
- The meeting took place shortly after the sad death of Dr. Lubomir Volenik, the President of the Czech Supreme Audit Office, which hosted the meeting. The conference opened with Members of the Working Group paying tribute to Dr. Volenik.
Meeting objectives
- Sir John Bourn, Comptroller and Auditor General of the United Kingdom and Chairman of the Working Group, thanked Mr. Leixner and his Czech colleagues, on behalf of all participants, for the warmth of their welcome, and for their exceptional efforts in the tragic circumstances. He also highlighted the excellent level of attendance at the meeting, which represented a substantial increase on the 14 members that attended the 1stmeeting of the Working Group in 1993, and presented the agenda for the 10th meeting to members for adoption.
- The agenda for the 10thmeeting was guided by the remit set for it at XVII INCOSAI, where it was agreed that in the period leading up to XVIII INCOSAI in Budapest in 2004, the Working Group should focus on:
- monitoring the effectiveness of the guidelines adopted by INTOSAI; and
- developing future audit guidance as necessary, for example on audit issues arising in the field of partnerships and where the state is a minority shareholder, and on alternatives to regulation.
- The Working Group met this remit through the following work programme:
- presentations from the SAIs of the Czech Republic, Bangladesh, Brazil, Germany, Poland, Romania, Saudi Arabia and Slovenia, and from Mr. Tomáš Ježek, former Minister of Privatisation and Chairman of the National Property Fund of the Czech Republic, on a wide range of issues relating to the audit of privatisation, and a paper from the SAI of India on their experiences of privatization audit;
- a consideration of lessons arising from the first 10 years of the Working Group’s operation;
- discussion of the future development of training courses in the audit of privatisation, following presentations by the SAI of Egypt and the INTOSAI Development Initiative; and
- further discussion of draft guidelines on Best Practice in the audit of Risk in Public/Private Partnerships.
Main conclusions
- The main conclusions of the meeting were:
- the Chairman should report to INCOSAI on the Working Group’s achievements and emerging issues the Group should address, based on the UK SAI’s presentation "Privatisation: 10 years on";
- the Working Group should form a Training Steering Committee to further develop training programmes in the audit of privatisation. The Training Steering Committee should initially consist of representatives from the SAIs of Egypt, the UK, and Norway, and the INTOSAI Development Initiative; and
- the Secretariat of the Working Group should amend the draft Guidelines on Best Practice in the Audit of Risk in Public-Private Partnerships to reflect discussions at the 10thmeeting, and circulate them to members for further comment before submitting them to XVIII INCOSAI for formal approval.
Theme 1 – Experiences in the audit of privatisation
- Mr. Ježek gave a presentation on the experience of privatisation in the Czech Republic from the perspective of the audited body – the Czech National Property Fund. He outlined what he saw as the 4 pillars of transition to a market economy (macroeconomic stability; price liberalisation; tax reform; and privatisation) and suggested that key drivers for successful privatisation in the Czech Republic were the speed of privatisation and use of vouchers in large-scale privatisations. Commenting on Mr. Ježek’s presentation to the Group as a privatisation practitioner, the Chairman expressed his delight that those auditing privatisations and those doing privatisations were able to come together to share experiences.
- A number of Members set out their experience in auditing privatisation, and the latest developments in their countries:
- The SAI of Poland talked about the experience of auditing the Polish Ministry of State Treasury’s liquidation of hundreds of enterprises between 1990 and 2002. The presentation pointed to a number of failings in the process of liquidation, including: lack of good record-keeping, that liquidations often took much longer than anticipated, conflicts of interest among liquidators – which were encouraged by weak appointment processes – and insufficient monitoring of how liquidators are paid.
- This presentation was followed by a general discussion around the theme of failed privatisations. The SAIs of the Zambia and the UK referred to similarly adverse outcomes that followed the respective privatisations of Zambian mines and Britain’s railways. The SAI of Egypt drew the distinction between privatisation of strategic sectors such as transport and small firms that have much less strategic importance. The Chairman suggested that members might wish to hold further discussions about failed privatisations at a future meeting.
- The Slovenian SAI outlined the findings and impacts of seven privatisation audits undertaken by the Slovenian Court of Audit since 2000. The audits reflected mixed experiences with privatisation in Slovenia. The presentation also addressed some of the practical and legal difficulties involved with completing these audits. The SAI stressed the need for greater co-operation between SAIs (such as recent joint working between the UK and Slovenian SAIs on a bank privatisation audit), the importance of asking "so what?" in undertaking an audit, and improved reporting of, and communication of, audit findings. The Chairman agreed that good communication with government was fundamental to successful audit, and proposed that this theme be developed further at future Working Group meetings. The SAI of Australia noted two related challenges - defining who the auditee is, and publishing findings that do not breach commerciality given the increased use of advisors by government.
- The SAI of Saudi Arabia relayed their experience of auditing Saudi Telecommunications, which was privatised in 1998. The audit found that preparation for privatisation with cash accounting raised a number of difficulties in determining a fair valuation. As a result of the audit, the balance sheet was altered to reflect a truer statement of the asset value of the company. In a discussion on valuation issues, the SAIs of UK and Austria highlighted the importance of competition in the market and government pressures in determining how assets to be privatised are valued (the UK and Austrian SAIs cited the respective and contrasting examples of UK third generation mobile telephone licenses selling at the top of the market, and the sale of shares in the main Austria telecommunications company in a weak market).
- The Group discussed a paper written by the SAI of India about the privatisation of State Owned Enterprises in India. The word "disinvestment" is typically used to describe a privatisation in India, and members exchanged views about the varying language of privatisation in different countries. There was also some debate about the impact of the stage of development of a country’s capital market on the decision on whether to undertake a trade sale or to arrange a flotation of the business to be privatised.
- The SAI of the Czech Republic presented their experiences of auditing privatisation. The presentation covered a wide range of issues, in particular the restricted powers of the SAI to undertake privatisation audits and the adverse impact that bureaucratic uncertainty can have on the privatisation process. The Chairman commended the SAI of the Czech Republic for providing other SAIs with an encyclopaedia of knowledge about the audit of privatisation. The SAI of Hungary noted how important it is to develop the appropriate framework within which to ensure that the findings of privatisations are taken on board by government.
- The SAI of Bangladesh told members that the SAI of Bangladesh had made good use of the Group’s guidelines, while making a few adaptions for local circumstances. They consider the main challenges for the future to be the development of more specialist training, increasing exchanges of knowledge between SAIs, and improving audit recommendations and reporting.
- The SAI of Germany talked to the group about the legal, philosophical and structural context in which privatisation audit in Germany takes place. The SAI act more as advisors to government departments that auditors, and this places them in a good position to influence legislation, procurement and public works projects. The presentation also made mention of the increased role of PPPs in Germany, and the need to develop risk "landscapes" , meaning that parties to PPPs would price the risk that they take on over the long-term contracts that they enter into.
- The SAI of Romania delivered a presentation on the audit of the privatisation of Steau Electrica. The SAI described this particular privatisation as a failure because of a number of failings in the process of privatisation (including lack of competitive negotiations, delays, litigation and insufficient marketing). The SAI outlined the recommendations they made to the government in these areas.
- The SAI of Brazil set out their experiences in monitoring the regulation of utilities in Brazil. The SAI seek to promote the effectiveness and efficiency of tariff regulation. In the audit of the National Agency of Electric Power, the SAI applied the INTOSAI Guidelines on the audit of Economic Regulation and developed new criteria and procedures to accompany tariff revisions.
Theme 2 – Lessons learned during the Working Group’s first 10 years
- The UK SAI outlined the achievements of the Working Group during its first 10 years, and set out 4 key messages that had emerged in this time:
- that context is crucial when applying the guidelines;
- that the SAI can assess whether a privatisation was a good deal by examining the business, the method of sale, and the timing of the sale;
- that the SAI has a role after privatisation; and
- that SAIs are developing their skills in privatisation audit
- The Chairman reflected that the Group’s discussions over the last 10 years mirrored the economic history of the world over the period. He called on members to suggest issues that the Group might take forward in the future. The SAI of Hungary commended the long-term view taken in the presentation and offered to present a paper at next year’s meeting relating to 10 years of privatisation in Hungary. It was agreed that the UK SAI would further develop the "Privatisation: 10 years on" presentation, and distribute it to members, in order that it can be delivered at XVIII INCOSAI in Budapest in 2004.
Theme 3 – Training in the use of the Working Group’s guidelines
- The SAI of Egypt stressed the need for good audit skills and proposed a 7-part approach to training in the use of the Group’s guidelines. They also called for the creation of a standing committee to take forward the development of training in the future.
- Representatives of the INTOSAI Development Initiative (IDI) reported on their experiences with the development of a multi-stage privatisation audit training programme, and outlined IDI’s strategic plan for the next few years. The presentation was followed by a discussion of whether IDI should deliver the privatisation audit training programme directly to auditors, or whether it was preferable to train "champions" in privatisation audit who could deliver such training back in their own SAIs. In both instances, IDI envisaged a need for "Subject Matter Experts" from various SAIs. Issues raised included:
- whether "champions" would move on and reduce the effectiveness of this form of training;
- the extent of expertise required to qualify as a Subject Matter Expert;
- the need to train the privatisers as well as the auditors;
- the possible read across from a training course developed by the German SAI in the audit of privatisation (the SAI of Germany offered to make the outline of this course available to the group);
- the need to clearly define what is meant by a "developed" and what is meant by a "developing" SAI; and
- the possibility of extending the training to cover PPP/PFI and economic regulation.
- Members agreed that a Training Steering Committee should be established and that the SAIs of the UK, Egypt, and Norway, in co-operation with representatives of the IDI, would initially take forward the issue of privatisation audit training.
Theme 4 – Draft guidelines on best practice in the audit of risk in Public-Private Partnerships
- The Group discussed the draft Guidelines for the second time. Members of the Group made a number of comments about the guidelines, and it was agreed that the Secretariat would revise the guidelines accordingly. The amended guidelines would then be distributed to members for further consideration.
Dates of future Meetings
- It was agreed that the Secretariat would advise members about the date and location of the 2004 meeting. Shortly after the 10th meeting in Prague, the SAI of the Bulgaria kindly offered to host the 11th meeting in Sofia in June 2004. The precise timing and location will be advised by the Secretariat in due course.
Prague, June 2003