SAI Working Group on the Audit of Privatisation
Proceedings of the Eleventh Meeting Sofia, 31 May - 3 June 2004
- The INTOSAI Working Group on the Audit of Privatisation held its 11th meeting in Sofia on 1 and 2 June 2004. The meeting was attended by representatives of 25 Supreme Audit Institutions (see Annex 1for a list of participants)
- The meeting opened with welcoming remarks from Dr. Nikolov, President of the National Audit Office of the Republic of Bulgaria. Sir John Bourn, Comptroller and Auditor General of the United Kingdom and Chairman of the Working Group, thanked Dr. Nikolov and his Bulgarian colleagues, on behalf of all delegates, for such a warm welcome and for their excellent efforts in hosting the meeting.
- Sir John Bourn also informed delegates that owing to a commitment to the International Labour Organisation he would be departing from Sofia in the afternoon of 1 June and would hand over the Chair to Jeremy Colman, Assistant Auditor General of the UK National Audit Office.
Meeting Objectives
- The Working Group’s remit, as set for it at XVII INCOSAI, was 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 of issues arising in the partnerships’ field and where the state is a minority shareholder, and on alternatives to regulation.
- The agenda for the 11th meeting was able to meet this remit through the following work programme:
- Presentations from the SAIs of Bulgaria, Hungary, the UK, Lithuania, the Russian Federation and Prof. Valery Dimitrov, Chair of the Economic Policy Committee at the XXXIX National Assembly of Bulgaria and Mr. Dimitar Ivanovski, Bulgarian Deputy Minister of Economy, on a range of issues relating to the audit of privatisation.
- Papers from the SAIs of Estonia and the UK on matters relating to PPPs and from the SAIs of Norway and Brazil on the audit of economic regulation.
- Discussion of recent training outcomes and priorities for future training needs, building on the first meeting of the Working Group’s Training Steering Committee held in Oslo earlier this year.
- Discussion of recent training outcomes and priorities for future training needs, building on the first meeting of the Working Group’s Training Steering Committee held in Oslo earlier this year.
Main Conclusions
- The main conclusions of the 11th meeting were:
- Members found the Working Group guidelines to have a tangible and useful impact on their audits of privatisation and recognise the value of working in partnership with other SAIs. The guidelines have responded to changing circumstances over the past decade. The importance of understanding the country context and the privatisation cycle was raised in a number of presentations, touching upon limitations such as the timing and scope of audits.
- The Working Group should continue to assist in training courses in privatisation and post privatisation audit, and the Secretariat will review and action priorities for future training needs agreed at the 11th meeting;
- The Chairman will report to INCOSAI in October 2004 on the outputs of the Working Group and fulfilment of our remit as discussed at the 11th meeting. The Chairman circulated to Members a paper based around the first 10 years’ experience of privatisation and related audit issues, which will be included in his report to XVIII INCOSAI.
Theme 1 – Experiences in the audit of privatisation
- Prof. Dimitrov, Chair of the Economic Policy Committee at the XXXIX National Assembly, gave a presentation on the legal framework of privatisation and post-privatisation control in Bulgaria. The presentation set out the implications of the recent privatisation act, adopted in 2002, which introduced the principle that all state owned companies (with a few exceptions) should be subject to privatisation. The privatisation process is now decentralised, but with a central Privatisation Agency to monitor the obligations of buyers. Prof. Dimitrov suggested the central agency is a hangover from the old regime and questioned whether it was still appropriate as it can cause disputes and fear. However, overall he believed the new legislation would speed up the process and increase accountability and transparency.
- The Bulgarian privatisation experience was taken up by Mr. Ivanovski, Deputy Minister of Economy, who outlined the history of the process from 1992 onwards. The remaining block of non-privatised entities is small and largely consists of areas of strategic importance to the Bulgarian economy. With the introduction of the new law some slowing down of pace has occurred, but in the lead up to Bulgaria joining the European Union in 2007, the pace should pick up as the final stages of the process are transacted.
- The SAI of Bulgaria then talked about how best practice could be adopted within the Bulgarian privatisation regime. The presentation touched upon limitations of scope – in Bulgaria auditors are restricted to looking only at the proceeds and examining the fiscal effects of the privatisation. This remit is thought too narrow, but the SAI take the approach that risks can be overcome in spite of the limitations, if sufficient forethought is given at the planning stage to the methodology used. The Chairman commented that although auditors have to live within the law, they should not take the "do nothing" approach, and that the Bulgarians had managed this situation well.
- Members heard a joint presentation from the SAIs of Hungary and the UK on the subject of a recent publication - a 10 year evaluation of privatisation audit in Hungary. The SAI of Hungary talked through the objectives of privatisation and the policy decisions taken over methods available. Although there have been ongoing problems with corruption, the process has been seen through the various privatisation cycles and the end-result is that the Hungarian economy is now in a position to be evolved into the economy of the EU. The SAI of the UK, who helped review the study, responded to the presentation. In their experience although it is possible to compare the privatisation methods open to transition economies, there is no winning formula. However, there is evidence that insider methods are not good for economic efficiency, coupon systems are not clearly advantageous, banking reforms and elimination of subsidies needed to come sooner in the process and outsider sales generate most efficiency but also greatest social dissatisfaction.
- Following these presentations, Mr Raschendorfer from the Austrian Court of Accounts generated some discussion by informing members that he and Dr. Kovács of the Hungarian SAI, along with the Chairman, were attendees at the inaugural meeting of the Working Group in 1993. They had witnessed developments in privatisation for over 10 years and had seen the benefits derived from sharing of experiences. The Chairman commented that the Working Group had reacted to the changing world and globalisation of the economy by adapting its work to new circumstances. He was delighted that members had found the Guidelines developed by the Group had actually been of real value.
- The Lithuanian SAI delivered a presentation which outlined their country’s system of privatisation, the main audit issues and the impact and role of the National Audit Office. A Privatisation Committee was established to supervise the process and the State Property Fund assisted in preparing entities for privatisation and monitoring the process. The Lithuanian NAO’s audit of privatisation concluded that the State Property Fund was not independent from Government, that the Privatisation Commission was a politicised institution, that legislation needed to be improved, in particular to give the Government "step in rights". On the basis of the National Audit Office’s recommendations a number of improvements were agreed with the Government and privatisation institutions.
- The SAI of the Russian Federation described their experiences in auditing the effectiveness of a privatisation model. The Government is proposing a new model to replace that which has been in operation for the past 10 years and has proved inefficient. The new programme aims to be more strategic and looks beyond the short term. The presentation set out the key features of a privatisation audit and how these might prevent problems encountered under the old model, such as misappropriation of assets.
Theme 2 – Experiences in the audit of PPP and economic regulation
- Based on the case of Enterprise Estonia (EE) - a partnership aimed at handling direct payments, EU funds and advising and training for the Ministry of Economics - the SAI of Estonia identified three potential problems with PPP:
- Governance by incident (reactive, rather than proactive decision making);
- Difficulty in achieving greater efficiency through PPP (e.g. high staff and administrative costs at EE); and
- Sub-optimal deliverables against public interest goals (e.g. regional singularity rather than co-ordinated regional development)
The Chair re-iterated the need for clear, objective criteria against which to assess the success of PPPs, citing the provision of helicopter pilot training in the UK through a PPP as an example of when such criteria were established.
- The SAI of the UK followed with observations on how corporate governance arrangements in PPPs could be improved, to increase the chances of PPPs delivering services effectively - as well as increasing the chance of them being socially acceptable. The presentation set out the draft framework on corporate governance in PPPs that is being developed by UNECE (the United Nations Economic Commission for Europe). The framework takes a broad definition of corporate governance and covers public accountability, the benefits of transparency (to Parliament and public), meeting social objectives while delivering commercial success, effective dispute resolution, and security and safety. The talk concluded by recognising that the spread of knowledge in a forum such as INTOSAI could play a key part in encouraging good governance.
Economic regulation
- Members heard two presentations about economic regulation. The SAI of Norway outlined how regulation of the railway service in Norway is developing. In recent years, the Norwegian Railway Corporation has performed poorly in seeking to meet targets that included passenger growth, train punctuality, and capacity utilisation. As a result of a performance audit by the SAI of Norway, the Ministry of Transport is seeking to improve its gathering of performance and management information, to focus its monitoring less on input activity and more on outcomes, and to apply sanctions in the event of poor performance outcomes against targets.
- The SAI of Brazil then delivered a presentation that provided an overview of utility regulation in Brazil. The presentation made reference to an audit that found large shortfalls in electricity provision following privatisation, particularly in the north of the country. The problems in electricity consumption have been compounded by the fact that, under the criteria followed by the Brazilian government, high income consumers have been receiving more subsidy than more needy low income consumers.
Theme 3 – Training
- Representatives of the INTOSAI Development Initiative (IDI) reported on progress in developing training in various audit fields, focusing on the privatisation audit course that they have formulated in co-operation with ASOSAI and the Privatisation Working Group over the past two years. The IDI also told the Group that they were about to undertake a global survey of training and capacity building needs in developing and emerging nation SAIs, to help determine how best to deploy its resources over the coming years.
- The SAI of the UK gave a report back from the first meeting of the Training Steering Committee in Oslo in April 2004. The next major step for training would be a series of illustrative case examples, based around key technical issues as follows:
- The presentation was followed by a "break out" and general group discussion about which technical issues the Secretariat should prioritise in taking forward the case examples. Members identified a range of technical issues connected with privatisation, PPP and economic regulation audit that they felt were important to illustrate more clearly, in particular:
- Understanding and maximising auditor access rights;
- Determining which methodological framework to adopt in undertaking an evaluation of privatisation or the post-privatisation environment (how, for example, should the auditor assess the economic and social effects of a privatisation or PPP? Or, alternatively, how can the auditor best evaluate the legal frameworks within which privatisation and regulation take place?);
- Understanding the best methods of asset valuation and price setting;
- How to make a partnership with the private sector work in practice; and
- Understanding how economic regulation works best in different sectors of the economy.
- Members agreed that the Working Group should continue to assist in training courses in privatisation (and any that might be developed for the audit of economic regulation and PPP), and that the Secretariat would review and action priorities for the series of case examples.
Theme 4 – Reporting to XVIII INCOSAI
- The meeting concluded with agreement that the Chairman should report to XVIII INCOSAI in Budapest in October 2004 based around the results of meetings of the Group since XVII INCOSAI. The Chairman would also submit a paper titled "Privatisation: 10 years on", reflecting on the achievements of the Working Group in its first decade, and the key lessons that members have learned through sharing experiences with one another.
Dates of future meetings
- The SAI of Brazil offered to host the 12th meeting of the Group during the latter part of 2005. The precise timing and location will be advised by the Secretariat in due course.
Sofia, June 2004