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INTOSAI Working Group on the Audit of Privatisation,
Economic Regulation and Public Private Partnerships



SAI Working Group on the Audit of Privatisation

Proceedings of the Twelfth Meeting  Brasilia, 12 – 14 September 2005

  1. The INTOSAI Working Group on the Audit of Privatisation held its 12th meeting in Brasilia on 13 and 14 September 2005. The meeting was attended by representatives of 27 Supreme Audit Institutions, 6 who were not yet members of the Group.
  2. The meeting opened with welcoming remarks from Mr. Adylson Motta President of the Court of Audit of Brazil. Sir John Bourn, Comptroller and Auditor General of the United Kingdom and Chairman of the Working Group, thanked Mr. Motta and his Brazilian colleagues, on behalf of all delegates, for such a warm welcome and for their excellent efforts in hosting the meeting.
  3. Sir John Bourn drew attention to the presentation of the conclusions of the 11th meeting to XVIII INCOSAI in Budapest and the need to continue this progress in light of the next meeting in Mexico City in 2007.


Meeting Objectives

  1. At XVIII INCOSAI it was agreed that in the period leading up to XIX INCOSAI in 2007, the Working Group should focus its efforts on:
     
    • Developing and submitting to the Governing Board sets of case studies which cater for differences between SAIs.
    • Continuing to adjust guidelines in the light of experience.
    • To carry out more training through the INTOSAI Development Initiative.
    • To do joint studies with two or more SAIs doing joint reports on selected features of each other’s programmes.
       
  2. The agenda for the 11th meeting was able to meet this remit through the following work programme:
     
    • Presentations from the SAIs of Bulgaria and Morocco, on a range of issues relating to the audit of privatisation. There were also two papers from the SAI of Brazil on the audit of economic regulation and papers from the SAIs of Norway, the UK and Hungary on matters relating to PPPs.
    • A discussion around the Working Groups Draft Technical Case Examples and the best way to take this initiative forward.
    • Discussion of training priorities for future needs.
    • Discussion around the potential opportunities for joint working within the Working Group.
       

Main Conclusions

  1. The main conclusions of the 12th meeting were:
     
    • Members found the Working Group guidelines to have a tangible and useful impact on their audits, as evidenced by the extensive use of the guidelines in the Brazilian approach to the audit of regulation. It is important to update the guidelines to reflect changing circumstances and different levels of experience. This might usefully include:
      • guidance on dealing with independent bodies such as the Moroccan Commission of Transfers and Evaluation Body and the Hungarian PPP Inter-departmental Committee;
      • revising the guidelines to encompass the audit of PPPs across their full lifecycle to reflect the fact that the assessment of vfm can vary over time and;
      • the need to provide measures to protect the State’s ongoing interests.
    • Members welcomed the Draft Technical Case Studies as an addition to the Working Group’s outputs and their focus on drawing lessons from a wider international perspective. However it was felt that it was difficult to derive practical advice from the examples provided.
    • The Working Group should continue to facilitate the sharing of information between both Members and external organisations such as the World Bank and OECD.
    • The Working Group should reconsider training priorities in privatisation and post privatisation audit.

Theme 1 – Experiences in the audit of privatisation

  1. Ms Dileta Kassabova of the Bulgarian national Audit Office spoke about the Bulgarian experience of auditing concessions. She explained that they encountered problems relating to a lack of monitoring by the state and no standardisation of processes; these were exacerbated by the limited time available for the audits. The Bulgarian Audit Office addressed this by adopting a wide scope and drawing lessons from across the sector and focussing their more detailed work in areas where it would add most value. This approach allowed them to promote improvements across all concession contracts and highlighted areas for future work; it also led to an amendment to the Concessions Act and the creation of an auditing standard for the examination of concessions. Ms. Kassabova drew attention to the fact that in many cases there was no competition in the award of concessions because such agreements were initiated by the private sector but the increased transparency as a result of the audit is improving the situation.
  2. Following this, Mr. Ahmed El Midaoui, the First President of the Moroccan Court of Audit, gave a presentation on the Moroccan experience of auditing Privatisations. The legal framework was described with attention given to The Commission of Transfers, which assists the responsible Minister, and The Evaluation Body, which sets the minimum price. Mr. El Midaoui went on to explain the effect the recent privatisation programme had had on the economy and the increasing responsibilities of the Moroccan Court of Audit and hence their decision to join the Working Group. Delegates questioned Mr. El Midaoui on the use of the funds received from the privatisations; it was explained that in part these go to the Hassan II fund to provide support to infrastructure projects. The Moroccan Court of Audit agreed to share their most recent audit report with the Working Group.

Theme 2 – Experiences in the audit of regulation

  1. The Brazilian Court of Audit (TCU) gave two presentations on the audit of economic regulation. The first was given by Mr. Luciano dos Santos Danni and focussed on the Brazilian’s application of the INTOSAI Working Group Guidelines on regulation. He highlighted the five areas covered by the guidelines and the how the Brazilians had addressed these. Firstly he spoke of the need to develop SAI Skills and the project financed by the Inter American development bank and supported by an academic body that analysed the capacity of the TCU and mapped internal processes, he also spoke of the graduate courses that had been provided in-house. Mr Danni then addressed the how the TCU had developed their knowledge of the Business of Economic Regulation through performing audits on sectors, examining the budgets and staff complements of regulatory agencies and monitoring public hearings. The guideline on The Supply of Service was addressed through audits of the monitoring arrangements following the electricity crisis and cross subsidy arrangements in the energy sector and an audit of the environmental assessments undertaken when awarding concessions. A better understanding of the Price of Service was obtained through monitoring periodic tariff reviews in electricity distribution and weaknesses found in the regulation of passenger coach services and telecommunications sector. Finally the guidelines relating to Developing Competition were addressed through the audit of Interstate passenger coach transport where it was highlighted that the regulator was not promoting competition. Subsequent questioning raised the issue of the need to build trust when auditing independent bodies such as regulatory agencies.
  2. Mr. Adalberto Santos de Vasconcelos then gave a presentation on the Brazilian experience of auditing the regulation of highway concessions. This was put into context by a review of the history and relevant legislation. It was explained that the market for highway concessions accounts for 25% of paved roads in Brazil and that the profitability of the contracts, that is the annual return over and above financing costs, ranged from between 11 and 24 percent. The TCU work highlighted a raft of problems including poor monitoring, overpricing in proposals and incorrectly calculated tariff adjustments.

Theme 3 – Experiences in the audit of PPPs

  1. Ms. Kjersti Morland Semlitsch of the Office of the Auditor general of Norway spoke about the recent Norwegian experience of auditing PPPs. She explained that there were inherent problems in auditing this area including a lack of experience and the absence of any guidance on PPPs in Norway. There uncertainties around the future of PPPs in Norway such as a lack of political support following failures at a local level but they could be a way to ensure the continued maintenance of schools and hospitals.
  2. Ms. Patricia Leahy of the UK National Audit Office spoke about a new approach to assessing vfm over the lifecycle of a PPP deal. She explained that the existing approach of examining the deal using the ‘four pillars’ takes no account of the operational performance of the PPP. The new approach involves a two dimensional matrix. This incorporates the key chronological stages of the deal, from strategic analysis to mature operational, and gives a range of key value for money indicators for each stage; each indicator is supported by detailed audit questions. As well as being suitable for assessing individual deals the approach can also be used to assess programmes of PPPs and to act as a traffic light system to highlight the key risks. Dr Obeid Shreim raised the question of auditing the effectiveness of PPPs and the difficulties of attributing outcomes to a particular procurement method. It was acknowledged that this was difficult but that it can be addressed by developing benchmarking systems. It was also pointed out that this approach does not have to be applied at the conclusion of a deal but rather it can be applied at numerous stages throughout the lifecycle. It can even be used as a framework to look ahead to see if risks are being anticipated.
  3. Dr. Gusztáv Báger of the Hungarian State Audit Office presented a paper covering the Hungarian experience of PPPs and specific audit issues that this had thrown up. He explained that Hungary is attracted to PPPs because the private sector is more efficient at procurement and the state cannot breach Maastricht criteria on state debt and deficit. The Government has established a PPP committee in order to take this initiative forward; one of their roles is to develop a central databank of deals so that they are in a better position to pass judgement on whether deals go ahead. Early deals have been unsatisfactory with the state taking on too much of the risks and incurring huge liabilities. Dr. Báger explained that the Hungarian State Audit Office is to establish a specialist PPP section so that it has the capacity improve the process.
  4. Mr. Jens Treuner of the Bundesrechungshof gave an impromptu presentation on the management of risks in PPP deals. He proposed a framework for identifying, allocating and monitoring risks and also listed some examples of common risks in PPP deals. The conclusion was that PPP needs to be beneficial to both parties and that this aim is achievable with good decision making and contract management.

Working Group Products

  1. Ms. Patricia Leahy and Mr. Oliver Lodge introduced three technical case examples on the subjects of valuation, evaluating socio-economic and environmental impacts and a dictionary and guide to the privatisation process. Although both sets of documents were well received there was feeling that although the case examples highlighted examples they did not draw conclusions from these that would be of value to auditors faced with difficult judgements such as valuing a business for which there is no market or the effect of claw back provisions on the valuation. Delegates thought the generic audit framework in the dictionary and guide to privatisation very useful but were concerned that the privatisation process was very different in different countries and that this was not presently captured in the guide. It was agreed that there was scope for turning this document into a quasi audit programme by identifying steps common to all privatisations.

The Portuguese and Venezuelan Experiences

  1. Mr. Carlos Moreno of the Tribunal de Contas of Portugal kindly agreed to make a short presentation on the results of Portuguese audits into their PPPs in the rail and highway sector. They have found that the public sector did not dedicate the resources needed to make the deals work and their negotiating capacity was weak; deals had been entered into principally to avoid funding investment from the state budget. As a result of this the risk transfer was not optimal and there was not scope for the public sector to share gains. Mr. Clodosbaldo Russián, Contralor General of the Contraloroía General de la República in Venezuela, made the point that in many countries the audit process was heavily tied to the legal system and that a more rounded vfm assessment such as that used by the UK should be employed.

Break Out Sessions

  1. Members of the Working Group were invited to join one of three discussion groups around the themes of auditing privatisations, regulation and PPPs. The groups explored current issues affecting their work in these areas and the implications for the future work program of the Working Group. The following issues were reported:

i. Privatisation

ii. Regulation

  • It is essential to fully define the role of SAIs as different countries may have different challenges. This could lead to adapting the guidelines to account for the different levels of development.
  • Regulators often lack capacity; can the SAI have a role in developing this?
  • There are often difficulties in accountability and transparency of the regulators. In addition they may not be sufficiently independent (for example if they have industry representatives working for them).
  • SAIs have a role in drawing out the best practice in regulation. This could be achieved through the sharing of case studies and reports on the Working Group website.

iii. PPPs

  • The need for guidance on legislation required for audit intervention in these types of projects. The Working Group has a large amount of experience on obtaining access rights to PPPs.
  • The Working Group could provide information on effective contract management so that this risk could be militated. This could encompass identification, allocation and monitoring of risks.
  • Further training to highlight specific areas such as claw back provisions.

Conclusions and future meetings

  1. The draft conclusions were circulated and comments invited. It was explained that comments would be incorporated prior to publication of the conclusions on the website.
  2. The subject of the location and timing of the 13th meeting of the Working Group was raised and expressions of interest were invited. Owing to time constraints interested parties were asked to contact the Working Group secretariat following the meeting.
Eleventh Meeting Index