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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 Thirteenth Meeting  London, 27 and 28 September 2006

  1. The INTOSAI Working Group on the Audit of Privatisation held its 13th meeting in London on 27 and 28 September 2006. The meeting was attended by representatives of 28 Supreme Audit Institutions, 3 of which were not members of the Group Two external speakers also attended the meeting; Mathilde Mesnard from the OECD and Ed Farquharson from Partnerships UK.
  2. The meeting opened with welcoming remarks from Sir John Bourn, Comptroller and Auditor General of the United Kingdom and Chairman of the Working Group. Sir John extended a warm welcome to delegates and hoped that they found the meeting productive and useful.
  3. Sir John Bourn drew attention to the conclusions of the 12th meeting in Brasilia and to the Working Group’s remit set at XVIII INCOSAI in Budapest in 2004. Sir John highlighted the need to continue progress in light of the next INCOSAI meeting in Mexico City in 2007.
  4.  Sir John considered that there had been significant historical developments in the privatisation field since the Working Group’s inception in 1993. The Group had moved from looking at privatisation to the related areas of economic regulation and Public Private Partnerships. Sir John suggested that the Group could consider changing its title to reflect these developments and its widening remit.
  5. The Working Group then heard from Sir John about some of the recent developments in the UK in fields related to the Group’s work. There are currently two high profile privatisations which the UK NAO is monitoring; the flotation of Qinetiq, the Government’s military research organisation and the planned sale of the Tote, the state run bookmaker, to the racing industry. Sir John also explained to the Group that in the area of economic regulation the NAO had recently been asked to audit the Financial Services Authority, the independent organisation responsible for regulating the financial and banking industry. He then highlighted some unusual and exotic ways in which Public Private Partnerships were being developed in the UK; in particular he drew on the example of a hospital trust which had entered into a joint venture with the private sector to breed maggots for medical purposes.


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 13th meeting was able to meet this remit through the following work programme:
     
    • Presentations from the OECD and the SAIs of Yemen, Poland and the Czech Republic on a range of issues relating to the audit of privatisation. There was also a paper from the SAI of Australia on the audit of economic regulation and presentations from the SAIs of the UK and Brazil and also from Partnerships UK on matters relating to PPPs.
    • Discussion and interactive voting around future work priorities for the Group, including update of the guidelines, in advance of XIX INCOSAI.
    • Discussion around the new Working Groups Technical Case Studies and potential future topics which the Group considered would be useful to members.
    • Discussion of training priorities for future needs and whether there were alternative ways of providing training to SAIs given IDI’s reluctance to prioritise training in the area of privatisation, economic regulation and Public Private Partnerships.
    • Discussion around the potential opportunities for joint working within the Working Group including the work to date between the UK and the SAI of Russia on the Dictionary of Privatisation terms.

Main Conclusions

  1. The main conclusions of the 13th meeting were:
     
    • Guidelines The Working Group agreed to update the PPP guidelines in the light of experience to fulfil our remit in advance of XIX INCOSAI. The Group did not attach such priority to updating the privatisation and economic regulation best practice guidelines.
    • Training SAIs considered that they still had a need for training, particularly for the audit of Public Private Partnerships. The Working Group explored options for carrying out training without drawing on significant resources from IDI. This for example could include more on-the-job secondments for auditors to assist SAIs in their audits.
    • Case Studies The consensus of the Working Group was that the technical case studies were useful to their work. The SAI of Brazil suggested that it would be useful to provide a web link to the examples where possible back to the full SAI report. A number of topics for future studies were prioritised (see paragraph 24).
    • Joint working The Working Group agreed to carry out further joint working projects and discussed opportunities for SAIs to work bilaterally. It was suggested that the Group could establish a network of sectoral and thematic experts and that the addition of an online collaboration tool to the website would facilitate joint working. Members of the Working Group were content for joint projects to carry the INTOSAI logo.
    • Timing of Audits The Working Group discussed the advantages and disadvantages of the SAI’s involvement, for example by way of providing advice, prior to privatisation. While only 15 % of delegates had statutory responsibility for carrying out pre-privatisation activities the majority of members were in favour of the Group actively encouraging their SAIs, where appropriate and in the interests of spreading best practice, to undertake more pre-privatisation activities.
    • Title of Group The Working Group welcomed Sir John’s suggestion that the title of the Group could be expanded to cover economic regulation and Public Private Partnerships given that these areas now form a significant area of our work. Sir John proposed to contact the Secretary General of INTOSAI in Vienna to pursue this change.

Theme 1 – Experiences in the audit of privatisation

  1. Ms. Mathilde Mesnard, economist from the OECD, began the presentations with a paper on the OECD Guidelines on Corporate Governance of State Owned Enterprises. The rationale for developing the guidelines was described and Ms. Mesnard explained that a survey of OECD countries on this subject had preceded the guidelines and informed their development. The process for development of the guidelines had then involved extensive and inclusive consultation with relevant players from OECD member and non-member countries. The priorities within the guidelines were to ensure a level playing field with the private sector, reinforce the ownership function within the state administration, improve transparency of State Owned Enterprises’ (SOEs) objectives and performance, strengthen and empower SOE boards and provide equitable treatment of minority shareholders. Since the development of the guidelines the OECD now plan to disseminate these and discuss with non-member countries. The OECD will also undertake follow up work to set up SOE objectives and performance evaluation based on country case studies and will do more on thematic issues such as value creation, board nominations and evaluation. Using the interactive voting technology Ms. Mesnard ascertained that while 22% of delegates currently used the guidelines, a further 59% thought they would be useful in the future. A majority of SAIs also thought that they could help spread best practice in this area through encouraging more use of the guidelines.
  2. Following this, Dr. Obeid Shreim, Vice President of the Central Organisation for Control and Auditing of the Republic of Yemen presented to the Group on the World Bank’s experience of privatisation. Dr. Shreim highlighted the conclusions of the World Bank’s experience which were broadly comparable with the Working Group’s best practice guidelines on the audit of privatisation. The World Bank has highlighted a number of key factors for a successful privatisation; including political commitment to the programme, experience and appropriate skills within the public sector, a well developed private sector market, adequate and appropriate pre-sale preparation and restructuring, a transparent sale process, robust competition and sufficient attention to the socio-economic implications of privatisation. The World Bank also recommends sales on a cash basis. Sir John Bourn remarked that cash now was always better than promises tomorrow and thought this point, not currently included in the Group’s own guidelines, could usefully be reflected in any future update.
  3. Ms Elzbieta Sikorska from the Supreme Chamber of Control of Poland then talked to the Group about two audits of the Polish spirit industry privatisation. Ms. Sikorska first explained the background to the audits. It was important to the SAI of Poland to evaluate the process and understand reasons why there were still non privatised companies within the spirit industry, despite the adoption of a policy to do so in 1998. Whilst these were the first privatisations in Poland where the Government prioritised and set strategic objectives with regard to the process, the privatisations were delayed and were not very successful in fulfilling objectives. Alcohol is a sensitive issue in Poland because of its high consumption and the high levels of excise duties on these products. The industry was not prepared for privatisation and the ministry responsible for implementing the programme was badly managed. Moreover the private sector companies in the spirit sector performed poorly over the period. The work of the SAI of Poland did a lot to demonstrate the benefits of transparency in the privatisation process. Ms Sikorska was questioned by Mr Holbert, the delegate from the SAI of Australia, about the Chamber’s involvement during the process rather than through traditional post hoc audit. Ms Sikorska agreed that early involvement was useful as it gave more scope to influence the outcome, and lessons were learned earlier avoiding future mistakes. The issue of involvement of the SAI in pre-privatisation activities was of particular interest to the Group and was debated extensively over the two days of the meeting.
  4. The final paper on experiences in the audit of privatisation was given by Ms.Hana Hyksova from the Supreme Audit Office of the Czech Republic. Ms Hyksova presented to the Group about the management of state assets by Railway Infrastructure Administration. The presentation opened by looking at the aim of the audit and the main issue of excess assets. Ms Hyksova also explained the legal framework to the audit and the background to transformation of the state railways. The results of this audit were that the transfer of assets from the Czech Railways was not adequately managed and that planned income from the assets was not realised fully or on a timely basis. The paper concluded that the overall success of the privatisation was limited.

Theme 2 – Experiences in the audit of regulation

  1. Mr Robert Holbert from the Australian National Audit Office presented to the Group on auditing regulatory frameworks for economic assets post privatisation. The paper was based on the example of Sydney airport and its economic role, tensions surrounding its development and regulation, and its transfer to the private sector. Mr Holbert outlined the evolution and structure of the regulatory framework that governs the airport which was unusual in being undertaken by a private company, restricting the Audit Offices access to information.It also explored some of the accountability issues that have emerged from audit activity and the associated lessons learnt. The presentation concluded that programmes to transfer major public buiseness to the private sector have resulted in complex regulatory structures. These structures are constantly evolving and therefore the challenges facing auditors are significant. One particular challenge for the SAI is when the private sector itself is involved in public regulation. Mr Holbert suggested that government strategies should aim to promote public accountability throughout all phases of the development and implementation of regulatory frameworks.

Theme 3 – Experiences in the audit of PPPs

  1. Mr. Peter Morgan from the UK National Audit Office led a workshop on accounting for service concessions. Mr Morgan explained to the Group the defining characteristics of a Private Finance Initiative (PFI) deal and went on to talk about the difficulty of accounting for PFI deals and the controversy this has caused in the UK, where there has been a political expectation that assets constructed under PFI will remain off the public sector’s balance sheet. The interpretations of accounting treatment used under UK Generally Accepted Accounting Practice were compared with differing interpretations under International Financial Reporting Standards and Eurostat guidance. Mr. Morgan used a series of case studies to demonstrate the inconsistencies in treatment of specific assets under these different rules. Delegates were particularly interested in the UK experience and the SAIs of Antigua and Oman described their own accounting arrangements in this field. Mr Camoin, the French delegate, made the interesting point that France has an example of the reverse to the off balance sheet objective to the public sector. The low voltage network for the privatised company Electricité de France (EDF) may be accounted for on the balance sheet by local authorities. If the assets are taken off the EDF balance sheet there could be an impact on share prices.
  2. The next presentation on the audit of Public Private Partnerships was given by Mr. Luciano dos Santos Danni from the Tribunal de Contas Uniao, Brazil. Mr Danni compared the TCU’s remit and framework for the audit of concessions which is well developed to their new oversight strategy for Public Private Partnerships. To audit PPPs the TCU has set up specialised units to look at investment analysis and micro-economic issues. The Brazilian Government has also established a PPP co-ordination Group. In beginning to audit PPPs the SAI of Brazil will face many new challenges including how to audit performance indicators. Mr Danni considered that the difficulties in how to interpret accounting treatment of PPPs, highlighted by the UK’s experience, would be an additional challenge for the TCU. The TCU has several pilot projects to test its oversight strategy, including two road construction projects, an ITC project and an irrigation system construction project.
  3. Mr. Ed Farquharson, an external speaker from Partnerships UK, ended the presentations with an overview of PPP in the UK market. Mr Farquharson started by looking at the different types of PPP that have evolved in the UK, the most prevalent of which is the Private Finance Initiative (PFI). The paper explained some of the key features of PFI procurement, including the importance of the unitary charge and use of the public sector comparator within the overall framework for assessing value for money. Some of the reasons why the UK has embarked on the PFI programme were discussed and institutional issues and challenges were considered. To conclude his overview, Mr Farquharson discussed the benefits of PFI and also the lessons learnt to date from the programme.

Working Group Update

  1. Ms. Patricia Leahy, Mr. Oliver Lodge and Ms. Louise Yaxley, members of the Working Group Secretariat updated delegates on the latest developments since the 12th annual meeting in Brasilia. Ms Leahy began by reminding the Group of their remit set at XVIII INCOSAI.
  2. Mr. Lodge then spoke to the delegates about the technical case studies. The three case studies presented in Brasilia had since been added to in light of additions from members. A further three case studies have also been produced on the subjects of conducting a flotation, protecting the state’s interests following privatisation and accounting for PPP/PFI transactions. Mr Lodge encouraged the Group to consider whether the technical case studies were useful and Mr. Danni from the SAI of Brazil suggested they could be more useful if where country examples were given links were provided to the original source e.g. the SAIs audit report. Mr Lodge also drew delegates’ attention to the notice board facility which had been set-up on the Group’s website.
  3. Ms. Yaxley then spoke about the four existing sets of guidelines produced by the Group and how these might usefully be updated to fulfil the remit set by INCOSAI. Ms Yaxley also explained to delegates that whilst training in privatisation and related fields was no longer a priority for IDI, the Secretariat understood that members were still keen to undertake training and that the Group could consider other, less resource intensive ways in which training could be provided. Ms. Yaxley suggested that these issues as well as debate on the technical case studies could be taken further within the break-out groups.
  4. Ms. Leahy concluded the update by speaking about the dictionary of privatisation terms produced by the UK in collaboration with the Russian Chamber of Accounts. Since the last meeting the dictionary had been updated to take on board comments and generic audit frameworks for auditing privatisations and flotations had been included. There was still further work to be undertaken in making the dictionary a searchable web-based product. Ms. Leahy sought the Group’s approval for branding this joint product with the INTOSAI logo.
  5. Ms. Leahy then asked delegates to turn their attention back to the issue of pre-privatisation audit activity which had been discussed earlier in the meeting. Delegates were given the opportunity to carry out some interactive voting on the subject. The majority of SAIs had no statutory responsibility for pre-privatisation audit. 55% of delegates, however, thought that the Working Group should encourage their SAIs to undertake appropriate pre-privatisation audit activities to encourage use of best practice in the privatisation process.

Break Out Sessions

  1. Members of the Working Group were invited to join one of three discussion groups around the themes of auditing privatisations, economic regulation and PPPs. The groups explored current issues affecting their work in these areas, priorities for the Group’s future work programme and potential topics for technical case studies. The following issues were reported:

i. Privatisation

ii. Regulation

  • Challenges to audit of economic regulation experienced by SAIs include; lack of regulatory bodies in some countries, lack of political commitment to regulate and inexperience.
  • Shareholder protections – an issue for the SAI of France when auditing defence companies.
  • Difficulties of part-privatisation –problems in only auditing public sector shareholding.
  • Ability to audit valuation of assets and companies and the problems of retrospective audit.
  • Protection of public interest when foreign SOEs involved.
  • Problems of auditing Government as a shareholder when objectives change over time.

iii. PPPs

  • Several SAIs had experienced failed PPPs – would be useful to draw on common lessons learnt.
  • Access rights to private sector are a grey area; not always clear, sometimes indirect and overlap with regulators -this causes difficulties in carrying out PPP audits.
  • Some SAIs have experience of PPPs where private sector partner is a foreign investor – cultural differences between partners.
  • Training in PPP audit is a big priority for SAIs. Some IDI material available but more useful if training was on the job/provided by secondees to the SAI.
  • Could we ask the Capacity Building Committee for help with training – it may have a role to play.
  • Working Group should set up networks of sectoral/thematic experts on website to promote joint working.

Future Work Priorities

  1. Following the breakout groups, delegates fed back to the plenary session their two key priorities in each of the fields of privatisation, economic regulation and PPP. These were:

    Privatisation Audit: Issue of limited access rights where state is a minority shareholder and Issue of limitations of retrospective audit.

    Economic Regulation Audit: Developing and improving effective regulatory frameworks and undertaking research on national regulation of international businesses/markets.

    PPP Audit: Developing PPP on-the-job training and joint auditing through a network of experts.
  2. The Working Group delegates were asked to vote on future work priorities and on suggestions for which topics should be taken forward in the technical case studies. Delegates thought that it would be useful to update guidelines for the audit of PPPs, particularly to reflect new thinking on operational performance but did not attach priority to updating the guidelines on privatisation and economic regulation. Topics for future technical case studies were prioritised; these included a general case study on access rights of the SAI, changing/reviewing regulatory frameworks in the light of international experience and lessons learned

Closing Remarks

  1. Sir John Bourn concluded the meeting by thanking delegates for their presentations and contributions to the meeting. Sir John commented that since the Working Group was established in 1993 his perception was that it had become bolder in its opinions and in the direction its work was following. In view of the changing remit of the Group’s work into the fields of economic regulation and PPPs, Sir John suggested he would approach the Secretariat in Vienna about changing the name of the Working Group. The location of the 14th meeting was confirmed as Morocco and timing would be confirmed to members in the near future. A communiqué of objectives and conclusions from the meeting was circulated and agreement from members to this will be sought via the website.
Thirteenth Meeting Index