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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 Fourteenth Meeting Marrakech, 16-18 October 2007

  1. The INTOSAI Working Group on the Audit of Privatisation held its 14th meeting in Marrakech on 17 and 18 October 2007. The meeting was attended by representatives of 33 Supreme Audit Institutions, 26 members and 7 who were not yet members of the Group. 11 Supreme Audit Institutions, including several countries attending for the first time, were members of ARABOSAI – including the Cour des Comptes of Morocco, the host SAI. The Group also welcomed an external speaker, Mathilde Mesnard from the OECD and 5 distinguished observers representing public institutions of the Kingdom of Morocco.
  2. Mr Ed Humpherson, Assistant Auditor General from the UK National Audit Office opened the meeting by welcoming delegates to Marrakech on behalf of Sir John Bourn, Comptroller and Auditor General of the UK and Chairman of the Working Group. Parliamentary business in the United Kingdom meant that Sir John joined delegates on 18 October.
  3. Mr Humpherson told the Group about three developments in the sphere of private finance which he thought would be of future relevance to the Group’s deliberations. The first was the increasing profile of Sovereign Wealth Funds, established to reinvest national surpluses. The size of these funds is increasing rapidly and they are expanding their activities. This raises important questions for auditors about the role and intention of Governments and the corporate governance of these funds.
  4. Mr Humpherson also discussed the emergence of secondary markets which allowed investors to buy interests in PPP deals as long term investments. Where relevant, auditors need to consider the implications of secondary markets, including for service delivery. He also discussed developments relating to private equity investors.
  5. Dr Ahmed El Midaoui, Auditor General of the Cour des Comptes of Morocco also extended a formal welcome to delegates and expressed his desire that it would be a successful meeting.


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 14th meeting was able to meet this remit through the following work programme:
    • Presentations from the SAIs of Morocco, Germany, Bangladesh, Hungary and Egypt on a range of issues relating to the audit of Public Private Partnerships. There were also papers from the SAIs of Brazil, Norway and the UK on the audit of economic regulation and presentations from the SAIs of Australia, Poland and Sweden on matters relating to privatisation.
    • An update to the Group from Mathilde Mesnard from the OECD about further work to supplement the guidelines she presented to the Group in London in 2006 on the corporate governance of state owned enterprises. Guidance is being prepared on accountability and transparency and the OECD saw a valuable role in this for SAIs. The Working Group agreed that there was an important role for SAIs and agreed to comment on the proposals and to coordinate with INCOSAI and the INTOSAI Secretariat on the way forward.
    • There was a discussion of Working Group products and outputs including Technical Case Studies, updated guidelines on Private Finance and Concessions, the guide to and dictionary of privatisation terms, the development of the network of experts and use of the INTOSAI collaboration tool.
    • Discussion around reporting to XIX INCOSAI including how the Working Group has met its remit, a change of name for the group to reflect an expanded remit and a proposed future work programme for the period 2007-2010. The group agreed the following top priorities to be taken forward as subjects for future technical case examples:
      • The importance of regulatory structures
      • Regulation of financial services

Main Conclusions

  1. The main conclusions of the 14th meeting were:
    • Change of Name Delegates voted to change the name of the Working Group to fully reflect our expanded remit. Sir John Bourn will recommend in his report to XIX INCOSAI in November 2007 that the Governing Board approves a new title and that in future the Group will be the INTOSAI Working Group for the Audit of Privatisation, Economic Regulation and Public Private Partnerships.
    • Report to INCOSAI SAIs considered that the draft report to XIX INCOSAI was acceptable and included the right remit for the Working Group going forward. The Working Group will propose to INCOSAI that for the period 2007-2010 we should continue to adjust guidelines where necessary in the light of experience; strengthen and develop the existing series of technical case studies; and develop the INTOSAI collaboration tool as a forum for members to share advice and expertise and to facilitate joint working.
    • Case Studies The consensus of the Working Group was that the technical case studies were useful to their work and that the Group should look to expand these and extend UK experience by including diverse examples from other SAIs.
    • Joint working The Working Group was enthusiastic about opportunities for joint working and discussed opportunities for SAIs to work collaboratively. The Group will start to use the network of experts to strengthen knowledge and skills and will use the INTOSAI collaboration tool as the forum for group discussion.

Theme 1 – Experiences in the Audit of Public Private Partnerships

  1. Dr El Midaoui, Prémier President of the Cours des Comptes opened the presentations with a paper about the Moroccan experience of Public Private Partnerships and the new challenges for SAIs. Dr El Midaoui began by explaining the context of PPP in Morocco, notably the increase in concessions during the 1980s. He then introduced the terms of the new 2006 act on delegated management which sets out principles of public service and processes to be followed by the public and private sectors. The new act has had positive effects in Morocco – particularly in boosting the climate for investment. It has also led to an increase in involvement in auditing PPPs from the Cour des Comptes who report annually to the King about their main observations and recommendations. Dr El Midaoui discussed how the SAI could help the state better play its new roles in ensuring a fair relationship between the public and private sectors. He concluded that the Working Group meeting was an opportunity for SAIs to reinforce their professional capabilities, to help them be in a position to act proactively and to help understand their structural and people needs.
  2. Following this, Mr Joachim Romers representing the Bundesrechnungshof gave a paper looking at the experience of PPPs in Germany. Mr Romers began by explaining the legal framework and current moves to simplify it. He explained that to date there is limited federal experience of auditing PPPs as it is concentrated at a local level. There is currently a strong political commitment to promote PPP in Germany with an emphasis on delivering public services more efficiently. The Government has therefore set some goals for the use of PPPs in terms of investment targets, producing manuals and guidance and developing centres of competence. Mr Romers consulted members about whether their countries had taken a similar approach. While only 23% of members had PPP investment targets in their countries, 59% thought these would be useful. 50% of delegates had manuals and guidance but most countries do not have centres of competence. Mr Romers then went on to talk about two specific examples of PPP at the federal level which the SAI had audited; a Defence IT project and road construction. Interestingly, these projects had not fulfilled expectations – particularly in terms of proven cost benefits.
  3. Mohammad Zakir Hossain then delivered a paper on the Bangladesh perspective on PPPs. Mr Hossain explained the principal reasons why PPP is used in Bangladesh. In particular it is helping the needs of the country and is fulfilling the expectations of important international donors such as the World Bank. In Bangladesh, health has been identified as the sector with the greatest PPP investment. Delegates were asked to identify the most prevalent sectors in their countries the most common being infrastructure. Only 17% of delegates thought health was a key priority in their country for PPP investment. Mr Hossain then set out four criteria for judging effective PPPs; universality, equity, efficiency and accountability and talked about the spectrum of relationships encompassed by PPPs and the potential partners to Government. In Bangladesh NGOs are very influential players in the PPP market. For example they represent 75% of expenditure in the health sector. Important conclusions in the Bangladeshi context are that there is no substitute for a strong public sector role and that for the public interest the influential role of NGOs should be taken into account by Government when setting PPP related policy.
  4. The final presentation on the subject of PPP was given by Dr. Gusztáv Báger representing the SAI of Hungary. The paper provided an update to members on experiences of auditing PPP in Hungary. New legislation has been enacted in Hungary so that a long term development ranking is given to PPP projects. This helps with accountability and transparency and can aid decision making processes. 62% of delegates thought this was appropriate. Dr Báger also explained how the Government has established a PPP inter-departmental committee with oversight of the PPP programme. A new rule has been introduced in Hungary which says that annual expenditure on PPP cannot exceed 3% of total expenditure. This has been increased from the previous rule of 2%. Over half of delegates thought that increasing the percentage of PPP expenditure was efficient. The presentation then focused on three specific PPPs in Hungary (the M5 toll motorway, the palace of arts and student hostels) and assessed them against six key performance themes as per the UK NAO’s methodology for evaluating PPPs. As a result of this work, Dr Báger was able to offer a series of ten conclusions about best practice – in particular he drew attention to the need to learn effectively from failed PPPs.

Theme 2 – Experiences in the Audit of Economic Regulation

  1. Ms Maridel Piloto de Noronha representing the SAI of Brazil began the presentations on the audit of economic regulation. The presentation looked at the new risk based approach of the Brazilian Court of Audit to regulatory agencies. In developing the new approach the SAI mapped the macro-processes and systems used by regulatory bodies and surveyed their data and systems. From this analysis the SAI was able to produce a risk concentration index for each macro-process and an overall colour coded risk map. Ms Piloto de Noronha thought that the exercise has helped the SAI focus its audit efforts, has facilitated better audit planning and has provided better information on competition in various sectors. While a majority of delegates did not currently adopt similar approaches in their countries, 76% thought this approach could be usefully applied.
  2. The presentations continued with a paper on co-operative audit from Ms Kjersti Semlitsch from the Office of the Auditor General of Norway. Ms Semlitsch began by explaining that what she meant by a co-operative audit was wide ranging and could include joint audits, parallel audits or co-ordinated audits. In the case of the audit of the Nordic electricity market which involved several SAIs, the end products were separate national reports and a joint audit memorandum. The presentation demonstrated that it was important to have an agreed audit process which partners were signed up to so that there was a common understanding of approach. Ms Semlitsch reported that the lessons learned so far were that securing commitment from those involved is a continuous process, that SAIs are very different and that this should be accounted for and that “loosening” levels of co-operation is a viable option. The presentation concluded with some tips from the INTOSAI Working Group on Environmental Auditing for undertaking co-operative audits. Encouragingly, 53% of delegates had some previous involvement in co-operative audit and 80% were planning to or wanted to participate in an audit of this nature.
  3. The last presentation on economic regulation was delivered by Mr Ed Humpherson of the UK NAO. The paper looked at Government’s interactions with capital markets and the regulation of capital markets. Mr Humpherson began by defining capital markets and went on to demonstrate the increasing size and importance of capital markets, with Government as a key player particularly in the bond markets. Privatisation is one notable example of how Government interacts with capital markets, but there is also bond issuance, PPP deals and regulation of privatised business to consider. The presentation then looked at the regulation of capital markets. There are different regulatory models with a single consolidated regulator – the Financial Services Authority – operating in the UK. 38% of delegates came from countries with a single regulator; a model which Mr Humpherson suggested was becoming more commonplace. Mr Humpherson talked about the NAO’s first review of the FSA which focused on risk based regulation and combating financial crime. 75% of delegates supported the SAI’s right to conduct performance audits of financial services regulators. The paper concluded that capital markets are a crucial player in private finance and cannot be ignored by SAIs.

Theme 3 – Experiences in the Audit of Privatisation

  1. The first presentation focusing on privatisation audit was given by Ms Alicia Hall of the Australian National Audit Office. Ms Hall’s paper looked at how ANAO audit’s the application of proceeds from asset sales. The proceeds from asset sales have traditionally been used prudently in Australia. The priorities for Government are to reduce net debt and to set aside money for special funds. The presentation focused on the sales of Telestra, Australia’s largest telecommunications company where the proceeds were put into a special fund which was used for environmental purposes and also used to meet unfunded superannuation liabilities. The ANAO found that creating and administering large funds led to some systemic problems. There are problems with capturing all data, forecasting the application of funds and a general misunderstanding of how the funds operate. Ms Hall concluded that the ANAO’s findings support the value in auditing the application of privatisation proceeds.
  2. Ms Elzbieta Sikorska from the Supreme Chamber of Control of Poland then gave a paper focusing on the privatisation of Polskie Huty Stali SA; the largest metallurgical company in Poland. This privatisation was part of a Government programme to restructure the iron and steel industry prepared in co-operation with the European Commission. Despite finding several irregularities – particularly in the valuation process, the SAI issued a positive assessment of the privatisation. Ms Sikorska was pleased to note that 58% of delegates felt they had adequate experience and competence to effectively audit pre-sale valuations – in this case consultancy and advice on valuation had been bought in by the Supreme Chamber of Control from PwC. Overall the sale was judged a success - it prevented the steelworks from bankruptcy, employment levels were sustained and the company almost achieved viability indicators as set by the EC.
  3. The final presentation on privatisation was delivered by Dr Dimitrios Ioannidis of the Swedish National Audit Office. Dr Ioannidis spoke an audit of the Swedish Government’s preparatory work in advance of a large privatisation programme. The Swedish Government announced in October 2007 its intention to decrease state ownership in commercial enterprises and to achieve this aim it committed to review all state owned companies to weigh up the arguments for and against continued ownership. In December 2007 the Government announced that three companies were to be privatised and the state shareholding would be reduced in a further three companies already listed on the stock exchange. The Swedish National Audit Office examined the steps the Swedish Government had taken in preparing the privatisation programme and found that the review announce in October 2007 had not been conducted. Relevant Government agencies had also not been consulted on the plans despite a Constitutional requirement. It was explained that the audit was hampered by insufficient documentation which also highlighted the risk that the Government’s decision making basis was less robust. The audit resulted in a petition to Parliament that future privatisation proposals are preceded by a review.

Working Group Update

  1. Dr. Mathilde Mesnard, attending the annual meeting for the second time and representing the OECD, presented an update to the Group on further work undertaken to supplement their guidelines on the corporate governance of state owned enterprises. The work focuses on accountability and transparency where there is an important role for SAIs. Ms Mesnard thought that the OECD had further work to do in promoting the guidelines as 41% of delegates did not know of their existence but there was encouraging feedback about the suitability of their contents. 90% of delegates also thought that SAIs should be allowed to carry out performance audits of state owned entities.
  2. Ms Louise Yaxley and Mr Oliver Lodge then gave a joint presentation on behalf of the Working Group Secretariat about developments in our work programme. Ms Yaxley began by reminding delegates about our fourfold remit set in 2004. The Group has made good progress in developing technical case examples with ten completed to date. Delegates gave feedback that the most widely used case example is on the topic of valuation in privatisation. During 2007 the Group has also updated existing audit guidelines on private finance and concessions to reflect new audit developments; especially experience of auditing contracts in operation.
  3. Mr Lodge then updated the Group on progress against the other aspects of our remit. In terms of training, the Group has continued to prioritise the strengthening of skills and has developed an online network of experts which can be used to give peer advice on technical audit issues in privatisation and related fields. Encouragingly 77% of delegates thought that they would use to network to address queries to the Group. The Group has also made progress in encouraging joint audits; the UK and Russia collaborated on a privatisation dictionary and members are moving towards use of the new INTOSAI collaboration tool as the Group’s default communication tool. Mr Lodge demonstrated the collaboration tool to members as a majority had not yet used it.
  4. Ms Yaxley then reminded members that at the 2006 annual meeting Sir John Bourn had proposed that the Group change its name to reflect its expanded remit in areas related to privatisation. Delegates voted that the new name of the Group should be the INTOSAI Working Group for the Audit of Privatisation, Economic Regulation and Public Private Partnerships. The Group is required to report to XIX INCOSAI in November 2007. Delegates endorsed the draft report to INCOSAI which gives details of the progress we have made since 2004. The Group was also content with our suggested remit going forwards which includes updating guidelines in the light of experience, strengthening and developing the existing series of technical case studies and developing the collaboration tool as a forum for members to share advice and expertise and to facilitate joint working.

Additional material

  1. The SAI of Egypt had an additional presentation which they wished to share with delegates on the subject of the Egyptian Public Private Partnership Strategy. PPPs have been used in Egypt since 1990 in the form of infrastructure projects (such as highways and ports). The paper defined the various types of PPP that prevalent in Egypt, including service contracts, management contracts and long term utilisation contracts. The broad objectives of PPPs were then described along with the key contractual considerations when entering into PPPs. The paper concluded that PPPs have a high profile in countries with budget deficits but highlighted some of the difficulties faced in the Egyptian market including the relatively weak legislative framework and the lack of technical capacity.

Break Out Groups

  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 and discussed opportunities for collaborative working, barriers to working together and how these could be overcome. Each group was asked to feedback to the plenary session their top three priorities for future work. These were as follows:

i. Privatisation

ii. Regulation

  • Importance of regulatory structure
  • Need to focus on price decisions
  • Financial services regulation

iii. PPPs

  • Defining access rights for SAIs
  • PPP in construction
  • Identifying gaps in PPP processes and methodologies
  1. In the plenary session the Group voted that the two top issues to take forward in our future work programme were both regulation based; the importance of different regulatory structures and the audit of financial services regulation.

Meeting Close

  1. Sir John Bourn, Chairman of the Group, was able to join delegates for the final plenary session. Sir John thanked presenters for their contributions and was updated on what had been covered and decided during the meeting. Sir John told the Group that he would be reporting on progress against our remit to INCOSAI in November and was pleased that he would be able to report positively. He also thanked Dr El Midaoui for the efforts of the Cour des Comptes in hosting such a productive meeting.
Fourteenth Meeting Index