Intosai Logo

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



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

Proceedings of the Sixteenth Meeting London, 10-11 May 2010

1. The INTOSAI Working Group on the Audit of Privatisation, Economic Regulation and Public Private Partnerships held its 16th meeting in London on 10 and 11 May 2010. The meeting was attended by representatives of 26 Supreme Audit Institutions, 23 of whom were members of the Group.

2. The agenda for the 16th meeting was able to meet the Group’s remit set by XIX INCOSAI through the following work programme:


Main conclusions

The main conclusions of the 16th meeting were:

Achievements of the Group and legacy: There was widespread consensus from members about the value of the Group’s work and the significant contribution it had made to SAIs’ understanding and development in the audit of privatisation, economic regulation and PPPs. The Group concluded it would be important to preserve the Group’s legacy going forward.

Arrangements for the future of the Group: The UK National Audit Office confirmed it would cede the Chair at INCOSAI XX, a position held since 1993. The SAIs of Brazil, the Netherlands and India proposed that they would explore whether it was possible to host meetings in 2011, 2012 and 2013 respectively on the theme of most interest to their SAIs from the Group’s overarching remit. The UK Secretariat agreed to explore the protocol for future arrangements with INTOSAI.

Global Financial Crisis and Recession: The effects of the crisis and resulting recession continued to have an impact on the areas of privatisation, economic regulation and PPPs but with a wide divergence of experience amongst members. The Group agreed to finalise two draft case studies on the subjects of the effects of the global financial crisis on PPPs and financial services sector regulation for presentation to XX INCOSAI.

Sharing of audit experience: The Group noted that there was still significant value in sharing of audit experiences in the field and explored ways in which it could continue to promote knowledge sharing.

Detailed proceedings of the meeting

4. Mr Amyas Morse, Comptroller and Auditor General of the UK National Audit Office opened the meeting in his capacity as Chairman of the Group. Mr Morse welcomed the delegates to London and introduced himself as it was his first opportunity since taking up post to Chair a meeting of the Group. Mr Morse set out the overall purpose of the 16th meeting of celebrating the achievements of the Group and ensuring its legacy is preserved in the light of the UK NAO’s decision to cede the Chair at INCOSAI XX in November 2010. Mr Morse also referred to the Group’s continued interest in the global financial crisis and economic downturn, a key theme for the meeting and also encouraged members to share recent audit experiences in recognition of INTOSAI’s motto “Mutual Experience Benefits All”.

5. Mr Morse passed over to Mr Ed Humpherson, Assistant Auditor General at the UK National Audit Office to chair the working business of the meeting. Mr Humpherson highlighted to members that this would be an important meeting for the Group not only because of the opportunity to hear papers from SAIs on their recent audit activities but because of the time given over to reflecting on the Group’s legacy. Mr Humpherson explained that the legacy issues would be handled in two sessions: on day one looking back at the past achievements of the Group; and on day two looking forward to the Group’s legacy for the future. Mr Humpherson then asked Ms Louise Bladen, on behalf of the UK Secretariat to the Group to lead members through the first legacy session.

The Legacy of the Group: Looking Back

6. Ms Bladen opened the presentations with a paper “Celebration of Achievements 1993-2010”. The paper began by outlining the history of the Group which was originally established to promote knowledge exchange on privatisation audit and to produce guidelines in this area. The Group is now one of the largest in INTOSAI and its remit has expanded into the related areas of economic regulation and Public Private Partnerships. Ms Bladen explained that the Group has successfully delivery against its remit and given the UK’s intention to cede the Chair, members might consider that having achieved its aims the Group should be dissolved. Ms Bladen went on to highlight the significant corpus of work produced by the Group including four sets of audit guidelines and 12 technical case studies. Beyond these products the Group had also made a wider contribution to the work of INTOSAI and to improving the competence of SAIs through facilitating experience and knowledge sharing. Overall the paper concluded that the outcomes from the Group’s work were the creation of a comprehensive reference point for auditors through published work; a contribution to the development of audit across many nations; encouragement for increased government accountability in this field; and benefits to citizens through governments achieving better value for money.

7. Members of the Group were then invited to join one of three break-out groups covering the subjects of privatisation, economic regulation and PPPs. The Groups were invited to discuss what they considered the legacy of the Group for their SAIs for each of these areas. Each Group was asked to feedback to the plenary session on the issues arising from their discussions:

Privatisation Economic Regulation Public Private Partnerships

§         SAIs reported Group had helped them identify key audit issues.

§         Use of technical material produced by Group helped SAIs overcome lack of experience in privatisation audit and build up capability

§         Generic material was adapted by SAIs for their regional/country context.

§         Material had been used by SAIs in dialogue with their government and Parliament.

§         Note of caution raised – context of guidelines is crucial. Privatisation is not necessarily appropriate for all economies.

§         SAIs reported guidelines were helpful for identifying audit risks.

§         SAIs suggested guidelines and membership of Group provided a mandate for regulation audit.

§         SAIs valued the technical support the Group provided.

§         Where SAIs were just embarking on regulation audit guidance was especially useful.

 

§         SAIs had made good use of Group’s audit guidelines.

§         SAIs had drawn on case studies and Group’s website material.

§         SAIs had deployed audit tools which they had come across through the Group.

§         SAIs had promoted Group’s material to ministries and other interested parties.

§         SAIs use Group and experiences gained to prepare for audit in the PPP field.

§         SAIs reported that Group had changed their mindset on some PPP issues – given them a different perspective.

8. Following feedback from the break-out groups Mr Humpherson chaired a lively discussion about the legacy of the Group. There was a broad consensus about the value of the Group’s work and outputs. Notably, Mr Osama Faquih, Auditor General of Saudi Arabia was interested to explore the context in which the guidelines had been adopted and the current trend away from privatisation to nationalisation. Mr Humpherson noted that current nationalisations were largely of bodies which had always been in the private sector rather than those that had been previously privatised.

Presentations on the Global Financial Crisis: Continuing effects

9. Mr Joshua Reddaway of the UK National Audit Office began the papers on the continuing effects of the global financial crisis by presenting to the Group a new technical case study on the impact of the crisis on the audit of PPPs. Mr Reddaway explained to the Group that the crisis had had a significant impact on PPPs, reducing the availability of finance and increasing its cost. The crisis had also led to a global economic recession which had led to increased supplier risk for PPPs and reduced demand for services potentially damaging project viability. Mr Reddaway had surveyed delegates in advance of the meeting about the impact of the crisis in their countries and reported a significant divergence of experience. Members suggested some additions to the case study, notably for it to reflect the significance of budgetary issues for many SAIs in relation to Maastricht criteria, that reduced demand for PPP services could damage the quality of service provided and that demand during a recession could potentially be increased in some sectors.

10. Colleagues from the UK National Audit Office went on to present on the work they had done in response to the crisis. Mr Phil Airey gave a paper on the NAO’s work to date on maintaining financial stability in the UK. Mr Airey covered two reports produced so far on the nationalisation of Northern Rock and on the measures put in place by the UK government to support banks. He explored the Government’s objectives, whether it had got the basics right, whether financial stability had been maintained and whether taxpayers had been protected. Mr Airey remarked on the complexity of audit in this field and that there was still a lot for the UK National Audit Office to do. In response to a question by the SAI of Brazil Mr Airey explained that the UK National Audit Office had taken the decision to carry out these audits independently of any external pressures. The SAI of Sweden was also interested to know about Parliament’s reaction to the reports. Mr Airey reported that Parliament was particularly interested in our work on supporting the banks as it had brought to light some issues which should have been disclosed to them by the Government.

11. Mr David Finlay of the UK National Audit Office then continued this theme with his paper on the effect of the credit crisis on the audit of UK infrastructure. Mr Finlay set out for delegates a summary of what had happened in the financial markets and the UK Treasury’s response to these events. Mr Finlay then went on to look at the audit issues arising in this area as a result of the economic downturn. In particular Mr Finlay drew attention to the impact of cost increases on deals, the additional risks for projects and the implications for government procurement, notably whether it was value for money for well advanced projects to move towards contract close if costs were increasing. The SAI of Norway asked Mr Finlay to expand on how the Treasury had supported deals in difficulties and he explained that Government lending to the private sector so that deals could go ahead was on the same commercial terms as if a bank had provided the financing.

12. The presentations continued with a paper from Ms Elzbieta Sikorska from the Supreme Audit Office of Poland. Ms Sikorska’s paper looked at shareholder/owner supervision in joint-stock companies in which the State has a majority interest. The presentation reflected on the SAI of Poland’s recent audit in this area which concluded that the governance for state owned entities in Poland has been weak owing to an absence of a comprehensive ownership policy, delays in decision making, poor monitoring arrangements, reliance on outdated financial reports and staff capability and continuity issues. Ms Sikorska reflected that the response of Parliament to the SAI’s report had been significant and it had commended the SAI for the excellence of the report. The presentation elicited a number of observations and questions. Mr Humpherson as Chair was pleased to note the SAI’s use of the OECD’s Corporate Governance guidelines given that the OECD had presented to the Working Group on these in 2006 and 2007. There were also questions for Ms Sikorska from the SAIs of Norway, Morocco and Romania, particularly around the recommendations stemming from the SAI’s audit.

13. The next paper was given by Mr Gusztav Bager of the State Audit Office of Hungary on the topic of new regulations and audit of state property management in Hungary. Mr Bager summarised the deficiencies in state property management in the period 1990-2007 and the terms of the new State Assets Act in 2007 which has given the SAI a role in auditing the Hungarian State Holding Company. The 2008 audit of the company concluded that the new system of management was not transparent, that interventions by major decision making institutions were not effective enough and that there were weaknesses in asset management. Mr Bager also reflected on the impact of the financial crisis on state asset management. The SAI of Romania questioned Mr Bager on the impact of the SAO of Hungary’s audit and Mr Bager highlighted the work that the company had subsequently undertaken to put together a new asset register.

14. Mr Dimitrios Ioannidis of the Swedish National Audit Office then gave a paper on the impact of the global financial crisis on the audit of regulation and the SAI’s audit of government guarantees during the crisis. Mr Ioannidis explained the results of the crisis in Sweden and the SNAO’s resulting activities. In particular the SAI was given a mandate to assess whether the government had set up and handled its guarantee scheme appropriately taking account of costs, decision making and transparency issues. The audit concluded that the government had acted on insufficient information and had not taken account of risks or made an assessment of future costs. The paper gave rise to a question about the SAI’s capacity and capability to respond on a timely basis to unexpected events such as the financial crisis and members discussed this issue in relation to their own approaches.

15. The papers on the theme of the financial crisis finished with a presentation from Ms Eleanor Murray of the UK National Audit Office to update members on the development of a case study on the regulation and audit of the financial services sector. Ms Murray explained the rationale for looking at this topic and the scope of the case study. The key findings presented in the draft case study were that there are a number of regulatory models for financial services with SAIs having different levels of access. SAIs can therefore perform a number of different roles including auditing crisis measures, safeguarding public funds, maintaining and promoting confidence and ensuring consumers are protected. SAIs have also found that there are a number of constraints inherent in auditing this sector. Ms Murray highlighted that work in this area is being taken forward by a new INTOSAI Task Force and that the case study would be revised and finalised before being presented to INCOSAI XX.

Conclusions from day one

16. Mr Humpherson drew out three conclusions in summarising the presentations and discussions from day one. Firstly he noted the practical difficulties facing public sector administrators in managing large portfolios of semi-state owned assets as highlighted by the SAIs of Poland and Hungary. Mr Humpherson then reflected on the turning of the tide away from privatisation towards nationalisation, away from PPPs to a different model of state support and away from light touch regulation to a more intense regime. Finally Mr Humpherson mentioned the huge benefits that SAIs had derived from the Group’s audit guidelines. Their value was in giving a mandate to SAIs to undertake audits and to help drive effective methodologies. Nevertheless, while application of the guidelines was good at transaction level, they were not always suited to all circumstances as observed by the Auditor General of Saudi Arabia.

Presentations on the Sharing of Audit Experience

17. Mr Humpherson opened this session by inviting delegates to discuss amongst themselves and then feed back to the Group on their learning from day one of the meeting. Some important points emerged from the discussions. The Group overwhelmingly noted the value of the material it had produced over the years and the high quality of presentations given and the importance of preserving it. In particular the SAI of India offered to share their own PPP guidelines with the wider Group. The SAI of Ecuador also presented a paper to the Group in hard copy on privatisations and rendering of public services process control by private initiative in the Republic of Ecuador which was circulated to delegates.

18. The first presentation of the session was given jointly by Prof Dr Cor van Montfort and Dr Jan Wieles of the Netherlands Court of Audit on the subject of governance at a distance. The presentation covered past audits by the Court on PPPs including a tunnel contract and a high speed rail link. Members learned that the Court has now commenced a review of 10 years of PPP in the Netherlands to inform future work. The paper then went on to explore market regulation issues, notably studies of the Netherlands Competition Authority and the Dutch Central Bank. Finally the presentation highlighted the complexity of financial relations which the SAI has to get to grips with. The paper concluded that the international networks and exchange of experiences is very important for learning, for uniformity of standards and for development of audit practice. The SAI of the Netherlands called for the continuation of an informal network so that audit experiences could be swapped and indicated it would be willing to participate in future activities. The SAI of Hungary asked about the success of PPPs in the Netherlands and Prof Dr van Montfort explained that PPPs had suffered from poor demand forecasting. Prompted by a further question from Hungary about the audit of the Netherlands Competition Authority members shared their wider experiences of auditing similar bodies.

19. The presentations continued with a paper delivered by Mr Marcelo Barros Gomes from the Tribunal de Contas da Uniao (TCU), Brazil, looking at criteria for auditing the governance of regulatory infrastructure agencies and the use of the Group’s guidelines by the SAI. Mr Gomes set out the role of the TCU in infrastructure regulation and then went on to detail the criteria for auditing the governance of regulatory agencies including relevant competencies, independence, control mechanisms and risk management. Mr Gomes went on to look at SAI skills in this area, the work it has undertaken and audit issues around service provision and pricing and developing competition. He concluded that with the TCU’s assistance regulatory bodies in Brazil had made significant progress towards the healthy functioning of infrastructure industries.

20. Following Mr Gomes’ paper, Mr Humpherson announced to the Group that the SAI of Brazil had made a creative and imaginative proposal in relation to the future of the Group by offering to host a one-off meeting in Brazil in 2011 on the topic of economic regulation. Mr Humpherson suggested the Group accept the offer and notify INCOSAI XX.

21. The final presentation on the theme of experience sharing was given by Mr Dimitrios Ioannidis on auditing the privatisation programme implemented by the Swedish Government since autumn 2006. Mr Ioannidis explained the background to the programme, the SAI’s audit strategy and methodology and outlined the completed audits to date and a number of current pre-studies underway. Through its experience the SAI had improved its understanding of the factors affecting price, of the competence and skills needed to undertake a privatisation, of the layers of decision making involved and had developed a strong appreciation of the importance of pre-sale management. Mr Ioannidis concluded that the work of the SAI had improved the sale process but that further improvement was desirable. Furthermore, a sensible dialogue had now been established between the SAI and the Government leading to improved co-operation with audits in this sphere.

The Legacy of the Group: Looking forward

22. The session began with a presentation from Ms Martina Hampel of the German Bundesrechnungshof giving members information about the SAI’s preparations for an EU Contact Committee-EUROSAI seminar on the audit of PPPs. Ms Hampel announced the seminar would take place 9-11 February 2011 in Bonn to be attended by auditors involved in PPP work on the ground. Keynote speakers were likely to include a representative from the EU, a member of the UK Secretariat for the Working Group and a representative from the German Federal Government or Länder. The meeting would comprise plenary sessions, panel discussions and workshops on specific topics. Ms Hampel asked for suggestions for content from members. Suggestions included the impact of the financial crisis on PPPs, exploration of the use of PPP in different sectors and auditing PPP programmes.

23. Ms Bladen from the UK Secretariat then invited delegates to convene again in their break-out groups to discuss the issue of the Group’s legacy for current and future audit issues. Following discussions representatives from each Group provided feedback to the plenary session on what they had covered:

Privatisation

Economic Regulation

Public Private Partnerships

§         SAIs could share guidance through an informal network without a formal Secretariat in place.

§         SAIs could share methodologies for auditing nationalisations.

§         SAIs consider contacts and network crucial for continued learning.

§         New forms of communicating/using electronic media present opportunities for knowledge sharing.

§         Regional INTOSAI groups could have an enhanced role in this sphere.

§         At individual SAI level there could be exchange of audit material.

§         SAIs consider that meeting regularly is still important.

§         SAIs consider maintaining guidance is important.

§         Use of new communication channels is vital. Updates could be posted on the web.

§         Group guidelines could be promoted at other INTOSAI forums.

§         INTOSAI Capacity Building Committee and IDI could have a role in preserving legacy.

§         Regional INTOSAI groupings could explore taking forward work on PPPs

§         Many SAIs’ PPP programmes are on hold. Members will use experience and knowledge to prepare for when programmes resume.

§         SAIs are taking forward capacity building, working with state level specialised PPP units.

§         SAIs will use Working Group literature as it is independent.

§         SAIs could share compendium reports on PPPs.

§         SAIs can use experience to help other SAIs in same region who are newer to PPP audit.

§         Group should ensure working level contact details for members are shared.

§         SAIs could promote informal networking.

24. Following the feedback from the break-out sessions and Brazil’s proposal to host a meeting on economic regulation in 2011, Mr Humpherson announced a further development. The SAIs of the Netherlands and India had also suggested that they explore with their senior management teams whether it would be possible for them to host further meetings in 2012 and 2013 respectively. It was suggested that SAIs could take on the role of hosting and chairing for a one year period, possibly with a number of SAIs forming a steering committee to support the Group.

25. Ms Bladen then closed the session on the legacy of the Group by presenting to members on the Group’s proposed report to INCOSAI XX in November 2010. Ms Bladen reminded members of the Group’s remit and how this had been achieved. The Group’s remit is to:

Since XIX INCOSAI the Group had not prioritised updates to guidelines but had produced executive summaries of all four sets of guidelines which had been published by INTOSAI. The Group had produced a further two technical case studies and had encouraged use of the collaboration tool, albeit finding that alternative means of communication were frequently preferable to members. Ms Bladen proposed that UK Secretariat would draft a report and circulate to members covering this progress and explaining the rationale for the UK ceding the Chair and arrangements for the Group for the future. Following discussion with members it was agreed that the Secretariat would explore with INTOSAI the protocol for the Group’s future given the generous offers of the SAIs of Brazil, the Netherlands and India to host meetings in 2011, 2012 and 2013 respectively.

Conclusions and closing remarks

26. Mr Humpherson summarised the Group’s discussions over the meeting and told members that he felt an enormous sense of pride in everything that the Group had achieved, sadness that this would be the final meeting of the Group with the UK as Chair and excitement that unexpected offers to host future events had been proposed. Mr Humpherson invited Mr Amyas Morse to then make some closing remarks.

27. Mr Morse told delegates that he understood that the meeting had gone very well with high quality presentations and discussions. Mr Morse reflected that the original rationale for the Group was to address the challenges facing SAIs in auditing this field but that the world had changed a lot over 17 years. Large scale privatisation programmes had been implemented in many economies, delivering benefits, but the post privatisation environment was now increasingly relevant for auditors. Mr Morse highlighted that the ongoing involvement of SAIs would be important and it was essential that the Group’s legacy should be preserved going forward, whatever the outcome of agreeing future arrangements with INTOSAI. Mr Morse thanked the delegates and the UK Secretariat for all their efforts in making the meeting a success and wished SAIs every success with their future work in this area.
 

Sixteenth Meeting Index