Contents
| Section 1: | Introduction |
| Section 2: | Analysis of the replies |
| Annex 1: | Copy of survey questionnaire |
| Annex 2: | Summary of survey replies |
Background to the Working Group
| 1.1 | Following a decision taken by the XIV INCOSAI in Washington in 1992, the INTOSAI Working Group on the Audit of Privatisation was formally established by the Governing Board in May 1993 under the Chairmanship of Sir John Bourn, Head of the United Kingdom National Audit Office. | ||||||||||||||||||||||||||||||
| 1.2 | The membership of the Working Group
comprises representatives from the SAIs of:
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| 1.3 | The Working Group has met annually since 1994. Since then its members have built up a formidable body of knowledge about the audit of privatisation as well as allied issues such as the audit of public/private partnerships and concessions and the audit of economic regulation. In November 1998 the XVI INCOSAI in Montevideo approved a set of forty guidelines on the audit of privatisation. The Working Group developed these guidelines following an extensive consultation process including the completion by many INTOSAI members of a survey sent to all INTOSAI countries. | ||||||||||||||||||||||||||||||
| 1.4 | In commenting on the draft guidelines on the audit of privatisation, a number of SAIs asked what consideration the Working Group was giving to audit issues arising on the economic regulation of privatised industries. |
Development of the survey on the audit of economic regulation
| 1.5 | As part of their work prior to the XVI INCOSAI the Working Group completed a pilot survey on the audit of economic regulation. The pilot confirmed that a number of SAIs had carried out performance and financial audits of economic regulators in their countries and had published reports on the effects of these regulators on the businesses that they regulate. The results suggested that economic regulation of private companies supplying public services including electricity, telecommunications and insurance companies was becoming increasingly widespread. The SAIs also reported that, as a result of their audits, they had promoted improvements both in the way economic regulators carry out their work and in the quality of service provided by the regulated businesses. |
| 1.6 | In view of these findings, the Working Group decided at their meeting in Jerusalem in June 1998 to invite all INTOSAI members to complete a revised survey on the audit of economic regulation in their countries. 176 SAIs were invited to complete it (a copy is at Annex 1). |
Responses to the survey
| 1.7 | Responses to the INTOSAI survey were received from 67 countries. This report provides information on and analysis of these replies. Annex 2 summarises the data provided by SAI responses. In preparing the report, the Working Group have made every effort to ensure that, wherever possible, the responses from all countries are presented on a consistent basis, although the terminology and definitions used for various aspects of economic regulation may differ between industries and countries. |
Discussion at XVI INCOSAI
| 1.8 | At the XVI INCOSAI the Working Group reported on the preliminary results of the survey on the audit of economic regulation. The analysis undertaken at that time underlined the role of Government in economic regulation and the diversity of approaches to the issue of economic regulation amongst member countries. In many countries, for example those moving from a state-owned to a free market economy, the industries concerned are both owned and regulated by Government. In some other countries, where these industries have remained in private ownership, systems of regulation carried out by accountable public bodies, operating at arm’s length to Government, have been developed over many years. More recently the privatisation of monopolies or dominant companies has been accompanied in a number of countries by the creation of industry specific regulators, also operating separately from Government; some other countries have, however, decided not to go down this route, relying on existing general competition regulation. Delegates at the XVI INCOSAI noted that privatisation by sale was not the end of the privatisation story and that economic regulation was a growing area of importance for Governments and citizens as well as for the regulated industries, including those which had been privatised, and SAIs are increasingly being requested to examine the activities of regulators. The XVI INCOSAI concluded that the Working Group should, as part of its ongoing work programme, develop guidance on the audit of economic regulation. |
The report
| 1.9 | Section 2 of this report provides an
analysis of SAIs’ replies, grouped under the following headings:
|
Overview
| 2.1 | The replies to the survey show that economic regulation affects many of the most important parts of the economy, both in the public and private sectors and that the audit of economic regulation is an important aspect of the work of many SAIs. The data show many examples of the contributions that SAIs are making to the work of the regulators, the industries that they regulate, and the customers they serve. The survey results underline that SAIs, through their published reports and other work, play an important role in strengthening the accountability of regulators and the industries they regulate. |
| 2.2 | Sixty-seven countries responded to the survey regarding the extent of regulation in the industries covered by the questionnaire. There are therefore 1,139 industries covered by the survey, 17 industries for each of the 67 countries. |
| 2.3 | A significant proportion of these industries are subject to economic regulation; the survey showed that 775 of the 1,139 industries (68 per cent) were regulated. |
| 2.4 | There was considerable variation between the types of industry in terms of the extent of economic regulation. In the telecommunications industry there was evidence of significant regulation in 96 per cent of countries replying to the survey; in railways regulation was rather less common (60 per cent). The survey showed that 33 per cent of respondent countries have a regulated coal industry; the low percentages recorded for coal and navigable waterways (43 per cent) may reflect the fact that not all countries have these industries, as well as the incidence of economic regulation in those that do. |
Figure 1: The percentage of industries subject to economic regulation
This Figure shows that the percentage of the industries subject to economic regulation ranged from 96 per cent for telecommunication industries to 33 per cent for coal industries.
Source: Replies to the INTOSAI survey
The impact of privatisation on economic regulation – Question 2
| 2.5 | The survey asked, where economic regulation exists in particular industries, whether privatisation had been a factor in the decision to impose economic regulation on any of those industries. |
| 2.6 | The responses showed that privatisation was a factor in the decision to impose economic regulation on industries in 25 per cent of the regulated industries and that, in the remainder, much regulatory activity existed where privatisation had not been a factor in its introduction. |
| 2.7 | Privatisation may have been a spur to increased or different forms of regulation: for example, privatisation was a factor in the decision to impose economic regulation in 48 per cent of regulated telecommunications industries. |
| 2.8 | In other industries privatisation had less impact on regulation: for example, privatisation was only a factor in 17 per cent of regulated postal industries; this may reflect the fact that many postal services remain in state ownership. |
Figure 2: Was privatisation a factor in the decision to impose economic regulation?
| Number of Countries | Per cent of regulation where privatisation is a factor | |
| Telecommunications Electricity Railways Banks Coal Airlines Water Ports Roads Bus Operators Airpoerts Gas Posts Pensions Insurance Oil Navigable Waterways Average |
31 22 14 16 6 14 13 12 11 11 11 9 10 8 8 7 4 |
48 % 39 % 35 % 29 % 27 % 26 % 26 % 24 % 24 % 24 % 20 % 20 % 17 % 17 % 16 % 16 % 14 % 25 % |
This Figure shows that, within a wide range, privatisation was a factor in the decision to impose economic regulation in on average 25 per cent of the regulated industries.
Source: Replies to the INTOSAI survey
The financial size of regulated industries – Questions 3 and 4
| 2.9 | The survey asked about the proportion of Gross Domestic Product represented by regulated industries. Of countries which responded 44 per cent reported that regulated industries amounted to 20 per cent or more; a further 24 per cent stated that the proportion represented by regulated industries was between 10 and 20 per cent. |
| 2.10 | Because these regulated industries often constitute a significant proportion of the economy (whether in state or private hands) SAIs have the opportunity, through their audit conclusions and recommendations, to have important beneficial effects on large-scale economic activity in their countries. |
Figure 3: Proportion of Gross Domestic Product represented by regulated industries
This Figure shows that 44 per cent of countries have regulated industries accounting for over 20 per cent or more of their gross domestic product.
Source: Replies to the INTOSAI survey.
The nature of the economic regulator – Questions 5 and 6
| 2.11 | Question 5 asked how economic regulatory bodies were constituted. In some countries there is more than one regulatory body for the industry concerned and so the total percentage for this question is more than 100 per cent. In 72 per cent of regulated industries the regulatory body was a Government minister or ministry and in 30 per cent of regulated industries there was a separate, non-Governmental regulator. |
| 2.12 | There were also a few industries where there is self-regulation by the industry concerned (7 per cent) or where a State privatisation body exercises its regulatory functions by monitoring contracts entered into by the industries concerned (2 per cent). |
| 2.13 | There are certain industries where the existence of a separate regulator is more frequent than in others. For example, in the banking industry a separate regulator exists in 54 per cent of cases, while in a further 33 per cent the regulator is a Government Minister or Ministry. |
| 2.14 | Where there is a separate regulator, this is more frequently a board (71 per cent of regulated industries) than an individual (29 per cent). |
Figure 4: How the regulatory body is constituted
* Monitored by a State Privatisation Body.
This Figure shows that in 72 per cent of regulated industries the regulator is a Government Minister or Ministry.
Industries may have one or more regulator, so the totals of percentages add up to more than 100 per cent.
Source: Replies to the INTOSAI survey
The funding of the economic regulator – Question 7
| 2.15 | The survey found that regulation is largely funded by the state (74 per cent of regulated industries), although regulated businesses also contribute significantly towards the funding of regulation (20 per cent of regulated industries). |
| 2.16 | It is relatively uncommon for funding to be provided by consumers (4 per cent) or in other ways (2 per cent). |
The appointment and removal of the economic regulator – Questions 8 – 10
| 2.17 | The survey found that Government Ministers had a central role in appointing the economic regulator of businesses (83 per cent of regulated industries). Parliament has the role of appointing the economic regulator in 5 per cent of regulated industries. |
| 2.18 | In the banking industry, the central bank appoints the regulator in 27 per cent of regulated banking industries; a Government Minister makes the appointment in the remaining 63 per cent of the sector. |
| 2.19 | The survey also sought information about whether a regulator who was independent of Government could be removed from office before the expiry of the appointment period and if so by whom. SAIs reported that their states often had the power to remove regulators from office, for instance on account of incompetence, incapacity (e.g. due to illness), misconduct or at the discretion of persons authorised to remove members of regulatory bodies from office. The responses showed that it is common for the Government to be able to remove a regulator from office (in 84 per cent of regulated industries). By contrast Parliament is able to remove a regulator from office in only 6 per cent of regulated industries. |
The accountability of the economic regulator – Questions 11 – 14
| 2.20 | The survey enquired into the accountability arrangements for regulators. The replies showed that in 76 per cent of regulated industries regulators report to Government Ministers. Regulators report less commonly to Parliament, regulated industries and the public. |
Figure 5: Accountability: bodies to which regulators report
This Figure shows that regulators report to the Government in 76 per cent of regulated industries.
Because a number of SAIs found that their regulators report to more than one body the total percentages add to more than 100 per cent.
Source: Replies to the INTOSAI survey
| 2.21 | The survey found that economic regulatory bodies were frequently required to consult Government (in 56 per cent of regulated industries) or members of the regulated industries themselves (33 per cent). They are required to consult the public in respect of 9 per cent of regulated industries. |
Figure 6: Parties which regulators are required to consult
This Figure shows that regulators consulted Government in 56 per cent of regulated industries.
Some SAIs reported that economic regulatory bodies consulted more than one group which means that the total percentages for Question 12 add to more than 100 per cent.
Source: Replies to the INTOSAI survey
| 2.22 | The Working Group are also examining how regulation operates in practice. Accordingly the survey asked whether Governments could give directions to regulatory bodies and whether Governments have exercised this right in practice. The replies show that Governments have the power to give directions to a regulatory body in 45 per cent of regulated industries. In the remaining 55 per cent a Government Minister or Ministry may often be the regulator. |
| 2.23 | The survey also found that the Government had exercised the right to give directions at least once in 30 per cent of all regulated industries. In about two-thirds of those industries where Governments have the power to give such directions they have actually used those powers at least once. |
Figure 7: Whether Government can give directions to regulators and how often this right is exercised in practice
This Figure shows that Governments can give directions to regulators in 45 per cent of regulated industries and that this right has been exercised at least once in 30 per cent of cases.
Source: Replies to INTOSAI survey
| 2.24 | The survey’s findings disclosed that regulated businesses, consumers and Government, broadly speaking, have a right of appeal to the courts or other bodies against decisions by the economic regulator in a substantial minority of cases. The replies show that Government had a right of appeal to the courts in 32 per cent, regulated businesses in 52 per cent, and consumers in 50 per cent of regulated industries surveyed. |
| 2.25 | The right of other types of appeal to eg. general competition regulators is provided for Government in 21 per cent, regulated businesses in 34 per cent, and consumers in 35 per cent of instances. |
Figure 8: Rights of appeal to the Courts or other bodies (eg general competition regulators) against decisions of economic regulators
This Figure shows that rights of appeal against the decisions of economic regulators vary, up to a substantial minority of cases
Source: Replies to the INTOSAI survey
The objectives of the economic regulator – Questions 15 –17
| 2.26 | The survey asked whether, across the five economic sectors surveyed (communications, financial, industrial, transport and utilities), there were common objectives of regulation. SAIs were also asked to state what were the most important objectives of economic regulators. In response many SAIs report more than one key objective for the economic regulator – accordingly the total percentage of sectors totals more than 100 per cent. |
| 2.27 | The survey listed four of the most important objectives of economic regulation and invited SAIs to indicate if they applied, by market sector. The result showed that the most commonly quoted of these objectives was to ensure that the regulated businesses supply essential services (78 per cent of regulated industries). In addition many SAIs ticked the protection of consumers against the abuse of monopoly power, the achievement of social goals, and the development of competition. Regulators often have a wide-ranging set of objectives, which aim at safeguarding the interests of consumers as well as encouraging competition in the industries themselves. |
Figure 9: Most important objectives of the economic regulator
This Figure shows that ensuring the supply of essential services is the most commonly identified key objective of economic regulation.
Source: Replies to the INTOSAI survey
| 2.28 | The survey found that Parliament set the objectives of the economic regulator in 63 per cent of regulated industries; other organisations (usually Government) set the objectives in the remaining 37 per cent. |
| 2.29 | The survey also asked SAIs to show, by
ticking boxes representing individual objectives, what were the main economic objectives
of their regulators. The five main objectives indicated in the responses in order of
frequency were:
|
| 2.30 | The responses showed that other interventions such as control of investment, enforcing employment conditions and control of profits were less common. |
The effects of the economic regulator – Question 18
| 2.31 | The survey asked for recent examples from
SAIs of impacts, which the regulatory bodies have had on the regulated industry sectors.
Many were reported, the overwhelming majority of them positive. The responses show that
regulators have had a number of key effects in four main areas :
|
Supply of services
| 2.32 | The survey found regulators had frequent effects as regards the supply of services. The table below shows examples of some of those effects (a full list of effects is shown in Annex 2, answers to Question 18): |
Examples of Effects achieved by Regulators
| Country | Effect |
| Argentina | Penalty imposed when investment commitments were not fulfilled. |
| Bangladesh | Private banks entered market and provided better service than Government controlled banks |
| Colombia | Concession for the building of the second runway of the Darado airport in Santa Fe de Bogata |
| Finland | Buses now operating throughout whole country |
| Ghana | Transport system modernised |
| Japan | More variety of services available to consumers |
| Phillipines | Transport and Franchising Regulatory Board can revoke/cancel bus/car licenses |
| United Kingdom | More homes have telephones |
| USA | Expanded powers to underwrite corporate securities and conduct other non-bank financial services |
| Vanuatu | Passengers can now travel to all parts of the country |
Consumer protection
| 2.33 | There were also some notable effects in the area of increasing consumer protection including those shown in the following table (a full list of effects is shown in Annex 2, answers to Question 18): |
Examples of Effects achieved by Regulators
| Country | Effect |
| Argentina | Fund management risk reduction |
| Australia | New prudential management certificate introduced to improve high level risk management in financial services industry |
| Brazil | Concessionaire fined for the bad quality of the supply of electricity. |
| Denmark | Some water suppliers shut down due to environmental health considerations |
| Estonia | Bank of Estonia and Insurance Supervisory Authority’s actions has avoided the collapse of some commercial banks and insurance companies. |
| Hungary | Securing compliance with environmental standards reduced environmental damage |
| Indonesia | Uses of environmentally friendly products reducing pollution |
| Philippines | National Telecommunications Commission can disenfranchise the carrier if it violates certain terms/regulations |
| Russia | Suspension of operation activity in certain banks |
| Thailand | Suspension of 56 finance companies in August 1997 |
Stabilisation or reduction of prices
| 2.34 | Many SAIs reported that regulators had acted to stabilise or reduce prices (important issues in relation to monopoly suppliers). The table below shows some of these effects (a full list of effects is shown in Annex 2, answers to Question 18): |
Examples of Effects achieved by Regulators
| Country | Effect |
| Brazil | Regulator divulged to the general public the fees of bank services |
| Denmark | The question regarding price setting in the banking sector has been decided on in favour of the banks who are allowed to set different prices on different kinds of loans etc. |
| Estonia | Control over rise of coal prices |
| Guyana | Reduction of interest rates charged by financial institutions |
| Iceland | One new telecommunications firm entered the sector which resulted in lower prices |
| Indonesia | Cancellation of certain increase in electricity prices reduced inflation rate |
| Philippines | The regulated companies could not increase transportation fares unless approved by Land Transportation Office. |
| Switzerland | Cheaper prices to consumers in telecommunications industry following introduction of competition |
| Tunisia | Reduction in telephone tariffs (15 per cent in 1998) |
| United Kingdom | Reduction in the prices of the dominant firm in the telecommunications industry of 45 per cent since it was privatised. |
Development of competition
| 2.35 | Many SAIs reported that regulators had helped open up the market to increased competition. The following table shows examples of these actions (a full list of effects is shown in Annex 2, answers to Question 18): |
Examples of Effects achieved by Regulators
| Country | Effect |
| Bangladesh | Private postal services have developed side by side with Government Post Offices |
| Colombia | Opening of long distance transport services to competition |
| Hungary | The enforcement of competition improved the standard of services |
| Italy | Fostering of competition in electricity sector |
| Malaysia | More competitive environment created in telecommunications sector |
| Mexico | More options for consumer in telecommunications sector |
| Netherlands | Cellular phone is no longer a state monopoly |
| Slovenia | Allowing freedom of entry for competitors |
| United Kingdom | Every household and business now has the choice of which companies supply gas and electricity, leading to price reductions. |
| USA | Electricity generators were made more responsive to market forces |
Access of the SAI to the Economic Regulator – Questions 19 –21
| 2.36 | Replies to the survey results indicate that 74 per cent of regulated industries are subject to financial audit by SAIs. SAIs also reported that they had carried out performance audits in 58 per cent of all regulated industries. |
Figure 10: The SAI as the external auditor of economic regulators
This Figure shows that the SAI is the financial auditor of the economic regulator in three-quarters of the industries concerned and can carry out performance audits of over half the regulators.
SAIs may carry out both financial and performance audits of the economic regulator, so the totals of these responses are more than 100 per cent.
Source: Replies to the INTOSAI survey
| 2.37 | In 21 per cent of regulated industries SAIs have rights of access to the regulated industries even where they are not the external financial or performance auditor. |
| 2.38 | The survey identified how auditors were carrying out their key audit responsibilities. For example, the responses indicated that, of the three audit techniques quoted, the most widespread used by SAIs was the examination of records and staff (79 per cent of regulated industries). The taking of evidence from third parties (51 per cent) and performance comparisons (38 per cent) were also noted methods of gaining information and evidence. |
Figure 11: How auditors carry out their audit responsibilities
This Figure shows that while the most widespread form of audit technique used by the SAI is examination of records and staff, the SAI also takes evidence from third parties in just over half of all regulated industries that are audited.
Source: Replies to the INTOSAI survey
Reports produced by SAIs on the work of economic regulators – Questions 22 –24
| 2.39 | The Working Group survey revealed that
many SAIs produced reports on their findings and that they distributed these reports to
interested parties:
|
Figure 12: Reports produced by SAIs on the outcome of their audits of regulation
This Figure shows that Parliaments received reports from SAIs in the majority of cases.
SAIs may send reports to more than one recipient, so the totals of these responses add up to more than 100 per cent.
Source: Replies to INTOSAI survey
Improvements achieved by regulators as a result of SAI investigations – Question 25
| 2.40 | Many SAIs reported specific improvements in both the way regulators operate and in the service provided by the regulated companies as a result of action taken by the regulators in response to investigations carried out by the SAI. In the United Kingdom, for example, the SAI found that, as a result of the introduction of competition into the domestic gas supply market, consumers who had changed their gas supplier had saved, on average, 20 per cent ($120 a year) since competition was introduced. The table below shows a number of impacts (a full list of effects is shown in Annex 2, answers to Question 25): |
Examples of Effects achieved by Regulators in response to recommendations made by the SAI
| Category | Country | Effect |
| Supply of Services | Albania Argentina Ecuador |
Improvement in services provided
by airlines and bus operators. Higher operational efficiency and efficacy in banking sector. Modernisation of bus industry. |
| Consumer Protection | Denmark Guyana Tonga |
Criticism of financial
supervisory authority for having failed its obligations. Improvement in collateral lodged to secure loans Improvements in compensation arrangements for consumers in telecommunications sector. |
| Stabilisation or reduction of prices | Bangladesh Tunisia United Kingdom |
Purchase procedure rationalised
in domestic airlines business due to audit objections. Prices held as result of SAI initiatives. The water regulator is seeking a tightening of the price controls on water companies which could reduce bills by some £2.5 billion over 5 years. |
| Development of competition | Argentina Cameroon Tunisia |
Higher operational efficiency and
efficacy in banking sector led to increased competition. Close of state owned companies making significant losses. Progressive liberalisation and easier market access in a number of sectors. |
Access of the SAI to the regulated businesses – Questions 26 –27
| 2.41 | The analysis carried out showed that it is relatively uncommon for the SAI to be the external auditor for regulated businesses for financial audit (38 per cent of cases) and less common still in the case of performance audit (23 per cent). It may be inferred, from the answers to Question 2 which showed that privatisation was not always a factor in the decision to regulate particular industries, that the SAI may well be the auditor of many regulated businesses still owned by the State. |
Figure 13: The SAI as the external auditor of regulated industries
This Figure shows that the SAI is the financial auditor in 38 per cent of regulated industries.
Source: Replies to the INTOSAI survey
| 2.43 | In a further 30 per cent of industries the SAI have rights of access even where they do not exercise financial or performance audit responsibilities. |
Improvements achieved by regulated industries following SAI investigations– Question 28
| 2.44 | It was encouraging to note that even where only some SAIs (26 out of the 67 countries which replied to the survey) have access to private regulated industries, a number of examples were quoted where SAIs achieved notable beneficial impacts. These include internal control improvements, reducing anti-competitive practices, improved business performance and improved billing arrangements. The table below illustrates some of these impacts reported by SAIs (a full list of effects is shown in Annex 2, answers to Question 28): |
Examples of Improvements achieved by Regulators as a result of investigations carried out by SAIs
| Category | Country | Effect |
| Supply of Services | Albania Egypt Indonesia |
Improvement in services and
growth of incomes. Supporting the transportation fleet with new units. Improvement in the services provided by the telecommunications sector to the public. |
| Consumer Protection | Argentina Ecuador Guyana |
Better water quality. Financial control improved. Payment of pensions on more timely basis. |
| Stabilisation or reduction of prices | Bangladesh Cameroon Estonia Tunisia |
Bills in arrears
recovered due to audit observation. Market forces determining price levels. Costs of electricity calculations specified by SAI. Minimisation of costs of gas pipeline installation. |
| Development of competition | Egypt Hungary Japan |
Privatisation of electricity
industry. Anti-competitive practises decreased. Improvement in procurement practices in airports. |
Other instances of economic regulation – Question 29
| 2.45 | Besides the 17 industries identified in the survey SAIs mentioned a number of other industries where they were involved in regulatory audit. These included beer, forestry, television, housing loans, agriculture, shipyards and construction. |
July 1999
The Survey Questionnaire was prepared as a Word file.
The Summary of Survey Replies is also a Word file.