INTOSAI WGAP: Guidelines on Best Practice for the Audit of Privatisations (June 1998)

	Opening Address
6.	Justice Mrs Miriam Ben-Porat welcomed members to Jerusalem and spoke of the importance of privatisation audit in all our countries. In particular she warned of the need to guard against the danger that private individuals might make unjustified profits at the expense of the state. She said that the auditor could play an important role before the decision to privatise was finalised; the auditor’s advice could be very useful in securing value for money and helping to avoid mistakes.
	Draft Guidelines on the Audit of Privatisation
7.	Mr Marshall led the discussion on the draft guidelines on the audit of privatisation. The Working Group finalised the forty guidelines on the best practice of the audit of privatisation to which Group members had contributed both at previous meetings and through correspondence. They took account of comments from some 40 SAIs in finalising the text.
8.	Mr Marshall said that the Group secretariat would take responsibility for securing the finalisation of the text in the five INTOSAI languages (Arabic, English, French, German, Spanish), so that copies would be available for delegates to the XVI INCOSAI.
	Privatisation Paper presented by Dr Arpad Kovacs, President of the Hungarian State Audit Office
9.	Dr Kovacs gave a most informative paper on the subject of the experience of privatisation in Hungary. He spoke of the way the management of the Hungarian privatisation company, APV Rt, of which he had been Chairman prior to his appointment as President of the State Audit Office, had emphasised the importance of eliminating errors previously made and stressed the improvements in preparation, regulation, procedures and disciplinary approach which had been materially assisted by advice of the State Audit Office.
10.	Dr Kovacs noted that during the eight years of the privatisation process more than 1,100 state companies were sold raising more than £1.4 billion Hungarian Florins for the state. Privatisation had been practically completed in the food, catering, printing, aluminium, steel and telecommunications sectors. The privatisation programme is now mainly complete in Hungary, although full or partial state ownership will remain in 116 companies in accordance with current legal requirements. The Working Group thanked Dr Kovacs for a very interesting presentation from a unique perspective.
	Directory of Privatisation Audit and Information Exchange
11.	Mr B M Oza circulated the draft directory of privatisation audit which he had compiled based on the questionnaire kindly sent to all SAIs by the EDP Committee. 42 SAIs had responded to the questionnaire and 30 SAIs reported that they had carried out examinations in the field of privatisation audit.
12.	Working Group members thanked Mr Oza for all his work in preparing the directory. It was agreed that the directory should be refined as proposed by Mr Oza, so that the details of what privatisation audit work has been carried out and who should be contacted in each country to learn more about it should appear on one page. It was also agreed that the A5 format developed for the Directory by Mr Oza was appropriate. Finally, the Group also thanked Mr Oza for offering to make copies of the revised directory available to delegates at XVI INCOSAI.
13.	Members also agreed with Mr Oza that following the completion of the directory a digest of reports completed by SAIs on privatisation audit would be useful in disseminating information on work completed. Members were invited to list the key conclusions of their most significant privatisation audits rather than list all their audits. It was agreed that members should send contributions to Mr Oza so that a start could be made on the Digest and that Mr Oza would review the information provided and report back to the Group at the sixth meeting in Poland in 1999.
	Papers presented by Mr Hugh Aldous, partner, Robson Rhodes, United Kingdom: Asset Valuation, a Private Sector View
14.	Mr Aldous stressed that the key to asset valuation was to understand that an asset was worth its future cash flow and that an important part of valuation lay in assessing the skills of the management who would generate that cash flow. A problem in the ex-command economies was finding effective management: the state could often lose out on potential value, when investors reduced their valuation of the company because they had little confidence in the ability of management to improve performance.
15.	Mr Aldous listed three important factors which states should understand well if they wished to generate good proceeds from privatisations and set up successful businesses post-privatisation. Firstly, they needed to consider whether it was feasible to keep existing management or whether it might not be better to buy in expertise from abroad. Secondly, they needed to consider how to build confidence in a market for shares in the newly privatised companies. Third, a rigorous legal and regulatory infrastructure was needed to protect minority shareholders since the bad treatment of these shareholders could undermine confidence in the market.
	Papers presented by Mr Jeremy Colman (United Kingdom) and Dr Akiva Ilan (Israel) on the Audit of Private, Public and Concessionary Finance
16.	Mr Colman presented a paper on how some United Kingdom roads had recently been funded through private finance. He stressed the importance of a well managed competitive process and of obtaining a substantial transfer of risk for the achievement of value for money. He also emphasised the importance of using a realistic correct discount rate in evaluating Private Finance deals in that a low discount rate tended to favour conventional finance whilst a high discount rate favoured private finance.
17.	Dr Ilan looked at the importance of carrying out a full cost benefit analysis of private finance projects. The cost of capital would always be cheaper for the Government; whether a private finance deal would provide better value for money would depend on whether the private sector partner could be more efficient in managing the project and on which party was best suited to managing the different risks associated with the project.
	The Audit of Economic Regulatory Bodies
18.	Mr Martin Yates (United Kingdom) introduced the paper on the outcome of the pilot questionnaire, indicating how the questionnaire had been revised in the light of responses by Group Members. The questionnaire had revealed a significant amount of activity by both regulators and by the SAIs as auditors of those regulatory bodies. In the light of comments made by Group Members the questionnaire had been simplified into a new tick-box format.
19.	Mr Uczkiewicz (Poland), Dr Kovacs (Hungary) and Mr Raschendorfer (Austria) noted the differing definitions of regulation in different countries and stressed the importance of not seeing regulation purely as a case of an individual regulator exercising powers. Mr Rodriguez (Argentina) and Mr Cameron (New Zealand) welcomed the results of the pilot being impressed by the wealth of activity it had revealed.
20.	It was agreed that the questionnaire should focus on economic regulation at the national level and that, once the introduction had been revised, the questionnaire should be sent out to all SAIs inviting their requests in time for the Group secretariat to be able to report on key findings in the Theme II discussions at the XVI Congress.
	Report to XVI INCOSAI and Discussion Paper for Governing Board and delegates at XVI INCOSAI
21.	Members agreed that the report and Theme II discussion paper, as amended, should be submitted to the Governing Board and XVI INCOSAI respectively. Dr Paixao, President of the Auditoría General de la Nacion of Argentina, had kindly agreed to act as moderator at the Theme II session.
	Future Meetings
22.	Mr Uczkiewicz confirmed that the Polish Court were much looking forward to hosting the 1999 (sixth) meeting in the week commencing 4 October 1999 in Poland, at a venue to be arranged nearer the time. It was agreed that, in addition to economic regulation and private finance, the Group should also consider at the sixth meeting the role and responsibility of the state as minority shareholder in privatised businesses.
	Privatisation: The Israeli Experience
23.	Mrs Zipi Livni, Director of the Government Corporation Authority, which is responsible for carrying out the privatisation programme in Israel, gave a stimulating talk to members on her role in organising this programme. She examined the competitive tension between getting the best price and other objectives such as privatising as quickly as possible.
24.	Mrs Livni said that changing ownership from a Government monopoly to a private monopoly was undesirable and that the State’s interest in these industries could be preserved through means of legislation, regulation or through the holding of a golden share. Her presentation lead to a very useful exchange of views and experiences.
	Conclusion of Fifth Meeting
25.	Mrs Ben Porat thanked all members for their very thoughtful contributions to a challenging meeting. She said she was impressed with the discussions she had heard, and recognised the valuable work which had been done at previous meetings. She wished members well in the work which they would be carrying out in the future. On behalf of the group Mr Marshall thanked Mrs Ben Porat and her staff for the excellence of the arrangements and the warmth of their welcome, which everybody greatly appreciated and which had contributed so materially to the successful outcome of the meeting.

	Summary
1.	The Working Group agreed the guidelines on the audit of privatisations, amended in the light of comments from SAIs. They agreed that the guidelines should be submitted for approval and adoption to XVI INCOSAI in November 1998 in Montevideo.
2.	The Working Group also agreed that the pilot questionnaire had produced much useful information about economic regulation in their countries. They decided that the Chairman of the Group should invite all SAIs to complete and return the revised questionnaire so that the outcome could inform the Theme II discussions at XVI INCOSAI.
3.	The Working Group also agreed that the directory of privatisation audit prepared by Mr Oza (India) should be provided for INTOSAI members at the XVI INCOSAI. Following this meeting India would lead the Group’s work in the production of a digest of cases of the privatisation audits undertaken by SAIs.
4.	The Working Group further decided that they would continue to consider a number of case studies produced by members on issues concerning the audit of private, public and concessionary finance, as well as continuing to produce papers and other contributions on the audit of privatisation.
5.	By the kind invitation of Mr Wojciechowski, State Controller of the Supreme Chamber of Control of Poland, the sixth meeting of the Group will take place in Poland in the week commencing 4 October 1999. Further details will be announced following XVI INCOSAI.

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