Comments on the Guidelines on the Audit of Public/Private Finance and Concession and the possibilities of their implementation in audits carried out by the Supreme Chamber of Control (SCC)
The following remarks on the possibilities of the implementation of the guidelines are the result of the comments provided by the organisational units of NIK after they had become familiar with draft guidelines.
Up till now, there have been very few examples of the financing of public administration projects by the public and private sectors jointly. Even when a given project was co-financed by extra-budgetary means, e.g. the European Union funds, in practice it meant that separate agreements were concluded with entities providing different financing and each of the investment projects was settled separately. In such cases, public investors had to comply with the provisions of the Public Procurement Act, whereas the EU funding was subject the EU procedures. Therefore, the external audits carried out by NIK were in fact focused on the compliance with the procedures provided for in the Public Procurement Act concerning the appropriate selection of the contractors. Further on, the audits also concerned the reliability of financial settlements. Complete objective assessment of the efficiency of the methods chosen by a public entity was, however, hardly ever carried out. Neither were, for instance, assessments of the implementation of wider strategic goals, nor assessments of the choice of the best form of partnership. Elements of "value-for-money" audit procedure were only occasionally introduced, e.g. to check the prices of purchased goods or the labour costs in order to compare them with the average prices of a particular type of work.
As it has been mentioned, the Supreme Chamber of Control has carried out audits of projects co-financed by the public and private sectors. During other audits, however, controllers came across situation were public tasks were commissioned to private entities. Tasks in the field of social care, development of physical culture and sport among young people could serve as best examples. The public entities that have been carrying out such tasks up till now have practically monopolised the local market. Such a situation was possible because until 1991 the subsidies were subjectively distributed, i.e. they were granted to organisations that performed such tasks pursuant to their statutes and that were of interest for the State in terms of financing. At the moment, these subsidies are objectively granted, i.e. they are given to such organisations that provide the best offer for the performance of the task commissioned by the State. There exists a competition between contractors in many areas and therefore the commissioning of tasks should be preceded by proper analyses.
The use of subsidies by private entities allocated for the financing of tasks commissioned by the State is the subject of the annual audit prepared by the Supreme Chamber of Control as a part of the State budget audit. Moreover, this issue has been the subject of the audit of separate groups of tasks commissioned to private entities. For instance, in 1999, The Supreme Chamber of Control implemented twelve detailed programmes, this following fourteen in 1998.
A relatively new area of activity of public entities is the transfer of control over communal or State property to private entities. Communal residential buildings, which have been commissioned to be managed by private entities, are examples of such activity. The Supreme Chamber of Control completed the audit of this area of activity last year in one of the big cities. It has been established that the City Hall chose two offers out of 8 that did not comply with some of the requirements stipulated in the Terms of Reference (TOR) and besides other companies submitted better offers. Moreover, the contracts with the two chosen companies were concluded despite of the fact that the financial guarantee required was not contributed which again constituted the infringement of the provisions of Terms of Reference (TOR). The City Hall also granted these companies additional privileges, included neither in TOR nor in the contract. The rent paid by the companies for premises rented was lower than the rent for communal buildings. Moreover, these companies sublet some of the venues to other entities for high market rates.
All the above examples concern the commissioning of state tasks by local government units. The government also commissions tasks to private entities. Privatisation consultancy could serve as a very good example. An audit of the privatisation of the telecommunication company has proved that the Ministry did not provide the potential tenderers with all important provisions of TOR, shortened the period of tender proceedings and additionally the selection of a contractor was inconsistent with its own assumptions.
Although the Supreme Chamber of Control lacks the experience concerning the auditing of projects financed from various sources, SCC has carried out numerous audits concerning the State tasks carried out by private entities. It seems that the experience gained could illustrate some of the guidelines.
1. During the audit of the construction of the City Hospital, The Supreme Chamber of Control discovered that the contractor (a private entity), with a consent of the investor (The City Hall) introduced high rates and overestimated the costs of the implementation of the project. To define and substantiate SCC’s opinion about overestimated costs the Supreme Chamber of Control based its objections on the average rates for similar works published in a local construction magazine. It was determined that the labour costs could have been lowered by $2,500 and the cost of materials by about $4,000. (Guideline no 2)
2. During the audit of the construction of another hospital, the Supreme Chamber of Control hired a specialist – an expert in the construction industry. (Guideline no 2)
3. Unreliable timetables of the project implementation prolonged the whole investment and increased the cost thereof (Guideline no 19). Additional construction work had to be performed due erroneous geological data and mistakes in calculations. This increased the value of construction work as a whole.
4. Another reason for additional costs was the fact that the investor did not properly identified its own needs and, therefore, the requirements to be met by contractors were not properly prepared. The change of purpose of interiors in buildings already constructed or the lack of use of the existing ventilation heating system could serve as a very good example (Guideline no 6).
5. In many audits irregularities concerning the contract management have been discovered, particularly those with regard to the remuneration for work performed and the management of alterations (Chapter 6). For instance, the investor did not enforce the payment of fines for delays although they were provided for in the contract. Besides, the investor paid for works that were badly performed or not performed at all. In the case of construction of a border check-point, the company in charge of the work supervision received the whole amount provided for in the contract ($453,000) despite the fact that the scope of the work actually performed amounted only to about one fourth of the whole project.
6. The City Hall organised a tender for the modernisation of a ferry crossing and specified all the conditions in TOR. However, the conditions were defined in such a manner that none of the contractors was able to fulfil them. The City Hall then concluded a contract with a contractor that did not fulfil the conditions stipulated in TOR (Guideline no 22).
7. One of the criteria applied to the selection the contractor for the reconstruction of a tram track line was the submission by a tenderer of an offer guaranteeing a complete financing of the project. The City Hall did not check the reliability of tenderers, and finally the contractor withdrew from making any efforts to obtain external financing for the project (Guideline no 30).
The organisational units of the Supreme Chamber of Control, which have submitted their comments on the guidelines, have identified the following two basic aspects of the guideline implementation during audits:
3.1. Enactment of legal solutions enables the co-financing of the projects from public and private sources.
The Act on Public Finance, which has been in force since the end the year 1998, provides that all and any entities are entitled to implement tasks financed from public funds, unless other regulations provide otherwise. This means that there exists a legal basis for commissioning public tasks to entities that provide an offer in conformity with the principles of fair competition and guaranteeing the effective, economical and timely implementation of the task.
Another important regulation that enables the combining of the financial means from different sources is the Act on the Principles of Supporting Regional Development in force since May 2000. Therefore co-financing from various sources and the commissioning of the implementation of public tasks to private organisations involving considerable funds from the State budget, foreign aid funds, and the funds from units of local government will become more popular.
3.2. The enrichment of the audit methodology of the Supreme Chamber of Control.
The INTOSAI group in charge of the privatisation guidelines audit have developed further guidelines, following the guidelines on the auditing of privatisation and the guidelines on the auditing of regulators. This is a further step to ensure that the State audit will be equipped with principles and standards that will guarantee the proper co-operation with other audit institutions. The guidelines will allow for the exchange of experience, consultancy and enrichment of the methodology and procedures of the audit.
Above all, these guidelines show that there are numerous issues that the importance of which the Supreme Chamber of Control has not been aware of. This concerns first of all the risk assessment, the choice of a proper form of partnership between the public and private sectors, the bidding strategy and the assessment of the contract management. In view of the above, the Supreme Chamber of Control should prepare itself, in a conceptual and methodological sense, to conduct audits concerning the distribution and the use of public funds engaged in the co-financing of projects implemented in co-operation with private entities, or solely by the latter.
The guidelines have drawn the attention of the Supreme Chamber of Control to the necessity to carry out audits already during the preparatory proceedings of the government bodies planning to commission some tasks to private entities and not after the conclusion of a contract.
The presented guidelines have made it clear that there exist differences in tradition, standards, scope and methodology of the auditing process, and even in basic audit terminology that may hinder a direct and effective use of the guidelines during audits. It is also clear that, in order to implement the said guidelines and standards there is a need for the Supreme Chamber of Control to have its own materials structuring the methodology of audits based on the Act on the Supreme Chamber of Control, executory provisions to this Act and the audit practice. It is also essential to develop specialist Polish terminology in this field.
The implementation of the procedures stated in the guidelines will, according to the Supreme Chamber of Control, demand earlier preparation of the audit in a very precise manner. The precise preparation of an audit, including research and material collection, carrying out simulations and effectiveness analyses, will result in a better quality of materials collect to assess the audited entity and in the shortening of the duration of the audit.
The implementation of the audit approach stipulated in the guidelines will require the Supreme Chamber of Control to abandon its usual method of carrying out a subsequent audit in favour of carrying an audit at preparatory stage of a given project, tender or licensing procedures, and then assess the implementation and the results achieved.
- According to SCC, it is essential to emphasise in the guidelines the necessity to undertake earmarked audits focused on the intention to co-finance tasks from public and private funds, and carried out before the public entity makes a decision in this respect.
- It would be useful to add the definition of two terms to the glossary, namely: the level of risk and the division of risk.
- It seems that the implementation of the postulate stipulated in guideline no 33, i.e. the creation of separate working groups to examine each individual aspect of the assessment, will cause a significant bureaucratisation of procedures.
The experiences of the Supreme Chamber of Control indicate that the choice of project financing, the selection of a contractor and manner of the execution of a contract may be particularly prone to corruption. Therefore, SCC is of the opinion that the guidelines should be supplemented by aspects that would make it easier for the auditors to discover transactions particularly prone to corruption and would help in their identification.