I. INTRODUCTION

As the title of the address suggests, my main focus today is on the various challenges that face Auditors-General in an environment of increasing privatisation of the public sector. The International Consortium on Governmental Financial Management has defined privatisation as encompassing:

‘the transfer of property rights from the State to enterprises and individuals, contracting out the delivery of public services to the private sector, or cut-backs in State activities to allow greater room for private initiative.’

I am also using the term ‘privatisation’ in a global sense to encompass the adoption and/or adaptation of private sector principles and approaches, including management techniques; the greater involvement of the private sector in the supply and provision of goods and services to the public sector, including policy and analytical advice; the greater commercialisation of public service functions and activities, including market testing; full costing and pricing of products/outputs/services as well as adherence to the Competitive Neutrality Principles; and partial and full privatisation of public sector functions, notably those conducted by Government Business Enterprises (GBEs).

Privatisation and/or commercialisation of public services is now occurring in Australia on a significant scale. Privatisation in Australia involves three principal contexts:

• the opening up to competition of areas previously reserved to government, such as telecommunications;

• contracting out by public sector entities to private sector suppliers of goods and services in areas such as employment services and information technology; and

• the transfer of over A$32 billion in Commonwealth assets or business to private sector owners.

The focus of this paper is on the role of Auditors-General, as a fundamental part of the public accountability framework, and the importance of maintaining this role in an increasingly ‘privatised’ public sector. In particular, I will examine accountability issues and the role of audit in the following scenarios: full or partial sale of government businesses; and private sector delivery of public services. Not surprisingly, my observations will be largely based on Australian experience. However, we are witnessing increasingly common privatisation approaches as part of changing governance arrangements in many of the countries represented on this Working Group.

Audit Mandate

Australia has a federal system of government with parliamentary institutions based, in part, on the Westminster model. The relationships between the Commonwealth (or Federal) level of Government and the eight State and Territory governments are established by the Australian Constitution and have been shaped over the years by a combination of constitutional amendment, judicial interpretation and political accommodation. Each of these levels of government has its own accountability regime, which is independent of the others and includes an Auditor-General. Thus, as the Auditor-General for the Federal Government, I have no mandate to examine the activities of State or Territory entities. To date, I have only undertaken contemporaneous audits with State Auditors-General.

My responsibilities as Auditor-General are outlined in the Auditor-General Act 1997 and in a range of entity-specific legislation. The legislative arrangements for the appointment of the Auditor-General and the establishment of the Australian National Audit Office (ANAO) mean that I am, by statute, independent of the political environment. The results of audits are reported to the Parliament, thus providing the Parliament and the community with an important source of information about the way public resources are being administered. The mandate of my Office is to undertake audits of:

• financial statements, which provide an essential independent attestation of the financial statements of public sector entities and, in so doing, provide an independent and objective assurance to all parties on the financial stewardship of the public sector and on the financial systems which support it; and

• performance audits, which evaluate the economy, efficiency and effectiveness of the management of public sector entities by, for example, examining and assessing the use of resources, information systems, performance measures, monitoring systems and legal compliance.

Performance audits often extend to the identification of best practice models which may be included as a part of the performance audit report or may be produced separately as a best practice guide. They also include financial control and administration audits of public sector agencies and programs which are designed to address the gap between financial statement audits and performance audits by identifying best practice in areas such as procurement, accounts processing, performance measures and indicators, travel and related expenses. Essentially these audits focus on those core activities that are vital for good management, including guidelines, instructions, monitoring practices, systems development, integrity and ethical checklists and audit trails.

Within the audit mandate, I have complete discretion in the selection of areas subject to performance audit and in the timing of audits. Given the size and complexity of agencies, it is normally impracticable to attempt to assess overall performance of agencies. Performance audits are normally directed towards specific functions and operations of an agency. The ANAO’s mandate does not extend to examining matters of Government policy per se: the setting of policy objectives is the prerogative of Government. I am empowered to examine how well government programs and policies are administered and whether they are meeting stated policy objectives.

The changing public sector environment

The past decade has been a period of quite significant change in public administration in most countries. Some are suggesting that this is simply the forerunner to even greater change - only time will tell of course. An imperative for all of us is to engender the culture, the professionalism and the flexibility in our organisations to be able to adjust quickly and credibly to such change.

As with many other democracies, Australian governments have been under increasing pressure to achieve a better performing public service and less costly, more tailored or better focussed and higher quality services to citizens. A major imperative has been the successful management of change.

Accordingly, the Australian Public Service has been steadily evolving towards a more private sector orientation with a new emphasis on: the contestability of services; the outsourcing of functions which the private sector can undertake more efficiently; ensuring a greater orientation towards outcomes, rather than just on process; and an accent on continuous improvement to achieve better performance in an environment of devolved authority and greater management flexibility. These developments have been described as the ‘privatisation’ or ‘commercialisation’ of the public service.

A major impetus for the changes we are seeing has been the fundamental questioning of what government does, or should do, allied with a perception of inefficient (costly) and ineffective (lacking client focus) delivery of public services due to its monopoly provision and/or other constraints of public sector administration. Put simply, it is considered that public services would be provided more efficiently and effectively, with greater client satisfaction, in a more market oriented environment which provided greater flexibility for management decision-making and the discipline of competition. Indeed, history shows varying support for such a view but with reservations, for example, about market imperfections and public goods arguments – using economic terminology. Nevertheless, some have a quite pragmatic view about notions of clients and markets as the following indicates:

‘The privileges of governance and the political consequences of disappointing sufficient citizens, therefore, require that governments be more than disinterested facilitators of market exchanges. … the limits of a government’s responsibilities to its citizens are far more extensive than that of delivery performance.’

There has also been a steady devolution of responsibility and authority away from central agencies so that operational agencies now have greater autonomy in their decision-making as well as greater flexibility in how they manage their affairs. Greater responsibility and flexibility in decision-making needs to be matched by at least a commensurate focus on strengthening the associated accountability arrangements to ensure that decisions are appropriately made and that those people making decisions can be properly called to account should the question arise. To provide such assurance, public sector entities need to have robust corporate governance arrangements and financial management and other control structures in place.

While the increasingly commercial or ‘business’-like approach of the public sector is welcome from an efficiency viewpoint, it is important to recognise that the provision of public services involves more than achieving the lowest price or concepts of profit or shareholder value. Public service agencies must strive to maximise overall ‘value for money’ for citizens which requires consideration of issues other than production costs, such as client satisfaction, the public interest, fair play, honesty, justice and equity.

The privatisation of the public sector also requires proper accountability for the stewardship of public resources, as it is accountability which is fundamental to a democratic system. Importantly, the privatisation of the public sector does not obviate or limit the need for accountability to stakeholders. Instead, less direct relationships such as the introduction of a new player in the accountability chain - the private sector service provider - and greater decision-making flexibility strengthen that need. These changes also have important implications for auditing approaches where management and accounting techniques have much in common with those in the private sector. There is also a growing impact on the demand for similar auditing skills and experience. Unfortunately, this growth also coincides with increased demands for accounting skills, linked to the move to accrual accounting and budgeting in the public sector, which is impacting adversely on both ANAO’s recruitment and retention programs.

It is during the transition period, as these accountability arrangements and changed organisational structures are bedded down, that the greatest risk to effective decision-making arises. In my view, such risk is accentuated with greater involvement of the private sector in contractual arrangements; loss of corporate memory in agencies with downsizing of the public sector; the greater use of computing technology with attendant control and fraud related issues, particularly when outsourced; a lack of required skills in project and contract management in the public sector; and insufficient experience generally in managing on an accrual basis.

The concept of accountability is not exclusive to the public sector. No one doubts, for example, that the boards of private sector corporations are accountable to their shareholders who want a return on their investment. It is the nature and extent of that accountability which public sector commentators would contend distinguishes the two sectors. Of note is that the adoption or adaptation of private sector approaches, methods and techniques in public service delivery, has highlighted trade-offs between the nature and level of accountability and private sector cost efficiency. On this issue, it has been noted in Australia that:

‘Contracting out inevitably involves some reduction in accountability through the removal of direct departmental and Ministerial control over the day-to-day actions of contractors and their staff. Indeed, the removal of such control is essential to the rationale for contracting out because the main increases in efficiency come from the greater freedom allowed to contracting providers. Accountability is also likely to be reduced through the reduced availability of citizen redress… At the same time, accountability may on occasion be increased through improved departmental and Ministerial control following from greater clarification of objectives and specification of standards. Providers may also become more responsive to public needs through the forces of market competition. Potential losses (and gains) in accountability need to be balanced against potential efficiency gains in each case.’

Accordingly, the essential issue, as it often is in public administration, is to achieve an appropriate balance which can vary in differing circumstances. Achieving such a balance becomes even more of an imperative when the converging private and public sectors not only focus on the similarities of issues and even responses that confront managers, but more sharply contrasts differences between the two sectors.

The role of Auditors-General

While there are variations in the mandate, focus and operating arrangements across countries, the fundamental role of Auditors-General or their equivalents in democratic systems of government is substantially the same. That role is to provide the elected representatives of the community (the Parliament) with an independent, apolitical and objective assessment of the way the government of the day is administering their electoral mandate and using resources approved by democratic processes, albeit in differing governance frameworks.

In most, if not all, systems of government, the concept of accountability is of fundamental importance to governance. By accountability I mean a direct authority relationship within which one party accounts to a person or body for the performance of tasks or functions conferred, or able to be conferred, by that person or body.

In my view, Auditors-General are an essential element in the accountability process by providing that unique blend of independence, objectivity and professionalism to the work they do. Indeed, the four national audit agencies making up the Public Audit Forum in the United Kingdom believe that:

‘... there are three fundamental principles which underpin public audit:

• the ability of public auditors to make the results of these audits available to the public, and to democratically elected representatives.’

Corresponding with the public sector changes, the role of the Auditor-General and the place of auditing in democratic government has also changed. In today’s environment, our role includes providing independent assurance on the overall performance and accountability of the public sector in delivering the government’s programs and services and implementing effectively a wide range of public sector reforms. And I cannot overstate the importance of the independence of the Auditor-General in those respects. As the public and private sectors converge; as the management environment becomes inherently riskier; and as concerns for public accountability heighten; it is vital that Auditors-General have all the professional and functional freedom required to fulfil, fearlessly and independently, the role demanded of them.

I would argue that the role of Auditors-General is more important to effective, accountable and democratic governance today than at any time in the past. I would also suggest that, as we move into the future, and as the pace of change remains unabated, this trend will not decline, rather it is likely to increase as the roles and responsibilities of the public and private sectors converge and, perhaps, the differences between the two become more apparent than real. As the British Prime Minister, Tony Blair, has observed in relation to the current environment:

‘Distinctions between services delivered by the public and private sectors are breaking down in many areas, opening the way to new ideas, partnerships and opportunities for devising and delivering what the public wants’.

and

‘People want effective government.’

These developments have given rise to a focus on what constitutes ‘core’ public sector activities as opposed to ‘non-core’ ones. That is, what are those functions which can, and should, only be performed and delivered by government. Clearly, the size of the core is shrinking as evidenced by outsourcing and privatising in areas which, hitherto, were considered traditional public sector activities. Just how small the core can become is open to debate. But even areas where the public sector has traditionally held a monopoly, such as the provision of policy advice, are becoming increasingly open to competition.

Having made the decision to privatise (by whatever means) activities previously undertaken by the private sector, important issues need to be addressed concerning the ongoing administration of the public interest, including proper accountability for public resources. This is the focus of my paper, examining some of the more significant accountability and audit issues in circumstances of partial and complete sale of the public’s ownership interest as well as the involvement of the private sector in the delivery of public services. Accordingly, I have structured this paper to reflect the different accountability and audit implications that arise in respect of:

• the full sale of government businesses, whether by public share offer, trade sale or management buy out;

• the partial sale of government businesses as part of a staged approach to asset disposition or in an attempt to encourage a more private sector business culture within the business; and

• private sector delivery of public services reflecting the public sector shift from being a provider of services to a purchasing role. This may take the form of public sector competition with the private sector or the public sector removing itself from the direct provision of services to the public by contracting the private sector to provide these services.

II. POST SALE

One of the most prominent forms of privatisation has been the outright sale of government businesses to the private sector. In Australia, the last ten years has seen an increased focus on privatisation of government business entities, with more than $32 billion raised by the Federal Government through such asset sales over this time. In addition to raising significant cash proceeds, asset sales provide an opportunity to transfer risks to the private sector and has been argued to offer the potential for improved business efficiency.

Financial statement auditing

Privatisation, whether by trade sale or public share offer, has always impacted on the financial statement business of Auditors-General through our participation in the activities associated with the due diligence program, which ensures the accuracy and completeness of information provided to prospective purchasers. Information disclosed to potential purchasers typically includes financial performance data for a five year period and the most recent audited financial statements, which emphasises the importance of comprehensive and sound financial statement auditing practices.

As you know, the underlying objective of a financial statement audit is to express an opinion on the fairness of the information reported in the financial statements. However, for the public sector auditor, the financial statement audit needs to extend beyond the minimum work necessary to substantiate financial statement disclosure. If the Auditor-General is to truly add value and provide appropriate assurance, it is important that the public sector financial statement audit recognise and report matters which, although not directly related to the financial statements or supporting systems, impact on the efficient, effective and ethical use of public resources.

In the longer term, privatisation also impacts directly on the public sector audit practice because it often reduces the size of the Auditor-General’s mandate. In my case, the Auditor-General Act 1997 and Commonwealth Authorities and Companies Act 1997 provide that my financial statement audit mandate includes wholly-owned Commonwealth companies or companies in which the Commonwealth has a controlling interest. As a result, the full sale, or sale of a controlling interest, in a GBE will invariably reduce the number and nature of those entities subject to a financial statement audit by my Office. The problem that creates for many Auditors-General is a diminution of opportunities to maintain particular knowledge, understanding and even skills of audit staff which can impact adversely on both their retention and recruitment. A particular challenge is created where there are only one or two entities involved in the area, for example, telecommunications, but any loss of a sizeable GBE, such as the Commonwealth Bank, can have an adverse impact on skills maintenance.

Performance (or value for money) auditing

Asset sales invariably represent a significant and financially material government activity. The United Kingdom Treasury has noted that a range of legislative, commercial and propriety issues arise when a public sector business or service is privatised. From our perspective, it is worth noting that Auditors-General have wider responsibilities than the traditional private sector auditor. Our New Zealand colleagues have previously noted that, in order to provide assurance to the Parliament, and the community, that the privatisation process has been successful, post sale audit activities need to consider:

• satisfying public information requirements about the sale. For example information about the nature of the tendering process or the terms of sale may not always be known to the public. In these circumstances the reporting of such information by the Supreme Audit Institution (SAI) goes some way toward meeting that need for information by the general public;

• ascertaining and reporting whether the maximum value for money was achieved on sale;

• ascertaining and reporting whether the sale achieved the objectives set preceding the sale. For example, some governments offer the sale of commercial activities carried out in the public sector as a way of redeeming public debt or improving the efficiency of delivery of social services such as public health. The SAI might consider whether it is appropriate to provide public comment on whether that objective has been met; and

• assessing whether any regulatory requirements accompanying the sale have been met on an ongoing basis.

The assurance provided by such audit activities plays an important role in enhancing accountability for the stewardship of the sale process and whether post-sale performance is meeting the objectives set by government. Australia has an ongoing program of asset sales. My Office has undertaken a program of performance audits to examine the extent to which government sale objectives have been achieved: the effectiveness of the management of the sale; and the ongoing risk exposure. Risk management has been a particular focus of the public service reforms in Australia, particularly in an era of devolved authority and commensurately less central control.

To ensure their effectiveness, my privatisation audits (such as the recent audits of the Telstra (our major public sector communications supplier) share offer, the leasehold sales of Federal airports, and third tranche sale of the Commonwealth Bank) are undertaken by a team of experienced officers who understand the commercial nature of the transactions and the overlaying public accountability issues. In addition, we engage appropriately qualified professionals to provide specific technical, including commercial, advice.

A key issue in these performance audits has been the role of financial, legal and other private sector advisers to the sale process. In Australia, the privatisation process itself is now subject to extensive outsourcing under multi-million dollar advisory contracts. This places considerable emphasis on contract management and balancing commercial interests with the overlaying public accountability required of the public service. One of the key outcomes from our privatisation audits has been the identification of opportunities for significant improvement to the process of tendering and managing these advisory contracts, the adoption of which have led to improved overall value for money and project management quality in subsequent sales. In short, the emphasis is on better practice to add value to public administration as a major audit objective.

Asset sales in Australia are invariably conducted by way of public share offers or trade sales. Although there are similarities in some of the administrative processes associated with the management of public share offers and trade sales, there are also stark differences which need to be considered when planning and undertaking audits of such sales. Because of the time pressures and commerciality of these sales, ANAO audits have all been ex-post. Opportunities were available to undertake probity audits of the sales processes but there were potential conflicts of interest as well as resourcing issues which inhibited our participation.

By virtue of their scale and complexity, audits of public share offers are quite challenging undertakings. Furthermore, the scale of such offers particularly emphasises the importance of sound administrative practices because small deficiencies can have significant adverse financial implications. My Office has examined the two largest public share offers conducted in Australia, namely the sale of one-third of the shares in Telstra Corporation and the third tranche sale of shares in the Commonwealth Bank which raised proceeds of A$5.15 billion and A$14.24 billion respectively. These reports have examined the key factors that affect the success of any public share offer, such as:

• the level and structure of fees paid to stockbrokers and advisers as these fees significantly influence the motivation for these firms to act in the vendor’s interest. While fees need to be high enough to motivate them to sell shares, it is important that the entity oversighting the sale should take advantage of the competitive broking market by considering the level of fees sought by individual brokers when deciding on the composition of the selling syndicate for the offer. It is equally important that the division of fees and commissions between the fixed component shared among the selling syndicate and the ‘competitive’ component paid according to which broker secured the order for shares provide an incentive for all brokers to actively market and sell shares, and that fees and commissions only be paid for services provided. For example, underwriting fees should only be paid on shares that are actually underwritten;

• the ‘price discovery’ process which is important to achieving value for money in initial public offers. In Australia, the final offer price is established by a ‘bookbuilding process’ whereby investors submit bids in advance of the pricing of the share offer and, on the basis of this information, shares are allocated to qualifying bidders. In secondary offers, a market price already exists for the shares being sold and this makes the process of establishing the issue price less complex. However, in an initial public offer, the bookbuild performs a more important price discovery role and it is important that the bookbuild allocation criteria, and any indicative price ranges specified by the vendor, encourage and reward bidders who indicate their price elasticity of demand for shares; and

• the logistics of the settlement process are important if the vendor is to receive the full proceeds from the share sale in a timely manner. This requires comprehensive settlement procedures to be developed and advised to successful bidders, ongoing monitoring and reconciliation of relevant bank accounts, and the implementation of effective settlement default procedures.

The accountability aspects of such elements of the sales process are outside the experience of most public servants and are not well understood by private sector participants. There is an ongoing learning process for all concerned, not least by the auditors concerned.

A common objective of any privatisation is to obtain a fair value from the sale. My audits of trade sales have adopted the Australian Accounting Standards’ definition of fair value, namely: the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction. In trade sales, fair value can be achieved through an open, competitive tender process that enables a market value for the assets or business to be established. For this reason, a clear focus of performance audits of trade sales has been on the tender process and the evaluation of tenders. From these audits, my Office has identified a number of principles of sound administrative practice to guide future Commonwealth trade sales, including:

• the advantages of flexible data access arrangements to minimise the costs of potential buyers understanding the business in order to develop their bid;

• adopting structures such as tender evaluation committees to enhance transparency and accountability as well as structuring these committees so that relevant agencies are able to satisfy themselves that the evaluation is fully informed, properly conducted and identifies the best possible offer for each business;

• the development of appropriate priorities which set out the relative importance attaching to each evaluation criterion;

• carefully considering the nature of fees paid to commercial advisers to ensure advisers do not have a pecuniary interest in the outcome of the tender process;

• seeking early resolution of the government’s position on future service requirements, and any ongoing subsidies or payments to the business, so that bidders have a full picture of the potential for the business and can frame their bids accordingly; and

• the merits of undertaking a credible assessment of the net financial benefits of all tenders in order to maximise financial returns from the sale.

It has been pleasing to observe that these trade sale audits have had a real impact on the way sales are being conducted. For example, Federal airports in Australia have been sold in two tranches and each tranche has been audited. An aspect of my Office’s approach to auditing the second tranche sale was to examine action taken in response to recommendations made in the audit report on the first tranche sale. We found that all eleven recommendations in our 1998 report were implemented by agencies, even though not all had been fully agreed to by the agency responsible for Federal asset sales. The improved processes resulting from implementation of these recommendations supported an effective overall outcome for the Phase 2 sales. This outcome was also due to the greater understanding of the accountability requirements by private sector contractors who not only addressed audit comments but also initiated related discussions with the auditors concerned.

The public sector as regulator

The power to make laws and associated regulations is a central role of government. Governments regulate in order to influence or modify the behaviour of individuals or business in ways which are consistent with their broader social or economic policy goals. Regulatory intervention by government has often been used to deal with situations of ‘market failure’. ‘Market failure’ does not necessarily justify government action but, rather, it suggests that government action may be called for to improve upon market outcomes. In order to justify regulatory action it needs to be demonstrated that such action will improve upon current outcomes and improve the community’s welfare.

Regulatory action takes many forms, but generally falls into two broad categories, economic regulation and social regulation. Economic regulation seeks to address market failure which is typically associated with the exercise of market power. Economic regulation in Australia has concentrated mainly on the regulation of those aspects of market structure and market practices which result in anti-competitive conduct, or which have other adverse effects on economic efficiency; and the regulation of natural and mandated monopolies in order to guarantee access to the regulated service and to ensure an efficient level of pricing (and prevent monopoly pricing). Social regulation addresses issues such as personal or public safety, environmental protection, and consumer protection. These issues typically concern ‘externalities’, where it is generally not possible to quarantine the effects of particular action on designated groups, and/or the lack of information which can unduly disadvantage individuals. Social regulation can sometimes be used as a form of de facto economic regulation in so far as it may impose costs on business, or otherwise restrict the entry of individuals or firms in particular markets.

Many public sector businesses were established to provide services or products that were important to the public interest. The sale of these businesses does not end public interest in the provision of these services and products, and this is often reflected in ongoing regulation of the business or industry. Some notable examples in Australia are:

• telecommunications - where, as mentioned earlier, one-third of Telstra Corporation Limited, Australia’s principal telecommunications carrier, was sold in 1997. Independent to the government’s role as the majority shareholder, the company is subject to regulatory regimes aimed at enhancing competition within the Australian telecommunications industry as well as obligations to ensure that standard telecommunications services are reasonably available to all Australians.

• banking -where between 1991 and 1996 the Commonwealth Bank of Australia was fully privatised in three public share offers. Maintaining the long-run stability of the financial system is important in reducing the chances of financial crises, all banks operating in Australia, including the Commonwealth Bank, are subject to prudential supervision by a government agency established for this purpose. The Federal Government’s ongoing interest in the operations of the Commonwealth Bank is further heightened by the fact that the government guaranteed some $325 billion of the Bank’s liabilities at the time of the final sale.

• airports - with long-term leases of five international and twelve domestic airports sold between 1997 and 1998. Because of the impact of these airports on national economic performance and each of the surrounding communities, the private sector operation of these airports is subject to a range of regulation regarding access to the airport facilities, responsive development of the airport site, price regulation and environmental regulation.

• human blood products - with Australia’s sole manufacturer of Australian-sourced blood plasma products (CSL Ltd) sold by public share offer in 1994. The Commonwealth regulates the registration and manufacturer of therapeutic goods, including plasma products produced by this company. The importance of this regulatory role is highlighted in circumstances where the products in question are vital therapeutic products in short supply internationally.

Considerable attention has been given over the last few years to the need for regulatory review and reform in Australia. Our country has made a significant transition from an economic and industrial environment which was highly regulated to one focussed on exposing key sectors of the economy (including public services) to the benefits of competition. However, Australia has been progressively moving away from a an inward-looking, industry-specific regulatory apparatus to an open broad-based economic focus premised on the need to introduce greater competition and contestability into the Australian marketplace.

This continues a move away from a traditional ‘protective’ regulatory regime to one which is more reliant upon ‘self-regulation’ and consumer empowerment. The emerging less regulatory environment is characterised by efforts at ‘deregulation’, simplification and streamlining, coupled with efforts by governments to reinforce the essential ‘contract’ between consumers (or clients) and the providers of goods and services, whether in the private or public sector. Auditors have to understand such environmental changes if we are to be an influencing factor in any improvement in governance as well as providing the necessary assurance to Parliamentary institutions that these changes are being implemented as intended.

Nevertheless, as the above examples demonstrate, privatisation does not necessarily diminish the public interest inherent in the operation of certain businesses. Accordingly, where government has seen a public interest need for regulation of privatised companies or industries in which privatised companies compete, Auditors-General can perform an important accountability function in examining and reporting on the public sector’s performance in regulating privatised businesses and/or administering government contracts with these businesses.

There is a risk that needs to be recognised and addressed in any audit of regulation namely, regulatory capture. In particular, the failure to implement cost-effective surveillance and enforcement programs (for whatever reason) can negate the effectiveness of regulatory requirements and result in inequities between non-complying and complying businesses. Regulatory capture has always been a risk, but the regulator’s independence, objectivity and (potentially) fairness can be impaired if it fails to recognise that the transfer of ownership interest to the private sector has fundamentally changed the nature of the relationship between the regulator and the business entity.

The public sector as customer (or client)

The customer relationship with the business also changes following privatisation. It is important that the ongoing customer relationship be subject to appropriate pricing arrangements and that competitors be given the opportunity to bid for government business. In the appropriate circumstances, the use of competitive tendering and contracting promotes open and effective competition by calling for offers which can be evaluated against clear and previously stated requirements to obtain value for money. This in turn creates the necessary framework for a defensible, accountable method of selecting a service provider. Late last year the ANAO released a Better Practice Guide aimed at addressing some of the financial and probity risks associated with contracting with non-government suppliers. The focus was on managing the risks. Significantly, a sound tendering process and effective management of the resulting contract are also critical for the efficient, effective and sustainable delivery of programs.

It is just as important that the ongoing business relationship between the public sector and the privatised business be defined by a legally enforceable agreement. This requires the written contract to accurately reflect the understanding of all parties to the contract, and constitute the entire agreement between the parties. Otherwise the documentary trail supporting the authority for the payment of public money and contractual performance requirements, incentives and sanctions may not be clear. It is recognised that contractual performance is maximised by a cooperative, trusting relationship between the parties. But it should never be forgotten that such relationships are founded on a business relationship in which the parties do not necessarily have common objectives. Accordingly, good commercial practice involves an appropriate contractual framework for the business relationship.

However, protection of the public interest, including obtaining value for money from contract payments, also requires the contract to be effectively managed. I shall address this issue more fully later in the paper but, suffice to say, effective contract monitoring and overseeing of performance are critical to achieving contract outcomes. This is an issue that I aim to address in my performance audit activities, for example:

• In 1997, the supplier of passenger and commercial vehicles to the majority of Commonwealth bodies (known as the DASFLEET) was finalised for a price of $408 million. Associated with the sale, a five year tied contract was signed for vehicle leasing and fleet management to be provided by the purchaser to the Commonwealth. The audit of the sale found that the financial implications of the tied contract are such that the Commonwealth is exposed to a range of commercial risks including increased leasing charges (the sale was intended to reduce costs) and potential responsibility for the cost of terminating the contract. As a result of an audit recommendation, the relevant agency initiated a comprehensive review of the Commonwealth’s financial exposures under the contract.

• An important part of the 1994 sale of the former Commonwealth Serum Laboratories (now CSL Ltd) was the execution of a ten year contract for A$1 billion between the Federal Government and the soon to be privatised company for the supply of blood plasma products. The audit of the sale process found that systems had not been established to manage the risk of overpayments under this contract. My Office is currently conducting a follow-up audit of the sale audit, focusing on the administration of the long-term contract by the relevant public sector agency.

Achieving the full benefits of privatisation

Often in trade sales, bidders include in their tenders ongoing commitments that are consistent with the ongoing objectives of the privatisation. These commitments often relate to advancing the public interest. For example, recent trade sales examined by my office have involved purchasers committing in the respective sale agreements as follows:

• For sales of Federal airports, capital expenditure committed to infrastructure development including new runways and terminal buildings. For the fourteen completed airport sales, these commitments totalled $754 million over the initial ten years of the airport leases. Unless expenditure is delayed due to economic factors such as reduced passenger numbers and aircraft movements or a force majeure event, any shortfall in expenditure is to be paid to the Commonwealth.

• For the sale of the intrastate freight and interstate rail businesses of a former GBE, the respective purchasers committed to contractual commitments from the three purchasers to a total of $86.6 million in capital expenditure over the four to six years following the sale. In addition, the sale agreement for the sale of the passenger rail business is to continue concessional rail travel for pensioners, blind pensioners and incapacitated war veterans under a mix of discounts provided by the Pax Rail purchaser and a top-up concession from the Commonwealth likely to cost in the order of $5 million per annum.

Such commitments can be an impressive adjunct to the financial returns from the sale, and often contribute significantly to non-financial sale objectives. However, the benefits of these commitments will be lost unless appropriate administrative procedures are implemented to monitor and enforce compliance with the terms of these sale agreements. Indeed, my privatisation audits have identified that these issues are often overlooked, for example in relation the performance audits of airport trade sales:

• the legal documents associated with the sale, which governed maintenance and development of the airport sites, have a life of up to 99 years but arrangements had not been made for the ongoing storage and safe custody of these important legal documents;

• comprehensive administrative procedures to monitor ongoing development of the airports sites had not been developed and implemented. This put at risk the benefits offered by the development commitments. In the event that the airport lessees did not undertake all contracted expenditure, the lack of monitoring could also have denied the Commonwealth the opportunity to have the expenditure shortfall paid to it; and

• security funds totalling $197 million were not deposited into Commonwealth bank accounts as required by the sale agreements. The sale agreements were also found to be incorrect in relation to the payment of interest on these funds.

These performance audits added value by identifying deficiencies in the administration of commitments by purchasers, prompting agency action to rectify the identified deficiencies and action to prevent recurrence of similar problems in future sales. Administration of the long-term contractual commitments is a possible area of future audit activity to provide added assurance that the full benefits of privatisation are achieved.

III. PARTIAL PRIVITISATION

The partial privatisation, or phased approach to full privatisation, gives rise to a different set of audit risks than full privatisation in one tranche. Chief among these is the question of whether the audit of partially privatised entities should be part of the core business of Auditors-General. For me, it is not. But we still carry the full audit risks, including accountability, to both non-government shareholders and to the Parliament including the Executive Government. The issue becomes how to handle the potential, if not likely, conflicts of interest.

There have been a number of instances of partial or phased privatisation in Australia:

• The Commonwealth Bank of Australia was sold in three tranches between 1991 and 1996. The first tranche involved the sale of some 30 per cent of the Commonwealth’s shareholding in the Bank which was offered to the public via a fixed price underwritten public share offer. This was followed in 1993 by an open priced public offer which reduced the Commonwealth’s shareholding to just over 50 per cent. This remaining stake was then sold in 1996.

• In 1993, 25 per cent of the national carrier Qantas Airways was sold to British Airways by way of trade sale. In 1995, the remaining 75 per cent of Qantas was sold by way of a public share offer.

• After initially selling 20 per cent of AIDC Ltd (a national investment corporation) in 1988-89, the Commonwealth bought back these shares in 1996 prior to offering the entire entity for sale. This sale was completed in 1997.

• One-third of the shares in Telstra Corporation were sold by public share offer in 1997 with the current Government announcing its intention for two further sell-downs. Legislation was recently passed by the Parliament to permit the Government to sell a further 16 per cent of these shares to reduce the Commonwealth to a 50.1 per cent shareholder. The government proposes to sell the remainder of the Commonwealth’s Telstra shares but this will require further legislative amendment needing the support of both Houses of Parliament which is somewhat uncertain at this time.

As noted earlier, the Auditor-General Act 1997 and Commonwealth Authorities and Companies Act 1997 provide that my financial statement audit mandate includes wholly owned Commonwealth companies or companies in which the Commonwealth has a controlling interest. Partial privatisation that does not involve such an interest presents risks to management/Boards and to Government and the budget but, where there is a Commonwealth controlling interest, there is also potential for conflicts of interests and audit risk. The latter is reflected in attendance at annual general meetings where there are normal audit responsibilities to respond to questions as auditor but also some expectations in relation to the broader responsibilities of an Auditor-General.

Government activities that have been partially privatised have somewhat different imperatives and require other forms of control or oversight in terms of how they are to be held accountable. In this context, Auditors-General need to consider what is the appropriate manner for them to discharge their mandate responsibilities. However, of critical importance is that, whatever delivery method is used, the Auditor-General has, and will continue to have, the ultimate responsibility for the conduct of financial statement audits.

I have taken the view that my Office’s core business is as the public audit practice for all agencies that are budget dependent. Our non-core business therefore broadly covers entities that are not in the budget sector. This distinction is based on the belief that my Office derives its public sector expertise and comparative advantage from its virtual day-to-day involvement in nearly all Commonwealth entities. It also reflects the principle that the Auditor-General does not deliver just one audit but a total audit service both at whole-of-government and individual agency levels.

That said, it is important to recognise that the partial privatisation of a government business does represent a marked change in the operating environment of an entity. Typically, the entities would not be part of the recognised core of public sector activity. It would often not be feasible, let along practical, for the Auditor-General to maintain in-house the expertise needed to audit such entities, particularly where there is a strong identification and/or relationship with the private sector and where the Audit Office has little, or only limited, knowledge and experience. Perhaps more importantly, from an audit effectiveness viewpoint, it would be very difficult to obtain and maintain the necessary experience to conduct such audits well, with a full knowledge and understanding of the industry in which they operate. Private sector firms with the appropriate connections are often able to call on the necessary expertise and background knowledge nationally and internationally as well as being able to maintain that expertise because of their broader client base in particular areas.

This is one reason why private sector involvement in public audits can add value. Accordingly, for a number of years my Office has been using private sector firms as our agents in conducting financial audits. This does not abrogate my responsibility for the opinion given on those financial statements nor from our responsibility to be satisfied that the work of our agents is not just "adequate" but is based on demonstrated good professional practice and in accordance with audit standards set by me. Therefore we retain strong project management and oversight of such audits both for our assurance and understanding of the issues, including the personal development of our staff.

Using the private sector in this way does, moreover, provide us with the opportunity to concentrate our own resources on what we see as our core business. Broadly, this is all entities wholly or mainly budget funded. Here we have our own specialist skills, knowledge, understanding and experience of public sector functions and activities. At the same time, we are providing a better service with private sector firms to the more specialised entities, often with limited or no additional budget funding, than we could using solely our own resources. Such a strategic approach ensures that we are not only able to provide the Federal Parliament with the required assurance about overall public service accountability but we also have the necessary degree of involvement to do so credibly. The issue is basically about achieving the right balance of such involvement to be effective.

It is in these ways we demonstrate our commitment to learn from the collective experience of our peers, particularly in the accounting and auditing profession, and to give other public sector entities that opportunity as well. We are also aware that, in some circumstances at least, these arrangements provide opportunities for firms and individuals to gain a better insight into the operations of the public sector. The result is intended to be a better performing public service. The primary emphasis is on complementary effort for greater effectiveness, basically using the economist’s notion of comparative advantage.

The point I would like to emphasise is that my aim, by allocating my own resources mainly to the audits of core Government, is to consolidate my Office’s expertise and experience in that particular area of public sector activity. There is no doubt in my mind that by doing this, we are increasingly able to provide a more focussed and value added service to public sector entities and to the Parliament alike. At the same time, we are gaining valuable experience and exposure to the oversight and management of audits of private sector-type activities and issues. This is essential to ensure we have the capacity to adjust quickly to any move to a more contestable and commercially oriented environment involving even greater private sector participation.

IV. PRIVATE SECTOR DELIVERY OF PUBLIC SERVICES

A feature of the changing public sector environment has been the outsourcing of functions which, it is judged, the private sector can undertake more efficiently. Three prominent examples in Australia are:

• The Defence Department’s Commercial Support Program which was introduced in 1991. This program seeks to make greater use of civilian infrastructure and national resources by contracting out support functions where this was operationally feasible, practicable and cost-effective. The objective of the program is to achieve best value for money in the acquisition of support services for the Department of Defence and to give the private sector an opportunity to participate in the provision of those support services. The program process involves requesting offers from the private sector to perform support services and comparing those offers with the proposal put forward by any in-house option, where such a proposal may be feasible. The option assessed as providing the best value for money is then selected and a contract is negotiated or, if the in-house option is selected, an agreement for the provision of the service is prepared. In 1998, at which time 94 activities had been market-tested under with a total value over $1.5 billion, my Office completed an audit of the program. The program was chosen for audit due to the significant value of activities involved and the relevance to other Government activities which may be subject to market-testing and outsourcing.

• More recently, the Commonwealth has undertaken its most significant outsourcing to date, that of employment services. This outsourcing initiative (now known as the Job Network) involved contracting out some $1.7 billion of services previously provided by the public sector with payment structures and incentives for service providers linked to the placement of job seekers in work. It is estimated that the value of the next round of contracts, to commence in February 2000 and run for three years, will be around $3 billion. In September 1998, I tabled a report which examined the management of this process. We found that the agency had followed key principles of good project management in implementing the new market arrangements, that each of the project-planning criteria had been met and that risks had been managed in line with good practice. My Office identified a range of good practices implemented by the agency examples of which are highlighted throughout the report as well as opportunities for improvement.

• The decision to outsource information technology infrastructure and telecommunications services across budget-funded agencies, subject to the outcome of competitive processes to be undertaken within a ‘whole of government’ framework. Through this strategy, the Government aims to achieve effective support of business needs and service delivery requirements as well as substantial economies of scale resulting in budget savings. Agencies were formed into groups to conduct competitive processes to market test outsourcing of significant components of their information technology infrastructure and telecommunications services. A number of contracts have been let with significant savings forecast. The administration of this initiative is being audited by my Office to assess the administration and financial effectiveness of the implementation of the initiative including assessing the effectiveness of the tendering, contracting and monitoring process undertaken to date.

Outsourcing advocates point to the opportunities offered in terms of increased flexibility in service delivery; greater focus on outputs and outcomes rather than inputs; freeing public sector management to focus on higher priorities; encouraging suppliers to provide innovative solutions; and cost savings in providing services. However, outsourcing also brings risks.

The experience of my Office has been that a poorly managed outsourcing approach can result in higher costs, wasted resources, impaired performance and considerable public concern. For example, the Job Network referred to above provides a good example of the inherent difficulties in applying a purely commercial model to the contracting out of community services. With media reports suggesting a number of the original 321 service providers were experiencing financial difficulties, pressure was placed on the Government for additional funding and changes in the commercial relationship. This situation emphasises the need to recognise the complex set of objectives and stakeholder views which must be taken into account when we make decisions in the public sector. There are grounds for believing that, in this instance, not enough consideration was given to the impact of a service provider’s closure on unemployed clients.

The main message from this experience is that savings and other benefits do not flow automatically from outsourcing. Indeed, that process, like any other element of the business function, must be well managed.

Outsourcing represents a fundamental change to an agency’s operating environment. It brings with it new opportunities and risks, requiring managers to develop new approaches and skills. Managing the risks associated with the increased involvement of the private sector in the delivery of government services, in particular the delivery of services through contract arrangements, will require the development and/or enhancement of a range of skills across the public sector and will be a key accountability requirement of public sector managers. In particular, outsourcing places considerable focus and emphasis on project and contract management, including management of the underlying risks involved. The thrust of this change is reflected in the Australian Senate’s Finance and Public Administration Committee’s recently released second report on Contracting Out of Government Services:

‘Despite the volumes of advice on best practice which emphasise the need to approach contracting out cautiously, to invest heavily in all aspects of the process and to prepare carefully for the actual implementation, and the substantial body of comment in reports from the Auditor-General indicating that Commonwealth agencies have a very mixed record as project and contract managers, the prevailing ethos still seems to promote contracting out as a management option that will yield inevitable benefits. Resources must be made available to ensure that contract managers have the skills to carry out the task.’

The effective and efficient management of the relationship with private sector investors/owners/operators by government agencies requires a solid foundation of commercial, project management and policy skills. If they are not to be disadvantaged by an asymmetry of information, public sector managers will need a level of market knowledge and technical skills that are at the same level, or above those prevailing amongst the private sector service providers. In this context, Supreme Audit Institutions also need to be cognisant of the potential risks which might arise from project management arrangements with private sector investors, such as:

• short term flexibility may be compromised by unforeseen ‘downstream’ costs or liabilities which erode or offset early gains;

• there may be a tendency for government to bear a disproportionate share of the risks, such as through the offer of guarantees or indemnities;

• the failure of private sector service providers may jeopardise the delivery of the project, with the result that the government may need to assume the costs of completion plus the costs of any legal action for any contractual breaches;

• drafting inadequacies in contracts or heads-of-agreement with partners could expose governments to unexpected risks or limit the discretion of future governments by imposing onerous penalty or default clauses;

• inadequacies in the modelling and projection of costs, risks and returns may, under some conditions, result in an obligation by governments to compensate private sector providers for actual losses or failure to achieve expected earnings;

• there may be some loss of transparency and accountability for disclosure as a result of private sector provider claiming commercial confidentiality with respect to the terms of their investment; and

• the level of private sector investment and the amount of risk private sector providers are willing to bear may be inversely proportionate to the conditions placed on them by governments to determine pricing, delivery of community service obligations, or transfer or sell interest in the project.

Contract Management

While the public and private sectors could be said to be converging or re-converging in historical terms, there remain (necessary) differences which are exemplified in the area of contract management (by which I mean the whole process from the initial release of tenders through to ongoing contract performance monitoring). The nub of these differences is that the taxpayers’ dollars are at stake. For instance, the awarding of contracts must of necessity follow a process which has ensured open and effective competition and the realisation of value for money. The reasons for a particular source selection need to be written up and be able to withstand scrutiny, including from the Parliament. Contracts have to be put in place with performance standards clearly specified including appropriate arrangements for monitoring and reviewing contractors’ performance.

It is important to recognise that managing an outsourcing contract starts before any decision has been taken on the selection process, let alone about the service provider. For this reason, proper project planning is essential to a successful outsourcing partnership. Indeed, the previous Australian Government Solicitor observed that:

‘There is often an inverse relationship between the amount of time spent in preparing tender and contract conditions and the resources required to deal with problems in contract administration and disputes after the contract has been formed.’

There is a wide body of administrative case law and procedural guidance applying to government procurement in Australia. The resulting framework embodies important principles such as value for money, open and effective competition, ethics and fair dealing, and accountability. The salient point is that the level of procedures required in the selection process should be in direct proportion to the extent and complexity of the services to be provided.

In the appropriate circumstances, the use of competitive tendering and contracting promotes open and effective competition by calling for offers which can be evaluated against clear and previously stated requirements to obtain value for money. This in turn creates the necessary framework for a defensible, accountable method of selecting a service provider. Significantly, a sound tendering process and effective management of the resulting contract are also critical for the efficient, effective and sustainable delivery of programs.

However, the more rigorous the selection process is, the more protracted the contract negotiation process is likely to be; the more clear and quantifiable the performance standards are, the less likely that there will be an unsatisfactory outcome. In essence, the issue is a trade-off between administrative and accountability processes (or simply ‘bureaucratic red tape’ in the eyes of some) and their impact on costs and prices. Put another way, the challenge of contract management is to maintain accountability and transparency throughout the process, with the ultimate end of achieving cost efficiencies and value for money outcomes. What also needs to be kept in mind is the cost associated with contract management which partially at least offsets the latter, as many studies of outsourcing have shown.

Crucial to meeting the challenge is the contract itself and how it is subsequently managed. The purpose of a contract is to make a legally enforceable agreement. Our audits have clearly illustrated the value of written consultancy contracts that reflect the understanding of all parties to the contract, and which constitute the entire agreement between the parties. Otherwise, the documentary trail supporting the authority for the payment of public money and contractual performance requirements, incentives and sanctions may not be clear. It is recognised that contractual performance is maximised by a cooperative, trusting relationship between the parties. As indicated earlier, it should never be forgotten that such relationships are founded on a business relationship in which the parties do not necessarily have common objectives.

The contract must clearly specify the service required; the relationship between the parties needs to be clearly defined, including identification of respective responsibilities; and mechanisms for monitoring performance, including penalties and incentives, set in place. There should not be any equivocation about required performance nor about the obligations of both parties. I stress that this is as much about achieving the desired outcome as it is about meeting particular accountability requirements. Both require sound, systematic and informed risk management which recognises that:

‘… managing contract risk is more than a matter of matching risk-reducing mechanisms to identified contract risks; it involves an assessment of the outsourcing situation.’

On the issue of contract preparation and management, Australia’s Productivity Commission has suggested that public sector agencies tend to transfer as much risk as possible to the agent, thus increasing the risk of contract failure. Conversely, bad contract design leaves too little risk with the agent. This can lead to poor service delivery and resulting political problems for the government. The latter reflects the rights of service recipients as citizens who are not party to the principal-agent relationship. This can create other problems as indicated in the following observation:

‘Probably the greatest accountability weakness, from the standpoint of service recipients and other third parties affected by the actions of a contractor, is the limitations of private contract law in dealing with the interests of parties not covered by the privity of contract between the government agency and the contractor.’

The same authority made the additional comment that:

‘In addition at law, both here and in the United Kingdom, there also seems to be a trend emerging to blur the traditional distinctions between what are public and what are private concepts, rules and remedies’.

Contracts should not be a daunting process for either party. The ideal contracts are the ones that you can leave in the bottom drawer but at the same time you are confident that, if a challenge were to arise, the government’s interests are well protected. Such an ideal reflects the establishment of a genuine partnership between the public and private sectors. It is an arrangement whereby the parties operate in tandem rather than at arm’s length and where there is room for some give and take. But the boundaries have to be clear enough that each request for a service or product does not result in either or both of the parties scrambling for the contract to settle differences.

During recent years the management of contracts by public sector agencies has been of particular concern to my Office and I have tabled a number of audit reports which address this area:

• One agency selected a service provider and provided advanced funding of 80 per cent of the contract fee to a contractor without undertaking any financial viability checks on the contractor. The contractor later abandoned the project before it was fully completed because of the withdrawal of its financial backers. As a result the agency terminated the contract and has taken legal action in an endeavour to protect any remaining Commonwealth funds held by the contractor.

• Similarly, the audit of the $5 billion project for six new submarines found that, although only two submarines had been provisionally accepted by the Navy, the agency had paid over 95 per cent of the construction contract funds. This was compounded by the finding that the contract only provides modest recourse by the Commonwealth by way of financial guarantees and liquidated damages for late delivery and under-performance.

• In conducting the initial sale of Telstra shares, advisers were appointed without having regard to the fees quoted by the tenderers because the Commonwealth agency considered the expected outcome in sale proceeds to be more important than sale costs. The contract fees, amounting to some $91 million, are the highest ever paid in a Commonwealth public share offer and were significantly above those indicated by other tenderers. Furthermore, the contractual arrangements required fees to be paid for services that were not provided and other fee payments departed from the terms of the relevant contract, which the agency said did not fully capture the commercial understanding of the parties as to the basis on which fees would be calculated and paid.

A common theme of these audit reports has been the deficiencies in the project management skills of agency decision makers, despite the fact that some of these projects involve substantial resources and complexity. As well, reports have flagged a need for care in assessing value for money and negotiating, preparing, administering and amending major contracts. The Parliament and the media have also paid particular attention to these issues during the past two years with several agencies receiving significant adverse comments and publicity. This situation has to be addressed as a matter of urgency. The public service has to reverse these concerns to win back the confidence of all stakeholders.

Each of the above examples highlights the importance of having a strong project and contract management skills base which can be drawn upon to make decisions and to achieve the required results. This does not necessitate a full time complement of skilled project and contract managers. Rather, agencies should ensure that, if the current decision makers do not have the requisite skills, sufficient external expertise is obtained. Such external expertise may be required, for example, in relation to the financial, legal and technical aspects of contract management.

The significance of agencies having a clear understanding of the legal imperatives associated with contracting was highlighted in a recent seminar in Australia which discussed among other things, the convergence of legal and commercial risks and the need for planning and sound systems for contract management, particularly over the whole life of the contract. Recent judicial decisions have also emphasised the importance of having a legally defensible tender process as an integral part of contracting out. It has always been important for the tender process to be commercially defensible. However, recent rulings have demonstrated that commercial interests are also served by what has to be done to meet legal requirements.

Also recently, the legal authority of Commonwealth statutory authorities and companies, including GBEs, to enter derivative financial contracts has been questioned. Consequently, a call has been made for greater legal certainty about the foregoing organisations’ power to enter into such contracts. A key risk for many of the commercial statutory authorities is exposure to the impact of changes in interest and exchange rates on cash flows and net worth. The deregulation and globalisation that have occurred in financial markets in recent decades has led to the accelerated development and use of a range of financial derivatives. Financial derivatives, such as swaps, options and forward rate agreements, enable government bodies to manage (or hedge) their financial risks, particularly in the area of sovereign debt and major procurement contracts.

Although originally developed as a risk management tool, derivatives also involve risks that need to be managed. For example, in recent years a number of entities have suffered significant financial losses associated with derivatives. Subsequent reviews have attributed the losses, in part, to flawed corporate governance systems that did not establish effective risk management and internal controls to ensure approved policies and risk limits were applied and were effective. There is also a risk that derivatives may be used to speculate on financial market movements, thereby creating new risks rather than managing existing risks.

Derivatives also raise important issues for auditors of statutory authorities. Corporations established by statute have no legal capacity beyond that necessary for the purpose for which they were established unless the enabling legislation shows a legislative intention to create a corporation with a wider capacity. Significant losses have been experienced by derivatives users and dealers when derivatives contracts were found to be unenforceable as counterparties did not have the necessary legal power and authority to engage in derivatives transactions, or because particular terms of the contract were not legally sound. Even where there is reasonable legal certainty, such as in the case of Commonwealth Companies subject to the Corporations Law, there is a stated concern that:

‘… these organisations can legally use derivatives for speculation, possibly exposing the Commonwealth to greater risks. Imposing restrictions in the use of derivatives in the memorandum or articles would send the appropriate signal to officers of these organisations that derivatives are to be used only for hedging purposes’.

The use of derivatives by Government agencies and bodies has been the subject of inquiry and debate in the Senate (the Upper House of Parliament) indicating clear Parliamentary concern with such use even in the more market oriented environment being experienced by the public sector. Central among these concerns was the leverage that such products offer with the possibility of significant financial gains and losses for a small initial outlay.

Of note is that the Commonwealth Treasury makes extensive use of interest rate and cross-currency swaps with over 300 swaps since May 1988 until recently with a notional principal value of more than A$38 billion. This swap program is aimed at changing the debt portfolio to fixed and floating interest rates as well as seeking to obtain foreign currency exposures which may reduce debt costs. While legislation removes any doubts about the Treasury’s legal authority to enter into these transactions, Parliamentarians have questioned the Treasury about the purpose of this swap program and the extent of the Commonwealth’s associated financial and risk exposures. Treasury assured the Parliament that the swaps program is soundly based with substantive processes that protect appropriately the Commonwealth’s exposure. My Office is currently undertaking an audit of Commonwealth Debt Management and the control and governance framework for the swaps program is an important element of the audit scope.

This issue highlights the importance of auditors having a sound understanding of the business environment of the agencies they audit. Because of their complex nature and the significant risks involved, the public sector auditor needs to be satisfied that financial derivatives are being used in a prudent and considered manner; that appropriate governance arrangements are developed and adhered to; and that government is aware of the nature and extent of the activities involved. However, it is also important that the auditor be satisfied that the agency has the power to enter into derivative contracts.

The use of financial derivatives by public sector agencies has a further implication for public sector auditors of these organisations. As part of the audit planning process, regard needs to be had to the control framework and a careful risk assessment undertaken. Where reliance is placed on controls (for a financial statement audit) or the performance audit scope includes coverage of the use of derivatives, it is important that the auditors have a sound understanding of these financial instruments and that audit examination be undertaken by appropriately qualified and independent staff.

The notion of partnership, in the context of contract management, is increasingly gaining acceptance, that is, the Commonwealth should be working in partnership with the private sector, or indeed that public sector agencies should be working in partnership with each other and with private sector firms, for example through purchaser/provider arrangements, to deliver public services. Partnerships depend on common understanding, trust and goodwill not legal compulsion. However the reality is that there will be testing times even in the best of relationships. Consequently, it is good practice for such relationships to be based on sound tendering and administrative processes and an enforceable contract.

In addition to the immediate impact of outsourcing on public accountability, the transition to an outsourcing arrangement can have long-term impacts. There is a particular risk that incumbency advantages may reduce the level of competition for later contracts as a result of the existing supplier having greater information and knowledge about the task than either the Commonwealth agency or potential alternative service providers. This risk becomes more pervasive when the outsourced activity has a significant impact on core business, or competition in the market is limited.

This is an issue that is going to require increasing attention by public sector managers, as has been recognised by the Australian Parliament’s Joint Standing Committee on Foreign Affairs and Trade in relation to the Defence Department’s Commercial Support Program:

‘Frequently, the successful tenderer for the support contract relies on recruiting the trained Defence personnel who have been made redundant in the ADF because of the function’s transfer to the commercial sector. Through employing these already-trained personnel, the successful civilian tenderer is able to provide a commercially attractive initial price for a support capability because there is no need to factor in staff training costs in the contract. This process becomes disadvantageous to Defence where the successful tenderer becomes the monopoly supplier of the support service, and Defence must subsequently renegotiate that contract from a position of weakness, having eliminated its own in-house capability to perform the particular function.’

Performance accountability

Although the public sector may contract out service delivery, this does not equate to contracting out the responsibility for the delivery of the service or program. It is the responsibility of the agency and agency management to ensure that the government’s objectives are delivered in a cost-effective manner. The agency must therefore specify in the contract the necessary level of service delivery and required quantitative and qualitative service standards and measures. However, it has also been suggested that:

‘Contracts should be framed for performance rather than detailing how to achieve this performance.’

Put another way, it is often more cost effective to seek solutions to defined problems or requirements in the market-place rather than to attempt to specify those solutions which essentially means an implicit shared responsibility for results between the purchaser and provider. Worse still, there may be a commensurate lack of commitment where there is no real ‘ownership’ by the provider.

An agency must also ensure that an adequate level of monitoring of service delivery under the contract is undertaken as part of the agency’s contract administration and in line with its broader service delivery responsibilities, such as might be set out in a Client Service Charter. Particularly with large and complex projects there should be provision for:

‘Contract milestone reviews in the progress of the project, with tests wherever appropriate that prove the progress, and provisions for relief in the event of default’.

Sound contract management, and accountability for performance, are dependent on adequate and timely information. Therefore it is important that agencies consider the level and nature of information to be supplied under the contract and access to contractors records they require to monitor adequately the performance of the contractor. However, the more detailed the performance standards, the specific requirements for rigorous reporting and monitoring and the need for frequent renegotiation and renewal, the closer the contractual arrangements come to the degree of control and accountability exercised in the public sector. Once again, it is a matter of balancing any trade-offs in efficiency and/or accountability if optimal outcomes are to be secured.

Contracting, while providing the benefits of cost efficiency and enhanced service delivery, can expose the public sector to increased risk. The public service is, in many cases, no longer directly responsible for program outputs, instead being reliant on a private sector contractor for the provision of particular services or products. Nevertheless, the relevant agency is still accountable for those outputs under current accountability requirements. This is also Parliament’s expectation. The Australian Senate’s Finance and Public Administration References Committee reinforced this concern as follows:

'The Committee believes strongly that contracting-out of services should not diminish public accountability through the Parliament, the Auditor-General and what can be summarised as the administrative law - the role of statutory officers such as the Commonwealth Ombudsman, the operations of agencies such as the Administrative Appeals Tribunal and legislation such as the Administrative Decision (Judicial Review) Act. It has been suggested that contracting-out may improve accountability by requiring services to be defined more precisely and imposing service agreements on providers. That should be seen as a bonus not an alternative.’

The competent management of the contract is often the Commonwealth’s key means of control over its outputs and their contribution to outcomes. This is why it is essential that we ensure our staff have the capability and capacities to manage contracts effectively if we are to achieve the results required of us. But I stress that it is not just skills in relation to contracting that are important, there is still a high premium on knowledge and understanding of the functions/business that we are managing. Put simply, we have to be in a position to know what we are actually getting under a contract and whether it is meeting the objectives we set. If we do not, we are virtually risking the success of our agency and its very reason for being.

There is no doubt that the more ‘market-oriented’ environment being created is inherently more risky from both performance and accountability viewpoints. To good managers, it is an opportunity to perform better, particularly when the focus is more on outcomes and results and less on administrative processes and the inevitable frustration that comes from a narrow pre-occupation with the latter. Having said this, it is important for us all to remember that the Public Service is just as accountable to the Parliament for the processes it uses as for the outcomes it produces. That is inevitable and proper. In my experience, however, some agencies, faced with the prospect of adverse comment in an audit report about the transparency and accountability of their risk management or other processes, have argued for a greater emphasis on the outcomes achieved by the agency. The following observation made by the then Chairman of the Australian Senate’s Standing Committee on Finance and Public Administration, reflects well my response to such arguments:

‘[Risk management] does not mean that managers can expect to be judged only on the efficiency and effectiveness of their results and be able to claim that the mix of inputs chosen, how they are applied and the selection of who is to supply them is outside the reviewer’s area of concern. The fundamental principles of accountability have not changed: information still needs to be readily available to allow reviewers to make their own assessments about the legal and proper use of inputs and the ethical behaviour of the people involved in the processes. Managers cannot simply claim that the ends justify the means.’

Auditors-General will always be obliged to comment on both aspects of agency performance in order to provide the level of accountability expected by Parliament and the people of the public sector in delivering government services. While Parliament’s attention in the past has largely been on fiduciary accountability (focussed on inputs), greater interest is now being shown in management performance of outputs and outcomes while recognising interdependence in the chain of accountability.

In addition to introducing different models for the delivery of public services, the Australian Government announced in March 1997 its decision to introduce Service Charters to promote a more open and customer-focused Commonwealth Public Service. All Commonwealth agencies which have an impact on the public were to have had their Charters in place by 30 June 1998. The Charters represent a public commitment by each agency to deliver high quality services to their customers. Where relevant, the Charters guarantee specific standards for service delivery. Again, the notion is to make the public sector more accountable to the general Australian community and more outcomes focused. Service Charter performance will be reviewed as part of the ongoing Performance Audit program.

Where service delivery has been outsourced, these Service Charters will clearly have a direct impact on the private sector contractor. In particular, it is to be expected that outsourcing contracts will need to reflect the Service Charter commitments if the Charters are to have any meaning. It will also be important to require, as part of the contractual arrangement, the provider to supply outcome, output and input information against which the provider’s performance can be assessed, including whether processes are efficient and the service quality is satisfactory. In this way, even if the client is one or more steps removed from the responsible agency, it should still be possible to ensure clients are receiving the appropriate level and quality of service, consistent with the Service Charter.

Commercial confidentiality

Virtually all traditional accountability mechanisms rely on the availability of reliable and timely information. As a result of contracting out to the private sector, the flow of information available to assess performance and satisfy accountability requirements has on the whole been reduced. This situation has arisen where performance data is held exclusively by the private sector or through claims of commercial confidentiality that seek to limit or exclude data in agency hands from wider parliamentary scrutiny. Thus accountability can be impaired where outsourcing reduces openness and transparency in public administration. For this reason, the issue of commercial confidentiality is likely to be of increasing importance as the extent and scope of outsourcing grows. A highly respected academic from the Australian National University captured the concern as follows:

‘The test case is the accountability challenge posed by alternative service providers and their claims that their contracts with government lessen their liabilities of public accountability because of the ‘commercial-in-confidence’ nature of their performance information.’

As the reform of government service delivery continues to evolve, so has the focus of the debate on these accountability issues, with commercial confidentiality and public interest issues (particularly involving ‘sensitive’ information) becoming of increasing concern. The debate has not been limited to Parliamentarians and Parliamentary Committees, Auditors-General, and academics. For example, an editorial in an Australian newspaper last November commented on the Australian High Court’s judgement in relation to the tabling of documents before an Australian State Parliament stated that:

‘This defence (that papers were commercially sensitive and should not be released) is over-used by governments trying to avoid scrutiny and embarrassment and often represents arrogance of the first order; a democracy elects its representatives to act on behalf of the electorate as a whole, not of vested interests. The system requires the utmost transparency and direct accountability from its Parliamentary representatives. Lack of transparency and limiting the capacity of Parliament to review government decisions weakens our democracy.’

The Australasian Council of Auditors-General has put out a statement of Principles for Commercial Confidentiality and the Public Interest. As an example, one of the Principles concludes that:

‘Some private and public sector bodies are instinctively apprehensive and protective about the disclosure of any commercial information. But such views often overstate the implied risks to an entity that might be occasioned by the release of commercial data. After-the-event commercial information has significantly less value than commercial information concerning events that have yet to occur. But even where commercial information might have commercial value to others, there are often overriding obligations that require it to be released. This is so for commercial information held in the private sector and, a fortiori, it applies to the public sector.’

The issues indicated in the above conclusion reflect a number of considerations which have exercised fellow Auditors-General in addressing commercial in confidence material. A particular concern has been the insertion of confidentiality clauses in agreements/contracts which can impact adversely on Parliament’s ‘right to know’ even if they do not limit a legislatively protected capacity of an Auditor-General to report to Parliament. For example, the Auditor-General of the State of New South Wales, recently observed that:

‘… it appears to me that governments just don’t want to be accountable and are using private sector participation and so are reducing the amount of information that’s available.’

At the heart of this debate is the on-going problem of clearly defining the ‘public interest’. The public interest is, of course, fundamental to democratic governance and is an issue that public officials, including auditors, continually grapple with. Again, the challenge is about striking the right balance between public and private interests. Section 37(1)(a) of the Auditor-General Act precludes publication by my Office of information whose disclosure would be contrary to the public interest for any of the reasons set out in sub-section (2) which includes unfair prejudicing of commercial interests of any body or person. The former also applies where the Attorney-General has issued a certificate to me along the same lines and is also subject to the same reasons. Not surprisingly, these provisions have been subject to considerable Parliamentary debate.

The risk to accountability associated with claims of commercial confidentiality in relation to government contracts has recently been commented on by the South Australian State Auditor-General:

‘... the issue of confidentiality is of central importance in matters associated with government contracting.’

and

‘In situations where government contracting results in a long term transfer of material government responsibility to the private sector, the right of the people to know the extent and terms of that transfer must take precedence over less persuasive arguments in favour of confidentiality. Not only is the public affected by the transfer of what is government responsibility but it is further affected by the creation of a new relationship (often long term) between government and a private entity. A relationship about which the public is entitled to advise, consent to or object to through both their Parliamentary representatives and other forums.’

This issue was also addressed by the Senate Finance and Public Administration References Committee in its 1997 Inquiry into Contracting Out of Government Services. My submission to that Inquiry noted that:

‘For agencies to be in a position to support the accountability obligations of their Minister and ensure adequate performance monitoring of contracted services, it is essential there be, at least, specified minimum levels of performance information to be supplied by the contractor to the agency, and agreed arrangements which provide for access by the agency to contract-related records and information.’

In making further recommendations to the Committee, the we suggested, as did the Commonwealth Ombudsman, that in relation to commercial confidentiality claims by private sector contractors a reverse onus of proof test should be applied, that is:

‘In our view, the question of whether or not commercial-in-confidence information should be disclosed to the Parliament should start from the general principle that the information should be made public unless there is a good reason for it not to be. In other words, what we are saying is there should be a reversal of the principle of onus of proof which would require that the party arguing for non-disclosure should substantiate that disclosure would be harmful to its commercial interests and to the public interest.’

The Committee agreed and in addressing matters of commercial confidentiality concluded that:

‘The committee is firmly of the view that only relatively small parts of contractual arrangements will be genuinely commercially confidential and the onus should be on the person claiming confidentiality to argue the case for it. A great deal of heat could be taken out of the issue if agencies entering into contracts adopted the practice of making contracts available with any genuinely sensitive parts blacked out. The committee accepts that some matters are legitimately commercially confidential. If Parliament insists on a ‘right to know’ such legitimately commercially confidential matters, the most appropriate course to achieve this would be the appointment of an independent arbiter such as the Auditor-General to look on its behalf and, as a corollary, to ensure that he has the staff and resources to do it properly.’

One of the difficulties in addressing commercial confidentiality issues is that of precise definition as to what is covered. While there is broad understanding of the kinds of information which contractors might regard as commercially confidential, the question is how to ensure adequate accountability for the use of public funds while ameliorating any justifiable ‘confidentiality’ concerns. Recent legal decisions have reiterated the importance of maintaining ‘proper confidentiality’ of tendering proposals. With the growing convergence between the private and public sectors referred to earlier, and the considerable increase in contracting, the issue has become a matter of practical importance and some urgency. A particular concern is that agencies may too readily agree to treat contractors’ documents as confidential, notwithstanding the wide access powers that may be provided to the Auditor-General.

Another challenge for Auditors-General in the move to increased contracting with the private sector for the provision of government services is our ability to access the relevant records. At present I do not have a legislative provision similar to that which I understand applies in the United States that guarantees access by government auditors to the private sector service providers’ records. However, my Office is currently encouraging the inclusion of a suitable access clause in contracts of this nature. My Office has drafted model access clauses (reflecting the provisions of the Auditor-Generals Act 1997) which have been circulated to agencies for insertion in contracts. These clauses give the agency and my Office access to contractors’ premises and the right to inspect and copy documentation and records associated with the contract.

The clauses are not necessary to provide me with access to information as such, but they are important in flagging to contractors that they must give full access to the Auditor-General for proper accountability. In my view it is a matter of educating both parties, whether public or private sector, to the requirements of a successful relationship or contract. Vague relationships do not assist either party; nor do they lend confidence to the partnership or use of contractual arrangements. Such accountability is an aspect of the public sector environment with which the private sector is becoming more familiar as outsourcing develops further.

Quite recently, the Joint Committee of Public Accounts and Audit (JCPAA) recommended legislative provision:

‘… to enable the Auditor-General to access premises of a contractor for the purpose of inspecting and copying documentation and records directly related to a Commonwealth contract, and to inspect any Commonwealth assets held on the premises of the contractor, where such access is, in the opinion of the Auditor-General, required to assist in the performance of an Auditor-General function.’

The comment was made in relation to a review of an Audit Report on the New Submarine Project. The Department of Defence disagreed with an ANAO recommendation for such access as unwarranted and not agreed by Parliament. Defence also claimed that their contracts already provide for adequate Commonwealth access for management of contracts. The Committee rejected this claim. A Deputy Secretary of the Department also argued that:

‘I believe that will raise Defence’s net costs of doing business because people will be more risk averse; and we will pay for that.’

Interestingly, the Committee not only disagreed with that view but also were concerned that:

‘… some agencies may see a benefit in the reduced accountability that can occur when services are outsourced to the private sector.’

and

‘… from time to time, agencies are not as cooperative as they could be in assisting the Auditor-General to access contractors’ information and records.’

The message here is that external scrutiny (through public reporting and the activities of Auditors-General) is an essential element in ensuring that public accountability is not eroded, by default, through contracting out. Just as it is incumbent upon public sector agencies to ensure they have a sound understanding of the commercial nature of any contract, private sector entities need to recognise that there are overlaying public accountability issues, not present in purely private sector transactions, that need to be addressed. For this reason, to reiterate my earlier comment, outsourcing contracts should include access provisions to fulfil any performance and financial statement auditing requirements as necessary. This requirement was re-affirmed in the most recent JCPAA report on Australian Government Procurement.

Contractors can expect to have their performance scrutinised both by purchasing agencies and by review bodies such as the Auditor-General. Some of my recent audit reports suggest that many contractors have yet to fully appreciate this aspect of working for government or to embrace the higher and/or different standards of accountability that are required when public money is involved. The latter is essentially the issue being covered by this address with any trade-off possibly being more about the nature and level of accountability rather than about efficiency per se. However, it is not difficult to envisage at least some cost for accountability over a purely market-oriented transaction.

Control structures to manage risk

This brings me to the issue of corporate governance and agency controls, which is particularly important in relation to privatisation of the public sector. In an environment that promulgates the notions of contestability, outsourcing and greater efficiency, the way that agencies implement their corporate governance framework, and particularly how they conduct their risk management, including the control of those risks, will be critical in determining how well the public sector can continue to meet its accountability obligations as well as its performance measures. The private sector needs to do the same to remain viable.

The control structures within a corporate governance framework provide assurance to clients and the Parliament that an agency is operating in the public interest and has established clear lines of responsibility and accountability for its performance. This is reinforced by the interrelationship of risk management strategies with the various elements of the control culture. Weak internal controls provide an environment where there exists an opportunity to commit fraud. A new Australian auditing standard establishes standards and provides guidance on engagements to report in relation to special purpose reports about the effectiveness of control procedures to apply for the first reporting period on or after 1 July 1999.

In a recent ANAO publication entitled ‘Control Structures in the Commonwealth Public Sector - Controlling Performance and Outcomes: A Better Practice Guide to Effective Control’, control is defined as:

‘... a process effected by the governing body of an agency, senior management and other employees, designed to provide reasonable assurance that risks are managed to ensure the achievement of the agency’s objectives.’

I would argue that corporate governance provides the mechanism to bring all of this together - not simply to manage the risks but to transcend them. Simply put, corporate governance is about how an organisation is managed, its corporate and other structures, its culture, its policies and the ways in which it deals with its various stakeholders. Corporate governance has been an issue in the private sector since the advent of joint stock companies in the United Kingdom (UK) in the eighteenth century. The core of the issue is, and has long been, how to ensure that the interests and expectations of owners and other stakeholders of corporate bodies are adequately addressed by the governing body and the executive management of corporate bodies.

In my view, corporate governance becomes more pressing in a contestable environment because of the separation of core business operations and the outsourced service delivery elements. This is because a sound corporate governance framework assists business planning, the management of risk, monitoring of performance and the exercise of accountability. While we can, and should, learn from private sector experience in such areas, public sector managers would do well to be mindful of the need for transparency and the interests of a broader range of stakeholders particularly when assessing and treating risk. We may not always be responsible for delivering public services but inevitably we will be held accountable for results.

Attention to the principles of corporate governance requires those involved to identify and articulate their responsibilities and their relationships; consider who is responsible for what, to whom, and by when; acknowledge the relationship that exist between stakeholders and those who are entrusted to manage resources and deliver outcomes. It provides a way forward to those, whether in the public or private sectors, who find themselves in somewhat different relationships than either have experienced before. Therefore they need to look beyond what have become their expectations over time particularly in view of the changes that have occurred in both sectors in recent years.

It is not sufficient though to simply analyse relationships, although that is a necessary step. Planning must also embrace issues of risk management and control, questions of information flow around the organisation and the management of its resources. I was interested to see recent development of a Financial Management Capability Model (FMCM) by the Canadian Auditor-General which bears on these issues and how they might be handled.

Our Canadian colleagues set out to encourage better financial management in government and improve understanding of its role. They developed this FMCM as a basis for future audits in this area but also argue that the Model provides a tool which can be used more widely by agencies, to determine their requirements, assess existing capabilities against these, identify and address the gaps. The model identifies three essential elements for financial management, the first of which is risk management and control, the others being information and management of resources. These three elements overlap with, and relate to, other elements of management. As the authors observe:

‘Ultimately, an organisation must have good management overall before it can have good financial management.’

Risk management is a central part of the model. The report states:

‘We would expect that in determining and establishing the financial management capabilities their organisation needs, managers would assess the nature of their operations and the risks they face. In this context, we consider risk to be any factor that may affect the organisation’s ability to achieve its objectives. Risks are identified through a process of first identifying potential hazards, then assessing the consequences to the organization should one occur, and finally determining the likelihood of the hazard’s occurrence, given the control environment of the organization.’

I offer for your consideration the above-mentioned Canadian model (Exhibit 6 in the report) which is attached to this paper. My staff are currently comparing it with an ANAO draft better practice guide on the use of financial information. At first blush it seems to me to offer a logical, coherent and graduated process for assessing organisations’ management capabilities, including of course their risk management arrangements. The model emphasises to me that those who are defined as integral to the corporate governance framework cannot simply muddle through. They are also obliged to consider, in a systematic manner, the issues facing the organisation and to plan, as well as conduct, its business and monitor its performance.

V. CONCLUDING REMARKS

The provision of government services by contractors is one of the most significant issues in contemporary public sector administration. There is a new emphasis on the contestability of services, the outsourcing of functions which the private sector can undertake more efficiently and on ensuring a greater public service orientation towards outcomes rather than just on processes and an accent on continuous improvement to achieve better performance. In effect, we are witnessing a convergence between the public and private sectors.

This convergence raises a number of important questions for the role and activities of Auditors-General. Significantly, the privatisation of the public sector does not obviate the need for proper accountability for the stewardship of public resources, as it is accountability which is fundamental to a democratic system. As experience has proven, savings and other benefits do not flow automatically from privatisation, Supreme Audit Institutions can assist accountability and provide assurance about performance through post-privatisation audit activities that:

• provide public information on the privatisation process including its objectives, the methodology adopted and any ongoing risks that require management;

• assessing whether the privatisation has, or is, achieving its objectives including maximising value for money;

• examine whether any ongoing regulatory requirements and/or contracts are being efficiently and effectively administered.

To be effective, these audits need to be undertaken by experienced officers who understand the commercial nature of the transactions as well as the overlaying public accountability issues. In addition, it is important to engage appropriately qualified professionals to provide specific technical advice in areas that are not the core business of the Supreme Audit Institution. This recognises that audit offices themselves are not immune to the need to carefully define their core business and contract-in or outsource non-core audit activities.

Privatisation raises issues about whether there should be a change in the nature of accountability. Private sector providers clearly feel under pressure from the openness and transparency required by the public sector accountability relationship with the Parliament and the community. Public sector purchasers are under pressure to recognise the commercial ‘realities’ of operating in the marketplace. In my view, there needs to be some movement towards striking a balance on the appropriate nature and level of accountability and the need to achieve cost-effective outcomes by:

• emphasising project and contract management skills in public sector managers;

• basing commercial relationships on sound tendering and administrative processes and an enforceable contract; and

• ensuring that public accountability is not eroded, by default, through contracting out that reduces external scrutiny through public reporting and the activities of Auditors-General.

Privatisation also offers opportunities for greater partnership and shared concepts but also gives focus to the distinctions between the two sectors. In my view the latter are mainly about accountability and the public interest and have come into prominence at the same time as the volume of information held and the technological means of its access (and of unlawful access) and use are expanding rapidly. However, it should never be forgotten that the foundation of any business relationship is a legally enforceable agreement and effective management of this contract. It is recognised that contractual performance is maximised by a cooperative, trusting relationship between the parties. But it should never be forgotten that such relationships are founded on a business relationship in which the parties do not necessarily have common objectives.

In summary, the provision of government services by the private sector is one of the most significant issues in contemporary public sector administration. It represents a major challenge for public service managers and Supreme Audit Institutions to establish an appropriate balance between achieving cost effective outcomes and accountability for the manner in which public sector resources are used. While the public sector reforms demand a greater focus on achieving efficient and effective outcomes for citizens, we also need to recognise that such outcomes also depend importantly on robust and credible administrative and management processes. In short, good processes should ensure good outcomes. They are complements not alternatives.

Such a relationship is reflected in the integrated nature of effective corporate governance frameworks. The public sector does have something to learn from the private sector in this respect while recognising the public interest factor and associated wide-ranging accountability requirements of the former. On the other hand, if privatisation of public services is to work effectively, private sector providers have to recognise the rights of citizens not just as customers or clients, and the associated accountability that goes with that recognition.

From an audit viewpoint, we need to have full access to information and government assets, including on private sector premises as necessary. We need to be able to assure the Parliament and the Executive Government about legal compliance, probity, security, privacy and ethical behaviour as well as providing an opinion on financial reporting and the systems and controls on which such reporting is based. We also need to be able to put in place a sound basis on which to assess the performance of private sector providers as well as of the ‘purchasing’ agencies. In most respects we should not need any more information and/or evidence than the accountable public servants would require to discharge their management obligations. Such accountability cannot be outsourced to the private sector. Nor can auditors fail to contribute to the development of a suitable accountability framework to the changing environment of the public sector with a greater focus on the market and the involvement of the private sector.

Failure to recognise, and take action to deal with, the changing accountability and auditing environment post privatisation, as broadly defined earlier in this presentation, is similar to an ‘own goal’, using a sporting analogy. The latter can occur because of players being under pressure; confusion in the goal mouth; failure to anticipate a threatening situation; players being caught off balance; too many players milling around; or, simply, an accident. We hope that it is not because of carelessness, panic or simple ineptitude. Many times an ‘own goal’ results from unforeseen and/or surprising circumstances that may not be easily countered. The team plan is to ensure that there is a sound defensive strategy that all players understand and which also includes a platform to counter-attack and catch the opposition off-guard. Success depends on players knowing what they have to do and ensuring they do it. Auditors can do no less.

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