An Increasingly Varied Field

2.  
3. But of course sales cover only one aspect of the increasing variety of ways in which the private sector, and private sector practices, are becoming involved in the provision of public services in all countries and at all stages of development. In many instances, publicly owned businesses or government activities are being put on a more commercial footing, frequently involving their being given a corporate status with accounts drawn up to modern accounting standards and audited accordingly. There may or may not be an intention ultimately to sell the business to the private sector. In other cases the public sector may remain responsible for the provision of the service or activity concerned, but the provision of that service is contracted out to the private sector in a competitive process. A variant of this could involve the existing management of the activity being required to compete with private sector bidders for the provision of a particular service (competitive tendering), with the state body concerned subsequently awarding the contract to the management of the bidding agency or to a private bidder.
4. A number of SAIs have expressed interest in exchanging information on audit issues arising from these developments; for example a number of SAIs commenting on the draft guidelines on the audit of privatisation have asked the Working Group to consider what audit guidance could be developed.
5. The Working Group have reviewed these issues and, within the scope of their remit, have identified two areas in particular which they think they could usefully study in the period leading to XVII INCOSAI.

 

Public/Private Partnerships and Concessions

6. In recent years, in a number of countries, governments have sought to involve the private sector, through a competitive process, in financing and constructing capital projects, such as roads, airports, prisons, hospitals and computer projects. In return, the private sector partner is given the concession to operate these services, often for long periods - 20 or 30 years or more - receiving payments from the state over that period for the provision of the service involved (eg prisons) and/or payments charged to users (eg toll bridges and roads).
7. In many ways, these arrangements raise similar audit issues to those set out in the privatisation guidelines. These issues include, for instance, the skills required by the SAI, the need for integrity and expertise on the part of the state’s agents, and the importance of full and open competition at all stages. But there are differences too. For example, although some businesses may be sold with strings attached (for example where the new owner gives undertakings to maintain employment or investment), in other cases the sale represents a clean break and whether the privatised business succeeds or fails is not a matter for which the state is legally answerable. But in contracting out and public/private partnerships, the state retains some responsibility for the procurement of the service concerned. This means that the state must give very careful consideration to the terms of the contract, how the risks involved are to be identified and shared between the public and private sector partners, and whether the deal is likely to provide value for money for the taxpayer.
8. The Working Group have undertaken a preliminary examination of these new issues, drawing on the experiences of SAIs who have examined and reported on a number of such contracts. They conclude that it would be valuable to examine these issues in greater depth. In doing so, they will be responding to the suggestion made by a number of SAIs, in commenting on the draft privatisation guidelines, that these offshoots of privatisation merit further study.

9. In addition, the Working Group note that the privatisation process has led to increased public and parliamentary interest in the role of economic regulation at the national level. In some countries privatisation has involved the introduction of economic regulation for instance, where utility companies, such as telecommunications, gas and electricity, have been sold retaining some monopoly powers. This has sometimes led to the introduction of regulatory requirements exercised by bodies - within or at arms length from government - with a variety of powers to act in the public interest eg in limiting the prices or profits of the privatised companies, while ensuring they are able to finance their businesses.
10. Economic regulation of course goes wider than privatised monopolies, for example in most countries the provision of financial services such as pensions and insurance is subject to some form of regulation, given that their failure could have profound adverse repercussions on society. The precise objectives of economic regulation vary from country to country; for instance in countries moving from a command to a market economy, the debate on the nature of regulatory controls to which privatised businesses should be subject is caught up in the wider debate about what should be the role of government in a market economy.
11. Parliaments and the public are increasingly looking to SAIs for independent appraisal of the effectiveness of national economic regulators in pursuit of their goals and a number of SAIs have carried out examinations of such regulators and the businesses they regulate, and published reports. A pilot questionnaire completed by members of the Working Group showed how the work of these regulators touches the lives of all citizens. It showed for example that while in most countries ensuring that regulated businesses continue to supply key public services is the commonest objective of national economic regulation, there is a growing pressure for regulators to protect consumers against the abuse of monopoly, and a lively debate as to whether the consumer would be better protected by the growth of a competitive market.
12. In view of the importance of these issues, the Working Group are circulating a questionnaire to all SAIs seeking information on the principal instances of national economic regulation in each member state, the nature, purposes and funding of the regulatory bodies concerned, and their influence, and what has been the experience and effect of the SAI in examining and reporting on such regulatory activities and their impact on the regulated companies. In the light of the responses to the questionnaire, the Working Group will examine to what extent SAIs are becoming involved in such issues.

Points for Consideration

• Are the arrangements for the exchange of information on privatisation audits likely to be helpful to SAIs? If so, what should INTOSAI members do to ensure they derive the greatest benefit from them?

• What specific issues relating to public/private partnerships and other concessionary finance arrangements merit particular study, including the development of an audit checklist?

• What specific issues could be most usefully examined in relation to the audit of economic regulation; for example, might the development of regulation audit guidelines be beneficial to SAIs?