INTOSAI Privatisation Working Group PWG

1
INTOSAI Privatisation Working Group (PWG)

• Technical case study
• Series 2 PPP

2. Audit access rights for public-private
partnerships
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Table of Contents

• 1. Summary 3
• 2. Defining Characteristics of privatised
  services and PPPs 4
• 3. Access Issues for SAIs 5
• 4. Case Studies of access rights 6
• UK National Audit Office 7
• The Office of the Auditor General of Norway 10
• Brazilian Tribunal de Contas da União 12
• Australian National Audit Office 13
• Office of the Comptroller and Auditor General of
  India 15
• Latvian State Audit Office 16
• The Court of Audit of Slovenia 17
• The Estonian National Audit Office 19
• 5. Best Practice for Auditors 20

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1. Summary

• SAIs can have different roles in auditing the
  private sectors involvement in public service
  provision.
• SAIs will often have a responsibility to audit
  the service provided by private industries,
  whether this is a former public sector body that
  has been privatised or a private sector
  contractor delivering public services under a PPP
  contract or concession arrangement.
• SAIs access rights to private sector
  organisations may not be well defined and can
  vary considerably across SAIs.
• Many SAIs have wide-ranging access rights given
  to them by statute. Some SAIs have been given a
  statutory right of access to contractors
  (including PPP contractors and sub contractors
  where the sub contractor is providing goods and
  services on behalf of the contractor) of bodies
  audited by the SAI. Furthermore, in some
  countries contracts for the provision of public
  services cannot be signed until documents
  relating to it have been made available to the
  SAI.
• How can SAIs best ensure they have adequate
  access to discharge their statutory duties?
• SAIs should seek to influence the development of
  adequate legislation to enable them to have
  appropriate levels of access to private sector
  organisations and contractors delivering public
  services.
• SAIs should encourage Government to incorporate
  standard clauses setting out the rights of access
  of the SAI in all contracts with the private
  sector service providers.
• Information can sometimes be obtained from the
  private sector by agreement where there are no
  access rights, but this involves a degree of risk
  to the SAI and information obtained in this way
  may need to be subjected to further validation.

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2. Defining characteristics of privatised
services and PPPs

• The private sector can be involved in public
  service provision in a variety of ways
• Public Private Partnerships (PPPs) this term can
  cover a wide range of different types of
  partnership. Most commonly PPP refers to where a
  capital project such as a school is designed,
  built, financed and managed by a private sector
  consortium, under a 25-30 year contract to
  provide services in return for a single unitary
  payment in each period, usually relating to
  availability and performance. In the UK this is
  generally referred to as the Private Finance
  Initiative (PFI) and has been used to fund major
  new public building projects, including schools,
  hospitals, prisons and roads. There are also
  many other models of PPP such as Joint Ventures
  between public and private sectors
• Service concessions and franchises where a
  private sector partner takes on the
  responsibility for providing a public service for
  a specified period of time, including
  maintaining, enhancing or constructing the
  necessary infrastructure and
• Privatisation the introduction of private sector
  ownership into state-owned entities, using the
  full range of possible structures (whether by
  flotation or the introduction of a strategic
  partner), with sales of either a majority or a
  minority stake.

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3. Access issues for SAIs

• Why are access rights an issue?
• SAIs need to have a good understanding of the
  impact that their access rights have on their
  ability to undertake their responsibilities and
  report on all areas of government expenditure.
  They should also be aware how these access rights
  fit with international practice.
• SAIs may be able to get information from the
  private sector without formal access rights, but
  there are risks in relying on this.
• In nearly all countries the responsibility for
  auditing PPPs and concessions entered into by
  central government and state agencies rests with
  the SAI. Such contracts can also however be
  awarded by regional or local government.
  Contracts let by these bodies may or may not fall
  within the remit of the SAI, depending on the
  auditing framework in place within a particular
  country. In any case the SAI needs to be clear
  who was responsible for what in awarding any
  contract and what is the SAI's remit for
  examining the deal.
• The timing of an audit is also of significance
  and a balance must be struck between the early
  involvement of the SAI to effect a positive
  outcome and the risk this creates in terms of
  compromising the SAIs ability to audit that
  outcome without a conflict of interest. In the
  field of PPPs and concessions, it can be
  particularly important that the central
  government departments, or ministries, and state
  agencies letting such contracts exercise
  well-informed judgement and discretion and this
  should not be unduly influenced by the SAI. On
  the contrary, it should be the aim of the SAI to
  encourage audited bodies to exercise their own
  discretion reasonably and wisely with regard to
  best practice learned from past experience.

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4. Case examples of specific SAIs access rights

• The following section presents information on the
  access rights of a selection of SAIs with
  examples of how these have been used to positive
  effect. The examples used are
• UK National Audit Office
• Office of the Auditor General of Norway
• Brazilian Tribunal da Contas União
• Australian National Audit Office
• Office of the Comptroller and Auditor General of
  India
• Latvian State Audit Office
• The Court of Audit of Slovenia
• The Estonian National Audit Office

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I - UK National Audit Office

• The National Audit Office (NAO) has rights of
  access to all central government records for the
  purposes of conducting both financial audits and
  value for money examinations.
• In the United Kingdom, from May 2003 the NAO was
  given a statutory right of access for financial
  audit purposes to contractors (including PPP
  contractors and sub contractors where the sub
  contractor is providing goods and services on
  behalf of the contractor) of bodies audited by
  the NAO, irrespective of whether there is any
  provision in the contract. This right was not,
  however, retrospective, and for contracts entered
  into before that date access is limited to those
  where the NAOs right of access was explicitly
  mentioned in the contract.
• For VFM purposes the Government has made explicit
  its belief that the NAO should have the same
  level of access to bodies for VFM purposes as for
  the purposes of financial audit and that this
  non-statutory access will be included in contract
  or grant terms and conditions.
• An early NAO report (The Private Finance
  Initiative The First Four Design, Build and
  Operate Roads Contracts) made clear that in
  situations where the public sector seek to
  withhold information on the grounds that they
  entered into a confidentiality agreement then it
  was within the NAOs rights to expect to be given
  the information and to disclose it in their
  report if they thought it was relevant to the
  judgement of whether value for money had been
  achieved.
• The access rights would not include access to the
  records of investors in PPP contractors and sub
  contractors unless these investors were, in some
  way, in a sub-contracting relationship with
  regard to the PPP contract in question, and even
  then the NAOs access rights would only extend to
  documentation and information which was relevant
  to the goods or services the contractor was
  providing (via the sub-contractor). The rights
  do not allow the NAO to carry out a more general
  audit of the contractor, particularly because
  investors could include private individuals, as
  well as corporate investors.

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UK National Audit Office continued

• Refinancing (an established technique whereby
  improved financing terms can be obtained in
  projects where risks have been successfully
  managed) is a particular case where the private
  sector has disclosed information to enable the
  sharing of refinancing gains to be effected. This
  has generally worked well but there were examples
  recently of some investors not disclosing their
  rates of return on projects, when asked.
• In many studies on PFI deals the NAO had
  discussions or semi-structured interviews with
  private sector companies, including unsuccessful
  bidders for a contract as well as those who were
  awarded the contact and those involved in
  refinancing of PFI deals. Surveys of bidders for
  PFI contracts were also undertaken in some
  studies.
• To obtain the necessary information on the terms
  and conditions of staff who transfer to the
  private sector contractor in PFI deals the NAO
  developed a survey questionnaire with specialist
  advice from industry, trade unions and the NAOs
  audit clients. A private sector research company
  was then commissioned to conduct the survey of
  Service Providers who are contracting parties to
  the PFI/PPP Special Purpose Vehicle (SPV)
  companies. The survey was conducted on-line.
• About two-thirds of SPVs responded and between
  them nominated 170 sub-contractors of whom around
  half responded. The data submitted by these
  sub-contractors was then critically reviewed so
  that only those organisations that had submitted
  fully comparable data were included in the final
  sample. The honesty of the responses could not be
  directly checked but cross-examination was
  undertaken in the case of outliers.

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UK National Audit Office continued

• Timing
• The NAO has generally undertaken examinations of
  PPP contracts after the deal has been done, but
  there was an exception in the case of the PPP
  contracts for the London Underground (The
  Financial Analysis for the London Underground
  Public Private Partnerships). This study was
  undertaken at the request of the Environment,
  Transport and Regional Affairs Select Committee
  of the House of Commons. The report examined
  whether the financial analysis used to evaluate
  bids for the PPP was likely to show whether the
  bids were value for money compared to public
  provision of the service. The trade off for
  taking an early look at a deal may be that the
  resulting analysis proves inconclusive.

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II - The Office of the Auditor General of Norway

• The Office of the Auditor General of Norway (OAG)
  may demand from central government bodies any
  information, explanation or documents it requires
  and conduct the analysis it deems necessary to
  perform its duties. This applies to the political
  management, officials and civil servants in the
  government administration, and others who are in
  the government administrations service, and in
  relation to the management, employees and
  auditors in companies that are wholly
  state-owned, and the wholly owned subsidiaries of
  such companies.
• Legislation passed in May 2004 provided that the
  OAG has the same rights to access and information
  that the ministries can demand from those with
  delegated central government administrative
  authority. Tasks financed by state funds, and
  private individuals who supply goods or services
  to the state are also subject to these
  permissions.
• The OAG has found that there can still be
  problems with access rights as in the following
  example. The main activity of a state-owned
  limited liability company is letting out office
  premises, and the companys operations also
  include the purchase, sale and development of
  real estate, and in this area it conducts
  business with the private sector.
• The OAG undertook an investigation into
  allegations that were made to the effect that
  some properties were sold, one of which was later
  bought back, to known associates at a price that
  was too low. The OAG had access rights to all
  information, reports and documents in the
  state-owned company. With the exception of
  accounting information that is publicly available
  however, the OAG did not have access rights to
  information from the private sector companies
  with whom the state-owned company had conducted
  business. This meant that the OAG concentrated on
  the state-owned companys handling of the matter,
  but a problem with this was that the company
  itself was the only source of factual information
  about their handling of the matter.

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II - The Office of the Auditor General of Norway
continued

• On the basis of information from the state-owned
  company and from the private players accounts,
  questions were raised as to whether the private
  players had acquired unreasonable gains. In
  addition, the accounts of the private players
  showed no sign of the profit from the
  transaction. The limitations to the OAGs rights
  to information meant that it was not been
  possible to discover more details about who had
  received a share of the profit achieved.
• As a follow-up to the OAGs investigation some
  aspects were examined more closely and it was
  revealed that the state-owned company had
  withheld documents and information. This showed
  that there were also problems concerning the
  enforcement of the access rights.

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III Brazilian Tribunal de Contas da União

• PPPs
• In Brazil the access rights of the Tribunal de
  Contas de Uniao (TCU) are prescribed by law, most
  recently by the PPP laws enacted in 2004. This
  rules based approach means that the TCU has a
  legal obligation to look at certain contracts and
  associated documents and there is an similar
  legal obligation for public bodies to provide
  information. Transgression of these rules is
  sometimes punishable by law.
• When a public body intends to contract with the
  private sector for the provision of public
  services the public body must provide copies of a
  large number of specified documents to the
  Tribunal de Contas da União (TCU). These
  documents for example include legal and
  contractual documents, financial evaluations and
  business case assessments. The contract cannot be
  signed until the TCU has had at least 45 days to
  examine the documents between ratification of
  the result of the proposals judgement and the
  signing of the contract. In some cases the
  documents must be examined and approved by the
  TCU before the executive branch can act. For
  other cases not all documents are examined by the
  TCU, and the responsible director in the TCU
  decides which ones to give priority to. If any
  irregularity is discovered during the audit the
  TCU has the power to stop the bidding process.
• Once the contract has been signed the public body
  is required to keep up-to-date information on the
  contract, which is to be available to the TCU on
  request, and the public body is also required to
  give the TCU a monitoring report every
  semester, and inform the TCU of various actions
  in relation to the public service concession or
  permission. Also, the oversight of the
  processes of concession, permission and
  authorisation of public services is required to
  follow procedures set out in a manual that has to
  be approved by the President of the TCU.
• Privatisations
• After each privatisation the public body
  responsible for the execution and monitoring of
  the privatisation is required to send to the TCU
  specified documents related to the privatisation.
  These documents are prescribed by law similar to
  the arrangements for audit of PPP contracts.

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IV - Australian National Audit Office

• A 1997 Act of Parliament outlines the mandate and
  powers of the Auditor-General and the functions
  of the Australian National Audit Office (ANAO).
  Although the Act provides extensive powers for
  information-gathering, the Parliament expressed
  concern about the degree of audit access to, and
  reporting on, confidential information,
  particularly that classified as
  commercial-in-confidence in contracts with the
  private sector. Also, the issue of access to the
  premises of private sector contractors was
  raised. These concerns resulted in some
  enhancement of the Purchasing Guidelines put out
  by the Minister for Finance and Administration,
  but no changes to the relevant Act.
• In a published report in 2001, the ANAO stated
  that A clear distinction exists between
  contracts involving two private sector parties,
  and those involving both private and public
  sector parties. In the latter case it is the
  taxpayer who funds government contracts.
  Decisions on whether matters that involve a
  government should, or should not, be disclosed
  involve a consideration of the public interest.
  Given the Australian system of parliamentary
  accountability, any party arguing for
  non-disclosure should be able to substantiate its
  case for such an approach.
• Increasingly in Australia, private sector
  organisations are contracted to provide services
  to, or on behalf of, government. In these cases,
  so as to leave reliance on legislated access
  provisions to those circumstances where it is
  essential, the Auditor-Generals access to
  private premises is assisted where an access
  clause has been included in the contract. In 1999
  the ANAO noted that such clauses are not
  routinely included. For example, an examination
  of 35 contracts across eight agencies revealed
  that only two referred to possible access by the
  Auditor-General, and in 2001 it reported that,
  in the contracts examined, where provision was
  made for agency access to contractors premises,
  ANAO access provisions were included in less than
  40 per cent of cases.

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Australian National Audit Office - continued

• Guidance by the Australian Department of Finance
  and Administration says that In relation to
  Public Private Partnerships, government (or the
  community) must have adequate rights of access
  for inspection/audit purposes and agencies
  should include appropriate contract clauses
  providing access for the ANAO to information held
  by contractors., and Steps need to be taken to
  plan for, and facilitate, appropriate disclosure
  of procurement information. In particular,
  officials should
• where relevant, include a provision in contracts
  to enable the ANAO to access contractors records
  and premises to carry out appropriate audits
  (model access clauses have been developed for
  agencies to tailor and, where appropriate,
  incorporate into relevant contracts) and
• consider, on a case-by-case basis, any request by
  a potential supplier for material to be treated
  confidentially, only entering into commitments to
  maintain confidentiality of contractors
  information where these are appropriate, having
  regard to guidance published by the Finance
  Department.
• Guidance published jointly by the Australian
  Department of Finance and Administration and the
  ANAO says that Tender documentation and
  contracts should also include clauses to provide
  access by the acquiring entity and the ANAO to
  relevant records and information of the
  contractor and any subcontractors for the purpose
  of conducting audits.
• In the numerous audits of privatisations
  undertaken in the last ten years, there has not
  been a single instance where the public sector
  entity responsible for undertaking the sale
  process has not included in contracts with
  advisers appropriate access clauses for the audit
  to be conducted in an efficient and effective
  manner via ready access to relevant records and
  officers. Appropriate provisions have also been
  included in sale contracts to protect public
  records now held by the entity that purchased the
  business or assets.

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V - Office of the Comptroller and Auditor General
of India

• The access rights of the Office of the
  Comptroller General of India (CAG) when auditing
  a PPP are largely indirect. For the purposes of
  verifying compliance, access to records is
  through an intermediary organisation.
• For example, the SAI of India audits the
  production sharing contract for Hydrocarbon
  Exploration and Production involving both public
  and private sector entities. In this case access
  to the records is obtained by the SAI through the
  Director General of a quasi-regulatory body in
  the field of Hydrocarbon production.
• The access rights of the CAG for privatisations
  are linked to the extent of the Governments
  shareholdings. If prior to privatisation the
  Government has in excess of 51 per cent of an
  entity it is fully subject to audit by the CAG.
  Following privatisation where this is some
  remaining Government shareholding, audit access
  is limited to certain documentation available to
  the Governments representative on the Board of
  the disinvested company. The scope of the CAG
  post privatisation is therefore limited to
  assessing how Governments residual stake is best
  protected.
• The audit of disinvestments in central public
  sector undertakings was taken up at a relatively
  late stage after the actual disinvestments took
  place. Since the objective of the audit was to
  examine the process of disinvestment, the records
  of procedures and the methods of disinvestment
  were checked at the level of the Ministry and
  clarification from the Global Adviser was
  received through the Ministry.

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VI - Latvian State Audit Office

• The access rights of the Latvian State Audit
  Office to the private sector are specified by
  law. Again, however, these access rights are
  indirect as it is the Latvian Privatisation
  Agency which monitors the implementation of
  contracts and performs activities provided for by
  the laws and the agreements to ensure
  compliance. The Privatisation Agency has the
  power to break agreements if the privatisation
  subject fails to comply with the terms of these
  agreements. As the Latvian Privatisation Agency
  is a public institution the SAI of Latvia
  according to the State Audit Office Law has the
  right to request all necessary information,
  including that specifically related to the
  private sector organisation.
• Until 2005 there was a special Privatisation
  Audit Department within the SAI of Latvia
  although this has now ceased to operate as
  privatisation is no longer a key issue for the
  office. During the period of its operation there
  were no problems with access rights in
  privatisation audits, including those to the
  private sector. The privatized companies had in
  their agreements with the Latvian Privatisation
  Agency a special stipulation which regulated the
  process for submitting various reports.
• These provisions also stipulated the timing of
  audit involvement by the SAI of Latvia in
  relation to exercising their access rights after
  the privatisation. These provisions were designed
  to avoid any problems that the SAI might
  encounter when exercising its access rights.

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VII The Court of Audit of the Republic of
Slovenia

• PPPs
• In Slovenia a PPP law only came into force in
  2007 and PPPs are still rare, although there have
  been several concession contracts prior to the
  legislation. The SAI can only audit private
  sector contractors if they are providing a public
  utility. If they are providing publicly procured
  services or goods then there is no right of
  access even if the contract is set up as a PPP.
• The SAI has recently undertaken its first PPP
  audit. As the private sector in this instance was
  providing a public utility there was an automatic
  right of access, but the audit was conducted at
  the instigation of the private sector and there
  was therefore a high level of co-operation.
• Privatisation
• In a privatisation situation the SAI will audit
  all sales of capital investments by the state or
  public law entity, special funds (e.g. the
  pension and invalid insurance and reparation
  funds) and companies with a majority state
  ownership. In practice all audits now focus on
  the two special funds as almost all state owned
  capital investments have been transferred to
  these two funds.
• Privatisation audit in recent years has been
  limited (there is no longer a dedicated team
  within the SAI as privatisation activity has
  decreased) but since 2004 there have been two
  contrasting cases. In the first instance the SAI
  was asked at the instigation of the parliamentary
  opposition party to look at the sales of a
  company that produced equipment for the army. As
  this was a grandchild company of the state
  there was no usual right of access but the
  parliamentary request overrode this. This could
  have led to problems in getting access to papers
  but the Ministry of Economics took the lead and
  this helped secure timely access.

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VII The Court of Audit of the Republic of
Slovenia continued

• A more difficult access rights issue arose on the
  audit of the special funds which were selling
  shares in Slovenias biggest merchant. The CEO of
  the fund was hostile to the audit and attempted
  to censure information flows. The Court was
  hampered by this approach and could technically
  have confiscated information, but as the fund was
  co-operating to a certain extent, a decision was
  taken that confiscation would be harmful to the
  audit process. In this case some further useful,
  but not critical information was denied to the
  SAI by the Ministry of Economics even though it
  had been sent to the EU commission to whom the
  Ministry was obliged to report to about the sale.
  The Court took a decision not to pursue their
  access rights further.
• Timing of the Audit
• The SAI has always audited privatisations after
  the event. There is no precedent for getting
  involved earlier in the process. The SAIs audit
  processes would not in any case, be supported by
  early involvement. In conclusion to a report the
  SAI makes obligatory demands for corrective
  measures. Obligatory demands can only be made in
  law once the privatisation process is complete.

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VIII The Estonian National Audit Office

• In Estonia the SAIs access rights extend to all
  public bodies, legal persons in public law,
  public foundations and companies where the state
  has a majority holding or whose loans are granted
  by the state, as well as any other bodies or
  persons if they receive money from the state
  budget.
• In principle therefore, every case of
  privatisation, PPP or economic regulation should
  fall into the audit scope of the Estonian
  National Audit Office. The access rights include
  economic control (i.e. internal control,
  financial management, financial accounting,
  legality, performance of management and
  organisation) and performance assessment
  (economy, efficiency and effectiveness).
• The SAI has not experienced any problems with
  enforcing access rights and does not consider
  access rights have been limited in any way in The
  SAI has always conducted privatisation audits on
  an ex post basis so there are no conflict of
  interest issues as the process is completed
  already.

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5. Best practice for auditors

• Where legislation does not already exist to give
  a SAI the access rights they consider that they
  need, the SAI should encourage their government
  to consider providing such rights so that the
  regularity (for example, whether expenditure is
  in accordance with intentions of a countrys
  Parliament) and the value for money of services
  for the public, funded by the public sector and
  provided by private sector organisations, can be
  assessed. Some countries have done this by their
  Finance Ministry, or equivalent, promulgating
  standard contract clauses to be incorporated in
  all PPP (or PFI) contracts
• Where there is no general right of access for a
  SAI to relevant records of a private sector
  contractor and a public sector body contracts
  with the private sector for the provision of
  public services, the SAI should encourage the
  public sector body to include rights of access
  for the SAI in the contract.
• When a SAI undertakes a value for money study on
  a service for the public for which a public
  sector body has entered into a PPP contract with
  the private sector, it is beneficial for the SAI
  to meet with key employees of the private sector
  organisation concerned and seek evidence which is
  not already held by the public sector body
  responsible for the contract. If there is no
  statutory right of access to the private sector
  organisation, this should not prevent the SAI
  asking for access on an informal basis. Such
  access may then be granted by companies that wish
  to be seen as co-operative and open about their
  dealings with the public sector. There are
  however risks to this approach and the SAI may
  need to conduct further validation and cross
  checking to ensure that information provided is
  reliable.
• Where SAIs are not legally obligated to take an
  early look at a PPP contract but do so prior to
  the deal being signed, they should try to manage
  the risks attached to this approach. For example,
  undertaking early analysis may mean that the
  resulting report by the SAI is inconclusive about
  value for money. This may lead to criticism of
  the SAI from external parties.

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References

• Public Private Partnerships - the Governments
  Approach, HM Treasury, 2000
• Standardisation of PFI Contracts - Version 4, HM
  Treasury, March 2007
• Research Note 16 2000-01, The Independence of the
  Auditor-General, Rose Verspaandonk, Politics and
  Public Administration Group, Australia, December
  2000
• Public Private Partnerships Contract Management,
  Australian Department of Finance and
  Administration, December 2006
• Commonwealth Procurement Guidelines, Australian
  Department of Finance and Administration, January
  2005
• Developing and Managing Contracts - Getting the
  right outcome, paying the right price,
  Australian Department of Finance and
  Administration and the Australian National Audit
  Office, February 2007
• The Use of Confidentiality Provisions in
  Commonwealth Contracts, Australian National Audit
  Office, Audit Report No.38 20002001, May 2001
• Contract Management in the Australian Public
  Service, Joint Committee of Public Accounts and
  Audit, November 2000
• Confidentiality of Contractors Commercial
  Information - Financial Management Guidance No.
  3, Australian Department of Finance and
  Administration, February 2003
• Act no. 21 of 7 May 2004 relating to the Office
  of the Auditor General (Auditor General Act)
  (Norway)
• Internal Rules (Brazil)
• Internal rule no. 27, December 2nd, 1998
  (Regulates the oversight of the denationalisation
  processes by the Brazilian Court of Audit)
• Internal rule no. 43, July 3th, 2002 (Establishes
  rules for the Brazilian Court of Audit to monitor
  the cases of periodic tariff review regarding
  contracts of concession of electricity
  distribution services)
• Internal rule no. 46, August 25th, 2004 (On the
  oversight carried out by the Brazilian Court of
  Audit of the processes of concessions of federal
  roads, including roads or part of roads delegated
  by the Union to Federal States, Federal District,
  Municipalities or a consortium among them)