INTOSAI Privatisation Working Group PWG

1. INTOSAI Privatisation Working Group (PWG) Technical case study Series 2 – PPP

2. 2 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 References 21

3. 3 1. Summary

4. 4 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.

5. 5 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.

6. 6 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

7. 7 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 NAO’s 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 NAO’s 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 NAO’s 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.

8. 8 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 NAO’s 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’.

9. 9 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.

10. 10 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 administration’s 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 company’s 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 company’s 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.

11. 11 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 OAG’s 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 OAG’s 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.

12. 12 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 proposal’s 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.

13. 13 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-General’s 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.”

14. 14 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.

15. 15 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 Government’s representative on the Board of the disinvested company. The scope of the CAG post privatisation is therefore limited to assessing how Government’s 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.

16. 16 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.

17. 17 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.

18. 18 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 Slovenia’s 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 SAI’s 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.

19. 19 VIII – The Estonian National Audit Office In Estonia the SAI’s 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.

20. 20 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 country’s 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.

21. 21 References Public Private Partnerships - the Government’s 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 2000–2001, 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)