INTOSAI Privatisation Working Group (PWG)

Technical case study

Series 2 – PPP

2. Audit access rights for public-

private partnerships
 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

I. UK National Audit Office 7

II. The Office of the Auditor General of Norway 10
III. Brazilian Tribunal de Contas da União 12
IV. Australian National Audit Office 13
V. Office of the Comptroller and Auditor General of India 15
VI. Latvian State Audit Office 16
VII. The Court of Audit of Slovenia 17
VIII. The Estonian National Audit Office 19

5. Best Practice for Auditors 20

References 21

2
 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.

3
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.

4
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.

5
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:

I. UK National Audit Office

II. Office of the Auditor General of Norway

III. Brazilian Tribunal da Contas União

IV. Australian National Audit Office

V. Office of the Comptroller and Auditor General of India

VI. Latvian State Audit Office

VII. The Court of Audit of Slovenia

VIII. The Estonian National Audit Office

6
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.
7
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’.

8
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.

9
 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.

10
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.

11
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.

12
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.”

13
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.

14
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.

15
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.

16
 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.

17
 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.

18
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.

19
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.

20
 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)

21