Public finance influences the rates of consumption, savings and, investment in both physical and human capital. As governments should be in a position to allocate resources efficiently when markets fail to do so and, provide relief to the poor, the public sector has expanded. Public investment should, therefore, promote development. ASOSAI member countries are making major investments for socio-economic development and are undertaking a large number of development programmes and projects.
The supportive role of State Audit systems in national development was the theme of the first International Seminar of ASOSAI held at Seoul in April 1982. The theme of the Fourth Seminar vjz "Role of SAIs in Promoting Effective Management of Public Finance and Investment" held at Beijing in May 1991 was in a way linked to this. In response to India's Principal Paper on the sub-theme, "Auditing of Public Investments", country papers were received from Australia, China, Cyprus, Indonesia, Israel, Japan, Jordan, Korea, Malaysia, Nepal, Pakistan, Papua New Guinea, Philippines, Saudi Arabia, Sri Lanka, Thailand and the UAE. The following is an extract of the comparative review paper submitted by the SAI, India at the 4th ASOSAI Seminar.
Generally all the countries notably, China, India, Indonesia, Japan, Malaysia, Nepal, Pakistan, Saudi Arabia, Sri Lanka and the UAE, have adopted comprehensive macro planning in one form or the other interalia to determine the priorities to be assigned to various public investments so as to ensure optimal distribution of scarce resources to the different sectors of the economy for achieving the various goals of development. In Cyprus and Korea also there is a planning board/bureau. By and large, public investments go much beyond the mere provisioning of infrastructure and other physical facilities, and include agricultural, industrial and human resource development. In Thailand, the investments are mainly in infrastructural projects to facilitate services to the general public. In Malaysia, the government is restraining its expenditure and is resorting to privatisation of public enterprises, but at the same time there is increasing allocation for basic infrastructure and related services, especially, rural development. In Philippines, according to a policy proclamation of privatisation, the government is launching on a programme of expeditious disposition and privatisation of certain government corporations in view of their heavy financial cost caused by poor return on investment in them. In Saudi Arabia, the government establishes fully-owned public enterprises for carrying out investment projects and then transfers considerable portion of the equity to the private sector after ensuring their proper operation.
In all the countries, besides direct participation by government, public investment is made in a variety of ways as detailed below:
The government investment in regard to (i) and (ii) takes the form of equity, capital loans, subsidies and grants.
The indirect involvement of government in public investment also includes guarantees for the loans raised by other entities for specific purposes. SAI, Malaysia has highlighted cash investments to generate resources for development and in the UAE also such investments are made inside and outside its territory.
The nature of public investment requires full public accountability which can be guaranteed only through audit by SAIs. All dimensions of investment projects - economic, technical, administrative and financial - must be appropriately designed and implemented. Investment scrutiny involves the three stages of project formulation, feasibility study and detailed project report to consider all available options. As brought out in the Seoul Recommendations (1982) and the Tokyo Declaration (1985), development of adequate information, control, evaluation and reporting systems within the public sector will facilitate the accountability process. The objectives as well as the norms by which investments are to be judged need to be clearly laid down by the planning and approving authorities so that there could be a meaningful audit.
The investment control is generally exercised through planning, programming, budgeting and accounting. All funds have alternative uses, or opportunity costs. Investment proposals in respect of which the expected benefits could be quantified are therefore subjected to an economic analysis, the basic technique of which is the cost-benefit analysis in terms of net present value (NPV) or internal rate of return (IRR). For others 'cost effectiveness' analysis can be adopted. Economic cost-benefit analysis also helps in choosing among various alternatives for the size, location, components, timing or technology of a proposed project. In Indonesia, cost-benefit analysis is not carried out for all the projects funded by the state's own budget and it is confined to projects assisted by loans from international financial institutions and, to those of state enterprises.
The traditional distinction between 'revenue' and 'capital' transactions in government budget and accounts and the presumption that the so-called capital investment alone is productive may tend to move the resources away from investment in human resources or enhancement of the productivity of physical investment. Presumably, to overcome this some of the countries like Indonesia and Nepal have adopted the budget classification, 'development expenditure1 to reflect all government investments. In Malaysia all such expenditures are met out of 'development' or other trust funds kept apart. Israel has called attention to the phenomenon of 'flights from the budget' of investments and the growing use of outside contractors to carry out the activities which were formerly carried out by the central organs of government thereby diluting accountability. In Cyprus, annual budgets of public corporations also require the approval of Parliament.
One of the reforms in budgeting procedures is the introduction of 'performance' budgeting. This not only reclassifies the budget to reflect the objectives and programmes but also attempts to monitor government performance by relating inputs to outcomes. In India, performance budgets are being brought out by each Ministry.
Pre-investment audit: In China, under specific laws and regulations, Audit Institution should carry out audit of capital construction funds raised by state enterprises and undertakings before budget provision is made for investment, and when a capital construction project is decided, a prior audit should be conducted before the commencement of construction to ensure compliance with the legal and procedural requirements. In Israel, till recently the philosophy was to begin audit after an investment is completed. But under the new preventive approach, the state audit no longer waits until the final stages of implementation. In special cases, the State Comptroller intervenes even before a decision is reached. In Jordan, pre-audit covers, the project reports, detailed financial and technical estimates, contracts and so on. In Pakistan, the SAI assumes no operational role in the public investment decision-making process and its audit starts at the post-expenditure stage. However the SAI feels that there is a need to associate audit in project planning and implementation.
Examination of Policy: According to the Seoul Recommendations, state audit should not interfere with questions of policy-making and strategy though post-evaluation of the utilization of resources and the achievement of objectives may at times reflect on questions of policies and the selection of strategies. However, later, the Tokyo Declaration left the issue of assessing policy decisions to the discretion and sound judgement of each SAI.
Public investment projects are not selected on economic criteria alone. Other concerns including political and personal interests of policy-makers often play a role. Korea has pointed out that regional interests prevail over economic and technical logic, in locating industrial projects and that budget appropriations are more a product of political decisions rather than of feasibility studies. Although examination of policy is outside the audit mandate, a view has emerged in the Korean SAI that major policy decisions should not be kept off audit purview. SAI, Cyprus considers examination of policy decisions controversial and feels that given the policy, various alternatives of the investments decided could be gone into in audit. SAI, Papua New Guinea has also termed the examination of policy and pre-audit of investment as controversial. SAI, Pakistan has stated that examination of policy is presently outside its mandate. It has however expressed a hope that in years to come it may be brought under the scope of its audit. SAI, Israel has stated that the fact that a certain decision was taken at the appropriate level does not in itself satisfy state audit, which goes on to examine the substance of the decision and the grounds on which it was based.
Economic Analysis : The economic analysis in terms of benefit cost ratio (BCR) or net present value (NPV) of internal rate of return (IRR) and sensitivity analysis is an important aid in the selection of the best alternative for a public investment. SAIs should be in a position to closely scrutinise the assumptions forming the basis of the analysis. In China, there is a combination of financial and, technical and economic review. At present a set of external experts are appointed to make technical and economic analysis and evaluation. SAI, Korea has raised the question of weightage to be given in cost-benefit analysis to various factors which cannot be quantified in an acceptable way and of how it should be satisfied that the discount rate adopted is appropriate as it is seldom based on clear criteria. Outside expertise is enlisted before reaching final audit conclusions, as it is needed in economic, technical and even financial analysis. SAI, Indonesia has brought out the lack of expertise to audit public investments using the latest techniques. The authority to engage outside experts is yet to be fully utilized by the SAI. SAI, Israel has pointed out the need for audit to look into the information base for decision-making in view of the problems of underestimation of inputs and overestimation of benefits as well as the uncertainties in committing current resources for future benefits, especially in regard to investment projects having long gestation period. Audit should also be alert on the choice of discount rates. The SAI has further brought out the desirability of central guidelines by the government on the various parameters for economic analysis.
Technical Analysis : An oft noticed phenomenon is the poor designing of investment proposals without proper evaluation of resources - both human and financial - and of linkages with other sectors of the economy. SAI, Cyprus has established a Technical Audit Service' which is responsible for audit of public construction projects, and its staff consists of civil engineers and technicians. The audit, which covers feasibility study, specification and drawings, and execution, is now reported to be done in a scientific manner. SAI, Jordan undertakes technical audit which is carried out by suitably qualified auditors. SAI, Israel has brought out the causes of cost and time overrun of projects as planning errors, unrealistic estimates, adoption of unproven technologies and so on. SAI, Indonesia has also highlighted the planning on inadequate data and survey. SAI, Korea has mentioned the problems as a consequence of lack of proper analysis of forward and backward linkages and of the demand and supply of inputs and outputs.
Multistage Audit: There is a combination of prior, mid-term and post audits of capital construction projects in China and Jordan. This is so in the UAE especially in regard to regularity audit. The audit of investment in Korea also is in several stages yjz. planning, implementation and post-evaluation. The audit in China however concentrates on the projects under construction and the post audit of effectiveness of projects has been taken up on a trial basis. In India and Indonesia, the projects are audited while they are being carried out and after their completion. It may be necessary for the SAIs to have access to the beneficiaries in order to judge the effectiveness of the projects and programmes. Otherwise as brought out in the Seoul Recommendations, SAIs may examine the systems for this within the concerned auditee organisations. In Korea, the BAI rarely audits a public investment programme as such in isolation, but it is audited as part of the overall operations of an auditee. However a 'cross sectoral' audit of an investment by different auditees is done at the same time so that the SAI could help coordination. India too had attempted coordinated nationwide reviews of investment in a particular sector of development by the Union and all the State governments which proved to be a valuable feedback to the planning process in the country.
Performance Audit: By and large, all the SAIs are engaged on performance audit of public investment projects and programmes going into the realisation of the purpose of investments and the manner of its realisation. In Australia, given that annual financial statement audits must take precedence, only residual capacity has been directed towards performance audits. Resources, in terms of the availability of staff with the necessary level of expertise and experience, are a perennial problem in Australia as elsewhere. However, substantial improvements have been achieved during 1990 in the performance auditing capacity of the NAO. As in India and Sri Lanka, and presumably in other countries too, the Indonesian SAI undertakes the performance audit on a selective basis. It covers the priority projects and programmes based on their strategic value, amounts involved, benefits to the society at large and impact on other development activities. In Japan, the Board of Audit is now making indepth study of the possibility of post-evaluation of public investment projects by applying the techniques used in pre-investment appraisal -or developing its own techniques. In Malaysia, the audit is mainly to ensure regularity, and performance audit is confined to selected issues covering utilization of funds, return on investment and physical achievement. In the case of companies assisted by government through equity participation or grants and loans, the audit is based on their audited accounts submitted to the SAI. In the UAE, there are difficulties in regard to performance audit owing to absence of valid criteria, unreliability of the data and the claims of the auditees. The SAI had to evolve performance indicators and generate information on its own to judge the effectiveness. SAI, Pakistan has pointed out that audit'of effectiveness of investments in training is as yet a new and difficult area and that lack of performance indicators makes the task more difficult. SAI, Sri Lanka also has made this point. The SAI has further drawn attention to the destruction of public property caused by civil disturbances and acts of terrorism, and the crash programmes of rehabilitation and rebuilding without adherence to the normal procedures of planning, implementation and documentation rendering the audit most difficult. SAI, Saudi Arabia has stated that the introduction of performance auditing has encountered problems owing to the limitation of the information available under the present budgeting and accounting systems and the maintenance of accounts on 'cash basis'. The SAI has emphasised the need for proper management accounting system. SAI, Jordan also has highlighted the need to improve the accounting system. SAI, Philippines has opined that the data necessary for effectiveness examination of public investments must be obtained not only from the auditees but also from the beneficiaries, recognised experts and the general public. In Papua New Guinea, the audit is at present confined to regularity of investment expenditure owing to constraints of resources of the SAI. In Thailand too the audit of public investment is of financial type but efforts are being made to apply performance audit techniques. The audit of government investment through private sector concerns covers only government's controlling systems, return on investment and the role of government nominees on their boards of management.
Audit of different types of Investment: It has been well recognised that different audit criteria and techniques will have to be adopted for auditing different types of investment depending on its nature whether economic or human resource development, the sector in which it is made, agricultural or industrial, and whether it is production, service or research oriented and so on. SAI, China has felt that cost benefit analysis will be more relevant in the case of investments in import substitution and export promotion. In India, separate audit disciplines have been evolved for audit of railways, communications, defence, public works and forests, science and technology development etc. SAI, Israel has pointed out that effective investment auditing in complex technical fields demands special expertise. SAI, Pakistan does not hire experts from the private sector and faces staffing problems to carry out performance evaluation of public investments, which requires professional and technical expertise in different disciplines. The SAI feels that it should be empowered to hire experts as and when needed. SAI, Korea has suggested that ASOSAI could prepare a comprehensive hand book on feasibility studies of different investment projects and programmes and distribute to the SAIs for guidance in their audit. The need for internal education and training at regular intervals, has also been urged. SAI, Nepal has stressed the need for continued international cooperation and exchange of experience and training of auditors in technical, economic and social aspects of public investments for various purposes. In this connection it may be stated that the International Training Centre established by the Comptroller and Auditor General of India is engaged in training the audit officials of the African, Asian and the Pacific regions on various auditing disciplines such as public utilities, public works and projects, transport, science and technology, public enterprises, rural development, social services and so on.
2.1 Apart from direct investments and those in fully owned and controlled public bodies and authorities, governments support investments by other entities through such means as loans, grants, guarantees, etc. SAIs should have a full and complete mandate to examine the efficiency, economy and effectiveness of all such investments, direct and indirect, and make for proper accountability.
2.2 SAIs have to ensure that all aspects of investment projects and programmes, such as economic, technical, administrative and financial, are appropriately planned, designed and implemented, and that adequate recording, reporting and evaluation systems are developed by executive authorities.
2.3 There being alternative uses or opportunity costs for funds, all available options for investment have to be considered as an integral part of the decision making process and these should be available for audit examination.
2.4 From the point of view of the accountability of government for the entire portfolio of public investment, it is desirable that they are distinctly disclosed in the national budget and accounts covering also those in development of human resources and enhancement of the productivity of physical assets.
2.5 In terms of the earlier Seoul Recommendations, the objectives as well as norms by which investments are to be evaluated need to be clearly laid down by the planning and approving authorities. In this context SAIs could encourage introduction of 'performance' budgeting not only to reflect the objectives of investment projects and programmes but also to relate the inputs to outputs or outcomes.
2.6 The audit of public investments should, inter alia, consider the feasibility studies, guarantees of funding and detailed project planning reports relating to the investments.
2.7 Where public investments are made in business enterprises or undertakings, profitability being a necessary consideration in addition to socioeconomic benefits that may accrue, financial analysis with emphasis on return on investments should receive adequate attention in audit.
2.8 Where public investments are made in promotional, developmental, research and extension activities, socio-economic benefits being a necessary condition apart from financial viability considerations, socio-economic and cost-effectiveness analysis should be a primary basis for audit examination.
2.9 Although the scope of audit may not extend to questioning the policy decisions in regard to investments, the adequacy as well as the reliability of the information provided for the purpose of the decisions should, inter alia, be considered.
2.10 SAIs may review an approved investment project or programme even though implementation may not have been commenced, so that possible risks and deficiencies could be identified at an early stage.
2.11 The nature and significance of public investments being what they are, there should be comprehensive financial evaluation with emphasis on auditing the final accounts for completed projects. Furthermore, emphasis should be put on reviewing the project implementation systems and procedures. And there should be increasing resort to socio-economic and technical analysis and evaluation, as far as possible. For this purpose the relevant expertise should either be built up within SAIs or hired as and when needed.
2.12 An oft noticed phenomenon in public investment programmes and projects is cost escalation owing to initial planning errors, unrealistic cost estimates, or time overruns caused by poor implementation management. Cost estimation and control should therefore receive special attention in audit.
2.13 In addition to audit of individual investments it may be desirable and even necessary to organise a sectoral review of investments, especially in a planned economy, in order to promote better coordination and management.
2.14 Crash programmes of public investments in urgent rehabilitation and rebuilding in the event of destruction of assets caused by natural calamities, war, civil disturbances or acts of terrorism amounting to national disaster, cannot be evaluated in audit applying normal standards of planning, implementation and other accountability arrangements. It may be necessary for the government to lay down appropriate standards consistent with the minimum needs of public accountability in these circumstances. The audit then may be conducted on the basis of such standards and it may be suitably mentioned in the related audit reports.
2.15 SAIs should also review disaster relief plans and, if necessary, encourage development and implementation of such plans, so as to :
2.16 Suitable criteria have to be developed for audit evaluation of different types of investments depending on their nature, whether economic or human resource development, the sector in which they are made, agricultural or industrial and, whether they are production, service or research oriented and so on.
2.17 Public investment being a major and crucial element of public finance, it is essential to refine the auditing and reporting instruments to make the maximum impact and to give objective and timely feed-back to all concerned on not only the shortcomings noticed but also, wherever possible, on measures for improvement.
2.18 There is need for continuous regional and international cooperation for training and exchange of experience in the field of auditing public investments in view of its special nature.
"Many of ASOSAI's achievements to date have been attained through seminars, workshops, training programmes and the like, each of which was designed to enhance the audit capabilities of the member institutions Not surprisingly, ASOSAI may be considered as the most active regional organisation of INTOSAI"
Mr.M. Jusuf
Chairman, Supreme Audit Board
Indonesia