* Director General of Audit - Central Revenues in the Indian SAI. Mr. Oza is also a member of the INTOSAI Working Group on Audit of Privatisation.
The decade of eighties is known for the spread of privatisation all over the world. There is a global development and expansion of this concept and there is no longer any doubt that it continues to be popular with all forms of Governments. The deteriorating profitability and increase in subsidies of State enterprises have further strengthened the belief that privatisation remains the only remedy to inject efficiency into public sector management.
Privatisation essentially means transfer of ownership from the State into the hands of non-state entities. There are however many transient forms of this process e.g. partial disinvestment, dilution of State ownership, contracting out certain functions, management buy outs etc. In every case however, the State decides to part with its assets or its right to manage them for a specific return. Since these assets were acquired out of the public funds and have grown in value over the years, it is in the public interest to ensure that the process of privatising them should be such as to get the best return for the exchequer.
It is here that the SAIs step in. As independent institutions with constitutional mandate to guard the interests of the State exchequer, they are naturally involved in examining the process of privatisation at various stages not only to ensure that the State receives the best return out of the enterprise or the assets being privatised, but also to ascertain that the ultimate objectives of the privatisation are realised.
The improvement in the public finances of the country is now dependent, among other factors on the progress made in reforms of public sector management in general and State enterprises in particular. Privatisation is one of the important measures in this direction and the public has already come to bestow a good deal of faith on this approach. As an extension of this faith, they expect that independent institutions, such as the SAI, which have come to be viewed as a kind of trustee, would, while facilitating the transition, also provide from time to time, not only a report on the progress made, but also its opinion on whether the privatisation has achieved its objectives. More significantly, it is also expected that the SAI would identify the systemic and other bottlenecks that are hindering the implementation of these measures and suggest ways as to how they could be overcome.
This perception has driven almost all SAIs to undertake the audit of privatisations by accommodating such audits within their mandate and by applying both traditional audit techniques as well as newly acquired skills; in this process, they have contributed substantially to making the process of privatisation more transparent and accountable. In doing so, the SAIs have generally confined themselves to the following major areas of examination :-
The objectives of audit as well as the methods, techniques and focus of audit efforts however differ from country to country, since the methods of privatisation, the extent of development of financial markets, the level of competition and the resources deployed in this area differ widely. The State objectives in privatisation and the historical background as well as the legal mandate of the SAI in each country will also influence its approach in each case.
The National Audit Office of UK (NAO) conducted a survey among the INTOSAI members on the audit of privatisation in 1994-95. The survey covered 117 countries, out of which, in 36 countries no privatisation had taken place. The results of the survey are described below.in brief, both in terms of the nature of privatisation in different countries, audit coverage by SAIs, and the nature of audit findings.
The survey results indicate' that while the privatisation process is now well developed within many of the member countries within INTOSAI, in others it is still in its infancy or yet to' begin. It also shows that although most of the privatisations have been of small retail and land businesses, there have also been privatisations of large values in the industrial sector in some countries.
For the sake of convenience of analysis of audit findings, SAIs have been categorised into three major regional groups:
Eastern and Central Europe
Audit conducted by the SAIs in Central and Eastern Europe presents an abundant variety of activities ranging from basic audit checks against legality with reference to the State legislations on privatisation, to the audit of corporatisation, privatisation of banks and even examination of the implementation of the obligations assumed by the buyers in the course of privatisation. The EUROSAI seminars on privatisation held in 1992 and 1995 present a very interesting account of these developments.
After the property ownership transformation was initiated in Poland in 1990, the Supreme Chamber of Control (SAI in Poland) stepped in for audit of privatisation process. The basic objective of the audits was to carry out an evaluation of assumptions adopted and the course and status of ownership transformation in the national economy from the point of view of their conformity with the binding legislation and the directions of transformations defined in subsequent years in the resolutions passed by Parliament. The SAI has, besides pointing out large scale irregular payments to foreign advisors, also suggested many changes in the legal framework to plug the existing loopholes, changes in procedure, training of personnel and redefinition of their responsibilities and also the ways of adequate protection of State property used by non-State entities. Many changes in these areas followed as a result of recommendations of the SAI.
In the emerging area of privatisation of banks, the results of SAI-Poland's audit have brought out the unduly high payments to foreign advisors in spite of slippages in the schedules of privatisation, absence of regulations to specify the principles for valuation of banks and stocks and consequently lower prices realised in such privatisation and the excessive influence of foreign advisors in the process of privatisation to the detriment of the State's interests.
In the same tradition, the work done by the Supreme Audit Institution of the Czech Republic is a fine example of the constructive approach blended with the audit for legality. The purpose of audit examination was to check whether the whole privatisation process took place in accordance with two basic legislations; namely, the Restitution Act and the Small-scale Privatisation Act. The SAI pointed out a number of drawbacks in the existing system. Divergent approaches of Central and regional authorities in the application of privatisation rules, and shortcomings in the professional composition of district privatisation commissions, resulting in low sales realisations and incomplete and poorly prepared privatisation projects. As a result of these findings, the Ministry of Privatisation carried out a number of amendments in the relevant laws and adopted a number of other measures to make the privatisation process more effective.
In Romania, however, the Court of Audit goes into more substantive issues, since the legislation empowering the National Agency for Privatisation lays down these details. The SAI is competent to verify the re-valued price of the enterprise determined before the sale, although it can not evaluate the final sale price. It also verifies adherence to the relevant legislation. Similar check is exercised in case of evaluation of stock prices as well as assets. A recent enactment in July 1995 to accelerate the privatisation process involves the Court of Audit both in the control of granting the facilities provided by law and in verifying the procedures through which the property transfer is effected.
The State Audit Office of Hungary has reported an interesting case of the privatisation of Hungarian Telecommunications Ltd, where it pointed out that one of the buyers had failed to pay the full amount of the fee of concession because of the faulty drafting of the sale agreement with reference to exchange rates. It also brought out violations of foreign exchange rules by foreign firms, which were parties to the sale.
The picture of privatisation audit in Central and Eastern Europe is dominated by legality and the dominant position of the SAIs in verifying implementation of legal provisions. The SAIs have emerged as true guardians of national financial interests and have lent their experience to the Governments in carrying out legal and administrative refinements in the process of privatisation. They have also taken rapid strides in taking up new areas of audit of privatisation, which are vital to enhancing their effectiveness.
Asia, Africa and other developing countries
The audit of privatisation is yet to acquire deep roots in Asia, Africa and other developing countries. Most of the countries in this region have not initiated privatisation in a big way. Even where it has started, many SAIs have not got involved in its audit, although in most cases they do have statutory powers to do so. However in some countries SAIs have started assuming an important consultative role in the process.
In Egypt, the Central Auditing Organisation conducts as a part of its duties, the evaluation of privatisation programmes by studying and analysing the draft laws submitted by the Government to ascertain whether it contains the conditions of success and adequate precautions to ward off negative effects and expresses an opinion thereon. It also verifies the execution of programme as per the time schedule, contracting, sale and other transactions. The SAI continues to retain its audit jurisdiction, till the Government shareholding falls below 25%,
In Bahrain, public sector restructuring is in its early stages. As restructuring projects come to fruition, the role of SAI is expected to become more direct in the specific areas of system development audit and post implementation reviews. It expects to provide technical accounting support and peer advice through its membership of project review committees. On the same lines, the SAIs of Mauritius, Thailand and Zambia are in the process of getting involved in the audit of privatisation. In Indonesia, Brazil and Lesotho, the SAIs have yet to get involved in privatisation audit.
SAI-lndia has firmly established its jurisdiction within the existing legal framework and has successfully conducted the audit of partial disinvestment of the shares of Government companies conducted in 1992. This disinvestment programme, which yielded a sum of Rs. 30.38 billion ( US $ 868 m.) to the Indian Government, aimed at disinvesting a part of the equity capital in respect of 30 public enterprises. The SAI's Audit Report highlighted a number of interesting points. It observed that the sale was not conducted in a competitive environment and was restricted only to the handful of financial institutions in the public sector. It also brought out that since the shares were sold below the reserve prices originally computed on the basis of valuation, there was a loss of Rs. 344 bn. ( US $ 10 bn.) to the Exchequer. Since there was no 'claw back' provision in the terms and conditions of the sale, the buyers made considerable profit as soon as the shares were offloaded in the market, from which Government derived no benefit. The report made considerable impact both in the Parliament and the media and the Government has initiated a number of corrective measures to streamline the procedures.
Apart from the fact that the privatisation process has not fully taken off in this region, one of the reasons for low key activity of SAIs in the audit of privatisation is that many SAIs are still in the process of equipping themselves for this task. Training and know-how for auditing in this complex area is one of the important inputs needed in this region. However as the process of privatisation gathers momentum, SAIs will also gear themselves to tackle this crucial area.
Western Europe and other developed countries
SAIs in the developed world are now tackling even the uncharted areas of privatisation audit. Their progress in this area is not so much because they have a wider or different mandate, but because of the state of the economic development of their respective countries. Some of these countries, notably the United Kingdom, possess experience of audit in this field since 1977. However, interestingly enough, there are also some new starters among them (1993), e.g. Finland, Portugal and Sweden.
A survey of work done by SAIs in this region reveals that all of them were concerned about the regularity aspects and most of them looked at the adequacy of financial information. Some of them also dealt with areas like credibility of the buyer and economic performance after privatisation. In the Netherlands, the SAI also draws up a comparison between state expenditure before and after privatisation and also audits the realisation of the general government objectives of privatisation. Most SAIs in this region maintain special departments or units to carry out the audit of privatisations.
The most refreshing feature, however is the pioneering work done by some of the SAIs in conducting performance audit of privatisations and projecting a positivist image of State Audit. For example, the report of the National Audit Office of the UK on the Sale of Girobank pic (1993) represents a thorough and incisive analysis, particularly of the problems of valuation, and well thought out conclusions, after weighing the problems faced by the Government in concluding this sale. This report on the sale, which yielded £111.8 million to Government revealed that prolonged negotiations, lack of preparatory work and decisions to sell the Girobank as an integral entity had resulted in a substantially lower realisation of sale price, out of which £18.2 million could be directly quantified. However, the report does not blame the Government directly , but makes a balanced presentation of the complex issues involved, the government objectives for the sale and the alternatives available.
In Germany, the scope of audit of the Federal Court of Audit (FCA) is not limited to examining the privatisation processes already initiated or completed. In some cases its statutory audit mandate enables it to argue for privatisation. The Federal Government is bound by statute not to hold shares in a company established under private law unless there is an important interest on the part of the federation and the purpose intended by the Federal Government can not be achieved more efficiently or effectively. Where FCA audit findings suggest that the federal interest in retaining such a share holding is not material and that there are more efficient ways of achieving the intended purpose, the FCA may give an impetus to the restructuring process by recommending sale of the federal share holding. FCA also has a right to advise Parliament on matters of importance. In exercise of its right, the FCA submitted a report to Parliament expressing its opinion on the Federal Government's forecasts concerning the financial impact of the proposed restructuring of the Railways and made a number of suggestions on individual clauses of the Railways Restructuring Bill.
The Austrian Court of Audit conducted a major audit of partial privatisation of the National Power Generating Company by public floatation, raising 5200 million Austrian Shillings. The Court observed that the valuation was unduly low, since it was based on the profit, which was unfortunately low in the year of valuation due to unforeseen, unparalleled events. The valuation ignored the company's healthy financial position, its high asset value and the excellent forecasts for its future economic development. The SAI also observed that the share price determined was overtly cautious, due to the under valuation coupled with the company's anxiety to complete the privatisation as fast as possible. The Court felt that it would have been more appropriate to first sell a smaller volume at a higher price in order to probe the response to the floatation, an approach which had yielded markedly higher share prices for a provincial power generating company.
The Australian National Audit Office has struck a positive chord in this field by publishing a Best Practice Guide for the sale of government assets as business ventures. Included as an Appendix in its report on the Sale of Aussat, a company which operated the government's telecommunications satellite, the Guide was meant for the government agencies. It lucidly explains the sale process through the four stages of identification, planning, implementation and evaluation. Presented in a logical sequence, the Guide is an important contribution towards the achievement of value for money, while ensuring the trail of accountability in the sale process. It also substantially enhances the capabilities of the SAI in evaluation of sale transactions.
Armed with their experience and moving with the changing economic situation, many of the SAIs in developed countries have managed to go beyond the audit of privatisation, and are now looking into the audit of regulators. The growth of regulatory agencies is a post privatisation phenomenon, and SAIs in Western Europe and developed countries are now trying to grapple with their audit. The SAIs of UK and Germany are active in this area. The privatisation of banks and financial institutions are presenting complex problems of valuation for the privatisers and still more intractable problems for the SAIs. Their experience is bound to be of help to other SAIs in the years to come.
The efforts of the SAIs in the field of the audit of privatisation acquired a new focus with the formal establishment of the INTOSAI Working Group on Audit of Privatisation in May 1993, following a decision taken by the XIV INCOSAI in 1992. The Working Group was formed under the chairmanship of the UK National Audit Office to identify and examine problems confronting SAIs in this field; to exchange information on the range of experience within the working group's membership in resolving these problems and to facilitate the provision of information on this subject to INTOSAI members.
The working group held its meetings at London and Ankara to exchange views and prepare papers which were later presented in a Symposium on the Audit of Privatisation held at Cairo following the XV INCOSAI in 1995. The documents which were distributed as the basis for discussions and the SAIs which prepared them included:
In their third meeting held at Buenos Aires in September 1996, the working group considered the draft guidelines on the audit of privatisation. The guidelines, which may include a number of issues, may be broadly grouped under the following principal headings: -
Under these headings, a number of issues would be covered and areas like valuation, method of sale, management buy outs, mass privatisations, auctions, sale costs etc. could be discussed. The working group has decided that in the coming years, apart from developing these guidelines, it will also examine the audit of regulatory bodies, considering both the regulation of privatised utilities and other public services provided by the private sector and consider the establishment of a framework for the dissemination of information on completed privatisation audits to INTOSAI members. The efforts of the working group would go a long way in enhancing the capabilities of the SAIs in the field of privatisation audit and equip them to tackle the issues of the future.
Audit of privatisation is one of the most complex issues faced by SAIs in their long and chequered history. It acquires new dimensions with the changing socio-economic and political situations. There are several areas which have proved difficult and elusive, one of them being the uncertainty about the value of business being sold and the consequent determination of the sale price. There can be no fixed formulae to solve these problems and every SAI has to make judgements to arrive at the best possible solution. Lack of experience of privatisation audit within the SAI, inadequacies in the existing market structure and inadequacies of legal provisions are some of the other major problems, but these are likely to get resolved with the passage of time.
The most encouraging feature in the recent trends in the audit of privatisation is the emerging strength of the SAIs and their role as independent advisors to streamline the systems to achieve better value for money. The proactive, positive and assertive role played by SAIs in the field of privatisation audit is a landmark in the evolution of state audit. It has exploded the myth that audit is merely a fault finding and negative function, and has underlined its crucial role in securing improvements in administrative systems to achieve greater economy, efficiency and effectiveness in governmental operations.