Executing a PPP deal is a major project in itself, typically involving substantial use of financial, legal and other private sector advisers. This is similar to the experience with the privatisation process in Australia, which itself is now subject to extensive outsourcing under multi-million dollar advisory contracts. This places considerable emphasis on contract management and balancing commercial interests with the overlaying public accountability required of the public service. The use of such advisers needs to be effectively managed by agencies in order to ensure there is appropriate accountability for their selection, performance and payment.
One of the key outcomes from ANAO's privatisation audits has been the identification of opportunities for significant improvement to the process of tendering and managing these advisory contracts, the adoption of which has led to improved overall value for money and project management quality in subsequent sales. In short, the emphasis is on better practice to add value to public administration as a major audit objective.
ANAO has examined the three largest public share offers conducted in Australia, namely the first and second tranche sale of shares in Telstra and the third tranche sale of shares in the Commonwealth Bank. These three sales collectively raised proceeds of some A$35 billion. The audit reports have examined the key factors that affect the success of any public share offer, including the level and structure of fees paid to stockbrokers and advisers as these fees significantly influence the motivation for these firms to act in the vendor's interest.
While fees need to be high enough to motivate them to sell shares, it is important that the entity oversighting the sale should take advantage of the competitive broking market by considering the level of fees sought by individual brokers when deciding on the composition of the selling syndicate for the offer. It is equally important that the division of fees and commissions between the fixed component shared among the selling syndicate and the 'competitive' component paid according to which broker secured the order for shares provide an incentive for all brokers to actively market and sell shares,82 and that fees and commissions only be paid for services provided. For example, underwriting fees should only be paid on shares that are actually underwritten.
In conducting the initial sale of Telstra shares, advisers were appointed without having regard to the fees quoted by the tenderers because the Commonwealth agency considered the expected outcome in sale proceeds to be more important than sale costs. The contract fees, amounting to some $91 million, are the highest ever paid in a Commonwealth public share offer and were significantly above those indicated by other tenderers. Furthermore, the contractual arrangements required fees to be paid for services that were not provided and other fee payments departed from the terms of the relevant contract, which the agency said did not fully capture the commercial understanding of the parties as to the basis on which fees would calculated and paid.83
The accountability aspects of such elements of the sales process are outside the experience of most public servants and are not well understood by private sector participants. There is therefore a continuing learning process for all involved in the privatisation process, not least for the auditors concerned.