The Audit Office of NSW

 

Contracting Out Review Guide

 

In recent years there has been an increasing reliance by government on contractors to provide services to the public. This may be done for a variety of reasons. However, one of the unintended side effects can be to impair public accountability. In the Commonwealth, the Industry Commission has drawn attention to the need to preserve accountability when services are contracted out:

      …while responsibility to do certain things can be transferred, accountability for the results cannot.

      Whatever the method of service delivery, a government agency must remain accountable for the efficient performance of the functions delegated to it by Government …(1)

The Administrative Review Council (Commonwealth) considers that:

      …the contracting out of government services should not result in a loss or diminution of government accountability or the ability of members of the public to seek redress where they have been affected by the actions of a contractor delivering a government service.(2)

A contract can be written to maintain or even enhance accountability and access, or can be written to diminish both. Contracting out therefore has the potential to frustrate existing accountability mechanisms and the public’s access to information and redress. This could adversely impact on efficiency and service quality. As noted by the Administrative Review Council:

      The effect of particular contracts … will depend, in part, on the drafting of the contract, arrangements for the monitoring and evaluation of the contractor’s performance and the approach taken by the agency to the enforcement of the contract if the contractor fails to comply with it.(3)

 

A recent example relates to auditing services. A NSW agency contracted out its internal auditing services to the private sector. The contract provided that the internal audit working papers were the property of the auditing company rather than the agency. The ability of management, external auditors and the Parliament to access the working papers is compromised by such arrangements. This is contrary to the public interest and the principles of accountable government. Contracts must avoid such provisions. The Treasurer has recently confirmed that all agencies should be required to ensure that ownership of internal audit working papers remains with the agency rather than with any contracted internal auditors. (4)

Agencies need to obtain and keep sufficient information to allow them to effectively manage outsourcing contracts and monitor performance. They will also need to ensure that sufficient information about contracts is available to allow Parliament and the Auditor-General to undertake their oversight functions. These requirements need to be built into contracts. The Western Australia Commission on Government noted that:

      Official records bear silent testimony to the administration of a government. …Proper record keeping serves two purposes. First, it is a prerequisite to effective accountability. Without it, the end purpose of FOI legislation can be thwarted. Without it, critical scrutiny by the Parliament, the Auditor-General and the Ombudsman can be blunted. Secondly, records themselves form an integral part of the historical memory of the State itself. A record keeping regime which does not address both of these requirements is inadequate.(5)

The Audit Office has noted and supported the following comments of the Senate Finance and Public Administration References Committee:(6)

      The Committee is concerned that the mantra of commercial confidentiality will increasingly be used to deny Parliament access to the detail of contracting arrangements. The Committee accepts that there are limited aspects of contracts which may be commercially confidential. However, whenever information is denied Parliament, there will be suspicion that it is to hide sloppy administration, extravagance, incompetence – or worse – in the expenditure of public money.(7)

 

The Australasian Council of Auditors-General has issued a statement of principles on commercial confidentiality and the public interest. In part, those principles provide that:

      Because the community has delegated to Parliament extensive legislative powers that can effect individuals (and because Parliament has delegated significant powers to the Government) there is an expectation that the accountability for Government activities will be more acute than for the voluntary transactions between individuals that occur in the private sector …

      The private sector must expect that, when it deals with the State, the disclosure requirements cannot merely be those that pertain to commercial transactions between two private sector entities. If the accountability arrangements are the same, insufficient weight will have been given to the need for the State to be accountable to the citizen.(8)

When preparing contracts for outsourced services agencies will need to consider four broad questions:

  • what is the scope of the service to be provided by the contractor, and how is it to be provided?
  • who is responsible when things go wrong and what obligations do they have to fix the problem?
  • what information are service recipients and other members of the public entitled to, and how are they given access to that information?
  • how will the contractor’s performance be evaluated?(9)

Both internal and external auditors are in a good position to assist management to meet its accountability obligations where contracting out is proposed. Auditors should focus upon how the contracts approach accountability and access issues.

 

Whilst the contract is vitally important, it represents only the formal/legal agreement which governs the contracting relationship. The contract will never capture the full nature of the relations between the parties, which is what guides much of the day to day activity. Contracts are consulted in detail when things go wrong. However, as has been shown in various TAO performance audits(10) there may be fundamental problems in the process which has been used in establishing the relationship between the contractor and the agency. It is important that accountability and access to information are features of the entire contracting relationship. This includes information about the decision to award the contract and on-going management of the contract. Auditors should consider the overall approach employed for the contract.

Agencies should take steps to ensure that contractors fully appreciate the issues of accountability and public duty, and the implications which these concepts embody. Most contractors do not fully understand these matters, and do not appreciate the regime of roles which flow from them. As the NSW Independent Commission Against Corruption has noted:

      The benefits of informing private contractors about the reasons for public sector rules are borne out in the current survey results: those respondents who perceived the public sector to be more ethical were less likely to consider the rules "pointless". This could suggest that those contractors who understand that the purpose of many public sector rules is to achieve a high ethical standard are more likely to be supportive of those rules. In addition, those who perceived that public duty was relevant to them were more likely to be aware of public sector rules. This suggests that private contractors who possess a better understanding of the core values which underpin public sector work and the rules which embody them, may also have a more positive attitude to working in the public sector.(11)

The following list of consider-points does not constitute legal advice, and is not intended as a comprehensive guide to contract drafting. It seeks simply to highlight issues that agencies and auditors should consider to ensure that acceptable levels of accountability are maintained when services are contracted out.

 

 

  Contracts for Outsourced Services: Consider-Points
  Does the contract:

Yes/No
 
  • clearly articulate the scope of services to be delivered?
  
 
  • allocate precisely responsibilities between the agency and the contractor?
  
 
  • anticipate, and contain measures to deal with, contingencies that could affect the performance of the contractor?
  
 
  • make clear what standards of performance are required by the contractor (which should be no less than those that would be expected were the service to be provided by the agency)?
  
 
  • specify how the contractor’s performance is to be evaluated and monitored?
  
 
  • spell out the contractor’s obligations to keep documentary records of the way in which they deliver the service?
  
 
  • require the contractor to provide information to the agency so that it is able to manage the contract and evaluate performance?
  
 
  • require the contractor to provide sufficient information to the agency about complaints to allow performance to be monitored?
  
 
  • require the contractor to provide information to the agency so that rights of access to information by the public are not diminished by the act of contracting?
  
 
  • set out the amount and quality of information to be provided to service recipients by the contractor?
  
 
  • have unambiguous arrangements for the resolution of complaints about service delivery?
  
 
  • require the contractor to provide information to the agency so that it is able to respond to inquiries by the Auditor-General, Parliament, the Ombudsman and the Minister?
  
 
  • provide access for audit purposes to relevant company records by the agency’s internal auditor and the Auditor-General?
  
  In addition, auditors should check as to whether the agency has put in place appropriate arrangements to monitor and measure the value-for-money achieved from the contracting-out arrangement.  

 

Footnotes:

(1)Industry Commission Report No. 48, Competitive Tendering and Contracting by Public Sector Agencies, AGPS, Melbourne, 1996, pages 4-5.

(2)Administrative Review Council, Commonwealth of Australia, Report No.42, The Contracting Out of Government Services, August 1998, p vii.

(3)Ibid, p 1.

(4)The Audit Office of NSW, Awareness No 4/99, June 1999

(5)Report No 2 of December 1995.

(6)The Audit Office of NSW, Performance Audit Report, Department of State and Regional Development: Provision of Industry Assistance, December 1998.

(7)Senate Finance and Public Administration References Committee, Contracting Out of Government Services, 2nd Report, Chairman’s Tabling Statement, May 1998.

(8)See http://www.vicnet.net.au/~vicaud1/acag/accomm01.htm

 (9)Summarised from Administrative Review Council, Commonwealth of Australia, Report No.42, The Contracting Out of Government Services, August 1998.

(10)Such as the performance audit reports on Sydney Showground, Moore Park: Lease to Fox Studios Australia and Review of Walsh Bay.

(11)ICAC Research Report, Private contractors’ perceptions of working for the NSW Public Sector, A survey of consultants and contractors, January 1999.

 

 

Further information on aspects of contracting out is available from:

  • NSW Council on the Cost of Government (Service Competition Policy)
  • NSW Department of Public Works and Services (NSW Government Procurement Policy)
  • NSW Premier’s Department, Public Sector Management Office (employee issues)
  • NSW Independent Commission Against Corruption (probity issues).

 

The web-site of these agencies can be accessed from the NSW Government web-site (http://www.nsw.gov.au/).

 

 

 

Queries on this Review Guide can be directed to:

Stephen Horne, Director Performance Audit, 9275 7278

or

Rod Longford, Senior Performance Audit Manager, 9275 7207