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JOINT COMMITTEE OF PUBLIC ACCOUNTS - 23/07/1996 - Review of Auditor-General's reports

CHAIR —I now invite the agencies to make a short comment.

Mr Lindenmayer —The Department of Health and Family Services has regarded the audit as essentially an audit on asset sales and therefore essentially an audit on a function discharged by the asset sales task force of the Department of Finance. Our role in that process was essentially a supporting role. There is nothing in particular that we would wish to say by way of a formal introductory statement about that supporting role we played and the Auditor-General's comments on that role.

Mr Hutchinson —As an asset sale, the Department of Finance was quite pleased with the outcome of its sale of CSL Ltd just over two years ago. The sale was completed at a price of $292 million. That represented a multiple of 17.1 times on the prospective forecasts of 1993 after-tax earnings and 14.2 on the forecast 1994-95 earnings.

This was the first Commonwealth asset sale to proceed by way of a public share offer and it paved the way for the government's subsequent successful public share offers for CBA 2, Qantas and CBA 3. The company appears to have responded well to the opportunities for privatisation in the intervening two years and has taken a number of commercial initiatives that have further strengthened it but that were probably inappropriate or unavailable to it previously under 100 per cent government ownership. The sale process has also locked in a commercial basis for the supply of product to the market, including the Commonwealth, on what we understand to be a sustainable competitive basis relative to world prices.

The Department of Finance has welcomed the review of the sale process by the ANAO, especially as those who were engaged in the process were acutely aware that they would have much to learn from this first public share offer. Although the report was not issued until November last year, the findings have informed later asset sale processes as part of the efforts by the Department of Finance at continuous improvement and learning. We have no doubt that these later asset sales have been the better for those findings and recommendations, just as we expect the ANAO's forthcoming review of those later asset sales to assist in the planning and executing of others that are in train or in prospect. My colleagues and I are at the disposal of the committee to assist in its deliberations in whatever way we can.

Mr Barrett —The ANAO tabled two asset sale audit reports in November 1995. The first was on the trade sale of the Moomba to Sydney gas pipeline system and the second was on the public float of CSL Ltd.

In undertaking asset sale audits, the ANAO aims to review the effectiveness and efficiency of selected individual sales, having regard to the overall framework in which the sale was undertaken. Our future aim is to identify areas of better practice for future sales.

As Mr Hutchinson just indicated, the sale of CSL Ltd was the first 100 per cent public float undertaken by the Commonwealth. Indeed, the sale was quite complex, given the particular nature of and the sensitivities associated with the industry, as well as the extensive involvement by the Commonwealth in providing product indemnities to CSL and through entering long-term contracts for blood products with CSL.Under the plasma fractionation agreement, the Commonwealth will fund CSL fractionation of the national blood supply to the year 2004, at an estimated cost of nearly $1 billion over the life of the contract.

The ANAO's main objectives in auditing the sale were threefold, namely, to review the extent to which the government objectives for the sale were achieved; to review the management of the sale process; and to assess the ongoing Commonwealth exposures and responsibilities.Indeed, the ANAO found that the government objectives for the sale of CSL were met; that the sale was completed on time; and that the total sale costs were reasonable, given that they amounted to $9.2 million, which was three per cent of the total sale proceeds of $299 million.

The ANAO made 15 recommendations, of which 13 were agreed or agreed in principle by agencies. Agencies accepted ANAO's recommendations, including those for the engagement of consultants; due diligence reporting; completion of external regulatory audits; preparation of timely and comprehensive public reports by relevant agencies on asset sales; seeking relevant ministers' views before entering into indemnity agreements; the need to consider options for risk transference; developing strategies for a more market oriented demand framework for blood plasma products; and review systems for regulating foreign sourced plasma processed in Australia.

The Department of Finance disagreed with one recommendation concerning clawback arrangements to the Commonwealth in future property sales. The ANAO recommended that agencies responsible for future asset sales involving substantial property assets evaluate the opportunity to include clawback arrangements to the Commonwealth where there is the potential for significant realisation of gains from future property sales. This is particularly difficult where there is no prior or related market experience on which to base a realistic sale price and the ANAO recognises that. As well, the conditions of sale often tend to constrain the purpose for which the asset is being used. The consequent uncertainty would therefore, in the ANAO's view, tend to create downwards pressure on any negotiated sales outcome. The Department of Finance argued that all such potential gains should be captured at the point of sale, which is a compelling argument in a perfect market situation.

The then Department of Human Services and Health disagreed with the recommendation that the Therapeutic Goods Administration seriously consider conducting a formal evaluation of the merits of adopting a specialised code of good manufacturing practice for fractionation of blood plasma products as part of its overall risk strategy assessment. The ANAO's recommendation was directed to ensure that the national interest is fully protected by ensuring that Australia is at the forefront of international good practice in manufacturing blood products.

The ANAO has continued its audit coverage of indemnities provided by the Commonwealth, undertaking a cross-portfolio performance audit into Commonwealth guaranteed indemnities and letters of comfort, which are scheduled to be tabled in September 1996. The ANAO will also be undertaking future asset sale audits with a study about to commence into the recent sale of the Commonwealth bank, as referred to by Mr Hutchinson. The senior auditors associated with this particular audit were Colin Cronin and Victoria Walker who would be pleased to take any questions from the committee.

CHAIR —We propose to look at specific recommendations and then ask questions about those before moving on to other areas. Firstly, on the question of indemnities and ongoing commitments, recommendations 5, 6 and 7 mention the agencies responsible for an asset sale should ensure comprehensive public reporting detailing the outcome of asset sales and any ongoing Commonwealth commitments, consultation with the responsible minister prior to entering into indemnity agreements, the quantitative assessment of potential liability under proposed indemnities and consideration of all available options for risk transference and management, including the possibility of share arrangements. This is a question to health. Could you provide the committee with a ballpark estimate of the Commonwealth's potential exposure under the product indemnities issued to CSL? Has an actuarial study been commissioned?

Mr Lindenmayer —I am not able to provide you with a figure. I think it is important to emphasise that, unlike most commercial risks, this is a risk where there is a sample of one as the CSL is the only producer within Australia of a range of products, particularly the critical products covered by the indemnification arrangements. CSL has certainly confirmed the department's previous experience that it has not been possible to find insurers prepared to provide insurance against liability at an affordable rate. The reason for that is essentially that the probability of an adverse event is almost impossible to calculate and the extent of public damage and, therefore, the exposure to adverse court decisions on damages, is also almost impossible to calculate. It is essentially for that reason that it was decided to provide Commonwealth indemnification, rather than simply to require the company to take out normal commercial insurance against such liabilities with the cost of that insurance being factored into the price of products.

Mr GEORGIOU —So the Commonwealth is the insurer.

Mr Lindenmayer —The Commonwealth, therefore, in effect, is the insurer.

Mr GEORGIOU —How much would it cost if we insured with commercial insurers?

Mr Lindenmayer —In respect of the things that are covered by the indemnities, it would be extremely high.

Mr GEORGIOU —How much?

Mr Lindenmayer —I cannot give you a figure because reliable figures have not be obtainable. CSL has informed the department of a number of attempts to secure domestically and internationally insurance on anything like remotely affordable and reasonable terms. It has been unable to secure that.

Mr GEORGIOU —Was ministerial approval given to the indemnity?

Mr Lindenmayer —The issue of indemnification was an integral part of the proposal to sell. That was made clear in the documentation that went to ministers at the time the matter was being considered by cabinet. I think one can say the answer is yes.

Mr GRIFFIN —The Auditor-General suggests in the report on the sale of CSL that options for the Commonwealth sharing product supply risk with CSL rather than picking up the tab for the lot should have been explored. Possibly that has partly been answered by Health just now, but is CSL's liability for faulty product limited to claims resulting from its culpable negligence as a manufacturer?

Mr Smith —My recollection is that CSL is not covered for any negligence or wilful damage. There are a couple of clauses, but I cannot remember the actual contract. But there were some specific exclusions in relation to wilful damage, negligence, and so on which, if that was proven then indemnity would not enforceable.

Mr GRIFFIN —Mr Lindenmayer, do you want to comment on that?

Mr Lindenmayer —Yes. In general, the language is along the lines of `indemnification is provided in relation to' certain things `unless CSL has failed to meet its obligations to comply with legal requirements or standards of care in manufacturing practice'.

Mr GRIFFIN —Did Finance or its business advisers seriously consider options for CSL accepting a proportion of product risk beyond culpable negligence? Was the issue considered?

Mr Smith —I actually cannot recall that, to be honest. The issue of an indemnity was a matter for the Department of Health and for the finance policy side of Finance and not for the task force, so I am afraid I cannot answer that question. But, in terms of business advice, I do not think that that was addressed by the business advisers to the task force.

Mr GRIFFIN —Health?

Mr Lindenmayer —I am sorry, we cannot add to that.

Mr GRIFFIN —Again to Finance: what is the Commonwealth's general policy on contracts of indemnity in relation to asset sales?

Mr Hutchinson —Our general policy is, first of all, to minimise the granting of indemnities to those cases where the indemnity is necessary to progress the sale satisfactorily; fair, having regard to the interests of all the parties involved; and as narrow as is required to fulfil its objective. In particular, we are always anxious to ensure that there is no indemnification against actions that would be criminal, a breach of good faith or which would involve negligence or gross negligence. They are the general guidelines. Within those guidelines, it is our practice to always secure ministerial concurrence to the granting of indemnities in connection with an asset sale.

Mr BEDDALL —I come back to Health or the task force. Further to my previous question about ministers being advised, if the Department of Health cannot give us a ballpark figure for the possible liability that could accrue to the Commonwealth now, how were ministers advised of the potential liability of the Commonwealth at the time that this sale was proposed? Surely a figure quantifying the possible risk to the Commonwealth would have to have been part of documentation going to ministers for consideration.

Mr Lindenmayer —My understanding is that it was simply not possible to put a particular figure on the extent of liability. You will appreciate that in relation to therapeutic goods--I am thinking here of medicinal drugs in particular--there have been, over several decades, a number of very high profile cases where the liability of the manufacturer or the supplier of the product was in the region of hundreds of millions of dollars when that product was found to have very serious side effects for the users. The probability of that occurring with any single product, of course, is very low indeed.

Were there, at the time of the sale, strong reasons to believe that a particular product's threat to the community would have been out of proportion to its value to the community as a therapeutic good, it would certainly no longer have been supplied. But the range of the potential liability would have been very large indeed, and no attempt was made--to the best of my knowledge--to quantify it.

Mr BEDDALL —This is a privatisation where you capitalise your profits and socialise your losses, isn't it?

Mr Lindenmayer —I think in this case the indemnification arrangement needs to be seen as a means of ensuring continued supply of a group of products which were deemed to be of vital importance to the health of the Australian community. Without the indemnity there would have been some prospect of the supply of products being interrupted.

Mr BEDDALL —Or it could have stayed in public ownership.

Mr Lindenmayer —That is another option.

Mr GRIFFIN —Comparable operations overseas are insured, I guess, are they?

Mr Wells —We have no information on that. Those insurance arrangements are usually commercial-in-confidence. There were a few--

Mr GRIFFIN —But you should be able to find out whether there is or there is not an insurance policy, I would have thought.

Mr Wells —I suppose the point is that CSL has tried, as required under the contract, and have reported to us that they have been unable for two years now--and they have to repeat this process every year--to secure insurance. We just do not know what the insurance arrangements are for overseas producers.

Mr GRIFFIN —CSL may well have to make inquiries along those lines. I guess I start from a point where it seems from the evidence so far that the argument is that you cannot get insured for this sort of coverage. Yet when the question is asked, `What about overseas, in terms of overseas companies doing the same sort of activity?' the answer is, `We don't know whether they are insured.' I would have thought that would be a principal starting point, because that would also give us some idea whether attempts had been made in a very serious sense to pursue the question of insurance or whether people have been going through the motions.

Mr Wells —What I said was that we do not know what their insurance arrangements are, so we do not know whether they are insured or, if they are insured, what premium they pay or what arrangements they have.

Mr GRIFFIN —I take the point on commercial-in-confidence, but I would have thought that a company overseas doing the same sort of activity ought to be able to say, without breaking any confidentiality questions, `We are insured' or `We aren't insured.' Has that question been asked? If the answer is that it has been asked and no answers were forthcoming, that is one thing. If the answer is that those questions have not been asked, then I am just wondering with what veracity the matter has been pursued. So is the answer, `We don't know,' or is the answer, `We haven't tried to find out'?

Mr Wells —I cannot answer the question that has been asked. I do not know.

Mr GRIFFIN —You do not know. Is there anyone from Health that would know?

Mr Wells —We would have to search our files, but nothing has been brought to my attention in the research we have done that would suggest that we have an answer to that question.

Mr GRIFFIN —It seems a bit bizarre, don't you think?

Mr Wells —I think the judgment was made at the time--

Mr GRIFFIN —If the judgment has been made that, essentially, for cost or whatever reason, there is no point in pursuing the question of insurance, that is a call that can be made or cannot be made in the circumstances. That is a judgment that can stand on its own. But if the answer is, in reality, we do not know what the situation is overseas because we cannot find out or, alternatively, because we have not tried to find out, then that is a very different answer.

Mr Wells —I understand that. All I am saying is that the facts are we cannot answer the question. To date CSL has been unable to obtain the cover anyway.

Mr GRIFFIN —How long does that indemnity last? Is it in perpetuity?

Mr Wells —It is for the period of the contract, which is 2004.

Mr GEORGIOU —It has not been able to obtain the cover or it has not been able to obtain it at a price that it regards as affordable, which I understand was Mr Lindenmayer's point. It seems to have developed since then to: it cannot obtain one, period.

Mr Lindenmayer —It can be said that insurance against almost anything can be obtained if one is prepared to pay the price that is demanded. In an environment where the highly infrequent and unlikely major disaster occurs, the payments by the insurer could be hundreds of millions of dollars. For a medium sized Australian company like CSL, that would impose one of two options: operating at a major loss to meet the premium that would flow from that or, alternatively, coming back to government with a view to imposing a price for its product which would be punitive on the community or punitive on the public through the taxpayer--or both.

Mr GEORGIOU —When CSL goes back every year and tries to get itself insured, can you tell us the last price it was offered for cover that was unaffordable?

Mr Lindenmayer —I do not know that.

Mr Wells —We do not have that information.

Mr GRIFFIN —Do we know if it was offered a price? I am not sure what the earlier comments meant--`They were unable to get insured'. As Mr Georgiou said, is it that they were unable to get insured full stop per se or was it a question that the price was too high?

Mr Lindenmayer —Can I suggest that, instead of seeking to answer this on the basis of the department's relatively limited knowledge, the committee agree that we consult with CSL and write to the committee about the matter?

Mr GRIFFIN —I do not have a problem with that in the circumstances, but I have a further question arising from that. If the circumstances are that it is possible to get insurance for such a matter, then there ought to have been figures available at the time of the sale being conducted and those figures should have been taken into account in any negotiations about cost, price, et cetera. If there were, what were the prices? If there were not and there are prices now, why the hell was that? If you do not know the answer to that one either, which you may not, that is something else we will need to know.

CHAIR —Could I ask at this point if Mr Barrett would like to make a comment about whether this is a serious issue for the Commonwealth. Should we be concerned about it, as we are?

Mr Barrett —I regard all these kinds of arrangements--as we will indicate in the report which I referred to as coming out in September this year, Guarantees, indemnities and letters of comfort--which were also indicated in the audit commission's report, as being quite serious matters. The issue in a sense is very much a commercial one. It is an issue that the company is going to have to face long before the contract runs out. It is going to have to decide whether it is of such a kind that it will not be in the business of blood fractionation any more or, if it seriously is, what it does.

I think it is a fair enough question to ask. Is there some kind of assessment that is possible in the light of advice from reputable insurance brokers? The Commonwealth is on record as going to international insurance brokers to get prices on insurance that is not available in Australia or was not available in Australia at that time in order to get some sort of handle on what the cost might be. The next question is whether that insurance would be made available in Australia and the next question after that is the one you are asking--what is the cost associated with that. It is an issue that exercised our minds. It is not one you can speculate on and say, `It is hundreds of millions of dollars.' I really do not have any idea, and I say that honestly.

The fact of the matter is that, as our friends in CSL would no doubt tell you, the blood business is changing. Technical factors are now entering into the provision of blood products that are mitigating the risks that we were seeing some time ago when indemnities were likely to be required. Today that situation is different. In those sorts of changing circumstances one should seriously start to look at this and decide for future decision making what the insurance premium we are paying is. I understand why you are looking at the past, but I am trying to look to the future.

CHAIR —Should the Commonwealth continue to bear that risk?

Mr Barrett —Yes. As I said, the question, in the assessment of that risk, is whether the risk today is the same as the risk was even when the sale was made; and I suspect it is not.

CHAIR —Does the department of health want to comment on that?

Mr Lindenmayer —I think Dr Cable might talk about the changing risk in blood products.

Dr Cable —There has been a number of developments in the last five years which have served to increase the level of safety in blood products by the introduction of improved screening methods and requirements to include validated viral inactivation steps in the manufacturing processes. Basically, in trying to ensure the quality of these products you have three levels of control: firstly, at the donor level in terms of the screening by questions of lifestyle and so on and the actual screening of a donation. The next one is when the plasma arrives at the fractionator, at which point there is pool screening. It has been introduced in the last couple of years. The final one is in the actual processing, as manufacturers are now required to validate the process to show, in a model system, that viruses if present, if they had escaped the first two steps, would be inactivated. So there are three steps.

The documentation and guidance on that shows that there has been tremendous activity in that area in the last five years. From an Australian and TGA point of view, this flows from the adoption of the European Union requirements post the Baume review in 1991 in which we decided to align our requirements basically for the registration of products with those requirements of Europe.

There has been a lot of work done on how one goes about validating this and the requirement to submit that information to the regulatory agency for independent assessment. We have been quite active as an agency in keeping in touch with the European Union, which developed these documents, and in insisting that they be introduced here.

There are other risks that clearly need to be addressed. One can never predict that you have actually got on top of all the potential risks. One that is topical at the moment is the question of the relationship between bovine spongiform encephalopathy, BSE, in the UK and the occurrence of the 10 forms of variant Creutzfeldt-Jakob disease, otherwise known as CJD, and what sorts of issues that poses. They are the sorts of issues which are continually being reviewed and looked at both by fractionators and by regulatory agencies around the world. You can never say that you actually know every potential transmissible agent that may or may not be present, but certainly there has been tremendous progress in the last five years in relation to these.

Mr Barrett —With the indulgence of the committee, I would like to invite Mr Colin Cronin to make a comment on the insurance issue that pertains in New South Wales which could be at least indicative if not instructive.

Mr Cronin —It is our understanding that some of the states operate managed insurance funds for themselves which involves them actually assuming a level of risk a bit like an excess and seeking reinsurance cover above that excess. These are to cover essentially very catastrophic type events--maybe art exhibitions through to high level exposures which can extend into pharmaceutical activities. That is one aspect.

In terms of the actual size of insurance and what is offered in the international reinsurance markets, the extent of the premium is pretty much dependent on how much excess you are prepared to wear. It is a probability game and, provided probabilities can be determined, they can generally structure products to take on some of that risk.

As we note on page 29, paragraph 3.9, one option is to look at the question of deductibilities or excesses. That can actually ameliorate tremendously the amount of premium that can be paid. The international insurance reinsurance market is a fairly dynamic beast and it offers all sorts of products. That is one of the reasons why we put this in terms of page 29.

Mr GRIFFIN —I have a question for the task force about the various comments that have been made on this issue. Do you need to seek further advice as to Finance's role in this sale as to whether in fact inquiries were made on your behalf to Health or whether something more should have been done?

Mr Hutchinson —Subject to any supplementary comments Mr Smith may wish to make, I think the Department of Finance would be satisfied that this was primarily an issue for the department of health. In executing the sale transaction, it was our view that the indemnity put in place simply continued the prior situation where the Commonwealth accepted the risk and that the arrangement that the department of health put in place did not change that situation as a consequence of the sale.

Mr GRIFFIN —Would that be usual with an asset sale, though? I understand this is a fairly specific business, but at the same time I just ask that question.

Mr Hutchinson —It would depend greatly on the issue under consideration and the nature of the asset sale as to whether there was an issue, whether that issue was a matter, as it was in this case, for the regulatory portfolio, whether it was an issue for the sale portfolio--the Department of Finance--or whether it was an issue more widely for government.

A broadly related issue might arise in other asset sales when we come to issues such as the warranties the Commonwealth may be required to give in an asset, concerning environmental cleanliness or contamination for example. That would depend upon the history of the site and the history of the issue. These things, I think, are all best dealt with case by case.

Mr Smith —If I could make a specific comment about the CSL sale, from my perspective it was my obligation to make sure that all the risks were exposed or revealed in the prospectus. The business adviser identified quite early in our process that issues relating to fractionation of blood and the consequences of that were going to be critical for investors. We took the issue up with Health. From my point of view, Finance's obligation at that point finished in that we raised the issue and Health responded in terms of continuing with the indemnity which existed prior to sale. We put that in the prospectus and made investors aware of that.

Mr GEORGIOU —The Auditor-General reports that the Commonwealth extended indemnities to the board and to two of the experts assisting you. Why was that necessary? What was the potential exposure to the Commonwealth of those?

Mr Hutchinson —It is quite customary, where officers who have no duty or obligation carry out a function which is nonetheless necessary as part of the asset sale, for indemnity to be granted, provided they are confined in line with the policy I outlined earlier. I would ask Mr Smith to reflect on the particular circumstances.

Mr Smith —The minister for health, upon appointing the board members, issued the board members with an indemnity under Finance direction 21. That indemnity prevailed through the sale process. There was a letter of clarification that went to the board clarifying that for the purposes of privatisation the indemnity would in fact stand. It was not that a new indemnity was issued. There was a clarification of an existing indemnification that was issued some time before the sale process.

In relation to the two experts that looked at Broadmeadows, we looked very far and wide for people who were capable of giving us a technical report on whether this new facility at Broadmeadows, which was a highly sophisticated facility, a leader in the world, was in fact going to be a viable facility. We wanted to make a statement to that effect, one way or another, in the prospectus to declare that to all prospective investors.

There were very few people in the world who had the ability to look at such a facility. We found these two gentlemen in the United States. They had in fact built a fractionation facility some many years before in the United States. They were two individuals who were retired. Whilst they had very good skills, they had no financial backing to provide us with a report without an indemnity.

Mr GEORGIOU —What is the connection? They were retired and they didn't have financial resources. How does that jump to indemnity?

Mr Smith —The only people we could get in the world were these two gentlemen, who were prepared to sign off a report that would be revealed in the prospectus. Under the corporations law, as you would understand, they would be exposed to claims made against them. Without that indemnity, they were not prepared to put such a report in the prospectus. There was a judgment made at that time as to whether or not we would have a report to give some clarity to investors. With clearance from the minister, we undertook to grant indemnity in this particular case.

Mr GEORGIOU —What was the potential risk? What was the potential exposure of the Commonwealth as a result of these indemnities? They must have made a calculation that it was not worth their while, for the money they were making, to put their names to it in case their got sued. Why?

Mr Smith —I cannot remember the actual insurable cost for that, but there was some analysis done at the time. It was decided--and the minister agreed--that the costs were prohibitive. I can't recall the actual figures.

Mr BEDDALL —On the broader question of indemnities for board members of Commonwealth business enterprises or statutory authorities that are privatised, are you saying that there is a normal indemnity for board members under the Department of Finance rules? It would not happen anywhere in the private sector.

Mr Hutchinson —There are two provisions that it is worth reflecting on. The first is Finance direction 21. That provides for the Commonwealth to undertake the defence and pay the civil penalties of any Commonwealth officer against whom action is taken for things they do in the course of their work. Provided the officer has acted in good faith, with a proper diligence, without negligence and the like, but nonetheless action is taken, then the Commonwealth will pick up that defence. The definition of `Commonwealth officer' under Finance regulations is cast quite widely.

Secondly, there are explicit indemnities which actually provide rights to the indemnified person to require the Commonwealth to essentially do the same thing in specific circumstances. Those indemnities are granted to directors of companies, for instance, that are undergoing privatisation for their engagement in the act of preparing a prospectus so that any liability they may incur as a consequence of preparing that prospectus, other than liability they might incur because of lack of diligence, lack of good faith or negligence, is underwritten by the Commonwealth because the Commonwealth is the beneficiary of their activities in undertaking that work.

The person is not the beneficiary. The company is not the beneficiary. The Commonwealth is the beneficiary because the Commonwealth receives the proceeds. I understand that it is quite customary for companies to indemnify their directors in like circumstances. Indeed, the articles of association of most companies provide scope for indemnification and most companies will provide indemnification in like circumstances.

Mr GEORGIOU —So the directors of CSL are essentially like the directors of a lot of private companies who are simply indemnified.

Mr Hutchinson —That is my understanding.

CHAIR —We might move on to recommendation 9--ministerial approval of large supply contracts. A question to health and finance: why was ministerial approval not required or sought for the change in the terms of the plasma fractionation agreement entered into between the Commonwealth and CSL? It is a billion dollar contract.

Mr Wells —The department is of the view that ministers were informed, that this was within the parameters of the original framework set by the government, that the outcome was successful and that ministers were advised progressively and ministers endorsed it. We agree with the recommendation but we regard it as a practice we follow.

Mr GRIFFIN —So they were advised or approval was required from them. I am not quite sure on that.

Mr Wells —Ministers were advised.

Mr GRIFFIN —So they were told what was happening but they didn't have any sort of role in approving or disapproving what was happening. Is that right?

CHAIR —Can I draw your attention to page 46 of the report--4.44? That is what we are quoting from. Therefore, Mr Wells, are you disagreeing with the Auditor-General?

Mr Wells —No. The Auditor-General says in 4.44 that the department `did not provide a documented briefing'. I am not disagreeing with that. But what I am saying is that the department regards that the minister was briefed.

Mr GRIFFIN —Verbally briefed, sent a telegram, pigeon?

Mr Wells —Verbally briefed.

Mr BEDDALL —There is no paper trail. There is no piece of paper that says this happened.

Mr Wells —Well there was the original cabinet submission on the sale which raised certain issues.

Mr BEDDALL —The point the chairman is making is that the Auditor-General's point was that there was no written briefing.

Mr GRIFFIN —Would that be usual with a matter like this?

Mr BEDDALL —The officers briefing surely would have had documentation from which they briefed the minister.

CHAIR —The original question was: was approval required or not required? That would have been done in writing if it was required.

Mr Wells--If it was required. But the actions that were taken were undertaken within delegated authority. So in that sense it was not necessarily required.

Mr GEORGIOU —So what happened? They said, `Sell it.' You said, `Fine,' and everything after that was delegated. What was the process? There was a decision. What advice was provided to the minister after the decision was taken about what was happening?

Mr Wells —There was the original process to cabinet. There were then oral briefings of the minister and the parliamentary secretary throughout the sale process. There was the scoping study report provided to the minister and the parliamentary secretary in December 1992. Then there was a briefing provided to the minister and the parliamentary secretary for the second reading speech on the CSL sale bill. They were the points of formal written briefing or submission.

Mr BEDDALL —A question to the Auditor-General: is that the normal procedure that is expected to take place?

Mr Barrett —I can only speak from my own experience as a long time departmental officer. I would have to say to you that if a matter of this importance were discussed with a minister I personally would always have a note for file if I did not actually have a briefing, particularly if a decision is taken. I do not think most public servants would take it upon themselves to just simply orally hear a decision and act on it. I think there would be some recognition of the fact that a decision was taken and, if necessary, sent across to the minister's office at least to be endorsed. I can only tell you from my own personal experience that it would not be normal practice for a public servant on a project of this importance.

CHAIR —The department is saying that it was not necessary to get agreement. This was merely a briefing, a verbal briefing, and it was done under delegated authority.

Mr Wells —The minister had delegated that authority.

Mr BEDDALL —Can we get a comment from Finance?

Mr Hutchinson —There are two issues here in our view. The first is whether the specific approval was within the delegation of the officer who approved it and what information the health portfolio minister received on the matter. Our view on that was that was entirely a matter within the health portfolio and not one that we who have responsibility for asset sales would have a view on. The issue we addressed was whether the action in changing that contract on the assumption that it was being done properly within authority, as indeed I think it was done, was consistent with the cabinet authority that underpinned the sale process.

That was the reason that the asset sales task force sought the advice from the Department of the Prime Minister and Cabinet in paragraph 4.42, which was to check with them, as the authority for interpretation of cabinet authority, to ensure that we were staying within the cabinet authority that would circumscribe the exercise of delegations.

The check we did in our interest--whether we were still within the right authority we had from cabinet--was positive. The execution within that positive check was a matter for the department of health, and we have no view on that.

Mr GRIFFIN —You do not have a view on the question of what sort of commitment should be done through departmental processes legally--I am not saying for one minute they were done illegally--which involves significant potential budget outlays over a number of years. Does Finance have a view on that?

Mr Hutchinson —As the Department of Finance, clearly the control of commitments, in line with forward estimates and the like, is a matter of concern to us. There are overarching arrangements in place that deal with those matters that were not the subject of this sale process. To the best of my knowledge there was no commitment entered into in this process that would breach those arrangements.

I thought the matter at issue here was whether, given the nature of this particular delegated approval, a minister within the portfolio should have been informed. My understanding of the evidence so far is that the department of health agrees with the general view, which is, yes, the minister should have been informed. They informed him orally, and it seems the view is that he should have been informed in documentary form.

Mr GRIFFIN —I think it is a little different to that. Going to the recommendations from the report, I think it is a wider question about the question of ministerial approval, as I take it, in terms of significant outlays. That is why I am a little concerned about the response initially from Health. The words that we used relate to the fact that, yes, the minister was advised. That is not what we are talking about here. We are talking about accountability. The question of advice and the mucking around we had to go through to work out exactly how they were advised, I found a bit irritating.

The question relates principally, say, to that recommendation which goes to the question of approval for significant outlays. I am not for one minute suggesting that Health has not done entirely what it should have done under the current rules. What I am suggesting is that maybe we need to be looking at whether there needs to be tightening up there, which is what the recommendation relates to.

Mr Hutchinson —On the general issue, it has always been, and it remains, a matter for each minister as to how he delegates his authority within his portfolio for the expenditure of his appropriations. That is not something that the Finance Department has, in the past, sought to intervene in at a general level beyond the fairly strict provisions of the finance act, the Audit Act, finance regulations and the like.

Mr Smith has a specific comment on this particular case. But, in general, it is a matter for each minister to settle within his or her own portfolio at what level and in what circumstances he or she will delegate his or her authority to officials.

Mr Smith —Mine is not so much a specific comment. I was going to make the point that Mr Hutchinson just made and also to add to that. In the previous purchasing regimes which existed prior to the FMIP review of purchasing arrangements back in the late 1980s, there were thresholds upon which these acquisitions had to be referred to cabinet--to ministers and so on. That was consciously considered by the previous government. It was decided that this responsibility should be devolved to ministers. So it was, in fact, a change from what you are suggesting back in the late 1980s.

Mr BEDDALL —When there is a change of minister, is each minister then made aware of the amount of delegation that was made by his or her predecessor?

Mr Hutchinson —The first point is that I understand that the Acts Interpretation Act provides for continuity of those delegations because the delegations are from the office. It is recommended good practice that, within a relatively short period of a new minister taking office within a portfolio, the minister should at least be advised of the delegations that are in place and given the opportunity to indicate whether they are acceptable. It is even better practice for a new minister to remake delegations, even if they are merely to confirm the established arrangements.

The problem with that good practice is that the volume of delegations tends to be very large in most portfolios. It is a very large and procedural bit of work to be addressed and therefore it does not perhaps get day one priority from ministers. Nonetheless, it is recommended good practice for successive ministers to reintroduce them to delegations and seek either their confirmation or variation.

Mr BEDDALL —It may be something that the Auditor-General wants to consider when looking at contingent liabilities. There are a lot of instances where delegations are some years old--some number of ministers old--and have never been brought to the attention of ministers until asked for.

Mr Barrett —If I could make a comment on Mr Beddall's comment. I certainly agree with his suggestion. It is something we will look at. We are really talking about prudential behaviour. The report is talking about what might be considered for the future. Let us not forget that, in a sense, a $1 billion debt was incurred as a result.

What we are suggesting is that consideration be given in such circumstances and that it be brought to the attention of the decision makers and whether or not, in those circumstances, individual ministers would be so happy about having that decision taken unilaterally by public servants. That is all we are suggesting. In that sense, it is a prudential matter in terms of the accountability framework.

Mr BEDDALL —But there is no question about who is finally accountable.

Mr GRIFFIN —This question is directed to both Health and Finance. We gather from the Auditor-General's report that the pricing for products supplied to the Commonwealth under the plasma fractionation agreement was calculated to afford CSL a rate of return consistent with major international pharmaceutical companies. Was this not exceptionally generous, given that the Commonwealth carries much of the product risk for CSL, whereas other pharmaceutical companies carry their own risks? The business advisers for the scoping study identified that the pricing form of the blood plasma should limit price increases to 60 to 70 per cent of world parity prices. Has this been achieved under the plasma fractionation agreement?

Mr Wells —The first parts certainly matter for Finance.

Mr Danaher —The price negotiated for the blood products was certainly not based on a target range for what was achieved by international pharmaceutical companies. It was based on CSL's particular circumstances in moving from being a government business enterprise where the government carried basically all of the risks of the business to being in the private sector where CSL saw a substantial risk in operating the plant and producing the products. The price paid at the old Parkville plant was not a commercial price. It was a cost plus arrangement whereby CSL got a mark-up on variable costs and, moving into the private sector, the price paid was a fully commercial arms-length arrangement for those products.

Mr BEDDALL —It was, I think, a 143 per cent price increase for that.

Mr Danaher —It was, but it reflected, first of all, the enormous change in the plant, that is, from the Parkville plant which was basically run down and had very outdated technology, to a modern high-tech plant with all the necessary quality controls built into it. It also reflected the assumption of operating risk by CSL for operating the plant.

Mr BEDDALL —We could not quantify the overall risk, but we could quantify the operating risk. Do they carry insurance for that?

Mr Danaher —No. The operating risk is a normal business risk of any business enterprise. They carry the risk that their product is suitable to be sold or used in the market. They carry the risk of investment that keeps the plant going. They are the normal operating risks of running any manufacturing business.

Mr BEDDALL —Let me get this right. We had an old run-down plant producing blood products--it was state of the art--and it got dearer to do it the modern way than the old way. Usually when you modernise a plant, it is to bring the unit cost down, not to increase the unit cost.

Mr Danaher —There are two issues there. It got dearer because we were moving to a commercial arrangement which reflected the full costs of operating the plant, including depreciation. Under the old arrangements, the price did not reflect the full commercial costs of operating the plant.

Mr Hutchinson —I think it is fair to talk about the change in pricing as being the sort of change in pricing you would have got by moving from a straight cash basis accounting arrangement for the old plant to an accrual and commercially sustainable based accounting system for the new plant. It is not unusual, when you break out of a cash based public service accounting for a service into a fully commercial accounting for a service, to get fairly significant changes, particularly when the production of a product, as it is in this case, is heavily capital intensive and therefore the plant and depreciation factors work through.

Mr GRIFFIN —We are starting to hit time constraints. Would the Auditor-General like to make any comment on that issue? He does not have to if he does not want to.

Mr Barrett —I am just trying to check the facts. But I was of the view that the old plant was on an accrual basis. I do not negate the point that Mr Hutchinson makes about the capital intensive nature of the processes et cetera, or the new plant; clearly the price is going to go up quite extensively. We may have to check this out, but my memory is that that was priced on a full accrual basis.

Mr GRIFFIN —Perhaps you could get back to us about that in the next week or so. I will move on to blood product funding, recommendations 11, 12 and 13. This question is directed to Health: what action have you taken or do you propose to take in relation to the recommendations that the Auditor-General made about blood product funding? I will go through a number of these points and ask you to address them in response. Does your system for blood product payments now have the capacity to reconcile CSL invoices with records of receipt of goods by the Red Cross? Has Health examined any strategies for establishing a market oriented demand for blood products? What action has Health taken to clarify the rights and obligations of the Commonwealth and CSL in relation to validation of the Broadmeadows plant? And has Health been able to identify any offsets in revenue relating to Commonwealth funding for validation of the Broadmeadows plant?

Mr Lindenmayer —We will need to split that between us.

Mr Wells —On the first question of the more market oriented approach, we accept this in principle. Part of the difficulty is that, of course, the base product on which CSL is working is freely given by blood donors and it is also covered by the various tissue acts of the states. So there are restrictions on what we can do. But we certainly would see that as a desirable objective. As part of our negotiations with the states around the COAG arrangements of greater devolution, that is certainly one of the issues we would be taking up in that context.

On the recommendation relating to validation, we have introduced a process of sampling, based on a methodology given to us by ANAO. We have tested that process of sampling batches of goods despatched from CSL and then cross-checking with receipts from the hospitals or organisations which are supposed to have received them. We have tested that, and that will be implemented fully shortly; next month is our planned implementation date. As I say, that is a system based on an ANAO package.

Mr GRIFFIN —Do systems for blood type payments have the capacity to reconcile CSL invoices with records of receipt of goods by the Red Cross?

Mr Wells —Yes. That is the sampling process.

Mr GRIFFIN —Is there any comment from the ANAO? With recommendations 14 and 15, which relate to blood product regulation, I have a question to Health again. Do you agree with the recommendation that there should be a specialised code of manufacturing practice for blood products: the Therapeutic Goods Act?

Mr James —The short answer is that the ANAO comment on 5.17 essentially sets the same issue that we are supportive of, that is, that Australia should stay at the forefront of international best practice. Our disagreement with this recommendation was not in the context of objecting to that issue; it was the formal evaluation component. The TGA has been very deeply involved with the international developments in blood for some time and we thought we were at the forefront of the international activities.

What we agreed to do, rather than formally undertake that evaluation, was to take the matter to the Pharmaceutical Inspection Convention, of which Australia is the only non-European member. This was a considerable achievement by TGA some years ago. Mr Tribe is the TGA's Chief Auditor and he took the issue to that organisation with a view to asking whether or not that was an appropriate way to go. I hand over to Mr Tribe, who will now take us through the discussions on that at the Pharmaceutical Inspection Convention and bring you up to where we are now.

Mr Tribe —The committee of officials of the Pharmaceutical Inspection Convention saw no need to prepare a special coded GMP for blood fractionation, because the existing European guidelines cover blood fractionation, amongst other things. Those guidelines for blood fractionation cover important issues such as viral inactivation. TGA has adopted those European guidelines into the Australian guidelines for the registration of drugs. These are followed by drug evaluators and GMP inspectors in Australia at this very moment.

Mr GRIFFIN —Mr Barrett, would you like to respond to TGA on that issue, given that it is against the recommendation?

Mr Barrett —No, sir.

Ms Walker —The ANAO believe that the merits of adopting a specialised code of good manufacturing were worth formal evaluation. I did not understand, Mr Tribe, whether you were going to revise that following your meetings. The one that we examined was a general code that applied to the production of injectable drugs. In our view, there was a much higher risk involved in blood products because of their human source. We thought that Australia should really be in the forefront of examining a more systematic code that was set down and which CSL would have to follow. Following your discussions, are you saying that this code is now going to be revised? This was the position at the time of the audit. Perhaps the other evidence you received is telling us that the situation is now changed.

Mr Tribe —Yes, we do have a general code of GMP which covers a wide range of non-sterile and sterile medicinal products. It is virtually identical to many other GMP codes around the world, including those in Europe. We have adopted the European guidelines on blood fractionation as guidelines for use by GMP inspectors and drug evaluators. So the code has a dual purpose, you might say. It has not been adopted as a code of GMP, but it has been adopted as guidelines in our drug evaluation procedures.

CHAIR —On that same subject, is there any risk of cross-contamination of Australian blood product supplies from imported plasma processed in CSL facilities and exported?

Dr Cable —This certainly has been a question which has troubled people over quite a long time, going back to various reports when plasma was pooled in the mid-eighties and so on. There is one fractionation plant there. We have looked at how the plant is operated in accordance with the code of GMP. In other words, the things are processed separately but the real question is whether it is two batches of Australian blood or plasma, or whether it is batches from anywhere else. The procedures in place require everything to be properly cleaned between runs.

This is audited by DMP auditors, so there is no potential for batches to be mixed, even if they come from different areas, because the product from imported plasma fractionate has to be returned from Australia back to the donating country. It is not sold here. The entry on the Australian register of therapeutic goods only allows it to be exported, so it is brought in for fractionation and then re-exported. To the extent that there is one set of equipment, the coded GMP has requirements built into it, whether it be for two batches of plasma for fractionation from Australia or for two from anywhere.

Mr Barrett —Mr Chairman, my observation on this is that, at the end of the day, the Commonwealth bears the cost of getting it wrong. That is what we talk about when we talk about the overall risk of setting strategy assessment. If the TGA has done its analysis and considers that the guidelines that they have adopted do what this recommendation is suggesting, then obviously it is superfluous. I simply reiterate that we are talking about that, if things go wrong, it is the Commonwealth that bears the cost.

CHAIR —Do you consider that was an adequate response to your recommendation on this subject?

Mr Barrett —Frankly, because I do not have the technical background, we would need to talk to the people concerned so that we understand exactly what it is that the application of the guidelines really means in practice. As I heard it, it was a fairly broad guideline as opposed to the one that was being suggested, which was a more narrowly based guideline.

We would actually have to look at that and see, in terms of risk assessment, whether or not it was worth the cost. Certainly, we would not be recommending anything that was not cost-effective in that sense. The one who is bearing the cost of the insurance at the end of the day is the Commonwealth. Again, not putting a price on it means that we do not know the cost associated with not getting it right.

Dr Cable —If I might elaborate a bit, because I realise that we did not touch on all the issues that were raised in the actual recommendations, the recommendations set out that we should review the regulatory arrangements and advise ministers whether there was a need to amend the legislation to provide greater control over imported plasma. There is one correction which the ANAO has noted and accepted in relation to 5.31. It basically says that the TGA does not have a role in relation to plasma pool testing. We have corrected that. We do have a role in relation to plasma pool testing.

In the three points of control that I outlined earlier, one is control of the donor and another is control of the plasma pool testing. That is done here in Australia, so we have control over that. It is set out in the European pharmacopoeia monograph adopted under part 2 of the act. Therefore, countries are required to meet the requirements that are set out in terms of screening pools before they are processed. We have control over the fractionation process because that sets out the viral inactivation steps and so on that need to be observed for Australian plasma. They are exactly the same for any other product. That is in the legislation, too.

The area which is more difficult--and this is the point the ANAO was referring to--is what control we can exert over the quality of control at the point of collection. Obviously, we are not able to license those collection centres because they are in other countries. In February, we met with the Australian Quarantine and Inspection Service, the Red Cross Blood Transfusion Service, the TGA and the CSL bioplasma division and discussed a guideline document that was being developed by the European Commission. That document basically sets out the criteria fractionators should include in their contracts with suppliers.

Blood fractionation on behalf of other countries is not unique to Australia. For instance, Canada has all of its plasma fractionated in the United States. In Europe there are also fractionators who fractionate on behalf of other countries. So the Europeans have developed a very useful document which sets out the sort of information that has to be included in that contract. We have negotiated with the Commonwealth Serum Laboratory for those contracts that are established with suppliers--including the Australian Red Cross--to state exactly what needs to be in place between the fractionator and the supplier, in addition to those other two points of control.

We have received written assurances from CSL that they will implement those, and they are in the process of doing that now. Our advice to the minister was to change the legislation in relation to those products from listed to registered under part 3 of the act. We will await the success of their implementation. We are in the process of having those contracts revised. They currently have agreements and they need to revise those agreements. One of the conditions is that we are provided with copies of those.

Having said that, the agreement sets in place some information. If you do not have evidence that people are complying with it, it is not terribly useful. They are, in addition to those agreements, required to conduct audits of the collection centres in the other countries and provide copies of those to the TGA for review. They are to hold those and provide them to the GMP auditors when they visit the factory or if we should require them. Each batch of plasma brought in has to be certified as complying with the requirements of the monograph in the European pharmacopoeia of human plasma for fractionation.

Those controls, if you like, are able to be exercised under the current legislation. So we do not actually see a need to change them at the moment. We do see a need to make sure the evidence is provided. If it is not, tightening that legislation would be another avenue.

CHAIR —The last area I would like to quickly cover is the task force. The Auditor-General made a series of recommendations about correct procedures for future asset sales--for example, the need for the task force to identify conflict of interest between the Commonwealth in its role as seller and in its role as regulator, and the need for regulatory agencies to provide written reports to the due diligence committee. What improvements in the handling of asset sales have resulted from the CSL experience and from the Auditor-General's recommendations on the CSL sale? Can you give examples of how lessons learnt on CSL have had an impact on the sale process for Commonwealth assets currently on your books, if any?

Mr Smith —There is an inherent difficulty for those of us who are trying to sell Commonwealth assets, in the sense that it is often difficult for us to get access to information which, by statute or some other regulatory environment, is information contained by other parts of the bureaucracy.

It was a particularly difficult issue for the CSL sale. We, as a group, decided that the best way to handle that potential conflict, as I see it, or contradiction was to have the Australian Government Solicitor operate on our behalf to make inquiries of those agencies and then to advise us on an exception basis were there any material issues which we should be addressing. The due diligence committee, which comprised the CSL board, all our advisers, the lead manager of the float, the investigating accountant and the board's own legal advisers, decided that that was a fair way to proceed and we made that known in the prospectus.

In terms of subsequent processes to the sales that I have been directly involved in since that time, it was not an issue because any regulatory environment that we got access from and agencies did not have these issues arise. The one that I am currently involved with is airports. Again, it is not a specific issue in that regard.

But I have to say that it is an inherent dilemma which I am not sure has an easy solution. I think the auditor has recognised that there is a very real need for the due diligence committee to have access to the information in the sense that we have an obligation, in our prospectuses in particular, to make known all the material risks that we are aware of.

In terms of other sales, obviously we would need to look at them on a case by case basis. But, from where I sit, I do not think there is an easy solution to that problem. How you cut across the obligations of agencies which have statutory obligations to protect information--like the Australian tax office and so on--is a very big dilemma in this particular area.

My responsibility, as I saw it, was to ensure that I could do the best I could in terms of my inquiries to identify those risks. We did that to the satisfaction of the due diligence committee and we made those risks known in the prospectus. In terms of the future, as I said, it is obviously a matter that we need to look at on a case by case basis; but I do not think there is a ready model that fits all cases.

Mr Hutchinson —Both those issues are picked up within the scope of work that we do in a scoping study prior to initiating a sale to settle how best we can address the Commonwealth's obligations both in terms of identifying risk and in terms of doing due diligence inquiries of the agencies of the Commonwealth. In subsequent asset sales we have sought to go as far as it is proper to go in pursuing the lines that the ANAO report has recommended. But, again, I think each one has been a case by case approach.

CHAIR —Mr Barrett, do you consider that an appropriate response to your recommendations on asset sales?

Mr Cronin —Picking up the points: each sale is different; but, with each sale, the Commonwealth needs to act on a whole of government basis. There were elements in this sale where the proposal at one stage was that the Department of Health was essentially going to treat TGA's involvement with CSL as if it were any other business--as if it was in the private sector. At the Commonwealth level we operate as one entity and that sort of stand is not applicable because we need to make full inquiries under the due diligence process. That is picked up in terms of the report.

CHAIR —Thank you, everybody.

[3.15 p.m.]

Audit Report No. 12, 1995-96, Risk Management by Commonwealth Consumer Product Safety Regulations