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Commonwealth policy principles for the use of private financing.



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Minister for Finance and Administration Commonwealth Policy Principles for the use of Private Financing

The Minister for Finance and Administration, John Fahey, today released the Commonwealth Policy Principles for the use of Private Financing (‘Private Financing Principles’).

"The Commonwealth Policy Principles for the use of Private Financing build on the Government’s well-established resource management framework, which already recognises the value of private sector participation in the cost-effective delivery of high quality public goods and services by the Commonwealth," Mr Fahey said.

"Privately financed projects can deliver significant benefits to the Commonwealth, and in turn taxpayers, including access to specialist expertise, innovation and the opportunity to transfer risk to those better able to manage it.

"The Commonwealth’s private financing policy recognises these benefits and establishes a principled framework for developing and carefully assessing private financing proposals at a whole-of-government level and on a case by case basis. This will ensure that private finance is adopted as the means of procurement only where it offers superior value for money.

"The Private Financing Principles will also ensure that private financing proposals meet the high public accountability and transparency requirements of Commonwealth procurement."

Mr Fahey invited discussion about the extent to which it is in the public interest to use private financing and warned against taking an opportunistic approach to its use.

"The availability of private financing should not be allowed to distort policy decision-making just because some functions might be easier to privately finance than others," Mr Fahey said.

Mr Fahey said that the Commonwealth Government intends to work with the States to maximise the extent to which Australian governments can develop a consistent approach to the assessment of private financing proposals.

"Much of the assessment involves the application of established finance theory and practice, " Mr Fahey said. "The greater the degree of harmonisation of assessment methodologies around Australia, the cheaper it will be to access the benefits of private financing. Taxpayers are not going to benefit from governments trying to ‘reinvent the wheel’ in relation to private financing."

Mr Fahey said that the challenge is to pull together the work that has already been done on the development of private financing guidelines by the Commonwealth and a number of Australian States. He said that the considerable experience of international governments is also a valuable resource.

To help the harmonisation process, Mr Fahey foreshadowed the establishment of an Australian Private Financing Industry-Government Forum.

"A number of industry participants have already indicated their strong support for the harmonisation of private financing methodologies. The Government now invites expressions of interest in involvement in a national Forum to help advance this objective.

"We will consult with the States about the shape that a national industry-government forum should take."

The Private Financing Principles will support increased industry and infrastructure development in Australia. When developing individual private financing proposals, appropriate opportunities for the involvement of small and medium enterprises will be fully explored, consistent with the Coalition’s established procurement policy.

The Government announced in the Budget this year the establishment of a central point of expertise on private financing within the Department of Finance and Administration. Guided by the Private Financing Principles, the Department’s Private Financing Unit will assist Commonwealth agencies in evaluating private financing proposals and ensuring that a whole-of-government perspective is taken.

For information on the Private Financing Principles visit the Finance web site at: www.finance.gov.au/gf/.

 

24 October 2001

 

COMMONWEALTH POLICY

PRINCIPLES FOR THE USE OF

PRIVATE FINANCING

Issued by

the Honourable John Fahey, M.P.,

Minister for Finance and Administration.

October 2001

© Commonwealth of Australia 2001

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be

reproduced by any process without prior written permission from the Commonwealth available from

Info Access. Requests and inquiries concerning reproduction and rights should be addressed to the

Copyright Manager, Department of Finance and Administration, GPO Box 1920, Canberra ACT 2601.

3

TABLE OF CONTENTS

Introduction 4

Application of the Private Financing Principles 7

Relationship with Other Commonwealth Policies 9

Core Principles 11

Principle 1: Value for Money 11

Principle 2: Transparency 16

Principle 3: Accountability 19

Assessment Process 20

Approval Process 22

Further Development 23

Attachment A: Overview of the Commonwealth Resource

Management Framework 24

Attachment B: Assessing Private Financing Arrangements 28

4

INTRODUCTION

1. Increasingly, governments both domestically and internationally have

been exploring the potential benefits that can be derived from private sector

involvement with the delivery of government outcomes. These

arrangements, often referred to as public-private partnerships, involve a

range of different relationships between governments and the private

sector, including privatisations, outsourcing and private financing.

2. The Commonwealth Government has a well established resource

management framework covering a range of activities, which sees the

Commonwealth engage the private sector to deliver high quality

government outputs more cost-effectively. The framework aims to make

the public sector more responsive to the needs of government through the

efficient and effective use of resources. Under existing procurement and

management reforms managers in Commonwealth agencies are required to

explore market opportunities for greater efficiency and effectiveness. The

impact of these reforms over the past decade is demonstrated by the range

of government funded services now delivered by the private sector.

3. This document (‘PF Principles’) builds on the Commonwealth’s

resource management framework and budgeting processes, and establishes

policy principles and processes for the use of private financing by

Commonwealth departments and agencies subject to the Financial

Management and Accountability Act 1997 (‘agencies’).

4. The term ‘private financing’ refers to a form of government

procurement involving the use of private sector capital to wholly or partly

fund an asset—that would have otherwise been purchased directly by the

Government—which is used to deliver Commonwealth government

outcomes. Private financing is generally an option to be considered for

major asset and infrastructure procurements. Private financing is often

used to support, or in conjunction with, the delivery of related services.

The procurement arrangements are managed through long term relationship

contracts with private sector financiers and service providers.

The Government has a strong record of engaging the private sector

5

5. The Government has established a specialist Private Financing Unit

within the Department of Finance and Administration. The Private

Financing Unit will work collaboratively with Commonwealth agencies

and their advisers to assist with assessing the relative merits and viability

of private financing proposals.

6. The Government recognises that the appropriate use of private

financing can provide significant benefits to the public sector, such as

access to specialist expertise and innovation, and the opportunity to transfer

risk to those better able to manage it. However, it is generally more

expensive for the private sector to raise capital through private capital

markets, than for the Commonwealth to do so directly. The critical test

when assessing a private financing proposal, therefore, is whether the

overall features of the private financing proposal provide the

Commonwealth with a net benefit when compared with traditional

procurement methods.

7. The PF Principles set out the:

a) types of arrangements to which the PF Principles will apply;

b) relationship between the PF Principles and existing policy and

processes;

c) private financing policy principles that must be considered when

developing procurement proposals which scope the use of private

financing; and

d) assessment and approval processes for private financing

proposals.

8. The Government’s objectives in establishing the PF Principles are to:

a) provide agencies with guidance, through a policy and process

framework, when developing private financing proposals and

assessing the relative merits of private financing arrangements in

comparison with other procurement methods; and

b) help ensure the effective and responsible allocation of

Commonwealth resources and fiscal management.

Private financing offers a range of benefits and costs

This document sets out principles to guide evaluation

A Private Financing Unit has been established

6

9. This document also sets out the Government’s intention to develop

further guidance for the use of private financing.

7

APPLICATION OF THE PRIVATE FINANCING PRINCIPLES

10. The PF Principles will apply to a relationship or proposed relationship

between the Commonwealth and the private sector where private sector

finance is used to fund an asset or infrastructure (whether or not ultimately

owned by the Commonwealth) that is used to deliver goods, services or

other outputs for or on behalf of an agency. The assets or infrastructure

may be used in conjunction with associated services, which may also be

delivered by the private sector, to produce an output which contributes to

the achievement of government defined outcomes.

11. The key distinguishing feature private financing from traditional

procurement is that the private sector, rather than the public sector,

acquires the underlying asset or infrastructure, at least initially. In return,

the Commonwealth makes long term commitments to pay for the resulting

outputs.

12. Debt issued under authorisation of the Treasurer is specifically

excluded from the definition of private financing. Also excluded from the

definition are contracts for services where all of the following conditions

apply:

a) the government has not traditionally owned the asset required to

provide the particular output;

b) the term of the contract is less than 5 years in duration (reflecting

the active market for the service); and

c) the service is commonly provided by the private sector (including

common business services).

13. In addition, pre-construction finance is not by itself regarded as private

financing. Pre-construction finance also includes arrangements whereby

constructors invest, on their own account, in buildings, plant and

equipment to be used in the production of assets for sale to the

Commonwealth where there is no specific financial or risk contribution by

the government.

8

14. Where there is uncertainty about the application of the PF Principles

the Private Financing Unit should be contacted.

9

RELATIONSHIP WITH OTHER COMMONWEALTH

POLICIES

15. The Commonwealth Government has an established procurement

policy and resource management framework based on the principles of

accountability, transparency and promotion of greater involvement of the

private sector in the delivery of government outputs where it delivers better

value for money. This has led to the establishment of numerous

partnerships between agencies and private enterprises. The PF Principles

build on this established framework by outlining principles and processes

for assessing whether agencies should be authorised to use private

financing in preference to alternative methods of procurement.

16. As with all forms of procurement, agencies considering using private

financing arrangements must also comply with other relevant legislative

and policy requirements, including the:

• Charter of Budget Honesty Act 1998;

• Financial Management and Accountability Act 1997 and related

legal instruments;

• Auditor-General Act 1997;

• Freedom of Information Act 1982;

• Chief Executive’s Instructions;

• Outcomes and Outputs Framework;

• Commonwealth Competitive Neutrality Policy (1998);

• National Competition Policy (1995);

• Public Works Policy (1998);

• Public Works Committee Act 1969;

• Competitive Tendering and Contracting (1998);

• Commonwealth Procurement Guidelines and Best Practice

Guidance (2001);

A mature framework already exists in the Resource Management Framework

Existing policies impact on private financing

10

• Model Industry Development Criteria (1997); and

• Commonwealth Property Principles (1997).

Further information about legislative and policy requirements is at

Attachment A.

17. The above legislation and policies provide, inter alia, a framework for

testing the delivery of government funded services against market

benchmarks and explicitly require agencies to actively search out

opportunities for increasing value for money for the Commonwealth.

18. The objective of the PF Principles is not to change the existing policy

framework in respect of private sector participation in the delivery of

public services. For example:

• the PF Principles supplement and do not diminish a Chief

Executive’s responsibility to promote the efficient, effective and

ethical use of Commonwealth resources, as defined in the Financial

Management and Accountability Act 1997; and

• in the case of Model Industry Development Criteria, the

requirement remains that agencies must clearly identify in tender

documentation any industry development criteria and associated

evaluation methodology and, where appropriate, opportunities for

small and medium enterprise participation.

19. The PF Principles add to and reinforce the need for special analysis

and appropriate protection of the longer-term interest of the

Commonwealth, while reflecting the unique features of private financing

arrangements.

20. The PF Principles, which deal with how an output should be procured,

do not displace existing policy and budget processes for deciding which

outcomes are to be funded.

Chief Executive’s responsibilities under Commonwealth legislation remain intact

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CORE PRINCIPLES

21. This section discusses the three core principles for assessing whether

private financing should be the preferred procurement method used: value

for money; transparency; and accountability.

22. While private financing has the potential to deliver net benefits to the

government, the arrangements often involve a more complex set of

operational, management and financial risks than traditional approaches.

Accordingly, the development and assessment stage of private financing

proposals warrants more detailed and specialist analysis. Meeting this

challenge will typically require the engagement of specialists in fields such

as financial modelling, project financing, risk assessment and tax, to help

determine the implications of available options for the relevant agency and

government as a whole.

P r i n c i p l e 1 : V a l u e f o r M o n e y

23. A core principle that underpins procurement activity, including the use private financing, is value for money. In the context of assessing a private

financing proposal, value for money is to be tested by comparing the

outputs and costs of private financing proposals against a neutral

benchmark, called the Public Sector Comparator, developed by the agency

(and its advisers) in consultation with the Private Financing Unit. The

Public Sector Comparator should reflect the most efficient public sector

delivery option likely to be achieved for the relevant project.

24. The Public Sector Comparator may include the cost-effective use of

outsourced service delivery and would be prepared on a risk-adjusted basis.

A key consideration in this regard is the selection of an appropriate

discount rate to compute the net present value of the payment streams

under each option. It is also important to ensure consistency with the

Commonwealth’s Competitive Neutrality policy.

25. Value for money should be assessed on a whole-of-life and whole-of-government basis. Factors which add value to a private financing proposal

Recognising the need for specialised skills is important for successful development and assessment

Value for money is paramount

The Public Sector Comparator should be best practice

12

include innovation, risk transfer, improved asset utilisation, ownership and

management synergies, and improved project management.

• The private sector’s ability to provide innovative solutions to

procurement is often a crucial driver in delivering net benefits to the

Government. This innovation may derive from either a service

related efficiency, or a unique asset configuration. Agencies will be

encouraged to specify deliverables in terms of service outputs rather

than on the basis of inputs.

• The ability to transfer risk is one of the most powerful drivers of

private financing. Access to specialist expertise in the private

sector can enable agencies to devolve or shift many key project

risks to contracted parties. Allocation of the risks to the party best

able to manage risks will usually result in the optimum business

outcome.

• Private financing may give the private operator scope to generate

third party income (e.g. by leasing assets to third parties when not

needed by Government). This allows more efficient utilisation of

economic assets and hence spreads fixed costs more effectively.

• Frequently the ownership of an asset by the same entity that is

responsible for the service delivery component of the output can

provide significant benefits through synergies. This is often true of

complex assets or large infrastructure projects, where management

is best applied by parties which have some nexus with the design

and construct phase.

• Private financing could lead to improved project management, in

terms of cost, time and operating efficiency of the end product.

26. Public interest considerations may also impact on the assessment of

the value of certain private financing proposals.

Cost and risk issues

27. As discussed above, a common component of private financing is the

use of capital funds raised by the private sector to make an investment that

Innovation

Ownership and Management Synergies

Improved Asset Utilisation

Risk Transfer

Improved Project Management

13

will ultimately be used to deliver government outputs. The cost of raising

capital is generally more expensive for the private sector than for the

Commonwealth. This is the case even where the Commonwealth is, or will

be, contractually obliged to pay a revenue stream to the private sector

entity. This additional capital raising cost, plus a margin, will be reflected

in the price offered to the Commonwealth.

28. Private financing, through value for money improvements, may

facilitate the early development of major infrastructure projects or the

procurement of assets, however such initiatives need to be assessed to

ensure there is no compromise to the Government’s overall fiscal strategy.

29. Analysis of risk is critical to the value for money determination and

is likely to be the deciding factor in many private financing proposals.

Evidence of a beneficial risk transfer will be reflected in such factors as:

a) little dependency on direct or implied Commonwealth

commitments other than the commercial obligation to pay the

agreed price for services, capacity or other output delivered;

b) asset ownership risks such as equipment suitability for purpose,

normal maintenance costs and residual value are effectively

passed to the private sector;

c) the private operator has specialist skills and can be appropriately

and equitably encouraged to apply those skills; and

d) the Commonwealth either does not bear or has little exposure to

specific risks such as residual value and indemnification.

30. Some other considerations relevant to private financing proposals

include:

a) arrangements which involve little or no transfer of risk (for

example finance leases and quasi-finance leases) are unlikely to

provide government with value for money given the relative costs

of capital;

b) risks should be allocated to the party best able to efficiently and

effectively manage them at least cost;

Analysis of risk is critical

14

c) if Commonwealth guarantees or indemnities are issued, the price

should be reduced to reflect the risk assumed through those

guarantees or indemnities (see Finance Circular 1997/06 issued

by the Department of Finance and Administration); and

d) scope should be retained for ongoing and post-implementation

monitoring of private financing arrangements to ensure that

intended outcomes and key performance indicators are being

achieved.

31. An important issue in the whole-of-government assessment of private

financing proposals is consideration of the potential implications for tax

revenue flowing from the use of private financing arrangements. There is

potential for the Commonwealth to face hidden costs through revenue

forgone resulting from the use by the private sector of tax effective

arrangements, and this should be accounted for in the final calculation of

relative value for money at a whole-of-government level.

Defining Options

32. For each initiative, all reasonable and competitive procurement

options should be scoped. Options involving private finance should be

assessed to identify those warranting full costing and assessment.

Similarly, the best of the non-private financing options should be identified

as the Public Sector Comparator for full costing and assessment. This

more detailed analysis must include the full extent of whole-of-life

acquisition and support costs, regardless of who provides the finance for

the project.

33. As part of the process of considering the various options for

procurement, agencies need to:

a) develop contract requirements that are clearly specified in flexible

outcome and output terms, rather than detailed input

specifications;

b) ensure that service evaluation standards and key performance

indicators are clear, achievable and objectively verifiable against

delivery;

Managers should look to all competitive options

15

c) be able to assess all of the risks, their proposed allocation in the

contract framework (including any proposed financial security

arrangements), and the consequential impact on the costs and

achievement of the overall project objectives;

d) consider the individual components of a private financing

proposal on their own merits, to ensure the accurate assessment of

the proposal and to highlight any cross-subsidisation that may not

be apparent if the components are assessed collectively; and

e) be aware that the assessment of the unbundled components

comprising the output may indicate that better value is achieved if

the Commonwealth uses its ability to access cheaper finance to

acquire the underlying asset or assets.

Unbundling is unlikely to be appropriate where it would reduce or

eliminate efficiency and/or operational synergies between the components

or when it creates additional risk exposure for the Commonwealth.

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P r i n c i p l e 2 : T r a n s p a r e n c y

34. Transparency is a key requirement of any procurement. Transparency and openness are important requirements of all government procurement.

The use of private financing should not diminish the availability of

information to Parliament, taxpayers and other stakeholders on the use of

government resources. Accordingly, agencies must ensure that appropriate

mechanisms are in place to meet established reporting requirements, such

as disclosure of information to Parliamentary Committees. For example,

the Parliamentary Standing Committee on Public Works considers and

reports on Commonwealth public works projects referred to it (refer to

Attachment A).

35. Completed private financing contracts should be disclosed in an

agency’s annual report in accordance with the Finance Minister’s Orders.

Financial statements included in an agency’s budget documentation should

be prepared on a basis consistent with the annual report. Private financing

contracts may involve risks or possess other features to which provisions of

the Charter of Budget Honesty Act 1998 (‘Charter’) apply. The Charter

provides for this by requiring fiscal strategy to be based on principles of

sound fiscal management and by facilitating public scrutiny of fiscal policy

and performance.

36. Private financing arrangements must have regard to the following:

a) the financial reporting of proposals will need to comply with

Australian Accounting Standards (in agency accounts) and

Government Finance Statistics standards (in the general

government sector accounts);

b) any proposed classification of information or documents as

‘commercial-in-confidence’ will need to be considered on a case

by case basis. Any successful private financing proposals that

contain commercial-in-confidence provisions are required to

maintain appropriate scope for the Commonwealth to disclose

general contract information, consistent with the provisions of the

Disclosure should not be reduced

17

Freedom of Information Act 1982 and meet agency accountability

obligations. Agencies should refer to ANAO Audit Report

(2000/2001) No. 38, The Use of Confidentiality Provisions in

Commonwealth Contracts, Chapter 4, for specific criteria relating

to confidential information;

c) agencies must comply with the Senate order on the reporting of

Government Agency Contracts of 20 June 2001, in accordance

with the terms outlined by the Government; and

d) the Auditor-General’s authority to access documents, information

and premises in accordance with the Auditor-General Act 1997.

37. Further, Commonwealth agencies will need to comply with the

Commonwealth’s mandatory reporting requirements for procurement (refer

to Box 1).

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Box 1: Reporting Requirements for Commonwealth Contracts

Under the Commonwealth Procurement Guidelines, agreements for the procurement of goods and services under which the Commonwealth is obliged, or may become obliged, to make payment of public money of $2000 (inclusive of GST) or more must be notified in the Gazette. These include any purchase order, oral or written contract or lease, a corporate credit card transaction, as well as an arrangement such as a standing offer to supply (such as a national or otherwise approved supply agreement for common use suppliers), a period contract, a service contract, or a maintenance agreement.

Required information includes:

• the ministerial portfolio, department or agency, division or group, branch

or office;

• a description of the goods or services sufficient to identify the nature and

quantity of the procurement;

• for contracts arranged, the purchase order number, total estimated liability

(Australian currency) and date;

• for standing offers or similar arrangements, the total estimated value

(Australian currency) and period of the offer;

• the identity of each supplier (including each party to a standing offer or the

like); and

• the name and telephone number of the contact officer for inquiries about

the notification.

In addition, agencies are required to:

• provide information on request to Members of Parliament, Senators and

the public after the tabling of annual reports as specified in the

Requirements for Departmental Annual Reports;

• remedy instances of failures to gazette as notified in their annual reports

by subsequent reporting in the Gazette;

• report to the Affirmative Action Agency when they have rejected

competitive bids from suppliers not compliant with the Affirmative Action

(Equal Employment Opportunity for Women) Act 1986; and

• refer public works costing in excess of $6 million to the Parliamentary

Standing Committee on Public Works, and notify it of proposals for public

works of estimated value of between $2 million and $6 million.

If the Chief Executive of an agency decides that details of a contract or standing

offer are exempt matters under the Freedom of Information Act 1982, he or she may

then direct in writing that the details are not to be notified in the Gazette.

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P r i n c i p l e 3 : A c c o u n t a b i l i t y

38. Agencies are responsible for the delivery of their outputs even through the use of private financing. Agencies are not able to transfer

accountability to a private sector entity, irrespective of the procurement

method.

39. The potential for private financing to alter traditional risk allocation

also requires close attention to how existing accountability arrangements

impact on the relationship between agencies and contractors.

40. Included in all private financing arrangements should be standard best

practice clauses on audit access, security, privacy, and parliamentary

access.

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ASSESSMENT PROCESS

41. Where private financing arrangements are tested against the principles

in this document, and before any Ministerial approval can be sought,

agencies must prepare a detailed business case using cost-benefit analysis.

This analysis is required to be undertaken on a whole-of-government basis

and take into account whole-of-life costing. In particular, the business case

should:

a) clearly identify where the risks and responsibilities lie, including

the allocation of risks and costs between the Commonwealth and

other parties under the proposed contractual framework. This

will require preliminary costing of the risks proposed to be borne

by the Commonwealth and the private provider and assessing

them in view of the project objectives;

b) assess the implications of the proposal for broader budget revenue

and expenditure impacts from a whole-of-government

perspective. This is particularly important in those proposals

where the access to private capital allows the agency to bring

forward major capital expenditure;

c) identify any tax implications, including any tax advantage that the

private sector might access, and contain strategies for managing

and/or accounting for this;

d) include, for comparison purposes, a preliminary Public Sector

Comparator (discussed above); and

e) also consider other issues that may be material to an informed

assessment of the proposal (eg. intellectual property).

42. A schematic outlining the assessment process to be followed when

considering the use of private financing is at Attachment B.

43. An important role of the Private Financing Unit is to ensure that

analysis of private financing proposals has adequately addressed the policy

principles outlined in this document. Agencies are encouraged to work

A business case should inform on all aspects of a proposal

21

collaboratively with the Private Financing Unit and to contact the Private

Financing Unit when:

• a potential private financing proposal is identified;

• identifying alternative procurement methods and defining options; and

• developing business case requirements for proposals.

22

APPROVAL PROCESS

44. Chief Executives will have a delegated authority to approve private

financing arrangements, where the asset replacement value does not exceed

$20 million and the proposal complies with the PF Principles. Further,

regardless of the $20 million threshold, proposals are to be submitted for

the approval of the Minister for Finance and Administration where they

have the potential to significantly limit or impact on an agency’s future

activity or the Government’s fiscal position.

45. All private financing proposals involving assets with a replacement

value in excess of $20 million must have been previously authorised by the

Minister for Finance and Administration. In addition, the full Government

is to be consulted in relation to proposals exceeding $50 million. Both the

$20 million and $50 million thresholds may be reviewed in the future.

46. The Private Financing Unit’s role includes overseeing, on behalf of

Government, the application and development of the PF Principles. The

Private Financing Unit will provide advice to Government and agencies on

the use of private financing arrangements generally, and the assessment of

specific proposals.

47. A key role of the Private Financing Unit will be to advise on the

relative value of private financing as an alternative to traditional

procurement, in order to choose between private financing and traditional

procurement prior to any decision committing the government to a

procurement method.

48. Agencies are encouraged to contact the Private Financing Unit at an

early stage in the development of major private financing proposals to

ensure a common understanding of options and business case requirements.

The Private Financing Unit will work collaboratively with agencies from

the inception of a proposal to determine the prima facie suitability of

private financing.

49. A schematic outlining the process to be followed when considering the

use of private financing is at Attachment B.

The Finance Minister has power of approval

23

FURTHER DEVELOPMENT

50. The PF Principles are the first part of a body of documentation aimed

at developing a Commonwealth framework for considering the use of

private financing.

51. In issuing this document, the Government has sought to maintain

flexibility in applying best practice methodologies to the development and

assessment of private financing proposals. It is expected that further

guidance papers will be developed and issued by the Private Financing

Unit for public consultation. This will support the development of a

thorough and enduring private financing policy framework commensurate

with experience gained from the application of private financing in the

Australian context.

24

OVERVIEW OF THE COMMONWEALTH RESOURCE

MANAGEMENT FRAMEWORK

Charter of Budget Honesty

The Charter of Budget Honesty Act 1998 puts in place a legislative framework for the

conduct and reporting of Government fiscal policy. The purpose of the Act is to

improve fiscal policy outcomes by requiring the Government's fiscal strategy to be

based on principles of sound fiscal management and by facilitating public scrutiny of

fiscal policy and performance.

Financial Management and Accountability Act

The Financial Management and Accountability Act 1997 sets out the financial

management, accountability and audit obligations on agencies (including

departments) forming part of the general Government sector, in particular:

• for managing public resources efficiently, effectively and ethically; and

• for maintaining proper accounts and records of the receipt and expenditure of

Commonwealth money.

Auditor-General Act

The Auditor-General Act 1997 is a set of greatly streamlined requirements for

Australia’s Auditor-General, one of our principal assurances of accountability, and

focuses on audit goals rather than processes. The aim is to promote unequivocal

accountability in the output and outcomes based budgeting system and reporting and

knowing the true cost of government. The Auditor-General Act creates the office of

the Auditor-General for the Commonwealth and defines the powers and functions of

that office to support its functional independence. To augment that functional and

professional independence, the Act also establishes the Australian National Audit

Office as a statutory authority to assist the Auditor-General in the performance of the

audit task.

ATTACHMENT A

25

Freedom of Information Act

The basic purpose of the Freedom of Information Act 1982 is to improve the quality

of decision-making by government agencies in both policy and administrative matters

by removing unnecessary secrecy surrounding the decision-making process, and to

enable groups and individuals to be kept informed of the functioning of the decision-making process as it affects them and to know the kinds of criteria that will be applied

by government agencies in making those decisions.

Chief Executive’s Instructions

The Chief Executive Instructions are the means by which departments set out their

internal financial policies in accordance with the requirements of the Financial

Management and Accountability Act 1997. The Chief Executive Instructions address

the range of business functions and provide clear directions for all staff.

Outcomes and Outputs Framework

All Commonwealth agencies are required to report on the basis of an outcomes and

outputs framework. The framework has two basic objectives: to improve agencies

corporate governance and to enhance public accountability. The framework is best

used both as a means of structuring corporate governance and management

arrangements and reporting on planned and actual performance. Within the broad

parameters of the framework, agencies and their ministers have considerable scope for

adopting specific structures and arrangements that suit their circumstances and

objectives.

Commonwealth Competitive Neutrality Policy

Commonwealth Competitive Neutrality policy requires that significant

Commonwealth business activities do not enjoy net competitive advantages over their

private sector competitors simply by virtue of public sector ownership. Under the

policy, competitive neutrality adjustments are made to the costs of a Government

business to ensure that relevant costs and margins that apply in the private sector also

apply to the relevant Government business. The policy is based on the Competition

Principles Agreement signed by the Commonwealth and all States and Territories in

1996.

26

National Competition Policy

In April 1995, all Australian governments reached agreement on a National

Competition Policy for Australia. Related reforms in the electricity, gas, water and

road transport industries also form part of the package. Reforms in these areas were

agreed at meetings of the Council of Australian Governments and the Heads of

Governments. For some areas of reform, agreements reached by inter-jurisdictional

bodies such as Ministerial Councils are also relevant.

Public Works Policy

The Department of Finance and Administration develops and co-ordinates policies

related to public works undertaken by Commonwealth agencies. This includes

providing advice and support to the Minister on relevant issues, and representing the

Commonwealth on the Australian Procurement and Construction Council (APCC).

The National Code of Practice for the Construction Industry and the Commonwealth

Implementation Guidelines for the National Code of Practice for the Construction

Industry provide the framework for the Public Works Policy.

Public Works Committee Act

The Public Works Committee Act 1969 empowers the Public Works Committee to

inquire into and report to the Parliament on each public work referred to it, including

works that are initially funded and constructed by others but are eventually transferred

to the Commonwealth. Such transactions may be described as Build, Own, Operate,

Transfer (BOOT) arrangements. The Act requires that all public works for the

Commonwealth which are estimated to cost more than $6m must be referred to the

Committee. There are some exceptions to this rule, but essentially all public works

sponsored by Commonwealth authorities come within the ambit of the Committee's

investigatory powers.

Competitive Tendering and Contracting

All Commonwealth Financial Management and Accountability agencies are required

to systematically review the activities they undertake to identify whether an activity

should be retained by the Commonwealth, devolved to a more appropriate level of

Government, such as State/Territory Government or Local Government, privatised or

discontinued. Where the decision is made to retain the activity or service, agencies

are required to market test relevant activities or services.

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Competitive Tendering and Contracting (CTC), enables agencies to explore

alternative service delivery options. CTC, also referred as the market testing process,

has become an integral part of the way Commonwealth government agencies manage

their resources. Following market testing the agency must make a decision as to who

is best suited to provide the service and what form of contract is most suitable for

managing the service provision. Managers must be satisfied that any decisions they

make represent value for money.

Commonwealth Procurement Guidelines

The Commonwealth Procurement Guidelines clarify what is required and expected in

Commonwealth procurement activity. They allow agencies to decide how best to

handle their affairs, taking account of their own circumstances and the nature of the

markets in which they are operating. The guidelines are intended to strike a balance

between prescription and empowerment so as to encourage agencies to obtain the best

value from procurement, on a whole-of-life basis.

Model Industry Development Criteria

Agencies are required, as outlined in the Commonwealth Procurement Guidelines, to

identify clearly industry development requirements in tender documentation. The

threshold for consideration of the six Model Industry Development Criteria (MIDC) is

for Commonwealth projects valued in excess of $5 million. MIDC Guidance Notes

assist Commonwealth officers to set industry development requirements in tender

documentation and provide a methodology to help officers to evaluate a prospective

tenderer's ability to satisfy industry development requirements.

Commonwealth Property Principles

The Commonwealth Property Principles outline the basis for the continued ownership

and development of domestic and overseas Commonwealth property. The principles

encourage the efficient, effective and transparent decision making and accountability

for management of Commonwealth-owned property.

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ASSESSING PRIVATE FINANCING ARRANGEMENTS

ATTACHMENT B

Scope the market • Approach the market to determine the nature of the private sector’s interest. • Analyse market characteristics. • Seek advice on how the private sector is able to

manage risks. • This may include seeking industry consultation, briefings or expressions of interest on PF and/or

PSC options without prejudicing or committing Government.

Develop the Public Sector Comparator (PSC) • Develop a base case PSC to serve as the benchmark option. • Ensure that the PSC incorporates all the efficiencies

in service delivery that could realistically be achieved for that option. • Document the costs, benefits and risks inherent in the government-funded option. • Make allowance for competitive neutrality. • Refine throughout process as new information

becomes available.

When identifying and defining options which involve private financing, agencies may seek assistance from the PFU when necessary.

Identify options • Identify alternative means of delivering the investment requirement. • Allow scope for innovation in service delivery.

Project management • Appoint project management team. • Develop project management plan. • Identify critical decisions. • Create project timeline.

Identify investment requirement • Output-based requirement. • Government endorsement of policy and outcome.

Agencies approach PFU when a potential private financing proposal is identified.

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Agencies should consult

with PFU at this stage on the business case requirements for major proposals.

Develop options • Test options against policy principles. • Establish whether unbundling can be achieved. Ask the question ‘to what extent can the financing be

unbundled from service?’ • Consider the opportunities for risk transfer. • Identify whole-of-government impacts, costs and

benefits. • Elaborate on the identified options by incorporating the information gained from the market. • Continue to refine throughout process as new

information becomes available.

Indicative Business case analysis • Conduct risk analysis. • Quantify and price risk. • Conduct quantitative whole-of-life financial

evaluation. • Evaluate qualitative impacts, costs, benefits and risks. • Whole-of-government perspective. • Compare PF option with the PSC on a value for

money basis. • Discuss results with PFU.

Engage the market • As no single purchasing method suits all situations the Government does not prescribe a specific purchasing method nor any arbitrary thresholds.

Buyers must consider the requirements and existing market conditions of each procurement, and select a procurement method on its merits.

Approval process • For private financing arrangements involving assets with a replacement value >$20 million, approval from the Minister for Finance must be sought. • For proposals >$50 million, full Government must

be consulted. • For proposals that do not exceed $20 million, it is expected that the arrangement will comply with the

general principles. However, PFU scrutiny is not required.

PFU advises Minister / Government as required.