VOLUME 1 - MAIN REPORT
State Government of Victoria
VOLUME 1 - MAIN REPORT
State Government of Victoria Printed on recycled paper
Contents – Volume 1 – Main Report
VOLUME 1 – MAIN REPORT
CONTENTS
PRINCIPAL FINDINGS AND RECOMMENDATIONS...... 1
OVERVIEW...... 1 VOLUME 1...... 2
1. PRIVATISATION AND CONTRACTING: 1992-99 ...... 2 2. OBLIGATIONS AND LIABILITIES OF THE STATE...... 2 3. PROBITY AND DISCLOSURE ...... 3 4. DISCLOSURE OF EXISTING CONTRACTS...... 4 VOLUME 2...... 4
GENERAL FINDINGS FROM THE CASE STUDIES ...... 4
INTRODUCTION – VOLUME 1 ...... 5
CHAPTER 1 VICTORIAN GOVERNMENT PRIVATISATION AND CONTRACTING 1992-99...... 7
1. BACKGROUND, OBJECTIVES AND SCOPE OF CONTRACTING...... 7 1.1 Background – The Position in 1992 ...... 7 1.2 Objectives of the Former Government in Contracting and Privatisation ...... 11 1.3 Scope of the Contracts Entered into by the Previous Government ...... 13
2. SOME KEY OUTCOMES OF THE CONTRACTING AND PRIVATISATION PROCESS ...... 16 2.1 Financial and Economic Outcomes ...... 16 2.2 Policy Framework ...... 18 2.3 Debt Reduction ...... 19 2.4 Restored Credit Rating...... 19 2.5 Social and Environmental Outcomes...... 20 2.6 Regional Impacts ...... 22 2.7 Impacts on Governance and Regulation...... 23 2.8 Impact on the Size and Role of the Victorian Public Service ...... 25 2.9 Assessment of the Overall Impact of Previous Government’s Contracting...... 27
3. SOME LESSONS FOR THE FUTURE ...... 28 3.1 The Nature of Contracting ...... 28 3.2 The Decision to Contract...... 28 3.3 Strengths and Weaknesses of Contracting ...... 31 3.4 Need for Prior Economic, Environmental, Social and Regional Studies...... 32 3.5 The Potential Contribution of Parliamentary Committees ...... 36 3.6 Cabinet and Treasury Consideration ...... 36 3.7 Assessment of Previous Government’s Approach to the Pre-Contract Phase...... 37 3.8 Benchmarking...... 37 3.9 Performance Measurement ...... 39
i. Contents – Volume 1 – Main Report
3.10 Financial Management and Reporting ...... 42 3.11 Concluding Comments...... 43
CHAPTER 2 OBLIGATIONS AND LIABILITIES...... 45
1. INTRODUCTION ...... 45 1.1 Interpretation of Term of Reference...... 45 1.2 Reporting of Obligations and Liabilities...... 46 1.3 Confidentiality ...... 47
2. ELECTRICITY ...... 48 2.1 Distribution Businesses...... 48 2.2 PowerNet Victoria ...... 48 2.3 Generators...... 49 2.4 Herman Research Laboratories...... 51 2.5 Residual Liabilities of SECV ...... 51
3. GAS ...... 52 3.1 Gas Distribution/Retail Businesses...... 52 3.2 GFE Resources ...... 54 3.3 Heatane...... 54
4. PORTS OF PORTLAND AND GEELONG ...... 54 5. MISCELLANEOUS ASSET SALES...... 55 5.1 State Plantations...... 55 5.2 Aluvic...... 55 5.3 Grain Elevators Board...... 56 5.4 TABCORP Float...... 57
6. TRANSPORT ...... 57 6.1 Passenger Trains and Trams ...... 57 6.2 V/Line Freight ...... 59 6.3 West Coast Railway and Hoys (Cobram Line) ...... 59 6.4 OneLink ...... 59 6.5 Buses ...... 61 6.6 VicRoads Plant ...... 61
7. CITYLINK...... 62 8. PRISONS ...... 64 9. HOSPITALS AND HEALTH SERVICES ...... 64 9.1 La Trobe Hospital...... 64 9.2 Mildura Base Hospital ...... 65 9.3 Health Services Contracts...... 65 9.4 Hospitals Cogeneration Project ...... 66
10. INFORMATION TECHNOLOGY OUTSOURCING ARRANGEMENTS...... 66 10.1 Traffic Camera Office/Enforcement Management Unit ...... 66 10.2 Victoria Police IT Outsourcing ...... 67 10.3 VicRoads IT Outsourcing and PTC IT Outsourcing ...... 67
ii. Contents – Volume 1 – Main Report
11. MAJOR PROJECTS...... 68 11.1 Federation Square ...... 68 11.2 Multi-Purpose Venue...... 69 11.3 Museum...... 69 11.4 State Library ...... 70 11.5 Royal Park Netball Stadium...... 71 11.6 Grand Prix ...... 72 11.7 Docklands Authority Contract with Transfield-Powercor for Development of Trunk Infrastructure...... 73 11.8 Sports and Aquatic Centre ...... 74 11.9 Immigration Museum...... 74 11.10 Exhibition Centre...... 75 11.11 Crown Casino ...... 75 11.12 Sale of 452 Flinders St...... 75 11.13 Leeds Media Advertising Agreement ...... 76 11.14 Melbourne and Olympic Parks Trust Contract with Ticketek...... 76 11.15 Beacon Cove Redevelopment...... 76 11.16 Kensington Banks Redevelopment...... 77
CHAPTER 3 PROBITY AND DISCLOSURE (TOR 2)...... 79
1. BACKGROUND...... 79 2. TERM OF REFERENCE 2 ...... 79 PROBITY ...... 80
3. PUBLIC AND PRIVATE SECTOR COMMERCIAL DEALINGS...... 80 3.1 Private Sector Standards of Conduct...... 80 3.2 Government Commercial Dealings and the Level Playing Field ...... 80
4. TENDERS ...... 82 4.1 General Principles...... 82 4.2 Emerging Best Practice...... 83 4.3 The Traditional Legal Rules of Tendering ...... 83 4.4 Tendering Processes ...... 85 4.5 Probity Adviser and Auditor ...... 89 4.6 Conflict of Interests ...... 91 4.7 Accountability...... 91
5. CONTRACT AWARD ...... 92 5.1 Informing the Market ...... 92 5.2 Making the Contract...... 93 5.3 Contract Administration...... 94 DISCLOSURE...... 95
6. CONFIDENTIALITY AND OPEN GOVERNMENT...... 95 6.1 Report by the Public Accounts and Estimates Committee...... 95 6.2 The Context – Democratic Government...... 96
iii. Contents – Volume 1 – Main Report
7. THE LAW OF CONFIDENTIALITY ...... 99 7.1 Origins...... 99 7.2 The Principles ...... 99 7.3 Confidentiality and Government ...... 103
8. FREEDOM OF INFORMATION ...... 107 8.1 The Philosophy of the Legislation...... 107 8.2 The Victorian FOI Legislation ...... 108 8.3 Secrecy Requirements in other Legislation...... 113 8.4 The Effect of Contracting out on FOI ...... 114 8.5 Reform...... 117
9. GOVERNMENT INFORMATION AND DISCLOSURE...... 119 9.1 The FOI Balance as a Guide to Disclosure ...... 120 9.2 Information Prior to Award of a Contract...... 120 9.3 Disclosure on Announcement of the Award of a Contract...... 120 9.4 Disclosure of Contracts ...... 121 9.5 Contractual Performance ...... 126 9.6 Practices in Other Jurisdictions ...... 127 9.7 Who Should have Access?...... 128 9.8 Public Records...... 134
10. CONCLUSION...... 134
CHAPTER 4 DISCLOSURE OF EXISTING CONTRACTS...... 135
1. DISCLOSURE OF EXISTING CONTRACTS (TOR 3) ...... 135 1.1 Existing Obligations of Confidentiality ...... 135 1.2 Who is Bound? ...... 135
2. RECOMMENDATIONS...... 136 TABLE - RECOMMENDATIONS IN RESPECT OF RELEASE OF SPECIFIC CONTRACTS ...... 137
RECOMMENDATIONS OF THE AUDIT REVIEW OF GOVERNMENT CONTRACTS ...... 165
iv. Principal Findings and Recommendations
PRINCIPAL FINDINGS AND RECOMMENDATIONS
OVERVIEW
The contracting activities of the previous Government had mixed results. From a financial and economic standpoint, the contracts brought very substantial benefits to Victoria. The government is now in a position to proceed on a sound basis, without overwhelming debt and with the confidence of financial markets.
On the other hand, the previous Government seriously neglected important aspects of the social, environmental and regional impacts of its contracting activities. Remedial work will be needed to overcome problems in these areas. Some contracts will need to be renegotiated and some legislative changes will be needed.
Unnecessary secrecy surrounded the sale of key assets and major contracts. The Report makes a number of recommendations designed to ensure that in future Victoria is a model of open and transparent government.
No allegations or instances of corruption were brought to the attention of the Review, though there were some instances of poor process. The Review has recommended that a number of contracts of concern should be referred to the Auditor-General for report and that a variety of social, economic and environmental studies should be undertaken, as detailed in the Case Studies.
The Review has also made recommendations for good practice in evaluating major projects before they proceed.
In regard to the specific Terms of Reference given to the Review by the Premier:
• Term of Reference 1: "... report on the significant ongoing obligations and contingent liabilities …"
None of the contracts entered into by the previous Government imposed any unreasonable financial obligations on the State. The contracts do, however, require the government to pay some $11 billion over the next 20 years for the supply of services by private sector contractors. Some non-financial obligations seriously hamper government action and policy development.
• Term of Reference 2: "… provide recommendations for probity and disclosure …"
The Review recommends that, in future, the government should disclose contracts to which it is a party, except where it is essential to limit disclosure, for example, to protect commercially sensitive information. This should be implemented by legislation.
• Term of Reference 3: "… report on…the possible release of specific major contracts …"
The Review recommends that, where possible, existing government contracts should be disclosed to the public after negotiation with the contractors concerned.
1. Principal Findings and Recommendations
• Term of Reference 4: "… the need for further investigation … [and based on] … a number of Case Studies … an initial assessment of the extent to which the Victorian public benefited …"
The Review looked in detail at seven Case Studies, covering a representative sample of the major contracts entered into by the previous Government. These Case Studies detail a number of financial and non-financial benefits and disbenefits associated with the contracts reviewed.
VOLUME 1
1. PRIVATISATION AND CONTRACTING: 1992-99
• The previous Government successfully tackled the State’s unsustainable debt and budgetary situation, restored private sector confidence and put the economy back on a strong growth path. • With its central focus on fiscal issues, the former Government placed less emphasis than it should have on the environmental and social impacts of its policies. • Unnecessary secrecy surrounded the sale of key assets and major contracts. The Report makes a number of recommendations designed to ensure that in future Victoria is a model of open and transparent government. • No allegations or instances of corruption were brought to the attention of the Review, though there were some instances of poor process. The Review has recommended that a number of contracts of concern should be referred to the Auditor-General for report and that a variety of social, economic and environmental studies should be undertaken, as detailed in the Case Studies. • Both the private and public sectors have the capacity to provide services to the community. In determining the mix between public and private provision, governments often have to balance financial considerations against other factors. • No major projects should proceed without first being subject to appropriate economic and environmental evaluation and Treasury and Cabinet consideration. • The Victorian experience between 1992-99 provides valuable lessons - both good and bad - on how responsibilities should be allocated across the two sectors.
2. OBLIGATIONS AND LIABILITIES OF THE STATE
• None of the contracts entered into by the previous Government imposed any unreasonable financial obligations on the State. The contracts do, however, require the government to pay some $11 billion over the next 20 years for the supply of services by private sector contractors. Some non-financial obligations seriously hamper government action and policy development. • Consequently the Review has no recommendations to make in respect of these findings.
2. Principal Findings and Recommendations
3. PROBITY AND DISCLOSURE
• The Review recommends that the Victorian Government Purchasing Board should revise its published guidelines and policies to give greater emphasis to the legal risks in the tendering process and contracting. • The Review recommends the use of Probity Advisers and Probity Auditors in large, complex or controversial privatisations or contracting out projects. It recommends adoption of the guidelines set out in the Department of Treasury & Finance publication Procedural Integrity and Process Auditing in Privatisations and Contracting Out. • For the avoidance of doubt, the Review recommends that in future every contractor should be informed prior to entering a government contract that there can be no guarantee of confidentiality because of the operation of the Victorian Freedom of Information (FOI) legislation. • The Review recommends that guidelines issued to government employees should be revised to place due emphasis on FOI legislation, on the underlying philosophy of open government, and on the precept that government information should be made publicly available unless there is a specific reason for exemption. • The Review recommends that all government business enterprises should be subject to the FOI legislation. • The Review recommends that the government should give consideration to the establishment of an FOI Commissioner. • The Review recommends that − contracts made between the government and an outside entity should, so far as possible, be disclosed to the public; − this step should be effected through special purpose legislation; − when deciding what to disclose, the government should be guided by the policy and principles underlying the FOI legislation, including the exemptions which protect trade secrets and other commercial information; − potential bidders for government contracts should be informed of the government's policy on disclosure of contracts; and − before disclosing, the government must provide the contractor with the version of the contract which the government proposes to publish. • The Review recommends that legislation should provide that, if confidential information is to be withheld from Parliament, the Minister should provide a statement both to Parliament and to the Auditor-General providing reasons why it is in the public interest that the information not be disclosed to Parliament. • The Review generally endorses the recommendations made by the Public Accounts and Estimates Committee in its report on confidentiality relating to access to, and publication of, information by parliamentary committees. • The Review recommends that the Audit Act 1994 be amended to provide: − access by the Auditor-General to contractors' records relating to the performance of the contract and the power to require contractors to answer questions relating to the performance of the contract; − a fine in the event of a contractor not providing the requested records or answering the questions within a specified time; and
3. Principal Findings and Recommendations
− that evidence provided in response to a request cannot be used against the contractor in any proceedings, except proceedings relating to breach of this provision.
• The Review recommends that the government:
− recover records currently in the possession of privatised or contracted out entities; − clarify whether all government corporations are covered by the Public Records Act 1973; and − ensure that future contracts include clauses that ensure proper management of public records.
4. DISCLOSURE OF EXISTING CONTRACTS
• The Review recommends that:
− where existing government contracts contain confidentiality clauses which prevent their being disclosed in full, the government should negotiate with the relevant contractors to secure their consent to disclosing as much of the contracts as possible; and − all other government contracts should be disclosed once the contractor concerned has been notified.
VOLUME 2
GENERAL FINDINGS FROM THE CASE STUDIES
• The Review looked in detail at seven Case Studies, covering a representative sample of the major contracts entered into by the previous Government. These Case Studies detail the financial and non-financial benefits and disbenefits associated with the contracts reviewed. • In a number of the Case Studies, the Review found that the former Government had undertaken only limited evaluation prior to proceeding with many major projects. It did not always evaluate fully the costs and benefits likely to flow from the projects, or conduct a proper assessment of the best contractual model for delivering the project. • The Review found that the benchmark calculations used to assess the relative costs of public and private sector service provision were often flawed. • The former Government seriously neglected important aspects of the social, environmental and regional impacts of its contracting activities. Remedial work will be needed to overcome problems in these areas. Some contracts will need to be renegotiated and some legislative changes will be needed. • The Review identified a number of ways in which regulation, contract management and consumer protection arrangements could be improved. • The Review found some evidence to suggest that the performance measures included in contracts did not always reflect the wider policy objectives or needs of the community or service users.
Specific recommendations about the seven contracts reviewed are set out at the beginning of each relevant Case Study in Volume 2 of the Report.
4. Introduction
INTRODUCTION – VOLUME 1
On 15 December 1999, the Premier and Treasurer, Hon Steve Bracks MP, announced the establishment of an Audit Review to examine major contracts entered into by the previous Government of the State of Victoria.
The establishment of the Audit Review followed an election commitment and was foreshadowed in the Governor's speech at the opening of Parliament on 3 November 1999:
‘The new government is committed to restoring public confidence through a new era of openness and accountability. … The government will initiate a major review of government contracts, and commission an audit review to provide an assessment of the major contracts entered into by the previous government.’
The Review formally commenced on 17 January 2000.
A Panel of independent experts was appointed by Cabinet to undertake the Audit Review. The Panel has relevant expertise in law, economics and accounting.
The Panel comprised:
• Professor Bill Russell (Chair) – Professorial Fellow at the Public Sector Research Unit, Victoria University of Technology; • Dr Nicholas Seddon – Senior Research Fellow in the Law Program at the Australian National University Research School of Social Sciences; and • Mr Ewen Waterman – Executive Director, Access Economics.
The Panel was provided with the following Terms of Reference, which were finalised and approved by the Acting Premier on 4 February 2000:
Professor Bill Russell (Chair), Dr Nick Seddon and Mr Ewen Waterman have been appointed as members of the Panel to conduct an Audit Review to investigate and report on certain matters relating to major contracts entered into by the State of Victoria by the previous Coalition Government for the purpose of:
• privatising assets where the State of Victoria transferred the ownership or leased the assets of the State of Victoria; • contracting out service provision to the private sector or to not-for-profit organisations; • facilitating private sector infrastructure projects; and • any other major contractual arrangements entered into by the State.
The Audit Review will investigate and report on the following matters in relation to these contracts, arrangements and undertakings:
• the significant ongoing obligations and contingent liabilities imposed by these contracts, arrangements and undertakings on the State of Victoria; • to provide recommendations and guidelines for probity and disclosure: − during tendering processes, − on announcement of the award of contracts, and − during the contract administration period.
5. Introduction
• the possible release of relevant details of specific major contracts, having regard to the State’s legal liabilities, and without infringing a reasonable interpretation of ‘commercial-in-confidence’; and • the need for further investigation of these contracts, arrangements and undertakings. In making this assessment the Audit Review will select a number of Case Studies, representative of the broad range of contracts, arrangements and undertakings entered into by the previous Government. This will include an initial consideration of the extent to which the Victorian public benefited from these contracts and undertakings in both financial and non-financial terms.
For the avoidance of doubt references to the State or the State of Victoria in these Terms of Reference include instrumentalities of the State, for example statutory corporations.
The Audit Review will not consider the details of, or issues relating to, the tender, disclosure or award processes for contracts in the context of local government.
A final draft report will be presented to the Government by 30 April 2000.
These Terms of Reference were amplified and clarified in a letter from the Premier dated 17 March 2000 (attached). This deadline for submitting the Review’s report was subsequently extended by a few days, at the request of the Panel and with the agreement of the Premier.
The Report is divided into two parts. The first provides an overview of major government contracts entered into under the last Government, focusing on obligations and liabilities, and general issues of confidentiality and probity. The second part of the report contains seven Case Studies, which examine particular contracts or groups of contracts. These Case Studies cover the following contracts and privatisations:
• private prison contracts; • automated ticketing system (OneLink); • CityLink; • Crown Casino; • public transport; • electricity industry privatisation; and • Australian Grand Prix.
The Audit Review of Government Contracts is not an audit in the traditional sense. It was not established on a statutory basis and did not have the formal investigative powers which the Auditor-General, the Ombudsman or a judicial inquiry possess. Unlike most investigative activity undertaken by these bodies, the Review’s focus has been on projects and services which have been transferred to the private sector and are no longer delivered directly by government. In line with its Terms of Reference, the Review has focused on the contracts executed by the former Government, and has not attempted to investigate or review in depth the tendering processes which led to the award of those contracts.
6.
Chapter 1
CHAPTER 1 VICTORIAN GOVERNMENT PRIVATISATION AND CONTRACTING 1992-99
1. BACKGROUND, OBJECTIVES AND SCOPE OF CONTRACTING
1.1 Background – The Position in 1992
The Coalition Government was elected in October 1992 at a time when Victoria was experiencing financial difficulties, a sharp decline in economic growth, a marked slowdown in population growth (partly reflecting net migration from the State to the rest of Australia) and rising unemployment. Associated with these developments was a crisis in business confidence.
The Victorian economy had been affected by the general recession in economic activity in Australia at the time, but the impact on Victorian output was much more severe than that experienced in the rest of Australia and output took much longer to recover in Victoria. Business confidence was low and total investment in the State (which is central to ongoing growth) fell markedly.
Some of the more important factors impacting on the Victorian economy at the time were related to the management of the State economy. The State deficit had expanded substantially on the back of large expenditure programs and the particular costs associated with the failure of the State Bank of Victoria. The enlarged deficit was reflected in a substantial expansion in Victorian State debt with net debt exceeding thirty percent of State output in 1990/91, well above the level of the other larger States. For example, Victoria’s State sector net debt was more than double that of the State of New South Wales as a proportion of output.
Chart 1 State Sector Net Debt as a Proportion of Output per cent of GSP 35%
30% Victoria projection 25% New South Wales Queensland 20% Western Australia
15%
10%
5%
0%
-5% Source: ABS, Victorian Budget, Access Economics. -10% 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 This chart illustrates the extent of the debt problem facing Victorian Governments at the start of the 1990s, and how until the mid 1990s, when proceeds of electricity privatisations became available, Victoria’s debt (measured as a proportion of Gross State Product) was relatively greater than other States. By the end of the 1990s, this relative disadvantage had been reversed.
7. Chapter 1
Appendix 3 provides additional information on economic and financial conditions in Victoria at the start of the 1990s.
1.1.1 Credit Rating
These issues, together with rising debt levels (and the associated ongoing demands on the State budget) resulted in the major credit rating agencies (Standard and Poor’s and Moody’s) reducing the long-term ratings of the State’s debt from AAA/Aaa to AA/A1. As a consequence, the cost of Victorian State Government borrowings rose substantially relative to the Commonwealth and the other larger States such as New South Wales and Queensland.
1.1.2 Objectives of the Previous Government
Major objectives of the incoming Government were to reduce the deficit and the level of the State’s indebtedness. Among other things, the Government placed a high priority on restoring the State’s credit rating and private sector confidence (and willingness to invest in Victoria).
1.1.3 Government Reforms Elsewhere
The incoming Government was clearly influenced by other developments in relation to the role of government in Australia and overseas. Although less revolutionary than in some countries, there had been an active program of reform at the Federal level in Australia for some years. The Hawke/Keating Governments emphasised improved efficiency through a general move to free and open competition in many areas of economic activity. This process of reform was given an impetus during the 1980s and early 1990s but in many ways was a continuation of a long reform process, the strands of which can be traced back many years.
There were important steps in the direction of pro-competition reforms that commenced as early as 1974 with the passage of the Trade Practices Act and the general reduction in tariffs by the Whitlam Government in 1973. The process of reform continued during the 1980s and early 1990s with tariff reductions, the abolition of import quotas and the introduction of greater competition into sectors of the economy such as domestic airlines and telecommunications. Governments at all levels in Australia and many other countries were also questioning their involvement (or form of involvement) in business enterprises resulting in their corporatisation and privatisation in many cases.
The former Government appears to have been influenced importantly by the experience in the United Kingdom and New Zealand where the process of privatising government businesses and the contracting out of government non-core functions was comprehensive. See Appendix 3 for a discussion of the historical context of the privatisation program.
1.1.4 National Competition Policy
The previous Government also came to office at a time when the Federal and State Governments in Australia had accepted that a more balanced and coordinated approach to reform across the three levels of Australian government was required. There were a number of important inquiries (including the Hilmer Report of 1993) that formed an important backdrop to the agreement in April 1995 by the Council of Australian Governments (COAG) to implement a National Competition Policy package.
8. . Chapter 1
The reforms agreed by all governments involved:
• extending the reach of the anti-competitive conduct laws in Part IV of the Trade Practices Act (TPA) to virtually all private and public sector businesses; • changes designed to improve the performance of essential infrastructure through reforms in the electricity, gas, water and road transport industries and third party ‘access’ arrangements for the services of nationally significant monopoly infrastructure; • reviewing, and where appropriate, reforming all laws which restrict competition, and aiming to ensure that any new restrictions provide a net community benefit; and • changes to improve the performance of government businesses through structural reform, introducing competitive neutrality so that government businesses did not enjoy unfair advantages or disadvantages when competing with private businesses, and considering the use of prices oversight.
Governments also agreed to apply these reforms to local governments in their jurisdiction.
1.1.5 The Former Government’s Reforms
It was against this background that the previous Government started a process of substantial reform of government that went much further than in the other States. As discussed in Appendix 3 there had been some privatisations in the first half of the 1990s but most of the initial change in Victoria’s budgetary position was due to expenditure restraint and cutbacks rather than asset sales. During this period government outlays as a proportion of State output fell markedly while revenue was relatively flat. In the five years from 1990/91, the annual rate of growth of Victorian State sector outlays was just 0.5%, well below the rate of growth of government spending in the other States and Territories. It was in the second half of the decade that the privatisation program had a marked impact on the Victorian budget position and debt levels, with asset sales of around $30 billion.
Chart 2 Victorian State Sector Outlays and Revenue (% of Output)
Share of GSP 20% Projections
18%
16%
14%
12%
10%
Outlays Revenue 8% Source: ABS, Access Economics.
6% 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03
9. Chapter 1
Chart 2 shows how one effect of the former Government’s reforms was to reduce the size of government spending in Victoria, when measured by the size of State outlays as a proportion of the State economy (gross State product). The reduction in spending reflects both lower interest costs and reduced scope of government. The increase in the share of outlays in 1998/99 was due to a special payment to reduce the State’s unfunded superannuation liabilities.
Chart 3 Average Annual Increase in Outlays in Five Years to 1995/96 per cent 6%
Source: ABS, Access Economics. 5%
4%
3%
2%
1%
0% Victoria New South QueenslandWestern South Tasmania ACT Northern Australian Wales Australia Australia Territory Average
Chart 3 shows how, during the first term of the Kennett Government, spending was severely cut back compared with other States. There was a lift in total Victorian recurrent expenditure in the four years to 1999/2000; the growth was quite strong, excluding interest costs and superannuation contributions.
The Victorian budgetary position was also affected by various forms of contracting out of public services, or in some cases, projects were brought forward on the basis of private sector participation, particularly in the provision of large infrastructure projects such as CityLink.
1.1.6 Tax Incentives
This private sector involvement had been encouraged by changes to the tax law by the Keating Government at the time of its One Nation Policy Statement in February 1992, during the recession of the early 1990s. The provisions were complex but were designed to encourage private sector borrowing for infrastructure projects by making such borrowings more attractive for private investors (as an investment outlet) and a more attractive form of capital for borrowers. Infrastructure borrowings were a special category of tax-advantaged finance designed to encourage private sector investment in such projects as roads, railway lines, docks, runways, electricity generation and transmission facilities and gas pipelines. The Government did this by effectively transferring the potential tax losses generated in the early years of a project into a reduced cost of funding for the borrower and a tax-advantaged return to an investor. These very attractive concessions remained in place in their original form until early 1997.
10. . Chapter 1
1.2 Objectives of the Former Government in Contracting and Privatisation
Elements of contracting out and privatisation had already appeared in Victoria in the closing years of the Kirner Government. Contracting out had long been in place in some parts of the public sector, such as the provision of route and school bus services, and cleaning and maintenance services in public buildings. Service agreements had been pioneered between the Health Department and hospitals. The first major electricity privatisation had occurred with the sale of a 51% stake in Loy Yang B Power station to Edison Mission Energy in 1992. The State Insurance Office was sold to its New South Wales counterpart, GIO, in 1992-93, and a framework had been set in place for the projects which were to culminate in CityLink being provided by private finance or Build Own Operate Transfer (BOOT) arrangements. The principle of corporatising public enterprises - a New Zealand import embraced by the Council of Australian Governments in 1991 - was being progressively implemented. Nonetheless there was no consensus in the Labor Government, the unions or the community that contracting and privatisation were paths that should be followed. Indeed throughout the 1990s poll results indicated majorities opposed whenever attitudes to privatisation were measured, although this was not reflected in the 1996 Victorian election result.
1.2.1 Public Sector Reform
These developments represented important steps on the path to privatisation, yet they fell far short of the comprehensive root and branch contracting and privatisation that had been adopted by that time in the United Kingdom and New Zealand. Many advisers to the Liberal opposition at this time - including Professor Michael Porter of the Tasman Institute, and the Institute of Public Affairs in particular - advocated comprehensive contracting and privatisation as the central policy direction the Liberal Party should adopt if elected in 1992. A first theme in the former Government’s pursuit of these policies was its belief that they represented a comprehensive path to public sector reform.
1.2.2 Reduction of State Debt
A second strand of significance arose from the former Government’s view that the reduction of Victorian government debt and the restoration of the State’s AAA credit rating should be a central policy goal. The financial crisis of 1987; the failure of the State Bank of Victoria; the financing requirements of new infrastructure developments such as the building of Loy Yang; the emergence of the funding of recurrent State government expenditure from borrowing; the adoption of lease and buy back schemes involving public assets such as public transport rolling stock and the World Trade Centre; and the reduction of the State’s credit rating by international ratings agencies – all these developments set the stage for a concern with debt reduction to be central. The Commission of Audit appointed by the incoming Government and chaired by Professor R R Officer strongly linked this debt reduction objective with the strategy of privatisation. In the event, the sale of the State’s electricity assets was largely justified on the basis that the proceeds could and would be used for debt reduction purposes (as they largely were in the event).
1.2.3 Risk Transfer
A third strand arose from new concerns about the management of risks, and especially the risks to taxpayers associated with the public ownership of government trading enterprises. The State’s ownership of diverse public enterprises was long standing, but concerns about potential risks inherent in this ownership had been dormant. These included:
11. Chapter 1
• risks of loss through accidents or natural disasters interacting with State assets – such as the Ash Wednesday bushfire losses incurred by the State Electricity Corporation of Victoria (SECV); • losses associated with entrenched management and industrial practices which are resistant to reform (as in the former Public Transport Corporation); • losses inherent in participation in financial markets. The SECV and other large public enterprises were involved in substantial foreign exchange and borrowing risks associated with their financing requirements; • losses associated with cost-over runs and other problems in the design and construction of new physical assets such as power stations ; • losses associated with electricity supply contracts such as that with Alcoa which cannot be predicted at the time of signing but later become substantial; and • losses associated with the deregulation and instability in emerging markets such as the energy market, in which the State could have lost substantial sums on the creation of an open national competition.
Some of these risks were not so critical when public enterprises enjoyed exclusivity rights in a particular State, or when their scale of operations was small, although they had implications for the pricing of essential services. However all of the above risks apply to direct large-scale service delivery operations in the energy, finance and transport fields.
1.2.4 Bringing Forward Major Projects
A fourth strand in the previous Government’s objectives was the desire to bring forward, finance and manage certain projects more quickly than they could have been procured through conventional public sector delivery mechanisms. The provision of CityLink, and the provision of new prisons and hospitals were examples of this objective.
Victorian Governments (which lacked either the claimant State benefits of Queensland or that State’s capacity to impose heavy taxes on mining companies for the use of State infrastructure) had long faced significant financial constraints. These were exacerbated by the world financial crisis of the late 1980s that added to Victoria’s financial problems and in an extreme form were reflected in the collapse of the State Bank of Victoria. One manifestation of these financial constraints was in the level of investment in State infrastructure.
Much of the State’s infrastructure was run down at the commencement of the 1990s. Specifically:
• the urban freeway network consisted of disconnected fragments, requiring very substantial investment if the fragments were to be connected; • prisons in most instances were antiquated nineteenth century stone buildings, poorly maintained and supporting negative cultures among inmates and staff; • hospitals in many areas were ageing and in metropolitan Melbourne were not always located optimally with regard to users; and • public transport rolling stock was ageing, especially on the tram network, the signalling system required heavy investment, and the ticketing system was outdated. The more modern rolling stock had been the subject of sale and lease back, reflecting capital shortages.
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In many respects this represented an acute capital shortage, while at the same time the debt position of the State precluded or at least impeded the traditional option of financing new capital assets through borrowings. Unconventional financing methods such as sale and lease backs were tried but had drawbacks.
1.2.5 Promoting Tourism and Entertainment
A fifth objective related to the facilitation of major events and projects designed to promote tourism, sport or entertainment. The use of contracting permitted the government to expedite these projects and place them under management arrangements somewhat removed from normal government procedures.
1.2.6 Increasing Labour Market Flexibility
Finally, an implicit objective of the former Government’s agenda seems to have been to lessen the power of unions. Changes in the power industry, education, prisons, the public service and public transport, through privatisation and contracting, have all had the effect of reducing the very strong bargaining power previously held by these unions. This objective was not always as transparent as the other goals mentioned, doubtless for tactical reasons.
1.3 Scope of the Contracts Entered into by the Previous Government
This Review has had the opportunity for the first time to examine the scope and extent, in functional, legal and financial terms, of the former Government’s contracting activities.
Within the scope of the contracts undertaken by the previous Government and examined by this Review, the most significant in financial terms were those for the privatisation of the former publicly owned energy industries. The sale of electricity assets alone accounted for $28 billion of the $35 billion dollars of contracts under review; when the sale of gas assets is included, some $32 billion of the contracting activities were in the energy field. Moreover, there is no remaining State asset of comparable value yet unsold, so that in some respects these transactions represented a major shift in the State’s ‘balance sheet’ with asset sales being used to effect a substantial reduction in State debt.
A contract’s significance cannot be measured in financial terms alone. Clearly the privatisation of public transport services, certain prisons and hospitals, and the entry of private financing into freeway provision are all of immense social significance. So too has been the use of contracting as a vehicle for the State to enter new sporting and entertainment fields, including gambling, the Formula One Grand Prix and other areas.
1.3.1 Types of Privatisation
In order to implement its far-reaching intentions with regard to privatisation, the former Government used eight different approaches to privatisation. Some methods, such as contracting out and trade sales, were used repeatedly, whereas others, such as sale by public float and BOOT projects, were used quite infrequently. The approaches to privatisation employed (all of which entailed contracting between the State or its agents and private parties) included:
• Trade Sales of Public Assets – examples, electricity asset sales • Sale of Public Assets by Public Float - example, sale of TAB • Franchising – examples, rail and tram franchises • Contracting Out – examples, metropolitan route bus contracts
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• Build Own Operate Transfer – example, CityLink • Build Own Operate – examples, prisons, hospitals • Licensing – example, Crown Casino • Management Buy Outs - example, Sale of VicRoads Plant Hire Division.
All the above are examples of the application of private financing to the provision of public assets or services. They may involve the application of private sector finance, management and operational expertise in the provision of an asset (and sometimes the related services) for use in public service, where the government pays an annual fee under a long-term concession to the provider. Examples of private financing projects include the construction of prisons and hospitals and roads and the provision of related services where the government provides the only source of revenue to the provider.
PPP is an abbreviation for Public Private Partnership. It is a further refinement of the private financing concept and describes the provision of public assets and/or services through synergistic contributions from government, the private sector and the consumer. The emphasis is on long-term contracts and strict performance regimes for a high quality service. Examples of PPP projects include real toll roads, the provision of tertiary education facilities and public transport franchises. In all these cases, the primary asset and/or service is provided by the concessionaire, but the government and the consumer also contribute revenue. In some cases the government will also contribute to the service provision through the provision of operational staff or through administering strategic and planning decisions.
Table 1 sets out privatisation options and some of their characteristics.
Table 1 Privatisation Options
Models of Privatisation and Victorian Examples Asset sale (by trade sale, management buy out Private sector ownership and control, but likely or public offer of shares) to have some form of regulation where public service obligations or public interest concerns Victorian example 1 – Trade sale of electricity are involved. power generation plants (Loy Yang, Yallourn etc.). Victorian example 2 – Floatation of TABCORP. Victorian example 3- Management Buy Out of VicRoads Plant Hire Division Concession Contracts1 (includes BOO, BOOT, The private sector undertakes to design, BOL, BTO projects) finance, build, maintain and operate an asset. The difference between types of concession Victorian example 1 – CityLink toll road (BOOT). relates to the ultimate ownership of the asset, Victorian example 2 – construction and which may or may not be passed back to the operation of private prisons and hospitals State at the end of the contract. (BOO).
1 BOO – BUILD OWN OPERATE BOOT – Build Own Operate Transfer BOL – Build Operate Lease BTO – Build Transfer Operate
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Models of Privatisation and Victorian Examples Franchises The private sector operates an existing facility or service for a period, taking on the revenue risks, Victorian example – passenger train and tram and in some cases includes obligations to operating franchises, replacement of 50% of replace existing assets. existing rolling stock and maintenance of existing infrastructure. Contracting Out The private sector constructs or manages a facility under a contract for an agreed period, Victorian example 1 – VicRoads and PTC IT without taking the finance or revenue risk. systems outsourcing. Victorian example 2 – major construction projects including Federation Square, Exhibition Centre, Multi-Purpose Venue and Royal Park Netball and Hockey Stadium. Leasing The private sector finances the facility and receives lease payments from the State for its World Trade Centre and public transport rolling use, but the State operates and maintains the stock in the 1980s. asset.
Different models of private sector involvement vary in the extent to which these benefits and disbenefits are realised. Table 2 below, taken from Privately Financed Concession Contracts2, summarises the perceived benefits of different models of private sector involvement. The author's original assessment of relative benefits has been updated to reflect experience since 1996.
Table 2
Government Efficiency Gains Efficiency gains Additional Option Strategic in Construction in Operation Finance Control Privatisation High High High Low Concession High High/Medium High/Medium Medium Contract Franchise High Medium Medium/Low Medium/Low Contracting Out Medium/Low Medium/Low None High Leasing Low None Medium High
2 A Merna and N J Smith, Privately Financed Concession Contracts Volume 1 (1996) Asia Law & Practice.
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2. SOME KEY OUTCOMES OF THE CONTRACTING AND PRIVATISATION PROCESS
2.1 Financial and Economic Outcomes
Many factors impact on the performance of a State economy including international developments and Federal policies over which a State government has little or no control. Nevertheless, a State government has considerable scope to influence economic conditions in the State. Some of the most significant influence flows from the budget/financial policies it pursues and how they are perceived in the marketplace.
As discussed in Appendix 3, economic conditions in Victoria have changed markedly over the past ten years. In the early part of the decade, deterioration in the State budget and rising debt levels impacted negatively on confidence and exacerbated the impact of the national recession at the time. Activity fell more sharply in Victoria and was much slower to get back on a positive growth path than in the rest of Australia. The Victorian economy recovered strongly during the previous Government’s tenure with strong growth in employment and demand, including a much-needed recovery in business investment. Growth seems to have continued apace more recently but the recovery is now well advanced and retail spending grew at an unsustainable pace in 1999.
Chart 4 Output Growth (Annual Rate)
Output % change 8
6
4
2
0
Victoria -2 Trend - Victoria Rest of Australia -4 Trend - Rest of Australia
-6 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Chart 4 shows the marked downturn in economic activity experienced by Victoria in 1991, and the extent of the recovery toward the end of the 1990s.
The incoming Government placed considerable emphasis on reducing Victoria’s deficit and debt levels with a view to restoring confidence in the State and regaining its AAA/Aaa credit rating. The incoming Government moved decisively to rein in government expenditure and quickly brought the deficit under control. The Budget moved into surplus during the mid 1990s and by 1996/97 it was in better shape than that of Queensland, which has traditionally run the largest budget surpluses.
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This turnaround occurred before the State’s substantial additional revenue from the privatisation program. This meant that the receipts from the latter program were primarily focused on reducing debt levels, which fell to levels comparable to the other States much faster than otherwise would have been the case. The privatisation program in the second half of the decade has made a substantial ongoing contribution to the budget because interest savings are expected to exceed dividend and other payments forgone.
Chart 5 Underlying Budget Balance – Comparison with Other States
$million 2500
2000 surplus 1500
1000
500
0
-500
-1000 deficit Victoria -1500 New South Wales -2000 Queensland Western Australia -2500
Source: ABS, Access Economics. -3000 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99
Chart 5 shows Victoria’s movement from deficit to surplus budgets during the 1990s.
Victorian underlying budget balance estimates adjusted for special payments to reduce unfunded superannuation liabilities in 1993/94 ($1399 million), 1995/96 ($490 million), 1998/99 ($2574 million) and the recall of capital from the Transport Accident Commission in 1993/94 ($1200 million). The heavy payments to fund superannuation liabilities mask the extent of the underlying surplus available to the Victorian Government.
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Chart 6 Headline Budget Balance – Comparison with Other States $million 6000 $11.2 billion $9.2 billion 5000 Victoria 4000 New South Wales Queensland surplus 3000 Western Australia
2000
1000
0
-1000
deficit -2000
Source: ABS, Access Economics. -3000 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99
Chart 6 shows movements in Victoria’s Budget when the proceeds of privatisation are added in. The picture shown in this chart is a ‘once only’ position, as there is no equivalent group of assets that can be sold in the future.
2.2 Policy Framework
The former Government had a clear commitment to engaging the private sector in its programs. An important step in that process was the publication in 1994 of an Infrastructure Investment Policy for Victoria, setting out how it intended to engage the private sector in the provision of infrastructure and related services. This statement set out how the public sector would seek and develop project opportunities with the private sector. The establishment of a Privatisation and Industry Reform Division within the Treasury was also of central importance in overseeing the very ambitious privatisation program, centralising the skill base and ensuring greater consistency in the treatment of issues.
Subject to concerns about process, which are discussed elsewhere in this Report, the decision-making framework established by the previous Government was effective in dealing with the private sector and getting reforms implemented.
2.2.1 CityLink
These arrangements were important in the execution of the Government’s reform program, against ambitious timetables in most cases. The private sector needs a clear policy framework and a government institutional structure within which it is comfortable working. Several of the contracts under review can be understood in this context. The BOOT project under which a private consortium would design, finance and construct the set of freeways tunnels and bridge now known as CityLink can be seen as a predictable strategy in this context. In this Review, concerns are raised as to the decision-making leading up to the CityLink contracts because no comprehensive economic assessment or environmental effects statement was prepared prior to the contract being signed. However the objective of
18. . Chapter 1 both the Kirner and Kennett Governments in approaching the project as a BOOT is quite clear: to undertake the project without adding substantially to State debt. The provision by the Keating Government through its One Nation policy of tax advantages to such projects at the time no doubt added impetus to the course chosen.
2.2.2 Prisons and Hospitals
In relation to prisons and hospitals, companies emerged worldwide during the 1980s capable of managing the whole of an operation, from design through building to operation. In the area of prisons, where Victoria’s principal reception prison was a bluestone compound, the building of which commenced in 1854, it is not surprising that the option of private provision via a BOO contract was adopted.
Three prisons are now privately operated, working in parallel with a substantial publicly provided group of prisons under the control of the Office of Corrections. From a financial and economic point of view, the adoption of private financing through BOO projects has allowed the State to have three new private prisons constructed. It appears that significant savings have been made in construction costs compared with those experienced in recent public prison provision in Victoria.
Victoria at the date of writing has not proceeded far with hospital privatisation. In common with the experience of other States with privatised hospitals, at least one of the operators is experiencing difficulties with its contract.
2.2.3 Public Transport
The privatisation of public transport system (including contracting out the ticketing system) can in part be viewed as another example of bringing forward new essential infrastructure investment which it might be difficult for the government to finance itself. There were other motivations - such as the desire to reduce union power - which were relevant.
2.3 Debt Reduction
The Bracks Government has inherited a state in a very strong budgetary and financial position. The budget is projected to remain in substantial surplus over the next three years. The already low levels of State debt will decline to insignificant proportions in the years immediately ahead. Including the assets of public financial enterprises, the Victorian State Government became a net creditor in 1998/99, compared with net debt of around $30 billion in 1992/93 (excluding unfunded superannuation liabilities that amounted to $11.5 billion at 30 June 1999).
2.4 Restored Credit Rating
The State has also regained its AAA/Aaa credit rating. Credit ratings have become increasingly important in recent years as an independent assessment of financial management. Variations in credit ratings have an important influence on the interest margins States must pay over Commonwealth debt.
To illustrate this point, in the early 1990s after Victoria’s debt was downgraded it had to pay around 130 basis points more on its long-term debt than the Commonwealth, whereas at the end of 1999 the margin was just over 30 basis points. With a debt level of around $30 billion at the start of the decade, the higher margin, if sustained with that level of debt, would have eventually added around $300 million to the State’s interest bill when all the debt was re- financed.
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It is, on the other hand, important that the issue of State debt be seen in perspective. A State Government can be said to abuse debt if it is used to finance recurrent expenditure, to build public monuments or to finance non-productive activities. It is not abuse if it is within the capacity of the community to service, and if it serves as a fair means of sharing the cost of a long lasting public asset across the generations that will enjoy it. A substantial proportion of Victoria’s debt in 1992 had been incurred to finance key State assets such as power stations, which in themselves returned dividends to the State. Borrowing largely provided the key assets whose sale enabled the State to restructure its balance sheet through privatisation.
2.5 Social and Environmental Outcomes
2.5.1 Introduction
Policy makers have often insufficiently addressed the social and environmental outcomes of the privatisation of public services and infrastructure. Financial and economic objectives have generally been uppermost. The main focus has been to achieve a reduction in State debt, to bring forward large projects, to avoid financial risks to the State, and in some cases to bring economic benefits. These are generally worthwhile aims, but they often weighed more heavily than the social and environmental impacts associated with the contracts.
2.5.2 Electricity
The La Trobe Valley community is one of the biggest losers from the privatisation process, with perhaps 7,000 jobs lost. Certainly, there was significant job shedding prior to privatisation, some job shedding formed part of the general restructuring associated with technological change, and there has been an element of reabsorption of displaced workers into private sector jobs. However, while Victoria as a whole enjoys the benefits of cheaper electricity prices, no coherent social policy has been developed to compensate the people whose livelihood depended on jobs in the electricity sector.
There have been positive social impacts from the privatisation process. Domestic electricity prices have been reduced and outages in most areas have decreased. To the extent that industrial users of electricity have been able to negotiate cheaper contracts, their competitiveness and their capacity to employ have been enhanced. In recognition of the hardships experienced by the La Trobe Valley community, the current Government has promised some financial support for a $2 million Energy Park in the region.
Environmental issues are now governed by the general legislative framework that applies to major projects, such as Environmental Effects Statement (EES) and Environmental Impact Study (EIS) requirements and planning laws. The Review notes that this contrasts with the position prior to privatisation, when the SECV was required to pursue environmental objectives as well as commercial objectives in pursuing its business, and implemented many programs in the areas of energy conservation and demand management.
2.5.3 CityLink
The CityLink project has also had both positive and negative social and environmental impacts.
On the positive side, the CityLink system enhances mobility for those who use it, and the savings in travel time which result should benefit private motorists and firms. Companies whose transportation costs are lowered are similarly placed in a more competitive position, with lower cost structures and more capacity to employ. Melbourne’s critical role as
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Australia’s leading port is enhanced and strengthened by the extent to which CityLink serves to ease port access and access to industrial areas and major highways.
On the other hand, there are some distributional issues. Those who use the new freeways must pay tolls, while motorists along the Eastern Freeway continue to enjoy toll free travel. Country and interstate visitors may be at a disadvantage and liable to be fined if they do not readily understand the day pass system. Some public roads have been closed or are to be narrowed pursuant to the State’s contractual obligations. Residents of some local areas are experiencing traffic congestion, and significant delays to tram services have been ascribed to traffic diverting from the freeway to avoid tolls. Higher traffic volumes in these areas will undoubtedly lead to higher levels of noise and air pollution in nearby communities. So there is an important issue as to whether this level of diversion is sustainable.
On balance, in the Review’s estimation, the positive social impacts of the provision of this asset significantly outweigh those that are negative, but it is less clear that direct tolling and the ongoing involvement of private operators in urban transport policy will be constructive. The Review notes that a full EES of the road as built was not commissioned during the planning stage. The study that was completed did not assess the impact of a toll road (in which traffic diversion was a factor) or the desirability of continued private involvement in day-to-day transport policy.
2.5.4 Casino
The Melbourne Casino project, together with the introduction of electronic gaming machines, raises very large issues of social impact. Again, it is important to note the benefits. A new entertainment precinct has been provided which has considerable popularity, with many people attending the casino area to use cinemas and restaurants as well as or instead of the gaming facilities. There has been direct employment creation at the site. The potential for organised crime and money laundering to be fostered through the industry seems to have been avoided, though it remains an issue. And the revenues generated for the government from the casino and gaming generally have allowed many important public projects to be advanced so that they can be enjoyed now.
On the other hand, the negative aspects of the growth of gambling during the same period have been very widely publicised, and have been subject to a number of reports after the event. The effects on the finances of lower income people and problem gamblers are damaging, and are such serious questions as to require a thorough re-examination of State gambling policy in all its aspects. The increased dependency of State budgets on gambling revenues is also extremely troubling.
2.5.5 Prisons
The relocation and privatisation of three Victorian prisons has had a significant effect on prisoners and their families. The most important positive has been the replacement of the cruel and dark prisons of the past with clean modern facilities, in which the capacity to control the abuses endemic within prison systems appears much improved. It is a very big step forward to have been able to close the Coburg Prison Complex (including Pentridge).
For some regional areas, a new prison can create new employment opportunities. The Sale community, for example, has benefited from the new employment opportunities arising from the Fulham Prison and has welcomed the location of the prison in its locality.
However the prison privatisation does create some social impacts of concern. The Review notes that competition seems to have brought some benefits in the form of ‘competition
21. Chapter 1 through comparison’. Offsetting these are dangers that the fragmentation of service delivery contracts may lead to inconsistencies within the one system and a lack of continuity of care.
The Review also notes that the location and the lack of easy public transport access to the new prisons has had a detrimental impact on the capacity of families to visit prisoners easily. If family and friendship relationships are weakened, it may be harder for some prisoners to move back into normal membership of the community after their release. This may diminish prisoners’ rehabilitation prospects.
Again, on balance, the Review considers the social balance sheet of prison privatisation to be favourable, even though it raises various important issues that need to be addressed.
2.5.6 Grand Prix
The Formula One Grand Prix has provided Melbourne with a major international event that provides entertainment for several hundred thousand people, as well as substantial short- term employment during the race period. The Grand Prix has also led to the rehabilitation of Albert Park and the provision of new sporting facilities, including the $52 million aquatic centre.
On the other hand, the event has impacted on the amenity and quiet of the neighbourhood, although these impacts may not in reality be very much worse than those experienced by the neighbours of other major sporting venues, such as the MCG in Jolimont, Optus Oval in Carlton, or the Showgrounds in Ascot Vale. The implementation of this project undoubtedly caused a high level of public disquiet. The majority of the submissions to the Review related to the Grand Prix project.
2.5.7 OneLink Automatic Ticketing System
The automatic ticketing system Case Study highlights the difficulties of introducing massive technological changes without adequate time being devoted to assessing the technology and the needs of the people the technology is designed to serve. The system is seen as difficult to use. Users have complained of feeling at risk because of the lack of personnel at railway stations. There are real dangers to older people of falls while buying tickets on trams. Management information produced by the system is of limited value in planning services, as trip destinations are not recorded.
On the other hand, subject to some adjustments, Melbourne’s automed ticketing system is now being accepted, and the financial savings it offers should allow other public benefits to be provided.
2.6 Regional Impacts
Parts of regional Victoria have experienced significant population decline over the past two decades. This has been due to reductions in agricultural employment and to the effects of major restructuring on regional industries. The most dramatic example was the restructuring of the electricity supply industry and its devastating effect on the La Trobe Valley.
The Victorian community as a whole has benefited from the revenues associated with gambling and some worthwhile projects have been funded. The Review notes however, that even large projects funded in regional Victoria are small when compared with those funded in Melbourne, such as the Museum, National Gallery of Victoria relocation, the State Library rebuilding project and others.
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As with social and environmental impacts, the Review notes that the privatisation process has generally not included explicit provisions to ensure that the needs of regional Victoria are considered. Such provisions could certainly have been made in some contracts, such as the privatisations of the SECV businesses and of country rail services.
2.7 Impacts on Governance and Regulation
As the comprehensive use of contracting examined in this Report was implemented, Victorian Government activities commensurately changed in a number of significant ways:
• direct service delivery was reduced in scope; • contract management became an important focus in many areas; and • independent regulation and/or performance monitoring became an increasingly important area.
In parallel with these developments, the previous government altered the structures of government significantly. Eight ‘mega-Departments’ were created to replace the more narrowly focused departments that had previously existed. A number of statutory corporations, which had played important roles in policy-making, dealing with stakeholders and planning as well as delivering services, ceased to exist or in some cases became ‘shell structures’ consisting of administrators. The State Electricity Commission, the Gas and Fuel Corporation, and the Public Transport Corporation were examples of this. Each of these corporations had had powerful boards and other governance structures of significance. These bodies were bound by the Financial Management Act, audited by the Auditor- General, and fitted within the overall framework of administrative law including the Freedom of Information Act, the Ombudsman and so on. With the removal of these structures and arrangements, major new governance structures became necessary in the new private provider environment. Progress on this front was uneven.
2.7.1 New Structures
New contract management, regulatory, grievance and consumer representation arrangements were established as service delivery was moved to private providers and outside the scope of public agencies. A new approach to forward planning and service integration was sometimes called for as well, for example in public transport, where all service delivery is now privately contracted. These issues are referred to in the various Case Studies. These structures are not entirely consistent across functions, and some opportunities exist for improvement.
2.7.2 Contract Management
Where services are totally privatised, an ongoing requirement for contract management is removed. However, with respect to prisons, hospital and public transport contracts examined by the Review, ongoing contract management remains an important task for the State.
New contract management groups have been established in each of the departments responsible for outsourced services. It is essential that these groups develop strategic and managerial capacity equal to the critical role they have to perform.
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2.7.3 Regulation
The Office of the Regulator-General (ORG) is the most significant new regulatory body in Victoria, with responsibilities for regulating the private electricity, gas, and grain handling industries, as well as responsibilities for regulating access to the rail network. In relation to some of these matters, especially the emerging national energy market, the ORG acts in co- ordination with the Australian Competition and Consumer Commission (ACCC). The principle here is that a strong independent regulator is necessary in newly privatised industries to protect the public interest and provide a forum in which contested views as to industry competition and performance can be resolved.
In the gaming industry, the Casino and Gaming Authority has provided this independent regulatory function, but its legislative function to ‘promote tourism’ is at odds with this role and should be removed. The contract with Crown Casino implicitly obliges the Authority to assist the casino to maximise gambling revenue. This is not an appropriate position for a regulator to be in, and negotiations are needed to remove this conflict, even though it has to date been theoretical rather than a real conflict of duties.
In relation to transport there is scope for the regulatory function to be developed further. Aspects of CityLink are regulated or reviewed by the Melbourne City Link Authority and by the Independent Reviewer. Similarly, aspects of the regulatory task in relation to trains, trams, buses taxis and tow trucks lie with the Director of Public Transport. However there is no comprehensive independent regulatory function.
For a variety of reasons, not all regulatory models necessarily deliver the intended results. This may be due to a number of factors. In the Victorian power industry, for instance, the ORG provides independent regulation of the industry by overseeing customer service standards, tariffs and the operations of the market generally. The Office’s primary responsibility is to ensure that all the key players in the market abide by the ‘market rules’. It remains to be seen whether ORG will have the resources it needs to deal with the mass of individual consumer disputes that may arise in a fully deregulated market.
2.7.4 Grievances and Consumer Issues
Where essential services are delivered by private companies, the principle proposed by the Review is that the consumer’s first line of remedy should be with the operator, who is best placed to provide immediate remedy if that is available. However, there should also be statutory protection through right of appeal to an ombudsman. In the case of the existing Energy Industry Ombudsman, this right is activated after a consumer has twice approached a service provider.
The government’s current proposals for the creation of an Essential Services Ombudsman provide an appropriate framework for this process. The Review considers that public transport should be included in the jurisdiction of the Essential Services Ombudsman.
In some of the Case Studies examined, the government has made provision for a consumer regulator to ensure that the rights of the consumer are upheld. In many instances the consumer regulator acts as the ‘voice of the consumer’ in raising issues.
In the newly privatised electricity industry, in addition to the ORG’s consumer protection powers, the Energy Industry Ombudsman of Victoria exists to resolve disputes between customers and the electricity industry companies ‘from a fair and independent point of view’. Doubts have been cast on the impartiality of this scheme because it receives its funding from the industry it monitors, and because the Ombudsman’s decisions may be made in secrecy, removing the openness that is essential for public accountability.
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Finally, the Offices of the Chief Electrical Inspector and the Chief Gas Inspector have been established as independent statutory bodies with responsibility for enforcing minimum standards for the safety of electricity and gas supply and efficiency throughout Victoria.
In the Victorian correctional system, the Correctional Services Commissioner was established in 1995 and is responsible for monitoring performance in the provision of all correctional services to achieve the safe custody and welfare of all prisoners and offenders. All service providers are required to report ‘notifiable incidents’ each day to the Commissioner. The Commissioner also has the power to investigate reportable incidents further.
However, neither CityLink nor the privatised public transport industry provides consumers with an independent channel of redress for complaints and substantive grievances. Generally, it makes sense for the operators to take principal responsibility for handling feedback from consumers and in the case of public transport the government has a role in ensuring fair play. But this does not obviate the need for an independent ombudsman capable of hearing, investigating and resolving grievances that cannot be settled in other ways.
2.7.5 Long-Term Planning and Policy Development
A further important role is that of long-term planning and policy development. In principle this task belongs to the Government through the Minister to whom the relevant portfolio is assigned. Where a department has responsibilities for both contract management and long- term planning and policy development, it is important that both functions be adequately performed.
In relation to the transport portfolio, a special need exists to promote integrated long-term planning: integrating the now numerous private operators’ efforts into a cohesive system; and integrating transport with land use planning through regular stakeholder consultation processes. In this context, the Review raises for consideration the possible creation of a Public Transport Commissioner within the Department of Infrastructure to undertake this task, in consultation with planners, providers, patrons and local government. This would emphasise the role of the Director of Public Transport in relation to contract management issues.
2.8 Impact on the Size and Role of the Victorian Public Service
The privatisation and contracting activities of the former Government have had a significant effect on the nature of the Victorian Public Service (VPS). Among other things, the service has been halved in size and its role has been transformed.
2.8.1 Impact on Skill Profile of the Victorian Public Service
The privatisations and outsourcing policies implemented during the previous administration, clearly had a substantial impact on the overall personnel profile of the VPS. This extended across all levels of employment in departments and to specific skill requirements.
Statistics maintained by the Office of the Commissioner for Public Employment3 indicate an overall reduction in full time equivalent Victorian Public Service (VPS) numbers of 45% between 1992 and 1999.
3 Report of the Office of the Commissioner for Public Employment (10 April 2000).
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Total VPS Staff (excluding executive positions) 30 June 1992 42,800 30 June 1999 23,597
A survey of the VPS in October 19974 (the most recent analysis available) indicates that 80% of VPS staff were involved in either service delivery or corporate/administrative functions. Policy regulation and contract management accounted for 20% of functional activity.
Profile of VPS Staff by Function
Service Delivery Policy Corporate Support Regulation Contract Management Human Resources Finance IT Executive Services
The factors that have driven this substantial change in the traditional role of VPS are:
• the quantum of goods and services provision now provided by contractors; • the introduction of related policies, such as competition initiatives and the Management Reform Program; and • targeted reductions in overall staffing levels.
These changes have presented a range of significant challenges for government as an institution and for government employees themselves.
Privatisation and contracting out are complex multi-disciplinary activities requiring a wide range of skills. There is need not only for knowledge of the policy environment (including competitive neutrality) and government objectives, but also knowledge of legal and regulatory frameworks, procurement and industry expertise, risk pricing and an awareness of the business environment. Also essential is a knowledge of financial markets, especially project financing options (although it is accepted that this expertise can be brought in on contract on a needs basis). Finally, there is a need for strong negotiating skills to represent government's interests in the development and management of contracts. 5
4 Office of the Public Service Commissioner, Victorian Public Service Employment Annual Report (1997/98) Figure 6. 5 Freehill Hollingdale & Page (Sydney), paper by John O’Sullivan and Philippa Stone from website: www.freehills.com.au
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2.9 Assessment of the Overall Impact of Previous Government’s Contracting
Overall, the contracting and privatisation activities of the previous Government had positive impacts. The government needed to move decisively and quickly given the situation it inherited, including the depth of the recession and the decline in confidence. The speed of the turnaround and the restoration of confidence were impressive, and were reflected in renewed growth in employment and living standards.
The State’s balance sheet has been improved markedly. The budgetary situation has been turned around. The unsustainable debt levels and associated decline in the State’s credit rating have been addressed. New capital has been introduced in important areas much earlier than would otherwise have occurred (for example, CityLink, public transport and prisons).
The social and environmental impacts of the reforms have been mixed. New assets such as CityLink and major building projects like the Museum, State Library and Federation Square provide benefits. On the other hand, the negative social effects of gambling are adverse, while employment losses from privatisations, especially in the electricity industry, have been severe. The impacts of CityLink traffic diversion on localities, on congestion and on the tram system are of concern.
The regional impacts of reform have varied but overall Victoria is in a much stronger financial position. The government therefore has the capacity and flexibility to address problems affecting those that have been disadvantaged.
New governance structures appropriate to private provisioning have been introduced. These must discharge a variety of roles, including contract management, regulation, the handling of consumer issues, and long-term planning. These structures and arrangements are somewhat unevenly developed and require more attention.
The process of privatisation and contracting out represented a major policy shift for the State. The overall approach has been very professional and the public sector will have built up a considerable skill base. There are some contracts of concern (listed in Appendix 4), but no allegations or instances of corruption were brought to the attention of the Review. A variety of process issues, including secrecy and lack of disclosure, were handled in an unsatisfactory manner.
Overall, the budgetary and privatisation policies of the previous Government left the State of Victoria in a very strong financial position. They also contributed importantly to the resurgence of growth in the 1990s and provide the present government with great flexibility in dealing with economic challenges.
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3. SOME LESSONS FOR THE FUTURE
3.1 The Nature of Contracting
In the context of public administration and the application of contracting out and privatisation in all forms by the Victorian Government, contracting may be defined as the use of binding legal agreements between the State and external parties for the provision of public services.
Privatisation is the transfer of assets and/or service functions from public to private hands. It includes therefore activities that range from selling State Owned Enterprises to contracting out public services with private contractors.6
Victorian governments to some extent have always used contracting, but the 1990s saw its extension to many new fields. By 1999, the Public Service Commission estimated that some 20% of Victorian Public Service staff were engaged in policy regulation or contract administration.
3.2 The Decision to Contract
When a government enters into a contract with a private firm for the provision of goods and services or the sale of an asset, the result is a binding set of mutual rights and obligations likely to involve a commitment from both sides for a period of years. In some of the larger contracts examined by this Review, the total cash flows involved have been measured in billions of dollars. Once such contracts are agreed, the flexibility to subsequently alter public policy becomes more circumscribed.
There are a variety of justifications for the previous Government’s outsourcing program, including the objective of allocating risk to the parties best able to, and with the incentive to, manage the risk. However, the use of contracts to provide public services introduces new risks inherent in the general nature of commercial contracting. These risks are discussed below but, in the worst case, they can result in litigation. This type of risk can be contrasted with traditional public delivery of services where legal risk is relatively low.
The legal risks that arise from government contracting do not necessarily mean that governments should not use contract as a tool of public administration. Rather, the requirement before making the decision to contract is to undertake a detailed analysis of financial and non-financial outcomes that takes into account the full array of risks, costs and benefits.
3.2.1 Increased Secrecy
In Chapter 3, the inclination to secrecy through the use of contractual confidentiality clauses is discussed. Although this might not be described as a ‘risk’, it certainly was a deleterious consequence of adopting the ‘private’ model of service delivery. The recommendations in Chapter 3 are designed to avoid this occurring in future contracting out and privatisation projects.
6 G Hodge, Privatisation: An International Review of Performance (2000) Boulder, Colorado, Westview Press, 14.
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3.2.2 Increased Complexity
One of the arguments for using contracts to procure public services is that it forces the parties to specify with precision the desired outcomes of the project. This argument is sound and the Review has noted many benefits from the need to draw up precise specifications. However, in each of the Case Studies, the requirement for precise specification resulted in immense amounts of contract documentation prescribing a complex regime of fixed terms and conditions for the contracting parties, as well as (in most instances) for their sub- contractors, agents and employees.
Once a contract is in place, the terms and conditions can only be varied by agreement. The consequence is that contract can be a somewhat inflexible tool, though it is always possible for the parties to agree to a variation. Experience has shown, however, that variations are often costly and contractors who have underbid will seek to make a profit on the variations.
The complexity of contracting is to be contrasted with the traditional mode of public service delivery, which is far more flexible. When problems arise, they can be sorted out by discussions and by an order from a superior officer when necessary (although in practice the bureaucracy can be slow moving in addressing and sorting out problems). This is to be contrasted with negotiation over the meaning of clauses in a contract and possible litigation.
The problem of imperfect contract specification is likely to be particularly prevalent in contracts involving new technology. The OneLink automated ticketing contract is an example where the relative inflexibility of the contract has proved to be a source of difficulty. The Review has been informed that during the preparatory phases of this project there were numerous implementation delays and changes made to the specifications. At the time of writing there are unresolved disputes between the contractor and the government arising out of these difficulties.
3.2.3 Risk of Increased Transaction Cost
A further factor for governments to consider is the upfront cost of contracting out. The costs to be taken into account include the initial legal costs involved in negotiating and drafting contracts.
By way of example, the Department of Treasury paid approximately $60 million in fees to consultants involved in the Transport Reform Unit, who worked on the reform of Victoria’s public transport businesses over a two and a half-year period.7 The costs associated with the sales of the three stapled gas distribution and retail businesses and Transmission Pipelines Australia, incurred by the Department of Treasury and Finance, were reported as $27.7 million.8 The costs incurred by the Department of Treasury and Finance in the sale of the Victorian Plantations Corporation (VPC) totalled around $7 million.9
Other costs that should be taken into account by the government in making the decision to contract out include the ongoing costs of governance, such as the cost of monitoring the contractor’s performance and the need for legal advice as to how to interpret particular clauses.
The counter argument is that transaction and continuing costs can be outweighed by the savings that are achieved from the competitive tendering process. For instance, it was
7 The Department Of Treasury and Finance informed the Review of this figure. 8 Report of the Auditor-General, Victorian Government’s Finances 1998-99, December 1999, 89. 9 Ibid, at 108.
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3.2.4 Risk of Litigation
Outsourcing places a great deal of reliance on contractual specifications to ensure that services meet the needs of the government and the community. As outlined above, the greater specification of services through the outsourcing process will inevitably lead to greater complexity in contracts, and the greater the complexity, the greater the possibility for the government, or the contractor, to make mistakes. These risks may be enhanced if the contract managers have not been properly trained or do not have relevant experience. The Review therefore notes that the decision by a government to move away from traditional public administration may also have the consequential effect of increasing the risk of litigation.
There is some risk in traditional public service delivery, but this manifests itself in public law remedies, the underlying purpose of which is to improve the quality of government decision- making. With the contracting out of government services, the sorts of administrative law mechanisms available to people in the past (in the form of agencies like the Ombudsman to investigate maladministration, access to information under Freedom of Information legislation, judicial review of administrative decisions and the expanding role of the Auditor- General) do not necessarily apply. Rather, if a legal risk emerges in connection with a contract, the parties have recourse only to private law remedies that are, as a rule, more costly than public law remedies. This tends to reinforce the point that the move to government contracting can increase costs if disputes arise. Once something moves from the public sphere to the private sphere, the protective umbrella of administrative law is removed and the parties have recourse only to more costly, private remedies.
The Review noted that in many of the more complex contracts examined, elaborate, graduated dispute resolution procedures are specified in the contracts. These were innovative (for example, there was commonly resort to an expert determination which can be less time consuming and expensive than the use of arbitration) and comprehensive. This feature of the contracting out processes was a very positive one, although yet to be fully tested in practice.
Given that a by-product of government contracting seems to be that the risk of disputation is increased, the Review recommends that in future government contracting projects, a graduated dispute resolution process should generally be established in the contract, including the use of expert determination.
3.2.5 The Danger of Fettering the State’s Future Freedom to Govern
A significant issue to be considered in the pre-contract phase is the risk of fettering the State’s future executive or legislative options. By entering into a contract, an administration may effectively bind future administrations so that future policy formulation is inhibited. The legal entity that has made a contract is the body politic (or a statutory corporation in some cases) and so it is not possible for a new administration to claim not to be bound by a contract made by the previous administration. There are limited legal exceptions to this proposition. The State may be able to break a contract on the basis of ‘executive necessity’, a common law principle that recognises that in limited circumstances, such as a crisis, the State has to break a contract and can do so with impunity. It is also possible for the government simply to legislate to override a contract.
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These measures are rarely used and, in practical terms, would expose the State to the risk of national and international censure with consequent effects on its credit rating. To all intents and purposes, therefore, government contracts are binding on subsequent administrations.
Some of the contracts examined by the Review are very long-term and affect the ability of future administrations to formulate policy. Perhaps the most telling example is the CityLink project. The contract is for 34 years, extendable in certain circumstances to 54 years. There are conditions in the contract that impose limits on the government’s ability to formulate transport policy - or at least require that, if the government wishes to change its policy, compensation should be paid to Transurban, the operator of CityLink. It is difficult to foresee what traffic and other transport arrangements will be appropriate for Melbourne in 2035, let alone 2055. Yet this contract will still be constraining the government’s policy choices far into the future.
Another example is the OneLink automated ticketing contract, which, in a different way, ties the hands of future administrations. The original contract was for a period of 13 years, although it is now projected to last until 2007 with a possible five year extension. This contract is about a form of technology that is changing rapidly. A comparatively long-term is undesirable because the contract may not deal adequately with rapid technological change. Every contract may, of course, be varied by agreement, but it is notorious that contractors often exploit variations to obtain higher than usual returns.
In considering whether to engage a private operator to undertake projects of this kind, an important consideration is the fettering factor. It may be a factor that is strong enough to persuade a government that private provision is not feasible or desirable.
3.3 Strengths and Weaknesses of Contracting
These contracting risks need to be assessed against the risks of continued direct public provision. Similarly, the benefits of contracting need to be set against those of direct public provision.
The following table summarises some of the issues to be considered.
Table 3 Risks and Benefits of Contracting Versus Direct Provision
Contracted provision: benefits Contracted provision: risks • Services precisely specified • Inflexibility • Capacity to enforce • Litigation • Duties and responsibilities of parties clear • Transaction costs • Risks can be allocated to most suitable party • Policy options may be committed for many years into the future Direct public provision: benefits Direct public provision: risks • Flexibility • Vague specification leading to poor cost • Staff can be directed to remedy errors control without resort to litigation • State may bear wide range of risks
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3.4 Need for Prior Economic, Environmental, Social and Regional Studies
It is vitally important that, in the pre-contract phase, processes are in place to ensure that the policy choices taken and embodied in the contract are sound. There are a number of well- established mechanisms for testing public policy proposals and ensuring that they are developed on a sound basis. Examples of such mechanisms, and the purposes they might serve, are set out in Table 4.
Table 4 Some Options for Pre-Contract Consideration Tests the financial and economic merit of proposals using standard models Economic evaluation, and techniques; may compare costs and benefits of public vs private cost benefit analysis provision Environmental Effects Identifies environmental impacts using statutory processes and involving Statement public inputs Social or regional Considers the effect the proposal may have on different groups in society or impact analysis regions in Victoria Allows Members of Parliament from different parties to judge the merits of a Parliamentary proposal, usually on the basis of public hearings, research and expert Committee reference advice Treasury analysis Used prior to government decision to highlight cost and economic issues Cabinet consideration Allows Ministers to debate proposal from their various standpoints
The processes used in considering policy proposals will vary, but most major proposals should at least be subject to the last two steps.
A striking feature of the major contracts examined in the Case Studies of this Review is the lack of prior analysis applied before decisions were taken and contracts signed. This is illustrated by Table 5.
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Table 5 Prior Consideration of Case Study Contracts
Grand Casino CityLink One Link Prisons Transport Prix Economic No Partial10 No No11 Yes No12 evaluation Environmental N/A Partial13 N/A N/A N/A No Effects Statement Social or regional No No No No No No impact analysis Parliamentary Committee No No No No No No reference Treasury comment See Appendix 8 in Volume 3 Cabinet consideration
N/A = Not Applicable
Table 5 reflects the conclusions of the Review after seeking advice from a number of Departments. The table is subject to the qualification that no such enquiries can be exhaustive, and that there can be room for interpretation as to whether particular reports qualify in the categories mentioned (see footnotes below).
10 The Review formally requested advice from the Department of Infrastructure on 23 March 2000 as to what prior economic evaluations had been undertaken. The reply received from the Acting Secretary of the Department on 14 April referred to the EES and to an April 1996 report by the Allen Consulting Group. The Melbourne City Link Authority in comments to the Review dated 17 April 2000 drew attention to the 1992 Ronaldson/Smith Review, which it States ‘was not publicly reported as it was included in a submission to a Cabinet Committee’. MCLA further stated that ‘It is true that not all of the financial evaluations or reports to Government on the selection of the mode of delivery were made public. The impression created in your report is that the project proceeded without due economic and financial analysis. This is not the case and the debate should be around how much of this was made public and the extent to which Government wished to entertain more traditional delivery options involving State funding and State D & C construction risk.’ 11 Instead of a comprehensive economic study, the more limited approach of benchmarking against the existing cost structure was adopted. For further discussion see Case Study in Volume 2. 12 With regard to the Grand Prix, the Department of Treasury and Finance drew the attention of the Review to a memorandum of 20 April 1993, prepared by the Melbourne Major Events Company (DTF File 94/0111). This memorandum is, in its own terms, not an economic evaluation; rather it recommends that $5,000 (sic) be allocated so that an economic evaluation can be carried out. 13 The Melbourne City Link Authority in comments dated 17 April 2000 suggested to the Review that the EES carried out for the Southern and Western Links constituted the EES for the proposal. However the EES did not relate to CityLink as built. Crucially, the EES undertaken related to an incomplete version of the project and did not address the impact of tolls. Hence the key issue of traffic diversion was outside its scope. (See CityLink Case Study in Volume 2 for further discussion.)
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3.4.1 Economic Analysis
Economic analysis is appropriate for any project involving the commitment of State funds in excess of $50 million, and should clearly be applied to any project of which the primary justification is economic benefit to the State. All of the projects chosen as Case Studies meet both these criteria, and none were subject to economic analysis except in relation to the public transport reforms and, however unsatisfactorily, the CityLink project.
Such analysis would normally involve the following elements:
• quantification of expected financial and economic benefits; • discounted cash flow analysis including the establishment of benefit/cost ratios, net present value estimates and pay back period; • assessment of future market conditions including demand, supply and competition issues; • assessment of regulatory framework; and • identification of externalities.
The Review finds it remarkable that such processes were not applied (or in some cases not applied comprehensively and/or not disclosed) by the former Government to some of these contracts. Such transactions involved cash flows of many millions of dollars. In the absence of rigorous and comprehensive economic analysis, it is difficult to understand how the previous Government could have been sure it had acted wisely at the time decisions were taken. Moreover, in the absence of public disclosure, the community could not make informed judgements about government policy and hold the government accountable for it.
3.4.2 Comparison of Public and Private Provision
A particular aspect of this analysis, which ought to have been regarded as mandatory in relation to contracts where BOOT structures were adopted, was a comparative full cost analysis of public and private provision. The Auditor-General was critical of the absence of such analysis in relation to the CityLink contract, where it is not self-evident that private provision was the most economically efficient option.
In relation to hospital and prison BOO projects, only a limited comparison was undertaken. This process was not a true application of benchmarking, as prescribed by standard literature on the subject. Instead, it involved only a limited comparison between the average costs of past public provision and the costs contained in the tenders from bidders. In relation to prison BOO projects, the cost per prisoner at Pentridge was a benchmark against which private prison bids were compared. It is clear that a narrow approach of this kind has limitations – the cost of operating a mid-nineteenth century stone prison provides only limited guidance as to the costs of running a modern unit-based prison.
3.4.3 Environmental Effects Assessment
Victorian law establishes the EES process as the prescribed method for assessing public works that may have adverse environmental impacts. The Environmental Effects Act 1978 (as amended) expressly requires the preparation of an EES for public works likely to have a significant environmental impact. The Act States:
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Section 3 (1) This Act applies to works that are declared to be public works for the purposes of this Act by Order of the Minister published in the Government Gazette.
Section 3 (2) The Minister must not make an order in respect of works under sub- section (1) unless the Minister is satisfied that the works could reasonably be considered to have or to be capable of having a significant effect on the environment.
Section 4 (1) Before commencing any public works to which this Act applies, the proponent must cause an Environment Effects Statement to be prepared and submit it to the Minister for the Minister's assessment of the environmental effects of the works.
In relation to the contracts under review, a partial EES was undertaken for two components of the CityLink project, but no comprehensive EES has yet been undertaken for the project as built, despite significant public concern regarding emissions.
In relation to the Netball Stadium constructed at Royal Park in 1999/2000, no EES was undertaken despite serious concerns that the sensitive environments of Royal Park (an important conservation area) and of the zoo might be adversely affected.
No EES was undertaken in respect of the public works associated with the staging of the Formula One Grand Prix, although at one stage such an assessment was promised, and an environmental management plan was produced. Works contracts involving Parks Victoria were signed and an environmental impact of some magnitude took place.
The limitations of environmental effects processes prior to the signing of the contracts suggests that the previous Government did not always wish to have these impacts assessed, and proceeded to the contracting stage without considered input on the environmental issues.
3.4.4 Social and Regional Impact Analysis
Some government decisions have particular effects on specific sections of society. Two examples of this are the effects of electronic gaming on lower income citizens, and the effects of the privatisation of the SECV on employment levels in the La Trobe Valley.
When it can be foreseen that a decision (and a contract) might have significant social or regional impacts, a government can undertake prior analysis in order to identify ameliorative measures to protect those most at risk.
Some Victorian contracts do offer such protection (for instance, the rail and tram contracts which protect concession fares, and the electricity tariff order which controls electricity prices to domestic consumers until 2001). Some social impact analysis has been undertaken after the event, particularly in relation to gambling and La Trobe Valley unemployment. Both of these were social phenomena too significant to overlook. However, the Review can find no example in which the former Victorian Government commissioned social or regional impact analysis prior to contracts being entered into.
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3.5 The Potential Contribution of Parliamentary Committees
Parliamentary committees have always played an important role in Victorian public policy making - particularly in the consideration of major public works and investments prior to decisions being made.
The Parliamentary Standing Committee on Railways - later to evolve into the Parliamentary Public Works Committee and then into the Parliamentary Economic Development Committee - was established following a rash of ill-judged political decisions to construct railways in the 1880s. In 1983, the Parliamentary Committees (Investigative Committees) Act provided clear roles for five new investigative committees, including the Public Accounts and Estimates Committee, the Economic Development Committee and a Social Development Committee.
Such committees are usually bipartisan in nature and work through a process combining submissions, public hearings, research and expert advice. They permit problematic and divisive social and public investment matters to be aired and considered in a forum that forms part of the parliamentary process. Such committees frequently work by reference from the Government of the day.
The Review has not identified any instances among the contracts under review where the former Government called upon Parliamentary Committees to investigate proposals,14 notwithstanding their far-reaching nature. In fact, Parliament itself was not always involved in decision-making processes. In respect of the CityLink project, the parliamentary forum was used to good effect, the contract was embodied in legislation and full debate was possible. But other major projects were considered neither by Parliament nor by Parliamentary Committees.15
The Review is forced to conclude that the former Government did not place parliamentary consideration of major new projects high on its agenda.
3.6 Cabinet and Treasury Consideration
By convention, the Cabinet processes of former governments are confidential. The Review cannot evaluate the extent to which Cabinet was involved in the decision making for projects under review, nor the extent to which Treasury advice was sought. Submissions have suggested that some major contracts - such as the Australian Formula One Grand Prix - were signed without Cabinet’s or Treasury’s formal consideration.16 The Review is unable to form a judgment on this matter, but notes the inference that has been made.
14 Apart from the PAEC studies of Outsourcing of Government Services in the Victorian Public Sector and Commercial in Confidence Material and the Public Interest. Examination of the summary information in Parliamentary Committees: Progress on Investigations and Ministerial Responses to Recommendations of Joint Investigatory Committees for the period 1992-99 revealed no major investigations into the specific contracts under review. 15 The issue of bypassing Parliamentary processes by the use of contract was the subject of an important article by T Daintith Regulation by Contract: the New Prerogative (1979) Current Legal Problems, 41. 16 Submission to the Review by the Save Albert Park group. The Department of Treasury and Finance (DTF) was significantly involved in the facilitation of the Grand Prix and relevant papers are on its files. The Review wrote to DTF on 23 March 2000 requesting advice as to the existence of prior financial or economic analysis. The Review’s attention was drawn by DTF to the 20 April 1993 MMEC Memorandum as illustrating prior economic analysis. However, no independent Treasury analysis of the proposal has been sighted to date.
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3.7 Assessment of Previous Government’s Approach to the Pre-Contract Phase
The pre-contract phase of any major project should be managed in a rational and systematic way. The processes described above should not be used to excess, but should reflect the steps which prudent managers use to see that decisions are made taking all relevant factors and risks into consideration. In particular, major projects of economic significance must be the subject of rigorous independent analysis and advice if risks are to be identified and managed appropriately.
The Review’s key recommendations are as follows: • major projects involving economic significance to the State should be subjected to a process of publicly disclosed economic analysis; • where a major BOOT, contracting out or franchising project is under consideration, this analysis should include consideration of the alternatives of public and private provision; • the provisions of the Environmental Effects Act 1978 should be invoked whenever a major project proposal has environmental effects; • Parliamentary Committee consideration is an appropriate process for some major projects, particularly where community opinion is divided and a process of public hearings and information exchange may assist in moving toward consensus; and • all major contracts should involve Treasury comment and Cabinet consideration.
3.8 Benchmarking
An important early step in the planning process for outsourcing is the development of a public sector financial benchmark. Benchmarks provide an estimate of the costs that would be incurred if a facility or service were provided in the public sector. This in turn provides a yardstick against which the value-for-money offered by private sector proposals and bids can be measured.
In a number of the contracts it examined, notably the prison contracts, the Review identified significant concerns about the basis for calculating the financial benchmarks. No allowance, or premium, was built into the benchmark for the additional risk being carried by the private provider. For example, when a prisoner escapes, there is a significant cost attached to returning the prisoner to custody. However, no premium was built into the benchmarks to account for these risks/costs. Furthermore, the benchmarks were based on the costs of operating an existing facility: no provision was built into the benchmarks for the cost of providing a new capital asset.
In the case of the prisons contracts, benchmarks were determined well before the project brief for each prison was drawn up, resulting in benchmarks that were out of date and inaccurate by the time the process went out to tender.
Benchmarks have a role to play in ensuring that private sector proposals are realistic and deliverable in practice. The fact that the three winning bidders for the prison contracts all came in below the financial benchmarks set by Government would appear to represent a big ‘win’ for Government in relation to the prisons contracts. However, overambitious bidding can reduce the extent to which risk is transferred to the private sector. It could lead to a situation in which providers are unable to complete the project for the cost specified, seek variations to their contract or even go bankrupt. Benchmarks should help to identify cases of unsustainably low bids or ‘lowballing’.
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Equally, however, it is important that benchmarks should accurately reflect the full risks that would be borne by the government if the project or service were to be delivered in the public sector. Benchmarks should establish a ‘level playing field’ between public and private sectors.
Recommendations for the establishment of Government financial benchmarks include: • the benchmark should be reviewed continually throughout the contracting process to ensure that it reflects accurately any changes to the project brief; • an independent body should undertake (or at least review) financial benchmarks, rather than the related Government department or agency; • risk premiums and differences in any difference in taxation obligations should be factored into benchmark calculations; and • public sector comparators should be revisited and updated throughout the process.
3.8.1 Establishment of Non-Financial Benchmarks
In a number of the contracts examined by the Review, including prisons and the train/tram franchises, privatisation led to the establishment of minimum performance standards, or benchmarks, for each key aspect of service delivery. This represented a major step forward in measuring and encouraging high standards of performance.
However, benchmarking has been defined as ‘a continuous and systematic process of evaluating the products, services and work practices of an organisation against businesses that are considered to be the best performers.’17 The non-financial benchmarks set by Government in relation to the prisons and OneLink did not meet this definition. In the case of the prison contracts, service delivery outcome benchmarks were based on the performance of outdated facilities within the Victorian prison system. These facilities, Pentridge and Fairlea, did not represent world’s best practice and therefore do not provide a sufficiently challenging benchmark for private sector providers. The State is now in a better position to benchmark prison facilities, with modern public and private facilities to use as a comparator. In the case of the OneLink contract, non-financial performance benchmarks were set by negotiation with the provider rather than by reference to best practice in ticketing systems elsewhere.
The Review identified two key types of non-financial performance measures. The first is the reporting of data relating to minimum standards of performance which the contractor is specifically required to meet. The second type of data, which the Review considers to be equally important, are indicators which, though not tied to specific contractual requirements, allow the public to evaluate the contractor’s performance.
The Review’s recommends that benchmarking should involve more than setting minimum acceptable levels of performance. It should involve examining the processes that best practice organisations have used in order to achieve superior levels of performance.18
17 K Langfield-Smith, H Thorne, and R W Hilton, Management Accounting: An Australian Perspective, (2nd ed 1998) McGraw-Hill, Sydney, 13-14. 18 See for example, M Spendolini, The Benchmarking Book, Amacom, New York, 1992; Y K Shetty, Aiming high: competitive benchmarking for superior performance, Long Range
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The Review sought advice with regard to the macro-economic and financial impacts of the previous government's policy. It was also keen to obtain independent advice on non-financial impacts, but was not able to do so in the limited time available to it. The Review therefore recommends that: • to provide guidance in establishing performance reporting systems in the future, an independent review should be conducted into the non-financial impacts on the Victorian community of private provisioning. The report should examine social, environmental, governance, employment, planning, health, community and regional impacts. The Review believes that such a report would: − contribute significantly to the overall depth, comprehensiveness and quality of reporting on project/contract outcomes; − provide a balance to the evaluation of financial impacts currently being undertaken; and − represent an important piece of advice to the government, which will be fundamental to the development and management of future policy in privatisation and outsourcing. • an assessment of public benefit in non-financial terms should be an essential part of the post-implementation review of any project, as well as an element of performance reporting for all public service contracts. Measurement and analysis of non-financial performance is complex but necessary.
3.9 Performance Measurement
3.9.1 Adequacy of Performance Measurement Systems
The Review considers that the systems implemented to monitor the performance of private providers were, in many cases, unsatisfactory.
In a number of the Case Study contracts (CityLink, Grand Prix, Crown Casino), no coherent performance measurement system was established or required under the contract. Marked exceptions were the train and tram contracts. Of the remainder of the contracts, the prisons Case Study is perhaps the most instructive in terms of providing recommendations to the government concerning performance measurement.
In the prison sector, the performance of each private contractor is measured by assessing performance against a series of Service Delivery Outcomes (SDOs). The Auditor-General was highly critical of the SDO regime for the prisons, arguing that the measures were too short-term in focus, too quantitative in nature, and did not reflect all key aspects of operator performance.19
These comments could be made about the performance indicators used to monitor performance in a number of the Case Study contracts. The comment that measures are often too quantitative in nature is certainly not restricted to the prison contracts. The advantage of quantitative measures is that they provide measurable outcomes, and as a result, are enforceable through a contract. It is much harder to measure and enforce performance against qualitative measures in a contractual situation. Yet qualitative
Planning, 1993 pp. 39-44; K Langfield-Smith, H Thorne, & R W Hilton. Management Accounting: An Australian Perspective, (2nd ed 1998) McGraw-Hill, Sydney, 13-14. 19 Victorian Auditor-General’s Office, Victoria’s prison system: Community protection and prisoner welfare, Special Report No. 60 (May 1999).
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The Review considers that performance measurement has a dual purpose:
• to facilitate contract management and ensure that minimum, enforceable standards are met; and • to allow the general public to assess performance outcomes of private providers.
The Review recommends a two-tiered system for performance measurement, incorporating both qualitative and quantitative measures of performance. This performance measurement system should include: • a series of quantitative measures, and benchmarks against which contractual performance can be assessed; and • a series of measures, both qualitative and quantitative, which would act as general indicators of the performance of a private provider. These measures, whilst perhaps not directly enforceable through the contract, should be publicly disclosed in order to enhance accountability to the public. Benchmarks should be made more challenging over time in order to encourage continuous improvement.
3.9.2 Publication of Performance Data
One positive feature of both the prison contracts and the train and tram franchises (but not some of the other contracts examined by the Review) is that operators’ performance against benchmarks is publicly disclosed.
The Review firmly believes that increased disclosure of non-financial performance information is required. In at least one case where such data is not currently disclosed (OneLink), the contractor has indicated its willingness for contractual performance data to be made public in future.
The Review recommends that future contracts with private providers should carry a requirement for non-financial performance information to be publicly disclosed.
3.9.3 Link to Goals and Strategies
It is widely accepted that performance measurement should align with or support the strategic objectives of the service provision.20 As the Auditor-General has indicated, benchmarks should be developed for all key aspects of operators’ performance. Even in contracts which contain a large number of benchmarks (such as prisons), it is clear that certain key aspects of operator performance are not adequately measured. The Review therefore recommends that, where possible, provision be made within future contracts to allow for a regular review of performance measures.
20 See for example, A Lockamy, and J F Cox, Re-engineering Performance Measurement, Irwin, New York (1994); A J Nanni, J R Dixon, & T E Vollman, ‘Integrated Performance Measurement: Management Accounting to Support the New Manufacturing Realities’ Journal of Management Accounting Research, Vol.4, (Fall 1992) 1-19; P. Drucker, ‘The Emerging Theory of Manufacturing’ Harvard Business Review, May-June (1990) 94-102.
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Similarly, performance measures should focus on the key drivers of performance. The contractual measures of OneLink’s performance indicate adequate performance by the operator since the system was fully commissioned in December 1998. However, the Review has raised significant doubts about whether the objectives of the automated ticketing system have been met. This suggests that the system established to monitor OneLink’s performance is not sufficiently comprehensive or focused on the key aspects of performance. There are no contractual measures, for instance, of OneLink’s success in delivering a system which is perceived as ‘user friendly’ by the travelling public, although it is conceded that including such a measure in a contract is by no means easy.
3.9.4 Unintended Outcomes
In developing performance measurement systems, government must be careful to ensure that unintended outcomes do not arise. For instance, in the case of prisons, incidents of self-harm (self-mutilations and attempted suicides) were included on the list of SDOs, whereas deaths in custody were not. In effect, this meant that private operators were penalised for attempted suicides but not actual suicides - a perverse outcome that was apparently not considered at the time of developing the SDOs.
3.9.5 Data Collection and Validation Procedures
The Review considers that government contracts should in future place greater emphasis on external data, specifically client/customer surveys.
A number of the contracts examined by the Review relate to providing a service to the public (for example OneLink, Crown Casino), but lack any system for measuring customer satisfaction. The Review recommends that such data be collected on a regular (perhaps quarterly) basis in order to assess whether the Victorian public has benefited. Data collection could be the responsibility of the government department or agency responsible for monitoring contractual performance.
If customer surveys are to be used in future, careful attention must be paid to survey development and design in order to achieve satisfactory response rates, to provide data that is reliable, and to ensure that samples are representative of the population from which they are drawn.
A Performance Audit Report on Key Performance Indicators prepared by the Audit Office of New South Wales noted that:
Whatever approach to performance measurement systems is adopted, to achieve effective accountability it is vital that reported information be useful and reliable. But most performance measurement systems in public sector jurisdictions lack adequate independent assessment and validation of performance information.21
This comment underlines the need for non-financial data to be independently assessed and verified. The Audit Office of New South Wales noted that independent data verification:
• assists users by interpreting the information provided and confirms that the information presented meets the following objectives: appropriateness, timeliness, accuracy, comprehensiveness and completeness; and
21 The Audit Office of New South Wales, Performance audit report: key performance indicators (1998), 22.
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• deters the selective presentation of information - the situation where measures are reported when performance is good, but ‘disappear’ when performance is poor.
The Audit Office of New South Wales also noted that for measures to be accurate, reliable and relevant, the indicators should be externally reviewed and endorsed, either by the Minister in conjunction with stakeholders and beneficiaries, or by an appropriate independent body. The Review concurs with this suggestion.
The Review is concerned that non-financial performance information provided by private operators is not always externally audited. Other jurisdictions have an independent authority to validate the performance information provided by government authorities, or private providers. For example, in the United Kingdom, private water providers are required to have their performance information validated by an accredited authority.22 The use of independent data validation may help to reduce disputes between the parties with regard to performance indicators.
The Review is also concerned that private providers may have a disincentive to report unfavourable incidents, especially when remuneration is tied to performance against specified benchmarks. Performance measures for all major contracts should therefore be independently audited, and data collection procedures should be reviewed in order to minimise the possibility of under-reporting.
The Review recommends that: • wherever possible, financial or contractual penalties for under-reporting should be specified in contracts; • performance measures should, where possible, be used to reward good operator performance as well as to punish unsatisfactory performance. This has proved to be a powerful driver of improved performance in the train and tram sector; and • where possible, measures of operator performance should focus more on rewarding positive operator performance than is currently the case.
3.10 Financial Management and Reporting
The private provision of public services sometimes results in the State stepping away from all interest and involvement in an industry. In the majority of cases, however, there are on- going government responsibilities. This is particularly the case where the purpose of privatisation is not to exit an area altogether, but to delegate service delivery in a context where ministerial responsibility remains and there is also a need for public accountability for the taxpayers’ funds committed to the area contracted out.
A full understanding of the issues of privatisation, debt, and their relation to a government’s stock of assets and expenditure capacity is best obtained where a government (as in New Zealand and New South Wales) presents a ‘Whole of Government Balance Sheet’ produced on an accrual accounting basis. Victoria has produced such Balance Sheets for the last three financial years. Such statements permit discussions of debt, privatisation and the State’s balance sheet to occur on a much more complete basis than previously. Their introduction was in line with a recommendation of the Victorian Commission of Audit appointed by the Government in 1992.23
22 Reported in The Audit Office of New South Wales, Performance audit report: Key performance indicators (1998), 23. 23 Report of the Victorian Commission of Audit (Chairman: Professor R R Officer) (1993).
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Examination of financial reporting issues was not a term of reference of this Review (as it was of previous Audit Commissions). However, several observations in this area are so important and so directly connected with the Review’s other work that they cannot be omitted:
• there is a danger that, in the context of outsourcing, government departments will provide insufficient or incomplete data in their annual reports24. These reports are important both for the purposes of Parliamentary accountability and often for social planning. Outsourcing should not result in the removal of key data from annual reports; • there is a danger that fragmenting publicly funded activity through outsourcing may make it more difficult to assess the aggregate outcome of government programs (whether privately or publicly delivered). The Review noted the model adopted by the New South Wales Government for assessing Service Achievements and Outcomes, a program initiated by the NSW Council on the Cost of Government.25
The Review recommends that: • government departments be directed to maintain the reporting of financial and performance data in their annual reports regardless of whether services are directly delivered or contracted out; and • the government consider adopting a regular, broadly based, outcomes reporting system similar to the Reports on Service Achievements and Outcomes produced by the NSW Council on the Cost of Government.
3.11 Concluding Comments
The challenge for the present government will be to address its own policy priorities while retaining the economic/financial strength it has inherited. This challenge was recognised by the Premier in his Second Reading speech on the Financial Management (Financial Responsibility) Bill when he indicated the Government’s commitment to maintaining a substantial Budget surplus and firm financial management. The Premier said:
We aim to be socially progressive but financially conservative.
To achieve this we have set ourselves four important goals.
The first is to maintain and enhance the State’s financial position. Obviously a surplus cannot be maintained without a commitment to financial responsibility.
Secondly, we want to grow the whole State – making sure the rewards of Victoria’s prosperity are spread across all sectors of the Victorian community, including rural and regional areas.
Another priority is to restore democracy, transparency and accountability in Victoria. And finally, we will deliver improved services to the community, particularly in key areas of health, education and law and order.
24 Research by Professor Colin Clark of V.U.T. discloses substantial limitations in the annual reporting of Victorian government departments during the 1990s. 25 NSW, Council on the Cost of Government, Reports on Service Achievements and Outcomes (1997) Sydney.
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To meet these commitments, the Government will need to adopt a policy of continued public and private service delivery. A policy of moving toward exclusive public or private provision would hinder the delivery of these objectives.
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Chapter 2
Important notice: while the Review has used its best endeavours to ensure the accuracy of this Chapter, it is currently awaiting comments from relevant departments on all contract summaries used in its preparation. This process may identify the need for further amendments to the contract summaries and/or this chapter. A revised version of this Chapter will be published if necessary.
CHAPTER 2 OBLIGATIONS AND LIABILITIES
1. INTRODUCTION
The unprecedented extent and complexity of the contracts entered into by the former Government makes it essential that in a due diligence sense, a careful review and identification of obligations and contingent liabilities in those contracts should be undertaken. This has been a most onerous and time-consuming task but one that the Review believes was vital.
1.1 Interpretation of Term of Reference
This Chapter addresses Term of Reference 1, which requires the Review to report on:
The significant ongoing obligations and contingent liabilities imposed by these contracts, arrangements and undertakings1 on the State of Victoria.2.
The Review has interpreted the expression ‘significant ongoing’ in Term of Reference 1 as applying to both obligations and contingent liabilities.
The Review has not used a fixed financial definition of significance for all transactions. For that reason obligations and liabilities in the context of a small transaction may be noted which would not be noted in the case of a larger transaction.
The Review interprets ‘ongoing’ obligations and liabilities as those that continue on foot at the time of this Report. Obligations which have already been discharged, such as transaction conditions precedent, are not generally reported, subject to exceptions in
1 In context, the expression ‘these contracts, arrangements and undertakings’ in Term of Reference 1 refers to the things denoted by the following longer expression in the preamble to the Terms of Reference: ‘…major contracts entered into by the State of Victoria by the previous Coalition Government for the purpose of: • privatising assets where the State of Victoria transferred the ownership or leased the assets of the State of Victoria; • contracting out service provision to the private sector or to not-for-profit organisations; • facilitating private sector infrastructure projects; and • any other major contractual arrangements entered into by the State.’ The precise scope of the contracts investigated by the Review is discussed in detail elsewhere in this Report. For present purposes, it is sufficient to note that in broad terms the Review has focused on contracts whose value exceeds $100 million or which are of significant community concern or interest. The contracts reviewed are set out in Appendix 1 in Volume 3 of this Report. 2 The Terms of Reference state that for the avoidance of doubt references to the State or the State of Victoria in the Terms of Reference include instrumentalities of the State, for example statutory corporations.
45. Chapter 2 particularly notable instances. The Review has not had the opportunity to investigate thoroughly the background to every transaction within its remit. Consequently it is possible that some of the obligations identified have been discharged or have lapsed.
The Review has directed its attention to contractual obligations that are binding on Government.3 The Report has not sought to identify verbal commitments and other representations that might give rise to significant ongoing obligations where they have not been reduced to contractual form.
‘Obligations’ as defined in this Report are broadly synonymous with liabilities that must be recognised in the Government’s financial statements pursuant to AAS 31 Financial Reporting by Governments. That Standard requires recognition of a liability where it is probable that a future sacrifice of economic benefits will be required, and the amount of the liability can be measured reliably. ‘Contingent liabilities’ as defined in this Report are generally potential legal liabilities that may become actual liabilities in the future on the happening of an uncertain event.4 However, the Report has not attempted to apply strict accounting principles in separating obligations from contingent liabilities.
1.2 Reporting of Obligations and Liabilities
Unless otherwise stated, sources for this Chapter of the Report are the Review’s own contract summarisation process and the reports to the Parliament of Victoria of the Auditor- General.
During the contract summarisation phase of the Review,5 summarisers were required to identify and summarise a large number of provisions of each contract. Of special importance from the point of view of obligations of the State were the following provisions:
• notable conditions precedent requiring performance by the State; • warranties given by the State; • significant ongoing obligations of the State during the life of the contract; • other significant or unusual obligations of the State; and • significant ongoing obligations imposed on the State after termination.
In researching the contingent liabilities arising under the major contracts studied, the Review has summarised the following aspects of major contracts:
• guarantee arrangements involving the State referred to, or incorporated, in a contract; • potential liability of the State to pay liquidated damages; • potential liability of the State to pay tax or indemnify another party for tax; • potential liability of the State under an indemnity (non-tax);
3 The Review has ignored the effect of the legal doctrine of executive necessity, whereby the State cannot ultimately be forced to perform an obligation that it does not wish to accept, or the possibility of the State legislating to negate a contract or a particular obligation arising under a contract. 4 The expression ‘contingent liabilities’ as used in this report would also embrace liabilities that would be disclosed pursuant to paragraph 15.5 of AAS 31, were it not for the operation of paragraph 17.1 (which relates to agreements equally proportionately unperformed). 5 For more details of the contract summarisation process see Appendix 7 in Volume 3.
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• any other material potential liabilities of the State under a contract; and • significant risks remaining with the State under a contract.
The following sections of this Chapter contain an overview of these obligations and contingent liabilities, organised according to sector, where they are ongoing and significant in the sense discussed above.
It is important to note that the Review has not attempted a survey of all obligations and liabilities arising out of the various privatisation and outsourcing programs of the former Coalition Government. In particular, obligations and liabilities arising from contracts that were not investigated by the Review are not consistently reported on. Residual liabilities that predate the contracts dealt with and remain with Government or with statutory bodies, are reported on only in relation to gas, electricity and ports. These sectors alone accounted for over 90% by value of total asset sale proceeds dealt with.
1.3 Confidentiality
Obligations of confidentiality arising under the contracts investigated are dealt with in detail in Chapter 4. As set out in that Chapter, the Review recommends in the case of each contract dealt with, release of the contract after notification to the counterparty, or negotiation with the counterparty with a view to release, subject to exceptions relating to trade secrets and confidential information comprising intellectual property. The sole exception is constituted by certain Grand Prix arrangements.
For present purposes, the Review is constrained in reporting on obligations and liabilities of the State in relation to those contracts which are confidential. The Review has taken the approach that the consent of the counterparties cannot be assumed prior to publication of this Report, and that the Government should not be placed in a position where it must breach or override confidentiality obligations in order to release this Report.6
This Chapter therefore deals with obligations and liabilities arising under all the transactions investigated by the Review, with a number of exceptions or qualifications where the State has undertaken obligations to keep the terms of some or all of the contacts confidential. Those transactions are:
Transaction Extent of exception or qualification to reporting Heatane Gas Division Obligations and liabilities are not reported. Passenger Train and Tram Obligations and liabilities arising under Asset Sale Franchises Agreements are reported in general terms only. Reporting of obligations and liabilities is restricted to those VicRoads Plant Division identified by the Auditor-General. Victorian Police IT Outsourcing Obligations and liabilities are not reported. Reporting of obligations and liabilities is restricted to those La Trobe Regional Hospital identified by the Auditor-General. Mildura Base Hospital Obligations and liabilities are not reported. Obligations and liabilities arising under arrangements with Grand Prix international parties are not reported except to the limited extent identified by the Auditor-General.
6 The interaction of Parliamentary privilege with the law of breach of confidence is a matter that has not been addressed in detail by the Review.
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Transaction Extent of exception or qualification to reporting Reporting of obligations and liabilities is restricted to that Sale of 452 Flinders Street adopted by the Auditor-General. Melbourne and Olympic Parks Trust Obligations and liabilities are not reported. Contract with Ticketek
2. ELECTRICITY7
2.1 Distribution Businesses
The State Electricity Commission of Victoria (SECV) sold its interests in various electricity distribution businesses in 1996/97. The distribution businesses sold were: United Energy Ltd, Citipower Ltd, Solaris Power Ltd, Eastern Energy Ltd, and Powercor Australia Ltd. The sale values are set out in Appendix 1 to this Report.
In respect of each of the distribution businesses the SECV entered into a Sales Tax Agreement whereby, for so long as the SECV did not terminate the agreement:
• the SECV would reimburse the sales tax liabilities of the distribution business after sale; and • the distribution business would not seek to pass on sales tax to its customers.
The arrangements were terminated effective 30 June 1998 when the government put in place the Winter Power Bonus Scheme. The total cost to the State associated with the termination of these agreements during the 1998/99 financial year was around $67 million, comprising a one-off payment by the SECV of $42 million and a $25 million reduction in franchise fees previously payable by the distribution businesses. In exchange for these sums, distributors agreed not to pass-through to consumers sales tax costs until 31 December 2000. The SECV recognised a provision of $47 million in its financial statements as at 30 June 1998 relating to estimated sales tax reimbursement claims from the businesses for goods acquired on or before 30 June 1998. It is understood that a claim on the part of one of the distribution businesses is still outstanding.
There are no other significant outstanding obligations and contingent liabilities arising from the sale of the distribution businesses. For historical purposes, it is noted that in the sale of United Energy Ltd, an indemnity was given to the purchaser whereby if franchise fees payable under the business’s distribution licence were determined not to be tax-deductible, the State would pay an amount of $85 million to the purchaser. This amount was paid by the SECV in February 1998.
2.2 PowerNet Victoria
In late 1997, the statutory corporation PowerNet Victoria (PNV) sold its high-voltage transmission business to a subsidiary of GPU, Inc of New Jersey, USA, for $2.555 billion cash and franchise fees totalling $161 million payable over a number of years.
Pursuant to the sale conditions the State was required to consider in good faith any request by the buyer for assistance in rectifying any deficiencies in the Seller's easements or any planning issues, including by way of passage of new laws. The State agreed to provide the
7 For further details of electricity industry privatisation generally and the sales of Loy Yang A and PowerNet Victoria in particular refer to the Case Study contained in Volume 2.
48. Chapter 2 buyer with a reasonable opportunity to comment on the final wording of any proposed legislation or statutory instrument.
To facilitate the sale, certain changes were also made to the Network Agreement between PNV and the Victorian Power Exchange (VPX) (now the Victorian Energy Networks Corporation (VENCorp)) whereby the agreement would be renegotiated in various circumstances, including a fundamental change in the way electricity is generated, distributed or consumed. On their face the changes could be interpreted as insulating the purchaser of PNV from a certain degree of market risk. However, the Review understands that because the transmission grid’s revenues are regulated under the Electricity Industry Act 1994 by reference to the hypothetical optimised use of capital assets, the so-called ‘stranded asset risk’ (ie. the risk of holding unprofitable assets due to changes in market structure) remains with the purchaser. Such risks may well be significant as technologies for generation and distribution of electricity (eg. cogeneration) continue to evolve, and to the extent that any such risk remains with VENCorp, this would be a matter of concern.
2.3 Generators
2.3.1 General
The State, through the SECV, disposed of substantially all of its interests in all Victorian electricity generation businesses in the period 1997–1999.8 However, the SECV continues to trade in electricity on behalf of the State as follows:
• the SECV is entitled to 29% of the electricity output of the Snowy Mountains Hydro- Electric Scheme. Snowy Hydro Trading Pty Ltd trades this output in the National Electricity Market on behalf of the SECV; • the SECV sells electricity to the Portland Smelter Services Pty Ltd (Portland Smelter) and to Alcoa of Australia Ltd (Point Henry Smelter) under long-term contracts entered into in 1984 having a term expiring in 2014–16. Both contracts are highly unfavourable to the State, with current prices averaging $12–13/MWh including transmission charges of about $7/MWh; and • in 1997 the SECV entered a long-term electricity supply contract (the State Hedge) with the owners of the Loy Yang B power station to cover its supply obligations to the smelters. The price under this long-term contract is $24/MWh (adjusted for CPI), significantly higher than the price paid by the Portland Smelter. The difference is partially made up by a $2/MWh levy imposed on Victorian electricity consumers. In its 1998/99 annual report, the SECV estimated the present value of the smelter contract obligations at approx. $1.279 billion, and the present value of the levy revenues at approx. $1.073 billion, resulting in a net present (negative) value of the liability of $206 million.
The above trading activities carry with them certain risks and obligations which the SECV has endeavoured to minimise in the ways indicated.
In the case of each generator sale, the SECV entered an ‘IRFM Support Deed’ providing for payments to be made to generators in cases of industrial disputes to compensate generators
8 The generation businesses sold were: Hazelwood Power Corporation Ltd (Hazelwood); Yallourn Energy Ltd (Yallourn W); Southern Hydro Limited (Southern Hydro); Loy Yang Power Ltd (Loy Yang A); the State’s remaining 49% interest in the Loy Yang B power station; and the assets of the business Ecogen Energy, being the Newport and Jeeralang gas-fired power stations. For details of sale dates and values, consult Appendix 1 in Volume 3. A number of minor asset sales also took place which are not dealt with in this Report.
49. Chapter 2 for certain losses connected with lost capacity. These arrangements sit beside the provisions of the Victorian derogations from the National Electricity Code9 whereby the SECV can be made liable to bear a proportion of certain uplift payments paid to Victorian and interstate generators where an administered price cap is imposed in Victoria during certain industrial relations disputes. These arrangements will expire on 31 December 2000.
2.3.2 Hazelwood
The sale of Hazelwood was packaged together with the sale of the Energy Brix Australia Corporation (EBAC) business. As part of the sale process for Hazelwood, the State paid a contribution of $42.7 million to fund capital works, clean-up and termination costs associated with the EBAC business.
2.3.3 Yallourn Energy
As part of the sale of Yallourn Energy, the State undertook:
• to buy or compulsorily acquire certain land at Maryvale and to sell the land to the company; • to procure the termination of unfavourable arrangements requiring Yallourn Energy to supply coal to the EBAC business; • to terminate prior to completion the company’s contractual obligations to provide power under the energy export contract entered into between the SECV and the Electricity Trust of South Australia; and • to indemnify the purchaser in respect of certain asbestos-related liabilities. The claim period for this indemnity lapsed in 1997.
2.3.4 Southern Hydro
There are no significant ongoing obligations and liabilities arising from the sale contract in respect of Southern Hydro, which operates hydro-electric generators at Kiewa, Dartmouth and Eildon, as well as some minor plants at other locations.
2.3.5 Loy Yang A
The following significant ongoing obligations of the State arose from the sale of Loy Yang A:
• an ongoing credit exposure to the purchaser in respect of certain payments made to the Lurgi Pulverised Dried Brown Coal (PDBC) plant operators under take-or-pay arrangements for PDBC; • potential liabilities connected with the 3/4 Bench, a block of land next to the Loy Yang A power station which has been modified to take a brown coal power station and which the SECV owns. Those potential liabilities would arise if the SECV were to build a power station on the block. In that case, it could be required to: - contribute to capital costs connected with increasing the capacity of the Loy Yang mine sold to the purchaser, - purchase certain mining assets in certain circumstances, and - contribute to mine clean-up costs.
9 As set out in Part 9.1 of the National Electricity Code.
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• to use best endeavours to procure the early termination of the Interconnection Operating Agreement. This Agreement was terminated in April 1997, with South Australia being paid $77 million by the other participants.
2.3.6 Loy Yang B 49%
The SECV’s exposures under the State Hedge, described above, are the only ongoing significant obligations and liabilities arising from the sale of the State’s remaining 49% interest in Loy Yang B.
It is notable that as part of the sale in 1997 the SECV effectively paid $1 billion to terminate long-term contracts for the purchase of electricity from and the supply of coal and miscellaneous services to Loy Yang B. Direct contractual relationships on commercial terms were put in place between the owners of Loy Yang A and Loy Yang B to replace the arrangements thus terminated. In addition the SECV acquired the State Hedge at what is considered a long-term favourable strike price.
2.3.7 Ecogen Energy
There would not appear to be any significant obligations and liabilities arising from the sale of Ecogen Energy, the operator of two gas-fired power stations at Newport and Jeeralang. Warranty claims by the purchaser were limited to $1. The seller agreed to enter a long-term hedging contract with a member of the Texas Utilities group if requested, to be assigned to the buyer on completion. The Review is not aware whether such a contract was entered into.
2.4 Herman Research Laboratories
As a consequence of the privatisation of Herman Research Laboratories (HRL), SECV remained liable to pay rent on a building located at 677 Springvale Road, Mulgrave. An amount of $26.348 million was noted as a commitment in the 1998/99 accounts of the SECV in respect of this lease. It is understood that the SECV has now acquired the property in question for nominal cash consideration as part of the unwind of a complex trust structure.
Apart from certain indemnities given in respect of intellectual property, there are no significant obligations or liabilities connected with the sale of HRL. However, it should be noted that four debentures amounting in aggregate to $182 million that were given to SECV to secure fees for the licensing of certain technology to HRL are redeemable only if the project is adjudged a technical and commercial success. The SECV has not recognised any asset in its accounts in respect of this transaction. In addition, the SECV provided interest- free loans to the company totalling $8.5 million which are due for repayment in 2002 and 2003. The interest-free loans were not recognised in the accounts of the SECV as their recovery was considered to be uncertain.
2.5 Residual Liabilities of SECV
After the separation of the various electricity businesses from the SECV, residual liability for personal injuries claims remained with the SECV. That residual liability mainly relates to claims in respect of pre-1987 injuries. On 30 June 1999, all personal injuries liabilities of the SECV, including some deriving from gas and ports, were transferred to the State by way of an allocation statement under the Electricity Industry Act. Pursuant to the same direction, the SECV paid Victorian Managed Insurance Authority (VMIA) the sum of $105 million on that day and the VMIA was appointed to manage the liability on behalf of the State.
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The SECV remained in possession of sundry parcels of land associated with its former businesses. All such parcels were allocated to the State of Victoria on 30 June 1999, other than certain lands on the former site of the Yallourn power station. A provision of $4.2 million was disclosed in the 1998/99 Annual Report of the SECV in relation to site clearance costs for the Yallourn land. That land has now been fully cleared by the SECV and will be disposed of in the near future.
3. GAS10
3.1 Gas Distribution/Retail Businesses
GASCOR is a public authority established under the Gas Industry Act 1994 to market and distribute gas. On 1 July 1997, the assets of GASCOR were disaggregated and three stapled groups were established, each consisting of a distributor and a retailer11. From 1 July 1997, the pipeline assets of the Gas Transmission Authority were allocated to Transmission Pipelines Australia, with VENCorp assuming control of the operation of the gas transmission system and the gas spot market.
In early calendar 1999 the following three ‘stapled’ gas retail/distributor businesses were sold by GASCOR: Kinetik Energy/Westar, Energy 21/Stratus Networks, and Ikon Energy/ Multinet. In addition, the pipelines business of Transmission Pipelines Australia was sold in May 1999.
3.1.1 ‘Stapled’ Businesses
The purchasers of the three ‘stapled’ gas businesses individually entered into a number of agreements, with the key agreement being the Gas Distributor and Retailer Asset Sale Agreement. The key terms common to each sale included the following:
• the State transferred all the employees of the ‘stapled’ businesses to the respective purchasers on and from the date of sale completion, pursuant to the provisions of the Gas Industry Act 1994; • the maximum aggregate amount which each purchaser could recover from the State in respect of all claims under the State’s warranties and indemnities specified within the terms of the contract, was limited to a nominal amount of $1; and • the State was required to pay any stamp duty in excess of the estimated duty payable by the purchasers,12 which amounted to $104 million.
Monetary liability under the warranties and indemnities contained in the contract was also limited to the first year after completion.
10 The bulk of the discussion in this section is closely modelled on that in the Report of the Auditor-General on the Victorian Government’s Finances, 1998-99, paras 6.20ff. 11 Other groups to be disaggregated were Gas Services Business Pty Ltd, a support services group, and Gasmart (Vic) Pty Ltd, the appliance retail arm jointly owned by all three distributor companies. The business of Gas Services Business Pty Ltd was largely sold in 1998/99 and this transaction is not further considered by the Review. 12 In the case of Stratus/Energy 21, this promise extended to stamp duty in respect of certain collateral financing arrangements.
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3.1.2 Transmission Pipelines Australia
The Asset Sale Agreement for the Transmission Pipelines Australia (TPA) group was entered into by the Treasurer and the purchaser in May 1999. The terms of this sale agreement are broadly consistent to the terms of the sale agreements relating to the three ‘stapled’ entities, with the following key exceptions:
• a sum of $46.7 million, representing the State’s capital contribution to the cost of constructing and expanding the capacity of the Interconnect Pipeline and the costs of constructing the Southwest Pipeline, was required to be paid by GASCOR to the purchaser on the date of sale completion; and • the purchaser is entitled to nominate a person, subject to the approval by the State, to be appointed as a director of VENCorp.
In addition, under the terms of a Loan Agreement between the parties, TPA agreed to provide an interest-free loan of $12.3 million to GASCOR, in lieu of an equivalent sum previously paid by GASCOR to TPA. The loan is to be progressively repaid by GASCOR to the purchaser by September 2000.
The State also undertook to consider in good faith any request by the buyer (up to a year after completion) for assistance in rectifying any deficiencies in existing easements and any planning difficulties, and to provide the buyer with a reasonable opportunity to comment on wording of any proposed legislation or other statutory instrument before submission to Parliament.
3.1.3 GASCOR Continuing Activities
At the time of this Report, the main activity of GASCOR is to purchase natural gas from Esso/BHP under an existing long-term contract, and to sell it:
• to non-contestable customers in Victoria, through agency arrangements with the gas retail companies, up until September 2001; and • directly to retailers under Sub-Sales Agreements to enable the retailers to satisfy the supply requirements of their contestable customers.
Furthermore, subsidiary companies of GASCOR have entered arrangements with Allgas Energy Ltd, a wholly-owned subsidiary of Energex, providing for the Release Gas Program. This program is designed to encourage the emergence of a new gas retailer in the market by providing a transitional source of supply of gas amounting to ten petajoules per annum from October 1999 to December 2003.13
3.1.4 Residual Liabilities of GASCOR and SECV Relating to Gas
GASCOR being a public authority, its liabilities and obligations are potentially liabilities and obligations of the State. GASCOR’s 1998/99 annual report discloses the following notable provisions and contingent liabilities:
13 The sale of the rights to this supply contract is not further dealt with in this Report. For further details refer to the Report of the Auditor-General on the Victorian Government’s Finances, 1998–99, paras 6.93 ff.
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• a provision of $6.0 million representing a future loss on onerous Winter 1999 gas program contracts, being contracts entered into by GASCOR against the possibility of a prolonged gas supply crisis arising from the Longford explosion in September 1998; • a contingent liability of $0.4 million representing possible payments to retailers for compensating customers who agreed to interruption and curtailment of gas supply after the Longford explosion; • a contingent liability relating to possible compensation of the SECV for costs associated with the remediation of former Gas and Fuel Corporation sites; and • a contingent liability associated with the Longford explosion litigation and with certain litigation associated with a transmission pipeline project in Singapore.
Provisions and liabilities of the SECV in respect of the gas industry are detailed in the SECV’s Annual Report for 1998/99 and consist of:
• residual accident compensation liabilities (which have now been transferred to the State of Victoria – see section 2.3 above); and • contingent liabilities associated with the Longford explosion litigation and with certain litigation associated with a transmission pipeline project in Singapore.
3.2 GFE Resources
In 1995 GFE Resources, the former exploration arm of the Gas & Fuel Corporation (a predecessor of GASCOR), was sold to Cultus Petroleum NL for $56.2 million.
The only remaining significant obligation on the State is a non-competition obligation, which expires five years after completion. The purchaser could make no claim for breach of warranty more than 24 months after completion and, accordingly, the risk to the State of liability for any such breach is eliminated. There are no other significant contingent liabilities remaining with the State under the Agreement.
3.3 Heatane
The Heatane LPG Division of the Gas and Fuel Corporation was sold for $130 million including working capital in 1993. Due to confidentiality restrictions that are ongoing, the Review is unable to report on the ongoing obligations and liabilities arising from this sale.
4. PORTS OF PORTLAND AND GEELONG
In 1996, the Port of Portland Authority sold the assets and the business of operating the Port of Portland to Infratil Australia Ltd and Ascot Investments Pty Ltd for a price of $30 million (subject to adjustment). In the same year, the Port of Geelong Authority sold the business of operating the Port of Geelong for a price of $50.5 million (subject to adjustment) including stamp duty to Ports Pty Ltd.
In the case of both sales, the State agreed:
• to grant 99-year leases at peppercorn rent over certain areas of seabed to the respective port operators; and • that if the State failed to amend land tax legislation so as to exclude the value of certain structures including buildings, breakwaters or berths, the State would meet
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the cost of any discrepancy between the land tax paid by the purchaser and tax which would have been paid if the amendment was made.
In relation to the Port of Portland, the State indemnified the purchaser against any reclamation costs which the purchaser may incur as a result of Pivot Ltd making a request under a certain term of its lease with the Port. Furthermore, while the purchaser undertook to carry out the State’s obligations to the Portland Aluminium Smelter under agreements dated 2 September 1980 and 9 February 1981, the State remains potentially liable if the purchaser defaults in those obligations.
In relation to the Port of Geelong, the State retained liability for environmental contamination on and around the real property at completion and for unfunded superannuation liabilities of transferring employees.
The SECV has administration and management of all residual rights and obligations of the former statutory authorities, Port of Portland, Port of Geelong and Port of Melbourne.14 All liabilities were transferred to the State on 30 June 1999.
5. MISCELLANEOUS ASSET SALES
5.1 State Plantations
The State sold the assets of the Victorian Plantations Corporation and issued two plantation licences to Hancock Victorian Plantations Pty Ltd under an agreement that was completed in December 1998 for a total consideration of $550 million.
As part of the agreement, the State indemnified the buyer against all liabilities incurred by the buyer arising from any order or demand of any court or environmental authority for a clean up of any land due to any Specified Environmental Event (being the contamination of land or waters in certain circumstances), that occurred before completion, up to a limit on claims of $5 million. However, the right to make a claim has now elapsed.
Otherwise, the State retained a contingent liability to make compensation under native title legislation in relation to the passage of the Victorian Plantation Corporations Act 1993 and the Land Titles Validation Act 1994.
The State also dealt with its obligations under Forestry Agreements between it and Laminex Industries Ltd, Timber Industries Ltd and Australian Newsprint Mills Ltd by way of sub- contract to the purchaser rather than by way of assignment. As such, the State has a continuing exposure to potential liability if the purchaser defaults in its obligations where the purchaser is insolvent and lacks sufficient insurance cover.
5.2 Aluvic
In 1998 the State sold its 25% share in the Portland Aluminium Smelter joint venture to a consortium of Marubeni Australia and CITIC, a Chinese investment company. The State also sold its wholly-owned company Aluminium Smelters of Victoria Pty Ltd (Aluvic) together with an 18% share in an associated spent potlining processing joint venture and certain other assets.
14 The Port of Melbourne Authority was replaced in 1996 by the Melbourne Port Corporation, the Victorian Channel Authority (a statutory corporation), and a maritime services organisation that was subsequently sold to the private sector.
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Following the conversion of the sale proceeds to Australian dollars, the State received gross proceeds of $502 million. However, $109 million of this amount was directed towards meeting costs associated with the assumption and termination of the foreign exchange hedge book ($101 million) and the cost of sale ($8 million).
As part of the sale, the State gave the purchasers:
• warranties as to Aluvic, its corporate status, its tax liabilities, etc.; • indemnities in respect of third party claims against other Portland Smelter joint venture entities; and • indemnities for misrepresentation or breach of the sale agreements by the State.
Liability under the above warranties is limited to an aggregate maximum of $7.5 million and claims must be made before 29 June 2000.
5.3 Grain Elevators Board
The grain handling business of the former Grain Elevators Board (GEB) was sold in 1995 to a consortium headed by the Victorian Farmers Federation in May 1995 for a purchase price of:
• $46.6 million payable at 30 June 1995, subject to final adjustments for variations in the value of assets and liabilities sold; and • $5.8 million receivable over the next three years, $5 million of which was only payable if the purchaser obtained a favourable tax ruling in relation to fixed asset depreciation deductions, and the remaining $800,000 subject to the receipt from marketers of amounts in respect of grain received but not distributed by the GEB at the time of sale.
The State assumed and repaid outstanding loans from the GEB totalling $54.2 million, leading to a net negative cash flow from the sale.
Following the determination of the final value of business assets and liabilities sold, in November 1995 the State made a payment of $1.1 million to the purchaser, representing an adjustment of the purchase price in accordance with the sale agreement. This final sale settlement was formalised through the issue by the Treasurer to the purchaser of a letter of waiver and acknowledgment, which also provided an indemnity to the purchaser against future costs incurred in excess of $10,000 in relation to any claims made under a workers compensation policy with the State Insurance Office, and against future costs incurred in excess of $300,000 in respect of WorkCover premiums payable for the period up to the date of sale.15
The Review has not determined whether the $5 million purchase price instalment was eventually paid, nor whether the indemnity remains outstanding. Otherwise, there are no significant ongoing obligations and liabilities arising from the sale of the GEB.
15 Report of the Auditor-General on the Statement of Financial Operations, 1995-96, paras 4.155 ff.
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5.4 TABCORP Float
A prospectus was issued in 1994 inviting subscriptions for 300 million shares from individual and institutional investors in TABCORP Holdings Ltd (TABCORP). TABCORP gained possession of the business of the Totalisator Agency Board (TAB) by way of allocation statement by the Treasurer under the Gaming and Betting Act 1994 (the Act).
The Prospectus envisaged a final price between $2.25 and $2.70 per share. The final price announced on 15 August 1994 was $2.25. Total proceeds from the sale were $675 million of which $597 million was paid to the State in consideration for the issue of a gaming licence and a wagering licence under the Act, and $78 million was paid to the TAB in consideration of the transfer of its business.
The significant ongoing obligations of the State relate to the exclusivity of the licences granted to TABCORP in connection with the float. TABCORP has the sole licence to conduct off-course totalisators in Victoria on thoroughbred, harness and greyhound racing in Australia and New Zealand.16 TABCORP also holds one of two licences to conduct gaming machines and keno games in licensed clubs and hotels in Victoria.17 The prospectus contains certain representations as to the exclusivity of the licenses. In addition, the prospectus sets out arrangements whereby at the end of the licences’ 18-year terms, if new licences are granted to third parties, then the State must pay TABCORP the lesser of the consideration for the new licences or a benchmark licence value. A failure to adhere to these conditions (for example following a change of gaming and wagering policy) could lead to significant compensation being payable to TABCORP or to investors by the State.
There would appear to be no other significant ongoing contingent liabilities. All contingent liabilities of the TAB remained with the TAB and were not transferred to TABCORP. The TAB settled a number of commercial disputes prior to June 1995 at a cost of $17 million. When the TAB was dissolved in June 1995, all outstanding assets and liabilities returned to the State, including $6.5 million in cash. During the 1995/96 year, an outstanding commercial dispute referable to the TAB was settled by a payment of the State of $10 million.
6. TRANSPORT18
6.1 Passenger Trains and Trams
In 1999, the Director of Public Transport entered into complex arrangements with a number of bodies for the franchising of the metropolitan rail businesses Bayside Trains and Hillside Trains, the metropolitan tram businesses Yarra Trams and Swanston Trams, and the country passenger rail business of V/Line Passenger. The expected payments by the State to franchisees over the term of the agreements amount to $3.6 billion.19
The franchisees were required to enter into three main agreements: a Franchise Agreement defining the main rights and obligations, an Infrastructure Lease whereby track and other
16 This licence also authorises the conduct of totalisators and fixed odds betting competitions in Victoria on sporting events and the conduct of on-course totalisators in Victoria on thoroughbred, harness and greyhound racing in its own right (rather than as an agent of a racing club). 17 The other clubs and hotels licence has been granted to Tattersall’s. In addition the Crown Casino represents competition in the area of gaming machines. 18 For more details of the background and effects of the passenger train and tram, OneLink and bus contracts, refer to the Public Transport Case Study in Volume 2. 19 For details of individual expected payments refer to Appendix 1 in Volume 3.
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The significant ongoing obligations arising from these agreements are as follows:
• payments to franchisees as required by the Franchise Agreements21 during the term of the franchises (between ten and 15 years); • ongoing monitoring and administration of the Franchise Agreements; • although there is no contractual obligation on the State to retender, it is anticipated that the State will need to re-tender the services when the first generation of Franchise Agreements expire; and • letting tenders for State Works as defined in the Infrastructure Leases. State Works are works to track and infrastructure that become the property of the Victorian Rail Track Corporation and thereby fall within the Infrastructure Leases.
The Director is potentially exposed to the following contingent liabilities:
• environmental contamination of infrastructure which pre-dates the lease; • liabilities associated with the exercise of step-in rights. Under the Franchise Agreements, the Director of Public Transport has step-in powers exercisable in case of very serious contravention. The agreements provide that the franchisee is not liable to the Director, a step-in party or an associate of the Director in respect of indirect or consequential losses arising from default or negligence on the part of the franchisee; • GST payable on the franchise payments, which the agreements provide is payable by the State; • liability to the Victorian Rail Track Corporation in respect of State Works not properly carried out; and • potential liabilities arising from the need to terminate arrangements early and re- tender franchises, potentially at a higher price. If the franchisee were insolvent, the Director would have limited recourse in respect of such losses.
To mitigate some of these risks, the State created a number of financial safeguards to ensure franchisees have sufficient resources to sustain a period of adverse financial performance, and to provide an incentive for franchisees to fulfil their obligations under their Franchise Agreements. These financial safeguards include minimum capital requirements and performance bonds, which have been lodged with the State.
Finally, the Director has also given guarantees to the lessors of new rolling stock in respect of fixed lease payments for the first 15 years of the vehicles’ lives.
20 In the case of V/Line Passenger, track access arrangements are made with the purchaser of V/Line Freight and the owner of Bayside Trains. 21 Comprising Franchise Payments; Concession Fare Payments; Special Event Balancing Payments; Free Travel Reimbursements; Senior Citizens Week Payments; Passenger Growth Incentives; and Superannuation Payments.
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The Audit Review considers that there may be further contingent liabilities associated with the Asset Sale Agreements. However, the Agreements have not been publicly released and contain confidentiality clauses that preclude the Review from reporting further.
6.2 V/Line Freight
The business of V/Line Freight (VLF) was sold in 1999 for a total sum, including lease prepayments and stamp duty, of $163 million.
Under the terms of the sale agreement, the key obligations and liabilities retained by the State are:
• responsibility for the unfunded superannuation liabilities of the business as at the date of sale; • provision of specified contributions to the purchaser in respect of community service obligations associated with the provision of the ‘fast-track’ operations until June 2000. This contribution totalled $4.6 million for the year ended 30 April 1999.
Liability for breach of any representation, condition or warranty by the State is limited to a nominal amount of $1, other than in respect of any assets not properly transferred to the purchaser, and claims were to be made against the vendor within one year of the sale completion date.22
6.3 West Coast Railway and Hoys (Cobram Line)
By agreements made in 1994 the Secretary permitted the Victorian Railway Company Pty Ltd (trading as West Coast Railway) and Hoys Roadlines Pty Ltd to provide a passenger train service between Melbourne and Warrnambool and an integrated road coach service between Cobram and Shepparton, respectively. The operators undertook to provide those services as defined and to perform certain ancillary obligations.
The Secretary’s obligations under the agreements are largely confined to making money payments to the operator in accordance with a formula set out in the agreement. Otherwise, the Secretary’s significant obligation is using best endeavours to ensure that any additional connecting coach services introduced by the Government coincide with the service to maximise services to customers.23
Separate obligations and liabilities under a contract between the operators and V/Line Passenger (VLP) whereby VLP provided certain services to the operator required to run the service have now been assumed by the purchaser of VLP. Similarly, the operators have direct arrangements with the owners of Bayside Trains and V/Line Freight for the use of track and other infrastructure.
6.4 OneLink
Under a consolidated service contract deed, the contractor, OneLink Transit Systems Pty Ltd, a joint venture of ERG Ltd, Fujitsu Australia Ltd and Mayne Nickless Ltd, is obliged to design, install, promote and operate an automated fare collection system for Melbourne's public transport system in exchange for payments from the Public Transport Corporation
22 See Report of the Auditor-General - Victorian Government's Finances, 1998-99, para 6.196. 23 In the case of the Hoys Agreement, where actions taken by the Secretary cause a major decline in usage significantly below that set out in the Agreement, the Operator or Secretary may give notice to renegotiate the terms and conditions of the Agreement.
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(PTC).24 The Treasurer has guaranteed PTC’s obligations under the service contract, with a concomitant undertaking from franchisees for any calls made under the Treasurer’s Guarantee.
The contract is separated into two stages: Phase 1, an initial trial stage, and the remainder. The contract ends on 1 March 2007. The PTC’s obligations are guaranteed by the Treasurer.
During the currency of the term, the PTC is under the following significant obligations:
• to make all payments to OneLink; • various duties of cooperation to facilitate the implementation of the obligations imposed on OneLink. PTC accepts the risk of defects in design insisted on by PTC; • to provide necessary documentation and information to OneLink; • to negotiate and implement agreements with bus operators so as to enable OneLink to install the Automated Fare Collection system for buses. PTC assumes the risk of bus operators either not entering into an agreement or breaching such an agreement; • to pay or reimburse OneLink for stamp duty, including rental business duty, payable on the Service Agreement but not other transaction documents. If rental business duty is payable then PTC and OneLink will enter into negotiations to minimise the incidence of that duty; • not to interfere with system equipment; • not to change the ticket processing or ticket types used in public transport without prior notice and consultation with OneLink; and • to notify OneLink if PTC becomes aware of any fault in the equipment or software.
PTC further bears the risk of:
• variations and their impact on OneLink's ability to meet the required standards; • Government actions or decisions specific to PTC, OneLink or the AFC system; • Government Industrial Relations Failure (as defined) but OneLink bears risk of the first 30 days of any delay caused by the Failure; • impediment to site access; • force majeure to the extent described in the agreement; • insufficiency of any compensation payments to fully compensate PTC as a result of OneLink failing to achieve the Approved Standards; • insufficiency of forfeited amounts but subject to limitations on liability; • insufficiency of damages but subject to limitations on liability; • variations required because PTC has failed to provide sufficient reliable information or quantities have been underestimated, etc., except where this is due to OneLink's breach;
24 The Review understands that all the rights and obligations of the State are intended to be transferred to the Revenue Clearing House Pty Ltd (RCH). Unless and until that occurs, however, the State will continue to be exposed to the above obligations and liabilities. Furthermore, the Review understands that it is intended to extend the Treasurer’s guarantee to cover the RCH after the transfer.
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• changes in tax, etc. laws (including GST) but excluding some categories of tax, rates and duties; • vandalism to equipment; and • the consequences of a failure by a bus operator to enter into an agreement or breach of agreement to provide OneLink with access to bus operator's buses.
Under the separate Collateral Tax Agreement PTC was liable to compensate OneLink up to a maximum of $2.5 million if they receive an adverse ruling relating to Division 16D of the Income Tax Assessment Act.
6.5 Buses
The various bus services agreements25 are relatively simple service agreements when compared to the train and tram franchise arrangements. The main obligations and liabilities associated with these agreements are:
• the obligation to make payments to franchisees as set out in the agreements during the term (generally, ten years). The Secretary, DOI gains revenue as a percentage of the Revenue Clearing House funds; however, these amounts are by no means sufficient to cover the subsidies payable to bus operators; • liabilities arising from the fact that passenger subsidies for multi-modal passengers are on a notional commercial fare basis, while revenues derived from the Revenue Clearing House are calculated as a percentage of total system-wide revenues, leading to potential funding gaps; • liabilities associated with the exclusivity of the lines of route that have been tendered and the associated inflexibility of transport policy; • ongoing monitoring and administration of the agreements; • re-tendering services when the agreements expire and potential liabilities to incumbent service providers arising from representations to them as to their right to renewal; • potential liabilities arising from the need to terminate arrangements early for non- performance and re-tender franchises, potentially at a higher price. If the franchisee were insolvent, the Secretary would have limited recourse in respect of such losses; and • potential liabilities arising from a change of transport policy requiring particular bus contracts to be bought out (for example, a shift to subsidising use rather than provision of public transport, or to subsidising taxi or mini-bus rather than bus passenger services).
6.6 VicRoads Plant
The Auditor-General has reported that the sale of the VicRoads Plant Hire and Technical Services business in 1994 for $42 million cash consideration was accompanied by arrangements whereby VicRoads hired back motor vehicles and specified equipment over a five year period for an annual fee of $13.5 million.26
25 Agreements involving the Secretary, Department of Infrastructure and the National Bus Company; each metropolitan bus operator; and each school bus operator. The Review has reviewed template contracts only in the latter two categories. 26 Report of the Auditor-General on the Statement of Financial Operations, 1994–95, para 4.74.
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Due to confidentiality restrictions the Review is unable to report further on obligations and liabilities. The Review has recommended in Chapter 4 that the State negotiate with the counterparty with a view to disclosure of the contract.
The Review has been informed by VicRoads that the motor car hire arrangements have expired while the contracts for plant hire beyond June 2000 is in the process of being retendered.
7. CITYLINK27
The Melbourne City Link Concession Deed and associated Agreements provide for the financing, design and construction by Transurban and Perpetual Trustee of the Southern and Western Links and the operation of the Links as toll roads. Upon expiry of the Term (initially, 34 years but extendable up to a maximum of 54 years in certain cases), the Links must be surrendered to the State.
As well as granting the concession, the State is obliged to provide support to the Link by way of management of other roads and Agreed Traffic Management Measures, to execute State Works, and to make land available by way of licenses and leases.
As summarised in the Case Study in Volume 2, the State has assumed the following significant ongoing obligations and liabilities:
• Operating environment There are certain events for which the risks are to be borne by the users of CityLink or the State. These are (a) actions taken by the State which hinder or prevent the delivery or operation of the project; (b) contamination, or Aboriginal or heritage claims relating to land leased by the State to Transurban (whilst an issue during the construction phase, could still be an issue in the future); (c) changes in Commonwealth law which have an effect on the project; (d) changes in State law and changes in transport policy;
• Events that may cause termination of project arrangements The State has accepted the risk of paying Transurban in certain circumstances where either State or Commonwealth laws or requirements fundamentally prevent the completion or operation of CityLink, the collection of tolls, or an EIS is issued by the Commonwealth Government which materially adversely impacts the project;
• Traffic Management Arrangements The State has undertaken that certain traffic management measures (known as Agreed Traffic Management Measures) will be implemented and that, once CityLink is established, future transport policies will treat it as a central part of Melbourne’s transport network;
• Responsibility for Outstanding Project Debt The State has undertaken to assume responsibility for any outstanding project debt in the event that the arrangements are terminated as a result of any changes in State or Commonwealth laws or policies which fundamentally prevent Transurban from delivering or operating CityLink; and
27 For more information as to the background and effects of this contract, refer to the CityLink Case Study in Volume 2.
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• Major Disaster Assuming control of the project in a damaged condition, under certain catastrophic and uninsurable events (ie. event of force majeure), although the State is not obliged to do so and no compensation is payable to Transurban.
The State has given numerous indemnities as follows:
• indemnities in respect of various State and local government taxes, duties and rates; • compensation for losses in revenue (due to untolled use rather than reduced use) and other costs due to connecting roads to the Link; • compensation for loss of revenues arising from a removal of agreed traffic management measures; if in first ten years, the State financial contribution shall be measure of first resort. Thereafter, State financial contribution shall be measure of last resort; • compensation in case of certain other events having a material adverse effect, but note that other measures may be used to reverse adverse effect; • an indemnity against costs in the event of a specified imperfection on the project land (now a past event); • an indemnity re clean-up notices relating to Crown land; • an indemnity with respect to prevention by law; • an indemnity in respect of State-caused loss or damage; • an indemnity in respect of infringement of a third party’s intellectual property; and • an indemnity in respect of EIS expenses.
The State also faces potential contingent liabilities arising from a need to take over the Links due to early termination of the concession period, for one of the specified early termination events set out in the deed.
As well as the above obligations and liabilities, it should be noted that the State’s expected revenue flow from the Links is uncertain. An annual concession dee is payable during the term of $95.6 million for the first 25 years, $45.2 million for the next ten years, and $1 million per year thereafter. The concession fee can be raised if the company makes higher than expected returns. However, the operator can elect to pay the concession fee to the State with ‘Concession Notes’. These notes cannot be cashed by the State unless the company's equity return is 10% per annum or more and the aggregate amount of fees to be paid in a year is less than 30% of distributable cashflow in the previous financial year. If the conditions are not fulfilled, the fee must be paid at end of concession period. The concession notes do not carry interest.
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8. PRISONS28
In 1995 and 1996 the then Ministers for Corrections entered three contracts, each providing for the construction of a prison and the provision of prison services, care, treatment and rehabilitation to prisoners to specified standards. The prisons were the Metropolitan Women's Correctional Centre at Deer Park, the Rural Men's Prison at Fulham, West Sale, and the Men's Metropolitan Prison at Port Phillip (Laverton). Each contract is for a 20-year term.
Under each contract, the State is required to pay a periodic fee for Accommodation Services, a fee for Corrective Services and a Performance Linked Fee. There is also a Health Services fee payable monthly in arrears under the Port Phillip Prison contract. The fees under each contract can be increased in cases of alterations to the facility after completion, expansion of capacity of the facility, or a change of policy by government having significant financial impact.
Any GSWT payable by the State in respect of the Prison Services Agreements will be reimbursed/credited to the State in full by the Commonwealth Taxation Office. In addition, the Project Director has a role under the contract of approving plans etc. on behalf of the State. It is therefore possible that the State will have a liability, for example to injured prisoners, in respect of poor design decisions.
9. HOSPITALS AND HEALTH SERVICES
9.1 La Trobe Hospital
This contract relates to the development, operation and management of the La Trobe Regional Hospital and the provision of the Services as defined to the service level specified in the contract to Public Hospital Patients to the Quality Standards, after the Hospital is Commissioned. Due to confidentiality obligations undertaken by the State in respect of this contract, the following discussion of obligations and liabilites is restricted to that provided by the Auditor-General.29
In January 1997, the New La Trobe Regional Hospital Agreement was executed between La Trobe Regional Hospital Pty Ltd (a special purpose company established by the Australian Hospital Care Ltd consortium) (the company), Australian Hospital Care (La Trobe) Pty Ltd (the operator) and the Minister for Health on behalf of the State. Under the arrangements, the contractor would design, construct, own and operate the new Hospital. After the commissioning of the Hospital (which has now occurred), the company through a sub- contracted operator will operate and maintain the new facility, and provide specified health services to public hospital patients in the La Trobe Valley over an initial period of 20 years. In return for the provision of these services, the company will be entitled to receive specified fees from the State, mainly based on casemix activity and the provision of other health- related services. These fees also include a capital component for the utilisation of the Hospital building, equipment and technology, which are designed to enable the company over the initial period to meet its debt servicing and certain other obligations.
28 For further details of the background and effects of the private prisons contracts, refer to the Prisons Case Study in Volume 2. 29 Report of the Auditor-General on the Government’s Annual Financial Statement, 1996-97, paras 8.157 ff.
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Under the terms of the agreement, the State has significant ongoing obligations, which include:
• in the event that the Commonwealth Government withdraws from an in-principle agreement to provide funding for the provision of services for 20 nursing home beds within the hospital, the State has agreed that it will reimburse the company for the unrecovered capital cost of providing such facilities through the capital component of the services charge, or the provision of an up-front payment if after using all reasonable endeavours, the company and operator have been unable to redeploy these facilities; • the State has agreed not to utilise the existing hospital sites to provide health services to public hospital patients, on the proviso that there is no unremedied default by the company. In addition, the State has agreed not to enter into any agreement to purchase services from any other health facility in the La Trobe Valley region or construct a new health facility in the region for the term of the agreement; and • during the development period and the term of the agreement, the State has agreed not to impose any laws or taxes which may discriminate between the company and the operator in relation to the hospital and other health facilities within the State providing public patient services.
The State enjoys step-in rights, which are exercisable where default by the company endangers the health or safety of patients. The step-in rights include the temporary assumption of total or partial operation of the hospital. In exercising these rights, the State will be entitled to retain a sufficient amount of the service charge to meet the reasonable operating costs. Notwithstanding these provisions, the State could potentially face contingent liabilities where it is forced to operate the hospital in circumstances where the company has defaulted and is insolvent.
Further, disputes and liability may arise from a provision of the contract that in the event of changes in law or government policy adversely affecting the ability of the contractor or the operator to perform their obligations, the parties will consult with a view to resolving any hardships.
9.2 Mildura Base Hospital
In 1999 the State entered into arrangements for the private construction and operation of the Mildura Base Hospital as a public hospital. This contract is confidential to the parties and has not been disclosed. As a result, the Review is unable to report on the significant ongoing obligations and liabilities that may be associated with it.30
9.3 Health Services Contracts
The Review has reviewed the standard Health Services Agreements between the Department of Human Services and various metropolitan health care networks, which are State bodies. These agreements are simple service provision agreements and do not contain the complex termination and step-in provisions to be found in the La Trobe Hospital and Mildura Base Hospital agreements. Obligations and liabilities would extend to obligations to make payments set out in the agreements, together with potential liabilities where, for example, the State wished to terminate a service or to re-tender the service.
30 The Minister for Health, the Hon John Thwaites MLA, stated in the Legislative Assembly on 8 December 1999 (at Hansard p. 956), that he would write to Ramsay Health Care seeking permission to table the contract. The Review is not aware of the response, if any, to the Minister’s request.
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9.4 Hospitals Cogeneration Project
Under this agreement, the Minister for Health engaged an operator to design, construct, finance, own and operate cogeneration plant and equipment for the production of steam and electricity at premises of certain hospitals. Each hospital was required to enter into a cogeneration site lease with the operator in respect of the Premises. The operator sells the steam produced to the Minister (on behalf of the hospitals) and the electricity to the State Electricity Commission of Victoria for on-selling to the Minister (on behalf of the hospitals).
As a result of these arrangements, the Minister for Health has the following significant ongoing obligations and liabilities:
• to purchase gas used in the cogeneration plant; and • to purchase electricity and steam generated by the plant, in the case of steam under a partial take-or-pay arrangement, for use in hospitals.
The contract will terminate in 31 December 2008 (subject to early termination).
10. INFORMATION TECHNOLOGY OUTSOURCING ARRANGEMENTS
The Review has reviewed the following four major IT outsourcing contracts:
• an agreement between the Attorney-General and Minister for Police and Emergency Services and Lockheed Martin–Tenix Pty Ltd for the outsourcing of certain functions of the Traffic Camera Office and Enforcement Management Unit; • an agreement between the State of Victoria (acting through and represented by Victoria Police) and IBM Australia Limited for the provision of IT services to the Victoria Police; • an agreement between VicRoads and IBM Australia Ltd for the provision of IT services to VicRoads; and • an agreement between the Public Transport Corporation and IBM Australia Ltd for the provision of IT services to PTC.
10.1 Traffic Camera Office/Enforcement Management Unit
This contract outsources the capture of photographic images as evidence of traffic offences and the development and operation of a system and services for recording and processing fines and judgement debts raised by various government bodies in the State of Victoria. This supersedes (in part at least) certain functions previously carried out by the Traffic Camera Office (TCO), the Fixed Penalties Payment Office (FPPO) and the Enforcement Management Unit (EMU). The TCO is a division of the Victoria Police and the FPPO is a sub-division of TCO. EMU is a unit of the Department of Justice. The term of this contract is five years from 30 October 1998.
Apart from payments of an estimated $145 million over five years, the State’s only contingent liabilities arise from those provisions which allow for a re-negotiation of contract prices due to:
• changes in policy/law (restricted mainly to changes in output specification requirements and/or relevant legislation); and • the impact of GST.
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The price impact of changes in policy can be factored into the decision to change policy, although the quantification of financial impacts will be complicated. However, the GST impacts are less clear cut. At worst the impact is an increase in price of 10%. Negotiations with the contractor based on open book accounting are nearing completion. The State will bear the cost of the net increase in contract price, approximately $9 million in present value terms over the remaining period of the contract.
A major risk associated with the contract is the development risk associated with the substantial changes taking place in camera/processing technologies. Such developments are managed using a “business case” approach, whereby the contractor must demonstrate the cost effectiveness of an innovation to government, which has the option to accept or reject the proposal.
10.2 Victoria Police IT Outsourcing
On 23 February 1999, the Victoria Police Chief Commissioner, Mr Neil Comrie, announced the outsourcing of the force’s IT systems. He announced that the scope of the contract includes management of the mainframe data centre, LAN desktop, wide area network communications management, application development and maintenance, help desk and state-wide implementation of a new desktop infrastructure. The contract would involve upgrading technology in about 400 police stations and complexes across the State, including deploying and refreshing 7,000 computer devices such as PCs, servers and notebooks. Mr Comrie said Victoria Police will retain responsibility for IT strategy, planning, policy and standards to ensure the business requirements continue to be met.31
Due to confidentiality obligations imposed on the State by this agreement, the Review is unable to disclose the obligations and liabilities involved in this contract.
10.3 VicRoads IT Outsourcing and PTC IT Outsourcing
These contracts were entered into in 1994 and relate to the provision by the Contractor of information technology services encompassing services for computer processing, data network, end-user (Help desk), applications maintenance and enhancement and additional services as detailed in Schedules to the agreements, together with provision for the sale by the Customer and purchase by the Contractor of specified assets and additional items. The contract with VicRoads differs in the extent of service provision (eg. VicRoads still performs its own inhouse systems development and has retained responsibility for desktop support).
The contract terms were five years (except in the case of VicRoads, where applications maintenance and enhancement services extended only for three years).
The PTC has advised that the PTC contract is in ‘wind down’ mode following privatisation of PTC. Some elements (eg. V/Line Freight) have already withdrawn from the contract. A support function is being maintained until all elements of former PTC can stand alone with their own systems. The contract will expire 28 November 2000.
VicRoads has advised that, in 1997, applications maintenance and enhancement services were extended for two years to November 1999. Computer processing services were extended for one year to November 1998. In 1998, all services were extended to November 2001.
31 Chief Commissioner’s press release dated 23 February 1999; also IBM press release dated 23 February 1999, at Internet address www.ibm.com/services/pressrel/PRESSREL_12614. html.
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Apart from the obligation on PTC and VicRoads to make the service payments, the State has few ongoing obligations and liabilities. Where the State tenders the service to another service provider, the contractor is required to offer required assets at market value and to provide migration services and services transfer assistance for a period up to six months after termination.
As part of the outsourcing arrangements, IBM Australia Ltd entered an agreement with the Hon Philip Gude, Minister for Industry and Employment, whereby IBM agreed to establish its Southern Regional Operations Centre at Ballarat and to provide services as described in the IT Outsourcing Agreements with VicRoads and PTC respectively from that Centre. The State has no significant ongoing obligations and liabilities arising from that agreement.
11. MAJOR PROJECTS32
11.1 Federation Square
The contract for the construction of Federation Square in Melbourne is made between the Department of Infrastructure as Principal and Multiplex Constructions Pty Ltd as Managing Contractor. The contract was made 20 July 1998 and the Project was scheduled to be completed and occupied by 31 December 2000. Note that under the contract some demolition works were scheduled to be completed in June 1998 (ie. prior to signature).
The Principal’s significant ongoing obligations are to:
• pay the contract sum to the Contractor; • carry out early works for the Project which includes a Foundation Works Contract and a Major Demolition Works Contract; • establish a Project liaison group to review the progress, design and construction of the Project, make recommendations and discuss improvements that can be made. The Principal must chair and minute each meeting; and • arrange works insurance and public liability insurance.
The agreement specifies that before completion of the Project the Principal may direct the Managing Contractor to increase or decrease Project, change the quality, change the relationship of part of the Project or otherwise alter the scope of the Project. The Principal may omit any part or element of the Project and then enter into a contract with a party other than the Managing Contractor to execute those parts of the Project omitted. The target end cost shall be adjusted appropriately for the variation directed by the Principal.
The target end cost (as amended) remains the most significant liability of the Principal under the Agreement. Other contingent liabilities of the State include:
• liability to pay any excess on the contract works insurance or the public liability insurance which is exactly $50,000, any other excess amount either greater or less than $50,000 is the liability of the Contractor; and
32 Part of this Section sets out details of contract values. In construction contracts, through variations, actual contract sums often differ from contract values. Actual contract values are set out in Appendix 1 in Volume 3.
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• a risk for the Principal if the Managing Contractor claims for an extension of time due to a direction of the Principal or industrial disputes. However, a claim for an extension of time must not extend practical completion beyond 31 December 2000.
11.2 Multi-Purpose Venue
11.2.1 Design and Construct Contract
Pursuant to this contract, the Secretary of the Department of Infrastructure as Principal has engaged Thiess Contractors Pty Ltd as the Contractor to design and construct a Multi- Purpose Venue at Melbourne Park, for a contract sum of $52,757,197.
The contract was entered in April 1999 and the date for practical completion was 12 November 1999, subject to variation.
The most significant obligation of the Principal under the Contract is the Principal’s obligation to pay the contract sum to the Contractor. The Principal must also provide access to the Site. The other major obligation of the Principal is to ensure that there is always a Superintendent and that in exercising the functions of the Superintendent under the Contract, the Superintendent acts honestly and fairly, acts within the time prescribed under the Contract or where no time is prescribed within a reasonable time; and arrives at a reasonable measure or value of work quantities or time.
There are no other significant ongoing contingent liabilities of the State.
11.2.2 Consultant’s Agreement
Secretary of the Department of Infrastructure as Principal engaged Peddle Thorp Melbourne Pty Ltd as Consultant to perform services including architectural services, structural/civil engineering services, acoustic services and geotechnical services. The Principal has novated its obligations under this contract to Theiss Contractors Pty Ltd by a deed of novation of June 1999.
As a result of this novation there are now no significant ongoing obligations and liabilities of the State.
11.3 Museum
Pursuant to this agreement, the Secretary of Department of Infrastructure engaged Baulderstone Hornibrook Pty Ltd to build a museum and IMAX complex for a sum of over $160 million.
The agreement was entered into on 27 January 1999 but had retrospective operation, with some of the works due for completion in 1997 and 1998. The works were due to be completed as follows:
IMAX 16 December 1997 West Carpark 16 January 1998 Back of House, West Zone & East Zone 11 January 1999 Gallery of Life 25 February 1999 East Carpark, Centre Zone and Landscaping 9 April 1999
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Because of unforeseen delays in gaining access to the Site, the Supplement Formal Agreement which was executed increases the Contract Sum and extends the Dates for Practical Completion.
The significant obligation of the State, once possession of the Site has been given, is to pay the Contracted sum to the Contractor.
It may be that GST applies, payable to the Contractor in relation to any supply made under the Contract. This will depend on whether the construction process is still underway after 1 July 2000 and on the application of the GST transitional rules to the contract.
Risks affecting the State in connection with this contract are limited to the following:
• a variation leading to an increase in the lump sum; • extensions of time for delays and disruptions caused by: − an act or omission of the Principal, its employees or agents; − a delay to the IMAX Concrete Structure Works; − a direction by the Superintendent to the Contractor to execute a variation or to suspend the Contractor’s performance; − any strike or industrial dispute so long as that dispute was not caused directly or indirectly by the workers of the Contractor or any other Site controlled by that Contractor; or − where the Contractor satisfies the Superintendent that the delay is genuine and that the notice of delay was given in a time and manner which enables the superintendent to verify the delay and its cause.
If the Principal were to exercise its right to terminate the contract without cause, it would be obliged to pay a reasonable sum determined by the Superintendent to compensate the Contractor for the Contractor’s demobilisation costs as a result of termination by the Principal of the Contractor’s engagement (and a reasonable sum determined by the Superintendent to compensate the Contractor for loss of profit.)
11.4 State Library
11.4.1 Construction Management Contract
The agreement for construction management services in respect of the refurbishment of the State Library was entered into between the Office of Major Projects for and on behalf of Secretary to the Department of Infrastructure as Principal and Baulderstone Hornibrook Pty Ltd as Construction Manager.
The agreement was made on 29 January 1999. However, it is deemed to have been effective since the Effective Date of 19 March 1998. The Date for Completion of the Works (ie. the date by which the Works are required to be performed) was 31 August 1999 (subject to extensions by the Principal).
There is provision for a specified fee for services, provided that completion of the works occurs by the original Date for Completion. An additional fee of 5% of the value of the excess of value of the final Direct Trade Works over a certain amount is payable. An additional fee will also apply for Services provided during any period after the Date for Completion but before the actual date of completion.
The Principal’s obligations are limited to:
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• providing directions or instructions to the Construction Manager as may be reasonably necessary to assist the Construction Manager in the performance of its obligations; and • paying the Construction Manager as set out in the Agreement.
The agreement contains a provision that if the agreement has been terminated for the occurrence of an insolvency of the Construction Manager, the Construction Manager is liable for and indemnifies the Principal against the costs of arranging an alternative Contractor to provide the Services and any other loss suffered by the Principal. The State might suffer loss arising from an inability to recover the full amount of its losses from the insolvent counterparty.
11.4.2 Pro Forma Works Contract
Actual works are carried out pursuant to a pro forma Direct Trade Contract, whereby the principal, through the construction manager, engages the contractor to execute the works to be described in the agreement. The main obligations and risks to the State arising from such an agreement are to:
• pay the contractor the contract price for the works; • give the contractor access to sufficient areas of the site to allow the contractor to perform its obligations; and • acknowledge communications within three business days and reply within ten business days.
If the principal terminates the agreement for the default or insolvency of the contractor, the principal may elect to appoint a replacement contractor to step into any relevant sub- contracts of the contractor and may deduct any related costs from the contractor’s security or from any amount due to the contractor.
11.5 Royal Park Netball Stadium
Royal Park Netball Stadium is being constructed pursuant to a design and construction contract between the Secretary to the Department of Infrastructure as Principal and Multiplex Construction Pty Ltd as Contractor.
The contract is based on the standard form AS4300 General Conditions of Contract for Design and Construct. Pursuant to this contract, the Principal engages the Contractor to design and construct a State Netball and Hockey Centre at Royal Park. The contract was entered on 17 March 1999, and the Date for Practical Completion (ie. contract target date) is 20 March 2000.
The most significant obligation of the Principal under the Contract is the Principal's obligation to pay the contract sum to the Contractor and also to provide access to the Site.
The Principal must also ensure that at all time there is a Superintendent and that in the exercise of the functions of the Superintendent under the Contract, the Superintendent acts honestly and fairly, within the time prescribed under the Contract or where no time is prescribed within a reasonable time; and arrives at a reasonable measure or value of work quantities or time.
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In addition to the Contract Sum, the agreement requires the Principal to pay an amount equivalent to the GST payable by the Contractor in relation to any supply made under the Contract.
Ongoing significant contingent liabilities of the State are as follows:
• variations – the Superintendent may direct variations to the work under the Contract and the Principal must pay the cost of this variation (clause 40 as amended by Annexure Part B). However, the Principal does have control over this potential liability; • extension of time – the Contractor is entitled to an extension for delays or disruptions caused by the Principal, the Superintendent or an employee, consultant, other contractor or agent of the Principal or Superintendent, a change in Legislative Requirements, claims in respect of the right of the Principal to have the work under the Contract carried out, a breach of the Contract by the Principal; and a variation. The Principal may also direct the Contractor to accelerate the Works for any reason, including as an alternative to granting an extension of time to the Date for Practical Completion. The Principal shall pay the costs of the Contractor complying with such direction (valued as a variation) except where the direction was issued as a consequence of an act or omission of the Contractor. • change in legislation – the Principal bears the risk of any increased cost in the works as a result of a change in legislative requirements; and • excepted risks – If the work under the Contract is damaged by an ‘Excepted Risk’, the Contractor must rectify that loss or damage if the Superintendent so directs. The cost of these works shall be valued as a variation (clause 16.3) and be payable by the Principal.
If the Contractor commits a substantial breach of contract and the Principal considers damages may not be an adequate remedy, the Principal may give the Contractor a written notice to show cause. If the Contractor fails to show cause, the Principal may take the work out of the hands of the Contractor or terminate the Contract. The principal may suffer loss and damage from having to re-let the work in circumstances where full recovery of additional costs from the Contractor may not be possible.
11.6 Grand Prix
The Australian Grand Prix Corporation has various arrangements in place for the conduct of the Australian Formula One Grand Prix at Albert Park.
The most important are with parties associated with the Formula One Administration (FOA). These arrangements began in 1996 and currently expire in 2006. The Auditor-General has identified the following inherent risks associated with the operation of the event:33
• exchange rate movements relating to fees payable to the international bodies involved in the promotion of the Formula One championship; • poor weather on race days impacting on attendances and possibly causing race cancellation; • tobacco advertising restrictions possibly resulting in the cancellation of the event;
33 Report of the Auditor-General on the Victorian Government’s Finances, 1998–99, para 5.26.
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• any revisions to the contractual arrangements between the international bodies involved in the promotion of the Formula One championship and racing teams, resulting in event cancellation or otherwise impacting on the Corporation; and • delays in the establishment of the required temporary facilities.
The Auditor-General also noted that the Corporation has addressed certain of these risks through:
• maintenance of insurances relating to certain commercial risks; • establishment of a hedging contract to manage its exposure to exchange rate movements impacting on fees payable to the international bodies involved in the promotion of the Formula One championship; and • maintenance of close liaison with individuals and organisations involved in the Formula One championship to protect the State's interests in the event.
The Treasurer in March 1996 approved the provision by the Corporation of an indemnity in favour of the race promoter against any costs arising from certain third party actions against the promoter, employees, agents and race drivers. The State's exposure was however mitigated by the Corporation's acquisition of public liability insurance for the 1999 Grand Prix event. Nevertheless, the State retained certain exposures, including claims in excess of the insurance policy limits and certain commercial risks.
Due to confidentiality obligations undertaken by the Corporation, the Review is unable to report further on significant ongoing obligations and liabilities arising from these arrangements.
The Corporation also has a recurrent works agreement with Parks Victoria covering the years 1998–2001 pursuant to which Parks Victoria licenses it to use certain lands at Albert Park for the purpose of preparing the circuit each year and dismounting race infrastructure afterwards. The Corporation pays an annual licence fee of $100,000 and is required to insure certain capital works pursuant to this agreement. Parks Victoria in turn is required to clean and maintain certain facilities during each year of the term.
11.7 Docklands Authority Contract with Transfield-Powercor for Development of Trunk Infrastructure
Under a Trunk Infrastructure Development Agreement (TIDA), the Docklands Authority contracted Transfield Pty Ltd and Powercor Australia Limited to design and construct certain infrastructure required for the development of the Docklands Area. While the primary proprietor is the Authority, the TIDA contemplates that the developers of precincts within Docklands (Precinct Developers) will become parties to the TIDA. The Works are divided into two categories:
• fundamental Works being those works that must be done by the Contractor; and • options being those works that the Authority can require to be done by the Contractor at the Authority’s option.
The TIDA was entered into in 1998. The dates for practical completion of both Fundamental Works and Options range from 30 June 1999 to 30 June 2000. The contract sum was approximately $70 million, subject to:
• variation in accordance with the TIDA for provisional sum items and variations; and
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• increase for cost of Options (if and to extent exercised by the Authority).
The Authority has limited obligations under the TIDA. They are to:
• appoint the Superintendent in accordance with the Superintendent Deed; • make the site available to the Contractor (although the Contractor is entitled only to an extension of time and delay costs if the Authority delays in doing so); • pay progress and practical claims as they fall due for payment as certified by the Superintendent; and • provide the Contractor with all the information necessary to assist the Contractor to perform obligations under the TIDA, directions and instructions in a timely manner, and any information required by the Contractor to supplement inadequate information.
Under the contract, the Contractor effectively bears all design and construction risks except:
• change in boundaries of the Docklands precincts (thereby resulting in relocating or extending utility infrastructure); • changes in final plans and specifications initiated by the Authority (ie. Authority variations); • delay in access to the Site caused by the Authority or any Precinct Developer; and • introduction of Site or Project specific legislation.
However, the TIDA does depart from the Risk Allocation Statement in one respect. While the Contractor is responsible for remediation of the Site, in certain circumstances the Authority may be required to meet the cost of remediation.
11.8 Sports and Aquatic Centre
The contract for the construction of the Sports and Aquatic Centre at Albert Park was made between the Secretary to the Department of Planning and Development as Principal and Baulderstone Hornibrook Pty Ltd as Contractor.
As this contract has now been completed, there are very limited ongoing obligations and contingent liabilities. The Defects Liability Period ended in or around June 1998. Public Liability insurance was required to be maintained by the Contractor until issue of the Final Certificate. Professional indemnity insurance is required to be maintained by the Contractor until ten years after the issue of the Final Certificate.
11.9 Immigration Museum
The Secretary to the Department of Infrastructure as Principal engaged LU Simon Pty Ltd as Contractor to provide construction management and building services for the refurbishment of the Old Customs House at 400 Flinders Street, Melbourne as a Museum of Immigration and Hellenic Archaeology.
The contract commenced in June 1997 and the date for practical completion was 1 April 1998 followed by a 52 week defects liability period. Note this does not take into account any extensions of time granted.
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11.10 Exhibition Centre
Pursuant to the Contract, the Urban Land Authority as Principal engaged Baulderstone Hornibrook Pty Ltd as Contractor to design and construct the Melbourne Exhibition Centre. The contract was made on 2 September 1994 and the date for Practical Completion was 30 November 1995. There are no or very limited ongoing obligations on the State arising out of this agreement.
11.11 Crown Casino
The State has entered two main agreements with the operators of Crown Casino: the Melbourne Casino Project Casino Agreement and the Melbourne Casino Project Management Agreement. The terms of the former agreement are confidential; as a result the Review is unable to report on the significant obligations and liabilities arising under it.
The significant ongoing obligations and liabilities of the State under the Management Agreement are:
• the State undertakes not to grant a licence to another entity anywhere within the State within six years from licence date (19 November 1993), and within 150 km of the casino, within 12 years from the licence date. This provision is expressly permitted under the Casino Control Act 1991 s 14; and • the number of gaming machines at any approved venue within 100 km radius of the Melbourne Casino shall not exceed 105 for 12 years from Licensing Date and that the total number of gaming machines permitted to be used in the State during the 12 years shall not exceed 45,000.
The other significant ongoing obligations of the State relate to administration and supervision of the casino’s licence, including step-in rights.34
Other than liabilities arising from a breach of the above exclusivity conditions and potential liabilities associated with exercise of step-in rights, the State has no significant ongoing liabilities arising under these Agreements. The contract automatically terminates if the casino licence is surrendered or cancelled or when the term expires. The licence may be terminated in the event of breach of its conditions by Crown. It does not appear that termination would impose any liability on the State, other than a potential interruption to revenue while another organisation was found to operate the casino and be granted a licence.
11.12 Sale of 452 Flinders St
Under this contract, the SECV sold the land, building and improvements at 452 Flinders Street, Melbourne to Permanent Trustee Australia Limited as trustee for Advance Property Fund for a price of $119.5 million. As part of the sale:
• the SECV agreed to pay the purchaser, on the day of settlement, a sum of $4 million described as a contribution to the building’s rental income; • the purchaser acknowledged that the property was sold subject to existing leases and agreed to observe the obligations of the SECV under each of the leases; and
34 Refer to the discussion of this issue in the Crown Casino Case Study in Volume 2.
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• the SECV assigned the benefit of building warranties to the purchaser, including the benefit of guarantees, bonds, agreements and licences relating to the conduct of the businesses on the site.35
There are no significant ongoing obligations and liabilities arising from this sale.
11.13 Leeds Media Advertising Agreement
Under an Agreement between Leeds Media and Communication Services Pty Ltd and the Victorian Government Purchasing Board for a Master Agency Media Service, the Contractor will provide all specified media agency services, as well as certain supplementary services as requested by State bodies.
The first three-year term of the contract expired on 1 October 1999 and the contract was extended for a further year.
The State’s significant obligations relate to making the contract payments. Where the State is late in making certain payments the contractor can charge triple rates.
The other main obligations of the State appear to relate to the exclusivity of the arrangement. The Contractor is appointed as the State’s exclusive media buying agency during the term. The contract provides that certain clauses relating to records, confidentiality and security, intellectual property, indemnity and insurance are surviving obligations beyond termination.
11.14 Melbourne and Olympic Parks Trust Contract with Ticketek
The Melbourne and Olympic Parks Trust has entered an agreement with companies in the Ticketek group for the provision of exclusive ticketing agency services. Due to confidentiality obligations undertaken by the State in this agreement, the Review is unable to report on the obligations and liabilities contained in this agreement.
11.15 Beacon Cove Redevelopment
Under an agreement between the Secretary to the Department of Planning and Environment and Mirvac Victoria Pty Ltd, Mirvac agrees to develop certain land at Beacon Cove, Port Melbourne as:
• a residential development incorporating both detached housing and apartments and a total of not less than 850 dwellings; and • on the water front of the Site, a commercial precinct incorporating at least five premises suitable for restaurants, bars and a convenience store (Waterfront Commercial Component).
In order to effect this development, Mirvac is also required to reclaim certain land at the edge of Port Phillip Bay and carry out infrastructure works on that reclaimed land.
Mirvac is required to undertake the development of Dwellings in stages each containing at least 100 Dwellings. The first Stage is to commence, effectively, on the signing of the Agreement. Thereafter Mirvac must exercise an option to proceed with each subsequent
35 Due to confidentiality restrictions in respect of the sale terms, this description is derived from that appearing in the Report of the Auditor-General on the Victorian Government’s Finances, 1997-98, para 4.64.
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Stage. If Mirvac does not exercise an Option within a time specified, Mirvac loses its development rights. Mirvac may exercise the Options in any order. Mirvac must undertake the development of each Stage in accordance with the Outline Development Plan.
Mirvac must carry out and complete the Reclamation Works (being a prerequisite to the Waterfront Commercial Component) within 12 months of the date on which it has settled the sale of 400 Dwellings That cost is to be funded by a levy deducted from sales proceeds of each Dwelling.
The Agreement also requires Mirvac to undertake:
• the extension of the Light Rail Line; and • works on the Finger Pier (Finger Pier Proposal).
The Secretary and Mirvac are to jointly fund the Finger Pier Proposal to a maximum of $350,000 each and Mirvac is to fund the Light Rail Extension to a maximum of $500,000.
The Development is supervised by a Project Committee comprising three representatives of each of the Secretary and Mirvac.
The main obligations on the Secretary are to:
• hand over Stages as Mirvac exercises Options together with access to those Stages; • upon request by Mirvac, provide all information held by the Secretary in relation to the Site; • assist in the sub-division of the Site; • upon request by Mirvac enter into and enforce contracts of sale for the Dwellings, and contracts of sale or leases for elements in the Waterfront Commercial Component; • indemnify Mirvac in relation to all claims for contributions in land, money or community facilities under any law in relation to the development of the Site; • pay land tax and ‘other assessments’ on the Site; • undertake local street works, repairs to seawall and steps, minor intersection works, and traffic facilitation works on Beach Street (subject to contribution of $150,000 by Mirvac); and • enter into any Section 173 Agreements required for the Development and approved by the Secretary but Mirvac is to indemnify the Secretary in relation to all obligations under these agreements.
The only significant obligation of the Secretary on termination arises if Mirvac terminates the Agreement for default of the Secretary. In that case, the Secretary must pay to Mirvac a price equal to the value (independently assessed) of all fixtures and fittings then on the Site. These may include partly completed buildings and the price could be substantial.
11.16 Kensington Banks Redevelopment
Pursuant to a Development Agreement between the Urban Land Authority (ULA), Epsom Properties Pty Ltd (Developer) and Pioneer Homes Australia Limited (PHA), the Developer (a related body corporate of PHA) is to develop the Site at Kensington for the use of medium and higher density housing (with associated commercial, community and retail uses).
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The Site consists of land sold to the ULA by the Melbourne City Council, land sold to the ULA by the Commonwealth, and land owned by the ULA.
The Developer and PHA are responsible for funding and conducting the development. The ULA is entitled to a specified proportion of revenue received from the sale of lots. The development timeframe was June 1994 to July 2000.
The main obligations of the State under the Development Agreement are:
• to purchase relevant land from the Melbourne City Council and the Commonwealth; • the ULA generally accepts responsibility for the Site and is responsible for pouring land fill on the Site; • subdivision plans are prepared by the Developer, approved by the ULA and then submitted to the City of Melbourne. The ULA is required to facilitate this process; and • the ULA will indemnify the Developer against any loss, damage, cost or expense suffered or incurred by the Developer as the direct or indirect result of the ULA being in breach of any of its warranties.
Under a Section 173 Agreement made in 1994 with the Melbourne City Council, ULA undertakes to:
• develop the land in accordance with the Concept Plan; • develop the land pursuant to Clause 118-6 of the Melbourne Planning Scheme; and • transfer open space at no cost to the Council and free of all restrictions other than easements for the purpose of the development.
Under a Transfer Deed made in December 1993 between the ULA, the Melbourne City Council and the Director of Housing, the ULA is required to:
• construct dwellings on lots 7 and 8; • relocate City tenants to new houses; • create a park known as Peppercorn Park; and • transfer land to Director within seven years with 16 full serviced house sites.
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Chapter 3
CHAPTER 3 PROBITY AND DISCLOSURE (TOR 2)
1. BACKGROUND
When a government enters into a contract it has chosen to employ a ‘private’ mode of achieving public outcomes. A strong theme running through the policy basis of moving to small government, privatisation and outsourcing is that adopting ‘private’ systems and methods is likely to lead to better and more efficient outcomes. This can be seen in the managerialism introduced into public service employment relationships and more broadly into the conduct of the public service, with the public sector attempting in many ways to mimic the private sector. Traditionally, contract is the quintessentially private institution for market exchanges whereby the parties are free to fashion their relationship in whatever way they choose and the State takes a minimalist position in regulating the relationship through the courts. The former Victorian Government chose contract to achieve some very major changes in the public sector. This pattern of government policy has been a widespread phenomenon throughout the world. The Victorian Government between 1992-1999 was undoubtedly one of the leading proponents of this model and arguably went further than any other advanced economy, as shown in Chapter 1.
In this Chapter the use of contract as a tool of public administration is examined. The use of a ‘private’ model in the public sector generates some tensions.
2. TERM OF REFERENCE 2
This part of the report is concerned with:
• probity in government tendering, contract award and contract administration; and • disclosure of information in connection with government contracting.
The two areas of probity and disclosure are necessarily linked because they both concern transparency.1 Probity, however, encompasses much more, including standards of proper conduct.
In this chapter the concept of probity is kept within a fairly narrow compass, namely, it is confined to its dictionary meaning of uprightness, honesty, proper and ethical conduct and propriety in dealings. In the context of government contracts the concept could be treated very broadly to include the kinds of concerns that relate to achieving best value for money when using public resources.2 In this treatment this wider concept is not included. If it were included, probity would embrace almost all aspects of the contracting process.
1 In some circumstances perceived probity can work against transparency. As discussed below, guidelines for government employees may emphasise the need for maintaining strict confidentiality. 2 For example, the Tasmanian Department of Finance and Treasury has published Probity Guidelines for Tendering and Contracting (1999) which include value for money and contract monitoring within the concept of probity.
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Under Term of Reference 4, the analysis found in the Case Studies may raise these broader concerns.3
PROBITY
3. PUBLIC AND PRIVATE SECTOR COMMERCIAL DEALINGS
3.1 Private Sector Standards of Conduct
In the private sector, when an entity decides to enter into and perform a contract, there is very little that the law or any other institution has to say about the probity of the behaviour of the parties to that relationship. Freedom of contract generally means freedom to exploit, behave harshly or otherwise to engage in practices that may offend moral scruples. Business can be tough; but of course, there are limits.
The law does not permit fraud and it may also provide protection to a party that has been the victim of harsh, unconscionable or exploitative conduct in the negotiation phase of a contract. In consumer transactions, special protection was thought to be necessary and many statutes provide safeguards for consumers when dealing with large or well-informed market operators. Other legislation has set standards of market conduct more generally, such as those found in the Trade Practices Act 1974, the State and Territory Fair Trading Acts and in the Corporations Law. There are other models of State control or regulation in particular areas of commerce, for example regulation (through legislation) of specific industries, such as telecommunications, or specific commercial relationships, such as the share market.
3.2 Government Commercial Dealings and the Level Playing Field
Governments are expected to operate on a level playing field with the private sector when engaged in commercial transactions. This means that government must at least adhere to the same minimum standards of conduct as are imposed on private sector entities, such as the obligation not to act in an unconscionable manner or to engage in misleading conduct. The level playing field is, however, somewhat misleading because it does not take account of the possibility that government may be required to adhere to higher standards than those that apply to the private sector. This requirement is well established.
3 See chapter 4.
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3.2.1 Sources of Government Standards
There are various sources of the government’s obligation to act according to more demanding standards than those that apply to private sector operators.
• The government is under an overarching obligation of accountability to Parliament and the people; this applies to its contracting activities just as it does to any other of its activities. • The finance legislation imposes standards and procedures on government that are designed to safeguard public money and ensure that it is spent efficiently. • The government is subject to the scrutiny of the Auditor-General. • An agency engaged in contracting may be subject to ministerial interference in the sense that a policy may override what may be regarded as the most efficient commercial outcome. • Judicial pronouncements have made it clear that the government must act as a ‘moral exemplar’ in the market place.4 This standard of conduct can translate into substantive rules, legal and otherwise, that bind governments, such as terms implied into a contract, a prohibition on a government employee being in a conflict of interests, a requirement of openness, a strict requirement to adhere to the rules of a tender process, to act in accordance with good conscience, and so on.5 • The government is subject to administrative law remedies, including the Ombudsman’s jurisdiction and Freedom of Information legislation. • The government is subject to the obligations of privacy in respect of personal information in the hands of the government.6 • The government may be constrained for political reasons in bringing the full force of the law to bear against a non-performing contractor because this could destroy the contractor (particularly if it is a small operator)7 or because the government is effectively locked in so that the remedy of termination is not an option, or else it would be very disruptive and expensive.
4 The expression ‘moral exemplar’ in connection with the government’s commercial activities was used by Finn J in Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 at 41. He drew on case law from both Australia and overseas. Relevant Australian judicial pronouncements can be found in Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333 at 342 (Griffith CJ); P & C Cantarella Oty Ltd v Egg Marketing Board (NSW) (1973) 2 NSWLR 366 at 383-384 (Mahoney J); Logue v Shoalhaven Shire Council [1979] 1 NSWLR 537 at 558- 559 (Mahoney JA); Northern Territory v Skywest Airlines Pty Ltd (1987) 48 NTR 20 at 45-47 (Kearney J). 5 For an elaboration of the practical consequences of the moral exemplar principle, see N Seddon, Government Contracts: Federal, State and Local (2nd ed 1999), Federation Press, paras 1.8- 1.10. 6 Privacy legislation has not yet generally extended to the private sector nor to entities that are performing tasks for the government under contracting out arrangements. 7 There have also been instances of the government being apparently reluctant to enforce a contract vigorously against substantial contractors.
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All of these requirements or standards of conduct can be broadly related to probity in its various aspects. They mean that the government is by no means on a level playing field with its private sector counterpart. In short, it is erroneous to consider that government can be run just like a private business. Government may certainly adopt business methods and use efficient systems and practices borrowed from the private sector but, in the end, the government is in a special position in its contractual dealings.
The Review takes the above requirements and standards as givens. They have evolved over a very long time to ensure that government is democratic and transparent. They need no further scrutiny in this Report.
What is required is to assess how these standards and requirements translate into specific measures in the overall government contracting process.
4. TENDERS
4.1 General Principles
One way in which the government can fulfil its obligation to make the best use of public money is to purchase or sell through a tender process. A properly conducted tender should generate a competition that ensures that the government obtains the best value, whether buying or selling. As will be seen below, the law traditionally had very little to contribute to the proper conduct of a tender, though this has changed in recent times. Tendering was therefore very much a matter for government agency decision as to how it should be conducted. There were initially very few ground rules. Legislation or guidelines might provide that a tender must be used for certain purchases8 but there was almost nothing said about the details of the process.
Obvious standards, such as the prohibition on corrupt conduct and the requirement that there should not be a conflict of interests,9 go without saying. More subtle standards of conduct were rarely stated. For example, is the government required to stick rigidly to the rules announced in the request for tender document (RFT)? If it is in the interests of the government to diverge from the announced rules (in particular if this could generate a better outcome in terms of value for money), is breaking the rules permissible? A simple illustration is whether to allow in a late bid, particularly if that tenderer is one of the major suppliers and is most likely to have an attractive bid. There were no clear answers to these kinds of questions relating to the proper conduct of a government tender.
8 For example, the Victorian Government’s Supply Policies and Guidelines 2.3, 2.4 and 2.5. Purchases over $50,000 must generally be by tender unless exempted. 9 Even this standard is frequently misunderstood. For example, it dictates not only that there should not be an actual conflict between a person’s interest and their duty but also that there should not be the appearance of conflict.
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4.2 Emerging Best Practice
Over the period from the late 1980s to the end of the 1990s a great deal of attention was paid to government tendering processes across Australia. This may have been in part because of the perceived lack of clear rules but was also a response to the uncovering of corruption and collusive practices in some government tenders. Both in New South Wales10 and in Victoria11 enquiries into the construction industry revealed widespread wrongdoing. As a result of these enquiries, codes of conduct for the construction industry were drawn up which went a long way towards establishing a proper framework of rules for government tenders.12 In addition, in Victoria a code of conduct covering local government contracting was drawn up. In Western Australia the Commission on Government dealt with tender processes, among other things, and made a number of recommendations about the proper conduct of government tenders.
4.2.1 VGPB Guidelines
More generally, the Victorian Government Purchasing Board (VGPB) has over the last six years published detailed guidelines covering procurement, including aspects of the tendering process. In addition, the Department of Treasury and Finance developed Outsourcing and Contract Management Guidelines and Procedural Integrity and Process Auditing in Privatisations and Contracting Out. These detailed guidelines and policies were developed principally during the previous Victorian Government’s term of office. The Review endorses these developments and notes that the Minister for Finance announced on 15 November 1999 that government purchasing arrangements, including the VGPB policies and guidelines, were to be reviewed.
One important aspect of the procurement process, including tenders, is the extent to which legal rules apply and can be enforced.
4.3 The Traditional Legal Rules of Tendering
Traditionally, the law treated the tendering process as not being governed by contract. This was because each tenderer’s bid was considered to be an offer and one of these bids was accepted to form a contract. This meant that any terms or condition applying to the pre-award period could not be enforced as contractual stipulations. When it became usual to draft an RFT that contained detailed ‘terms and conditions’, there immediately arose a divergence between the expectations of the parties stemming from those terms and conditions and the legal regime which held that there was no way to enforce them.13 This traditional position of the law has changed only recently in Australia.
10 Royal Commission into Productivity in the Building Industry in New South Wales (1991) (Commissioner RV Gyles). 11 Parliament of Victoria's Economic Development Committee, Inquiry into the Victorian Building and Construction Industry (1993). 12 The current version is the Code of Practice for the Building and Construction Industry (1999). 13 This divergence was noted in one of the English cases in which the law was changed and, indeed, the expectations of the parties to a tender process were put forward as a powerful argument for the change. See Blackpool and Fylde Aero Club v Blackpool Borough Council [1990] 1 WLR 1195 at 1202-1204.
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4.3.1 The Hughes Aircraft Case
In other countries with similar legal systems to Australia, such as New Zealand, the United Kingdom, Canada and the United States, the courts modified the traditional approach to the tendering process and have held that it was governed by a contract - a pre-award contract that deals with the rules of the tender process. The terms of this ‘process’ contract governing the pre-award period are the terms and conditions announced in the RFT. The RFT thus has a hybrid character and becomes the basis for an invitation for bids (offers) - its traditional role - and the terms governing the tendering process.
The Federal Court of Australia adopted this analysis in 1997 in Hughes Aircraft Systems International v Airservices Australia.14 Finn J found in that case that the predecessor to Airservices Australia, the Civil Aviation Authority, had committed several breaches of the ‘process’ contract governing the conduct of a tender for the purchase of a new air traffic control system for Australia. The most significant breach was that, after the bids had been submitted, the Authority resolved to change the rules relating to the selection criteria by giving more weight to a less important criterion than the rules had stipulated. They did this without telling the parties and without asking them to re-submit on the basis of the changed selection criteria. They then awarded the contract to Hughes’ rival bidder. Hughes successfully challenged in court.
Finn J also found other breaches of the ‘process’ contract and breaches of the Trade Practices Act in that the Civil Aviation Authority had engaged in misleading conduct. Much of what Finn J had to say in this case concerned matters of probity, that is, the tender was not conducted properly or fairly, the bidders were not treated in an even-handed manner and the Authority misled the bidders.
The significance of this case for government tendering is profound.15 Whereas traditionally there had been very little by way of regulation of government tenders there now exists a legal regime to give enforceability to the rules announced in the RFT. The consequence is that the planning of a tender and the drafting of the RFT must be done with the same care as is taken with the planning and drafting of the main contract.
4.3.2 Other Forms of Legal Redress
In addition to the process contract just discussed, it is possible to use other legal channels to generate liability arising out of an improperly conducted tender process.16 These include:
• misleading conduct under the Trade Practices Act or the State and Territory Fair Trading Acts; • the law of negligence;
14 (1997) 146 ALR 1. 15 The overseas case law on the ‘process’ contract governing the tendering process has only been applied to government tenders so far. It is another example of the public and private sectors being governed by different standards of conduct. 16 For a full account of the legal dimensions of government tenders, see N Seddon, Government Contracts: Federal, State and Local (2nd ed 1999), Federation Press, Ch 7.
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• estoppel (the legal basis for complaining about someone acting contrary to a representation, promise or assumption where such action has caused loss to another because the latter relied on the first party adhering to the representation, promise or assumption); and • administrative law remedies, including complaint to the Ombudsman.
The Victorian case of Metropolitan Transit Authority v Waverley Transit Pty Ltd17 illustrates the use of both estoppel and administrative law remedies to provide redress to an unsuccessful bidder after a tender process. The facts of this case were complex and unusual. This was a case where the plaintiff had been assured that its contract would be renewed without a tender, but this assurance was broken when the MTA decided to conduct a tender and awarded the contract to a rival bidder. The plaintiff succeeded in having the decision to award the contract to the rival company set aside with the Court ordering that the plaintiff’s contract should be renewed.18
4.4 Tendering Processes
The result of these recent developments in the law about tenders is that there are both legal and public administration dimensions to government tendering processes. The former provides legal redress to a disgruntled bidder19 in the event of a breach of the rules announced by the government in the RFT. The latter provide guidance as to the proper conduct of tenders from the perspective of the government agency.
The Public Accounts and Estimates Committee in its report on outsourcing20 devoted a whole chapter to the quality of guidance provided in the plethora of official guidelines and policies. It noted that the sheer volume of information could give rise to problems, such as inconsistent advice being provided. The Committee also noted that in some circumstances the published material could create an inflexible regime for contracting out. In some cases it was not clear the extent to which the guidelines and policies were being followed. Relevant to the issues of probity and ethics, the Committee was told that the published material paid insufficient attention to these matters.
17 [1991] 1 VR 181. 18 The case is discussed in the Public Transport Case Study in Ch 4. 19 The ‘process’ contract can also provide redress to the government if a tenderer breaks the rules. This has occurred in Canada. 20 Public Accounts and Estimates Committee, Outsourcing of Government Services in the Victorian Public Sector (34th Report to the Parliament, March 2000). This report was tabled on 5 April 2000.
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The Committee made the following recommendations. • 5.1. The Department of Treasury and Finance undertake a review of the Outsourcing and Contract Management guidelines and the guidelines of the Victorian Government Purchasing Board to ensure both sets of guidelines are consistent. • 5.2. The Department of Treasury and Finance adopt a clear definition of outsourcing; and develop a methodology so that consistent and meaningful information on the level of financial savings achieved may be collected for analysis and reporting. • 5.3. Departments and agencies ensure that adequate training on probity and ethics issues is undertaken by staff involved in the tender process to ensure they are fully aware of their duties and responsibilities. • 5.4. Departments and agencies ensure their staff and potential contractors are aware of the principles of ethics and probity applicable to public sector tendering and that they understand the importance of compliance with those principles.
The Review endorses these recommendations but makes some additional recommendations set out below.
4.4.1 Legal Risk
The Review believes that the current VGPB published guidelines and policies do not sufficiently pay attention to the legal aspect of the tendering process. They contain many principles that attempt to ensure integrity and probity in the tendering process but they do not alert government employees to the importance of the RFT in relation to legal risk that can arise out of a tendering process. It may be that this type of awareness is instilled in the training courses provided by the Procurement and Contracting Centre for Education and Research. It would, however, be sensible for the published guidelines to make clear that the RFT becomes legally binding with the consequence that its rules must be adhered to.
The ‘golden rule’ of tendering is that the government must be scrupulous about treating the bidders fairly and evenhandedly and it must stick to the rules announced in the RFT. This is not sufficiently emphasised in the VGPB guidelines. It is given no attention at all in the Department of Treasury and Finance Outsourcing and Contract Management Guidelines which devotes five pages to negotiation, preparation and signing of the contract.
The legal risk may be very considerable. The Hughes Aircraft case was eventually settled and the amount of damages, if any, paid to Hughes is a secret. The legal costs, on the other hand, must have been in the millions of dollars because of the very large number of days (approximately 120 days) spent arguing the case in the Federal Court before it was settled.
Accordingly the Review recommends that the VGPB published guidelines and policies be revised so as to give proper emphasis to the legal aspects of the tendering process, making it clear to users that there is legal risk in conducting a government tender process.
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4.4.2 High Risk Phases of the Tender Process
There are certain phases of a tendering process that are high risk. These are brought out in Procedural Integrity and Process Auditing in Privatisations and Contracting Out.21 They are:
• when correspondence and information, including the RFT, is dispatched to potential bidders; • in adhering to deadlines, particularly the deadline for submitting bids. If a flexible deadline is set, then it is essential that no bid should be opened until all bids have been submitted; • when evaluating tenders. Because this is the process whereby all but one bidder is excluded, it is the most likely area for complaint and so must be conducted with scrupulous attention to the announced rules. The choice must be made in accordance with the announced selection criteria and unannounced criteria (for example, preference for local companies) must not be used; • communication with bidders and within government. Communication with bidders must be handled very carefully so that there can never be the appearance of preferential treatment; • the conduct of the agency and its advisers after receipt of bids; • storage and distribution of tender information; and • potential conflicts of interests.
This is not an exhaustive list but its merit is to emphasise to those conducting a tender process that there is the potential for things going wrong.
The Review recommends that a similar focus on high risk phases of the tender process set out in Procedural Integrity and Process Auditing in Privatisations and Contracting Out be included in the VGPB guidelines.
4.4.3 Drafting the RFT
In providing a draft set of conditions for an RFT the VGPB has taken an important step in lessening the possibility of legal attack on the tender process. On the other hand it has possibly created a rigid set of rules that may not necessarily serve the best interests of the government in all cases. If the RFT is the basis for a ‘process’ contract, as held in the Hughes Aircraft case, then the parties are bound by the terms set out in the RFT. It is not possible to diverge from the terms unless the RFT expressly provides that the government has the right unilaterally to vary the terms or all parties agree to a variation.22 Therefore it is essential to foresee in the RFT what is required and expressly provide for the way in which the tender will be conducted. In such circumstances, unless the RFT provides that, for example, late bids may be considered, then they cannot be considered. The current draft RFT, published by the VGPB, states that late
21 Department of Treasury and Finance, Procedural Integrity and Process Auditing in Privatisations and Contracting Out (1997), p. 9. 22 It is a common practice in Victorian government tenders for the government to have the right to vary the rules. If it is necessary to change the rules, this must be done with great care so as not to provide an advantage to one bidder.
87. Chapter 3 tenders will not be considered except that, if it can be conclusively proved that a tender was late due to the fault of the government, then it will be treated as having been submitted on time. This is clear but it leaves no room for the government exercising a discretion to allow in a late bid which, for example, is late due to circumstances beyond the control of the bidder.23
The dilemma here is that a standard form RFT provides a template for agencies engaging in tendering processes (thereby providing certainty and cost saving) but, at the same time, the standard terms may not be in the best interests of the government, at least for some tenders. There is a further dilemma and that is to strike a balance between flexibility in the terms (such as a non-strict deadline for submission of bids) and maintaining the integrity of the tender process. If the tender rules are too ‘loose’ (thus providing the government with maximum flexibility and minimum legal risk) potential bidders may be put off and the response from the market may be poor as a result. For routine purchases, a template set of RFT terms and conditions is usually adequate but for more complex purchases (or sales) the agency should be prepared to modify the template so as to tailor the tender process appropriately.
The Review recommends that the current VGPB guidelines on tendering should be revised to reflect the need for some flexibility in the tendering process where appropriate, such as for more complex tenders, and that the review into government purchasing arrangements being conducted under the auspices of the Minister for Finance should consider this issue. Agencies must seek legal advice if they propose to change the standard terms of an RFT.
4.4.4 Ensuring that the Message Gets Through
The other point that can be made about the VGPB guidelines and policies is that, although they are reasonably comprehensive and contain many important pointers to ensuring integrity and probity in a tender process, no amount of such material will ensure that individual government employees or politicians will necessarily follow them. Training is a very important aspect of probity (and it is part of the policy to have proper training of government employees involved in procurement). In the end, however, there is always a danger of non-compliance that may be due to ignorance, inadvertence or to more base causes, such as corruption.
The current practice is to have an Accredited Purchasing Unit in each Department with staff trained to a high level of expertise in tendering and purchasing procedures. These Units should generally provide a sufficient safeguard against ‘drifting’ away from the proper procedures.
4.4.5 Whistleblower Legislation
The Review believes that there should nevertheless be a ‘back stop’ measure for ensuring that tenders and purchases are carried out in accordance with the guidelines and policies. One way of minimising the danger of non-adherence is to enact whistleblower legislation (which, of course, has a much wider function than ensuring proper procedures in tendering and purchasing). Victoria does not have such legislation. This is surprising because Victoria has been in the forefront of reforms that are broadly about improving the accountability and integrity of government, such as creating an independent office of the Director of Public Prosecution and being the first State to introduce Freedom of Information legislation. Whistleblower legislation is
23 The Commonwealth Department of Defence standard form for tendering in DEFPUR 101 has a flexible deadline in that late bids will be considered in certain, limited circumstances.
88. Chapter 3 admittedly difficult because it must accommodate a number of practical problems. The Review endorses the present government’s announced policy to enact whistleblower legislation.
4.5 Probity Adviser and Auditor
A measure that may enhance the probity and integrity of a tendering process is to make use of a Probity Adviser or Auditor before, during and after the conduct of the tender.
The terms ‘Probity Adviser’ and ‘Probity Auditor’ should be properly understood.24 Probity Adviser: a person who advises on how a process should be conducted and who has a pro-active role during the process, including giving advice on how to solve problems as they arise. Probity Auditor: a person who audits the process after it has been completed and assesses and reports whether it was conducted in accordance with the required standards of probity. Sometimes these expressions are used interchangeably. For example, in the Hughes Aircraft case25 the ‘Probity Auditor’ was in fact a Probity Adviser.
Probity Advisers and Auditors have been used in Australia, generally in connection with large projects. Examples include the Commonwealth government’s outsourcing of case management services for job seekers, the Victorian trams and trains franchises tender processes and the Docklands Redevelopment Project.
There is scope for using both Probity Advisers and Probity Auditors in certain projects. Their use is expensive and is probably only justified when the particular project is a large one26 or when it is foreseeable that it may generate controversy. The functions of the Adviser and Auditor must be kept distinct. The Auditor cannot be involved in the decision-making process and must remain independent so that he or she can report after the event, or in a complex tender, at various stages. If the Auditor is asked to provide advice during a tender process then his or her function is compromised. The Adviser's function, if successfully carried out, will undoubtedly make the Auditor's task simpler.
4.5.1 Probity Adviser
The Probity Adviser must be appointed early in the process and must:
• develop and implement a probity plan; • ensure that the evaluation team is properly briefed on probity;
24 See Tasmanian Department of Treasury and Finance Probity Guidelines for Tendering and Contracting which makes a clear distinction between Advisers and Auditors. 25 Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1. 26 The Public Accounts and Estimates Committee in its report Outsourcing of Government Services in the Victorian Public Sector (34th Report to the Parliament, March 2000) recommended (para 5.8 and recommendation 5.5) that Probity Advisers be used ‘particularly where large contracts are involved’. See also Department of Treasury and Finance, Procedural Integrity and Process Auditing in Privatisations and Contracting Out (March 1997) which makes a similar recommendation.
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• ensure that various stages in the tender process are fully documented; • resolve specific probity issues as they arise in line with the agreed probity standards; and • ensure that tendering and contract award processes comply with the probity plan.
The Adviser's role may extend beyond the period of bid evaluation and contract award to include issues such as archiving and proper handling of documents in accordance with public records requirements. However, because of the expense involved, there is no reason why these tasks cannot be undertaken by government personnel. They do not involve matters of probity as such.
The use of a Probity Adviser does not necessarily guarantee that the tender process will be conducted properly. One of the allegations made in the Hughes Aircraft case, discussed earlier, was that the Civil Aviation Authority was in breach of the process because it had promised that a Probity Adviser (called a ‘Probity Auditor’) would be employed to ensure that the rules would be followed. As already mentioned, serious breaches occurred during the tender process. The judge, Finn J, held that the Probity Auditor’s failure did not constitute a breach of contract by the Civil Aviation Authority because it was not the Authority’s responsibility to ‘audit the auditor’.
This case shows that selection of the Adviser should be done with some care and his or her role in the process should be precisely defined. There are differing models. For example, the Adviser may be from within government or may be an independent party appointed from outside the government. There is a danger of capture if the Adviser is seen to be too close to the team that is assessing bids. The Adviser should be given authority to question the conduct of the tender at any stage. The agency conducting a tender process should generally defer to the Probity Adviser's judgment even if this may mean that the outcome is not as good for the government as otherwise might have been hoped. It is false economy to go for the very best solution in financial terms if the tender process is at the same time compromised. The financial advantage of the supposedly best solution will undoubtedly be wiped out if litigation follows a flawed tender process.27 A Probity Adviser should provide ‘insurance’ against the whole process being jeopardised.
It is essential that the Adviser has a finely-tuned sense of what is required to maintain the integrity of the tendering process. Selecting an appropriate person is absolutely essential but difficult. He or she must be very experienced (particularly with government policies and processes), must carry authority in his or her dealings with the parties, must have a finely attuned understanding of what constitutes an actual or potential conflict of interests, must be able to foresee the consequences of what might appear at first sight to be innocuous conduct, must be endowed with common sense and must have excellent communication skills. The Adviser must not be ‘captured’ by the government agency, as already noted. It would be better to have no Probity Adviser at all rather than a weak or compliant one.
Because of the very demanding requirements for a Probity Adviser, he or she must be prepared to face potential legal liability. It is possible that, if the Adviser fails to do his or her job properly, a very expensive tender process could fail. He or she should therefore be insured.
27 The Commonwealth has had to pay for a new air traffic control system twice: once to the contractor and once because of the Hughes Aircraft litigation (which may or may not have involved a payment to Hughes).
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4.5.2 Probity Auditor
The Auditor's job is in effect to audit the Adviser as well as the agency after the tender has been completed or, in more complex tenders, at critical stages of the process. It may be undertaken by the Auditor-General or by an independent Auditor. An example of an audit report that the Review regards as a model is that which took place after the train and tram franchising contracts were awarded.
The Review recommends the use of Probity Advisers and Auditors in large complex or controversial privatisation or contracting out projects, in line with the guidelines set out in Procedural Integrity and Process Auditing in Privatisations and Contracting Out.
4.6 Conflict of Interests
A proper tender process must not be tainted by actual or perceived conflicts of interests, or, to put it more accurately, there must not be an actual or perceived conflict between the duties of government personnel who are evaluating bids and conducting the tender process and their personal, business or other interests. It is necessary to go through a formal process of identifying any possible conflicts by asking the people who are to be involved in making any decisions to declare their potential conflicts and, if necessary, removing them from the process. A formal declaration in the form of a statutory declaration should be signed by those who are to make the crucial decisions in the tender process. These declarations should be kept in a secure place by the CEO or the Minister.
As for potential conflict interest on the provider's side, it is probably sufficient to provide in the RFT and the draft contract that, if a bidder or contractor is found to have a conflict of interest, that is a sufficient ground to eliminate him or her from the tender or, if the contract has been awarded, to terminate the contract. More elaborate precautions (such as signing statutory declarations) may be necessary in some instances, for example, where it is foreseeable that conflict of interest issues may be raised.
The Review recommends that formal procedures to identify and manage an actual or perceived conflict of interest be adopted before a tender process is initiated.
4.7 Accountability
It must be possible to track the tender process. It is therefore essential to document the process so that each stage can be examined and justified. Decisions must be recorded and, most importantly, the reasons should be properly set out. All government personnel should assume that each decision made during a tender process may be the subject of investigation by a court, the Auditor-General, the Ombudsman or by a Parliamentary Committee.
The Review recommends that all tender processes are properly recorded, including recording reasons for decisions made at all stages, so that there is a paper trail for later evaluation of the process.
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5. CONTRACT AWARD
There is an obvious need for probity and proper procedures at the crucial time of announcing the winner of a competitive process. There are two principal issues at this time:
• transparency in informing the public and the market; and • ensuring that the process of contract formation is absolutely clear.
5.1 Informing the Market
A government contracting out or privatisation attracts a great deal of interest from both the market and from the public generally, particularly if it is a large project or if it is controversial. The government is inevitably working under a spotlight. It is therefore very important to ensure that the process by which the winner is announced is impeccable.
5.1.1 Practical Difficulties
There is a practical difficulty. The announcement arguably should not be made until the contract has been signed with the successful bidder. Yet the process of making the contract with the successful bidder may be drawn out, with possible leakage of information. Some might even argue that the announcement should be made first and the contract signed afterwards. This may, however, substantially undermine the government's bargaining position.
In some tenders the government may reserve to itself the right to negotiate with a preferred bidder and then, if those negotiations fail, it will enter into negotiations with the next preferred bidder. This process obviously keeps the second preferred bidder in suspense and could be seen as disadvantageous. There is nothing that can be done to alleviate this problem except to make this process absolutely clear (by spelling it out in the RFT) and then adhering to it. The government may choose to announce a preferred bidder publicly but, as noted, this course of action would not generally be recommended.
5.1.2 Clarity of Process
The point is that all of this should be carefully considered at the planning stage of the project. The Review believes that the public announcement of the winning bidder should not generally be made until a contract has been signed, even though this may keep interested parties, including the general public, in suspense for a long period in more complex projects. The procedures for announcing the winner should be included in the information provided to the market at the time of the issue of the RFT and then those procedures must be adhered to.
The Review recommends that the procedure for publicly announcing the successful bidder in a tender process be clearly spelt out in the RFT and that usually no announcement should be made until the contract has been signed.
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5.2 Making the Contract
5.2.1 Formal Contracting
The second issue that needs to be considered in relation to contract award is the procedure for entering into the contract. The law of contract assumes that there is a precise ‘moment of contract’ - a particular point of time when the legal relationship of contract starts. This point of time is when an offer has been accepted, or, more precisely, when an acceptance has been communicated. This model of contract formation works satisfactorily when formal procedures are followed, such as signing a fully written contract.
5.2.2 ‘Drifting’ into a Contract
The law has had to adapt to what people actually do, with the consequence that the precise ‘point of time’ model just described does not always apply. It is quite possible for parties to ‘drift’ into a contract because of what they have said or done, without there being a formal signing or some other obvious indicator of precisely when the legal relationship started.
The significance of the possibility of ‘drifting’ into a contract for the tendering process and contract award is that it may not be very clear whether a contract has been made. For example, if the government agency announces that a particular bidder has been awarded the contract, but no formal steps have been taken with that bidder to sign a contract, is the announcement sufficient to create a legally binding contractual relationship? Or, if a bidder is told by a government official that it has got the job and it starts to prepare for performance of the contract, is that sufficient to create a contract? These kinds of questions commonly come before the courts and are likely to be a problem in government contracting in the case of more routine contracts rather than in large projects. The usual dispute is that one party claims that there is a contract while the other claims that contract formation has not yet occurred.28
5.2.3 Avoiding Uncertainty
The government obviously does not want to become embroiled in a question of whether or not it has awarded a contract. The way to avoid this kind of problem is to make it absolutely clear in the RFT how the contract will be made and then to adhere to that. The simplest model is to state that no contractual relationship will be entered into between the government agency and the supplier (or purchaser) until a formal written contract is signed by both parties. For the avoidance of doubt, the RFT should state that the announcement of a preferred bidder (if that procedure is adopted) does not indicate that there is a contract.
Including a clear statement as just recommended is not the end of the matter because such a statement can be undermined by the conduct of the parties. It is a common occurrence for a government officer to say something to the preferred bidder that gives the bidder the impression that it should start work or otherwise gear up for performance. If this happens, the parties may have ‘drifted’ into contract even though it was originally contemplated that a formal contract should be signed. It is therefore essential that government officers are aware of this danger and are trained so that they do not inadvertently or carelessly allow the government to become committed to a contract before formal signature. This is another example of the need for the legal risks associated with government contracting to be brought home to the parties involved in the process.
28 An example is Coogee Esplanade Surf Motel Pty Ltd v Commonwealth (1976) 50 ALR 363.
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The Review recommends that the RFT state clearly how the contract will be formalised and that government employees should be made aware, for example through the VGPB guidelines, of the risks associated with failing to adhere to the announced procedures.
5.3 Contract Administration
5.3.1 The Government as ‘Moral Exemplar’
Probity issues arising out of contract administration are similar in kind to those discussed earlier in the context of tenders. It will be recalled that the tender process is itself a contractual relationship and that the terms of the RFT are legally enforceable. The difference between a tender ‘process’ contract and the main contract is that in the case of the tender there is the ‘golden rule’ of fair and even treatment of the parties to the tender process. In the case of the main contract there is generally only one party apart from the government, though there may be multiple providers as, for example, with hospitals, prisons and public transport. Nevertheless, the other points made earlier, in particular that the government party must act as ‘moral exemplar’ in its contracting activities, applies just as much to the administration of the main contract.
Translating the ‘moral exemplar’ principle into practical rules, as for example might appear in the VGPB guidelines, is not easy because of the myriad of circumstances that can arise during the administration of a contract. Further, it is by no means self-evident whether the government should be ‘soft’ on a contractor who is not performing; or whether the government should provide assistance to a contractor who is in trouble. The requirement that the government should obtain best value for money may be in tension with the view that the government should not act in the same hard-nosed way as may be appropriate in a private sector contract. Some may not even see this kind of dilemma as a probity issue but more a matter of judgment or policy.
5.3.2 Transparency of Contractor Performance
One of the issues discussed later under the heading of Disclosure concerns the transparency of the contracting process as the contract is performed. It is recommended below that the performance of the contractor, who is carrying out a contract for public purposes and being paid with public money, should be visible to the public. It is in any case necessary for the government agency to monitor the contractor's performance, whether or not the information about that performance is released to the public.
5.3.3 Contract Variations
It is always possible for the parties to a contract to vary it. The legal rules for making a change to a contract are the same as for making a contract in the first place, namely, there must be agreement and consideration. Case law has shown that it is very easy to make a change to a contract. This may happen quite casually; it may be done ‘on the run’. In other words, just as it is easy to ‘drift’ into a contract, it is easy to ‘drift’ into a contract variation. This may happen even when formal procedures are set down in the contract and these procedures have not been followed.29
29 An example being Commonwealth v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567.
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This is not so much a problem of probity as one of proper contract administration. Nevertheless, it is so important that the Review considers that it should be discussed here. The ease with which a contract may be legally changed generates some important management issues. These should be addressed in guidelines such as those published by the VGPB. Government employees need to be made aware of the dangers posed by, for example, a casual conversation, or possibly by what has been said in a meeting, that may have the effect of making a legally binding variation to the contract with possible financial consequences for the government.
The fact that contract changes are bound to occur from time to time in any long-term or complex contract means that the changes must be properly recorded. It is necessary to keep an up-to- date version of the contract and a historical record of changes so that it is possible to ascertain what the terms of the contract were on a particular date.
The Review recommends that the review into government purchasing arrangements being conducted under the auspices of the Minister for Finance should consider including in the VGPB guidelines suitable warnings about casual contract variations so that government personnel are made aware of the ease with which a legally binding contract variation can occur.
DISCLOSURE
6. CONFIDENTIALITY AND OPEN GOVERNMENT
The same tension, discussed at the outset of this chapter - between the use of a ‘private’ form in achieving public objectives - is evident in connection with access to information about government dealings. Confidentiality clauses are commonly included in government contracts. This part of this Chapter examines the appropriate level of disclosure in the tendering and contracting process undertaken by government agencies.
The principal focus of attention is disclosure of information about contracts to citizens, to Parliament and to important arms of the accountability structure of government, such as the Auditor-General and the responsible Minister.
6.1 Report by the Public Accounts and Estimates Committee
On 5 April 2000 the Public Accounts and Estimates Committee (PAEC) tabled a comprehensive report, Inquiry into Commercial in Confidence Material and the Public Interest which covers much of the analysis in this section. That Report was of course not available until it was tabled and so the Review and the PAEC were working in parallel, but not together. The PAEC project was started in February 1997 while the Review's examination of this issue took place between February and April 2000. Accordingly, some of the issues are explored far more thoroughly in the PAEC report.
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The philosophical approach to open government and access to government information is very similar in the two reports. The principal difference between the recommendations made by the Review and those made by the PAEC is that PAEC recommends that a more limited form of contract disclosure be adopted. Where the Review recommends full disclosure of contracts subject to some exceptions, the PAEC recommends disclosure of contract summaries only. There are some other differences of approach or emphasis. The PAEC report will be referred to where appropriate in the discussion that follows.
6.2 The Context – Democratic Government
The issue to be discussed is: what is the correct balance to strike between the requirements of confidentiality and the precept of open government?
6.2.1 The Law of Confidentiality - Keeping Secrets
The law of confidentiality, discussed in detail below, is simply about keeping secrets: the law protects the relationship of confidence when someone has told another a secret. The law is perfectly general. It does not distinguish between types of secrets, so that the law of confidentiality may be invoked to protect secrets between husband and wife, priest and penitent, doctor and patient, lawyer and client and so forth, although it does not protect mere tittle-tattle. It is therefore not dependent on the existence of a contractual relationship, though it can be made the subject of contractual agreement.
It may also be used in commercial relationships where certain information may be said to be ‘commercial in confidence’. When used in private sector entrepreneurial contracts, and in certain government contracts, the need to protect valuable information or trade secrets is readily understandable.
When a relationship of confidentiality arises between government and a company or citizen, there is immediately a tension between the need to keep secret certain information, such as valuable proprietary information, and the countervailing imperative of open government. The question that arises is whether a government contract is invariably the same as a private sector contract and whether, in particular, the freedom to create and protect secrets is unfettered, as it generally is in the private sector.
6.2.2 Open Government
The precept of open government is complex. It necessarily includes the equally complex concept of accountability. Much has been said about accountability and its areas of operation. Suffice it to say here that accountability, in the context of government activities, is one of the central pillars of a democratic system. Government cannot divest itself of accountability, whether it chooses public or private methods of service delivery.
Accountability embraces taking responsibility for actions and reporting to Parliament and ultimately to the people so that those actions may be judged. It also includes specific mechanisms of accountability, in particular the roles of the courts, the Auditor-General, the Ombudsman and legislation allowing access to government information.
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At the core of a proper system of accountability are information flows. Without access to information, accountability can be diminished. There is a direct relationship between the two: the less information a person in authority is required to provide, the less accountable he or she is. This works equally the other way: the less information that a subordinate or agent has to provide, the less accountable he or she is.
The concept of accountability considered here is concerned with allowing a government’s actions to be assessed by the people. It is not about a form of democracy whereby the people can participate in every decision and engage in debate before a decision is made. This is obviously impractical for every contract decision that a government might make. Only when a decision is controversial or would benefit from a wide public debate does accountability embrace this wider conception of democracy.
The Western Australian Royal Commission into Commercial Activities of Government made some basic points about accountability and representative democracy. The Commission stated two axiomatic principles:
• it is for the people of the State to determine by whom they are to be represented and governed (the democratic principle); and • the institutions of government and the officials and agencies of government exist for the public, to serve the interests of the public (the trust principle).30 “Both the democratic principle and the trust principle…if they are to have real meaning in this State, demand that government be conducted openly. They require that the public be informed of the actions and purposes of government, not because the government considers it expedient for the public to know, but because the public has a right to know. Openness in government is the indispensable prerequisite to accountability to the public. It is a democratic imperative. The right to vote is without substance unless it is based on adequate information. If government is to be truly government for the people, if the public is to be able to participate in government and to experience its benefits, the public must be properly informed about government and its affairs.”31
6.2.3 Access to Information
Because the mechanism of accountability through Parliament to the people is attenuated and necessarily patchy in terms of the matters that are revealed, there is a need to allow citizens to have direct access to information. This is given effect to by the Freedom of Information (FOI) legislation. This legislation plays a pivotal role in a system of representative democracy in many countries. Its importance cannot be overstated.32
Maintaining public accountability relies on a number of measures, including the obligation to provide information, direct and periodic scrutiny of government decisions, mechanisms to challenge official decisions and the establishment and enforcement of procedural and ethical
30 Report of the Royal Commission into Commercial Activities of Government and Other Matters (1992), WA Govt Printer, Part II paras 1.2.3 and 1.2.5. 31 Ibid at para 2.1.3. 32 See Australian Law Reform Commission and Administrative Review Council, Open Government: a review of the federal Freedom of Information Act 1982 (ALRC 77/ARC 40, 1995), AGPS, ch1 for an account of the importance of the FOI legislation in a democratic society.
97. Chapter 3 codes of conduct.33 On the face of it, none of these objectives is consistent with private commercial contractual arrangements which are traditionally about secrecy, are only enforceable between the parties in accordance with the doctrine of privity34 and in which the parties are really only accountable to the extent required by the contract.
6.2.4 Constitutional Guarantees
The concept of open government in a democratic society has been considered by the High Court in cases where it has been successfully argued that there must be a constitutionally guaranteed freedom of political communication. In a series of cases, the High Court has found that this freedom is inherent in the Commonwealth Constitution, even though it is not expressly stated.35 The full extent of this implied freedom has not been fully explored. It certainly has the potential to affect the activities of State governments, either because State legislation may possibly be inconsistent with the Australian Constitution36 or because the State Constitution may itself contain the implied freedom.37 It is not necessary here to dwell on this constitutional freedom except to note that it represents an important aspect of open government and the concomitant notion of accountability through access to information.38 In Lange v Australian Broadcasting Corporation39 the High Court said:
Accordingly, this Court should now declare that each member of the Australian community has an interest in disseminating and receiving information, opinions and arguments concerning Government and political matters that affect the people of Australia. The duty to disseminate such information is simply the correlative of the interest in receiving it. The common convenience and welfare of Australian society are advanced by discussion - the giving and receiving of information - about Government and political matters.
The Review focuses on the potential impediment to the free flow of information that may occur when government decides to use the tool of contract to achieve public purposes and includes a confidentiality clause in the contract.
Before discussing the tension between confidentiality and open government it is necessary to set out the law, both as to confidentiality and freedom of information.
33 R C Beazley and D M De Silva, ‘Outsourcing Democracy & Public Accountability’ notes of a presentation made by R C Beazley at the IBA Conference, September 1988, 15. 34 The privity doctrine means that only the parties to a contract are bound by it. Outsiders have no rights and are under no obligations found in the contract. 35 Nationwide News Pty Ltd v Wills (1992) 177 CLR 1; Australian Capital Television Pty Ltd v Commonwealth [No. 2] (1992) 177 CLR 106; Theophanous v Herald & Weekly Times Ltd (1994) 182 CLR 104; Cunliffe v Commonwealth (1994) 182 CLR 272; Lange v Australian Broadcasting Corporation (1997) 189 CLR 520; Levy v Victoria (1997) 189 CLR 579. 36 The State action under challenge would have to have some Federal effect, that is, it would have to impinge on freedom of communication affecting Federal government or politics in some way. 37 As was found in the Western Australian Constitution: Stephens v West Australian Newspapers Ltd (1994) 182 CLR 211. 38 At least one commentator has argued that the constitutional guarantee may override contractual ‘commercial in confidence’. See T Brennan, ‘Undertakings of confidence by the Commonwealth. Are there limits?’ (1998) 18 AIAL Forum 8. This argument could be applied at State level if a State Constitution was found to contain the implied guarantee. 39 (1997) 189 CLR 520 at 570-571.
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7. THE LAW OF CONFIDENTIALITY
7.1 Origins
As noted above, the law of confidentiality is about protecting the relationship of confidence that is established when one person tells another a secret. This part of the law was developed by the English Court of Equity. This Court was very often concerned with ensuring that people did not do things which went against good conscience. This necessarily vague concept of unconscionability was developed in a number of different contexts, including the law of confidentiality, and, over the years, the rules applying to a particular context became reasonably clear through the decided cases.
The law of confidentiality is now a well-established body of principles. Its equitable origins can still be detected in the concern to protect the relationship of confidence. It is not directly concerned to protect information (as, for example, is the function of some aspects of the law of intellectual property) though, in practical terms, that is how it is used. This dichotomy between the law's original purpose and its practical application does give rise to some difficulties when the law is applied to modern commercial or governmental relationships. For example, the relationship may be an arm’s length, commercial one where the idea of trust and good faith is not as apparent as in the relationship between, say, doctor and patient.
Another complication is that a duty of confidentiality may be created by contract. If so, then the appropriate analysis is a contractual one - what did the parties agree to? - rather than one determined by equity principles which are, as already noted, principally concerned with protecting a relationship of confidence. It is a basic precept of the law of contract that the parties may agree to whatever they like (apart from illegal stipulations)40 and so the parties to a contract can fashion the obligations of confidence in any manner that they wish. This freedom of contract means that in government contracts (as in any other contracts) any limits placed by the equitable principles on what can be made confidential can be overridden by contract. This ‘contract override’ is of some importance in any discussion about confidentiality, as will be seen below.
7.2 The Principles
The law of confidentiality provides protection when: • a person imparts information to another in circumstances where, either expressly or by implication, the latter is required to keep the information confidential, that is, he or she must not pass it on or use it without permission of the first party; • the information is in fact capable of being confidential, that is, it is a secret that is not known or accessible to the general public; and • the confidant breaches the relationship of trust by either passing on the confidential information or otherwise misusing it, or threatens to do so.
40 The government, or any other party, cannot use a contractual confidentiality clause to hide illegal activity. Such a clause would be against public policy to the extent that it attempted to protect illegal activity and would not be enforced: A v Hayden (1984) 156 CLR 532.
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The law's remedy is either to grant an injunction to stop the misuse of the information (if it is not too late) or to provide compensation in the form of money damages. The remedy extends to preventing third parties from misusing confidential information.41
7.2.1 Uncertainties
Although the law of confidentiality is well established, there are a number of uncertainties about its operation.
• Detriment
One uncertainty is whether it is necessary for the person who is attempting to protect confidential information to show that the disclosure would cause him or her to suffer a detriment. The case law tends to support the proposition that there is no need to show detriment, apart from the inherent detriment in having one's secrets revealed. This is almost certainly the case with personal information.
The position is not so clear with commercial information where it may be necessary to show some kind of business detriment to the ‘owner’ of the information, such as that the confidant will benefit financially from using the information.
It will be seen below that when a government attempts to protect information it must show detriment of a special kind, namely, serious detriment to the public interest.
• Type of information
Another uncertainty relates to the type of information that is protected. There are statements in the courts that, for the protection of the law to be invoked, the information must be inherently confidential.42 This is obviously not an easy concept to define but it is at least arguable that it is not sufficient that the parties to a relationship have stamped documents ‘commercial in confidence’ for the law to provide protection if there is in fact nothing inherently confidential in those documents. However, if the parties have agreed through a contract that the information is confidential, this overcomes the requirement that the information must be inherently confidential.
41 The remedy against an innocent third party, that is, someone who received the information without being aware that it was confidential, is not very certain. 42 Moorgate Tobacco Co Ltd v Phillip Morris Ltd (No 2) (1984) 156 CLR 414 at 438 (Deane J); Coco v AN Clark (Engineers) Ltd (1969) RPC 41 at 48.
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This uncertainty in the law, and lack of sophisticated knowledge by those who may be tempted to use confidentiality as a screen to their activities, make it very easy to over-use contractual confidentiality by the simple expedient of declaring everything to be ‘commercial in confidence’. There is certainly nothing in the law to stop this practice. It is not, for example, possible to obtain an injunction to stop someone from unnecessarily using ‘commercial in confidence’. Therefore, if a contract is ‘commercial in confidence’, the assumption is that it is necessary to ensure that it is not disclosed, even if the information contained therein is mundane or relatively trivial. Certainly, a person who considered that there was no justifiable reason to keep the contract secret would have a difficult time in persuading others that this was correct.
This is a further illustration of how contract can override the underlying law of confidentiality. If the parties agree to make everything in their contract confidential, then the prohibition on disclosure or misuse is protected by the ordinary law of contract.43
• Justified disclosure
Another uncertainty is the scope of justified breach of confidentiality. It is reasonably well-established that it is legally justifiable to break the requirement of confidentiality if the confidant would be revealing a crime by so doing. (The confidant may, unless compelled by law,44 choose not to reveal such information because of a self-imposed, or institutionally-imposed, duty to maintain confidence, such as the priest who learns of such information in the confessional.) In the United Kingdom, the courts have gone further and permit a breach of confidentiality if it would disclose wrongdoing that does not necessarily amount to a crime if it would be in the public interest to disclose the wrongdoing.45 The law of confidentiality in Australia has not gone this far46 but the same result may be achieved, at least in relation to government activities, by whistleblower legislation. Suffice it to say that the limits of the legally justified breach of confidence are not certain.
Again, contract overrides this uncertainty: if the parties have prohibited disclosure in their contract, then disclosure is a breach (assuming that the contract is not being used to screen illegal activity). It may, however, be the case that the breach does not create any measurable loss, that is, damages for breach cannot be assessed in any sensible way. An example would be where there is disclosure, in breach of contract, of a clause in the contract which reveals how much the government is paying a contractor. It may well be the case that such a breach causes no measurable loss to the contractor.
43 The protection provided by the law of contract may, in appropriate circumstances, be overridden by the freedom of information legislation. 44 For example, mandatory reporting of child abuse. 45 Fraser v Evans [1969] 1 QB 349; Woodward v Hutchins [1977] 1 WLR 760. 46 Castrol Australia Pty Ltd v Em Tech Associates Pty Ltd (1980) 33 ALR 31.
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7.2.2 Practical Difficulties
Another problem with confidentiality is not so much its legal boundaries as its practical operation.
• Tracking who has access
When information is confidential it is almost always the case that it can be revealed to a limited class of people. In fact, a potentially useful aspect of a contractual confidentiality clause is that it should define with some precision what information is confidential and who can see it. A company tendering for a government contract would know that the team considering the tenders would be privy to the information in the company's tender. It may be the case that the company insists that each member of the team signs a confidentiality deed. If there is then a change in personnel in the government team, it is necessary to seek permission from the company (and the other tenderers too, in all likelihood) to allow the new member of the team to see the confidential information.
The point being made here is that the existence of confidentiality may necessitate the use of elaborate procedures.
• Physical precautions
Another practical aspect of confidentiality is that special precautions have to be taken within the offices of the government (if only some of its personnel are privy to the information) such as locking up documents in secure cupboards and so forth. It is not correct to assume that, once confidential information has been given to an organisation, then anyone in that organisation can see it. It would be a breach of confidence to pass on the information to someone in the organisation who had no business to know about it.47
• Costs of confidentiality
In short, the existence of confidential information imposes costs. This has been recognised by government and, on occasions, the government will require bidders in a tender process to ensure that a tenderer only uses ‘commercial in confidence’ when it is necessary and not to stamp every document with the phrase. This measure is obviously designed to reduce the burden generated by the existence of confidential information.
In this enquiry, the Review has been told that, when it was no longer necessary to maintain confidentiality in relation to contracts after a successful FOI case had been mounted against the government, the task of the Department concerned was considerably simplified as a result of the removal of the various administrative burdens imposed by the requirement of confidentiality.
The practical difficulties associated with confidentiality are exacerbated by the law's uncertainty as to what information can be the subject of the duty of confidentiality. Generally, the law is not concerned with the nature of the information so much as the fact that a party has said that he or she wants it to be confidential, although this
47 Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1.
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proposition can be challenged if the information is not inherently confidential. As noted, if the information is made confidential by contract then there is no limit as to what may be included in the clause. It is therefore all too easy to resolve any doubts about what to include by over-using ‘commercial in confidence’, rather than making the effort to distinguish between information that needs to be protected and that which does not.
7.3 Confidentiality and Government
The law of confidentiality and its operation, so far described, have made no distinction between the private and public sectors. As already noted, the development of the law of confidentiality was essentially about various kinds of private relationships, commercial or otherwise. One of the difficulties posed by government's use of contract is that the assumptions that are appropriate to private sector relationships are sometimes said to apply in the same way to public contracts. Indeed, the assumption underlying the new managerialism and the so-called level playing field aspiration is to treat government as being in the same position as business, with the concomitant use of business methods for the purpose of promoting efficiency in public administration. The ‘private’ assumption has also been adopted in connection with the use of ‘commercial in confidence’, that is, that the government is in no different a position from its private sector counterparts when it comes to generating and protecting secrets. This assumption has been challenged in the discussion of the ‘level playing field’ precept at the beginning of this chapter.
While it may be the case, as discussed below, that the government may be subject to more exacting standards than private sector entities, this does not detract from the legitimate concerns of those doing business with the government. They are just as much concerned to make profits and to keep their competitive edge when doing business with government as they are when doing business with other entities in the private sector. This concern must be accommodated alongside the precept of open government.
The assumption that the law of confidentiality operates indifferently between the private and public sectors is not justified. This has been made clear by the High Court of Australia.
7.3.1 Government Secrecy
Before examining the case law, it is as well to provide some background. Government has always been entitled to keep certain matters secret. The Westminster system of government simply assumed that the government is entitled to keep whatever it likes secret from the public.48 The undermining of this assumption by FOI laws came from other systems (principally the United States) and it is worth noting the singular reluctance of the United Kingdom to embrace FOI legislation.49 However, quite apart from the introduction of FOI legislation, the law
48 For a comprehensive account of the traditional government assumption of secrecy, see P Finn, Official Information Integrity in Government Project, Interim Report, (1991), Australian National University. 49 The United Kingdom government has at the time of writing (April 2000) introduced a Freedom of Information Bill. A comprehensive account of the introduction of FOI legislation at the Federal and State levels in Australia may be found in Australian Law Reform Commission and Administrative Review Council, Open Government: a review of the federal Freedom of Information Act 1982 (ALRC 77/ARC 40, 1995), AGPS, Ch 3. Victoria's experience is described at para 3.15.
103. Chapter 3 of confidentiality in its application to government and its related concept of government secrecy (sometimes protected by public interest immunity) have been under close scrutiny by the courts, both in the United Kingdom and Australia. The usual circumstance in which the issue is considered is that in litigation the government resists having to produce documents that are relevant to the litigation. There is no doubt that the government can do this: this is called public interest immunity. The justification for the immunity is that high matters of State would be adversely affected if the information is disclosed. However, the courts have made it increasingly difficult for governments to justify this immunity, particularly when the proper administration of justice would be undermined by the claim of immunity.
7.3.2 Burden on Government to Justify Non-disclosure – The Reverse Onus Principle
The result of the case law in this area is that the onus is on the government to justify a claim that information should not be disclosed. This is in marked contrast to the private sector where the onus is on the person who wishes to disclose to justify the disclosure and the grounds for justification are narrow and somewhat uncertain, as discussed above. The public sector rule was made clear by Mason CJ in Esso Australia Resources Ltd v Plowman50 where he said ‘This involves a reversal of the onus of proof: the government must prove that the public interest demands non-disclosure’. In an earlier decision, Commonwealth v John Fairfax & Sons Ltd51, Mason J said:
However, the plaintiff must show, not only that the information is confidential in quality and that it was imparted so as to import an obligation of confidence, but also that there will be ‘an unauthorised use of that information to the detriment of the party communicating it’ (Coco v. A. N.Clark (Engineers) Ltd. (1969) RPC 41, at p 47 ). The question then, when the executive government seeks the protection given by equity, is: What detriment does it need to show?…
The equitable principle has been fashioned to protect the personal, private and proprietary interests of the citizen, not to protect the very different interests of the executive government. It acts, or is supposed to act, not according to standards of private interest, but in the public interest. This is not to say that equity will not protect information in the hands of the government, but it is to say that when equity protects government information it will look at the matter through different spectacles.
It may be a sufficient detriment to the citizen that disclosure of information relating to his affairs will expose his actions to public discussion and criticism. But it can scarcely be a relevant detriment to the government that publication of material concerning its actions will merely expose it to public discussion and criticism. It is unacceptable in our democratic society that there should be a restraint on the publication of information relating to government when the only vice of that information is that it enables the public to discuss, review and criticize government action.
Accordingly, the court will determine the government's claim to confidentiality by reference to the public interest. Unless disclosure is likely to injure the public interest, it will not be protected.
50 (1995) 183 CLR 10 at 31. 51 (1980) 147 CLR 39 at 51-52.
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The court will not prevent the publication of information which merely throws light on the past workings of government, even if it be not public property, so long as it does not prejudice the community in other respects. Then disclosure will itself serve the public interest in keeping the community informed and in promoting discussion of public affairs. If, however, it appears that disclosure will be inimical to the public interest because national security, relations with foreign countries or the ordinary business of government will be prejudiced, disclosure will be restrained. There will be cases in which the conflicting considerations will be finely balanced, where it is difficult to decide whether the public's interest in knowing and in expressing its opinion, outweighs the need to protect confidentiality.
The sentiments expressed in this passage show that the traditional government attitude to secrecy, which is to assume that everything is secret unless there is reason to suppose otherwise, is at odds with what the law holds. The reverse onus approach to secrecy in the context of government information is widely accepted.52
7.3.3 Contractual Confidentiality
The traditional inclination of government to secrecy has been provided with a powerful additional weapon in an age of contracting out, namely, the ‘commercial in confidence’ clause. The point has already been made that, whatever the law may contain by way of limitations on the use of confidentiality, these limitations can be bypassed by the use of contract. The parties to a contract are free to decide how they will construct their relationship. In government contracts this freedom can have deleterious consequences. The inclination to governmental secrecy has been bolstered by the all-too-easy use of the confidentiality clause. The Public Accounts and Estimates Committee in its report on confidentiality made the point that ‘commercial in confidence’ clauses have been over-used and, further, that the initiative for secrecy tended to come from the government rather than the contractor.53
The fact that the law provides that the use of confidentiality by government must be justified poses little practical impediment to its use, particularly in a contract. In any case, the test of whether the claim of confidentiality is justified only comes in litigation. In other words, government employees and ministers can be fairly sure that they can ‘get away with it’ because of the unlikelihood of challenge. This was certainly so before the advent of FOI legislation. But even with FOI legislation the government employee or minister appears to be reasonably safe because one of the exceptions to the obligation to disclose is that the information is confidential.54 However, this is not invariably so. The interaction between the law of confidentiality and the FOI legislation is examined below.
7.3.4 Increased Secrecy
52 See Public Accounts and Estimates Committee, Commercial in Confidence Material and the Public Interest (35th Report to the Parliament, March 2000), recommendation 5.2; Senate Finance and Public Administration References Committee, Contracting out of Government Services Second Report (1998), 70-71; Western Australia, Report of the Royal Commission into Commercial Activities of Government and Other Matters Part II (1992) paras 2.5.16-2.5.21. 53 Ibid, Ch 5. 54 Freedom of Information Act 1982 (Vic) s 35.
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The Review notes that the Case Studies in Chapter 4, as well as the bulk of the other contracts that have been examined, demonstrate that the former government’s policy of contracting out led to an increase in the secrecy of information relevant to the particular projects. Many of the contracts examined by the Review contain confidentiality clauses, some simply blanket clauses covering the whole contract55 and others more selective in what is covered. Yet, other contracts were made publicly available.56 It was not always clear to the Review why some contracts were open and others were secret.
The Public Accounts and Estimates Committee in its report on confidentiality listed numerous examples, covering many of the contracts examined by the Review, where information was denied both to the public, to politicians and even to the Auditor-General because of confidentiality clauses.57 As already noted, in many cases the government took the initiative in including a confidentiality clause. More rarely the initiative came from the other party. An illustration of the latter is the contract concerning the Grand Prix where significant obstacles are placed in the way of government personnel (including those working on this Review) wishing to have access to, let alone wishing to disclose, particular details of the contract.
It is not clear to the Review why, after the political benefits had been secured by contracting out exercises, and the sensitivity and value of commercial information used to secure those arrangements were significantly reduced, the government still agreed to the inclusion of blanket confidentiality clauses which resulted in inadequate disclosure of information to the public after contracts were awarded. The general idea behind these clauses seemed to be that, if the information was provided to the public, it would compromise the commercial viability of the private operators. The Review saw few instances of this in practice. The Public Accounts and Estimates Committee doubted ‘whether every aspect of all of [the examples discussed in its Report] would stand up to serious scrutiny as being legitimately commercially confidential’.58
One of the benefits from contracting out is that accountability is improved as a result of having to specify with some precision what has to be done by the contractor. The Review has observed this effect in the privatisation of prisons.59 In order to realise the perceived benefits for accountability that contracting out can offer, it is important that the improved information, and the lessons to be drawn from the experience, be readily available. It is of no benefit if the information generated by the contractual process is not made public on the grounds of commercial confidentiality or indeed that the criteria within a contract against which performance is assessed are not published for the same reason.
By way of example, the Review has examined the contracts for the construction, operation and management of the new La Trobe Regional Hospital and the Mildura Base Hospital and acknowledges that these contracts provide a good example of the degree of prescription of the quality of standards required and the level of accountability involved in a hospital privatisation
55 Examples are the Metcard, casino licence, private prisons, V/Line Freight sale of assets, AH Plant, tram and train franchises and Mildura Base Hospital services contract. 56 Such as the CityLink Concession Deed and casino management contracts, both of which were embodied in legislation. Nevertheless, contracts associated with these projects were ‘commercial in confidence’. The casino licence agreement is an example. 57 Public Accounts and Estimates Committee, Commercial in Confidence Material and the Public Interest (35th Report to the Parliament, March 2000), para 5.2. 58 Ibid at 76. 59 J Chan, ‘The Privatisation of Punishment: A Review of Key Issues’ (1992) 27 (4) Australian Journal of Social Issues, 233, at 243.
106. Chapter 3 arrangement. The same applies to the standards set in the Metcard contract in respect of the performance of automatic ticketing machines. However, each of these agreements is ‘commercial in confidence’.60
7.3.5 Conclusion
The law of confidentiality is only part of the legal framework relating to information flows within which the government operates. When government engages in contracts, freedom of contract - whereby the parties may agree to whatever they like so long as it is not illegal - ‘trumps’ the law of confidentiality. The result is that, even though the law of confidentiality does recognise the special nature of government information by placing the burden on government to justify non-disclosure, this salutary rule can be bypassed by the simple expedient of agreeing to keep secret any or all information associated with a contract. There is no doubt that governments have taken advantage of this so as to screen their contracting activities from what they might consider to be the unwelcome attention of the public. The former Victorian Government certainly did this.
It is necessary in this Report to arrive at a suitable balance between legitimate claims to confidentiality and the countervailing requirement of open government. Neither is an absolute value; each is subject to qualification and exception. This dilemma will be taken up below.
8. FREEDOM OF INFORMATION
8.1 The Philosophy of the Legislation
The FOI legislation, enacted in all jurisdictions in Australia except the Northern Territory, reflects the philosophy of open government discussed in this Report. It was introduced as a counter to the prevailing ethic of secrecy that has traditionally characterised the Westminster-style of government administration. The basic precept underpinning the legislation is that any citizen has a right to know what the government is doing. Informed debate about government actions and policy can only occur if information is readily available. This right is so important that there is no test of standing. That is, it is not necessary for a citizen who seeks information to establish that he or she has a valid reason for seeking the information. Busybodies can quite properly seek information under the FOI legislation,61 though there are safeguards within the legislation to deal with applications for documents which are unduly burdensome on the government agency
One of the salutary effects of the FOI legislation is revealed by two of the cases in which information was sought about the management buy out of Plant Branch of Vic Roads and the tender process for non-emergency ambulance services.62 In each case the Tribunal member said that it was important for information to be disclosed so as to ‘clear the air’ of any suspicion
60 The Review was informed just prior to publication that, in relation to the Metcard automatic ticket contract, Public Transport Corporation and the contractor have agreed to the substantial release of the contract in response to an FOI request. 61 The Freedom of Information Act 1982 (Vic) s 13 provides that ‘every person has a legally enforceable right to obtain access in accordance with this Act’. 62 Re Mildenhall and Vic Roads (Fagan P, 19 Feb 1996) and Re Thwaites and Metropolitan Ambulance Service (Galvin DP, 5 Feb 1996).
107. Chapter 3 that might otherwise have been held about those transactions. Similarly, the Tribunal has in other cases made it clear that if the documents sought revealed wrongdoing then it would be in the public interest to release them. In some cases the Tribunal itself has viewed the documents and, if they do not reveal any impropriety and they would otherwise be exempt, has decided not to release them.63 In other cases release of the documents is justified because disclosure will ‘either confirm the grounds for public disquiet or dispel them’.64
8.2 The Victorian FOI Legislation
The Australian legislation is not uniform. The Victorian Act is the Freedom of Information Act 1982. Victoria was the first State or Territory government in Australia to enact such legislation.
The legislation has, at the time of writing (April 2000), been recently amended in a number of ways as part of the present government's measures for increased accountability.65 In particular, the section (s 34) dealing with exemption of trade secrets and information acquired from a business, commercial or financial undertaking has been modified. The Public Accounts and Estimates Committee in its report on confidentiality has made a number of recommendations for further amendment to the FOI legislation. In this Review the examination of the FOI legislation is not so extensive and only one recommendation is made for amending the substantive provisions of the legislation.
8.2.1 The Objects
Section 3 of the Act states as its object:
(1) The object of this Act is to extend as far as possible the right of the community to access to information in the possession of the Government of Victoria and other bodies constituted under the law of Victoria for certain public purposes by- (a) making available to the public information about the operations of agencies and, in particular, ensuring that rules and practices affecting members of the public in their dealings with agencies are readily available to persons affected by those rules and practices; and (b) creating a general right of access to information in documentary form in the possession of Ministers and agencies limited only by exceptions and exemptions necessary for the protection of essential public interests and the private and business affairs of persons in respect of whom information is collected and held by agencies.
63 See D Murphy, ‘Commercial Confidentiality, Freedom of Information and the Public Interest’ AIAL Forum No 9, 1. 64 Re Just and Department of Justice (1996) 10 VAR 126, at 129 65 Freedom of Information (Miscellaneous Amendments) Act 1999 which came into effect 1 January 2000.
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8.2.2 Exemptions
All FOI legislation recognises that there must be some exemptions from having to disclose information. The categories of exemption in the Victorian Act are:
• documents containing personal information (Part 3A); • Cabinet documents (s 28) and documents containing matter communicated by any other State (s 29); • internal working documents (s 30); • law enforcement documents (s 31) and documents affecting legal proceedings (s 32); • documents affecting personal privacy (s 33); • documents relating to trade secrets, etc. (s 34); • documents containing material obtained in confidence (s 35); • where disclosure would be contrary to the public interest (s 36); • certain documents arising out of companies and securities legislation (s 37); • documents to which secrecy provisions of enactments apply (s 38); • council documents (s 38A).
In addition, there are other provisions which may have the practical effect of denying access. For example s 25A provides a basis for denial if the processing of an application would be unduly burdensome.
8.2.3 ‘Commercial in Confidence’ and FOI
The main focus in this Report is on the use by government of confidentiality in its contractual dealings. The exemptions that are most likely to be relevant to contracting activities are:
• documents relating to trade secrets,66 etc. (s 34); and • documents containing material obtained in confidence (s 35).
There is an overlap between these two exemptions.
Section 34 is aimed at the type of information that is legitimately protected because it is of commercial value or is in some other way properly kept secret, such as examination papers. It covers information of this type provided to the government and information of this type generated within the government. The difficulty with the section is to predict what types of information are legitimately protected. The information found in a contract does not generally
66 ‘Trade secrets’ is not defined. In the United States it has been given a fairly narrow interpretation for the purpose of FOI, namely, a ‘commercially valuable plan, formula, process, or device’: Public Citizen Health Research Group v FDA, 704 F.2d 1280 (DC Cir 1983). The Public Accounts and Estimates Committee in its report on Confidential Commercial Material and Accountability (35th Report to the Parliament, March 2000) sets out a list of items that could constitute trade secrets (at pp 29-30) drawn from Hulls and Victorian Casino and Gaming Authority (1998) 12 VAR 483, at 493.
109. Chapter 3 come within the types of information that are properly protected, though there are exceptions. On the other hand, information provided during a tender would generally be within this exemption.
Section 35 is directly concerned with confidential information. It is, however, only concerned with confidential information provided to the government. It excludes trade secrets and similar information taken care of by s 34. It is also limited to information that would be exempt if it was generated by the government itself; or the exemption applies if disclosing the information would result in the ‘drying up’ of future information.
Section 35 is not apparently concerned with information that is made confidential by contractual agreement where such information is neither a trade secret, etc. nor confidential information provided by an outsider. An example would be the terms of the contract itself.67
8.2.4 Difficulties of Interpretation
The interpretation of the legislation has been the subject of a considerable number of Tribunal68 and court cases. Its interpretation is very difficult, in particular because different parts of the Act appear to pull in opposite directions, perhaps an inevitable consequence of legislation which provides for both access and exemptions. Section 16, for example, encourages an agency to disclose documents even if they are exempt, where it would be appropriate to do so. Moreover some exemption provisions (but not all) are qualified by reference to the public interest, for example, s 30 (internal working documents). In the case of s 30 the onus is on the government agency to establish that it would not be in the public interest to disclose the information in a similar manner as that put forward by Mason J in the Fairfax case under the general law of confidentiality.
8.2.5 The Public Interest Override
There is a very important provision that is unique to the Victorian Act. It has been dubbed the ‘public interest override’. Section 50(4) provides: On the hearing of an application for review the Tribunal shall have, in addition to any other power, the same powers as an agency or a Minister in respect of a request, including power to decide that access should be granted to an exempt document (not being a document referred to in section 28, section 31(3), or in section 33) where the Tribunal is of opinion that the public interest requires that access to the document should be granted under this Act.
The meaning and application of this provision has itself been the subject of judicial interpretation and its place in the legislative scheme has proved to be as difficult to discern as other parts of the Act. It appears that the onus in relation to s 50(4), by contrast to that mentioned in connection with s 30, is on the applicant for the information to show that release of the information is in the public interest rather than on the government to show that release would not be in the public interest.69 If an application for information involves both an exemption provision (such as s 30 or s 34) and the override provision (s 50(4)) then the Tribunal is obliged to consider the public interest twice, once under the exemption provision and, if it is decided that
67 See Re Thwaites and Metropolitan Ambulance Service (1996) 9 VAR 427. 68 The Victorian Civil and Administrative Tribunal, formerly the Administrative Appeals Tribunal. 69 Department of Premier and Cabinet v Hulls [1999] VSCA 117, at 55-56.
110. Chapter 3 the information is within the exemption, again under the override provision. It was explained by Phillips JA, speaking for the Court of Appeal in Department of Premier and Cabinet v Hulls, that this necessarily means that under this legislation the idea of the public interest ‘may wear different aspects’,70 that is, there are competing public interests that the Tribunal must weigh.
When a whole contract is treated as confidential, the FOI legislation does not appear to deal with this category of confidential information very well because it is drafted so as to cover information provided to the government rather than information, in the form of a contract, generated by the government and the contractor jointly. The public interest override found in s 50(4) of the Act can be used for the purpose of revealing a whole contract, at least to the extent that it does not contain trade secrets or other commercially valuable information.71 If it does contain such information, then most of the contract can be disclosed with suitable excisions.
Recent decisions reveal that the AAT does not accept that the concluded agreements between agencies and commercial undertakings contain information acquired from the commercial undertaking but rather ‘constitute the record of the transaction between the parties’ (Thwaites and MAS at p 393).72
The importance of s 50(4), and any other provisions in the FOI legislation that either encourage disclosure, such as s 16, or else permit disclosure after considering the public interest, is that the legislation prevails over any contractual confidentiality clause or duty of confidentiality that may arise apart from contract.
As already noted, the Public Accounts and Estimates Committee, in its report on confidentiality, has given detailed consideration to the operation of s 34 and has recommended further changes to the legislation. The Review was not able to give detailed consideration to the operation of the FOI legislation and accordingly has made only the limited recommendations set out here. The Review believes that the public interest override found in s 50(4) of the Act has provided the ultimate safeguard for open government as well as legitimate confidentiality and that further amendments to s 34 are probably not necessary in the light of the Tribunal's responsible interpretation of s 50(4). It should be borne in mind that ss 34 and 35 are subject to s 50(4).
70 Ibid at 27. 71 An example being the release of the private prison contracts: Coburg Brunswick Community Legal and Financial Counselling Centre v Department of Justice [1999] VCAT 28. The only information that was withheld related to prison security. It is possible for the override to be used to disclose information that would otherwise be exempt if the Tribunal considers that the public interest in disclosure is more important than the contractor's interest in secrecy. 72 T Hurley, ‘Commercial Confidentiality and the Victorian Freedom of Information Act 1982’ AIAL Forum No 9 18, at 22. An example of a decision that supports this proposition is Re Ventura Motors and Metropolitan Transit Authority (1988) 2 VAR 277.
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8.2.6 No Absolute Guarantee of Confidentiality
It is sometimes argued that commercial entities may be reluctant to enter into commercial relationships with governments if confidentiality cannot be guaranteed.73 There is some evidence that this may occur in the area of advanced technology contracts in the United States.74 It is unlikely to be a problem in more routine contracts because the contractor is less likely to impart truly sensitive information to the government. The answer to this concern is that confidentiality indeed cannot ultimately be guaranteed unless special legislation is passed to override the FOI legislation.75 Anyone doing business with the government ought to be made aware of that. A contractual clause that purported to override the FOI legislation would be ineffective.
Another argument that is mounted against disclosure is that revealing commercial information may disadvantage the incumbent contractor because, when it is time to renew the contract, its rivals will know the commercial basis on which the existing contractor is providing goods or services to the government. The answer to this is that it encourages competition for this information to be out in the market place. ‘Indeed, non-disclosure may well afford an undue commercial advantage to those entities whose tenders were previously successful and may thereby give rise to an impediment to the government obtaining the most favourable arrangement.’76
The Review believes that the Tribunal has made use of s 50(4) in a responsible manner, protecting legitimate confidential information when necessary but, at the same time, not allowing confidentiality to screen wrongdoing or perceived wrongdoing.
Any company or individual doing business with the government can be assured that confidential information in the nature of trade secrets or proprietary information will not be disclosed unless it is necessary to disclose such information as part of uncovering wrongdoing or dispelling an accusation of wrongdoing. Even then, it is usually possible to reveal the wrongdoing without necessarily disclosing sensitive commercial information.
The other point to be made about the Tribunal's treatment of s 50(4) is that confidentiality cannot be used to screen information that is not inherently confidential, such as almost all of the terms and conditions of a contract. In the event of the Tribunal not striking the correct balance (at least from one party's point of view) between the public interest and confidentiality, it is of course always possible to appeal to the Supreme Court.
73 See, for example, submissions made to the VCAT in Coburg Brunswick Community Legal and Financial Counselling Centre v Department of Justice [1999] VCAT 28 at 5. 74 T M Susman, ‘Risky Business: Protecting Government Contract Information Under the Freedom of Information Act’ 16 Public Contracts Law Journal 15 at 19. 75 As in for example the Australian Grands Prix Act 1994 s 49. 76 Coburg Brunswick Community Legal and Financial Counselling Centre v Department of Justice [1999] VCAT 28 at 23.
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For the avoidance of doubt, the Review recommends that every contractor should, as a routine matter, be informed prior to entering a contract (in a standard explanation issued with the Request for Tender or other pre-contract documentation) that there can be no absolute guarantee of confidentiality because of the operation of the Victorian FOI legislation. This information should also be incorporated into the VGPB published guidelines. This recommendation is substantially similar to recommendation 6.5 in the Public Accounts and Estimates Committee’s report on confidentiality.
8.3 Secrecy Requirements in other Legislation
The Australian Law Reform Commission and Administrative Review Council in their joint report on open government, in discussing Commonwealth FOI legislation, noted that the presence of other legislation which prohibits government employees from disclosing official information was difficult to reconcile with FOI legislation.77 At the least, the presence of this other legislation caused confusion in the minds of government employees and encouraged a conservative approach to requests for information that was incompatible with the philosophy of the FOI legislation. In some respects, there was direct incompatibility between the FOI legislation and other legislation imposing duties of secrecy.
In Victoria this is less of a problem. There is no general criminal sanction78 for disclosure of official information imposed on ordinary government employees, though there is on police officers. The public service Code of Conduct, prepared by the Commissioner for Public Employment under the Public Sector Management and Employment Act 1998 s 37, provides in paragraphs 19 and 20 that government employees should not communicate official information other than for official purposes unless permission is obtained from the relevant CEO. The paragraphs go on to say that disclosure is permitted if the information is normally given to the public or if it comes within the FOI Act and it is protected by the Act in the sense that the government employee is protected against legal action. There is no sanction attached to a failure to adhere to these Code provisions. Presumably, a breach by a public official would have adverse consequences in the employment relationship.
A police officer is prohibited from publishing or communicating ‘any fact or document’ which comes to his or her knowledge or comes into his or her possession as a police officer except to some person to whom he or she is authorised to publish or communicate the information.79 Breach of this provision attracts a maximum fine of 20 penalty units. Disclosing information under the FOI legislation constitutes an example of justified publication or communication.
There is a difference between the strict legal position and the perception by government employees and police officers of their duty not to disclose official information. The discussion above shows that government employees or police officers may well be legally justified in disclosing information in appropriate circumstances. Obviously, public officials are not going to get a legal opinion whenever they are faced with the problem of whether it is legitimate to
77 Australian Law Reform Commission and Administrative Review Council, Open Government: a review of the federal Freedom of Information Act 1982 (ALRC 77/ARC 40, 1995), AGPS, paras 4.22-4.28. 78 Individual legislation does contain secrecy provisions. Examples are Casino Control Act 1991 s 151 and Corrections Act 1986 s 30. 79 Police Regulation Act 1958 s 127A.
113. Chapter 3 disclose. They would, however, be assisted if the VGPB guidelines and policies, discussed earlier, included accurate information and guidance as to a government employee's duty under the FOI legislation. At present the guidelines tend to make bland assertions that government employees must at all times maintain confidentiality.80 Such statements do not foster a proper regard for the philosophy underlying the FOI legislation.
The Review recommends that in policy and guideline documents issued to public officials proper regard is paid to the FOI legislation and its underlying philosophy of open government, so that public officials are given the clear message that government information should be publicly available unless there is a specific exemption.
8.4 The Effect of Contracting Out on FOI
8.4.1 Reduced Coverage
An area of concern is that one of the effects of contracting out is that it diminishes the reach of FOI. This is because the legislation generally only applies to information in the hands of government. The legislation therefore cannot be used to obtain information from a private sector contractor. This is so even though the contractor may be performing services that directly affect the public.
Contracting with private sector bodies for the provision of service directly to the public on behalf of government poses a potential threat to the government accountability and openness provided by the FOI Act. It should not be possible to avoid that accountability and openness by contracting with the private sector for the provision of services.81
This problem has been the subject of extended discussion by both the Australian Law Reform Commission and the Administrative Review Council, with different solutions being proposed by those two bodies.82 It is therefore a controversial issue. It is also an important issue and is likely to become more so if contracting out and privatisation are continued.
80 See, for example, C2 Purchasing Principles under the heading Professional Integrity and Probity. 81 Australian Law Reform Commission and Administrative Review Council, Open Government: a review of the federal Freedom of Information Act 1982 (ALRC 77/ARC 40, 1995), AGPS, para 15.12. 82 Ibid paras 15.12-15.15; Administrative Review Council, The Contracting Out of Government Services (Report No 42, 1998), recommendations 15 and 16. The Public Accounts and Estimates Committee, Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000) at 106-107 discussed this issue but made no specific recommendation.
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8.4.2 Suggested Solutions
Possible solutions are:
• making the FOI legislation directly applicable to a particular private provider;83 • making the FOI legislation directly applicable to any contractors funded by government; • deeming relevant documents to be in the possession of the government agency and imposing a statutory obligation on contractors to provide documents to the government if an FOI request is submitted; and84 • incorporating information access rights into individual contracts.85
Any contractual solution to this problem (whereby the government inserts a clause into the contract that requires the contractor to provide documents which are the subject of an FOI request) does not provide any direct rights to citizens who apply for information. They are not parties to the contract. In such a case the citizen would apply for information and the government agency would then have to assert its contractual right against the contractor. Presumably the clause would reflect the FOI exemptions and so the contractor might then assert that it was exempt from having to produce the requested documents. The contractual solution has the added disadvantage that it depends on the government agency ‘going in to bat’ for the citizen - something it may be reluctant to do if that would involve use of scarce resources. Further, the contractual remedy for breach by the contractor may be ineffective. This is because damages would not be assessable and the remedy of specific performance may not be available, though this would be a matter for the discretion of a court.
It would be preferable for the FOI legislation to provide a direct right of access to the citizen in cases where services are contracted out. But should this right of access be against the government agency or the contractor? The Administrative Review Council believed that FOI was primarily the responsibility of government and that applications for information should be made to the government agency and not to the contractor. It therefore recommended that relevant contractual documents should be deemed to be in the possession of the government agency and that the contractor should be under a statutory obligation to provide those documents to the government agency.
8.4.3 FOI and Full Privatisation
There are further difficulties that arise from contracting out and privatisation. The recommendation of the Administrative Review Council depends on there being a contract between the government and a service provider. When there has been a full-blown privatisation, there is no contractual relationship between the provider and the government. For example, Victorian electricity retailers, distributors or generators are independent private bodies with no contracts with the government. On the other hand, the entities running the trains and
83 This has been done in Victoria in relation to the privatisation of prisons: Corrections Act 1986 s 9F. 84 This was the preferred solution of the majority of the Administrative Review Council and was adopted by the Senate Finance and Public Administration References Committee in its report on Contracting Out of Government Services Second Report (1998). See also Official Information Act (NZ) which has adopted this solution. 85 This was the preferred solution of the minority of the Administrative Review Council.
115. Chapter 3 trams in Victoria are private but they are in contractual relationships with the government. The Administrative Review Council's suggestion, if implemented, would therefore apply differently in respect of information sought about how these different entities are performing.
One answer to this is that if an entity is truly privatised, as in the Victorian electricity industry, it is no longer appropriate for there to be an expectation that the FOI legislation could be used in respect of activities in that industry, just as there is no expectation of access to information about a steel or oil company. Whereas with the trams and trains, a government subsidy is paid and so the necessary connection with the public interest is still present.
Some might argue that the provision of electricity is so much part of the State's infrastructure that it is still sufficiently ‘public’ to warrant the kind of scrutiny provided by the FOI legislation. They might also argue that particular types of information, such as the entity's records relating to customers, should be accessible by those customers.
One solution to the countervailing arguments outlined above is that FOI is appropriate so long as public money is used for the provision of services and that other mechanisms of accountability are appropriate when service provision is no longer supported by public money. If it is thought that a ‘private’ service is sufficiently important to the public welfare, then an alternative mechanism could be in the form of regulatory requirements that include provision of sufficient information to the regulatory body (such as the Regulator-General in the case of the electricity industry). That information could then be published or sought under FOI.
The Review sees merit in the recommendation made by the Administrative Review Council but believes that further work needs to be done in arriving at an appropriate balance in providing access to information in an era of privatisation and contracting out.
The Review recommends that the government give consideration: 1. to the recommendation of the Administrative Review Council to provide citizens with a right of access to information relating to contracted out activities in the hands of contractors by deeming such information to be in the possession of the government agency; and 2. to establishing appropriate accountability mechanisms relating to information about fully privatised entities that are not supported by public money, such as through the information that must be provided by those entities to relevant regulatory bodies.
8.4.4 GBEs and Freedom of Information
Under the State Owned Enterprises Act 1992 s 90, it is possible to exempt government business enterprises covered by the Act from the operation of the FOI legislation. The Review was informed, after completion of this Report, that there are some GBEs that are exempt from the operation of the FOI legislation, not under the State Owned Enterprises Act, but under other specific legislation dealing with those entities. This information is contained in Appendix 9. In conformity with the discussion above concerning the applicability of FOI whenever public money is being used, there is a case for ensuring that government bodies are brought within the FOI regime, no matter how commercial they are. In addition, GBEs are by definition government
116. Chapter 3 bodies and so are subject to a higher level of scrutiny for that reason alone.86 If the FOI legislation is applied to GBEs, the exemptions can then be used to protect genuinely confidential information in the hands of a GBE. The Public Accounts and Estimates Committee in its report on Commercial in Confidence and the Public Interest discussed this issue and expressed the same view - that GBEs should not be exempt from the operation of the FOI legislation - but made no recommendation.87
The Review recommends that government business enterprises should be subject to the FOI legislation.
8.5 Reform
This report is not a general examination of the FOI legislation but rather is concerned with examining the proper level of disclosure in connection with government contracting. Even within this more limited compass, it is almost certainly the case that, whatever balance is struck in the drafting of the legislation, it will be necessary to resort to court rulings in order to clarify the meaning and application of the Act. This process has been continuing in Victoria, and in Australia generally, for some time now in connection with the current legislation. It could well be counter-productive to engage in a root and branch re-casting of the FOI legislation.88
In any case, the nature of the FOI legislation is such that reform may be as effectively achieved by change in government practice as by tinkering with the Act or replacing it. The Act certainly allows a particular administration to adopt an ‘open’ government stance. In fact such an approach is encouraged by the Act and is entirely in accord with the letter of the legislation and its spirit.89 The joint report by the Australian Law Reform Commission and the Administrative Review Council stressed the importance of agency attitude to the legislation. Agencies should, therefore, approach a request with a presumption that the document should be disclosed. Submissions and consultations indicate that the starting point for some agencies is quite the opposite - rather more along the lines of deciding immediately that the document will not be disclosed and then scanning the exemption provisions to find a way of justifying their refusal to disclose the information.90 The same point was made in the Western Australian Royal Commission. ‘To be a reality, open government must be a habit, a cast of mind.’91
86 The Public Accounts and Estimates Committee considered that the requirement for disclosure applicable to a GBE could be seen as a community service obligation: Public Accounts and Estimates Committee, Commercial in Confidence Material and the Public Interest (35th Report to the Parliament, March 2000), 83. 87 Ibid at 82-83, 136-141. 88 The present government has already amended the FOI legislation by the Freedom of Information (Miscellaneous Amendments) Act 1999 assented to on 21 December 1999 and in force from 1 January 2000. 89 In Public Service Board v Wright (1986) 160 CLR 145 at 153 the High Court stated that ss 3 and 16 of the Victorian Act supported a construction of the legislation in favour of disclosure. The Victorian Supreme Court has endorsed a similar approach to the legislation: Accident Compensation Commission v Croom [1991] 2 VR 322; Sobh v Police Force of Victoria [1994] 1 VR 41.
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Some might object that it is better to entrench open government principles in the legislation so that a particular administration cannot use the Act as a shield to its activities as opposed to a lens through which its activities may be examined. The answer to this is that the Act is already framed in terms of open government principles. In short, the proper use and administration of the FOI Act is as much a matter of government policy as it is of legislative prescription. A government that ignores the philosophy of the FOI Act does so at its political peril.
The Review has already recommended that appropriate policy and guideline documents (such as those published by VGPB) should be re-cast to provide government employees with an accurate statement of the philosophy underlying the FOI legislation.
8.5.1 An FOI Commissioner
For additional focus on establishing an FOI culture, a possible area for reform would be to consider adopting the recommendations of the joint report by the Australian Law Reform Commission and the Administrative Review Council to establish an FOI Commissioner.92 His or her responsibilities would be to:
• audit agencies' FOI performance; • provide an annual report; • collect statistics of FOI requests and their disposition; • publicise the legislation; • issue guidelines and provide training to agencies on how to administer the Act; • provide information, advice and assistance to applicants; and • provide policy advice to the government.
There is at present no particular body or person charged with the dedicated responsibility of administering the FOI Act in Victoria, as there is in, for example, Queensland and Western Australia. The administration of the Act is split between the Attorney-General as responsible Minister, the Ombudsman and the Tribunal. The Department of Justice carries out a limited coordinating function across government. The creation of an independent statutory officer to administer the Act would be a desirable accountability measure because it would demonstrate to the public that the government is committed to open government. Further, once established, an FOI Commissioner would be difficult to remove, at least by a government that was concerned to promote an image of open government. The work done by the Commissioner would then provide a proper basis for policy development in the area of access to government information.
90 Australian Law Reform Commission and Administrative Review Council, Open Government: a review of the federal Freedom of Information Act 1982 (ALRC 77/ARC 40, 1995), AGPS, para 4.2. 91 Report of the Royal Commission into Commercial Activities of Government and Other Matters (1992), WA Govt Printer, Part II para 2.1.7. 92 Australian Law Reform Commission and Administrative Review Council, Open Government: a review of the federal Freedom of Information Act 1982 (ALRC 77/ARC 40, 1995), AGPS recommendations 18-27.
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The Review recommends that the government give consideration to the establishment of an FOI Commissioner.
9. GOVERNMENT INFORMATION AND DISCLOSURE
Having examined the relevant law that affects the free flow of government information, it is necessary to set out the different types of information in the hands of government. The case for or against disclosure obviously turns on the type of information. The types of information include:93
• information that is publicly available such as annual reports, information published by government, press releases, Hansard, etc. There is no disclosure issue about this information (although there may be difficulties of access to such material sometimes); • information provided to the government by third parties, such as citizens and businesses. Some of this type of information is protected by privacy legislation, such as personal information supplied by citizens to government. Business information may or may not be provided in confidence. If it is, it will generally be the case that the government will be under a duty not to disclose, though, as discussed above, there may be occasions where the FOI public interest overrides the duty of confidentiality. Another class of information in this category is information provided to the government in circumstances where disclosure would compromise or jeopardise the source of the information, so that in the future such information would not be supplied if disclosure occurred; • information generated within government not falling into the first category, such as internal government documents, information relating to dealings with other governments, police and security information, etc. It is here that the issue of disclosure is most difficult, with the traditional attitude of government being to treat such information as secret; and • information which is proprietary in nature, that is, although generated within government institutions, it is analogous to trade secrets in the private sector. Such information may be generated from government commercial activity, from government research or possibly from ordinary governmental activities when, for example, the government develops an innovative system or process. Generally, the government will be justified in choosing not to disclose such information, just as a company is entitled to keep such information secret. Of course, there may be arguments about how appropriate it is for government to keep such information to itself, given the government's public responsibilities. It may be argued, for example, that the government should reveal new scientific information.
93 See P Finn, Official Information Integrity in Government Project, Interim Report I, (1991), Australian National University, 19-27.
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9.1 The FOI Balance as a Guide to Disclosure
These categories of government information are reflected in the FOI legislation. As already pointed out, this enquiry is not a full-scale examination of the FOI legislation and the Review makes no recommendations about changing the exemption regime in the legislation. Victoria's legislation is already more ‘open’ than other legislation in Australia because of the public interest override.94 As far as contractual information is concerned, the Review believes that the FOI legislation strikes an appropriate balance.
In any case, the main focus here is on voluntary disclosure of contracting information rather than on forced disclosure through FOI litigation. In considering the question of voluntary disclosure, the balance found in the FOI legislation is nevertheless a useful one. The legislation recognises the legitimate concerns of commercial entities doing business with government. The Review believes that in deciding what contractual information to disclose, the government should take the FOI legislation as its guide. If the government errs on the side of not disclosing information that arguably should have been disclosed, this can be tested by resort to the FOI Act. If the government errs by proposing to reveal too much, this too can be tested by resort to judicial determination.
9.2 Information Prior to Award of a Contract
It is generally accepted that information generated prior to a contract being awarded, particularly when a tender process is used, should be kept confidential. There are obvious reasons for this. The probity and integrity of a tender process must be preserved and one of the key elements to achieving that is to ensure that a proper competition is conducted. This necessarily means that information provided by bidders must be closely guarded during the evaluation period. In other words, it is in the government's interests to maintain confidentiality so as to ensure a good outcome from the competition. It is, of course, also in the legitimate interests of bidders that their information should be kept confidential.
The tender process itself, as embodied in the Request for Tender (RFT), should as a general rule be made public so that not only market participants who may be interested in bidding have access to the information but also the general public should be informed about what the government is seeking from the market and the basis for evaluating responses.95
9.3 Disclosure on Announcement of the Award of a Contract
In relation to government contracts, a distinction needs to be drawn between disclosure of the fact that a contract has been awarded and disclosure of the contract itself. It is common for governments to publish information about what contracts have been awarded and to whom and such a disclosure will usually include the total price of the contract. The Victorian Government is, at the time of writing (April 2000), developing a contracts data base called the Contracts
94 See the comparisons drawn by C Finn, ‘Getting the Good Oil: Freedom of Information and Contracting Out’ (1998) 5 Public Law Review 113 particularly at 116-118. 95 This view is reflected in recommendation 6.2 of the Public Accounts and Estimates Committee in its report Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000).
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Publishing System which went live on an Internet site96 on 3 April with full implementation due on 1 July 2000.97 This is an important measure of transparency.
Once the award of a contract is announced, the Review believes that information provided by bidders should continue to be kept confidential. Certainly, this is so of the information provided by losing bidders. There is no public purpose to be served in publishing such information which, in any case, will often contain trade secrets or other commercially sensitive information such as costings. A possible exception to this might be the publication after award of all bidders and their global prices98 but this information would not be particularly useful because it is often the case that a contract is awarded on the basis of various factors of which price is only one.
Losing bidders should, however, be debriefed and provided with sufficient information to assist them to perform better in any future tenders.
The winning bidder's information will be published to the extent that the overall price of the winning bid is included in the data base of government contracts. In addition, the winning bidder will have been told, if the Review's recommendations about publishing contracts are implemented, that the contract will be made publicly available. This does not mean that genuinely confidential information will be disclosed. The Review recommends that losing bidders should be debriefed and that sufficient information is revealed to these bidders to enable them to know why their bids were not successful.
9.4 Disclosure of Contracts
It is now necessary to consider the extent to which it is appropriate to disclose the contents of the contract and associated information, such as the contractor's performance under the contract.
Revealing the contents of a contract is the most difficult and controversial issue relating to disclosure. The very idea seems surprising at first sight because of the essentially private nature of contracts. Enough has been said in this Chapter about the difference between public sector and private sector contracts. The Review believes that the starting point is that all government contracts should be published.99 It is then necessary to consider safeguards to protect legitimate confidential information that may mean that certain contracts cannot be published or, more likely, that a contract can be published with excisions.
96 www.tenders.vic.gov.au/contracts/public. 97 The PAEC report referred to immediately below recommended that public information about tenders should include the identity of the tenderer and the tender price and in most cases information about the relevant performance criteria. 98 This possibility is mentioned in the context of smaller purchases by the Public Accounts and Estimates Committee in its report Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000), 101. 99 The Public Accounts and Estimates Committee in its report Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000), 102, observed that there was ‘broad support for the publication of information about contracts’. The Committee had the benefit of a large number of public submissions.
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9.4.1 The PAEC Recommendation
The Public Accounts and Estimates Committee in its report on Commercial in Confidence Material and the Public Interest recommended that public information about contracts should include a list of specified items, such as the identity of the parties, the duration of the contract, maintenance provisions, the price, variation rights, etc.100 The list of items is extensive. The Review does not support this approach. To start with it requires someone to compile a summary of the contract with the required items included. The experience in South Australia with the preparation of contract summaries has been most unsatisfactory. Agencies have been very slow in providing summaries and, when they have done so, the summaries are little more than a publication of the contents page of the contract.101 Preparation of a contract summary requires a skilled person to read the whole contract and then prepare a summary that includes the required items. This preparation may be done imperfectly and it may be the case that the list of specified items is inappropriate for certain types of contract. On the other hand, publication of the contract as a whole is far simpler. No extra work is required unless parts of the contract have to be excised because they are confidential. Further, the publication of the contract provides the primary material rather than a secondary source. This is the most transparent way of providing this information.102
Bearing in mind that the Review considers that the balance struck by the FOI legislation provides a good guide to what should be voluntarily disclosed by government, it is necessary to examine particular aspects of a contract to assess whether disclosure is justified or not.
9.4.2 Pricing Information
It would appear that disclosing pricing information provided by a contractor, that is, the amount which the government must pay for goods or services provided by a contractor would not be exempted under ss 34 or 35. Some may argue that disclosing such information could put the contractor at a competitive disadvantage, particularly if a fresh tender is to be called at contract renewal time. A distinction needs to be drawn between a contractor's costing information, or other information relating to inputs, and the pricing information found in the contract itself. The former may be provided by a tenderer to the government during the tender process and such information would be legitimately protected from disclosure.103 The latter, on the other hand, simply discloses what the government is paying for a service or for goods and is a matter of legitimate public concern. The Review is not convinced that disclosing pricing information would put an existing contractor at a competitive disadvantage at contract renewal time.104 It may be
100 Ibid recommendation 6.3. 101 The South Australia Auditor-General has tabled two summaries since 1997, those of the Modbury Hospital and South Australia Water Corporation contracts. 102 Some might say that it is the least transparent way because most contracts are unreadable. The answer to this is that people interested in obtaining access to government contracts must be prepared to read them. In any case, contracts are generally readily understandable and are usually drafted in plain English. In some cases of important contracts the government may be prepared to provide a summary. 103 A number of submissions to the Public Accounts and Estimates Committee in its report Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000) drew a distinction between inputs and outputs, the former being legitimately confidential. See ch 6. 104 See discussion of the Victorian case law on this point by C Finn, ‘Getting the Good Oil: Freedom of Information and Contracting Out’ (1998) 5 Public Law Review 113, 116-118.
122. Chapter 3 uncomfortable for the incumbent contractor to have this information made public but such disclosure can only enhance competition in the new round of tenders. The legislation (s 34(2)(d)) does require the government agency to make a decision as to whether disclosure would be in the public interest.
One answer to the sensitivity about pricing information is that it is simply part of doing business with government that this kind of information will be publicly available.105 Contractors will have no expectation that pricing information will be kept confidential if the government adopts a policy of releasing the contract as a matter of course, with deletions for trade secrets, such as innovative ideas or other information that provides a commercially competitive edge to the contractor. The pricing information is one of the key components of a contract and it is important for the public to know how much public money is being spent on the provision of services or goods to the government or to the public itself.
It is worth noting that the Western Australian government announced before a tender process for the provision of the Acacia prison that the contract would be published, including pricing information.
Generally, the previous Victorian Government was inclined not to release pricing information. This was so with, for example, the prisons contracts and the Metcard automatic ticketing contract. In the case of the prisons contracts, after a successful FOI application, this information was eventually released. The Review has not been told that this was a disaster or that Victoria's ability to attract future providers has been jeopardised. To the contrary, the Corrections Commissioner has informed the Review that, since the contracts are now no longer confidential, the administration of the prisons has been simplified with a particular source of difficulty and contention being simply removed. The same view was expressed by other government agencies and also by some private sector providers interviewed by the Review. This evidence bears out the point made earlier that secrecy imposes costs.
As already noted, the Review recognises that information provided by a potential contractor prior to the making of a contract should be kept confidential. After the contract has been let there is only a very limited amount of information that warrants the protection of confidentiality.106 Trade secrets and proprietary information are the proper basis for confidentiality. The Review believes that pricing information, that is, information about how much the government is paying for a service should be disclosed. It may be the case that the pricing of individual items could in certain circumstances be commercially sensitive, in which case the information could be protected from disclosure. Apart from that, pricing information should be made public.
105 The Public Accounts and Estimates Committee in its report Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000) noted at p 96 a submission by the Australasian Council of Auditors-General: the ‘private sector must expect that, when it deals with the State, the disclosure requirements cannot be those that pertain to commercial transactions between two private sector entities’; and ‘those in the private sector who wish to gain commercial advantage from dealings with the government cannot seek to escape the level of scrutiny that prevails in the public sector’. 106 This was the view expressed by the former Auditor-General of New South Wales, Mr Tony Harris, to the Senate Finance and Public Administration References Committee in its report Contracting out of Government Services Second Report quoted at p 55.
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9.4.3 Performance Indicators
It is equally important that the public should know how the contractor is to be assessed in its performance of public tasks. The former Government's inclination was to keep this type of information confidential. An example was the edited form of the prisons contracts published in 1997. The prices paid and all the performance information were excised from these contracts. These excisions made the contract as a whole more or less meaningless because the very information that was important in terms of assessing the spending of government money and the efficacy of using a private provider for prison services was denied to the public. This prompted recourse to the FOI legislation to force the government to reveal this vital information. As already noted, the contract was fully revealed save only for information that would jeopardise security within a gaol, without any apparent adverse effect.
An argument against the disclosure of performance indicators is that the standards set by the indicators may become an unofficial benchmark for the next round of contracting. This may have the consequence that it is difficult to improve standards. This problem can be overcome by the government making clear to the market that one of its aims is to improve standards over time and that innovative proposals in a tender process will be considered.
In the case of the Metcard automatic ticketing contract, there was some public disquiet about the performance of the contractor. The public was well aware of problems because members of the public experienced at first hand that ticket machines were not working. Release of the information that would tell the public what the contractor was supposed to achieve could only be beneficial. It could even show that the perception was far worse than the reality in that the contractor was in fact performing reasonably well. Or it could show that the standards imposed on the contractor were not sufficiently rigorous. Or it could show that indeed the contractor was not performing well but this would merely confirm the public impression and would not cause any further damage to the contractor's reputation. Either way, release of this type of information would be beneficial. Secrecy feeds misunderstanding and tends to nurture conspiracy theories.
It is not a sufficient ground for denial of access to information that disclosure would cause embarrassment either to the government or to the contractor. In fact, the Review has been told by the company providing the Metcard automatic ticketing system that it would have no difficulty with the performance standards being published and that periodic reports of whether those standards were being met would be quite acceptable.107
9.4.4 Other Contract Clauses
Equally, there is no discernible justification for keeping the other terms of the contract secret unless a particular term relates to a genuine trade secret or to information that may be related to security, some other compelling government concern or the contractor's competitive advantage. It is in fact rare for a contract to contain a term that reveals these kinds of secrets. A contract may reveal the presence of the secret but not the secret itself.
Risk management and allocation clauses are, for example, routine and of central concern to anyone who is making an assessment of the government's management of public money through contracting out. The Metcard automatic ticketing example, noted above, is a case in point. The introduction of the Metcard and its associated technology and software was an
107 The performance of the trains and trams is now made publicly available through the government bulletin Track Record.
124. Chapter 3 innovative, and to some extent risky, project. The risk was that there would almost inevitably be teething problems and that there were unknowns that had to be confronted and dealt with. Revealing this information could only promote a more informed debate about the contractor's performance than would be the case if the information were withheld.
The Review believes that information about the contents of a contract made with an outside entity should, so far as possible, be disclosed, guided by the FOI principles. Disclosure should be on the Internet and, at an appropriate charge, in hard copy. Before disclosure takes place, the contractor should be furnished with a copy of the contract in the form in which it is to be disclosed, that is, with any excisions to protect genuinely confidential information such as trade secrets. The contractor can then inform the government whether it agrees and, if it does not, this would then be a matter for negotiation. The question of confidentiality should have been the subject of negotiation before the contract was entered into so that it is unlikely that there will be a dispute about what can be included in the contract when it comes to publishing the contract.
Because the publishing of government contracts as a matter of course is a new step, at least in Australia, it is advisable that this be achieved by special purpose legislation rather than executive action. Taking this step by legislation makes explicit the new policy, enables the debate to be aired in Parliament and for the wider community, including business interests, to discuss the proposal. In the Australian Capital Territory, at the time of writing (April, 2000), there are Bills before the Legislative Assembly for the disclosing of contracts (discussed below).
The Public Accounts and Estimates Committee in its report Commercial in Confidence Material and the Public Interest has recommended a more elaborate procedure which places a heavy onus on a contractor who wants to include confidentiality clauses in a government contract, with the government agency making clear what will and will not be considered as ‘commercial in confidence’.108 The Committee has also recommended that if an agency wishes to include a confidentiality clause it should submit the proposal to the Ombudsman for approval. The Review believes that this approach is over-prescriptive and favours procedures that leave it to the parties to negotiate what is appropriately confidential, guided by the FOI principles. The government agency will be aware of open government principles if the recommendations in this report about awareness and training are effectively implemented. The contractor will have been informed of the government's stance on confidentiality prior to bidding for a contract.
108 Public Accounts and Estimates Committee, Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000) recommendations 6.2-6.6.13.
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The Review recommends that: • contracts made between the government and an outside entity should, so far as possible, be disclosed to the public on the Internet; • this step should be effected through special purpose legislation; • when deciding what to disclose, the government should be guided by the policy and principles underlying the FOI legislation, including the exemptions which protect trade secrets and other commercial information; • potential bidders for government contracts should be informed of the government's policy on disclosure of contracts; and • before disclosing, the government must provide the contractor with the version of the contract which the government proposes to publish.
9.5 Contractual Performance
Obtaining information about a particular contract does not provide a way of assessing performance. It is often the case that the contractor must report on its performance. Alternatively, the government agency may generate its own reports on how a contractor is performing.
This type of information is arguably even more important, in terms of open government, than the details of the contract itself. It provides the answer to the ultimate question about contracting out: has it worked satisfactorily? The Industry Commission, in its report on contracting out made the point that ‘information on the specifications of the service, the criteria for tender evaluation, the criteria for measurement of performance and how well the service provider has performed against those criteria’ are all important.109 At least some private sector providers have told the Review that they would have no objection to this type of information being publicly available. They argued that they should be prepared to face public scrutiny of their performance.
The Review believes that this information should be readily available to the public. Ideally it should be published in agencies’ annual reports. It will sometimes be available after the Auditor-General has examined a particular contract. It is probably accessible through FOI but open government principles should not be implemented through the coercion of legal action.
109 Industry Commission, Competitive Tendering and Contracting by Public Sector Agencies (Report No 48, 1996), 95.
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A model for performance reporting is provided by the government bulletin Track Record which provides detailed information about the performance of the franchised tram and train services.110 This publication also provides information about penalties imposed on the franchisees for failing to meet contractual targets and bonuses paid for exceeding contractual targets. The Review considers this to be an excellent example of transparency in contract administration. The Review recommends that the government give consideration to establishing regular reporting mechanisms that provide information to the public on contractual performance, such as through the annual reports of agencies or special purpose bulletins.
9.6 Practices in Other Jurisdictions
As already noted, the Review believes that, subject to limited exceptions relating to trade secrets, proprietary information and other sensitive information, public contracts should be published. In case this should be considered to be a somewhat radical recommendation, it is worth considering what happens in other jurisdictions with similar governmental and legal systems to Victoria. In some places, it is simply a routine expectation that public contracts are made available for public scrutiny. In this Report it is not possible to provide a comprehensive analysis of disclosure regimes in other jurisdictions.111 Instead, some examples are provided.
• In some jurisdictions, the government has resolved to provide summaries of contracts. Examples are the United Kingdom, the United States Federal government,112 New South Wales (in relation to privately financed infrastructure) and South Australia. The South Australian experience has been that agencies have been very slow in providing summaries and, when they do, they are little more than a publication of the contents page of the contract.113 • In Western Australia the Commission on Government recommended that, after award, a copy of the complete contract should be lodged for public inspection with the State Supply Commission or tabled in Parliament and that potential contractors should be informed of this practice.114 It appears that the State Supply Commission has not yet implemented the recommendation that contracts be published in full,115 though it is reviewing its policy. In relation to the awarding of the contract for the Acacia prison, the Western Australian government informed bidders that the contract would be made public after award. The contract is now available on the Internet. • In the Australian Capital Territory, at the time of writing (April 2000), a Public Access to Government Contracts Bill is being considered. This Bill requires that, within 21 days after making a government contract, the government agency must prepare a public text of the contract which must be published in hard copy or electronically, the latter being
110 The Age April 20, 2000 at 2. 111 There is some useful comparative information in Public Accounts and Estimates Committee, Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000) Appendix 1. 112 Federal Acquisition Regulations Part 5. 113 The South Australia Auditor-General has tabled two summaries since 1997, those of the Modbury Hospital and South Australia Water Corporation contracts. 114 Commission of Government, Report No 1, para 2.3.11. 115 See State Supply Commission (WA), Managing Purchasing Conducted by Private Sector Providers (1999).
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available without charge and preferably on a website. The public text must contain all the text of the contract that is not confidential and other information if it is not revealed by the text, such as the identity of the parties, the duration of the contract, any transfer of assets under the contract, maintenance provisions if any, the full consideration, renegotiation provisions, risk allocation clauses, penalty provisions, guarantees, information required by law to be disclosed to ASIC and any other information needed to understand the contract. If confidential information ceases to be confidential then it must be included in a new version of the public text of the contract. A government agency is protected from liability for anything done in good faith in compliance with the legislation. The proposed legislation also deals with the circumstances in which it is legitimate for an agency to enter into a contract containing a confidentiality clause.116 The Australian Capital Territory Legislative Assembly has established a Select Committee on the Government's Contracting and Procurement Processes which at the time of writing (April 2000) is considering, among other things, the extent to which contracts entered into by the ACT government are open to public scrutiny. • In the United States it is common to find a very open disclosure regime relating to government contracts. An example of this approach is taken from Utah. Private businesses which contract with Salt Lake County to provide either goods or services or to perform functions on behalf of the government are required, by an enactment of the Utah Legislature, to treat their business records regarding contractual services as subject to public disclosure, under certain circumstances. In brief summary, the law requires that a private entity must disclose as public any business records relating to the contract itself, monies paid by the government to the contractor, information regarding the contractor's compliance with the contract, the nature and extent of services provided under the contract, and accounts and vouchers indicating governmental expenditures related to the contract. As a general rule, the Utah law provides that almost all records related to governmental activities are treated as open and available to the public. There are, however, some exceptions including legitimate business confidentiality, including trade secrets and information that may result in unfair competition, eligibility for public assistance, medical or psychiatric information, an individual's finances, situations in which privacy is required by State or federal law, matters which are affected by copyright, and records regarding donors who have requested anonymity. • The California Public Records Act s 6253(a) provides that every person has a right to inspect any public record. ‘Public records’ includes ‘any writing containing information relating to the conduct of the public's business prepared, owned, used or retained by any State or local agency regardless of physical form or characteristics’ (s 6252(e)). Corporate financial records and proprietary information, including trade secrets, are excluded. There are other exemptions and there are also provisions for temporary confidentiality after which the information must be publicly disclosed.
116 At the time of writing (April 2000) there are also a separate Government Contracts Confidentiality Bill and a Financial Management Amendment Bill which duplicate the Public Access to Government Contracts Bill to some extent. The latter Bill provides for disclosure to the Legislative Assembly. The explanation for the three Bills is that each is being promoted by different members of the House of Assembly.
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9.7 Who Should Have Access?
So far, the discussion has focused on the people and their right to information through the FOI legislation and the voluntary disclosure of contracts by the government to the public at large. It is necessary to consider who within government should have access to ‘commercial in confidence’ information, having regard to the principles of democratic government, accountability and openness discussed earlier.
9.7.1 Access within Government
The Review believes that additional safeguards are necessary to ensure that public officials do not lapse into old traditions of secrecy. This is particularly important when there is a danger of access being denied to the central pillars of the democratic structure.
Access by Parliament and Parliamentary Committees, the Ombudsman and the Auditor-General raise rather different issues from those that relate to access by citizens. As a general principle, these vital organs of government and avenues of accountability should not be curbed in their work by claims of confidentiality. The same could be said of the responsible Minister and the Premier. So, a starting point is that any claims to confidentiality cannot be sustained if any of these bodies or persons need to have access to commercial information.
Is this absolute principle sustainable? Clearly, it would involve divulging information to a large body of people with consequent dangers of leakage. The Review believes that the absolute principle of access is not sustainable in relation to all of these bodies, but that it applies to certain of the bodies mentioned who must have unfettered access.
The Review believes that it should never be the case that either the government itself or a publicly-funded statutory corporation should commit itself to contractual secrecy to the extent that high public officials, such as the Minister, the Premier or the Auditor-General, are not permitted to have access to the contract.
9.7.2 Access by Parliament and Parliamentary Committees
The Western Australian Royal Commission gave detailed consideration to the dilemma being considered here. It considered that, subject to preserving legitimate secrecy and confidentiality, the financial affairs of government agencies involved in commercial activity must be subject to full review by Parliament.
The Western Australian Commission did however recognise that at least some information may have to be withheld from Parliament. It recommended that legislation should provide that the responsible Minister should notify both the Parliament and the Auditor-General whenever action was taken that would have the effect of preventing or inhibiting the provision by the Minister of information relating to the conduct or operation of the relevant agency to Parliament. In such a case the Minister must provide reasons why it is appropriate that the provision of information to Parliament is to be prevented or inhibited. These reasons should relate to the public interest, that is, the Minister must justify non-disclosure by reference to the public interest. What lies behind this recommendation is the reverse onus principle discussed earlier in the context of the High Court decision in Fairfax. If the government wishes to keep something secret then it must
129. Chapter 3 justify. A legislative provision that mandates reporting to Parliament each instance of secrecy fulfils the requirement of the onus.117 The Review agrees with this approach.
The problem of disclosure of confidential information to Parliament and to Parliamentary Committees has attracted a lot of attention. The Senate Finance and Public Administration References Committee in its report on Contracting out of Government Services Second Report gave detailed consideration to the problem.118 Some of what was said in that report turned on particular procedures and Senate Standing Orders. The Committee did not provide any definitive solution but suggested that taking evidence in camera before a Parliamentary Committee might provide a way of dealing with the problem. It was also suggested that, when there is a dispute between a committee and the executive, the Auditor-General ought to be called in as an umpire.
The Public Accounts and Estimates Committee in its report on Commercial in Confidence Material and the Public Interest119 expressed concern over the fact that, although evidence before a Parliamentary Committee could be taken in camera, the committee could not then release the information. It made a series of recommendations which would allow, with appropriate safeguards, for the publication of confidential information by a committee if it considered that it was in the public interest to do so.120
The Committee nevertheless recognised that there may be occasions where information could be withheld and made a similar recommendation to the Western Australian Royal Commission, namely that the Minister must provide reasons in writing if a decision is made to withhold information.
The Committee recommended that the Ombudsman could act as umpire in a dispute between a Parliamentary Committee and the executive. This is an interesting contrast to the suggestion made by the Senate Committee that the Auditor-General should take on this role. The Review believes that, if anyone, the Auditor-General is the more appropriate person to act as umpire in a dispute about confidential information. However, there is a case for allowing this kind of dispute to be negotiated as part of the political process rather than as a quasi-judicial one, with either the Ombudsman or the Auditor-General being involved. The Review makes no recommendation about the resolution of a dispute between a Parliamentary Committee and the executive.
117 In the Australian Capital Territory at the time of writing (April 2000) there is a Financial Management Amendment Bill before the Legislative Assembly. This Bill envisages that contracts should be disclosed to the Assembly unless the Minister certifies that they should not be. 118 Senate Finance and Public Administration References Committee, Contracting out of Government Services Second Report (1998), 55-71. 119 Public Accounts and Estimates Committee, Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000), 46-50. 120 Ibid recommendations 5.7-5.9.
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The Review recommends that legislation should provide that, if confidential information is to be withheld from Parliament, the Minister should provide a statement both to Parliament and to the Auditor-General providing reasons why it is in the public interest that the information not be disclosed to Parliament. The Review generally endorses the recommendations made by the Public Accounts and Estimates Committee in its report on confidentiality relating to access to, and publication of, information by Parliamentary Committees but makes no recommendation about disputes between such committees and the executive.
9.7.3 The Auditor-General
The Auditor-General should have unfettered access to government contracts and any other information that is needed. This is a widely accepted principle. It was one of the recommendations made by the Western Australian Royal Commission.121 The Public Accounts and Estimates Committee in its report Commercial in Confidence Material and the Public Interest122 endorsed this view and did not have to make a recommendation because the Auditor- General already has access to information held within the public sector.123
There are two issues that arise from the Auditor-General's function:
• to what extent should the Auditor-General have access to contractor's records? • to what extent can the Auditor-General publish information that is commercially sensitive?
Both these issues have been considered elsewhere, including by the Public Accounts and Estimates Committee in its report Commercial in Confidence Material and the Public Interest.
• Access to records
The former Victorian Auditor-General reported to the Public Accounts and Estimates Committee the difficulties he had experienced because he could not have access to contractors' records or that he could not include some information in his report. The Committee believed that access should be available, as did the Western Australian Royal Commission. For example, the Auditor-General may need access if a contract variation occurs and it is necessary to see on what basis a contractor claims for additional remuneration. It could also occur if the basis of payment of a contractor is cost-plus.
Access by the Auditor-General can be achieved in two ways: by contract or by legislation.
It is quite possible to include a clause in a contract that imposes an obligation on the contractor to allow the Auditor-General access to the contractor’s records. A problem
121 Report of the Royal Commission into Commercial Activities of Government and Other Matters (1992), WA Govt Printer, Part II recommendations 11-13. 122 Public Accounts and Estimates Committee, Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000), 109. 123 Audit Act 1994 ss 11 and 12.
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with doing it this way is simply one of ensuring that the clause is included. This could be done by including an appropriate clause in standard form agreements. This solution would not, however, pick up tailor-made agreements. The second problem is one of enforceability. If a contractor took issue with the Auditor-General after a request for information was made, there would be real difficulties in gaining access even if the Auditor-General was prepared to litigate. A court would have to exercise its discretion in favour of making an order for specific performance, that is, an order that the information be provided.
On the other hand, if the obligation were imposed by legislation it would apply across the board and would carry more coercive weight than a contract clause. The Western Australian Royal Commission recommended a legislative solution.124 The Public Accounts and Estimates Committee recommended both contractual and legislative solutions.125
The Review believes that the legislative solution should be adopted and that there is no need for further powers to be given to the Auditor-General, such as the power of search and seizure. A legislative requirement with an appropriate penalty for non-compliance is sufficient. The provision should provide protection to the person required to provide information against self-incrimination. It should also ensure that the Auditor-General confines his or her request to information relevant to the performance of the contract.
The Review recommends that the Audit Act be amended to provide: • access by the Auditor-General to contractors' records relating to the performance of the contract and the power to require contractors to answer questions relating to the performance of the contract; • a fine in the event of a contractor not providing the requested records or answering the questions within a specified time; and • that evidence provided in response to a request cannot be used against the contractor in any proceedings, except proceedings relating to breach of this provision.
• Publication of information by the Auditor-General
Once the Auditor-General has obtained information, including confidential information, to what extent can he or she disclose this information to the Parliament and to the public? The Review has recommended that the question of disclosure should be informed by the principles that are found in the FOI legislation. As already noted, that legislation strikes an appropriate balance. It should be the basis for the Auditor-General deciding whether or not to disclose commercially sensitive information. On rare occasions it may be necessary to disclose, because of wrongdoing or because the public interest in disclosure outweighs the interest of a contractor in non-disclosure. On most occasions it
124 Report of the Royal Commission into Commercial Activities of Government and Other Matters (1992), WA Govt Printer, Part II recommendation 14. 125 Public Accounts and Estimates Committee, Commercial in Confidence Material and the Public Interest (35th Report to Parliament, March 2000) recommendations 6.14 and 6.18.
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will be possible for the Auditor-General to do his or her job properly and effectively without disclosing confidential information.
9.7.4 The Minister
The Review believes that the Minister responsible for an agency has a right of access to all commercial information of the agency, including confidential information.126 The Review would only add to this that whatever a Minister is entitled to see, the Premier should be entitled to see.
9.7.5 The Ombudsman
The Review also believes that the Ombudsman when carrying out an investigation must, so far as possible, have unfettered access to information, whether confidential or not. The purpose of the Ombudsman's jurisdiction is to investigate poor administration. This purpose should not be thwarted by an agency denying information to the Ombudsman. The Ombudsman already has unfettered access to government records and personnel under s 18(3) of the Ombudsman Act 1973 for the purpose of investigating anything related to a government contract.
The same issue may arise, as discussed above in relation to the Auditor-General. It may be difficult for the Ombudsman to carry out an investigation when important information is in the hands of a contractor.
There has been much public debate about the erosion of the Ombudsman's jurisdiction as a result of contracting out.127 This problem is in some ways similar to the problem of the erosion of the freedom of information regime by the use of contracts, discussed earlier. In each case, the legislation does not extend to private contractors unless specific legislation is passed to expand the regime.128 In relation to the Ombudsman, it has proved to be a particularly troublesome problem when human services are contracted out, that is, a private entity provides services to citizens that were previously provided by the government directly. If the service is poor, the Ombudsman has a very limited capacity to investigate.
Should the Ombudsman's powers be extended in the same way as recommended above in relation to the Auditor-General? The Review believes that, because the Ombudsman's function is to deal with maladministration, it would be going beyond the present Terms of Reference to make a general recommendation about the Ombudsman being able to exercise powers against contractors. Whereas the Auditor-General's task is centrally concerned with having access to information, the Ombudsman's function is about investigating conduct and decision-making. The problem of erosion of the Ombudsman's jurisdiction is more wide-ranging and should be considered separately. The question to be considered is whether the Ombudsman's jurisdiction should be extended to cover private contractors who are providing services to citizens.
126 Report of the Royal Commission into Commercial Activities of Government and Other Matters (1992), WA Govt Printer, Part II para 2.5.10. This is probably already the law. See Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 at 89. 127 For a general discussion of the erosion of these public law remedies, see N Seddon, Government Contracts: Federal, State and Local (2nd ed 1999) para 8.2. The Commonwealth Ombudsman's annual reports have been pursuing this issue. See, for example, Commonwealth Ombudsman, Annual Report 1995-96, AGPS, 16-18 and Annual Report 1997-98, AGPS, 5. See also Administrative Review Council, The Contracting Out of Government Services (ARC 42, 1998) recommendations, 9-14. 128 An example of such legislation is the Corrections Act 1986 s 9G.
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9.7.6 Access by Government Employees
In a case where a public official, such as the Auditor-General or a Minister, has unfettered access to confidential information, the problem arises whether his or her staff should also have access. The Review believes this is not an issue that needs to be the subject of specific recommendation because it is simply a fact of life in government. Advisers to high officials must be trusted with information which is often highly sensitive. In appropriate circumstances, it may be necessary to limit the number of advisers with access.
9.8 Public Records
One of the consequences of contracting out and privatisation which has been drawn to the Review’s attention is the loss of control over (and sometimes even the loss of) public records, governed by the Public Records Act 1973. In the time available, the Review was unable to examine this issue in any depth, but remains concerned about the effect of contracting on the proper management of public record.
The Review recommends that the government: • recover records currently in the possession of privatised or contracted out entities; • clarify whether all government corporations are covered by the Public Records Act 1973; and • ensure that future contracts include clauses that ensure proper management of public records.
10. CONCLUSION
The recommendations made in this Chapter, if implemented, will be important measures for ensuring that Victoria provides a model of open and transparent government. The tendency to secrecy that can all too easily be resorted to when contract and privatisation are used as central tools of public administration is antithetical to democratic government. The culture of open government needs to be nurtured. Government employees must be trained in, and constantly reminded of, the underlying philosophy of the Freedom of Information legislation. The contracts entered into by government should be made publicly available except to the extent that genuinely commercially confidential information, such as trade secrets, needs to be protected.
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CHAPTER 4 DISCLOSURE OF EXISTING CONTRACTS
1. DISCLOSURE OF EXISTING CONTRACTS (TOR 3)
This Chapter considers whether, under Term of Reference 3, the details of specific major contracts should be released by the government, having regard to the State's legal liabilities and without infringing a reasonable interpretation of ‘commercial in confidence’.
1.1 Existing Obligations of Confidentiality
In Chapter 3 the tension between the use of contract by government, with its ‘private’ connotations, and the requirements of open government were analysed. The recommendations made in that Chapter relate to future government action in striking an appropriate balance between the need for secrecy in certain limited circumstances and the imperatives of open government and democracy. Nothing said in that Chapter can answer the question: what should be done about existing contracts which are hidden from public view?
A contract made by a particular government administration is made by the body politic (or statutory corporation where appropriate) and the legal entity bound by that contract does not change when a new administration is voted into office. Although there are limited legal means available for governments to break contracts, such as executive necessity1 or even by passing special legislation, the present government has made it clear to both the general public and to the Review that it does not intend to make use of such means and will abide by the contracts made by the previous administration.2 Accordingly, any confidentiality obligations are binding unless they are released by the party who has provided the relevant confidential information.
1.2 Who is Bound?
A confidentiality clause may impose obligations of secrecy on both parties, on one party or on the other party to a contract. There are therefore three possibilities.
1. If a contract imposes confidentiality obligations on both parties, neither party can release information without the agreement of the other. 2. If it imposes such obligations only on the contractor but not on the State, then the State is free to release any information. 3. If, on the other hand, it imposes a secrecy obligation on the State and not on the contractor, the State is not free to release information without first obtaining the permission of the contractor.
It is therefore necessary to examine the relevant contracts to ascertain which category they fall into.
1 This is a common law doctrine that recognises that a government may have to break a contract in certain circumstances, such as when there have been major policy or budgetary changes or the exigencies of a crisis make it necessary to break a contract. See N Seddon, Government Contracts: Federal, State and Local (2nd ed 1999), Federation Press, ch 5. 2 Press release, 25 August 1999.
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If a contract falls into category 1 or 3 and the contractor is not willing to release the State from its confidentiality obligation, then the information should not be disclosed. The Review has, however, found that a number of contractors are willing to allow the details of the contract to be disclosed. In many cases the need for confidentiality at the commencement of a project will have disappeared. The government should negotiate with the relevant contractors with a view to releasing the contracts to the public.
If a contract falls into category 2, or else there is no confidentiality provision in the contract, the government should as a matter of courtesy inform the relevant contractor what information it intends to release. This precaution also prevents the mistaken release of information where, for example, the confidentiality clause and its effect have been misconstrued.
The obligation of confidentiality would extend to any summary of a contract prepared by the Review so long as that summary contained information that was confidential under the original contract. The contract summaries prepared for this Review are a valuable resource and provide relatively easy access for citizens and others, such as Members of Parliament, who may wish to find out about the contracts without having to read the legal documents. Accordingly, the recommendations contained in this Chapter apply to the contract summaries prepared by the Review.
2. RECOMMENDATIONS
The Review recommends that:
• where contracts impose an obligation of confidentiality on the State or relevant public body, the contracts and their summaries prepared by the Review not be disclosed but that the government should negotiate with the relevant contractors with a view to seeking consent to disclose as much of the contracts as possible; and • where contracts impose an obligation of confidentiality on the contractor but not on the State or relevant public body, or where there is no confidentiality obligation in the contract, the government should disclose the contracts after having informed the contractor of the proposed disclosure.
The following table sets out the contracts, their confidentiality requirements and the appropriate recommendation.
136. Chapter 4
RECOMMENDATIONS IN RESPECT OF RELEASE OF SPECIFIC CONTRACTS
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 1.01 1.1.2 Clauses 15.1 and 15.3 require the Buyer to keep the agreement Yes Disclose United Share Sale confidential except in certain specified cases. Energy Ltd Agreement relating Clause 15.2 provides that a party may make protected disclosures to to United Energy advisers. Limited 1.02 1.2.2 Clauses 13.1 and 13.3 require the Buyer to keep the agreement Yes Disclose CitiPower Share Sale confidential except in certain specified cases. Limited Agreement relating Clause 13.2 provides that a party may make protected disclosures to to CitiPower Limited. advisers. 1.03 1.3.2 Clauses 14.1 and 14.3 require the Buyers to keep the agreement Yes Disclose Solaris Share Sale confidential except in certain specified cases. Power Ltd Agreement relating Clause 14.2 provides that a party may make protected disclosures to to Solaris Power advisers. Limited 1.04 1.4.1 Clauses 14.1 and 14.3 require the Buyer to keep the agreement Yes Disclose Eastern Share Sale confidential except in certain specified cases. Energy Agreement relating Clause 14.2 provides that a party may make protected disclosures to to Eastern Energy advisers. Limited (dated 4 November 1995) 1.05 1.5.1 Clauses 13.1 and 13.3 require the Buyer to keep the agreement Yes Disclose PowerCor Share Sale confidential except in certain specified cases. Australia Agreement relating Clause 13.2 provides that a party may make protected disclosures to Limited to PowerCor advisers. Australia Limited. 1.5.2 Asset Sale Agreement
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 137. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 1.06 1.6.1 – 1.6.2 Clauses 14.1 and 14.3 require the Buyer to keep the agreement Yes Disclose Hazelwood Share Sale confidential except in certain specified cases. Power Agreement, Asset Clause 14.2 provides that a party may make protected disclosures to Corporation Sale Agreement advisers. 1.07 1.7.1 Clauses 14.1 and 14.3 require the Buyer to keep the agreement Yes Disclose Yallourn Share Sale confidential except in certain specified cases. Energy Ltd Agreement Clause 14.2 provides that a party may make protected disclosures to advisers. Clause 14.5 imposes certain obligations of confidence before completion. Clause 14.6 requires the parties to procure that the Reviewer and Expert not disclose. 1.08 1.8.1 Buyers must not disclose anything in respect of Agreement or sale Yes Disclose Southern Asset Sale of assets except as required by law or any stock exchange and, Hydro Agreement even then, only in consultation with the State (Clause 17.1). Limited Any party may make disclosures to its officers, employees or professional advisers only on a needs to know basis and must use best endeavours to ensure all matters disclosed are kept confidential (Clause 17.2). Buyers acknowledge Seller’s obligations under the Electricity Act to provide information to Minister or Treasurer (Clause 17.4). No general obligation of confidentiality on the State, the Seller, the Operator, the Guarantors or UniSuper other than to ensure information disclosed to officers, employees and professional advisers under Clause 17.2 is kept confidential. 1.09 1.9.1 The Buyer is not permitted to disclose ‘anything in respect of this Yes Disclose Loy Yang Asset Sale agreement or the sale of the Assets’ except as required by law or Power (Loy Agreement the requirements of any recognised stock exchange: Clause 22.1. Yang A) The State can waive this requirement of secrecy.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 138. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 1.11 Loy 1.11.1 Clause 22.1 provides that information contained in or relating to the Yes Disclose Yang Power Transaction Agreement, and all negotiations leading up to the execution of any of (Loy Yang B Implementation them is confidential to each of the Parties and is not to be disclosed, 49%) Agreement provided that (notwithstanding any Clause to the contrary in the Agreement) the State is not bound to keep the matter confidential pursuant to Clause 22.1 or any similar or corresponding Clause in any attachment to the Agreement. Clause 22.2 details the exceptions to the Parties’ obligations of confidentiality. 1.12 1.12.1 Clause 17.2 imposes obligation on Buyer not to disclose ‘anything in Yes Disclose Generation Ecogen Energy Sale respect of this Agreement or the sale of the Assets’ except in limited Victoria / Agreement defined circumstances. Clause 17.4 reinforces that obligation. Ecogen There is no corresponding obligation on the Seller or the State. 1.13 1.13.1 The Buyer is not permitted to disclose ‘anything in respect of this Yes Disclose PowerNet Asset Sale agreement or the sale of the Assets’ except as required by law or Agreement the requirements of any recognised stock exchange: Clause 17.1. The State can waive this requirement of secrecy. 1.15 1.15.1 – 1.15.15 Clause 19.1 specifies that the Vendor will hold all Confidential Even though this Negotiate for Heatane Sale Agreement Information in confidence for as long as that information remains transaction was entered disclosure confidential or until notified by the Purchaser in writing that the into in 1993, the obligation information is no longer confidential. of the Vendor to keep Confidential Information is defined in the Agreement as all confidential information information relating to the Business which is not in the public domain confidential would and may reasonably be regarded as confidential, including: continue after completion. The State would therefore 1. the business records; have to obtain the 2. existing or proposed business methods and management consent of Elgas Limited systems; to disclose details of this 3. distribution and other agreements; transaction to the public. 4. financial and business information of any kind; and 5. strategic information as information concerning proposed products and marketing strategies. Furthermore, Clause 19.2 specifies that the Vendor must not use
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 139. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? any Confidential Information for any purpose associated with LPG, disclose any Confidential Information or copy or reproduce confidential material for any purposes associated with LPG. Clause 27.9 specifies that a party may not make a press or other announcement or releases relating to the Agreement and the transaction without the approval of the other party to the form and manner of the announcement or release, such consent not to be unreasonably withheld. 1.16 1.16.1 Clause 17.1 Parties must make public announcement on signing Yes Disclose Kinetik Gas Distributor and this agreement in terms approved by the State. Energy Retailer Asset Sale Clause 17.2 Buyers may disclose information only when required by Agreements law or a stock exchange on which it is listed. Before making any such disclosure, the Buyers must accommodate reasonable requests by the State as to form and content and seek exemptions to disclosure to the maximum extent possible. Clause 17.3 Disclosure by parties to anyone limited to a need to know basis within the parties. Clause 17.4 This agreement is not to be disclosed without written consent of the State. Clause 17.5 Buyers acknowledge Sellers’ obligations to provide information to the Minister or the Treasurer. 1.17 1.17.1 Clause 17.1 Parties must make public announcement on signing Yes Disclose Stratus/ Gas Distributor and this agreement in terms approved by the State. Energy 21 Retailer Asset Sale Clause 17.2 Buyers may disclose information only when required by Agreements law or a Stock Exchange on which it is listed. Before making any such disclosure, the Buyers must accommodate reasonable requests by the State as to form and content and seek exemptions to disclosure to the maximum extent possible. Clause 17.3 Disclosure by parties to anyone limited to a need to know basis within the parties. Clause 17.4 This agreement is not to be disclosed without written consent of the State. Clause 17.5 Buyers acknowledge Sellers’ obligations to provide
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 140. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? information to the Minister or the Treasurer under the Gas Industry Act. Clause 14.3 Acknowledgment of disclosures and good faith. 1.18 1.18.1 Clause 17.1 Parties must make public announcement on signing Yes Disclose Ikon Energy Gas Distributor and this agreement in terms approved by the State. Retailer Asset Sale Clause 17.2 Buyers may disclose information only when required by Agreements law or a stock exchange on which it is listed. Before making any such disclosure, the Buyers must accommodate reasonable requests by the State as to form and content and seek exemptions to disclosure to the maximum extent possible. Clause 17.3 Disclosure by parties to anyone limited to a need to know basis within the parties. Clause 17.4 This agreement is not to be disclosed without written consent of the State. Clause 17.5 Buyers acknowledge Sellers’ obligations to provide information to the Minister or the Treasurer. 1.19 1.19.1 Clause 17.1 Parties must make public announcement on signing Yes Disclose Transmission Gas Distributor and this agreement in terms approved by the State. Pipelines Retailer Asset Sale Clause 17.2 Buyers may disclose information only when required by Agreements law or a stock exchange on which it is listed. Before making any such disclosure, the Buyers must accommodate reasonable requests by the State as to form and content and seek exemptions to disclosure to the maximum extent possible. Clause 17.3 Disclosure by parties to anyone limited to a need to know basis within the parties. Clause 17.4 This agreement is not to be disclosed without written consent of the State. Clause 17.5 Buyers acknowledge Sellers’ obligations to provide information to the Minister or the Treasurer under the Gas Industry Act. Clause 14.3 Acknowledgment of disclosures and good faith.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 141. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 1.20 1.20.1 The Purchaser may not make any disclosure regarding the There are no specific No decision should GFE GFE Share Sale Agreement or sale of shares without the prior written consent of the provisions in the be made to release Resources Agreement State, other than to its officers, professional advisers or as required Agreement to prevent the the Agreement to by law or any stock exchange (Clause 10). Under the Agreement, State from releasing the the public until that there is no obligation of confidentiality imposed on the State. Agreement to the public confidentiality deed The confidentiality deed between the State, GFE and the Purchaser without the consent of the has been reviewed. dated 11 May, 1995 is referred to in Clauses 1.1 and 7.9, however Purchaser. However, we have not been provided with a copy of that document. It may be there may be provisions in that the confidentiality deed imposes additional obligations of the confidentiality deed confidentiality on the State and the Purchaser. referred to above which prevent any disclosure. 1.21 1.21.1 Clause 16.3 incorporates into the Agreement, the terms of the There are no specific Disclose Port of Asset Sale Confidentiality Agreement made between the Purchaser and the provisions in the Portland Agreement (the Vendor relation to the sale of the Business and the Assets. Agreement or the Agreement) Under this Confidentiality Agreement, the Purchaser (and its agents, separate Confidentiality employees, principals and advisers) has wide obligations of Agreement which prevent confidentiality and must keep confidential and not disclose any the State from releasing information relating to and contained in the Government’s proposals the Agreement to the for ports reform, the sale of the assets of the Port of Portland, the public without the consent Information Memorandum and the nature, scope and method of of the other parties. implementation of the sale of the assets of the Port of Portland. The Agreement further provides that the Purchaser must endeavour to keep and maintain confidential all information obtained by it prior to completion (Clause 17.1). The Purchaser must not make any public announcements in relation to the sale of the Business and the Assets for a period of six months after the date of the Agreement without the prior written consent of the Vendor and State (Clause 20.1). However, the Vendor and the State are entitled to make public announcements in relation to the sale of the business and the assets (Clause 20.2).
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 142. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 1.22 1.22.1 Clause 18.3 incorporates into the Agreement the terms of the There are no specific Disclose Port of Asset Sale confidentiality agreement made between the Purchaser and the provisions in the Geelong Agreement (the Vendor at the time the Purchaser received the Information Agreement or the Agreement) Memorandum in relation to the business. separate Confidentiality Under this Confidentiality Agreement, the Purchaser (and its agents, Agreement which prevent employees, principals and advisers) have wide obligations of the State from releasing confidentiality and must keep confidential and not disclose any the Agreement to the information relating to and contained in the Governments proposals public without the consent for ports reform, the sale of the assets of Port of Geelong and the of the other parties. Information Memorandum. The Agreement further provides that the Purchaser must endeavour to keep and maintain confidential all information obtained by it prior to completion (Clause 19.1). The Purchaser must not make any public announcement in relation to the sale of the business and the assets for a period of six months after the date of the Agreement without the prior written consent of the State (Clause 22.1). Conversely, the State is entitled to make public announcement in relation to the sale of the business and the assets (Clause 22.2). 1.23 1.23.1 Clause 16.1 imposes obligation on Buyer not to disclose ‘anything in Yes Disclose State Asset Sale respect of this Agreement or the sale of the Assets’ except in limited Plantations Agreement (as defined circumstances. Clause 16.3 reinforces that obligation. subsequently There is no corresponding obligation on the Seller or the State. amended by the Deed Amending Asset Sale Agreement dated 3 December, 1998)
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 143. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 1.24 1.24.1 Citic 3 and JV Holding Companies cannot disclose the contents of Yes Disclose Aluvic Share Sale the Transaction Documents without the consent of the State, except Agreement – as may be required by law or any stock exchange and, even then, Aluminium Smelters only in consultation with the State (Clause 10.1). Citic 3 and the JV of Victoria Pty Ltd Holding Companies are also permitted to disclose the contents of those documents to its officers and professional advisers on a need to know basis (Clause 10.2). 1.24 1.24.2 There are no provisions in the Agreement dealing with Yes Disclose Aluvic Asset Sale confidentiality. Agreement 1.25 1.25.1 Clause 22.1 imposes reciprocal confidentiality obligations on the No, but the Review To the extent that V/Line Sale of Assets parties not to disclose any Disclosed Information, terms of the understands that the the contract has Freight Agreement Agreement or Transaction Documents without the consent of the contracts were disclosed not been disclosed, other party. Clause 22.2 provides for usual exceptions to non- in full in the United States negotiate for disclosure obligations (professional advice, required by law, publicly and subsequently on the disclosure. available etc.) and also incudes permitted disclosure to the Crown or Passenger Charter any State or Governmental Agency minister, officer, employee etc. website (at the time of writing down for reconstruction). 1.26 1.26.1 Clause 21 of the Plant Business Sale Agreement relates to No Negotiate for AH Plant Plant Business Sale confidentiality. This Clause provides that all information, including disclosure Agreement the Confidential Information (defined in Clause 1.1 as all trade secrets and all financial, marketing and technical information, customer and supplier lists, pricing information, ideas, concepts, formulae, technology, operating procedures, processes and knowledge and any information belonging to or used by VicRoads in the conduct of the Business that is not in the public domain) and the Disclosure Material (defined in Clause 1.1 as all the material available for the Purchaser in the data room established by VicRoads) and the Transaction Documents (defined as the Plant Business Sale Agreement, each of the Hire Agreements and the Service Providers Agreement) is confidential except in the following circumstances: (a) to employees, legal advisers, auditors or other
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 144. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? advisers/consultants requiring the information on the basis they agree to keep the information confidential; (b) with the consent of the party which supplied the information; (c) if the information is lawfully in the possession of the recipient of the information through sources other than the party who supplied the information; (d) if the information is in the public domain; (e) if required by law or a stock exchange; or (f) if required in legal proceedings in relation to the Agreement. Clause 19 further provides that no public announcement or communication relating to the negotiations of the parties or the subject matter of terms of the Agreement is to be made or authorised by any party without the prior written approval of the other parties (subject to certain exceptions outlined in this Clause). 1.26 1.26.2 Clause 11.1 provides that the Contractor must (unless authorised by No Negotiate for VicRoads Service Providers VicRoads), at its own cost keep strictly confidential all Confidential disclosure Plant (AH Agreement Information (defined in Schedule 4 as all items designated in writing Plant) or speech as confidential, including without limitation, trade secrets and all financial, marketing and technical information, customer and supplier lists, pricing information and any other information belonging to or relating to a party in the conduct of its business of or received from VicRoads which may come to the knowledge of its officers, agents, employees, subcontractors and other representatives arising from this Agreement and any Service Agreement). Clause 11.4 contains a corresponding provision that applies to VicRoads in relation to the Confidential Information of the Contractor (though this Clause is subject to the FOI Act). Clause 11.2 provides that the Contractor must ensure at its own cost, that Confidential Information of or received from VicRoads is only disclosed to its employees, advisers, consultants, suppliers agents and representatives on a need to know basis provided that it is made clear to the recipient that the information is to be kept confidential and that each recipient agrees and undertakes that the Confidential Information will be kept strictly confidential. Clause 11.5
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 145. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? contains a corresponding provision that applies to VicRoads in relation to the Confidential Information of the Contractor. The obligations of confidentiality contained in Clause 11 are subject to the standard exceptions outlined in Clause 11.6 (ie. is not confidential if at the time of disclosure; the information was within the public domain). Note that as Clause 1.1 of the Plant Business Sale Agreement provides that Service Providers Agreement is a Transaction Document and each Transaction Document is deemed to fall within the definition of Confidential Information (also defined in Clause 1.1), Clause 21 of the Plant Business Sale Agreement (which provides general provisions relating to the non-disclosure of Confidential Information) applies in respect of disclosure of the Service Providers Agreement. The exceptions relating to confidentiality contained in this Clause also apply to disclosure of the Service Providers Agreement (see Doc. No. 1.26.1). 1.26 1.26.3 As Clause 1.1 of the Plant Business Sale Agreement provides that No Negotiate for VicRoads Bituminous each of the Hire Agreements are each Transaction Documents and disclosure Plant (AH Surfacing each Transaction Document is deemed to fall within the definition of Plant) Equipment Hire Confidential Information (also defined in Clause 1.1), Clause 21 of Agreement; the Plant Business Sale Agreement (which provides general 1.26.4 provisions relating to the non-disclosure of Confidential Information) Passenger Motor applies in respect of disclosure each of the Hire Agreements. The Vehicle Hire exceptions relating to confidentiality contained in this Clause also Agreement; apply to disclosure of the Hire Agreements (see Doc. No. 1.26.1). 1.26.5 Road Maintenance Plant Hire Agreement; 1.26.6 Specialised Equipment Hire Agreement.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 146. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 1.28 1.28.1 The Purchaser, the ABB, Victorian Grain Services and GrainCorp The State may make Disclose Grain Sale of Business may only make public announcements of, or in relation to, the sale public announcements of, Elevators and Shares and purchase of the Business or the Assets if required by law or with or in relation to, the sale Board Agreement. the prior written consent of each of the other parties (Clause 22.1). of the Business and Assets. There is no requirement for the State to notify the other parties or to seek their consent in relation to the State’s disclosure (Clause 22.2). 2.01 2.1.1 Clause 16 restricts the disclosure of the Agreement or information Under the fifth exception Disclose National Bus Transport Services provided under the contract to the following situations: above, disclosure is not Company Agreement • to the extent that disclosure is required by operation of law or by prohibited if disclosure is Metropolitan Buses the requirements of Accreditation; required as a policy or ‘order’ of the Government. • to the extent that the agreement requires disclosure; • to the extent that disclosure is required by the Listing Rules of the ASX; • if required by accountants, lawyers or other advisers engaged by either party to give advice; • to the extent required by the Secretary, for the purpose of implementing or complying with any legislation, regulation, order or policy of the Government of Victoria; • to the extent required by the Secretary for the purpose of business plans, reports, advice to Parliament, advice to a Minister, or for system marketing purposes (but this does not permit the disclosure of financial information except under one of the other exceptions stated above); and • to the extent necessary for negotiations for the sale of the Operator.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 147. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 2.02 2.2.1 Clause 36.1 provides that the Director and the Franchisees must, No Negotiate for Yarra Trams Franchise and the Franchisees must procure that each other Franchise Entity disclosure 2.03 Agreement – does, keep confidential: Swanston Metrolink Victoria (a) the Disclosed Information (which, as defined in Clause 1.1 Trams Pty Ltd (Yarra) includes the Information Memorandum and tender invitation and 2.04 2.3.1 other material in relation to or in connection with the Victorian rail Hillside Franchise privatisation); Trains Agreement – (b) any written or oral agreements, negotiations or information in Swanston 2.05 relation to the Transaction Documents; Bayside 2.4.1 (c) any documents or information which is confidential under the Trains Franchise Agreement; and Agreement – Hillside 2.06 (d) other particular Clauses to be kept confidential which differ V/Line 2.5.1 between the various Franchise Agreements. Franchise Passenger Clause 36.2 contains a list of standard exceptions to this general Agreement – confidentiality provision. Bayside Clause 36.3 sets out a series of other exceptions whereby the 2.6.1 Director may publish, or require the Franchisee to publish, inter alia, Franchise any information the Director considers reasonably necessarily to Agreement – V/Line publish in connection with the performance of his or her functions; Passenger and any other information where the Franchisee cannot demonstrate that publication would be materially detrimental to its business. 2.02 2.2.2 Clause 32 requires that the parties to the Infrastructure Lease No Negotiate for Yarra Trams Yarra Infrastructure Agreement must keep confidential: disclosure 2.03 Lease (a) the Disclosed Information (which, as defined in Clause 1.1 Swanston 2.3.2 includes the IM and tender invitation and other material in Trams Swanston relation to or in connection with the Victorian rail privatisation); 2.04 Infrastructure Lease (b) any written or oral agreements, negotiations or information in Hillside 2.4.2 relation to the Lease Agreement; Trains Hillside (c) any documents or information which is confidential under the 2.05 Infrastructure Lease Lease Agreement; and Bayside 2.5.2 (d) certain Clauses of each Lease Agreement. Trains Bayside Clause 32.2 contains a list of standard exceptions to this general Infrastructure Lease
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 148. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? confidentiality provision. Clause 32.3 gives the Director powers to publish a wide range of information. For instance, he/she is entitled to publish the results of Condition Surveys, details of any Default Events, and a range of other information about the performance of the Franchisee. 2.02 2.2.3 Clause 25.1 provides that the parties (in respect of each of the Sale No Negotiate for Yarra Trams Sale of Assets of Assets Agreements) must keep confidential and not allow disclosure 2.03 Agreement – disclosure of or in relation to: Swanston Metrolink Victoria (a) any Disclosed Information (which, as defined in Clause 1.1 Trams Pty Ltd (Yarra) includes the IM and tender invitation and other material in 2.04 2.3.3 relation to or in connection with the Victorian rail privatisation); Hillside Sale of Assets (b) the terms of this Agreement or any other Transaction Document; Agreement – Trains (c) any documents which are or information which is confidential Swanston 2.05 under this Agreement, and 2.4.3 Bayside (d) other particular documents to be kept confidential which differ Sale of Assets Trains between the different Sale of Assets Agreements. Agreement – Hillside 2.06 without the prior written consent of each of the other parties. V/Line 2.5.3 Clause 25.2 contains a list of standard exceptions to this general Passenger Sale of Assets Agreement – confidentiality provision. Bayside 2.6.3 Sale of Assets Agreement – VLP 3.01 3.1.1 Clause 16 restricts the disclosure of the Agreement or information Under the fifth exception Disclose in Metro Route Transport Services provided under the contract to the following situations: above, disclosure is not template form Buses Agreement • to the extent that disclosure is required by operation of law or by prohibited if disclosure is Metropolitan Buses the requirements of Accreditation; required as a policy or (Template) ‘order’ of the Government. • to the extent that the agreement requires disclosure; • to the extent that disclosure is required by the Listing Rules of the ASX; • if required by accountants, lawyers or other advisers engaged by
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 149. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? either party to give advice; • to the extent required by the Secretary, for the purpose of implementing or complying with any legislation, regulation, order or policy of the Government of Victoria; • to the extent required by the Secretary for the purpose of business plans, reports, advice to Parliament, advice to a Minister, or for system marketing purposes (but this does not permit the disclosure of financial information except under one of the other exceptions stated above); and • to the extent necessary for negotiations for the sale of the Operator. 3.02 3.2.1 None Yes (subject to DOE Disclose in School Bus School Bus Contract guidelines/PTCA) – at template form Contract (Template) least in template form 3.03 3.3.1 Clause 12.1 requires that any confidential information (an undefined No definition of Disclose West Coast Services Agreement term) that either party deals with before, during or after the term of ‘confidential information’ is Railway – the Agreement is to be kept confidential by the party by which it is given in the Agreement. Warrnambool received, subject to standard exclusions such as where the Therefore it is unclear confidential information is already in the public domain or is whether the terms of the disclosed as required by dispute resolution procedure or law. Agreement are Clause 12.4 specifies that Clause 12 does not prevent disclosure of confidential or not. confidential information to any minister, officer, employee, agent, adviser, consultant, department, agency or authority of the Government of Victoria. In the event of an investigation of an Incident or Accident under Clause 14, Clause 14.2 provides that both parties to the investigation have full and free access to all relevant information. All such information must be treated as confidential.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 150. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 3.03 Agreement for the Clause 26 requires that any confidential information (an undefined No definition of Disclose West Coast Supply of Passenger term) that either party (or its employees or agents) deals with before, ‘confidential information’ is Railway – Train Services during or after the term of the Agreement is to be kept confidential given in the Agreement. Warrnambool between by the party by which it is received, unless and until the parties Therefore it is unclear Warrnambool and agree that such confidential information (or part thereof) is in the whether the terms of the Melbourne public domain whereupon to the extent that the information is public, Agreement are the obligations of confidentiality cease. confidential or not. 3.04 3.4.1 Clause 14.1 requires that any confidential information (an undefined No definition of Disclose Hoys Services Agreement term) that either party deals with before, during or after the term of ‘confidential information’ is Roadlines – the agreement is to be kept confidential by the party by which it is given in the agreement. Cobram Line received, (subject to standard exclusions, for example where the Therefore it is unclear confidential information is already in the public domain or is whether the terms of the disclosed as required by dispute resolution procedure or law). agreement are Clause 14.4 specifies that Clause 14 does not prevent disclosure of confidential or not. confidential information to any minister, officer, employee, agent, adviser, consultant, department, agency or authority of the Government of Victoria. In the event of an investigation of an Incident or Accident under Clause 11, Clause 11.2 provides that both parties to the investigation have full and free access to all relevant information. All such information must be treated as confidential. 3.04 Agreement for the Clause 26 requires that any confidential information (an undefined No definition of Disclose Hoys Supply of Passenger term) that either party (or its employees or agents) deals with before, ‘confidential information’ is Roadlines – Train Services during or after the term of the Agreement is to be kept confidential given in the agreement. Cobram Line between Shepparton by the party by which it is received, unless and until the parties Therefore it is unclear and Melbourne and agree that such confidential information (or part thereof) is in the whether the terms of the Road Coach public domain whereupon to the extent that the information is public, agreement are Services between the obligations of confidentiality cease. confidential or not. Cobram and Shepparton
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 151. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 3.05 Automated Fare Various requirements of confidentiality. Main provision is Clause 54 No. The Review has Negotiate for Public Collection System to which other Clauses (eg 9.7, 13.4, 14.3, 39.5) refer. Clause 54 been informed that there disclosure of Transport Project Consolidated imposes obligations of confidentiality on both PTC and OneLink and has been agreed partial balance of contract Ticketing – Service Contract their subordinates. disclosure after an FoI not disclosed after OneLink Deed Confidential information in respect of which OneLink is under an request FoI request (Metcard) obligation means all information relating to passenger movements and patronage and information denoted by PTC as confidential. Confidential information in respect of which PTC is under an obligation means any commercial or business information of OneLink, the individual equipment or unit prices charged by OneLink, all software and other information owned by OneLink and all information relating to Approved Performance Standards, Essential Service Obligations and levels of Compensation Payments, Withholding Amounts and Forfeited Amounts under the contract. 3.06 3.6.2 Information provided by the Secretary to the institution must not be Yes Disclose subject to Human Inner and Eastern disclosed if likely to lead to identification of a client or clients (Clause privacy obligations Services Health Care 20) Contracts Network - Health More general obligation to keep safe and secure records (Clause which exceed Service Agreement 21) $100 million 1998/1999 3.07 3.7.1 1. Except as required by law, the Minister must not disclose any The Minister is prevented Disclose subject to Hospitals Co- Energy Services proprietary information in the Development Documents (as from releasing the keeping proprietary generation Agreement defined in Schedule A and including the Project Manuals and Agreement to the public information Project other plans, specifications and documents relating to the only to the extent that confidential cogeneration plant and the Facilities) (Clause 3.3). doing so would require a 2. Neither party to identify the other in any promotional materials disclosure of any (Clause 4.9). proprietary information in the Development Documents.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 152. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 3.08 3.8.1 The Contractor is required to keep confidential the terms of the Yes - subject to normal IP Disclose subject to Traffic Deed for Deed, the Software Licence, Guarantees, Escrow Agreement, the constraints in Software keeping proprietary Camera Development and Technical Information and any related documents AND any other Licence and technical and intellectual Operations Provision of documents so designated by the State (Clause 72). data owned and property Outsourcing Processing Services General requirement to observe confidentiality obligations of data developed by contractor. information for Fines and protection provisions enshrined in various existing statutes. confidential Judgements Debts 3.09 Victorian 3.9.1 Obligations of confidentiality are imposed on both IBM and the State No Negotiate for Police IT Deed. The (Clause 6). ‘Confidential Information’ is defined broadly and includes disclosure Outsourcing document appears ‘information relating to the financial position of the Party’ including to be a deed ‘information relating to the assets and liabilities of a Party’. because the execution Clause refers to the document being ‘signed, sealed and delivered’ by the Minister for Police and Emergency Services, although the document is referred to as an Agreement or Contract throughout 3.10 3.10.1 & 3.11.1 Clause 39 Detailed provisions requiring Contractor to not make Yes Disclose subject to VicRoads IT Provision of public or disclose the Customer's Confidential information (as keeping proprietary Outsourcing Information defined Clause 39.3) in this contract or any associated contract, information 3.11 Technology without written consent of Customer (except as legally required – confidential PTC IT Services Clause 39.4). Outsourcing Agreements Clause 39.8 Contractor shall on demand return all documents etc Clause 39.9 Parties shall not be restricted in use of any information technology or network management ideas, concepts, know how or techniques except to the extent such use involves the disclosure of Confidential information.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 153. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? Clause 39.11 Contractor may disclose confidential information to specified people on a need to know basis to its parent company, solicitors auditors insurers or accountants if it marked confidential prior to disclosure. Clause 39.12 Customer may disclose information to Minister Parliament, solicitor, auditors, insurers or accountants on a need to know basis, if marked confidential. Clause 39.13 This Clause shall survive the termination of this Contract. 4.01 4.1.1 Usual requirement in a commercial document concerning Already disclosed N/A CityLink Melbourne City Link information that is either expressly or impliedly confidential (Clause Concession Deed 19.3). The fact that the Concession Deed is embodied in legislation and therefore a public document may be significant in that it shows that these types of contracts as a whole do not need to be confidential. 4.02 4.2.1 Clause 48.1 provides that no party is permitted to divulge, or permit Yes Disclose La Trobe New La Trobe its officers, employees, consultants, advisers or agents to divulge: Hospital Regional Hospital (a) any of the contents of the Agreement; Agreement (b) any of the commercial bases for the Agreement; (c) any information relating to negotiations concerning the Agreement; (d) any information otherwise concerning the operations, dealings, transactions, contracts, commercial or financial arrangements or affairs of any party involved in the development or operation of the Hospital, or the provision of the Services. The above general confidentiality restrictions are subject to certain exceptions, one of which provides that the restrictions do not apply to the disclosure of any information where the disclosure is made by a Minister in the course of his or her official duties.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 154. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 4.03 4.3.9 Clause 48.1 provides that no party is permitted to divulge, or permit Yes Disclose Mildura Base Mildura Base its officers, employees, consultants, advisers or agents to divulge: Hospital Hospital Services (a) any of the contents of the Agreement; Agreement (b) any of the commercial bases for the Agreement; (c) any information relating to negotiations concerning the Agreement; (d) any information, report, account or data provided by a party to the other in the course of performing its respective obligations under the Agreement; or (e) any information otherwise concerning the operations, dealings, transactions, contracts, commercial or financial arrangements or affairs of any party involved in the development or operation of the Hospital, or the provision of the Services. The above general confidentiality restrictions are subject to certain exceptions, one of which provides that the restrictions do not apply to the disclosure of any information where the disclosure is made by a Minister in the course of his or her official duties. 4.07 4.7.1 Confidentiality imposed with respect to the terms of the Transaction Already disclosed under N/A Deer Park Metropolitan Documents and any document or information which is confidential FOI. Women's Women's (Clause 73.1/73.1/71.1) Prison Correctional Centre 4.05 - Prison Services Prisons – Agreement June Fulham 1995 4.5.1 4.06 Rural Men's Prison - Men's Prison Services Metropolitan Agreement October Prison 1995 4.6.1 Men's Metropolitan Prison - Prison Services Agreement [undated]
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 155. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 5.01 5.1.1 Clause V4 specifies that the Managing Contractor must keep all There is no restriction on Disclose Federation Volumes 1 – 3 matters relating the Agreement absolutely confidential, and must not the Principal in disclosing Square Federation Square disclose any information relating to the Agreement unless or to the details of the Agreement. Managing extent that any disclosure is: However, there may be Contractor • necessary for the performance of the Managing Contractor’s restrictions placed on the Agreement obligations under the Agreement; Managing Contractor’s Tender (which has not • required by Law; or been reviewed). • given with the Principal’s written consent. Clause V5 specifies that the Managing Contractor must refer all media enquiries regarding the project to the Principal’s Representative, and must not give information publishing the Project without the written permission of the Principal’s Representative. 5.02 5.2.1 The confidentiality obligations are contained in Clauses 8.6 and 8.7 Clause 8.6 does not Disclose subject to Multi- Instrument of in the Contract. extend to the terms of the keeping proprietary Purpose Agreement and Drawings, specifications and other information, samples, models, contract itself (including information Venue at Conditions of patterns and the like, supplied by the Principal and marked or any amendments) and confidential Melbourne Contract otherwise identified as confidential, shall be regarded as confidential any other information that Park and shall not be disclosed to a third party except with the prior is not marked as agreement of the other party to the Contract. confidential by the Contractor. Therefore, If required in writing by a party, the other party shall enter into a the Principal could release separate agreement not to disclose to anyone else any confidential the contract terms without matter even after the issue of the Final Certificate pursuant to the consent of the Clause 42.6 or the earlier termination of the Contract (Clause 8.6). Contractor. The Contractor shall not issue any information to the media without the prior approval of the Principal (Clause 8.7). 5.02 5.2.3 The consultant shall not release any document or article or divulge Clause 12 specifies that Disclose Multi- General Conditions any information without the prior written approval of the Principal the Principal can publicise Purpose for Engagements of (Clause 12). the Project in any such Venue at Consultants terms as the Principal Melbourne considers appropriate, Park which could include disclosing terms of the Contract.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 156. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 5.03 5.3.1 Confidentiality obligations are contained in Clauses 8.6 and 8.7 in The State is under no Disclose Museum of Formal Instrument of the Contract. obligation to other parties Victoria Agreement and They specify that drawings, specifications and other information, to retain the details of the (includes Supplemental samples, models, patterns and the like, supplied by the Principal and Contract from the public IMAX Theatre Formal Instrument of marked or otherwise identified as confidential, shall be regarded as eye, and bears the power construction) Agreement confidential and shall not be disclosed to a third party except with to give ‘consent’ to other the prior agreement of the other party to the Contract. parties to release material. If required in writing by a party, the other party shall enter into a separate agreement not to disclose to anyone else any confidential Clause 8.6 does not matter even after the issue of the Final Certificate pursuant to extend to the terms of the Clause 42.6 or the earlier termination of the Contract (Clause 8.6). contract itself (including The Contractor shall not issue any information to the media without any amendments) and the prior approval of the Principal (Clause 8.7). any other information that is not marked as Clause 65 prescribes that: confidential by the (a) The Contractor must keep confidential and not allow, make or Contractor. Therefore, cause any public announcement or other disclosure of or in the Principal could release relation to: the contract terms without • the terms of the Contract (including any written or oral the consent of the agreements, negotiations or information in relation to the Contractor. Contract); and However, the Principal • any document or information which is confidential under the must be satisfied there Contract are no other side without the prior written consent of the Principal. arrangements or (b) The Contractor’s obligation not to make any disclosure or understandings with the announcement without the Principal’s consent does not apply to Contractor. (We have not disclosures or announcements to the extent that the disclosure been notified of or or announcement is required: provided with any side arrangements). • by law; • by the listing rules of the Australian Stock Exchange; or • for the Contractor to perform its obligations under the Contract.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 157. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 5.06 5.6.1 Other than as required by law or to perform its obligations under the Yes Disclose State Library Construction agreement, the Construction Manager must keep confidential and of Victoria Management not allow, make or cause any public announcement or other of or in Redevelop- Agreement - Pre- relation to the Agreement without the Principal’s prior written ment Project Stage 4 and Stage 5 consent (Clause 12.10). Works The Principal may not unreasonably withhold its consent under Clause 12.10. There are no restrictions upon disclosure by the State. 5.06 5.6.2 All documents provided by the Construction Manager or the Yes Disclose State Library Direct Trade Principal to the Contractor in relation to the Agreement are of Victoria Contract (Stage 5) confidential and must not be used, reproduced or disclosed by the Redevelop- Contractor for any purpose other than the performance of the ment Project Agreement. There is no restriction placed on the State. 5.06 5.6.3 None. Yes Disclose State Library Proforma Minor of Victoria Trade Contract Redevelop- ment Project 5.07 5.7.1 The confidentiality obligations are contained in Clauses 8.6 and 8.7 Clause 8.6 does not Disclose Royal Park Formal Instrument of in the Contract. extend to the terms of the Netball Agreement Drawings, specifications and other information, samples, models, contract itself (including Stadium patterns and the like, supplied by either the Contractor or the any amendments) and Principal and marked or otherwise identified as confidential, shall be any other information that regarded as confidential and shall not be disclosed to a third party is not marked as except with the prior agreement of the other party to the Contract. confidential by the Contractor. Therefore, If required in writing by a party, the other party shall enter into a the Principal could release separate agreement not to disclose to anyone else any confidential the contract terms without matter even after the issue of the Final Certificate pursuant to the consent of the Clause 42.6 or the earlier termination of the Contract (Clause 8.6). Contractor. The Contractor shall not issue any information to the media without the prior approval of the Principal (Clause 8.7). However, the Principal must be satisfied there
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 158. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? are no other side arrangements or understandings with the Contractor. (We have not been notified of or provided with any side arrangements). 5.08 5.8.1 Arrangements Disclosure of any commercial aspect of the arrangements is a No Do not disclose Grand Prix with international breach which may occasion termination by the counterparties. bodies 5.08 5.8.2 Recurrent Each party is required to keep all information conveyed to it for the Yes Disclose Grand Prix Works Licence with purpose of the licence confidential except the licence itself. Parks Victoria 5.08 5.8.3 Various Each party is required to keep all information conveyed to it for the Yes Disclose Grand Prix Capital Works purpose of the licence confidential except the licence itself. Licences 5.09 5.9.1 Subject to usual exceptions (eg. legal requirements) the Contractor Yes, subject to there not Disclose Docklands Transfield-PowerCor (but not the Authority) must keep confidential the terms of the TIDA being any other document Trunk Consortium Trunk (and any information relating to the TIDA) and any documents or we have not seen (such Infrastructure Infrastructure information which are/is confidential under the TIDA and must not as a confidentiality Agreement Development publicly disclose any of those things without the prior written consent agreement) entered into Agreement (TIDA) of the Authority (which can be given or withheld at the Authority’s prior to the TIDA. absolute discretion) (Clause 8.1). However, the Review Parties to the TIDA must not disclose any information concerning the understands that the Project without Authority’s approval (Clause 8.7) Authority considers itself bound not to disclose the TIDA publicly. The basis for the Authority’s position is not clear.
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 159. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 5.10 5.10.1 Confidentiality obligations are contained in Clauses 8.6 and 8.7 in Clause 8.6 does not Disclose Melbourne Instrument of the Contract. extend to the terms of the Sports and Agreement Drawings, specifications and other information, samples, models, contract itself (including Aquatic patterns and the like, supplied by the Principal and marked or any amendments) and Centre otherwise identified as confidential, shall be regarded as confidential any other information that and shall not be disclosed to a third party except with the prior is not marked as agreement of the other party to the Contract. confidential by the Contractor. Therefore, If required in writing by a party, the other party shall enter into a the Principal could release separate agreement not to disclose to anyone else any confidential the contract terms without matter even after the issue of the Final Certificate pursuant to the consent of the Clause 42.6 or the earlier termination of the Contract (Clause 8.6). Contractor. The Contractor shall not issue any information to the media without the prior approval of the Principal (Clause 8.7). However, the Principal must be satisfied there are no other side arrangements or understandings with the Contractor. (We have not been notified of or provided with any side arrangements). 5.11 5.11.1 • No disclosure to third parties by Principal or Contractor of Yes, subject to Disclose subject to Immigration Agreement dated drawings, specifications and other information, samples, models, compliance with Clause keeping any Museum June 1997 patterns and the like which are marked or otherwise identified as 8.6 restricting disclosure proprietary confidential (Clause 8.6) of drawings, specifications information • Contractor not to issue any information, publication, document or etc marked or identified as confidential article concerning the project for publication in any media without confidential. Principal’s prior approval (Clause 8.7) • Contractor to keep contract, subcontracts and all matters arising from the Services or the works confidential and shall not disclose to third parties without written consent of Principal (Clause 49).
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 160. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? 5.12 5.12.1 Confidentiality obligations are contained in Clauses 8.6 and 8.7 in The Principal may by Disclose lead Exhibition Melbourne the Contract. implication, disclose terms contract Centre Exhibition Centre It specifies that, drawings, specifications and other information, and conditions of the Project samples, models, patterns and the like, supplied by the Principal and Contract without the Documentation marked or otherwise identified as confidential, shall be regarded as consent of the Contractor, confidential and shall not be disclosed to a third party except with but may not disclose the prior agreement of the other party to the Contract. subcontract or trade contract details. If required in writing by a party, the other party shall enter into a separate agreement not to disclose to anyone else any confidential matter even after the issue of the Final Certificate pursuant to Clause 42.6 or the earlier termination of the Contract (Clause 8.6). The Contractor shall not issue any information to the media without the prior approval of the Principal (Clause 8.7). Special Condition 7 prescribes that: (a) The Contractor must keep confidential and not allow, make or cause any public announcement or other disclosure of or in relation to: • the terms of the Contract (including any written or oral agreements, negotiations or information in relation to the Contract); and • any document or information which is confidential under the Contract without the prior written consent of the Principal. (b) The Contractor’s obligation not to make any disclosure or announcement without the Principal’s consent does not apply to disclosures or announcements to the extent that the disclosure or announcement is required: • by law; • by the listing rules of the Australian Stock Exchange; or • for the Contractor to perform its obligations under the Contract. (c) The Principal must not allow make or cause any public
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 161. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? announcement or other disclosure of or in relation to the commercial terms of the Contractor’s agreements with its subcontractors, subject to the same exceptions as specified in paragraphs (i), (ii) and (iii) above, without the prior written consent of the Contractor. (d) A party may not unreasonably withhold its consent under this Clause. 5.14 5.14.2 Every page of the contract is stamped ‘Commercial in Confidence’. No Negotiate for Crown Melbourne Casino In addition Clause 36 provides that all documents and information disclosure Casino Project Casino provided by one party to another party under this contract must be Agreement kept confidential. Routine exceptions to this obligation are set out in Clause 36, eg. where information is in the public domain, where its disclosure is required by law, etc. 5.14 5.14.5 Clause 30 provides that all documents and information provided by Already disclosed in N/A Crown Melbourne Casino one party to another party under this contract must be kept legislation Casino Project Management confidential. Routine exceptions to this obligation are set out in Agreement Clause 36 eg where information is in the public domain, where its disclosure is required by law, etc. Despite this, the contract itself is, of course, not confidential because it is in an Act of Parliament. 5.15 5.15.1 SECV and the Purchaser each undertake that subject to limited No Negotiate for Sale of 452 Contract of Sale exceptions (to meet legal and regulatory requirements) neither it nor disclosure Flinders its employees, agents or representatives will disclose the provisions Street of the Contract and any information flowing from it to any third party without consent of other party (special condition 22(a)). Further, neither SECV nor Purchaser may make any press announcement concerning the Contract without consent of other party (special condition 22(b)). 5.16 5.16.1 Clause 12 provides that all State information provided to the Yes Disclose Leeds Media Agreement between Contractor is confidential, and that at the request of the Board or a Leeds Media and Department, the Contractor will require an employee or contractor to Communication enter a confidentiality deed. Services Pty Ltd and the Victorian
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 162. Chapter 4
Can the State unilaterally Transaction Contract Summary of confidentiality provisions Recommendation * disclose the contract? Government Purchasing Board for a Master Agency Media Service 5.16.2 Variation of a Master Agency Media Service Agreement 5.17 5.17.1 Each party must keep confidential information disclosed by the other No Negotiate for Melbourne Ticketing Services party, including the terms and provisions of the Agreement, and may disclosure and Olympic Agreement (the only disclose that information to its officers, employees and agents Parks Trust Agreement) on a needs to know basis (Clauses 20.1 and 20.2). Contract with Usual carve out from obligations of confidentiality for information Ticketek already in public domain, disclosed as required by law or copies of records provided by Agent to MOPT as required under the Agreement (Clause 20.3). 5.18 5.18.1 There are no confidentiality provisions in the Agreement. Yes Disclose Beacon Cove Development Development Agreement 5.19 5.19.1 None Yes Disclose Kensington Agreement Banks
* Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 163. * Where the Review recommends disclosure it also recommends that the contractor be informed prior to disclosure 164. Recommendations
RECOMMENDATIONS OF THE AUDIT REVIEW OF GOVERNMENT CONTRACTS
VOLUME 1
1. CHAPTER 1: VICTORIAN GOVERNMENT PRIVATISATION & CONTRACTING 1992-99
1.1 The Decision to Contract (Section 3.2)
• In future government contracting projects, a graduated dispute resolution process should generally be established in the contract, including the use of expert determination.
1.2 The Pre-contract Phase (Section 3.7)
• Major projects involving economic significance to the State should be subjected to a process of publicly disclosed economic analysis. • Where a major BOOT, contracting out or franchising project is under consideration, prior analysis should include consideration of the alternatives of public and private provision. • The provisions of the Environmental Effects Act 1978 should be invoked whenever a major project proposal has environmental effects. • Parliamentary Committee consideration is an appropriate process for some major projects, particularly where community opinion is divided and a process of public hearings and information exchange may assist in moving toward consensus. • All major contracts should receive prior Treasury comment and Cabinet consideration.
1.3 Benchmarking (Section 3.8)
• Benchmarks should be reviewed continually throughout the contracting process to ensure that they reflect accurately any changes to the project brief. • An independent body should undertake (or at least review) financial benchmarks, rather than the related Government department or agency. • Risk premiums and any differences in taxation obligations should be factored into benchmark calculations. • Public sector comparators should be revisited and updated throughout the contracting process. • Benchmarking should involve more than setting minimum acceptable levels of performance. It should involve examining the processes that best practice organisations have used in order to achieve superior levels of performance. • To provide guidance in establishing performance reporting systems in the future, an independent review should be conducted into the non-financial impacts on the Victorian community of private provisioning. The review should examine social, environmental, governance, employment, planning, health, community and regional impacts. The Review believes that such a report would:
165. Recommendations
− contribute significantly to the overall depth, comprehensiveness and quality of reporting on project/contract outcomes; − provide a balance to the evaluation of financial impacts currently being undertaken; and − represent an important piece of advice to the government, which will be fundamental to the development and management of future policy in privatisation and outsourcing. • An assessment of public benefit in non-financial terms should be an essential part of the post-implementation review of any project, as well as an element of performance reporting for all public service contracts. Measurement and analysis of non-financial performance is complex but necessary.
1.4 Performance Management (Section 3.9)
• A two-tiered system for performance measurement should be established in contracts, incorporating: − a series of quantitative measures, and benchmarks against which contractual performance can be assessed; and − a series of measures, both qualitative and quantitative, which would act as general indicators of the performance of a private provider. These measures, whilst perhaps not directly enforceable through the contract, should be publicly disclosed in order to enhance accountability to the public. • Benchmarks should be made more challenging over time in order to encourage continuous improvement. • Increased disclosure of non-financial performance information is required. In at least one case where such data is not currently disclosed (OneLink Automatic Ticketing System Contract), the contractor has indicated its willingness for it to be made public in future. • Future contracts with private providers should carry a requirement for non-financial performance information to be publicly disclosed. • Where possible, provision should be made within future contracts to allow for a regular review of performance measures. • A number of the contracts examined by the Review relate to providing a service to the public (for example, the bus contracts, OneLink, Crown Casino), but lack any system for measuring customer satisfaction. The Review recommends that such data be collected on a regular (perhaps quarterly) basis in order to assess whether the Victorian public has benefited. Data collection could be the responsibility of the government department or agency responsible for monitoring contractual performance. • Wherever possible, financial or contractual penalties for under-reporting should be specified in contracts. • Performance measures should, where possible, be used to reward good operator performance as well as to punish unsatisfactory performance. • Where possible, measures of operator performance should focus more on rewarding positive operator performance than is currently the case.
166. Recommendations
1.5 Financial Management and Reporting (Section 3.10)
• Government departments should be directed to maintain the reporting of financial and performance data in their annual reports regardless of whether services are directly delivered by them or contracted out. • The Government should consider adopting a regular, broadly based outcomes reporting system, similar to the reports on Service Achievements and Outcomes produced by the NSW Council on the Cost of Government.
2. CHAPTER 2: OBLIGATIONS & LIABILITIES ON THE STATE
No recommendations.
3. CHAPTER 3: PROBITY & DISCLOSURE
3.1 Tendering processes (Section 4.4)
• The Review endorses the following recommendations of the Public Accounts and Estimates Committee on the Outsourcing of Government Services in the Victorian Public Sector: • the Department of Treasury and Finance should undertake a review of its outsourcing and contract management guidelines and those of the Victorian Government Purchasing Board (VGPB) to ensure both sets of guidelines are consistent; • the Department of Treasury and Finance should adopt a clear definition of outsourcing; and develop a methodology so that consistent and meaningful information on the level of financial savings achieved may be collected for analysis and reporting; • departments and agencies should ensure that adequate training on probity and ethics issues is undertaken by staff involved in tender processes to ensure they are fully aware of their duties and responsibilities; and • departments and agencies should ensure their staff and potential contractors are aware of the principles of ethics and probity applicable to public sector tendering and that they understand the importance of compliance with those principles. • The focus on high risk phases of the tender process set out in Procedural Integrity and Process Auditing in Privatisations and Contracting Out should be included in the VGPB guidelines. • The current VGPB guidelines on tendering should be revised to reflect the need for some flexibility in the tendering process where appropriate, such as for more complex tenders. The review into government purchasing arrangements being conducted under the auspices of the Minister for Finance should consider this issue. Agencies should seek legal advice if they propose to change the standard terms of a Request for Tender (RFT). • The Review endorses the present Government’s announced policy to enact whistleblower legislation.
167. Recommendations
3.2 Probity Advisers and Auditors (Section 4.5)
• Probity Advisers and Auditors should be used in large, complex or controversial privatisation or contracting out projects, in line with the guidelines set out in Procedural Integrity and Process Auditing in Privatisations and Contracting Out.
3.3 Conflict of Interests (Section 4.6)
• Formal procedures to identify and manage an actual or perceived conflict of interest should be adopted before a tender process is initiated.
3.4 Accountability (Section 4.7)
• All tender processes should be properly recorded, including recording reasons for decisions made at all stages, so that there is a paper trail for later evaluation of the process.
3.5 Informing the Market (Section 5.1)
• The procedure for publicly announcing the successful bidder in a tender process should be clearly spelt out in the RFT. Usually, no announcement should be made until the contract has been signed.
3.6 Making the Contract (Section 5.2)
• The RFT should state clearly how the contract will be formalised. Government employees should be made aware, for example through the Victorian Government Purchasing Board guidelines, of the risks associated with failing to adhere to the announced procedures.
3.7 Contract Administration (Section 5.3)
• The review into government purchasing arrangements being conducted under the auspices of the Minister for Finance should consider including in the Victorian Government Purchasing Board guidelines suitable warnings about casual contract variations, so that government personnel are made aware of the ease with which a legally binding contract variation can occur.
3.8 Victorian Freedom of Information Legislation (Section 8.2)
• Every contractor should, as a routine matter, be informed prior to entering a contract (in a standard explanation issued with the RFT or other pre-contract documentation) that there can be no absolute guarantee of confidentiality because of the operation of the Victorian Freedom of Information (FOI) legislation. This information should also be incorporated into the Victorian Government Purchasing Board’s published guidelines.
3.9 Secrecy Requirements in Other Legislation (Section 8.3)
• In policy and guideline documents issued to public officials, proper regard should be paid to the FOI legislation and its underlying philosophy of open government, so that public officials are given the clear message that government information should be made publicly available unless there is a specific exemption.
168. Recommendations
3.10 The Effect of Contracting out on FOI (Section 8.4)
• The Government should give consideration: − to the recommendation of the Administrative Review Council that citizens should be provided with a right of access to information relating to contracted out activities in the hands of contractors by deeming such information to be in the possession of the government agency; and − to establishing appropriate accountability mechanisms relating to information about fully privatised entities that are not supported by public money, such as through the information that must be provided by those entities to relevant regulatory bodies. • Government Business Enterprises should be subject to the FOI legislation.
3.11 Reform (Section 8.5)
• The Government should give consideration to the establishment of an FOI Commissioner.
3.12 Disclosure on Announcement of Award of a Contract (Section 9.3)
• Losing bidders should be debriefed and sufficient information should be revealed to these bidders to enable them to know why their bids were not successful.
3.13 Disclosure of Contracts (Section 9.4)
• Contracts made between the government and an outside entity should, as far as possible, be disclosed to the public on the Internet. • This step should be effected through special purpose legislation. • When deciding what to disclose, the government should be guided by the policy and principles underlying the FOI legislation, including the exemptions which protect trade secrets and other commercial information. • Potential bidders for government contracts should be informed of the government's policy on disclosure of contracts. • Before disclosing, the government should provide the contractor with the version of the contract which the government proposes to publish.
3.14 Contractual Performance (Section 9.5)
• The Government should consider establishing regular reporting mechanisms that provide information to the public on contractual performance, such as through the annual reports of agencies or special purpose bulletins.
3.15 Who Should Have Access? (Section 9.7)
• Legislation should provide that, if confidential information is to be withheld from Parliament, the Minister should provide a statement both to Parliament and to the Auditor-General providing reasons why it is in the public interest that the information not be disclosed to Parliament. • The Review generally endorses the recommendations made by the Public Accounts and Estimates Committee in its report on confidentiality relating to access to, and
169. Recommendations
publication of, information by Parliamentary Committees but makes no recommendation about disputes between such committees and the executive. • The Audit Act should be amended to provide: − access by the Auditor-General to contractors' records relating to the performance of the contract; − the power to require contractors to answer questions relating to the performance of the contract; − a fine in the event of a contractor not providing the requested records or answering the questions within a specified time; and − that evidence provided in response to a request cannot be used against the contractor in any proceedings, except proceedings relating to breach of this provision. • The Government should: − recover records currently in the possession of privatised or contracted out entities; − clarify whether all government corporations are covered by the Public Records Act 1973; and − ensure that future contracts include clauses that ensure proper management of public records.
4. CHAPTER 4: DISCLOSURE OF EXISTING CONTRACTS
• Where contracts impose an obligation of confidentiality on the State or relevant public body, the contracts and their summaries prepared by the Review should not be disclosed. The Government should, however, negotiate with the relevant contractors with a view to seeking their consent to disclose as much of the contracts as possible. • Where contracts impose an obligation of confidentiality on the contractor but not on the State or relevant public body, or where there is no confidentiality obligation in the contract, the Government should disclose the contracts after having informed the contractor of the proposed disclosure.
170. Recommendations
VOLUME 2
1. PRIVATE PRISON CONTRACTS
• There have been allegations that prison authorities are under-reporting incidents. While the Review has not received documentary proof that these claims are true, it has noted that the current contractual arrangements provide a disincentive to operators to report incidents. The Review recommends that this issue be further investigated. • The Review has also heard evidence from a number of sources that training of prison staff at private prisons is inadequate. The Review does not have the resources to undertake a review of staff training procedures, but takes the view that such procedures should be investigated. • Given Victoria’s position as a world leader in the privatisation of prison services, the Review believes that the multi-provider system should be comprehensively reviewed. Particular emphasis should be given to the issue of whether qualitative outcomes can be reflected in contractual arrangements, to the revision of Service Delivery Outcomes (SDOs) and SDO benchmarks, and to information flows within the system. • In reviewing SDO benchmarks, the Review recommends that these, or other similar non-financial benchmarks, should be based on international best practice in corrections services, rather than on performance at outdated facilities which had been earmarked for closure. Furthermore, SDO benchmarks should be updated regularly to encourage continuous improvement. • The role of the Correctional Services Commissioner should be strengthened and that the position should be a statutory appointee reporting to Parliament. • Every proposal to build a new prison should be subject to a thorough evaluation of public and private procurement options, as well as an assessment of the potential costs and benefits involved. The results of these analyses should be considered, along with questions of policy. • The basis for calculating Public Sector Benchmarks should be reviewed. In particular the Review recommends that financial benchmarks should be developed or reviewed by a party independent from the project team, should include premiums for identified project and operating risks, and should be set after the project brief has been developed and, thereafter, reviewed regularly as the project progresses. • The disclosure of prison contracts and of operator performance has been a constructive step. The Review recommends greater disclosure of details of similar contracts, based on this experience.
2. AUTOMATED TICKETING SYSTEM (ONELINK) CONTRACT
• A project of this type should only be undertaken after a detailed evaluation of the potential costs and benefits of the project, and after extensive community consultation, particularly with groups representing commuters with special needs. • Projects requiring the development of complex new technology applications should not be undertaken in such short timeframes as was the case in this project, particularly where new uses of technology are involved.
171. Recommendations
• The State should consider the appropriateness of Treasurer’s guarantees, particularly in situations where it is possible that the contract may be assigned to a private company, although it is acknowledged in this case that the State is protected to a large extent by indemnities in the franchise agreements with transport operators. • The Review recognises the need for some commercially sensitive information to remain ‘commercial in confidence’ but, where possible, information in the public interest should be disclosed at the outset. The situation in regard to this contract - that the entire contract was ‘commercial in confidence’ - was unsatisfactory and has only been remedied in part after an FOI request. The Review has recommended, in response to Term of Reference 2, that government contracts should, as far as possible, be disclosed. • Information on operator performance is in the public interest, and therefore should be disclosed. The Review recommends that the parties to the contract negotiate to ensure the public disclosure of OneLink’s operating performance.
3. CITYLINK
• Having substantially delivered this groundbreaking project, it is important that government learns lessons from a comprehensive, independent, post-implementation review of the process and its overall outcomes (environmental, financial, social and on the transport system). To obtain maximum value from this review it is recommended that a suitable time elapse before it is undertaken, for example five years. • The State should avoid contractual obligations that impact on its discretion to develop alternative or competing strategic policy, in this case for up to 54 years if certain contingencies arise. • A comprehensive study of the environmental impact of the project should be undertaken. • The Melbourne City Link Act should be reviewed to remove many of the redundant features and sections no longer required after the construction phase is concluded. • Options for addressing the problem of traffic diverting from the freeway to avoid the toll system should be investigated. Such investigations should include full or partial shadow tolling, as well as other pricing options, including off-peak road pricing. • Consideration should be given to assigning certain regulatory powers with respect to CityLink to an independent regulator: − distributional issues arising from other utility privatisations are addressed by the Regulator-General, who is required to balance to some extent commercial and community interests; and − the project could be made subject to a five yearly review of all aspects of the project, similar to the privatised electricity industry. For this purpose it may be appropriate to develop a comparable regulatory framework within which progressive assessments of CityLink can be made. • The Government may wish to consider renegotiating a number of provisions of the contract, such as the Agreed Traffic Management Measures, limitations on transport policy making, and restrictions on the construction of future transport modes such as the freight railway to Melbourne Airport (in the case of CityLink). • Future BOOT projects of similar magnitude should be subject to a rigorous process of investment appraisal, environment effects assessment, and parliamentary scrutiny
172. Recommendations
prior to implementation, as detailed in our general recommendations. Such processes should be designed to incorporate public consultation and disclosure arrangements.
4. CROWN CASINO
• In respect of significant future amendments to the Casino Licence, the Casino Agreement should provide for the use of pre-determined valuation methodologies, or alternatively commit the parties to be bound by an independent expert's opinion. This would provide both parties with greater certainty. In addition, the objectivity of such provisions would provide greater transparency and clarity of process from a public interest perspective. • The role of the Victorian Casino and Gaming Authority (VCGA) should be split to separate the contract management role from that of regulator, or that appropriate ‘safeguards’ are put in place to achieve this effect. • The objective of the VCGA to promote tourism, employment and economic development should be removed to allow the Authority more clearly to safeguard the interests of the community. • The Review recommends that Section128P of the Casino Control Act 1991 should be repealed. • The Review sees no reason for the conditions of the Casino Licence to be kept confidential and recommends that the terms of the Casino Licence be publicly disclosed.
5. PUBLIC TRANSPORT
• Consideration should be given to the possibility of the creation of a Public Transport Commissioner with responsibility for long-term transport planning, linked with land use planning and based on wide stakeholder consultation. • Given the scope for rationalisation and efficiency improvements over coming years, the Government should seek further independent legal advice on its position of not tendering longstanding bus contracts, and subject to that advice, notify bus operators that their contracts will be re-tendered when the existing contracts expire in 2007. • As much as possible of the detail of the bus contracts should be published (with the agreement of all parties to the contract). At a minimum the template form of the contracts should be publicly available. • Given the limitations of management information systems in this area, the Department of Infrastructure, together with the public transport operators, needs to consider options for reliably measuring public transport patronage. • The Review found there is insufficient direct protection for the consumer/passenger on public transport services. The Government should investigate further the benefits and practicalities of extending the jurisdiction of the Ombudsman or including this area within the jurisdiction of the proposed Essential Services Ombudsman to include private sector transport operators. • The Department of Infrastructure (DOI) should consider a more pro-active approach to performance monitoring, for instance examining long-term technological options for monitoring the operational performance of buses, or simply using inspectors.
173. Recommendations
• In concert with public transport operators, the Government should consider options for measuring public transport patronage, given the current inadequacy of such systems and the centrality of patronage growth to transport policy and the evaluation of the system’s performance. • DOI should take a more active role in ensuring that train, tram and bus operators coordinate their timetables and other service functions in order to deliver a convenient, seamless service for passengers.
6. ELECTRICITY
• The Review has no recommendations to make on electricity privatisation. A number of crucial challenges lie ahead for the industry and the authorities which regulate it. In particular, the following issues are likely to be of major importance: - the ability of consumers to understand the options available to them post-2000, especially when they are likely to be offered ‘packages’; - the possible imperfections in quality and security of supply due to the current immaturity of the market; - the regulatory role to be played by the ACCC to deal with the ‘monopoly sector’ of the market covering the transmission sector; and - how effectively the new industry regulatory arrangements work in terms of dealing with consumer concerns.
7. GRAND PRIX
• While acknowledging that the current contract cannot be disclosed, the Review recommends that for future contract negotiations every reasonable effort should be made to disclose the terms of the contract, with exclusions limited to narrow and specific issues of commercial confidentiality.
174. 175. 176.
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