Australia: Governance of public entities - new legislation sets agenda for reform

In brief - Public Governance, Performance and Accountability Act 2013 now in force

New legislation aims to empower the Commonwealth and its agencies to manage resources, risk and performance while imposing more consistent obligations on Commonwealth agencies and promoting cooperation to achieve common, whole of government objectives.

Reforms designed to improve productivity and performance of public sector

The Public Governance, Performance and Accountability Act 2013 (PGPA Act) commenced on 1 July 2014.

The PGPA Act complements the Auditor-General Act 1997, the Charter of Budget Honesty Act 1998 and a range of other governance-related legislation. It forms one of the building blocks of an ambitious package of reforms of public governance at the federal level. As identified in the Explanatory Memorandum to the Public Governance, Performance and Accountability Bill 2013:

...the reforms will seek to deliver long lasting benefits, including:
  • improved quality of information to parliament to support its constitutional role in relation to Commonwealth expenditure;
  • a more mature approach to risk across the Commonwealth; improved productivity and performance of the Commonwealth public sector with concomitant benefits for a broad range of stakeholders; and
  • reduced red tape within the Commonwealth and for partners who contribute to the delivery of Australian government programs and services, including grant recipients.

Reforms designed to enhance public sector's potential for innovation

With the above benefits in mind, the PGPA Act permits individual Commonwealth entities to have a higher level of operational independence. In this regard, the PGPA Act reflects the feedback received by the Commonwealth from various stakeholders, including the public service, private sector and academia to the effect that the Commonwealth should grasp the opportunity to, among other things, enhance the public sector's potential for innovation.

Goals targeting innovation and productivity now complement traditional public sector governance objectives of achieving best value for money, ensuring proper accountability for use of government resources and transparency in government decision-making.

Public bodies are, of course, traditionally more focused on risk mitigation and compliance than innovation. It remains to be seen whether the PGPA Act and the rules to be promulgated under it have achieved the balance between guidance and flexibility so as to drive cultural change successfully towards innovation and productivity.

PGPA Act aims for consistent approach to decision making and resources

The PGPA Act replaces the existing Commonwealth public governance framework comprising the Financial Management and Accountability Act 1997 (FMA Act) and the Commonwealth Authorities and Companies Act 1997 (CAC Act). In its emphasis on developing a more flexible governance framework, the PGPA Act is closer in philosophy to the CAC Act, than the more prescriptive, financially-focused and rules-based FMA Act. Further, the PGPA Act also addresses a major criticism of the previous framework, whereby — due to a largely artificial distinction based on "ownership" of funds — different kinds of Commonwealth entities were subject to the quite different compliance regimes encapsulated by the FMA Act and the CAC Act. The intent is that, through the application of the same framework to all Commonwealth entities (as the term is used in the PGPA — distinguishing such entities from "Commonwealth companies"), there will be greater transparency and efficiencies obtained from a consistent approach to controls of decision-making and use of resources.

Structure of the PGPA Act

Commonwealth entities and Commonwealth companies

Section 6 of the PGPA Act provides that the Act mainly concerns the governance, performance and accountability of "Commonwealth entities". These bodies are regulated by Chapter 2 of the PGPA Act, which comprises seven Parts and the greater proportion of the legislation (78 sections).

By comparison, Chapter 3, focusing on Commonwealth companies, comprises two Parts and 11 sections. It should also be noted that the PGPA Act exempts the High Court of Australia and the Future Fund Board of Guardians from its ambit, due to their enabling legislation and particular roles including, in the case of the High Court, its Constitutional status. (See section 10(2) and section 89(1)(c) of the PGPA Act.)

A "Commonwealth entity" is broadly defined in section 10 to apply to both corporate and non-corporate entities of the Commonwealth. These are:

  • departments of state
  • parliamentary departments
  • listed entities
  • bodies corporate established by, but not under, laws of the Commonwealth

It can be seen from the above definition that Commonwealth bodies corporate which are not operationally independent from the Commonwealth (for example, Commonwealth authorities, previously governed by the CAC Act) will be subject to the same governance requirements as Commonwealth bodies such as Departments of State (reporting directly to ministers).

By contrast, any "Commonwealth company" (being a company established under the Corporations Act 2001 that the Commonwealth "controls") is covered by Chapter 3. (Please see Section 89 of the PGPA Act. The three tests for "control" under subclause 89(2) are in equivalent terms to the tests contained in sections 46 and 47 of the Corporations Act.)

That the governance and performance — as opposed to accountability — of entities governed by Chapter 3 are not matters covered by the PGPA Act simply reflects the reality that the Corporations Act is the primary governance framework for such companies. Consequently, given the primary regulatory role the Corporations Act plays in relation to Commonwealth companies, the main focus of this paper is on Commonwealth entities.

Draft rules focus on probity, financial and insurance matters

While the PGPA is intended to offer flexibility regarding governance requirements, it does allow for rules promulgated under Division 2 of Chapter 4. Section 102 of the PGPA Act provides guidance as to the matters that may be addressed in the rules. Those matters include performance-related issues that are core to good public governance such as:

  • Ensuring or promoting the proper use and management of public resources
  • Ensuring or promoting proper accountability for the use and management of public resources
  • Risk oversight and management
  • Performance

Draft rules have been prepared by the Department of Finance and are available online. The current draft of the rules focuses on probity, financial (including investment and auditing) and insurance matters. The extent to which the finalised rules seek to address the broader reform agenda will be a litmus test for whether or not the PGPA Act, in practice, facilitates a better approach to innovation and productivity. It should be noted that, on 13 February 2014, the Joint Committee of Public Accounts and Audit resolved to inquire into and report on the rules' development and further changes to the rules may occur.

In relation to "the Commonwealth" and "non-corporate Commonwealth Entities", section 103 allows for further rules to be developed. (For example, section 103 covers matters such as the acquisition, use, management and disposal of certain kinds of property).

Accountable authorities, internal controls and annual performance statements

The PGPA Act holds entities to a more explicit framework for monitoring and evaluating performance. Thus, in relation to Commonwealth entities, Part 2.2 of the PGPA includes specific provisions relating to the general duties of "accountable authorities". Each Commonwealth entity must have an "accountable authority", be it the Secretary of the Department, the governing body of a body corporate or, for a listed entity, the persons prescribed as such by the rules.

The duties of accountable authorities include a duty to keep the minister and Finance Minister informed of the activities of the Commonwealth entity and its subsidiaries (if any). This general duty may be supplemented by rules prescribing how the duty is to be discharged. (See section 19 and section 20 of the PGPA Act.)

Where appropriate, the accountable authority of a non-corporate Commonwealth entity may also establish an advisory board to assist with governance. (See section 24 of the PGPA Act.) The PGPA Act therefore focuses explicitly on the duties of personnel in leadership or management roles.

Part 2.3 of the PGPA Act then concerns planning, performance and accountability. It is in this Part that provisions are found which deal with corporate planning, budgeting, record keeping, performance measurement (including the preparation of annual performance statements) and financial reporting and auditing. Part 2.3, therefore, recognises the importance of internal controls in improving public governance.

Under section 40 of the PGPA Act, the responsible minister or the Finance Minister may request the Auditor-General to examine and report on the entity's "annual performance statements". This provision expands the existing role of the Auditor-General (currently, to prepare audit reports).

The requirement to produce performance statements is intended both to strengthen accountability and to ensure that a Commonwealth entity's focus is not merely on financial data, but on the extent of achievement of its purposes. This is consistent with the reform agenda recognising that a government body's performance should be evaluated against non-financial as well as financial indicators, thereby enabling overall performance and productivity improvements to be identified and implemented in a timely fashion.

Broad ministerial and parliamentary oversight of performance of Commonwealth entities, encapsulated by ministerial rights to full and free access to performance-related records ( section 37 of the PGPA Act) and the tabling of annual performance statements in parliament ( section 39 of the PGPA Act) should drive productivity and innovation. Such measures will also be a mechanism to encourage strategic cooperation and coordination between Commonwealth entities.

Duties of accountable authorities

An accountable authority is required by the PGPA Act to observe additional general duties which relate to its role in managing the entity and setting its strategic focus. In summary, they are:

  • A duty to govern the entity in a way that promotes the proper use and management of public resources, the achievement of the entity's purposes and financial stability
  • A duty to establish and maintain appropriate systems of risk oversight and management and internal control
  • A duty to encourage co-operation with others to achieve common objectives, where practicable
  • A duty, when imposing requirements on others in relation to the use or management of public resources, to take into account the risks associated with that use or management; and the effects of imposing those requirements

There is no overarching risk management framework that applies across the Commonwealth. Instead, with an emphasis on "appropriate" risk management systems, the PGPA Act permits each Commonwealth agency to adopt an approach to risk that is tailored to the agency's role and risk profile. Given the wide scope of Commonwealth activities, such flexibility is designed to encourage innovation and improved performance, resulting in the overall better use and management of resources. At the same time, the requirement to establish an "appropriate" system of internal control is designed to guard against inappropriate risk-taking.

Duty of Commonwealth entities to cooperate with others

Section 17 of the PGPA Act sets out the duty to cooperate with others. According to the Replacement explanatory memorandum, "others" should be interpreted broadly as including other Commonwealth entities, other jurisdictions, and other public and private bodies (such as the not-for-profit sector). The provisions recognise that effective government is a complex undertaking and requires collaboration and consultation with a variety of stakeholders in the development and implementation of policy and the use of Commonwealth funds.

Again, the section is conditioned by the requirements of achieving "common" objectives and that it be practicable to do so. Thus there is no legislative intention to require collaboration where there is no common goal to be achieved. Furthermore, some Commonwealth entities are less able to cooperate fully with others; the role of the Reserve Bank of Australia in determining monetary policy is a case in point.

It will be interesting to see, over time, how cooperation requirements operate in practice, given that the other themes within the PGPA Act, such as operational independence and individual approaches to risk management, may result in Commonwealth entities implementing quite different frameworks to drive performance improvements.

Effectiveness of PGPA Act may depend on rules which will underpin it

The PGPA Act espouses a different approach to public governance. It seeks to walk a fine line between empowering the Commonwealth and its agencies to manage resources, risk and performance issues and at the same time imposing more consistent obligations on Commonwealth agencies and focusing on cooperation as a mechanism to achieve common, whole of government objectives.

It is part of a more ambitious program of government reform and if implemented effectively, may lead to significantly better productivity outcomes. Much will depend, however, on the rules that will underpin the PGPA Act and perhaps the heavy lifting is yet to come as those rules undergo a process of consultation and development.

For more information:

Victoria Hawkins
CBP Lawyers

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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