In considering the legal and accountability issues involved in this matter, it is necessary to appreciate that the contracting arrangements or outsourcing processes of government now being implemented are taking place at the same time as numerous other administrative changes within government. These changes include: developments associated with budgetary and financial reporting reform; the devolution of authority from central to line agencies; and, in the pursuit of economy and efficiency, claims for managerial autonomy at the agency level³⁰.

It is important to state that Audit acknowledges that competitive tendering and contracting can provide the delivery of quality public services and at a lower price. These benefits can flow from the engagement of private sector skills, experience and resources.

The audit observations that follow in this Report relate to the complex administrative and audit issues that can arise from the use of contractual arrangements and do not imply that such processes should not be pursued where such a course is appropriate. Indeed, in the performance of public sector audits, this Department itself contracts the services of private sector auditors.

It is of the utmost importance that contract administrative procedures are established to verify that contract performance is achieved, ie not only in terms of objectives and quality of services, but also that predicted economy has resulted³¹.

Concurrent with the process of contractualisation, the commercialisation and corporatisation of government entities has been an integral part of arrangements that have been implemented. This has been done with the aim of achieving improved efficiency and introducing the discipline of market forces as much as possible. However, a balance must be struck between efficiency enhancing systems and the obligations of government to provide arrangements protective of the public interest. These obligations extend beyond competitive cost considerations and embrace non-delegable duties to protect the vulnerable in the community and to ensure that government entities implement practices consistent with democratic ideals and principles.

Having regard to the consequences of these changes in public administrative arrangements and the rapidity with which they have been implemented, ensuring the maintenance of public confidence in the procedures and accountability of public institutions is of paramount importance³².

In general terms, and in addition to the matters already referred to in the two preceding sections of this Part of the Report, the issues that arise for consideration in the context of accountability for government contractual arrangements are:

• To what extent has the contracting out of government services fettered the discretion of future governments and what are the inter-generational consequences of those contracts?
• To what extent do claims of commercial confidentiality diminish the ability of Parliament and the public to hold government responsible for services that have been contracted out?
• To what extent has the contracting out of government services committed the expenditure of public funds in advance of their appropriation by Parliament?
• Has the contracting out of government services reduced the Parliament's and the public's ability to scrutinise government conduct and service provision?

• To what extent have the total costs to government, on a whole-of-government basis, been identified and appropriately allocated?
• To what extent has the contracting out of government services created current obligations and future contingent liabilities for the Government?
• To what extent have Crown and other government privileges been conferred on contractors?

• To what extent is the private contractor subject to the direction and control of the Government?
• Does the Government have sufficient contractual rights to ensure it is kept informed about the activities of the private contractor?
• To what extent does the contract ensure that performance is measured according to stated performance indicators?

• Does the contract impose on the contractor sufficient reporting obligations to ensure that the government can adequately monitor the contractor's performance?
• Will contractual performance be subject to independent audit and review?

It should also be recognised that there is the potential for some loss of accountability (in fact in some circumstances it may be inevitable) when moving the provision of a public service from a government department under Ministerial control to a private contractor. Public servants under Ministerial control are subject to direction by Ministers through departmental arrangements at any time. Whilst the convention of Ministerial responsibility does not make Ministers personally responsible for all acts performed by their subordinates, nonetheless, it does require Ministers to be accountable to answer on behalf of their departments, to ensure that reasonable administrative structures are in place, and to impose remedies when faults come to light³³. Such responsibility entitles Ministers, or senior public servants acting on their behalf, to intervene at any point in the departmental/statutory authority hierarchy and implement remedial arrangements if such are deemed necessary³⁴.

Contracting out, however, imposes a break in this chain of oversight and accountability. Ministers are no longer accountable for the day-to-day administration of service provision because their role and rights of intervention are limited to the terms of the contract. Day-to-day accountability of individual private service providers is to their private sector employers not to the department or the Minister.

This reduction in accountability is most obvious when mistakes occur and members of the public seek remedies from the Government. In the case of public service provision of services, the Minister concerned will be able to conduct immediate inquiries and, where possible, impose immediate remedies. In the case of provision of services by a private contractor, the Minister may be powerless to act.

The contractor may not be in clear-cut breach of the contract and/or the contract may not allow the Minister any right of intervention on behalf of the public. Though contracts may be written carefully in an attempt to forestall such difficulties, the unpredictability of events means that Ministers will always have less control over private contractors than over their own Departmental arrangements. Indeed, as already mentioned, this freedom from day-to-day political control and intervention may be one of the factors in the greater efficiency of some contracted services.

A fundamental feature of contracting out of services traditionally supplied by the public sector is the transference of responsibility for delivery of those services from the public to the private sector. As indicated above, when responsibility is transferred in this way the relevant Minister or chief executive of the public agency substitutes direct lines of administrative and legal authority and control for rights and obligations under the relevant contract. Consequently, the terms of the contract between the public agency and the contractor become the principal determinants of the rights, obligations, and potential risks to, the public agency.

Governments often claim a right to secrecy on the basis of commercial confidentiality in respect to functions that have been contracted out. This results in a reduced capacity for scrutiny by Parliament and the public³⁵. One commentator has observed that:

In its 1996 report, titled 'Competitive Tendering and Contracting by Public Sector Agencies', the Commonwealth Industry Commission (now the Productivity Commission) drew attention to the need to preserve accountability when services are contracted out, stating:

• translating broad program objectives into detailed service specifications;
• choosing a person (in-house or external) to deliver the service;
• ensuring that the service required is actually delivered;
• dealing equitably and responsibly with clients and the public³⁷.

Though contracting out necessarily involves some diminution of Ministerial and therefore Parliamentary accountability, it does have the potential to increase accountability in other respects. For example, the need to spell out service requirements in advance may force governments to clarify both the objectives sought through a particular service and the criteria by which the performance of providers is to be assessed. Such improvements in clarity and transparency can be said to enhance public control over service providers and thus help to make them more publicly accountable³⁸.

Again, contracting out may harness the incentives of a competitive market to make service providers more responsible to citizens' needs. In some cases citizens may be offered a choice of alternative providers. More commonly, where the service is provided by a monopoly supplier, the provider will normally have an incentive to perform satisfactorily in order to have the contract renewed beyond its current term³⁹.

Whether or not responsiveness to consumers through market competition is to be equated with the relationship of public accountability to citizens is open to question⁴⁰. It may be argued that without the status of ultimate ownership, which members of the public hold in relation to public agencies, there can be no relationship of accountability. Private companies are accountable more to their owners (ie shareholders) than to the customers they serve. In this case, while increased responsiveness may indicate increased efficiency in service delivery it need not imply a corresponding increase in citizens' rights of accountability and may even be accompanied by a diminution of such rights.

In the light of such considerations it becomes clear that issues of accountability in contracting out are manifold and complex. No simple rule will be applicable to all instances of contracting. Rather, a careful assessment must be made of each individual case.

In my opinion, care should be taken to ensure that processes of contracting out do not unduly diminish citizens' rights to hold government accountable for the provision of 'public services'. The fundamental principle of a system of democratic government is that all government power ultimately rests on the sovereignty of the citizens. The citizens, being unable to govern a complex society for themselves, entrust this function to their elected representatives and to a range of government agencies legally empowered by these representatives. A condition of this public trust is that all public officials and public institutions should be accountable to the public for the exercise of what are essentially powers delegated by the people⁴¹.

When services to the public previously provided by public sector agencies are contracted out to private companies, with functional responsibility remaining with the government, it is important to ensure that the citizens' rights of requiring accountability by government are not thereby unduly diminished. Because contracted services are provided from public funds, under the direction of public officials, and under the ultimate control of responsible Ministers, there are strong grounds for asserting that public accountability should remain intact.

Indeed, the South Australian Government has accepted the general principle that contracting out should not affect the level of public accountability. As the (then) Premier acknowledged in his statement on Government Accountability (6 February 1996), 'It is · important for the Government to remain fully accountable to the people, through this Parliament, for what is being done to deliver the services they require'⁴².

Notwithstanding the commitment to accountability, there is no guarantee that the accountability rights of the community will be maintained. Indeed, some arguments for contracting out attribute the superior efficiency of the private provision of certain services to reductions in levels of public accountability⁴³. Private contractors, it is claimed, are able to provide the same services for less cost, largely because they are not subject to the same degree of scrutiny as public sector agencies, for instance in areas such as employment practices.

It must be admitted that increasing the requirements of accountability for private contractors could tend to negate the savings to be made through contracting out⁴⁴. As such arguments indicate, accountability in contracting out cannot be taken for granted and there is a strong possibility of incurring an 'accountability deficit'.

In my opinion, governmental administrative arrangements should be so structured that an accountability deficit does not arise.

In addition to 'financial' and 'efficiency' considerations an 'Executive Government Accountability Statement' should, in my opinion, be an essential element in all cases of contracting out where the contract involves matters of material public interest.

A requirement for an Executive Government Accountability Statement could be incorporated as part of the Prudential Management Framework in accordance with 'accountability criteria' to be formulated⁴⁵. This criteria should, in my opinion, include matters dealing with both public law rights of citizens⁴⁶ and the accountability of the Executive Government to the Parliament.

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