Contracting out of Government Services

CHAPTER 7

ACCOUNTABILITY ISSUES

Introduction

With market-testing of the provision of government IT services mandated, and outsourcing already underway, the question facing the committee was how outsourcing IT would affect accountability. The effect of contracting out government services generally was addressed at some length by the Industry Commission in its 1996 report.[1] It concluded that 'while responsibility to do certain things can be transferred, accountability for the results cannot' and whatever the method of service delivery, a government agency remains accountable through the minister to Parliament, and through Parliament to the people, for the efficient performance of the functions entrusted to it. To the committee, this is indisputable. But there are differences which result from the provision of IT services by an outside agent, particularly the lengthening of the chain of responsibility. In this chapter, the committee considers whether these differences amount to a risk to accountability or whether they may in fact enhance it.

By accountability in this context the committee means, in simple terms, how the public whose money is used to finance the provision of IT services to government agencies is able to satisfy itself about the performance of and, if necessary, call to account those who act on their behalf. Obvious intermediaries are ourselves, as elected members of Parliament. What access should we have, and what access should our delegates such as the Auditor-General, the Ombudsman, the Privacy Commissioner and the Administrative Appeals Tribunal have, to the activities of IT service providers? Accountability, as a recent MAB/MIAC report observed, 'does not imply simply providing information or answering questions, but includes setting goals, providing and reporting on results and the visible consequences for getting things right or wrong, including rewards or sanctions as appropriate'.[2]

The rationale for contracting out the provision of IT services in the first place is to save costs and improve efficiency by harnessing the virtues of competition. It has been argued that those cost savings are achieved, in part at least, precisely by the reduction in the accountability burden.[3] The committee considered whether that was the case and, if so, whether in the present era of risk management, such reduction was an appropriate risk to take.

The Accountability Chain

When the provision of IT services is, broadly speaking, provided in-house by a government department or agency, the chain of responsibility for the conduct of those services goes from the hands-on operators through their superiors to senior officials and ultimately through the minister to Parliament. Intervention from above is a possibility at any point along this hierarchical chain. When you impose a contract in the chain, service provision is placed in the hands of persons not under the day-to-day control of the government department or agency. Technically the service provider is accountable only for performance as specified in the contract and not for discretionary acts performed in association with the contract. As the Attorney-General's Department pointed out in its submission to the committee,

the contractor is an independent contractor which is responsible for its own actions in the course of the performance of the services. It is a principle under the general law that an employer is vicariously liable for its employees (over whom it exercises direct control), but a principal is not held responsible for the actions of an independent contractor (over whom it does not exercise direct control).[4]

If a minister cannot exercise direct control over the operations of a contracted service, should he then accept responsibility if things go wrong? To the committee's knowledge, there have been no precedents in the outsourced IT field to provide guidance. It will consider the matter further in its second report on the general contracting out of government services, where several examples spring to mind.

On the matter of principle, the Clerk of the Senate asserted that a fairly clear line could be drawn around the extent of ministerial responsibility. Ministers should have no role in assessing tenders and awarding contracts but,

if something has obviously gone wrong with the tendering process, if the contractor who has been awarded the contract has some financial connection with somebody sitting on the panel that is awarding the contract or something like that, the minister has to be accountable for the integrity of the process. The minister has to be answerable to the parliament for the process going wrong. So the minister has a responsibility to see that due processes are in place and that all reasonable safeguards are in place to ensure the integrity of the contracting process.[5]

He added that nowadays there is much more public scrutiny - not merely parliamentary and political scrutiny - of the activities of corporations, which will have to accept that their activities are going to be subjected to examination, whether or not they are involved in public contracts.

Accountability and Audit

One of Parliament's principal agents in assisting it to monitor the way public monies are spent and to determine whether those monies are well spent is the Auditor-General. Representatives of the Australian National Audit Office (ANAO) raised two particular accountability concerns with the committee: the adequacy of contract monitoring by agencies; and Audit Office access to information and records generated by contractors.

As contracting out of IT infrastructure is a relatively recent phenomenon, agencies have had little time to develop contract monitoring skills. The ANAO too has conducted few performance audits on IT outsourcing, and in its two audits conducted on the Department of Veterans' Affairs first IT outsourcing contract had to use the services of a specialist consultant itself. While painting a rosy picture of the actual costs and the cost savings, both of which were in line with predictions, and other benefits, the audit found that more adequate documentation of the management arrangements, and a formal evaluation, would have been desirable.[6] Based on its experience to date, the ANAO is producing a best practice guide for the management of IT outsourcing.

For effective contract administration, the contracting agency, as well as the ANAO, require certain access to the contractor's records and information. In the view of Mr McPhee of the ANAO, such access should be specified in the contract, via standard use contract provisions. He accepted that access to such records was a 'sensitive issue', but pointed to the situation in the United States where federal regulations contain a requirement for negotiated contracts of worth more than $10,000 to contain a clause allowing access by the US Comptroller General and authorised staff to relevant records.[7] The committee is sympathetic to the ANAO's desire to ensure access to such records, should the need arise. It will consider the issue in more detail in its report on general outsourcing issues, as experience in Defence is particularly relevant.

Accountability and the Right to Redress

IT outsourcing has the potential to place in private sector hands sensitive personal information which government may have demanded of individuals. A major aspect of accountability is the provision of a right of redress to individuals whose rights have been infringed by a government department or agency, or those acting at the behest of a department or agency. The most likely scenario in this context might be the unauthorised release of personal information but the right to privacy is by no means the only right which may be infringed.

At present, when government IT provision is largely handled in-house, individuals affected by that provision have the many administrative law provisions available to them at little or no charge. Complaints about basic maladministration can be taken to the Commonwealth Ombudsman; information can be sought via Freedom of Information legislation; judicial review of decisions can be obtained through the courts and merit review through specialist tribunals; privacy abuses may be addressed by the Privacy Commissioner.

The importance of the right to redress is demonstrated by the government's extension of the administrative law package to the private sector case managers operating under the Employment Services Act 1994.

If the administrative law provisions are not extended to cover outsourced IT services, the provision of right of redress can only be effected by contractual clauses. The Ombudsman expressed her doubts about whether the standard clauses she had seen were satisfactory. She suggested that if Parliament wanted transparency, consistency or probity in the use of government money, it would need to ensure that the Ombudsman, FOI and ANAO legislation was explicit in its extension of coverage of accountability as it pertained to government functions performed by third parties. Such explicitness could be achieved, in her view, by a simple deeming provision.[8] The committee notes that her Queensland counterpart's jurisdiction covers acts by private agencies taken under functions conferred on, or instructions given by, a [public] agency.[9]

There was little support amongst other witnesses for the extension of the administrative law package to private sector contractors. Dr Macdonald of OGIT believed that many of the issues could be addressed through standard clauses in contracts, but indicated that there were ongoing discussions between his agency and the Attorney-General's Department on the matter.[10] A Department of Finance representative suggested that if the administrative law requirements were extended to contractors, it might even deter firms from tendering. A private sector representative commented:

If the services sought under contracting out arrangements are not amenable to normal commercial contractual disciplines including those pertaining to service performance then they probably should not be contracted out. To overlay contractual arrangements with application of the Ombudsman Act would appear to risk negating or detracting from the benefits of contracting out.[11]

The committee has been unable to determine even a ballpark figure for the additional costs which might accrue, principally in terms of staff investigative time, if the Ombudsman's jurisdiction or FOI provisions were to be extended to cover private sector IT providers.

The Australian Law Reform Commission (ALRC) and the Administrative Review Council (ARC) recently examined the Freedom of Information Act 1982 (Cwealth), and made a number of recommendations regarding private sector bodies contracting with the Commonwealth. One recommendation was that the FOI Act should not be extended to apply generally to private sector bodies.[12] As Alan Rose, Chairman of the ALRC, pointed out to the committee, in cases such as the ESRA legislation where statutory discretions were being exercised as part of the contract, the ALRC was supportive of the extension of FOI, archives access, privacy protection and administrative review in the enabling legislation; but at the other end of the contracting spectrum, where a contract simply substituted for the provision of a physical service previously provided by public servants, such legislative provision would be inappropriate.[13]

As the Industry Commission report recognised, the base line here is that 'a change from direct to contracted provision ought not undermine the ability of individuals or organisations to seek redress for decisions or actions for which governments are accountable'.[14] The Commission was generally unenthusiastic about the extension of the administrative law provisions to contractors but urged particular consideration when client choice or degree of competition was limited.

Accountability and Commercial Confidentiality

The issue of when commercial confidentiality should properly attach to documents in which Parliament has an interest has been debated within the Parliament and elsewhere for decades. This committee's predecessor considered the issue on several occasions, a prominent example being its inquiry into ABC employment contracts.[15] That committee found that, while due regard should be paid to matters such as personal privacy and commercial competitiveness, public authorities had to be prepared to account to parliamentary committees for all aspects of their financial management and administration.

It was put to the committee by the Clerk of the Senate that 'claims that information is commercial-in-confidence are not really justified because, at the end of the day, it cannot be demonstrated that any real damage would be done by disclosing that information either publicly or on a confidential basis to the committee concerned'.[16] This view was supported by Mr Brendan Godfrey of Administrative Services, a department with extensive experience in commercial contracts. He told the committee:

if we believe a company has [information] so specific that it would affect their ongoing business, we will go to great lengths to protect that because it is to the advantage of the Commonwealth and the taxpayer to protect that information - that is, we are going to continue to get a better price ... We have provided to lots of parliamentary committees information in camera which has been protected, and the suppliers know that. If they are aware of that arrangement that an agency will protect [commercial information] and will ask, if possible, to go in camera to provide that information, I think suppliers have not been reluctant to provide details to us in order to get the best contract.[17]

The Attorney-General's Department was more cautious, stating that:

Parliament should only examine commercial-in-confidence contractual arrangements between government agencies and service providers in limited circumstances ... Parliament should only require disclosure of [commercial-in-confidence] information where the public interest in the information being on the public record is not outweighed by other relevant considerations'.[18]

It went on to suggest that in the great majority of cases, accountability would be achieved by ensuring that agencies adopted appropriate tender and contract procedures.

The committee notes that the US, however, has a rather more robust attitude to these matters. There it is widely accepted that once a contract is finalised, its provisions are a matter of public record. The New South Wales Auditor-General, Mr Tony Harris, supported this view:

it appears to me that there should be a very clear demarcation between commercial information which is ex ante, before a decision is made relevant to that information, and commercial information which is ex post - that is, after decisions have been made. Tender documents provided before the tender decision is made are particularly commercially sensitive ... because the benefits and rights attaching to that information can be usurped by others should that information be given out. After the decision is made ... the information is of very little value in a commercially confidential sense.[19]

He explained that for very large contracts, the provisions are known to hundreds of lawyers, advisers, financial consultants and hence the information could not be considered to have much commercial value.

As a general rule the committee accepts the ANAO 'reverse onus of proof' position, namely that contract information should be public unless there is a good reason for it not to be.[20] And in any event, the provisions of a signed contract should always be publicly available except in the most limited of circumstances. Such circumstances might include intellectual property and other industrial property trade secrets and pricing structures. Mr Alan Rose gave an example of just such a situation: the Attorney-General's Legal Practice agreed to confidentiality clauses concerning the software billing systems created for it, because it got the package at a lower price by permitting the contractor to exploit the product commercially at a later stage.[21]

Precisely what should be covered by commercial-in-confidence provisions is a challenging question. There have been sufficient examples of mismanagement and/or downright fraud in outsourcing internationally to suggest to the committee that bland bureaucratic assurances that all will be well here are yet another attempt to divert parliamentary attention away from the integrity of processes - an attempt that will be resisted. Value for money is an important goal but not one that should be achieved at any cost. The committee considers that on balance, it is probably better to start at the other end of accountability and to demand that government departments and agencies have available the maximum amount of information concerning contracts they have entered into, for possible parliamentary scrutiny through questioning of the agency which let the contract.

Such information that is properly deemed to be commercially sensitive should nevertheless be available for scrutiny in camera by parliamentary committees, should a genuine need arise. The committee notes and agrees with the view that this should not become a routine matter, though it does not necessarily agree that routine in camera parliamentary access to commercially confidential material would affect the price tendered or the willingness of agencies to contract for government services.

Conclusions

What must not be lost sight of in this matter is that what is at stake is the expenditure of public money. Of course Parliament wants to reassure itself that its public servants achieved an optimum IT facility at a good price. But it also wants to know that the tendering process was conducted with complete integrity; that the process of contract monitoring by the agency and the audit office is not impeded by lack of access to relevant information; and that the agency/contractor relationship is a well documented, professional partnership open when required to parliamentary scrutiny.

Senator Shayne Murphy

Chairman

Footnotes

[1] Industry Commission, Competitive Tendering and Contracting by Public Sector Agencies, AGPS, Melbourne, 1996, pp. 81-103.

[2] MAB/MIAC, Accountability in the Commonwealth Public Sector, AGPS, Canberra, 1993, p. 13.

[3] Finance and Public Administration References Committee, Submissions, vol. 3, p. 597 (Professor Mulgan).

[4] Finance and Public Administration References Committee, Submissions, vol. 2, p. 375.

[5] Mr Harry Evans, Committee Hansard,4 April 1997, p. F&PA 103.

[6] Auditor-General, Management of IT Outsourcing, Department of Veterans' Affairs, AGPS, Canberra, 1996, p. x.

[7] Committee Hansard, 3 April 1997, p. F&PA 62.

[8] Committee Hansard, 4 July 1997, p. F&PA 589.

[9] Queensland Parliamentary Commissioner Act 1974, s. 13 (7).

[10] Committee Hansard, 4 July 1997, p. F&PA 590.

[11] TNT, Committee Hansard, 19 May 1997, p. F&PA 305.

[12] ALRC/ARC, Open Government: a review of the federal Freedom of Information Act 1982, recommendation 97.

[13] Committee Hansard, 20 May 1997, p. F&PA 471.

[14] Industry Commission, Competitive Tendering and Contracting by Public Sector Agencies, AGPS, Melbourne, 1996, p. 99.

[15] Senate Standing Committee on Finance and Government Operations, A.B.C. Employment Contracts and their Confidentiality, 1986.

[16] Mr Harry Evans, Committee Hansard, 4 April 1997, p. F&PA 105.

[17] Committee Hansard, 4 April 1997, p. F&PA 182.

[18] Finance and Public Administration References Committee, Submissions, vol. 2, p. 384 (Attorney-General's Department).

[19] Committee Hansard, 20 May 1997, p. F&PA 378.

[20] Mr Ian McPhee, Committee Hansard, 3 April 1997, p. F&PA 71.

[21] Committee Hansard, 20 May 1997, pp. F&PA 474-5.