House of Representatives

Replacement Explanatory Memorandum

(Circulated with the authority of the Minister for Finance and Deregulation, Senator the Hon Penny Wong)

GENERAL OUTLINE

1. The Public Governance, Performance and Accountability Bill 2013 (PGPA Bill) provides a strong foundation for a modern, streamlined and adaptable Commonwealth public sector that can meet Australia's changing needs. If enacted, it will form the legislative basis for an integrated system that promotes high standards of governance, performance and public accountability.

2. The PGPA Bill consolidates within one piece of legislation the governance, performance and accountability requirements for the Commonwealth. It would replace the current model for Commonwealth financial management established under two Acts: the Financial Management and Accountability Act 1997 (FMA Act) and the Commonwealth Authorities and Companies Act 1997 (CAC Act).

3. The Bill sets out a regulatory framework for the Commonwealth and relevant entities, which are called 'Commonwealth entities'. These include Departments of State, executive agencies and statutory authorities established by Parliament. For Commonwealth companies, the drafting of the Bill takes into account the fact that the primary regulatory framework that applies to them is the Corporations Act 2001 (Corporations Act).

4. Rather than prescribing detailed requirements, the PGPA Bill establishes a core set of obligations that apply to all Commonwealth entities. Under this simplified financial framework, entities will have the flexibility and incentives to adopt appropriate systems and processes that help them to achieve diverse policy and statutory objectives efficiently and effectively. They will also be held to high standards of accountability through a more explicit framework for monitoring and evaluating performance.

5. The PGPA Bill is a fundamental part of broader reforms to be introduced through the comprehensive Commonwealth Financial Accountability Review (CFAR), which began in December 2010.

Financial Impact Statement

6. While the impact is difficult to quantify, simplifying regulatory requirements can contribute to improved efficiency and productivity in government operations. Most of the contributors in the CFAR process supported this premise.

7. Contributors in the CFAR consultations provided considerable feedback about the transactional and compliance-focused nature of the FMA Act. Many commented on the adverse impact this can have on the cost profile and performance of a Commonwealth entity. The approach under the FMA Act contrasted unfavourably with the principles-based approach in the CAC Act.

8. Several Commonwealth entities have been transferred from the CAC Act to the FMA Act over the past few years. A common theme from their feedback is that there is no noticeable improvement in performance from the additional burden of operating under the FMA Act. For example, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission commented on the time and resources involved in changing their financial processes and systems as a result of switching to the FMA Act, with no gains in transparency or performance.

9. Commonwealth entities and Commonwealth companies have provided positive feedback about the reforms to the Commonwealth's financial framework that are contained in the PGPA Bill.

10. The PGPA Bill includes a number of provisions on special or standing appropriations. These provisions continue special appropriations that are currently in the FMA Act (and the Audit Act 1901 before that), such as for refunds of money. Continuing these special appropriations from the FMA Act has no additional financial impact.

Statement of Compatibility with Human Rights

11. The Bill, if enacted, will not affect any of the applicable rights or freedoms outlined in the Human Rights (Parliamentary Scrutiny) Act 2011, such as those in the International Covenant on Civil and Political Rights.

12. The Bill does not propose any offences or penalties that limit any human rights.

13. The Bill is therefore compatible with the human rights and freedoms recognised or declared in the international instruments listed in subsection 3(1) of the Human Rights (Parliamentary Scrutiny) Act 2011.

The PGPA Bill in a context of reform

14. To meet fiscal and service challenges into the future, all governments will need to consider, often fundamentally, how public services are delivered and outcomes are measured. The financial framework should support a productive and innovative public sector that can adapt to increasing community demands and changing circumstances, while retaining robust systems of management and accountability.

15. CFAR's objective is to improve performance, accountability, risk management and service delivery across government. A more effective financial framework will help support a modern, adaptable and forward-looking public sector.

16. The CFAR process had broad input from across all levels of government, the private and not-for-profit sectors and academe. It identified opportunities for reform to remove red tape in the public sector, enhance the public sector's potential for innovation, improve the performance of the public sector in meeting the government's goals, gain the best value for money spent on any particular purpose, promote high standards of stewardship and accountability, and enhance transparency.

17. The proposed reforms are based on four guiding principles:

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Government should operate as a coherent whole.

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A uniform set of duties should apply to all resources handled by Commonwealth entities.

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Performance of the public sector is more than financial.

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Engaging with risk is a necessary step in improving performance.

18. While the CFAR reforms emphasise improving strategic coherence and coordination in the Commonwealth, allowing individual entities to have an appropriate level of operational independence is an underlying theme.

19. The PGPA Bill is the cornerstone of a broad, integrated package of reforms to the Commonwealth's financial framework. Taken together, the reforms seek to deliver long-lasting benefits, including:

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improved quality of information to Parliament to support its constitutional role in relation to Commonwealth expenditure;

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a more mature approach to risk across the Commonwealth;

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improved productivity and performance of the Commonwealth public sector with accompanying benefits for a broad range of stakeholders; and

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reduced red tape within the Commonwealth and for partners who contribute to delivering Australian Government programs and services, including grant recipients.

20. The 2010 declaration of open government strives to enable government entities and their officials to be more innovative and more responsive to input and feedback, while maintaining the high ethical and professional standards expected. Likewise the inclusion of Australia as a member of Open Government Partnership supports transparent, effective and accountable governments - with institutions that empower citizens and are responsive to their aspirations is entirely consistent with the principles of this Bill.

21. The PGPA Bill will create a financial framework where entities have the flexibility and incentives to adopt appropriate systems and processes that help them to achieve diverse policy and statutory objectives efficiently and effectively. The Bill will underpin other aims in reducing red tape, simplification, and encouraging joint ventures with partners both within and external to Government, all of which have policy relevance and are directly linked to the open Government agenda.

22. It will take several years to implement the reforms and integrate them fully into the practices and processes of Commonwealth entities and Commonwealth companies. Gradual introduction of the reforms will ensure that they are appropriately tested and refined in light of experience.

Issues to address in the existing Commonwealth Financial Framework

23. The Commonwealth's financial framework provides rules for the governance of Commonwealth entities and Commonwealth companies and for the proper management and use of public resources. The framework supports the government in meeting its obligations and responsibilities to the public and the Parliament. It is an important feature of an accountable and transparent public sector and guides the daily work of Commonwealth entities and Commonwealth companies, office holders and employees.

24. The current framework is primarily based on two Acts, the FMA Act and the CAC Act. Those Acts outline the roles and responsibilities of people who make decisions about the management and use of public resources.

25. The FMA and CAC Acts were a significant improvement on the financial management framework provided by the Audit Act 1901, which was highly prescriptive, rules-bound and focused on controls. Both Acts contain many sound provisions, and have provided a firm basis for the financial aspects of government operations since they commenced on 1 January 1998.

26. Despite these strengths, both pieces of legislation have been regularly amended since their introduction to maintain their serviceability and to respond to emerging issues. This incremental approach to legislative reform has been effective in addressing isolated issues as they have emerged. But it has added complexity to the financial framework's administration and may also have contributed to its fragmentation.

27. The current financial framework is not broken, but it does creak at times. It can be improved so as to reduce unnecessary complexity, enhance the operations and efficiency of the Commonwealth and clarify the accountabilities of the entities, companies and individuals who operate within the Commonwealth.

28. Under the current framework, the classification of Commonwealth entities as either FMA Act agencies or CAC Act bodies turns on the notion of 'ownership' of funds. According to the Explanatory Memorandum accompanying the FMA Bill in 1996:

This Bill is concerned with the regulatory/accounting/accountability framework for dealing with and managing the money and property of the Commonwealth. Its scope covers the underlying principles that are to govern the activities of persons in organisations that, financially, are agents of the Commonwealth-that is, Departments; those Statutory Authorities whose enabling legislation does not give them legal ownership of money or property separately from the Commonwealth; and any body, organisation or group of persons prescribed as an Agency on the basis of its dealing with and managing public money or public property on behalf of the Commonwealth.

29. In comparison, the original intent of the CAC Bill was to provide financial reporting and ethical and auditing provisions for corporate public authorities whose enabling legislation gives them 'ownership' of their operating funds and assets.

30. The distinction between entities under the FMA Act and entities under the CAC Act is overstated, and confuses operational independence with ownership. The money and property held by CAC Act entities are still public resources in the sense that they should be properly managed. The public interest in these resources is further underlined by the fact that the Auditor-General audits these entities on behalf of the Parliament.

31. The two-Act model has offered a governance choice between a single chief executive (FMA Act) or a board of directors (CAC Act). This choice between two basic governance models does not fit neatly, however, with the administrative and legal diversity that now exists among Commonwealth entities.

32. To illustrate the complexity that has become commonplace under current arrangements, 13 bodies corporate are classified as, or are contained within, FMA Act agencies, although they have legal powers (including financial powers which are not exercised) distinct from the Commonwealth.

33. Other issues with the current legislative structure include:

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The FMA Act does not have a logical flow and has a largely transactional focus.

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Some provisions are complicated to implement and have led to processes with significant regulatory costs. These costs may have become disproportional to the materiality of the issues they seek to address. This is likely to have become the case in relation to drawing rights and FMA Regulation 9.

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The CAC Act fails to recognise that many CAC Act bodies:

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receive all or most of their funding from the Parliament through the appropriations process, as do all FMA Act agencies; and

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are classified in the General Government Sector (GGS), which is the same statistical classification for all FMA Act agencies.

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While the independence of CAC Act bodies is often mentioned as a reason for establishing a body under that Act, some FMA Act agencies are very independent from government. For example, the Australian Federal Police, the Australian Security and Intelligence Organisation and the Australian National Audit Office (ANAO) are all FMA Act agencies with significant statutory independence.

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The way employment arrangements interact with governance arrangements is not clear enough, particularly in relation to the duties of employees.

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There is a strong focus on financial accountability, but this is not matched by a corresponding focus on the achievement of objectives or the quality of performance monitoring and evaluation.

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There is a strong focus on entities in their own right, but less of a whole-of-government perspective. For example, the duty of a director to act in the best interests of their Commonwealth authority (paragraph 23(1)(a) of the CAC Act) means that they may not always consider how their decision might affect the wider Commonwealth.

Consultation

34. CFAR was announced by the Minister for Finance and Deregulation on 8 December 2010, as part of the government's Better Government agenda. The review consulted widely on potential areas of reform. This included the public release of a discussion paper on 29 March 2012 and a position paper on 23 November 2012.

35. The position paper attracted more than 60 submissions from within government and from interested stakeholders, including other jurisdictions and the private and not-for-profit sectors. Consultations were held across Australia with state and territory governments, businesses, the private and not-for-profit sectors, and academe. The Joint Committee of Public Accounts and Audit (JCPAA), the Senate Standing Committee on Finance and Public Administration and the ANAO were also consulted.

36. The PGPA Bill has been developed with strong involvement and input from Commonwealth entities and companies. The Bill reflects a balanced and considered approach to the issues raised by entities, including explicit reference to required consequential amendments to preserve the statutory independence of certain entities. Commonwealth entities have provided positive feedback that the Bill will reduce their compliance burden. The rules that will be made under the Bill will also be developed in close consultation with Commonwealth entities and companies. A number of them have flagged their interest in being involved in working groups to develop draft provisions.

Key elements of the PGPA Bill

Government as a whole

37. The PGPA Bill provides a coherent approach to the governance, performance and accountability of the Commonwealth, at the level of primary law. It also provides the opportunity to align the financial framework with the enabling legislation of many Commonwealth entities. This second goal will be continued through consequential amendments to be made once the Bill has been passed.

38. The enabling legislation of several Commonwealth entities specifies that they or their office holders have functions or roles that are to be exercised with a high degree of independence from the executive government. The Auditor-General Act 1997, the Reserve Bank Act 1959 (RB Act), the Australian Broadcasting Corporation Act 1983 (ABC Act) and the Special Broadcasting Service Act 1991 (SBS Act) contain such provisions. The PGPA Bill gives proper recognition to these arrangements.

39. However, some exceptions will need to be made to accommodate special circumstances or particular mandates contained in enabling legislation. For example, the Bill exempts the High Court of Australia and the Future Fund Board of Guardians (though not the Future Fund Management Agency) from its ambit, noting their enabling legislation and particular roles.

40. The categorisation of Commonwealth bodies under the PGPA Bill is based on their legal character as set out in their enabling legislation. This is a departure from the FMA Act and CAC Acts, which define entities based on how they hold their funds.

41. The PGPA Bill creates two primary categories of Commonwealth body: 'Commonwealth entities' and 'Commonwealth companies'. The category of Commonwealth entities has two sub-categories, 'non-corporate Commonwealth entities' (which are not bodies corporate and are therefore part of the Commonwealth) and 'corporate Commonwealth entities' (which are legally separate from the Commonwealth but are not Commonwealth companies). Non-corporate Commonwealth entities are subject to greater financial controls than corporate Commonwealth entities, since they are legally part of the Commonwealth. A Commonwealth company is a Corporations Act company that the Commonwealth controls.

42. Several themes and requirements in the Bill apply to all Commonwealth entities. One is that entities must keep Ministers and the Parliament informed of their activities through regular and ad hoc reporting, such as corporate plans and annual reports. Another is that the Commonwealth Auditor-General is designated as the auditor of all Commonwealth entities, which continues the existing legislative arrangements. A third is that accountable authorities and officials have a uniform set of duties relating to how they perform their roles, especially when they manage and handle public resources.

43. The roles and responsibilities of the Finance Minister in overseeing the financial framework, governance and the use and management of public resources, as outlined in the PGPA Bill, also help to bring together the single scheme. These are currently sprinkled through the FMA Act, the CAC Act, and the Regulations and Finance Minister's Orders made under those two pieces of legislation. The Bill specifies the areas in which, and in some parts the extent to which, the Finance Minister can make rules. This is a significant advance in terms of clarity and transparency, compared to the FMA and CAC Acts.

44. The Bill also outlines the responsibilities of all Ministers when they approve proposed expenditure proposals. The responsibilities of Ministers are currently specified under the FMA Act.

Independence of entities

45. The Bill does not alter the operational independence of entities as set out in their enabling legislation. It is for the Parliament to set out the relationship between an entity and the government; it is not for general resource management legislation to do this. For example, some entities have decision-making powers that have been deliberately quarantined from executive government influence. The Bill will not impinge on these arrangements.

46. To give an example, the ABC is exempt from several provisions in the CAC Act and, with a few exceptions, is not subject to direction by the government (subsection 8(1) of the ABC Act). Various provisions in the SBS Act (sections 11, 12 and 13) maintain the independence and integrity of SBS in relation to the content and scheduling of programs. Other arrangements go to the independence of the boards of the ABC and SBS and appointment of their managing directors. For example, the ABC has its own charter (section 6 of the ABC Act) and its board has a statutory obligation to maintain the independence and integrity of the ABC (subsection 8(1) of the ABC Act). Similar provisions are in paragraph 10(1)(a) of the SBS Act.

47. To ensure independence is not compromised, consequential amendments to relevant enabling legislation of entities will be made. The drafting and consultation of these amendments must be completed by July 2014. Amendments to the ABC Act and the SBS Act, and other relevant Acts, will be put to the Parliament before the commencement of the relevant provisions of the PGPA Bill, to preserve existing arrangements under enabling legislation, such as independence.

Uniform duties

48. Whether resources are provided by the Parliament, generated by commercial operations or cost-recovered activities, or provided through donations and bequests, those resources have been entrusted to the custody of a Commonwealth entity. The governance and funding arrangements of a Commonwealth entity do not change the inherently public nature of the resources entrusted to their care.

49. The PGPA Bill introduces a uniform set of duties relating to Commonwealth entities. Some of the duties apply specifically to accountable authorities because they govern and set the overall strategic direction of their entities. The rest of the duties apply to all officials of a Commonwealth entity, reflecting the obligations of all to act responsibly in carrying out their duties, including in relation to public resources.

50. The duties of officials are based on the fiduciary duties in the Corporations Act. Aligning duties in this way may help to create consistency across the public, private and not-for-profit sectors. It may also help directors who serve in multiple sectors to be clearer about their responsibilities and obligations.

51. A number of the duties imposed on officials also align with requirements under the Code of Conduct set out in the Public Service Act 1999 (PS Act). The duties in the PGPA Bill sit alongside the PS Act duties, so a breach of the general duties in the Bill can be the basis of action under the PS Act, including termination of employment.

Public resources

52. The PGPA Bill clarifies the concept of public resources by introducing a single definition that applies to all money and all property held by Commonwealth entities. This will eliminate any perceived advantage or disadvantage in terms of public accountability arising from the different classification of entities that occurs under the existing framework.

Planning and evaluation

53. The key dimensions of resource management (the cycle of planning, budgeting, implementing, evaluating and being held accountable) are not well reflected in the FMA and CAC Acts. The PGPA Bill, and future elements of the CFAR reforms, will link the key elements of resource management so that there is a clear cycle of planning, measuring, evaluating and reporting of results to the Parliament, Ministers and the public.

54. The PGPA Bill does this by:

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explicitly recognising the high-level stages of the resource management cycle;

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recognising the value of clearly articulating key priorities and objectives;

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requiring every Commonwealth entity and Commonwealth company to develop a corporate plan;

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introducing a framework for measuring and assessing performance, including requiring effective monitoring and evaluation; and

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maintaining the rigorous audit arrangements that are currently in place.

55. Under the current framework, the information that is most readily available from Commonwealth entities and Commonwealth companies is financial in nature. But financial information, by itself, does not show whether publicly funded programs and activities are achieving their objectives and outcomes. Measuring performance in the public sector also requires adequate and relevant non-financial information.

56. The PGPA Bill addresses the current imbalance between financial and non-financial performance information by placing obligations on officials for the quality and reliability of performance information. The benefits of this approach include:

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fostering a strong focus on performance management and reporting; and

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achieving a clear line of sight between the information in appropriation Bills, corporate plans, Portfolio Budget Statements and annual reports. Entities will need to define, structure and explain their purposes and achievements to create a clear read across these documents.

57. To support officials, the Department of Finance and Deregulation will play a stronger role in encouraging a more systematic approach to performance monitoring and evaluation. It is hoped that as performance information improves, so too will the value it can bring to strategic policy deliberations.

Risk management and earned autonomy

58. Risk management is a fundamental feature of modern management. An appetite for prudent risk-taking is crucial for improving productivity and innovation in the public sector.

59. Public sector managers deal with risk every day. However, risk management is not covered in the FMA Act or the CAC Act, and the Commonwealth does not have an overarching risk management framework. In this, the Commonwealth public sector lags behind other sectors.

60. The PGPA Bill improves the Commonwealth's focus on risk. First, it places a duty on accountable authorities to ensure that their entities have appropriate systems of risk oversight and management.

61. Second, the Bill provides the foundations for a system of earned autonomy for Commonwealth entities. The Bill gives the Finance Minister the power to prescribe matters or make different provisions for particular Commonwealth entities or classes of entities. This model will see a targeted and risk-based approach taken to financial framework regulation. An entity's risk profile and performance will determine how much oversight and regulation it is subject to.

62. The model for earned autonomy will draw on the better practice principles for regulators identified by the Productivity Commission, which include:

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streamlined reporting requirements;

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risk-based monitoring and enforcement;

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a graduated response to regulatory and compliance breaches and performance deficiencies; and

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clear and timely communication. ^[1]

63. While the Bill introduces the concept of earned autonomy, to develop a comprehensive model is likely to take quite some time. This system will be put in place through the rules to the Bill. The rules will allow regulatory approaches to be tailored to individual entities based on clear risk metrics. The rules will be developed in close consultation with Commonwealth entities. This means that the rules do not need to be in place by 1 July 2014 for the legislation to commence.

Cooperation and partnering

64. The PGPA Bill seeks to encourage greater cooperation between Commonwealth entities themselves, and between Commonwealth entities and their partners, including states and territories and the private and not-for-profit sectors.

65. Contributors in the CFAR consultations consistently spoke about the unnecessary compliance burdens that government places on outsiders. This is at a time when the public policy problems faced by governments often require solutions that span different jurisdictions or sectors of the economy. The FMA and CAC Acts were not necessarily set up to deal with such arrangements.

66. The PGPA Bill places an obligation on accountable authorities to encourage officials within their entities to cooperate with partners, and to consider how compliance burdens affect their partners. These positive duties are not designed to force entities to cooperate with others, but they do send a message that cooperation needs to be seriously considered, and that the financial framework will not impede effective partnering.

Accountability

67. The PGPA Bill strengthens and simplifies accountability across Commonwealth entities. It places a greater emphasis on performance monitoring, evaluation and reporting. It also provides greater clarification in relation to annual reporting. The requirements for annual reporting under the current framework can be inconsistent because they come from different pieces of legislation. The Bill gives the JCPAA an enhanced role in approving the proposed annual report requirements for all Commonwealth entities, not just those whose annual reports are provided under the PS Act.

Penalties and sanctions

68. With one exception, the PGPA Bill does not contain specific penalties and sanctions. This is to avoid duplicating provisions that already exist under other legislation or legal arrangements. For example, employment arrangements (including for public servants) usually include a range of sanctions, while criminal conduct is covered by the Criminal Code Act or other criminal laws. This approach stands in contrast to the FMA Act, which contains criminal penalties, and the CAC Act, which contains both civil and criminal penalties.

69. The one exception is a provision allowing for the removal of a member of an accountable authority of a corporate Commonwealth entity for failing to comply with their duties as an official. This provision is intended to be used only if the scope of a corporate entity's enabling legislation is inadequate to address a breach of the duties outlined in the Bill.

70. For the sake of clarity, the PGPA Bill states that the finance law that is put in place under the Bill is an applicable Australian law for the purposes of the PS Act. This means that if an official employed under the PS Act contravenes the finance law, the official may be subject to sanctions under the PS Act, such as termination of employment.

Simplification

71. The PGPA Bill seeks to remove or modify undue and unnecessary regulation or administrative requirements. Under the broader CFAR reforms, compliance requirements will focus on areas of high risk, without prescribing procedures that are better addressed through internal controls. This will mean that some current detailed requirements, especially the prescriptive process-related requirements under the FMA Act, will not be part of the core obligations imposed on entities.

72. The framework will require the periodic review of reporting obligations to ensure they continue to meet their objectives efficiently and effectively. The broader CFAR reforms will look for other ways to streamline financial reporting requirements for Commonwealth entities. One option is to introduce tiered or differential financial reporting arrangements that are tailored to relevant entities. Again, stakeholders, including the Auditor-General and the Parliament, will be consulted to ensure that the new arrangements do not compromise transparency and accountability.

Rules

73. The PGPA Bill sets out the fundamental elements of a coherent financial framework for all Commonwealth entities. It will be underpinned by detailed rules issued by the Finance Minister. This is no different to the current FMA Act and CAC Act, under which Regulations have been made and Finance Minister's Orders issued to clarify the requirements of, or give detail to, the primary legislation. Rules will be issued that modify the framework requirements for a small number of entities (such as intelligence, security and law enforcement agencies).

74. The rules will be disallowable instruments, which means that they must be tabled in both Houses of Parliament. They will be developed in consultation with Commonwealth entities. The JCPAA will also play an important role in developing and approving the rules.

Consequential amendments

75. Importantly, the enabling legislation of all statutory authorities, like the Reserve Bank of Australia (RBA), the ABC and SBS, will be updated through consequential amendments so that their existing exemptions from specific financial framework requirements can continue to apply.