‘Yawning gaps’: government corporations need new watchdog


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The recent public debate and recognition of the need for tougher regulatory scrutiny of the banks and other key private sector organisations has to date largely overlooked a significant gap in corporate regulation of public sector corporations.

The increasing involvement of Commonwealth-owned corporations in commercial activities opens up scope for corrupt activities by public sector officials at all levels, including members of parliament.

There are currently no politically independent mechanisms to have issues of concern examined and independently determined.

The increasing complexity of commercial transactions means that it is entirely beyond the capacity of federal Parliament and its committees to adequately investigate the actions of public sector corporations.

Current regulatory responsibilities sit with the Department of Finance, which is subject to direct ministerial control. This means that it lacks independence and is inconsistent with the approach of an independent regulator for private sector corporations.

Furthermore, notwithstanding the existence of two oversight bodies for the public sector, the auditor-general and the Commonwealth ombudsman, are both constrained in their abilities to independently initiate investigations and inquiries. The auditor-general may only initiate an inquiry into a specific organisation with the endorsement of the Public Accounts Committee, and the ombudsman is specifically precluded from examining the decisions of ministers.

My experience as a director of the Indigenous Land Corporation (ILC), a key Indigenous public sector corporation, provided confirmation of the flawed regulatory arrangements for public sector corporations.

“The increasing involvement of Commonwealth-owned corporations in commercial activities opens up scope for corrupt activities by public sector officials.”

Upon being appointed to the board in late 2011, it became apparent that the decision of the former board to acquire the Ayers Rock Resort at Yulara was highly problematic. The resort was acquired for about $300 million, involved borrowings of some $215m, and appeared to be based on flawed analysis. The subsequent commercial performance of the resort was substantially below the projections used to justify the transaction, and led to the necessity to write down the value of the resort within three years to $202m, since revised upwards to $248m.

The net effect of this transaction was that the ILC spent around $375m in acquiring and upgrading the Resort, yet five years later it was worth only $248m. The transaction severely and adversely impacted the ILC’s capacity to undertake its statutory functions as a result of the ongoing impost of the interest rate repayments, and the requirement to refinance the debt by May 2016. This most recent refinancing involved an increase in the interest burden and a requirement for the ILC to inject a further $30m in equity.

When the five new members of the Board were appointed in 2011 (along with two of the former directors) we made a number of governance changes aimed at ensuring that the flaws in the decision-making processes undertaken by the previous board could not re-occur.

We sought a government-initiated inquiry and were told to initiate it ourselves. We did so and the review found over twenty major issues of concern [but the report, by consultants McGrathNicol, has now been taken down from where it was previously available on the ILC website].

We sought to make changes to the ILC Audit Committee membership and structure (some members had been on the Audit Committee for over a decade), and were actively resisted by the former board members.

The board advocated publicly for a formal investigation of the transaction directed to confirming the legality of the actions of the former directors and staff. We were stymied by the minister and the government refused to acknowledge or respond to our correspondence outlining in detail our concerns.

At one point, Finance Minister Mathias Cormann agreed in writing that an investigation was warranted, but delegated the task to the Minister for Indigenous Affairs, Senator Nigel Scullion, who point-blank refused. He claimed that the matters had already been investigated and that there was no new information to warrant such an investigation. Senator Cormann acquiesced and the review he had agreed was warranted never eventuated.

Scullion recently decided to step in and replace $65m of the ILC’s private sector debt with a Commonwealth loan to reduce the interest burden facing the ILC. The fact that he felt obliged to take what is unprecedented action to prop up a major public sector corporation confirms the continuing problematic nature of the original transaction, raises new questions about his role and knowledge of the transaction in 2010, and reinforces the need for an independent investigation of the original transaction. The details of the $65m have been kept confidential by the Commonwealth.

“We were stymied by the minister and the government refused to acknowledge or respond to our correspondence outlining in detail our concerns.”

The former ILC chair Dr Dawn Casey wrote to the Senate Select Committee inquiry into the establishment of a National Integrity Commission, strongly supporting such a body which first and foremost has the power to investigate and examine the activities of ministers and their departments, but which also has a broader remit to investigate associated white-collar crime.

This committee prepared an interim report but was prorogued when the recent election was called. It remains unclear whether the committee will be re-constituted. Perhaps the composition of the new Senate and reported high levels of voter support for an independent commission against corruption at the Commonwealth level will provide some momentum for the committee to complete its work.

More fundamentally, while the government has reversed the previous cuts to the Australian Securities and Investments Commission, and announced other changes to strengthen its capacity, it has done nothing to fill the gaping hole in our corporate regulatory regime: namely, the lack of an independent regulator for the very substantial activities of public sector corporations.

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