Legal Briefing No. 75

Number 76

5 December 2005

This issue

Preparing for transition

Becoming an FMA agency – employment
considerations

Financial management under the
FMA Act

Implementing the Uhrig review: becoming an FMA agency

Anne Kelly

Canberra
Anne Kelly Special Counsel, Commercial
T 02 6253 7004 F 02 6253 7316
anne.kelly@ags.gov.au

One potential outcome of the Uhrig review is that authorities
under the Commonwealth Authorities and Companies Act
1997 (CAC authorities) may become agencies under
the Financial Management and Accountability Act 1997 (FMA
agencies). 1 The assessment of Australian
Government agencies against the Uhrig templates and principles
is to be completed by March 2006.

The focus of this briefing is on key issues relating to
becoming or creating an FMA agency, and the changes that
flow from being an FMA agency rather than a CAC authority.

When a CAC authority is to become an FMA agency, the process
can seem quite daunting. This briefing looks at critical
issues that will need to be addressed early including:

  • preparing for transition (governance, preparing staff,
    due diligence)
  • transition to Public Service Act employment
  • transition to the FMA Act regime.

Preparing for transition

Cooperation between organisation and portfolio department

Fundamental to achieving a smooth and seamless transfer
is close cooperation between the authority and its portfolio
department. Both have an equal stake in the successful
outcome of the transition process and neither the authority
nor the department can carry out its role without the help
of the other. The CAC authority has all the knowledge of
the organisation and its myriad different arrangements.
The department needs to understand these so that decisions
can be made about how to deal with various issues that
arise out of those arrangements. One way that this cooperation
can be achieved is to set up a small group (the transition
committee), comprising both departmental and authority
personnel, who will drive the process and ensure that all
issues that need to be addressed are addressed.

Governance during the transitional period

Governance arrangements during the transition period need
to be established. The following are some examples of governance
issues that will need to be addressed. There may be others
that will need consideration depending on the particular
authority's circumstances and operations.

Role of the board

During the transition period the board will, of course,
continue to manage the authority and ensure that it carries
out its functions properly in accordance with the enabling
and other applicable legislation which applies to the authority.
However, there will be a number of matters that may need
to be done differently.

The board will now be managing the authority knowing that
it is about to be abolished and replaced with an FMA agency.
In this situation its role will become a caretaker role.
The board will need to fulfil this role in close consultation
with the department, bearing in mind that the authority
will soon cease to exist in its current form.

One of the first things the transition committee needs
to do is to draw up protocols for communication and decision-making
during the transition period. For example, these protocols
could:

  • set out matters where the authority could continue
    to make decisions in the usual way
  • indicate matters likely to require approval of the
    department (or minister), such as:
    • arrangements which involve any significant spending
    • arrangements which will last longer than say six
      months
    • further appointments of permanent staff.

There may also need to be new delegations by the board
to the staff of the authority to take account of the new
arrangements.

Meetings between the board and the minister

It might also be desirable for the minister during this
time to meet with and brief the board more frequently than
he or she otherwise would. This will ensure that at the
highest level there is no misunderstanding. It may also
be desirable for the board to be briefed by the authority
more frequently than may otherwise be the case.

Close liaison with other departments

In order for there to be a smooth transition, the transition
committee needs at an early stage to consider which departments
need to be consulted. For example, the Department of Finance
and Administration is responsible for both the CAC Act,
which sets out the governance and accountability arrangements
for statutory authorities, and the FMA Act, to which the
CAC authority will be moving.

Assistance and advice should be sought from Finance at
an early stage. If the statutory authority has any debt
or tax issues then Treasury should be consulted.

Preparing the staff for the new environment

There are two important aspects to this:

  • setting up processes for ensuring staff are kept up-to-date
    with what is happening
  • training staff on the new governance environment.

Keeping staff informed

Fundamental to a successful transition is ensuring that
employees know what is happening and are kept informed.
It is natural that there will be some uncertainty at this
time, and it is vital to have processes in place to ensure
that staff anxiety is kept to a minimum. Again, there needs
to be a specific plan drawn up for this. This could include,
for example:

  • a weekly newsletter to staff providing updates on
    the process
  • a dedicated web site where information is published
  • meetings where employees can ask questions
  • a way for staff to ask questions anonymously (e.g.
    via a question box, with answers posted on the web site).

Training on new environment

All public sector bodies, whether they are CAC authorities
or agencies under the FMA Act and/or the Public Service
Act 1999, have well defined governance frameworks which
require adherence to the highest standards of accountability
and transparency.

However, employees in CAC authorities work within a different
governance framework from those in FMA agencies, and staff
transferring to an FMA agency will need to understand the
governance framework for the handling and spending of public
money. Further, the employment regime for CAC employees
who are not already under the Public Service Act, but are
employed under other arrangements, is also different.

Under the Public Service Act, the governance framework
for public servants is codified in the APS Values, and
the conduct expected of public servants is set out in the
Code of Conduct, which also provides for sanctions on APS
employees who breach that Code.

There will also be a number of other requirements, such
as the Legal Services Directions, that the new agency will
be subject to.

Training for staff on this new environment would make
the transition for them very much easier, assisting the
new agency to carry on its functions in a seamless way.

Due diligence preparation for transition

The third item which should be on any transition group's
agenda is due diligence. Due diligence is a shorthand way
of saying that there needs to be a detailed examination
of the business of the authority, including its functions,
its assets and liabilities, and its contractual and other
arrangements, with a view to identifying any issues that
may need to be addressed during the transition process.

Why due diligence?

Many CAC authorities that become FMA agencies will do
so pursuant to legislation. Why is it important to identify
issues and arrangements when the legislation can simply
provide for all assets and liabilities to be moved to the
Commonwealth, which will become the successor in law to
the authority? There are several reasons:

  • to ensure that all functions are suitable for transfer
    to the FMA agency
  • to ensure there are no arrangements which are unsuitable
    simply to be transferred by legislation
  • to ensure that there are no arrangements which cannot
    be simply transferred by legislation
  • to identify any peculiarities which will need to be
    dealt with specifically in the legislation.

Experience shows that an agency cannot make decisions
about these matters unless it has a thorough understanding
of all aspects of the business of the authority.

How to set about due diligence

It is often useful to draw up a due diligence check list.
This should include all areas of the authority's
activities which need to be investigated. The authority
will then need to examine in detail all of its arrangements
in relation to each of these areas. This would involve
detailed discussions with the authority employee who is
responsible for each specific aspect, as well as looking
at the statutory or contractual arrangements that relate
to that aspect of the business.

The aim is to ascertain any issues – an important
part of a thorough due diligence process is to have an
issues list on which each issue, or potential issue, is
set out as soon as it is identified. Someone then needs
to be tasked to consider that issue further, in order to
determine whether it can be resolved before transfer, whether
it needs specific provisions in the legislation to resolve
it, or if it cannot be easily resolved, how to manage it.

Examination of functions

The functions of the authority need to be considered carefully,
so a decision can be made as to whether all the functions
are suitable to be performed by the new FMA agency, or
whether there are any that might be more appropriately
moved to a similar CAC authority that is remaining under
the CAC Act (or indeed to another department or agency).

If there is to be any change in functions, or any removal
of some functions to another body, then there will be the
issue of which of the staff and assets/liabilities, contracts
and records should follow those functions. They will then
have to be excluded from any transfer in the legislation
to the new FMA agency. Two recent examples are:

  • The abolition of ATSIC, where some functions and assets
    were transferred to the Commonwealth and some to other
    CAC authorities such as the Indigenous Land Corporation
    or Indigenous Business Australia.
  • The repeal of the National Occupational Health
    and Safety Commission Act 1985 and the transfer
    of the Commission's assets, liabilities and most
    of its functions to the Commonwealth. However, one
    of its functions, that of declaring national standards
    and codes of practice, has been conferred by new legislation
    (the Australian Workplace Safety Standards Act 2005)
    on an advisory body called the Australian Safety and
    Compensation Council, established by the executive
    power of the Commonwealth.

Examples of some areas where there may be issues

The due diligence process may uncover a variety of issues
which will need to be addressed. For example:

  • There may be matters that might not be able to be
    transferred by legislation. For example, contracts governed
    by overseas laws, or that may need to be varied (e.g.
    contracts that may not be consistent with FMA requirements
    in relation to handling public money).
  • There may be contracts which have provisions for the
    contract to terminate at the election of the other party
    if there is a change of ownership. Obvious examples of
    this are contracts for borrowings or long-term property/leasing
    contracts.
  • Does the authority have any subsidiary companies?
    If so, what is the intention in relation to these companies.?
    Will they simply transfer to the Commonwealth? Will their
    assets and functions be transferred back to the authority
    and the company wound up before transition?
  • If an authority is an income tax payer, are there
    any outstanding matters to work through with the ATO?
  • Has the authority entered into any joint venture arrangements?
    Will these remain, and if not, how can they be unravelled?
  • In relation to complex or sensitive contracts, even
    if there is no fetter to their legislative transfer to
    the Commonwealth, it may be advisable to inform the other
    party of the proposed changes to the authority early,
    and make sure that it is comfortable with the arrangements.
  • There may be contracts which will no longer be necessary
    after transfer. It may be possible to unravel them before
    transition. There may be property or equipment leases
    that will no longer be needed after transition. If the
    authority is occupying premises it will no longer require,
    then there is a real issue unless the lease can be terminated,
    or another agency found to occupy the premises.
  • Intellectual property and information technology issues
    may arise.
  • Any contractual arrangements between the authority
    and the Commonwealth may need to be replaced by an MOU,
    or a letter.
    This can create particular issues if contracts with other
    parties (e.g. subcontractors) are dependent on the contract
    between the Commonwealth and the agency.
  • Existing insurance policies may no longer be required
    if the agency is to come under Comcover arrangements.

Anne Kelly is Special Counsel in the Commercial
Group in Canberra and is also the co-leader of AGS's
Governance and Corporations network. She has led AGS
teams in a number of major and complex projects and has
advised departments and statutory authorities extensively
on governance issues.

Notes

1 Mr John Uhrig AC was appointed in November
2002 by the Australian Government to conduct a review of
the corporate governance of Commonwealth statutory authorities
and office holders. The review reported to the government
in June 2003. On 12 August 2004, the government released
its response to the report (see <http://www.finance.gov.au/governancestructures/>.

The government accepted the recommendation that financial
frameworks be based on the governance characteristics of
the authority. Hence Budget-funded agencies, whose money
and property should be held by the Commonwealth, typically
should be subject to the Financial Management and Accountability
Act 1997. Where it is appropriate that the authority
be legally and financially separate from the Commonwealth
and the authority is best governed by a board, it should
be subject to the Commonwealth Authorities and Companies
Act 1997.

Becoming an FMA agency – employment
considerations

Richard Harding

Canberra
Richard Harding Senior General Counsel
T 02 6253 7026 F 02 6253 7304
richard.harding@ags.gov.au

This is a brief overview of some of the key employment
issues that arise when a CAC authority not previously
covered by the Public Service Act becomes an FMA agency,
focusing mainly on the terms and conditions of employment
of the transferring employees.

Will the authority employ under the Public Service Act?

From the point of view of employment matters, the first
issue to consider when looking at a CAC authority becoming
an FMA agency is whether the authority will also, as part
of the transition, become a Public Service Act agency.

Being a CAC authority and being staffed under the Public
Service Act are not mutually exclusive. Some 17 of 105
CAC authorities are staffed under the Public Service Act.
Generally, CAC Act coverage is not accompanied by Public
Service Act coverage, and generally FMA Act coverage is
accompanied by Public Service Act coverage. While this
is the norm, it is not inevitable.

There are likely to be very few employment issues arising
out of the transition to the FMA Act of a CAC authority
that already employs its staff under the Public Service
Act. We do not discuss that situation further in this briefing.

Does the authority currently employ staff on its own
account?

The next issue to consider is whether the CAC authority
that is in transition currently employs its own staff.

For this to be the case, the authority must have its own
legal personality, separate from the Commonwealth. This
will usually be the case in relation to non-FMA authorities,
but there are plenty of exceptions in the CAC Act world.

This briefing looks at the situation of CAC authorities
that have their own legal personality and employ their
staff on their own account.

The authority in transition will usually be a statutory
authority (though not always). If it is, it will usually
have a statutory power to engage employees. If it has that
power, it will almost certainly have a statutory power
to determine terms and conditions of employment of employees.
The relevant provision will also typically include, or
be followed by, a power to engage consultants.

To give an example, let's look at the Health Insurance
Commission, that ceased to exist on 1 October 2005. Subsection
9(1) of the Health Insurance Commission Act 1973 (HIC
Act) established the HIC as a body corporate, as follows.

(1) The Commission –

(a) is a body corporate with perpetual succession;

(b) shall have a common seal;

(c) may acquire, hold and dispose of real and personal
property; and

(d) may sue or be sued in its corporate name.

Note: The Commonwealth Authorities and Companies
Act 1997 applies to the Commission. That Act deals
with matters relating to Commonwealth authorities,
including reporting and accountability and conduct
of officers.

Subsections 28(1) and 28(2) of the HIC Act provided for
standard arrangements in relation to the engagement of
staff of the HIC and the setting of their terms and conditions,
as follows.

(1) Subject to this section, the Commission may engage
such staff as it thinks necessary for the purposes of
this Act.

(2) The terms and conditions of employment (other than
in respect of matters provided for by this Act) of persons
engaged as staff under subsection (1) shall be as determined
by the Commission.

Provisions like this are replicated in the establishing
statutes of many statutory authorities.

We can see from these provisions that the HIC had a separate
legal personality from the Commonwealth – because
it was established as a body corporate – and that
the HIC body corporate had the power to employ its own
staff.

The Commonwealth is the employer of employees under the
Public Service Act

Public Service Act employment is employment by the Commonwealth.
An agency head under the Public Service Act engages employees on
behalf of the Commonwealth (s 22). Every person who
is employed under the Public Service Act is an employee
of the Commonwealth. (This is why it is not strictly correct
to say 'I am employed by the Department of Finance
and Administration.' Strictly, if you are from Finance,
you are employed by the Commonwealth, in the
Department of Finance and Administration.)

Why is the question of whether the CAC authority employs
its own staff a critical one? Why does it matter who is
the employer of APS employees?

The short answer to this question is because of the transmission
of business provisions in the Workplace Relations Act
1996, and the effect those provisions will typically
have when a CAC authority begins to employ under the Public
Service Act. Those provisions are likely to come into play
when there is a change of employer.

The transmission of business provisions can apply where
there is a change of employer

Where a transition to Public Service Act employment involves
a change of employer, the transmission of business provisions
in the Workplace Relations Act will usually apply. And
those provisions can operate to bring across the employees' current
conditions, as set out in awards, certified agreements
and AWAs.

There is some complex case law on when the transmission
of business provisions under the WR Act apply. We do not
consider that case law here. While the application of the
transmission of business provisions should not be assumed,
it will generally be the case that those provisions will
operate when a CAC authority employing staff on its own
account becomes an agency employing staff under the Public
Service Act.

What is the effect of the transmission of business provisions?

To answer this question, we need to backtrack a little,
to consider the range of instruments that will typically
operate in a CAC authority to regulate the terms and conditions
of employment of its staff.

Instruments that determine terms and conditions

Most CAC authorities that employ outside the Public Service
Act will have the terms and conditions of their staff determined
under a rich amalgam of different instruments.

The constituting legislation itself

Some terms and conditions may be determined directly in
the authority's constituting legislation, although
this will be fairly rare.

Determinations made under the constituting legislation

Some terms and conditions of employment may be set by
CEO or Board determinations made under a power in the constituting
legislation to determine terms and conditions of employees,
like subsection 28(2) of the Health Insurance Commission
Act, quoted above.

Certified agreements

Most of the terms and conditions of employment for most
of the employees will be determined under a certified agreement
(CA), if one is in place. In many cases a certified agreement
will be in place, but not all CAC authorities have a certified
agreement.

AWAs

Terms and conditions for some (typically senior) staff
may be set under Australian workplace agreements (AWAs).
Some CAC authorities may have all of their staff working
on AWAs; some may have no staff on AWAs.

Awards

Conditions of employment may be underpinned by an award;
but the award will typically have no operation in the CAC
authority (apart from acting as the benchmark for the application
of the no disadvantage test when CAs and AWAs are being
made). This is because any awards will usually have been
explicitly or generally excluded by the terms of the authority's
certified agreement (and because AWAs entirely exclude
awards).

Common law contracts of employment

Subject to any of the instruments referred to above, there
may be common law contracts of employment operating between
the authority and its employees.

Having set out this background, we need to consider what
will happen to the conditions of employment of the current
staff if they are moved to employment under the Public
Service Act.

Operation of transmission of business provisions

When the transmission of business provisions apply, they
generally operate to make the industrial instruments under
the Workplace Relations Act apply to the new employer,
at least in respect of the employees who are transferred,
and arguably, more broadly than that.

There is a provision in the Workplace Relations Act which
makes an award that applies to an employer transmit, so
that it binds the successor of the employer (see section
149). There is a provision which makes a certified agreement
transmit, so that it applies to the successor of the employer
(see section 170MB). And there is a provision which makes
an AWA transmit so that it binds the successor of the employer
(see section 170VS). In the cases under discussion the
Commonwealth will generally be the successor in employment
to the CAC authority, for the purposes of the Workplace
Relations Act.

The provisions in the Workplace Relations Act that make
awards and certified agreements transmit allow for their
operation to be varied by the Australian Industrial Relations
Commission.

A complex picture can develop on transmission

The simplest case will be where an authority is merely
changing status and is not going to become part of an existing
agency, and is not combining with another (existing) agency
(or several such agencies) to form a new agency.

In this simple case, there will typically be a certified
agreement and perhaps AWAs operating in the authority,
and an award that is in the background, but not operating.
Because the authority is simply changing status, there
will be no industrial instruments to worry about at the
receiving end of the transfer, apart from the Australian
Public Service Award 1998 (the APS Award).

A somewhat more complicated case will be where the authority
is to become part of the portfolio department. Here the
issue will usually be the relationship between the certified
agreements of the authority and the department.

The most complex cases can be very complex indeed, involving
multiple overlapping certified agreements and awards, and
sometimes state awards and state transmission of business
arrangements.

But even in the simple situation, significant issues may
arise.

One problem that can arise is that while the award that
applied to the authority when it was under the CAC Act
will usually have been excluded by the authority's
certified agreement, that certified agreement may not operate
to exclude the operation of the APS Award. The potential
situation, then, is that the transmitted certified agreement
and the APS Award will operate in tandem, with the agreement
prevailing over the award to the extent of any inconsistency.
This will not be a problem if the certified agreement is
expressed to be comprehensive; but it will depend on the
wording of the certified agreement.

Beyond the transmission of business issues, there may
be issues about the classification structure the new agency
is to have. The classification structure of the authority
when it made its own employment arrangements may not match
the classification structure of the APS. The structure
will have to be changed to fit the Public Service Act model,
even though it is a model with significant flexibility.
In this situation some translation work will have to be
done.

Another possibility is that the engagement and tenure
arrangements in the authority may not match those under
the Public Service Act. For example, an authority may not
employ employees on an ongoing basis, but may engage all
of its employees on term contracts, say for a maximum of
five years. This does not fit the model of tenure under
the Public Service Act and it is not possible to change
that model. It is not possible to engage employees (other
than Senior Executive Service employees) for a five-year
term under the Public Service Act. A decision will usually
have to be taken as to whether these staff are to be given
ongoing employment.

WorkChoices

The government is proposing to change the transmission
of business arrangements under the Workplace Relations
Act. Under the WorkChoices proposals, awards, certified
agreements and AWAs would not transmit where no employees
take up employment with the new employer. And where transmission
does occur, the transmitted instruments will only operate
for a maximum of twelve months.

In practice these changes are not likely to have a great
deal of impact on CAC authorities moving to the Public
Service Act.

How are the employees to be moved to the new Public Service
Act agency?

Particularly where there is a change of employer, the
question will arise, how are the employees to be moved
to the new agency? When the new employment is Public Service
Act employment, there are at least two possible answers
to this question.

The first is that the staff will be moved by the Public
Service Commissioner, who among other things has the power
to terminate the employment of an employee in a Commonwealth
authority, and to engage that employee in the APS. So,
generally speaking, the move can be effected administratively
by the Public Service Commissioner, under section 72 of
the Public Service Act. This action does not depend on
any consent of the affected employees.

The second option for moving people is by legislation.
Generally when an authority is being moved into FMA Act
coverage, there will be a need for amendment to the authority's
enabling legislation (if it has enabling legislation) and
provisions can be included in the amending Act that move
the staff to the new agency. However, this path is generally
not necessary because of the considerable flexibility of
the Public Service Commissioner's power in the Public
Service Act to move staff.

Where the Public Service Commissioner moves the employees

Where the Public Service Commissioner moves the authority's
employees into the public service under section 72 of the
Public Service Act, there is a facility in the Public Service
Regulations which enables the agency head of the new Public
Service Act agency to effectively preserve remuneration
and conditions of employment of the transferred employees.
A determination made under regulation 8.2 of the Public
Service Regulations preserving conditions of employment
ceases to apply to an employee as soon as they become covered
by a new award, certified agreement or AWA.

Other issues

Here is a short list of some of the other employment issues
that will need to be looked at if an authority is moving
into Public Service Act coverage.

Policy parameters for agreement making

The government's policy parameters for agreement
making in the Australian Public Service are substantially
similar to the parameters that apply to Commonwealth authorities.
There are, however, some minor differences – mostly
relating to mobility across the APS – and authorities
need to be aware of these.

Different Commonwealth legislation may apply

A number of pieces of Commonwealth legislation apply directly
to employees employed under the Public Service Act. So
the statutory framework that applies in an authority may
change once it is within Public Service Act coverage.

This is not likely to lead to major change, because most
CAC authorities are likely to be covered by most Commonwealth
employment legislation. But to give one example, the Maternity
Leave (Commonwealth Employees) Act 1973 will automatically
apply once the authority is under the Public Service Act,
where at present that Act does not apply to a number of
Commonwealth authorities.

Coverage by the APS Values and the APS Code of Conduct

Authorities need to be aware that the conduct rules for
employees will change to a greater or lesser extent once
employees are employed under the Public Service Act. Section
10 of the Public Service Act sets out the APS Values, and
section 13 sets out the Code of Conduct. It may be necessary
to provide staff with training in the new arrangements.

Powers of delegation

New delegations will need to be made for the exercise
of powers under the Public Service Act. The Public Service
Act includes very flexible powers of delegation. Authorities
will need to be conscious that the employment powers in
their current personnel management regime may not be perfectly
mirrored in the Public Service Act.

Conclusion

The issue of the terms and conditions of employment can
be a complex one where a CAC authority moves to the FMA
Act and with that move, to employment under the Public
Service Act. It is prudent to tackle the employment issues
as early as possible.

Richard Harding is a Senior General Counsel
who specialises in public service employment law and
workplace relations law. He has a background in people
management policy in the Australian Public Service and
has recently completed work as legal advisor to a major
public service reform project in Samoa sponsored by AusAID.

Financial management under the FMA Act: handling public money, appropriations and procurement

Kathryn Graham

Canberra
Kathryn Graham Senior General Counsel
T 02 6253 7167
F 02 6253 7304
kathryn.graham@ags.gov.au

Simon Konecny

Sydney
Simon Konecny Senior Executive Lawyer
T 02 9581 7585
F 02 9581 7445
simon.konecny@ags.gov.au

When a body becomes a prescribed agency under the Financial
Management and Accountability Act 1997 (the FMA
Act), it becomes subject to a comprehensive regulatory
regime in relation to financial management. Section
44 of the FMA Act imposes on the Chief Executive of
each agency responsibility for the efficient, effective
and ethical management of the Commonwealth resources
under the Chief Executive's control. The FMA
Act, the Financial Management and Accountability Regulations
and the Finance Minister's Orders then impose
a range of obligations and restrictions on the way
public money and public property is to be managed and
used, and how that management and use is to be reported.
This briefing sets out some of the important obligations
which arise for FMA Agencies. 1

The context: the Consolidated Revenue Fund and public
money

What is public money?

All money which is held by the Commonwealth (including
money which is held on behalf of another person), and all
money which is held by another person on behalf of the
Commonwealth is 'public money'. 2 This
includes:

  • all money which is in the bank accounts of an FMA
    Act entity 3
  • all petty cash held by an FMA Act entity
  • all money which is held by a third party on behalf
    of an FMA Act entity
  • as well as the money which is held by Finance in the 'Official
    Public Account' (OPA).

What is the Consolidated Revenue Fund?

There is no longer a 'fund' into which money
is paid, which is called the Consolidated Revenue Fund
(CRF). Rather, under the 'self-executing' theory
of the CRF, money becomes part of the CRF when it is received
by the Commonwealth, and remains part of the CRF until
it is paid by the Commonwealth (or by someone else on behalf
of the Commonwealth) to another person.

For most purposes, money which is 'public money' is
part of the CRF, and vice versa. Importantly, money which
is held by or on behalf of an FMA agency is part of the
CRF.

Appropriations

One of the most important principles of the Westminster
system of government is that money cannot be spent by the
Executive Government unless Parliament has passed a law
appropriating the money. This principle is enshrined in
sections 81 and 83 of the Constitution. In particular,
money cannot be spent from the CRF without an appropriation.

As noted above, money held by FMA agencies forms part
of the CRF. Under the devolved system of financial management,
agencies are responsible for managing and reporting on
their expenditure under appropriations. In particular,
they are responsible for ensuring that every time public
money is spent, an appropriation is available to cover
the expenditure, and that the expenditure is recorded,
to ensure that there is no risk of overspending the appropriation.

Every expenditure made under an appropriation must be
recorded by the agency. This process is called 'debiting' the
appropriation. This recording must be done on a cash, not
an accruals, basis.

Drawing rights

One way in which the FMA Act ensures that there is no
risk of expenditure taking place without an appropriation
is by requiring that every time public money is spent,
the relevant appropriation is debited by a person holding
a 'drawing right'. Moreover, the person who
actually makes the payment of public money is also required
to hold a 'drawing right'. 4 The
Finance Minister has delegated the power to issue drawing
rights to the Chief Executive of each agency. 5

Complex issues arise when one agency makes payments from
an appropriation which is controlled by another agency,
and legal advice should be sought if an agency is involved
in this kind of transaction. The Department of Finance
and Administration should also be consulted.

Can an agency 'keep' money that it earns?

One issue that arises because of the requirement that
money in the CRF cannot be spent without an appropriation,
is that when an agency 'earns' money (from
the sale of small assets, or from cost recovery activities),
it cannot be spent by the agency without a further appropriation.

The common way of dealing with this problem is for the
minister responsible for the agency to enter into a 'net
appropriation agreement' or 'section 31 agreement' 6 with
the delegate of the Finance Minister. The effect of such
an agreement is that amounts received by the agency are
added to the annual departmental appropriation to the agency,
meaning that the amounts can then be spent without a further
appropriation.

It is crucial that any agency which relies heavily on
income from its activities to meet its own expenses enters
into a section 31 agreement as soon as possible. Otherwise
there is a real risk that the agency will spend money without
an appropriation, which can amount to a breach of section
83 of the Constitution.

Custody of public money

Under the FMA Act, public money can only be deposited
by an official into an official bank account. Official
bank accounts can only be opened in accordance with strict
requirements imposed by the Finance Minister. In particular,
official bank accounts are ordinarily required to comply
with what is known as the 'core protocols' for
agency banking. Under these protocols:

  • all agency bank accounts (other than those which hold
    trust money) are swept into the Official Public Account
    overnight – that is, their balance is reduced to
    zero and then restored the following morning
  • agencies do not earn interest on their bank balances
  • all agencies must maintain at least a departmental
    payments account and a departmental receipts account.

Not all major banks are able to comply with the core protocols.
It is therefore necessary to ensure that the agency is
banking with a compliant bank prior to becoming an FMA
agency, and that the agency's bank accounts comply
with FMA Act requirements.

Public money being received or handled by outsiders

Difficult issues arise where money which is payable to
or by the Commonwealth, is actually handled by persons
outside the Commonwealth. This is becoming increasingly
common, as agencies outsource functions such as payroll,
collection of fees, the running of conferences etc.

Where an outsider is simply involved in the receipt and
custody of public money, then this can be handled by an
authorisation under section 12 of the FMA Act.
However, where outsiders are involved in spending or managing
public money, the effect of the FMA Regulations is that
the outsiders themselves become 'officials' under
the FMA Act. The outsiders may not pay public money into
their own bank accounts, and are subject to all the rules
about the handling of public money which apply to officials
inside agencies. Moreover, special arrangements may need
to be made in relation to record keeping, and the management
of appropriations.

It is essential to seek advice in relation to these kinds
of arrangements, as special contractual arrangements may
be required.

Procurement

The FMA Act regulates the procurement activities of bodies
that are subject to its requirements. The most significant
aspects of procurement it regulates are:

  • entering into contracts
  • the procurement process
  • contract provisions.

Entering into contracts

Under FMA regulation 13, a person must not enter into
a contract unless the proposal to spend money for the contract
has been approved under regulation 9 and if necessary regulation
10. Regulation 9 requires FMA agencies to ensure that expenditure
is in accordance with the policies of the Commonwealth,
is an effective and efficient use of public money and is
consistent with the terms under which the money is held.

Regulation 10 requires the approval of the Minister for
Finance (or his delegate) if there are not sufficient 'appropriations' to
cover the expenditure under the contract.

The procurement process

FMA regulation 8 requires that regard be had to the Commonwealth
Procurement Guidelines (CPGs) in any procurement.
Some aspects of the CPGs are also considered to be Commonwealth
policies that have to be complied with under regulation
9. The CPGs are both 'best practice guidelines' (detailing
general policies that must underpin any procurement process
of an FMA agency such as value for money, encouraging
competition, efficient use of resources, and transparency
and accountability) and a set of rules (the Mandatory
Procurement Procedures – MPPs) that must be followed
for 'covered' procurements.

The MPPs largely evolved out of the Australia – United
States Free Trade Agreement. While some CAC authorities
are subject to the CPGs and in particular the MPPs, their
application for FMA agencies is different and more detailed.

The most important of the MPPs are:

  • the monetary threshold that triggers the application
    of the MPPs in most cases ($80,000) – which is
    much lower for FMA agencies compared to non-FMA agencies
    that are covered by the CPGs
  • in almost every case an agency must approach the market
    at some stage in 'covered' procurement process – that
    is, an agency cannot rely on an understanding of what
    the market can provide
  • the agency must clearly identify the information it
    requires of tenderers (minimum form and content requirements)
  • the agency must clearly identify the legal, commercial,
    technical and financial capacities tenderers must have
    to participate in the procurement (conditions for participation)
  • specifications should be performance based – essential
    aspects must be identified to tenderers (essential requirements)
  • the agency must exclude tenders that do not comply
    with the minimum form and content requirements (except
    where there is an unintentional error of form) or the
    conditions for participation
  • the agency must give tenderers sufficient time to
    lodge their tenders and must exclude tenders that are
    late (except where due to agency mishandling)
  • unless it is not in the public interest, an agency
    must accept the best value for money tender that meets
    the form and content requirements, conditions for participation,
    and essential requirements.

Contract provisions

FMA regulation 9 requires FMA agencies to have regard
to relevant Commonwealth policies. These change from time
to time, but are currently described in the Department
of Finance and Administration's Financial Management
Guidance Number 10, Guidance on Complying with Legislation
and Government Policy in Procurement. These policies
cover a range of considerations (e.g. construction, environment,
security and privacy). The CPGs themselves also contain
some Commonwealth policies for the purposes of Regulation
9. These can impact both on the conduct of a procurement
process and on the terms of any resulting contract.

FMA regulation 10 regulates contingent liabilities (that
might arise, for example, through long term contracts,
or where warranties, indemnities and limitations on liability
are provided for in contracts). It requires that approvals
be obtained in certain circumstances either from the Minister
for Finance or from a delegate. For agencies not previously
regulated under the FMA regime, the requirement to take
account of the need for Regulation 10 approvals may require
a different approach to tendering, negotiations and contract
approvals.

The Department of Finance and Administration has issued
a range of publications in relation to procurement which
are available from its website (www.finance.gov.au).
AGS also has a range of publications in relation to Commonwealth
procurement – for some recent examples see Commercial
Notes 10, 11, 16 and 17.

Notional transactions

It is important to note that transactions between agencies,
although they do not involve money leaving the CRF, are
treated by the FMA Act and annual appropriations Acts as
if they were real transactions. This means, for example,
that it is necessary to debit an appropriation when a payment
is made to another agency, and that approval of the expenditure
must be given.

Kathryn Graham has particular expertise
in Commonwealth financial management and provides advice
on constitutional issues; assists clients in policy development,
the development of drafting instructions and review of
draft legislation; and advises on the interpretation
and application of Commonwealth legislation.

Simon Konecny has extensive knowledge and experience
in property and contracting matters including acquisitions
and disposals, leasing and advice on leasing obligations,
fitouts, building and construction matters, tenders and
advice in relation to tender processes and strategies,
outsourcing and consultancy arrangements, indemnities
and licence arrangements.

Notes

1 There are a number of other obligations,
and this paper should not be regarded as a comprehensive
discussion of FMA Act obligations.

2 FMA Act section 5.

3 Subject to special legislative provisions
which might allow an FMA agency to hold money which is
not public money.

4 See section 26 of the FMA Act, which makes
it an offence to make a payment of public money, or to
debit an appropriation, without a valid drawing right.

5 The power to issue drawing rights is contained
in section 27 of the FMA Act. Most Chief Executives have
delegated the power to issue drawing rights in their own
agencies.

6 So-called because it is made under the terms
of section 31 of the FMA Act. A special account established
under section 20 of the FMA Act can also be used to set
apart money received from a particular activity for a particular
use. Section 20 of the FMA Act contains a standing appropriation.

AGS contacts

AGS has a team of lawyers specialising in advising agencies
on implementing the government's decision on the
Uhrig recommendations. For further information on the articles
in this issue or on other Uhrig issues, please contact
our practice leaders in this area, John Scala and Robert
Orr, or any of the lawyers listed below:

John Scala

John Scala Chief Counsel, Commercial
T 03 9242 1321
F 03 9242 1481
john.scala@ags.gov.au

Robert Orr

Robert Orr QC Deputy General Counsel
T 02 6253 7585
F 02 6253 7445
robert.orr@ags.gov.au

Governance, due diligence, legislation

Anne Kelly

02 6253 7004

Peter Lahy

02 6253 7085

Cathy Reid

03 9242 1203

Kenneth Eagle

03 9242 1290

Ros Kenway

02 6253 7078

Robert Powrie

02 6121 4701

Employment considerations

Richard Harding

02 6253 7026

Leah Edwards

02 6253 7090

FMA considerations

Guy Aitken

02 6253 7090

Kathryn Graham

02 6253 7167

FMA procurement

Harry Dunstall

02 6253 7037

Peter Kidd

02 6253 7210

Simon Konecny

02 9581 7585

Paul Lang

03 9242 1322

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

The material in this briefing was first prepared
for the AGS forum 'Implementing the Uhrig Review:
implications of becoming an FMA agency' held
in Canberra on 25 October 2005. It is anticipated that
a series of follow-up seminars will be held in May–June
2006. Enquiries: Leslie Peters 02 6253 7195

For enquiries regarding supply of issues, change of address
details etc.
T 02 6253 7052 F 02 6253 7313 E ags@ags.gov.au

The material in this briefing is provided to AGS
clients for general information only and should not
be relied upon for the purpose of a particular matter.
Please contact AGS before any action or decision is
taken on the basis of any of the material in this briefing.