COMMERCIAL CONFIDENTIALITY AND THE PUBLIC INTEREST

The views set out in this paper were first presented in July 1997 in a Council submission to the Victorian Public Accounts and Estimates Committee Inquiry into Commercial Confidentiality and the Public Interest. That Inquiry was prompted by concern expressed by the Victorian Auditor-General that he was encountering claims that information he wanted to include in reports to Parliament was commercially confidential and sensitive.


TABLE OF CONTENTS


(1) The Legal and Other Frameworks Applying to the Concept of
Commercial Confidentiality in the Public and Private Sectors in
Australia and Overseas


Informing the Public
Information to Account for Stewardship
Information to Obtain Approval
Information for Public Sector Accountability
Commercial Information in Public-Private Sector Arrangements
Commercial Information - How Secret Is It?
Conclusion


(2) Establish the Major Constructs Underpinning the Notion of Government
Accountability and Public Interest and Outline Existing Mechanisms and
Systems Aiming to Ensure These

Powers of Public Sector Auditors
Confidentiality Clauses
Accountability Mechanisms
Conclusion


(3) Information Required for Public Interest and Accountability Reasons

Conclusion


(1) The Legal and Other Frameworks Applying to the Concept of Commercial Confidentiality in the Public and Private Sectors in Australia and Overseas

There are those who might argue that all commercial information concerning the private sector should be considered confidential. However, law and practice distinguishes between commercial information that may remain protected and information that should be released.

The distinction reflects several factors:

the economic cost to the owner of commercial information if it is released, versus community costs if it is not;
the requirements of management to provide sufficient information to account for the exercise of their stewardship responsibilities;
the requirements of management to obtain the consent of shareholders where proposed action is outside of the powers delegated to management;
the voluntary or involuntary nature of the economic relationships to which the commercial information relates;
the capacity to keep information secret.


Informing the Public

The first factor requires a balance to be made between private and public rights.

In considering that balance, it is useful to note that the sensitivity of commercial information is not indefinitely uniform. Commercial information is particularly valuable when it relates to the future (to plans not yet implemented or tenders not yet awarded). This is because the benefits attaching to future plans or tenders have not been secured and the benefits are at risk of being usurped by others.

After the potential benefits have been secured by contracts, deeds or agreements, the sensitivity or value of commercial information used to secure those agreements is significantly reduced.

This distinction between ex-ante and ex-post commercial information is evident in a wide range of laws and practices concerning the release of commercial information.

It is evident, for example, in requirements on companies to disclose commercial information (including requirements obliging companies to issue official statements) so that the market can be properly informed of developments that are material to the company (so called continuous disclosure requirements). These disclosure requirements are justified on the basis that there should be an informed market, notwithstanding the remaining sensitivity of commercial information that must be disclosed.


The ex-post/ex-ante distinction is also relevant in some overseas jurisdictions legislation on freedom of information. In California, for example, private sector generated documents relating to proposed arrangements (for a private sector tollway, for example) are not available under FOI legislation until agreements are executed. When the Government and the private sector have finalised an agreement - that is when the private sectors property rights in the commercial information are deemed to be secured - the entire agreement is able to be released publicly.


Information to Account for Stewardship

Those who argue that all commercial information always has a value to the owner do so because the public disclosure of details of an entitys business has a cost to the shareholders of the business. However, the community has determined that such a cost is warranted in view of the importance of adequate accountability to shareholders (and the higher cost to shareholders if there is inadequate accountability).

Again there is a suite of laws and standards that set out the communitys views of minimum disclosure requirements. And because of past abuse (real and perceived) by management in being accountable to shareholders, there has been a growth in the volume, frequency and quality of information that management is obliged to provide to its shareholders, notwithstanding any arguments about the commercial sensitivity of that information.

Included in that regime is the requirement under the Corporations Law for companies to provide audited financial statements and to provide their external auditors with access to all documents and information relevant to audit. Indeed, the Corporations Law creates an offence for the obstruction of external auditors in the conduct of the audit.


Information to Obtain Approval

While shareholders are content in most instances to receive information from management ex-post, there are circumstances when management does not have the delegated powers to authorise proposed arrangements. In these circumstances management must consult with and obtain the consent of shareholders before the event, and must accordingly disclose sufficient information to obtain that consent, again notwithstanding its commercial sensitivity.

The requirement that persons seek consent where their delegated powers are inadequate to authorise an intended transaction is also evident in a suite of laws and practices.

In the private sector, those requirements to obtain consent relate, for instance, to substantial changes to a companys structure occasioned by a merger or take-over.



Information for Public Sector Accountability

The fourth distinction concerns commercial information which relates to voluntary economic transactions and those which relate to involuntary transactions.

Transactions in the private sector, whether ownership of shares or the purchase of goods and services, are a matter of choice for the buyer and the seller. That voluntary relationship means that the party can quit the relationship (sell the shares) for any number of reasons, eg if the return or benefit is less than expected.

Transactions in the public sector can generally be seen as involuntary transactions. This is most evident in the taxation of residents. It is, however, also present in most areas of public sector expenditure. Taxpayers are not necessarily voluntary participants in the Governments expenditures on defence or education.

Even where the public sector entity participates in a competitive market - such as the Commonwealths provision of long distance telecommunications - there remains the involuntary ownership of Telstra by Commonwealth residents. That involuntary ownership means that the Government, for as long as it controls Telstra, should be obliged to account to Parliament for Telstras management of public resources.

Because the community has delegated to Parliament extensive legislative powers that can affect individuals (and because Parliament has delegated significant powers to the Government) there is an expectation that the accountability for Government activities will be more acute than for the voluntary transactions between individuals that occur in the private sector.

Indeed the whole basis of law relating to activities in the public sector differs from that applying to the private sector. Whereas, generally, the private sector may do what has not been proscribed, the public sector generally may do only that which has been prescribed or allowed.


Commercial Information in Public-Private Sector Arrangements

This accountability relationship between the individual and the State must perforce affect accountability for commercial dealings between the State and the private sector.

The private sector must expect that, when it deals with the State, the disclosure requirements cannot merely be those that pertain to commercial transactions between two private sector entities. If the accountability arrangements are the same, insufficient weight will have been given to the need for the State to be accountable to the citizen.



Commercial Information - How Secret Is It?

Lastly, as a practical matter, commercial information cannot, in practice, be efficiently protected beyond a certain limited time, even if it always deserved protection (which it does not).

A reasonable example of such practical problems is the development of a complex privately-owned urban toll road. There can be several parties to such a proposed transaction (including Government line agencies, Government regulators, financiers, owners, operators, developers, special purpose companies). And each party can have several advisers (lawyers, scientists, accountants, engineers, merchant banks) who work in substantial firms. By the time an agreement for the toll road has been executed, detailed knowledge about the agreement may be held by a very large number of people. In these circumstances, as a practical matter, any residual commercial sensitivity in the information is likely to be small. Any arguments advanced to restrict the disclosure of information in such circumstances because it is commercial in confidence should be challenged.


Conclusion

Some private and public sector bodies are instinctively apprehensive and protective about the disclosure of any commercial information. But such views often overstate the implied risks to an entity that might be occasioned by the release of commercial data. After-the-event commercial information has significantly less value than commercial information concerning events that have yet to occur. But even where commercial information might have commercial value to others, there are often overriding obligations that require it to be released. This is so for commercial information held in the private sector and, a fortiori it applies to the public sector.


(2) Establish the Major Constructs Underpinning the Notion of Government Accountability and Public Interest, and Outline Existing Mechanisms and Systems Aiming to Ensure These

Quite plainly, the duty of Parliament to oversight the Government raises the prospect that Government activity will be disclosed as being inefficient, uneconomical, ineffective or improper. But that prospect should not be the rationale for a Government refusing Parliament access to information without which it cannot undertake its duty to hold the Government to account.

Modern Parliaments also use the endeavours of other agencies to help it acquit its functions. One of these is the Auditor-General. In most jurisdictions, Auditors-General have the obligation to undertake an annual audit of every public sector entity. They also have the duty to advise Parliament of issues uncovered by the audit that are important for Parliaments oversighting role. Because of that oversighting role, the public sector audit is of a different character to private sector audits.

Comments provided in (1) above outlined the different bases to accountability in the private and public sectors.


Disclosure requirements do have in common the need for management/Governments to account for their use of delegated powers to shareholders/Parliament.

In the private sector, this is acquitted by the presentation of an annual report to shareholders which report includes audited financial statements and by the holding of statutorily required meetings.

In the public sector, rather different accountability processes are required. These processes need to reflect:

the complexity of Government activity which cannot adequately be captured by the bottom line or financial position and operating result. This leads to increased emphasis on the reporting of performance indicators and on value for money audits in the public sector;

the different legal bases that distinguish public sector from private sector activities. This places more importance on compliance issues in the public sector than exists in the private sector;

the involuntary nature of the relationship between the Government and the citizen. This requires more emphasis to be given to accountability and probity issues in the public sector.

Thus, all performance audit functions and the responsibility to address probity and compliance issues, stem from the public sector auditors responsibility to advise Parliament on matters that Parliament ought to know. This is to help Parliament acquit its constitutional responsibilities to legislate and to oversight Government.

Recent experiences in Australia would indicate that Government agencies are tending to use the pretext of commercial confidentiality as a shield against the disclosure of information which is commercially embarrassing to the Government or which raises issues of probity.


Powers of Public Sector Auditors

Because these public audit roles are additional to the duty to audit financial statements of the Government and its reporting entities, it would be surprising if the legislated powers of Auditors-General were less than the legislated powers of private sector auditors.

For most purposes, the powers available to the public sector auditor are somewhat stronger than are available to the private sector auditor. But it is relevant to this inquiry to note that auditors whether in the private or public sector should have powers to access all information - including commercially sensitive information - held by the body subject to an audit that is relevant to the audit. By definition, any restriction on powers of external auditors to access documents relevant to audit would seriously impact on the effectiveness of the audit process.


There are no identified grounds for concern, at least in Australia and New Zealand, that Auditors-General would be refused access to audit related information because it is commercially sensitive. But there should be no doubt that any such development would have significant, adverse implications for effective accountability.

Very large numbers of Government agencies have as their dominant purpose the conduct of commercial business (in the water, ports, electricity, finance, communications, transport and forestry sectors for example). The bulk of financial information held by these agencies could be construed by them to be commercially sensitive. Allowing these agencies the opportunity to avoid basic accountability requirements that routinely apply in the competitive private sector would do a fundamental damage to the effectiveness of Parliamentary democracy.


Confidentiality Clauses

Rather more current is the concern that some Governments are routinely agreeing to the insertion of confidentiality clauses in agreements. Such secrecy provisions are relevant to and could be seen as being adverse to Parliaments right to know - a right which is basic to Parliaments legislative and oversighting roles.

This concern was identified by The Commission on Accountability (The WA Burt Report) which stated in 1989:

The Commission is concerned by the practice of secrecy or confidentiality provisions being included in contracts entered into by State-owned entities The secrecy arrangement denies public scrutiny and it may even deny ministerial scrutiny (p24).

The Burt Report recommended:

as a general rule, only to be departed from with the approval of Parliament, no government agency be permitted to conduct operations in a manner or to enter into any agreement which contains a provision which would prohibit the agency or the responsible Minister from providing to Parliament information as to its operations or the contents of that agreement in such manner and to the extent that the Minister thinks fit (p25).


Notwithstanding this concern, it is still a routine practice for Governments in a number of jurisdictions to insert, or to agree to the insertion of, confidentiality clauses in employment contracts, deeds of settlement, infrastructure arrangements and so on. Anecdotal information indicates that this is particularly prevalent in areas of the public sector where former private sector employees and private sector practices have a substantial presence, and in areas where the public and private sector are joint participants. This might suggest that private sector practices have been adopted in many public sectors notwithstanding the different foundations that exist in the public sector, the different basis in law that exists in the public sector, and the resulting different accountability requirements in the public sector.

In other jurisdictions - admittedly they are overseas - legislation requires the Government to release on request the whole of agreements executed by Governments.

In New South Wales as a matter of policy (not law) the Government releases an audited summary of arrangements between the Government and the private sector that deal with major infrastructure projects. (But even in this jurisdiction Governments of all persuasions have - so far unsuccessfully - proposed commercial confidentiality as a reason not to table information requested by Parliament.) In South Australia the same audited summary arrangements are being developed to cope with increased private sector participation in Government functions.

Where confidentiality clauses do exist, they do not override legislative provisions that require information to be included, for instance, in tabled financial statements or annual reports. And they do not themselves limit the capacity of the Auditor-General to report to Parliament, where that capacity is protected by legislation. And for all jurisdictions, Parliaments have the right as well as the obligation to examine commercial documents where that examination is necessary to acquit properly its functions.

But the common use of confidentiality clauses in some jurisdictions suggests that there can be an uneven appreciation in those Governments of the oversighting role of Parliament. At the worst, their prevalence can be interpreted as suggesting that there should be a reduction in the Parliamentary accountability regime to which the Government is subject.


Accountability Mechanisms

As inferred above, an adequate accountability regime would need to include legislative provisions requiring the Government and its agencies to report to its Parliament in a timely, regular way. Governmental reports would canvass (generally as a minimum only) those issues which private sector boards of management have to include in their reports. They are likely to include a range of other issues specified by Parliament as being relevant to Parliaments oversighting role. These issues often relate to probity, compliance and performance issues.

Parliaments also specify other reportable issues, relevant to their individual needs. These might include reporting on asset sales, on use of consultants, on EEO issues, on environmental imposts.

It is also a feature for Parliaments to require the Auditor-General to test the assertions of management and to provide Parliament with an Auditor-Generals opinion on the fairness and accuracy (on the basis of standards) of information provided by management to the Parliament.

In many jurisdictions this audit function relates to public sector managements financial statements. In some, it extends to the adequacy of managements system of internal controls. In others, it includes an Auditor-Generals report on performance indicators included in managements accountability report.

Many Auditors-General also have the legislated capacity to undertake performance audits on issues that have been identified in consultation with a Parliamentary Committee or on the basis of their assessed importance.


Some have the more limited role to report on the capacity of management to manage efficiently.

It is also typical that Auditors-General have the duty to advise Parliament on those matters that have been identified in the audit process about which Parliament should know. This particular duty - more than any other - distinguishes the public sector audit from its private sector equivalent.

There is no equivalent duty on private sector auditors to report publicly (except in some limited matters set out in the Corporations Law). But the duty attaching to the Auditor-General also requires the public sector auditor to remain alert during the audit process for those probity and compliance issues that ought to be brought to Parliaments attention.

It is in the exercise of this duty - and to some extent in the performance audit arena - that Auditors-General often are confronted with claims of commercial confidentiality.

The key accountability mechanism is, of course, the Parliamentary mechanisms of inquiry and, if necessary, censure. These mechanisms include, question time, answers to questions on notice, debates and matters of public importance and the activities of the Parliamentary committees established by Parliament to help its purpose.

If these Parliamentary mechanisms are to be effective there can be no general rule proscribing against Parliamentary access to commercial documents to which the Government is a party. Indeed, in many circumstances, Committees of Parliament which have been granted the right to call for papers and persons also have the duty to examine these commercial documents in order to meet Parliaments requirements. As a practical matter, unless these Committees do carefully consider commercial documents relevant to the terms of their inquiry, they are capable of being misled, of misleading Parliament and of causing Parliament to fail its oversighting and legislative role.


Conclusion

Parliamentary democracy and responsible Government provide the foundation for Australias politic. Inherent in these is the necessity for Parliament to scrutinise the activities of Government and for the Government to facilitate that scrutiny through the provision of information.

Those in the private sector who wish to gain commercial advantage from dealings with the Government cannot seek to escape the level of scrutiny that prevails in the public sector. Such scrutiny is required because of the non-commercial nature of much Government activity, the non-voluntary relationship between individuals and their Government, and the different rule of law which applies in the public sector compared to the private sector.

In many overseas jurisdictions the power of law providing open access to information means that arguments to deny access to commercial documents are not raised. it would be a fundamental breach of accountability if those arguments were successfully raised in Australia to deny the Parliament or the public sector auditor access to commercial documents.

(3) Information Required for Public Interest and Accountability Reasons

Following discussion in (1) above, there are two broad reasons which would require the Government to expose private sector commercial information to scrutiny.

One is to allow the Parliament to acquit its legislative function. That is, if the Government does not have, because Parliament has not given it, sufficient power to enter an arrangement with the private sector, it is obliged to make its case to Parliament for that arrangement to be allowed.

What information is relevant to Parliament depends on the circumstances of the individual case. In some cases the Government might have a firm contractual arrangement dependent only on Parliaments approval. In those circumstances, all information (except arguably that information dealing with the future competitive position of the private sector participant) could be made available for scrutiny, depending on its relevance to Parliaments needs. (In other cases the Government might seek from Parliament approval to execute arrangements not yet concluded on the basis that it will be accountable for the result.)

Where the Parliament has delegated its powers to the Government to enter arrangements with budgetary implications, Parliament must retain the right to scrutinise the arrangements after the event. In these circumstances, it can examine that large number of issues necessary to determine whether the Governments actions and arrangements offered value for many or allowed a fair and reasonable return.

Commercial information required for the Parliament to acquit its functions should be sufficient to assess:

that the processes allowed best value to be achieved and were not partial;

if the processes were constrained by Government policy, that the reasons for and costs of the constraints are reasonable;

that the disposition of risks and benefits are fairly matched as between the public and private sectors;

that remedies available to the Government for default by the private sector are reasonable;

any ex ante or ex post information that the profits of the private sector participant would be or are reasonable;

any restrictions or conditions imposed by either party affecting the Governments reasonable return or value;

that any non-commercial features, obligations and undertakings have fair and reasonably been reflected in value for money considerations.


The Public Accounts Committee of the Parliament of New South Wales commented on the information concerning major infrastructure contracts which it believed should be included in audited contract summaries. The elements of the summaries should, in its view, include:

the full identity of the successful proponents, including details of cross ownership of relevant companies;

the duration of the contract, including details of future transfers of assets of significant value to government at no or nominal cost and details of the right to receive the asset and the date of the future transfer;

the identification of any assets transferred to the contractor by the public sector;

all maintenance provisions in the contract;

the price payable by the public;

the basis for changes in the price payable by the public;

provisions for renegotiation;

the results of cost-benefit analyses;

the risk sharing in the construction and operational phases quantified in NPV terms (where possible) and specifying the major assumptions involved;

significant guarantees or undertakings, including loans, entered into or agreed to be entered into, with an estimate of either the range, or the maximum amount, of any contingent liability;

any other information required by statute to be disclosed to the Australian Securities Commission and made available to the public;

to the extent not covered above, the remaining key elements of the contractual arrangements.

In the Committees view the contract summaries would not disclose:

the private sectors cost structure or profit margins;

matters having an intellectual property characteristic;

other matters where disclosure would substantially disadvantage the competitive position of the contracting firm.


The degree of detail suggested above might seem to some to be excessive. That judgement, however, depends on the standards used to form it. The degree of information sought should be assessed in light of the constructs concerning public sector accountability discussed earlier.

It is suggested that the degree of detail provided in private sector annual reports would not be a sound model to guide disclosure rules in the public sector. Nor would the requirements imposed on the private sector for continuous disclosure or for prospectuses be a suitable model, notwithstanding their onerous nature. Similarly, the more onerous disclosure requirements facing the private sector when it operates overseas (eg USA) should not be seen as a ready model. Their accountability requirements cannot be equated to those in the public sector. And there is no ready equivalents in the private sector of the reports issued by Parliamentary Committees, Royal Commissions, and Auditors-General.

Where there is genuine concern about the public release of commercially sensitive information, a number of avenues are open to Parliaments and their Committees:

commercially sensitive information may be excised from documentation outlining proposed arrangements (as noted above, concluded arrangements rarely, if at all, raise commercially sensitive issues);
Parliamentary Committees can elect to meet in camera to protect sensitive information from wide distribution;
Parliament can delegate the task of examining sensitive information for report back to it or its Committee in a way that protects genuinely sensitive information. For example, most Auditors-General operate under legislation that requires audit information not to be released except as provided by law.


Conclusion

The accountability requirements in the public sector cannot be equated to those in the private sector.

There is a requirement in the public sector that the Government demonstrate that its use of public resources has been effective, economical, efficient and that it complies with all law and meets community standards of probity and propriety.

When considering concerns expressed by the private sector about commercial confidentiality, it should be borne in mind that the private sector party must itself disclose such information to the auditor and, in defined cases, to the public in Australia and overseas.