FINANCIAL FRAMEWORK LEGISLATION AMENDMENT BILL 2008 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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FINANCIAL FRAMEWORK LEGISLATION AMENDMENT BILL 2008

2008 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES FINANCIAL FRAMEWORK LEGISLATION AMENDMENT BILL 2008 EXPLANATORY MEMORANDUM (Circulated by the authority of the Minister for Finance and Deregulation, the Hon Lindsay Tanner MP)

TABLE OF CONTENTS Outline ...................................................................................................................................1 Financial Impact ...................................................................................................................1 Notes on clauses ....................................................................................................................1 Part 1--Preliminary ............................................................................................................1 Clause 1--Short title .....................................................................................................1 Clause 2--Commencement ...........................................................................................1 Clause 3--Schedules .....................................................................................................1 Notes on Schedule 1 Main amendments ..........................................................................2 Part 1 - Amendments ...........................................................................................................2 Amendments to the Albury-Wodonga Development Act 1973 ......................................2 Amendments to Financial Management and Accountability Act 1997.........................3 Notional payments and receipts by Agencies: section 6 .....................................................3 Offences: section 7 ..............................................................................................................3 Interaction between Finance Minister's Orders and the FMA Regulations ........................3 Penalties generally ...............................................................................................................4 Outsiders making payments: section 12 ..............................................................................4 Special Instructions are a legislative instrument: section 16 ...............................................4 Appropriations and drawing rights: section 27....................................................................4 Advisory Committees and FMA Regulations: sections 33, 34 & 59 ..................................5 Note regarding appropriations supporting act of grace payments: section 33 ....................5 Payments pending probate: section 35 ................................................................................5 Investment of public money: section 39..............................................................................5 Chief Executives' powers to enter contracts etc: subsection 44(1) .....................................6 Compliance with other legislative requirements: subsection 44(2).....................................7 Relevance of Commonwealth policies: subsection 44(3)....................................................7 Keeping responsible Minister and Finance Minister informed: proposed section 44A ......9 Audit committee requirements: section 46..........................................................................9 Additional Financial Statements: section 50 .......................................................................9 Reporting requirements and change of Agency: section 51 ..............................................10 Advisory Committees: section 59......................................................................................10 Status of FMOs as a "legislative instrument": section 63 .................................................10 Guidelines by Ministers: section 64 ..................................................................................10 Amendment to the Public Service Act 1999................................................................10 Amendments to the Reserve Bank Act 1959................................................................11 Part 2 other provisions ...................................................................................................11 Saving provision relating to the Albury-Wodonga Development Corporation...........11 Application, saving and transitional provisions relating to the FMA Act...................11 Regulations relating to transitional issues ...................................................................11 Provisions relating to the National Water Commission Act 2004 ...............................12 Notes on Schedule 2 Consequential amendments to Defence legislation....................12 Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page ii

Table of Acronyms and Defined Terms AWD Act Albury-Wodonga Development Act 1973 AWDC Albury-Wodonga Development Corporation CAC Act Commonwealth Authorities and Companies Act 1997 FFLA Bill Financial Framework Legislation Amendment Bill 2008 FMA Act Financial Management and Accountability Act 1997 FMA Regulations Financial Management and Accountability Regulations 1997 FMOs Finance Minister's Orders Item An item of a Schedule to the FFLA Bill LI Act Legislative Instruments Act 2003 NWC Act National Water Commission Act 2004 Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page iii

1 Financial Framework Legislation Amendment Bill 2008 Outline 1. The Financial Framework Legislation Amendment Bill 2008 (FFLA Bill) proposes amendments to the Financial Management and Accountability Act 1997 (FMA Act) as well as to four other Acts: the Albury-Wodonga Development Act 1973, the Public Service Act 1999, the Reserve Bank Act 1959, and the Defence Home Ownership Assistance Scheme Act 2008. The FFLA Bill also contains a provision that affects, but does not directly amend, the National Water Commission Act 2004 (NWC Act). 2. The purpose of the proposed amendments to the FMA Act is to further simplify and clarify the financial management framework, thus reducing red tape in internal Australian Government administration. The amendments to the other Acts above are either consequential to the FMA Act amendments or otherwise related to the financial framework. 3. This is the fifth FFLA Bill since 2004, as part of an ongoing approach to maintaining the Australian Government's financial framework. Four of those Bills became law, with the first FFLA Bill lapsing upon the prorogation of the Australian Parliament for the 2004 federal election. Financial Impact 4. The FFLA Bill would have no financial impact. The proposed provision relating to the NWC Act, and the Water Smart Australia Special Account, is budget-neutral. Notes on clauses Part 1--Preliminary Clause 1--Short title 5. This clause specifies that when the FFLA Bill is passed it may be cited as the Financial Framework Legislation Amendment Act 2008. Clause 2--Commencement 6. This clause provides for the amendments relating to the Albury-Wodonga Development Corporation to commence on 1 July 2009, with all other substantive amendments to commence on Proclamation. Clause 3--Schedules 7. This clause provides that each Act specified in a Schedule to the FFLA Bill would be amended as set out in the applicable items in the relevant Schedule. There are two schedules to the Bill: · Schedule 1 contains amendments to the FMA Act, the Albury-Wodonga Development Act 1973, the Public Service Act 1999, and the Reserve Bank Act 1959. It also contains a provision relating to the NWC Act. · Schedule 2 contains amendments to the Defence Home Ownership Assistance Scheme Act 2008. Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 1

2 Notes on Schedule 1 Main amendments Part 1 - Amendments Amendments to the Albury-Wodonga Development Act 1973 8. Items 1 to 14 amend sections of the Albury-Wodonga Development Act 1973 (AWD Act), primarily to apply the Commonwealth Authorities and Companies Act 1997 (CAC Act) to the Albury-Wodonga Development Corporation (AWDC). 9. Item 1 amends the definition of `chief executive officer' in subsection 3(1) to identify the chief executive officer by reference to the person appointed under section 10A. This amendment ensures consistency between the definition and the current provision relating to the appointment of the chief executive officer. 10. Item 2 corrects a typographical error in a reference to the Legislative Instruments Act 2003, where section 5A of the AWD Act incorrectly refers to the Legislative Instruments Act 2000. 11. Item 3 inserts a note at the end of subsection 9(1) of the AWD Act to state that the CAC Act applies to the AWDC. 12. Item 4 repeals section 9A of the AWD Act which specifically provides that the AWDC is not a Commonwealth authority for the purposes of the CAC Act. 13. Item 5 repeals the existing paragraph 15(2)(g) and substitutes a new paragraph, which is a consequential amendment required due to the repeal of section 16 of the AWD Act at item 6. The new paragraph instead refers to sections 27F and 27J of the CAC Act. 14. Item 6 repeals section 16 of the AWD Act, which is inconsistent with sections 27F and 27J of the CAC Act. 15. Item 7 adds a missing parenthesis after the reference to the Public Service Act 1999. 16. Item 8 repeals section 27 which provides for moneys of the AWDC to be paid into an account of an approved bank. Since Division 3 of the CAC Act deals with banking arrangements, section 27 of the AWD Act can be repealed to avoid inconsistency. 17. Item 9 omits the characters "(1)" from section 28 of the AWD Act. This is required as a result of the repeal of subsection 28(2), at item 10. 18. Item 10 repeals subsection 28(2), which relates to the investment of moneys. Since subsection 18(3) of the CAC Act deals with investments, subsection 28(2) can be repealed to avoid inconsistency. 19. Item 11 repeals section 30 which outlines the auditing requirements for the AWDC. Since section 8 of the CAC Act provides for the Auditor-General to audit a Commonwealth authority, and section 20 of the CAC Act outlines the requirements for accounting records, section 30 of the AWD Act can be repealed to avoid inconsistency. 20. Item 12 repeals paragraph 31A(1)(b), because paragraph 31A(1)(c) sufficiently covers the ability of the Minister responsible for the AWDC to issue delegations to SES employees. 21. Item 13 amends subsection 31B(1) by omitting the reference to section 28 of the AWD Act. Section 31B relates to the ability of the Finance Minister to make delegations, however, the repeal of subsection 28(2) renders this reference redundant. Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 2

3 22. Item 14 repeals sections 32 and 33, which relate to the preparation of an annual report and an annual financial statement. The CAC Act provides for the preparation of an annual report by a Commonwealth authority (see section 9 and Schedule 1). Therefore sections 32 and 33 of the AWD Act can be repealed. Amendments to Financial Management and Accountability Act 1997 Notional payments and receipts by Agencies: section 6 23. Item 15 substitutes a new section 6 of the FMA Act. The purpose of section 6 is to ensure that payments made within the Commonwealth, by FMA Act agencies, which are analogous to actual payments, are treated as if they were actual payments and therefore require, for example, the use of a drawing right and the debiting of an appropriation. 24. The proposed section 6 clarifies that, even if an FMA Act agency makes a notional payment, whether to another agency or another part of the same agency (such as a different "business unit" within that agency), this is to be treated as if it were a "real" payment. 25. The amended section also clarifies that the FMA Act applies in relation to a notional receipt, which is to be treated as if it were a real receipt. 26. These provisions expand upon the recognition of a "notional transaction" in the annual Appropriation Acts. In particular, clause 5 of the Appropriation Bill (No. 1) 2008-2009 says "For the purposes of this Act, notional transactions between Agencies are to be treated as if they were real transactions". Further, the note to clause 5 states that "One of the effects of this section is that the payment will be debited from an appropriation for the paying Agency, even though no payment is actually made from the Consolidated Revenue Fund". Offences: section 7 27. Item 16 repeals section 7, which is now redundant because Chapter 2 of the Criminal Code Act 1995 now applies to offences under the FMA Act, without that needing to be stated, due to subsection 2.2(2) of the Criminal Code Act 1995. Also, because the standard drafting practice is no longer to refer to "maximum penalties" in Commonwealth legislation, but instead rely on the standard provisions of the Crimes Act 1914 dealing with penalties, references throughout the FMA Act to "maximum penalty" have been replaced with "penalty" (as set out below at the relevant items). Interaction between Finance Minister's Orders and the FMA Regulations 28. Items 17, 26, 45, and 57 amend sections 10 (banking), 13 (official accounts), 40 (securities), and paragraphs 60(2)(a) and (b) (Commonwealth credit cards), respectively. Those provisions contain references to the Finance Minister's Orders (FMOs) that are to be substituted with references to the Financial Management and Accountability Regulations 1997 (FMA Regulations), as made under section 65 of the FMA Act. 29. The main reason for these amendments is to streamline the legislative framework affecting FMA Act agencies. Accordingly, most matters addressed in the FMOs are to be subsumed into the FMA Regulations, while retaining the FMOs to focus on the requirements for agencies' financial statements (in the version of the FMOs typically titled as the "Finance Minister's Orders for Financial Reporting", in relation to the relevant financial year onwards). 30. This will help reduce the scope for confusion that can arise between two different sets of FMOs, which are currently made under the same legislative authority (section 63 of Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 3

4 the FMA Act). Accordingly, officials in FMA Act agencies will only need to have regard to the FMA Regulations and the FMOs on these subsidiary matters, rather than to the FMA Regulations and two sets of FMOs. Penalties generally 31. Items 18, 24, 27, 30, 31, 46, and 56 amend sections 10-11, 12, 13-14, 16, 26, 40- 41 & 43 and 60, respectively, to align the references to penalties with standard drafting practice. Each of the references to "Maximum Penalty" in those sections is substituted with the word "Penalty." Outsiders making payments: section 12 32. Items 19 to 25 amend the provisions in section 12 relating to outsiders. In short, it will allow a person who is neither a Minister nor an official in (or part of) an FMA Act agency to make payments of public money, where the agreement or arrangement engaging them is authorised by Parliament or the Finance Minister. This is a deregulation initiative to better facilitate the process by which outsiders, such as contractors, can collect money on behalf of the Commonwealth and, for example, deduct an authorised level of fees before transmitting the balance to the Commonwealth. 33. An outsider making a payment in accordance with section 12 will not become an official for the purposes of the FMA Act by making such a payment. Rather, an official within an agency will still be required to hold a valid drawing right and debit the relevant appropriation. The amendment includes an offence for an outsider making a payment of public money that is not authorised. 34. In other cases (except where exempted by other legislation), the FMA Regulations have the effect of conferring the status of an "official" on a person who makes a payment of public money, due to the definition of "financial task" in the FMA Regulations. Special Instructions are a legislative instrument: section 16 35. Items 28 and 29 clarify that a Special Instruction issued under section 16 (in relation to what then can be described as "special public money") is a legislative instrument under the Legislative Instruments Act 2003 (LI Act). It is necessary to state this explicitly, because subsection 16(2) states that "in the case of inconsistency, Special Instructions override" the FMA Act, the regulations and the Finance Minister's Orders. Accordingly, it is appropriate to have Parliamentary scrutiny of Special Instructions. 36. Subsection 16(2) also states that "Special Instructions cannot be inconsistent with the terms of any trust that applies to the money concerned". The interaction of the terms of any trust, with the FMA Act, and the possible need to seek a Special Instruction from the Finance Minister, are matters for agencies to consider before agreeing to the terms of a trust. It would also be relevant to consider that a Special Instruction is disallowable, under the LI Act, and is also subject to the sunsetting requirements of the LI Act. Appropriations and drawing rights: section 27 37. Items 32 and 33 clarify that drawing rights under section 27 may be issued in relation to a class of appropriations. This confirms that the Finance Minister, or a delegate, may issue drawing rights in terms that encompass a type of appropriation, thus reducing red tape and the potential for drawing rights to become overly complex. For example, where a drawing right relates to a departmental appropriation, there is a risk that the drawing right instrument would need to be reviewed each time that an Appropriation Act or an Appropriation (Additional Estimates) Act is passed. Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 4

5 Advisory Committees and FMA Regulations: sections 33, 34 & 59 38. Items 35, 38 and 61 relate to the need for details that are subject to potentially regular amendment (in sections 33, 34 and 59) to be set out in the FMA Regulations, rather than in the FMA Act itself. These details relate to an "Advisory Committee", which is required to prepare a report before the Finance Minister waives an amount, or authorises an act of grace payment, over $100,000. The composition of the Advisory Committee is set out in section 59 of the FMA Act. However, both the amount of the threshold and the details of the composition of the committee require updating. For example, the name of the Department of Finance and Deregulation would need to be updated in section 59. 39. Rather than make those amendments to the Act, these issues can be better co-located in a regulation, and thus details such as threshold amounts and the names of agencies can be updated through the regulations in future. 40. A note has been added to explain that regulations (made under section 65 of the FMA Act) can provide for these details, before the Finance Minister makes the relevant decisions. The proposed amendment to section 65 (see Item 61 of the Bill) also specifically (and to avoid doubt) allows for regulations to be made on these matters. 41. Item 34 adds a note to the end of subsection 33(1) referring to subparagraph 65(2)(a)(ia), specifying that regulations can be made regarding the Finance Minister considering a report, before authorising an act of grace payment above a specified amount. 42. Item 37 adds a similar note to the end of subsection 34(1), specifying that regulations can be made regarding the Finance Minister considering a report before authorising the waiver of a debt above a specified amount. Note regarding appropriations supporting act of grace payments: section 33 43. Item 36 removes the words at the end of a note in section 33 because an agency's outcomes are not directly relevant in supporting an act of grace payment where the appropriation to be relied upon by the relevant agency is a departmental appropriation. This interpretation of a departmental item, in the annual Appropriation Acts, is informed by the High Court case of Combet v Commonwealth of Australia (2005) volume 224, Commonwealth Law Reports (CLR), at page 494. Payments pending probate: section 35 44. Item 39 repeals section 35, dealing with the Finance Minister's approval of payments pending probate, on the basis that this issue is more appropriately dealt with in regulations, rather than in the FMA Act itself. As mentioned below in relation to Item 61, (and to avoid doubt), the regulation-making power in section 65 of the FMA Act expressly provides for the making of regulations on this topic. Investment of public money: section 39 45. Items 40 to 44 deal with the investment of public money by the Finance Minister and the Treasurer under section 39. Item 38 clarifies that investments made by the Finance Minister or the Treasurer are made "on behalf of the Commonwealth". This is consistent with the removal of subsections 39(7) and 39(8) which include references to two bodies corporate (and corporations sole) formerly used as a way to distinguish the Commonwealth as an entity from the investments made under section 39. 46. This reform is being proposed as a clearer and simpler alternative to the archaic "saving" of two bodies corporate derived from two now-otherwise-repealed laws: the Audit Act 1901 and the Loan Consolidation and Investment Reserve Act 1955. Similarly, Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 5

6 further information is proposed for the end of a note that appears after subsection 39(6), to explain that re-invested amounts do not become "public money" under the FMA Act because "the proceeds will not be received by or on behalf of the Commonwealth before the proceeds are re-invested". Chief Executives' powers to enter contracts etc: subsection 44(1) 47. Item 47 adds a note after subsection 44(1), to help explain its significance in relation to one of its most common and practical uses entering into contracts on behalf of the Commonwealth. 48. Subsection 44(1) says that "A Chief Executive must manage the affairs of the Agency in a way that promotes proper use of the Commonwealth resources for which the Chief Executive is responsible". The proposed note states that a Chief Executive "has the power to enter into contracts, on behalf of the Commonwealth, in relation to the affairs of the Agency". 49. The reason for this, again as part of improving the Act's readability, is to recognise expressly that section 44 reflects the fact that Chief Executives may exercise the executive power of the Commonwealth generally, to the extent that it relates to the affairs of their Agency. This capacity mirrors that of Ministers in whom, of course, executive power of the Commonwealth vests, as well as the executive power of the Governor-General: see sections 61 and 64 of the Australian Constitution. Accordingly, the executive power of the Commonwealth is used frequently in relation to entering into contracts or other agreements or arrangements, including leases and licences. 50. As stated in, for example, Seddon, N, Government Contracts: Federal, State and Local, 3rd edition, Federation Press, 2004, "The department head (or Chief Executive) has the same authority as the minister, that is, to enter into contracts properly within the subject matter of the department's portfolio" (pages 105-106). 51. This interpretation derives from a range of cases, such as Coogee Esplanade Surf Motel Pty Ltd v Commonwealth (1976) volume 50, Australian Law Reports, page 363 at 383, where Glass JA said "the authority of a particular officer to bind the Crown by a contract made in the ordinary course of government business may be inferred from the nature of his [or her] office (New South Wales v Bardolph (1934) 52 CLR 455 at 502-503) and requires no statutory foundation". 52. The reference in the note to a Chief Executive being able to enter contracts "in relation to the affairs of the Agency" is to be read in broad terms. In particular, the Government will generally expect agencies to work cooperatively in a range of areas, including the implementation of whole-of-Government policies. This might include, therefore, one agency entering into a contract on behalf of the Commonwealth, where the services can be accessed by other agencies or governmental bodies (such as occurs currently, for example by the Department of Finance and Deregulation in relation to the leasing of vehicles for Commonwealth agencies). Decisions on whole-of-Government procurement will typically be made at a Ministerial level. There may also be occasions when agencies decide cooperatively to share arrangements, such as through a request for tender that allows the inclusion of other agencies. 53. Similarly, a Department of State may need to work closely with another agency in the same portfolio. This is particularly the case in relation to formation, dissolution or change processes for portfolio agencies or bodies generally, where Departments may legitimately obtain goods or services on behalf, or in anticipation, of the requirements of a portfolio body. Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 6

7 54. Moreover, some FMA Act agencies will be required, by their nature, to deal with contracts and payments on behalf of other agencies. In these cases, arrangements might also be established to reimburse the Department or agency bearing the initial costs of such contracts. 55. The note also recognises that Chief Executives may delegate the ability to enter contracts on behalf of the Commonwealth to officials in accordance with section 53 of the FMA Act. Delegations, along with authorisations under the general law, are important ways for the Chief Executive's ability to enter contracts (which, as mentioned above, can be "inferred") to be passed on to officials within an agency or to relevant officials of other agencies. It is also a mechanism by which a Chief Executive can help control the contractual capacity of officials who might otherwise be regarded as having implied authority to enter into contracts etc, on behalf of the Commonwealth, absent an authorisation from a Minister, an authorisation or a delegation from a Chief Executive or a statutory office-holder with such capacity, or direct statutory authorisation. 56. Importantly, the ability to provide delegations under section 53 also includes the ability of the Chief Executive to provide directions to delegates about their use of the delegation. Similarly, a Chief Executive may provide instructions to officials in their agency, including delegates, through the Chief Executive's instructions, which can be made under section 52 of the FMA Act. Similarly, those instructions may be a useful place for Chief Executive to co-locate other internal governance requirements, such as delegations and authorisations, depending on the size and needs of the particular agency. Compliance with other legislative requirements: subsection 44(2) 57. Item 48 amends subsection 44(2), primarily to improve its readability. 58. The existing subsection 44(2) uses over 50 words to effectively recognise the fact that Chief Executives, in promoting the proper use of resources, must of course act within the law. However, it is not necessary to describe law as something that could potentially "hinder or prevent the proper use of those resources". Rather, the boundaries of the law set the legitimate context within which the "proper use" of resources is to be promoted. Accordingly, the revised subsection 44(2) was able to be shortened by removing that wording. 59. Similarly, subsection 44(2) has been prepared so that it will be read in the context set out in subsection 44(1), to basically state, as much to avoid doubt, the need for Chief Executives to comply with the law. 60. The second way in which the provision has been simplified is through removing the phrase that, if a law would "hinder or prevent" the proper use of resources, then the Chief Executive "must manage so as to promote proper use of those resources to the greatest extent practicable while complying with those requirements". This has been removed as complying with the law (whether in the Act, the FMA Regulations, a "Special Instruction" under section 16 regarding special public money, or another law) is the context within which policy discretion applies, rather than something that would "hinder or prevent" the proper use of resources. To put this another way, it could hardly be said that the proper use of resources would be a use that did not comply with the law. Relevance of Commonwealth policies: subsection 44(3) 61. Item 49 adds the requirement that the "proper use" of that is to be promoted in relation to Commonwealth resources under subsection 44(1), is defined under subsection 44(3) as being: "proper use means efficient, effective and ethical use that is not inconsistent with the policies of the Commonwealth" (emphasis added). Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 7

8 62. The principal purpose of the amendment is to ensure that subsection 44(1) although conferring basic responsibilities on a Chief Executive in relation to the operations of an agency is not seen as conferring on Chief Executives autonomy from the Government's policies (in particular, Chief Executives of bodies such as Departments, which do not have any legal independence from the Commonwealth Government). To that extent, the amendment serves a function similar to the stipulation in subsection 57(1) of the Public Service Act 1999 that the Secretary of a Department manages the Department "under the Agency Minister". 63. This also recognises a concept that already exists under FMA Regulation 9, which requires people (such as Chief Executives and their delegates) who can approve spending proposals to ensure that the approval will both "make efficient and effective use of public money" and that it will also be "in accordance with the policies of the Commonwealth". 64. This concept is sufficiently important to be reflected in the primary legislation. In particular, it would be difficult to assert that it would be ethical to promote a use of resources in a way that was a clear contravention of Commonwealth policy. The proposed test in section 44 that proper use be "not inconsistent" with Commonwealth policies is not as emphatic as the requirement under FMA Regulation 9 that the approval of a spending proposal be "in accordance with" Commonwealth policies. However, the distinction has been made consciously, on the basis that a specific spending proposal will allow for a more direct consideration of relevant policies in the context of the relevant procurement, grant or other commitment. 65. More generally, it is important to note that Commonwealth policies always exist within a relevant context. For example, some policies may set out levels of discretion about when they are to apply. Also, some policies may be stated in terms of broad guidance only, while other policies may involve very specific guidance on particular issues. Policies can also set out that decision-makers should not apply the policy inflexibly, and should consider the context of the particular situation. Other policies may be expressed as "mandatory", as illustrated by the Mandatory Procurement Procedures within the Commonwealth Procurement Guidelines. 66. Typically there will be a process by which the policy decision-maker could be asked to consider an exception to, or a modified application of, the policy. The relevant decision-maker is typically the person or body that made the initial policy, unless they have authorised another person or body to agree to changes or exceptions. 67. A government policy is conventionally established by Ministers collectively, such as through Cabinet or by the relevant portfolio Ministers obtaining agreement from the Prime Minister. Where such a policy has a direct financial management requirement, the Prime Minister will typically involve the Finance Minister. 68. Officials are also required to comply with their Chief Executive's policies for the operation of their agency, such as stated within each agency's Chief Executive's Instructions. Officials may also be required to act consistently with a policy of the Minister with portfolio responsibility for their agency, which may, for example, be reflected in the Chief Executive's Instructions or in a Ministerial direction where applicable. 69. In relation to procurement, a useful starting resource for finding relevant policies is the list that appears in Financial Management Guidance No. 10: Guidance on Complying with Legislation and Government Policy in Procurement, which is available through the website for the Department of Finance and Deregulation. More recently, the Government has decided to develop and implement a policy framework for coordinated procurement contracts, which agencies will need to comply with as it is rolled out. Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 8

9 70. Four other general policies affecting financial activities of agencies include the Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort, the Australian Government Competitive Neutrality Guidelines for Managers, the Australian Government Foreign Exchange Risk Management Guidelines and the Australian Government Cost Recovery Guidelines. 71. The amendment, of course, does not reduce the position or decision-making of independent statutory office holders, whose position has been set out in legislation, when they make decisions that implement the statutory function provided to them by the Parliament. This is because, in all cases, policy is subservient to the law. Keeping responsible Minister and Finance Minister informed: proposed section 44A 72. Item 50 inserts a new section 44A that mirrors in part the requirements of the former subsection 50(2). 73. The new subsection 44A(1)(a) allows the responsible Minister to request information relating to the operations of the agency. This requirement is similar to sections 16 and 41 of the CAC Act (in relation to Commonwealth authorities and wholly- owned Commonwealth companies respectively). The amendment makes explicit an approach that has generally been considered implicit: in the exercise of responsible government, a Minister responsible for an agency can seek information from the agency generally. 74. The new subsection 44A(1)(b) allows the Finance Minister to request information on the financial affairs of the agency. This requirement largely already exists in subsection 50(2), but is properly co-located with the new section 44A, equivalent to the relevant provisions of the CAC Act. In the comparable provision in the CAC Act there is no restriction for such requests that a Chief Executive "is not required to give information whose disclosure is prohibited by any law". Accordingly, those words have not been carried over to the new section 44A. In particular, the application of such words is not entirely clear, and it could potentially lead to the view that mere undertakings of confidentiality could restrict the proper access to information by Ministers regarding relevant affairs of agencies. Audit committee requirements: section 46 75. Item 51 removes the requirement for the Finance Minister's Orders to address audit committee requirements, and instead lists on the face of the FMA Act itself the functions of an audit committee. The amendment allows for the regulations to prescribe the composition of such committees. This approach is consistent with the approach taken in the Commonwealth Authorities and Companies Act 1997. 76. Further, the amendment will specifically refer to one of the functions of the audit committee being to help the agency to comply with its legislative obligations under the financial framework. An agency's Chief Financial Officer (CFO) is a significant nexus between the agency as well as its internal and external auditors (the latter being the Australian National Audit Office). This amendment aims to more directly help CFOs, and other relevant senior managers, to play a role in this crucial relationship as better governance takes account of audit findings and the legislative framework that underpins financial management and accountability generally. Additional Financial Statements: section 50 77. Items 52 to 53 relate to Chief Executives' requirements to provide financial statements to the Finance Minister. Subsection 50(2) is being repealed, with the contents Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 9

10 to be contained in the new section 44A. Accordingly, the heading will only refer to "Additional Financial Statements", since the words regarding "and information" relate to the part of the provision that has moved to the new section 44A. Reporting requirements and change of Agency: section 51 78. Item 54 repeals the existing section 51 of the FMA Act and substitutes a new section 51. The amendment clarifies the reporting requirements of agencies that cease to exist or whose functions are transferred, and ensures that all foreseeable situations are covered (which was not the case with the original provision). 79. Subsection 51(1) relates to reporting requirements where an agency ceases to exist (for example, where an agency is abolished) and its functions are not transferred to another agency or agencies. The amendment allows the Finance Minister to nominate the Chief Executive who is to report, under section 49 of the FMA Act, on the functions of the agency that no longer exists. 80. Subsection 51(2) relates to those instances where the function of the agency that no longer exists is performed by another agency or agencies. The amendment allows the Finance Minister to nominate which Chief Executive or Chief Executives shall report on the function for the purposes of section 49 of the FMA Act. 81. In both cases, the way in which the nomination will occur is set in general terms, as was the case with the original provision. Advisory Committees: section 59 82. Item 55 repeals section 59 in order to simplify the requirements for reporting large waivers, as set out above in relation to items 35, 38 and 61 (see the heading "Advisory Committees and FMA Regulations: sections 33, 34 & 59", above). Status of FMOs as a "legislative instrument": section 63 83. Items 58 and 59 relate to the Finance Minister's ability to make Orders. Subsection 63(1) is amended to clarify that an Order is made by legislative instrument. 84. This is necessary because subsection 63(3) said "an Order is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901", but that section has now been repealed and the concept of disallowable instruments is dealt with by the concept of a legislative instrument under the LI Act. These Orders will still be disallowable and subject to the sunsetting regime under the LI Act. Guidelines by Ministers: section 64 85. Item 60 inserts a new subsection 64(3) to clarify that a guideline made by a Minister is a legislative instrument, being a term that therefore leads to these guidelines being published, under the LI Act, on the Federal Register of Legislative Instruments. However, these guidelines are exempt from the disallowance and sunsetting rules, due to subsection 44(2), at item 21, and subsection 54(2), at item 19, of the LI Act, respectively. Amendment to the Public Service Act 1999 86. Item 62 amends subsection 73(5) by omitting the reference to "Agency outcomes." This amendment brings the section into line with the decision in the High Court case of Combet v Commonwealth of Australia (2005) 224 CLR 494. In short, it is not necessary to link departmental expenditure to particular agency outcomes. Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 10

11 Amendments to the Reserve Bank Act 1959 87. Items 63 to 66 amend subsection 7A(3) and paragraphs 25L(4)(c) and (d) of the Reserve Bank Act 1959, to update references to provisions in the CAC Act which were amended by the Corporate Law Economic Reform Program Act 1999 (also known as CLERP 3). Part 2 other provisions 88. Items 67 to 76 relate to savings, application and transitional provisions, as explained in more detail below. Saving provision relating to the Albury-Wodonga Development Corporation 89. Item 67 saves the annual reporting provisions applying to the AWDC for the financial year ending 30 June 2009. This is because the CAC Act does not affect it until 1 July 2009 and therefore the AWDC would not report under the CAC Act until after the first full year of the CAC Act affecting the AWDC's operations. Application, saving and transitional provisions relating to the FMA Act 90. Item 68 states that part of the amendment to section 12 of the FMA Act (item 20, relating to the ability of an outsider to make a payment of public money) only applies to agreements or arrangements entered into on or after the commencement of the item. This would, of course, allow existing arrangements to be amended (if authorised) so that existing outsiders could commence making payments where appropriate. 91. Item 69 applies the amendments (in items 32 and 33) affecting drawing rights (under section 27 of the FMA Act) issued on or after the commencement of the item. 92. Item 70 saves the application of section 35 regarding payments pending probate, in relation to payments authorised before the commencement of item 39. 93. Item 71 preserves investments made under section 39, and clarifies that any such investments are held on behalf of the Commonwealth (as in force before the commencement of item 44). 94. Item 72 allows for any audit committees established before the commencement of the amendment to section 46 to remain in place. However, it does require Chief Executives to identify and rectify any areas of non-compliance under the section as amended, upon the commencement of the new section 46. This is not expected to require any rectification, in practice, as the general requirements in the new section 46 are already more than generally covered under the existing FMOs relating to the functions and responsibilities of an audit committee. 95. Item 73 saves the application of subsection 50(2) in relation to Chief Executives responding to a requirement to provide information due to a request made before commencement of the amendment. 96. Item 74 applies the amendment made by item 54 to section 51, in relation to reporting requirements following a change in agency functions, to agencies that cease to exist, or functions that are transferred, after commencement of the item. Regulations relating to transitional issues 97. Item 75 allows for regulations to be made addressing any transitional issues required as a result of amendments contained in Schedule 1 to the Bill. Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 11

12 Provisions relating to the National Water Commission Act 2004 92. Item 76 allows the Special Account, known as the Australian Water Fund Account, contained in the NWC Act, to be debited by a maximum of $320,000,000. This reflects the change in administrative arrangements for the Water Smart Australia program, which from 1 July 2008 is administered by the Department of the Environment, Water, Heritage and the Arts. That Department will be funded for the Water Smart Australia program by a means other than the Australian Water Fund Account (such as general Appropriation Acts). 93. Importantly, this item is designed only to provide for amounts that represent unspent Water Smart Australia program moneys (which are held in the Australian Water Fund Account as at 30 June 2008) to be available. The amendment is not directed to other amounts representing other moneys that may be held in the Australian Water Fund Account regarding other programs that are supported by the Australian Water Fund Account (including the Raising National Water Standards program). 94. The item also clarifies, to avoid doubt, that the Chief Executive Officer of the National Water Commission no longer has responsibility for any financial assistance provided from the Australian Water Fund account for the Water Smart Australia program following the debiting of the amount referred to above. Notes on Schedule 2 Consequential amendments to Defence legislation 95. Item 1 amends section 83(1) of the Defence Home Ownership Assistance Scheme Act 2008, as a consequence of the amendment to section 12 of the FMA Act proposed at item 20 above, regarding outsiders making payments of public money. 96. Item 2 applies the amendment at item 1 of Schedule 2 to agreements or arrangements entered into on or after the commencement of the item. Explanatory Memorandum Financial Framework Legislation Amendment Bill 2008 page 12

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