IN THE MOONLIGHT? THE CONTROL AND ACCOUNTABILITY OF GOVERNMENT CORPORATIONS IN AUSTRALIA.

• Date: 01 August 2019
• Author: Ng, Yee-Fui

I Introduction II Government Corporations: Classification, Characteristics, and Functions III History and Rationale IV Control and Accountability Issues A Internal Controls B Financial Accountability C Directors' Duties D Parliamentary Accountability E Legal Accountability 1 Judicial Review 2 Crown Immunity 3 Other Legal Mechanisms V Conclusion I Introduction

Government businesses have been a fixture in Australia since colonial times. They may be structured either as (1) statutory corporations, or (2) government-owned or -controlled companies established under the Corporations Act 2001 (Cth) ('Corporations Act'). (1) In this article, the term 'statutory corporation' is used to refer to those in the first group, and 'Commonwealth company' to refer to those in the second. The term 'government corporation' encompasses both of these categories. Alongside departments, government corporations play an important role in the structure of the Australian system of public governance. All government corporations 'have a dual nature; they are instruments of national policy but they are autonomous units, with legal independence', handling 'aspects of commercial undertakings'. (2) As such, the regulation of these corporations must balance the tension between an independent corporation with managerial and operational freedom, and 'a "popular representative" (a Minister) exerting control over the independent board to harmonise its actions with public opinion', as the Minister is constitutionally responsible to Parliament. (3)

On the one hand, government corporations have been structured as armslength bodies to remove an area of specialist activity from the partisan interference and short-termism exhibited by periodically elected officials, and to enhance efficiency in government operations. Herbert Morrison, a former Minister of Transport in Britain, stated:

[I]t is necessary that the management [of national undertakings] should be sufficiently free from those undesirable pressures associated with both public and private Parliamentary strategy, political lobbying, and electoral 'blackmail'. Subject to whatever Ministerial or other checks or appeals may be provided in the public interest, the management must be a responsible management and must be able to stand its ground in the interests of the undertaking which is committed to its charge. (4) On the other hand, complete insulation from political accountability effectively places significant power in the hands of a 'small, unrepresentative, and often self-perpetuating group' controlling the government corporation. (5)

Government corporations have not been without controversy in Australia over the years. In the 1950s, the Joint Committee of Public Accounts made findings of mismanagement by the Australian Aluminium Production Commission, a statutory corporation set up to ensure the production of aluminium resources for defence purposes. (6) In the 1980s, the WA Inc Royal Commission investigated large-scale scandals involving the murky relationships between government and business, where the State government improperly utilised statutory authorities and government-owned companies to prop up the failing merchant bank Rothwells with public funds. (7) The Commission found that senior politicians acted to elevate their personal or party interests above the public interest, which culminated in the jailing of two State Premiers, Brian Burke and Ray O'Connor.

The Commission noted that government-owned corporations were used as a device to evade accountability and disclosure to Parliament and the public:

The evidence showed that it was possible to use the limited accountability of a public sector agency, WAGH [West Australian Government Holdings Ltd], to protect from disclosure to the Parliament and the public a commitment of public funds. Furthermore, in that particular case, the exercise of governmental influence was not disclosed. (8) In addition, the Commission found that incompetent people 'with no apparent qualification to exercise the responsibilities entrusted to them' were appointed to statutory authorities and were given control of large sums of public funds, but disregarded their legal and public duties. (9)

At the federal level in 1989, the Senate Committee on Finance and Public Administration was also critical about the rapid growth of the number of subsidiary companies formed by government corporations, as well as the growth of substantial minority government shareholdings in companies, which allowed these bodies to evade accountability to the legislature. (10) The Committee expressed the concern that '[t]he veil of incorporation may be used to resist calls for ministers to be answerable for the conduct of government business', and found that the reporting and auditing arrangements of government companies were inadequate, therefore weakening the ability of Parliament to carry out its scrutiny functions effectively. (11)

The collapse of both the State Banks of Victoria and South Australia in the 1990s are large-scale examples of mismanagement by government-owned financial corporations. The State Bank of Victoria was put in financial peril due to the weight of irresponsible lending made in the 1980s by its wholly owned merchant bank subsidiary Tricontinental. Tricontinental eventually collapsed with catastrophic losses of $2.7 billion, which threatened the existence of the State Bank and led to its forced sale to the Commonwealth Bank. (12) The Royal Commission investigating the matter found that 'Tricontinental's management of credit risk failed at almost every turn', (13) and some of Tricontinental's investment banking transactions gave rise to 'deep suspicions of warehousing, insider trading, and failure to disclose relevant interests in substantial shareholdings'. (14) The Commission also remarked that government ownership of Tricontinental meant that its parent company, the State Bank, was not under the supervision of the Reserve Bank, and there was no informal 'supervision' by market forces of its ability to borrow funds or its share price. (15) Nevertheless, the Commission found that the government properly refrained from interfering with the State Bank's day-to-day commercial operations and absolved the government of responsibility for the collapse. (16)

In a similar vein, the State Bank of South Australia was in such a parlous financial condition that the taxpayers were forced to pay a $3.1 billion bailout before the State Bank was sold to Advance Bank. (17) The Royal Commission investigating the issue found that the then Treasurer deserved 'severe criticism' and should have exercised more control over the State Bank and monitored its dangerous lending but, at the same time, should have intervened less in the State Bank on political issues, such as interest rates at election time. (18) The Commissioner also lambasted the board of the Bank for its incompetence and reckless lending of public money. (19)

These scandals illustrate the problems that arise from the use of the government corporation as an instrument of government policy. There is a risk of reduction of accountability to Parliament, combined with a lack of clarity about the level of monitoring or control that should be exercised by government over the activities of its corporations, which is then in tension with the level of independence from political interference that these arms-length bodies should possess.

Government corporations are thus of interest to public lawyers, as they may provide a way of operating a 'government by moonlight', (20) by performing public functions with low political visibility and, in non-wholly owned companies, with diluted accountability. Yet there is not much literature systematically examining the checks and controls that are applicable to these bodies, and much of what has been written is now dated, (21) as much has changed since the introduction of the Public Governance, Performance and Accountability Act 2013 (Cth) ('PGPA Act').

This article seeks to redress this. It will first consider the classification, characteristics, and functions of government corporations at the federal level in Australia (Part II), and then examine their history and rationale (Part III). Following this, in Part IV, the article will analyse the control and accountability of government corporations, through both internal controls via the structuring of these corporations and the operation of directors' duties, as well as external controls through legal, financial, and parliamentary accountability. In doing so, it will grapple with the consequences of various forms of government ownership of corporations (ie full ownership with a statutory basis, full ownership of private companies, or control of private companies) for the accountability arrangements that apply to these corporations. This article is confined to analysing government companies at the federal level, but it should be noted that the states have their own separate regulatory regimes for government business enterprises. (22)

II Government Corporations: Classification, Characteristics, and Functions

A Commonwealth government corporation can be established in two ways: as a statutory corporation by a specific Act of Parliament, or as a registered company under the Corporations Act ('Commonwealth company'). Both types of corporations are separate legal entities from government.

For statutory corporations, the constituting statute may create a corporation 'comprising a board of directors, to be appointed by the executive, with defined tenure and conditions for removal'. (23) Through the Administrative Arrangements Order, which lists the matters handled by each department and allocates responsibility for legislation to Ministers, responsibility for the statutory corporation is allocated 'to the Minister in charge of the Department of State most closely related to the activities of the corporation'. (24) Thus, for statutory...