Attached is a copy of the Guidelines for the Export of the Skills and Expertise of NSW Public Sector Agencies, together with a policy statement on the export of public sector skills generally.

The purpose of the Guidelines is to help agencies identify the commercial and internal management risks associated with overseas projects, and to prescribe accountability measures designed to ensure that, for any given project, the risks will be contained within general parameters which are acceptable to the Government.

It would be appreciated if you would circulate the Guidelines to all agencies within your administration.

If agencies have any queries in relation to the application of the Guidelines, contacts at the relevant agencies are:

1. Office of Economic Development: Mr Ian Roberts, Executive Director Investment Group. Telephone (direct line) 228 5902; facsimile 228 415
2. Treasury: Mr George Maltabarow, Deputy Director Commercial Sector Division. Telephone (direct line) 228 4021; facsimile 228 5278; and
3. The Cabinet Office, Legal Branch: Mr David Harris, Legal Officer. Telephone (direct line) 228 5544; facsimile 228 5542.

John Fahey
Premier and Minister for Economic Development

Issued: Legal Branch, The Cabinet Office
Contact: David Harris (ext 5544)
Date: 13 September, 1993

GUIDELINES FOR THE EXPORT OF THE SKILLS AND EXPERTISE OF NSW PUBLIC SECTOR AGENCIES

PREMIER'S POLICY STATEMENT

The NSW Government recognises the benefits which exporting public sector skills and expertise can bring to the State, particularly by assisting the private sector in overseas projects.

These benefits include:

1. NSW and Australian companies need access to public sector operational and training expertise in order to be able to bid for large-scale, integrated projects overseas;

2. the involvement of a public sector "partner" can considerably strengthen the competitiveness of NSW/Australian companies bidding for government contracts in those markets (and can, indeed, be a prerequisite for success);

3. successful bids for international project work can lead to valuable downstream procurement opportunities for NSW/Australian manufacturing and service firms, which in turn can create significant "spin off" benefits in terms of increased production, exports and employment;

The Government recognises that it must assist Australian corporations to position themselves favourably in overseas markets.

The Government also acknowledges that overseas work is one means of improving the Government's capacity to deliver efficient, cost effective and quality services to the people of NSW.

The benefits for the NSW public sector of exporting skills and expertise include:

1. commercial returns for the NSW public sector: export activities have the potential to provide agencies and the NSW Government with a commercial return on their existing investments in highly trained and experienced personnel, in infrastructure and capital facilities and in research and development;

2. organisational improvement:

(a) export activities can provide a means for agencies to measure their performance against national and international counterparts. Agencies can use this information in setting corporate goals and targets, and thereby establish a basis to achieve "best practice";

(b) it is particularly desirable for agencies which have long held a monopolistic or semi-monopolistic position within NSW to be able to measure their performance through competition and to seek innovative ideas for change and improvement from outside their organisations;

3. staff development: at the level of individual motivation and performance, key public sector professionals can benefit substantially from being exposed to the challenges posed by the new operating environments and commercial disciplines associated with export activities. This is particularly important where skills and commitment might otherwise atrophy due to the uneven nature of domestic capital works programmes; and

4. benefits of internationalisation: while intangible, there are nevertheless very real and political benefits associated with strengthening commercial linkages between the NSW public sector and the countries in our region. These include a greater mutual awareness of the capabilities and opportunities we each have to offer, and an increased acceptance of Australia as part of the Asia/Pacific region.

There are, however, risks and disadvantages associated with the pursuit of overseas opportunities by NSW public sector agencies. They include:

1. commercial risks such as:

(a) risk of project failure;

(b) risk of financial loss due to inadequate costings;

(c) liability for negligent advice or defective product;

(d) the risk that the State will be liable on any express or implied assurance;

(e) the credit risk on payments due;

(f) unfavourable currency fluctuations after tender; and

(g) foreign jurisdiction risks such as restrictions on repatriation of funds or foreign taxes;

2. internal management risks such as:

(a) the internal cross-subsidy of export activities;

(b) the giving of priority to an export project at the expense of an agency's domestic obligations; and

(c) the use of export projects to disguise the inefficient use of resources; and

3. unfair competition with the NSW private sector if services are not priced appropriately.

The Government firmly believes that the primary function of public sector agencies is to provide services to the people of New South Wales. In view of this, and having full regard for the risks and disadvantages identified above, the Government supports and encourages the efforts of NSW public sector agencies to pursue international market opportunities for their skills and expertise provided that these activities:

• do not result in the agency giving priority to an export project at the expense of an agency's domestic obligations;
• have demonstrable links with the agency's core function(s);
• are generally undertaken on the basis of supplying knowledge and expertise rather than undertaking construction activities or providing equity;
• operate on a fully commercial basis, with separate financial reporting; and
• are subject to appropriate levels of review, risk analysis and risk coverage with a view to minimising liability for the Government.

GUIDELINES FOR THE EXPORT OF THE SKILLS AND EXPERTISE OF NSW PUBLIC SECTOR AGENCIES

1. The purpose of these Guidelines.

The policy guidelines are intended to:

• outline the process by which NSW public sector agencies may, by making available their skills and expertise, assist Australian corporations to pursue international market opportunities;
• identify some of the commercial and internal management risks involved in exporting skills and expertise;
• outline how agencies can keep these risks within parameters acceptable to the Government;
• advise agencies that the preferred way for them to export skills or expertise is to export their technical expertise and not to engage in marketing or project management roles outside their expertise. Licensing the use of intellectual property or contracting as a consultant to a project is preferable to taking the lead role in a project; and
• prohibit agencies from engaging in export projects which can be expected to cost the State money or undertake undue risk or result in the use of resources for export projects which should be used for domestic purposes.

2. Which skills and expertise is it appropriate for NSW public sector agencies to export?

• Prospective projects for the export of skills and expertise must be approved in accordance with these Guidelines.
• An agency and the Minister responsible for that agency must be satisfied that a prospective export project will not result in the agency giving priority to the export project at the expense of its domestic obligations.

Where a prospective export project requires the approval of the Treasurer and/or Cabinet under these Guidelines, the Treasurer and/or Cabinet will need to be similarly satisfied that the agency will not be giving priority to the export project at the expense of its domestic obligations.

• Selling services and expertise embodied in off-the-shelf products (for example, existing computer software or technology) or other products which require minimal additional resources probably present the lowest risk of unacceptable priority being given to activities because selling those products will not require substantial resources.
• Other than in exceptional circumstances, an agency should only export its skills or expertise in areas within its core function(s). The risk that an agency which attempts to export skills and expertise in non-core functions will allocate disproportionate resources to those functions is too great.

An example of an exception may be where a department has already invested substantial resources in a non-core function which is proposed for export, such as writing computer software, and the sale or licensing of the fruit of that investment will not of itself require disproportionate resources.

• If an agency has sufficient resources to enable it to proceed with a prospective export project, it should consider whether those resources could be used to enhance its capacity to perform its core function(s). The agency must address this issue in its application for approval of the prospective project.

3. Which NSW public sector agencies can export their skills and expertise?

• In a policy document entitled Classification and Control of State Organisations published in June 1989, the NSW Government identified six basic types of Government organisations, ranging from heavily subsidised monopolistic bodies such as the Department of Conservation and Land Management, and central agencies such as Treasury (Category A), to self-sufficient competitive bodies such as the Public Trustee (Category F).
• These Guidelines apply to agencies which fall within Categories A to E of the above classification. While Category F agencies are free to export skills and expertise in the course of their core businesses, certain of these Guidelines apply to those agencies where expressly stated.
• An agency must be satisfied that it has the power to engage in export activities.

If the agency is a statutory corporation, the agency must be satisfied that its Act empowers it to export the relevant skills or expertise in the way proposed.

If the agency is a Department or an Administrative Office, it will not be regarded as a legal entity separate from the State. While the State's capacity to engage in activities is the same as that of a natural person, the authority of an officer or officers from a Department or Office to engage in activities on behalf of the State must be made clear.

Advice from the Solicitor General indicates that, for projects which are outside the well recognised or ordinary functions of government, the giving of authority to an officer or officers of a Department or Office is likely to require Cabinet or Executive Council approval.

Crown law advice should be obtained in this regard.

4. Can a NSW public sector agency invest equity in a foreign project?

• An agency may structure its involvement in an export project in a number of ways.

However, an agency (including a Category F agency) must not invest equity in a foreign project unless the Treasurer and Premier have approved the prospective investment in foreign assets or assets in Australia for a foreign project.

5. How does a NSW public sector agency assess whether it should pursue a possible export opportunity?

• The first step is for the agency to identify the skills or expertise which the prospective project will require.

The agency should only progress assessment of the project if it considers that its providing relevant skills or expertise will comply with these Guidelines.

• If the project will require skills or expertise in addition to those possessed by the agency, then the agency should consider making its skills or expertise available in a joint bid with a partner(s) which has the additional skills or expertise.

The agency should not try to develop the other skills or expertise itself.

• The agency should develop a preliminary work plan for its role in the prospective project. The agency can then consider whether it has available resources required to carry out the work plan. If it does, the agency should consider whether the resources are surplus to its requirements.
• The next step in an agency assessing an export opportunity will be the preparation of a budget for the project.

In preparing a budget for any project, the relevant agency must identify and incorporate the full direct and indirect costs of providing the relevant skills and expertise, including imputed Commonwealth and State taxes and charges where these do not otherwise apply (see NSW Treasury Publication,Financial Management for Inner-Budget Sector Entities and Department of Finance Guidelines for Costing of Government Activities, Australian Government Publishing Service, Canberra 1991).

• Costings for export projects must also include:

- a profit margin consistent with A Financial Distribution Policy for NSW Government Trading Enterprises, NSWGovernment, August 1992; and

- the full direct and indirect costs of replacing/redeploying staff, of changes to work programmes, and of dedicating marketing/management resources.

• The agency must assess the contractual terms of the prospective project so that it can correctly identify all costs and risks as well as rewards.
• The agency will then have to assess and, where possible, quantify, all commercial risks in the project.

It may be possible to quantify some risks by obtaining estimates of the premiums and fees which would be payable for all appropriate insurance and other risk minimisation (such as hedging any foreign currency exposure). Examples of the types of risks involved in international project work, and some mechanisms available to offset these, include:

Risk Offsetting mechanism

Buyer insolvency Export credit insurance

Delay in payment Export credit insurance

Repudiation of contract Export credit insurance

Exchange transfer delays Export credit insurance

Professional error Professional indemnity insurance

Public liability Public liability insurance

Currency fluctuation Forward exchange cover, currency hedging

Imposition of controls Overseas investment insurance
on repatriation of profits/capital

Expropriation Overseas investment insurance

Property losses resulting from Overseas investment insurance
war/civil disturbance

• To enable it to assess all relevant risks, the agency may have to undertake some due diligence on the party offering the export opportunity (although this would not be required for projects financed by AIDAB or by multilateral funding institutions such as the World Bank, the Asian Development Bank and UN agencies) and on potential partners.
• The agency must then do a financial analysis of its participation in the project. This analysis must be made on the basis of financial criteria only, and must demonstrate a clear expected commercial return from the project.

An example of a way in which that risk could be eliminated is to forward sell the asset before providing the relevant skills or expertise and to receive for the sale cash or a promise to pay cash backed by a bank guarantee from a reputable bank.

• An agency should only consider proceeding with a project where a clear commercial return can be demonstrated or, in exceptional circumstances, where the project has demonstrable and significant non-financial benefits.
• As with any sound business, all careshould be taken in applying good management and professional judgement in selecting and managing projects, staff, and in ensuring that exposure to commercial risks is minimised. A strategic business plan should provide a framework for this approach (see paragraph 11, "How should a NSW public sector agency account for export projects?").

6. How does a public sector agency structure its involvement in export activities?

• This will largely be a function of the type, scale and complexity of the prospective project.
• The structure must ensure that the agency does not offer to provide skills or expertise which the agency does not have. Licensing the use of intellectual property or making a consultant available to a project bidder will usually be preferable to taking the lead role in the project.

Limited liability

• One of the most important considerations in structuring a bid is to ensure that the State of NSW is not liable for breach by an agency of a contract to export skills or expertise, or for the negligent provision of the skills or expertise. Potential liability for the export project must be limited to the entity which proposes to engage in the project.

One way to achieve this may be for an agency to establish a (subsidiary) company to engage in the export project. The company could enter into joint venture or contractual arrangements with other private or public sector entities or companies, and could provide marketing advantages and greater operational flexibility for entering into such arrangements.

Written legal advice should be obtained regarding the risks to the State of an export project.

Company

• An agency which is a Department or statutory authority and which proposes to use a company for an export project must also comply with Premier's Memorandum No. 91-2, Guidelines for the Formation and Operation of Subsidiary Companies by Departments and Statutory Authorities, in addition to these Guidelines.

• If an agency uses a company for a project:

- the agency should ensure that the officers who will be responsible for the project are represented on the company's board of directors;

- a properly constituted management structure based on similar private sector arrangements should be implemented;

- the agency should ensure that the company's directors are adequately insured against the risks of being a director; and

- the Minister responsible for the agency and officers of the agency who are not directors of the company should be aware that if the directors of the company are accustomed to act as directors in accordance with the directions or instructions of the Minister or officer, then the Minister or officer may be deemed to be a director of the company and may be liable as a director. Once a project has been approved, the directors of the company should not habitually act in accordance with the directions or instructions of any other person.

State assurance

• As stated above, the State of NSW must not become liable for breaches by an agency of their contracts to export skills or expertise, or for the negligent provision of those skills or expertise.
• The State will not guarantee performance of agencies' obligations, unless the agency has negotiated with The Treasury for the provision of an express guarantee and has paid an agreed fee. Agencies should be aware, in any case, of the limitations on the State's capacity to give guarantees.
• Agencies should include in their promotional material and the letter of engagement or other contractual document under which they are retained to export skills or expertise an express disclaimer of any State liability or implied guarantee or assurance.
• An agency which is an entity distinct from the State but which has a name or some other feature which implies or may imply a connection with the State should also include an appropriate disclaimer on its letterhead and other promotional material.

Consortium

• Where a public sector agency proposes to provide the relevant skills or expertise in conjunction with one or more other private (or public) sector agencies, the agency must fully negotiate and document exactly what each participant will contribute to the project, how risks and rewards will be shared, how consortium decisions will be made, and other matters relevant to the relationship of the participants with one another.

Commercial risks

• The structure of the bid will also have to address all identified commercial risks and any relevant aspects of the law in the relevant foreign jurisdiction(s).

For example, it might provide for payment in instalments during the course of the project as a way of reducing the risk of non-payment or the credit risk of the party to whom the relevant skills or expertise will be provided. Payment in Australian dollars (or stronger currencies) will reduce the currency risk.

Where possible, it may be desirable to provide that the governing law of the contract under which the skills or expertise will be provided is the law of New South Wales.

• It may be necessary for an agency to obtain advice from private sector advisers experienced in structuring arrangements for the provision or export of skills or expertise. The costs of such advice must be included in the project budget.

7. How should a NSW public sector agency select a private sector joint venture partner?

• It is the responsibility of the agency involved to ensure that its process of selecting a private sector partner or of responding to an invitation to jointly bid with a private sector partner reflects best commercial practice. A competitive selection process will generally be required. In cases where there is a good reason for not engaging in a competitive selection process, the reason(s) should be recorded.
• If approached by a private sector company with a proposal for undertaking a joint export project, an agency should take care to establish, within the bounds of commercial confidentiality, that its own and the State's best interests would be served by a joint arrangement with that particular company.

It may be appropriate for the agency to provide its skills and expertise on a non-exclusive basis, which would enable it to participate in other consortia bidding for the same project.

8. How does a NSW public sector agency prepare an offer or tender?

• The details of how an agency prepares an offer or tender are a matter for the agency's judgement and will be influenced by a number of factors including:

- the scale and complexity of the prospective export project;

- the complexity of the skills or expertise which the agency proposes to provide;

- the credit worthiness and standing of the prospective client;

- any relevant requirements of the foreign jurisdiction(s);

- the desirability of a joint approach with private (or public) sector organisations;

- the balancing of risks and rewards; and

- competitive considerations, such as the desirability of the agency taking the lead role in a joint venture.

• A large part of most offers or tenders will deal with commercial matters such as identifying and addressing the prospective client's needs, describing the agency's capability and experience, setting out the price and terms of payment, specifying how and on what timetable the relevant skills or expertise will be provided, and specifying how contract variations will be made.
• However, some disciplines must be observed in all offers or tenders.
• An agency must not submit for the approval of its responsible Minister, the Treasurer and/or Cabinet (as required by these Guidelines) a proposal to accept the offer or respond to the invitation unless:

- the stipulated terms are acceptable to the agency and comply with these Guidelines; or

- in its acceptance or response the agency specifies amendments which it will require to the stipulated terms.

• If an agency proposes to:

- respond to an offer or invitation to tender; or

- offer to carry out a project,

and the agency has not obtained approval for its participation in the prospective project as required by these Guidelines, the agency's response or offer must clearly state that it is made subject to that approval being obtained.

9. How does a NSW public sector agency protect its intellectual property used in, or the subject of, a NSW export project?

• For the purposes of this paragraph, "intellectual property" includes confidential information, know-how, software programs, formulae, designs or any other material in respect of which an agency may have a valuable interest, copyright and/or any patent or trademark rights.
• If a prospective project will result in an agency giving another party or parties access to, or allowing it or them to use an item of the agency's intellectual property, the agency must ensure that its intellectual property is adequately protected.
• For example, if the agency has developed computer software for the purpose of performing a certain function and the agency enters into a joint venture agreement with a NSW private sector firm in the course of which the software will be used, the agency will have to:

- assess the value of the software and decide whether it is too valuable to risk giving its joint venturer access to the software;

- ensure that its joint venture agreement prohibits the use or copying of the software and gives the agency appropriate rights if that prohibition is contravened; and

- ensure that the contract between the joint venture and the export client or customer contains similar protection.

• It is not possible to prescribe a form of protection which will be adequate for all purposes. An agency may need to obtain specialised legal advice in relation to any prospective project in which its intellectual property would be used.

The agency may also need to include in the documentation of a project a clause or clauses which will have the effect of protecting its intellectual property.

10. How does a NSW public sector agency deal with staff/industrial relations issues with respect to a prospective export project?

• The extent of any staffing and industrial relations issues will depend on the nature of the relevant project.
• In assessing a project, an agency should consider whether any staffing and industrial relations issues do arise. These may include:
• general management issues such as:

- any impact of the prospective project on the efficient use of resources by the agency for its core functions;

- the impact of the prospective project on workloads of personnel performing core functions; and

- the impact of personnel issues on project costing;

• personnel management issues such as:

- any prospective change in the terms of employment of relevant staff (eg: salaries, travel allowances, leave arrangements);

- placement of relevant staff at project completion;

- fairness of any change to terms compared with other employees;

- career planning implications and opportunities;

- the need for travel and personal accident insurance;

- the application of workers' compensation arrangements; and

- emergency/health care arrangements.

• The agency must ensure that all officers are aware of the agency's position and their own obligations as to the ownership and protection of any existing intellectual property, or any developed as a result of the agency's or officer's involvement in an export project.
• If services will be provided in the course of a project by an entity (such as a subsidiary company) other than the agency which employs the staff, it may be necessary to put in place a consultancy or service agreement between:

(a) the entity which will provide the services; and

(b) the agency which employs the relevant staff.

In some cases it may be necessary for the staff to take leave from their usual employer so that they can be employed by the entity which will provide the relevant services.

These staffing and industrial relations issues must be dealt with in all project proposals.

• If it is proposed that the terms of employment, function or designation of any staff will be changed for the purposes of the project, the advice of the Minister for Industrial Relations must be obtained before the relevant proposal is submitted for approval, unless the agency itself or its Minister has the necessary delegation/accreditation to make such changes.
• The comprehensive guidelines on overseas allowances prepared by the Commonwealth Department of Foreign Affairs and Trade may also be a useful reference.

 11. How should a NSW public sector agency account for export projects?

• Accounting for export projects must be transparent.

Each export project for which budgeted direct and indirect costs or revenues received or receivable by the agency exceed $20,000 must be accounted for separately.

Projects under that threshold may be aggregated and accounted for on an aggregate basis.

• An agency which engages in an export project must comply with Monitoring Policy for NSW Government Trading Enterprises, NSWGovernment October 1992. In the unlikely event that an agency engages in export activities otherwise than through a company, the agency must comply with that Policy in respect of its export activities as though they were carried out by a company.

12. Approval of projects which comply with these Guidelines.

The approval process applicable to any particular agency will vary according to:

1. whether that agency is a statutory corporation or a Department; and

2. how that agency is classified under the NSW Government's 1989 classification policy, "Which NSW public sector agencies can export their skills and expertise?"

Irrespective, however, of the applicable approval process, the Office of Economic Development must be informed of each potential export project at the earliest possible stage in an agency's assessment of each such project.

(a) Category A-C agencies:

These agencies will be required to seek the approval of the responsible Minister and the Treasurer for all export projects.

If these agencies propose to embark on a project with budgeted direct and indirect costs or revenue received or receivable in excess of $5 million, Cabinet approval for that project must also be obtained.

(b) Category D-E agencies:

These agencies may only embark on a project with the approval of:

(i) the responsible Minister if the project has budgeted direct and indirect costs or revenue received or receivable up to $1 million;

(ii) the responsible Minister and the Treasurer if the project has budgeted direct and indirect costs or revenue received or receivable in excess of $1 million but not in excess of $5 million; or

(iii) the responsible Minister, the Treasurer and Cabinet if the project has budgeted direct and indirect costs or revenue received or receivable in excess of $5 million.

(c) Category F agencies:

Unless otherwise specified in these Guidelines, these agencies do not require approval by their Minister, the Treasurer or Cabinet. Rather, they should obtain approval in accordance with their own approval procedures.

(d) Preliminary matter for Departments:

It was stated above in paragraph 3, Which NSW public sector agencies can export their skills and expertise?, that if a particular project contemplated by a Department is outside the well recognised or ordinary functions of government, then the authority of the officer or officers engaging in the activity on behalf of the State must be established.

Advice from the Solicitor General indicates that, in order for an officer or officers to obtain the requisite authority to act on behalf of the State, the project must receive either Cabinet or Executive Council approval.

(e) Approval generally:

An application for approval of a prospective project must include a submission which demonstrates that the prospective project complies with each of these Guidelines.

The Minister responsible for an applicant agency must have approved an application to the Treasurer and/or to the Cabinet. When submitting a prospective project for approval by the Treasurer and/or Cabinet, the agency and the relevant Minister must indicate that they have first determined that the project:

(I) complies with these Guidelines; and

(ii) has a financial profile which justifies it proceeding.

 13. Approval of projects which do not comply with these Guidelines.

• There may be exceptional cases where a prospective project does not comply with these Guidelines but has demonstrable and significant non-financial benefits.
• In those cases the responsible Minister will be required to seek the approval of the Treasurer and Cabinet for the prospective project. The responsible Minister will be required to inform the Treasurer and Cabinet of the ways in which the prospective project does not comply with theseGuidelines and demonstrate the significant non-financial benefits of the project which, in the agency's and Minister's opinion, warrant the project's approval.