Commercial activities

Government entities increasingly undertake commercial activities to generate income. Sometimes agencies take on commercial activities in addition to their core functions. Other agencies may commercialise their existing functions, for example, by delivering services on a user-pays basis.

Many agencies engaging in commercial activities do so by establishing a discrete business unit within their existing organisation, which is distinguishable from the rest of the agency because it serves a defined external market. An example is a local council establishing a business unit to compete in the open market for the provision of regulatory services. Sometimes these business units compete with external suppliers to provide a service to the entity in the form of an in-house bid. When an in-house group is successful in the bidding process, it becomes a service provider to its own parent entity, which becomes a client or purchaser.

Government agencies may also form completely separate bodies, such as companies, to conduct commercial activities. An example of this type of activity is a university establishing a company to undertake research under contract or the activities of a state-owned corporation.  In some cases, a public authority will have a legislated discretionary mandate to enter into joint ventures and partnerships (for example, subsection 15(b) of the Destination NSW Act 2011).

Proactive probity for a council’s business unit

A NSW local council established a business unit that provided development assessment and building certification, facility cleaning, civil engineering, parks and building maintenance, asphalt and concrete work, and waste services. These services were available on a commercial basis to both the council and other organisations (such as other local councils, government departments, universities and private businesses).

In setting up the unit, the council established guidelines to ensure that public sector standards of probity around its business activities are maintained. Arrangements for work allocation and supervision, assessment procedures and segregated filing systems were established as safeguards to reduce and manage conflicts of interest, or conflicts of duty (that is, inadequate separation of duties) that may arise for staff of the business unit. The guidelines are publicly available and revised regularly.

Source: Complaint provided to the ICAC.

The different ways that the private and public sectors are expected to do business can give rise to corruption risks. For example, giving gifts, lobbying, and using connections may be accepted in the private sector, whereas such activities are subject to greater scrutiny and regulation in the public sector – including in public sector business units. The greater controls can be a surprise and source of resentment to individuals working in these units who have come across from the private sector. Corruption considerations remain pertinent for these units and may even be heightened.

Common corruption risks around commercial activities include:

  • an employee of the business unit failing to disclose a prior relationship with an entity, either private or public, that is selected to have a commercial relationship with the unit
  • an employee of a government entity acting partially towards an organisation it regulates because the organisation also has an important commercial relationship with the government entity
  • business unit employees being offered gifts and benefits by clients or potential clients.

Developing a strategy

Commercial activities should be driven by a business case, with structures and processes in place to help generate profits. A clear business case will help determine allocations of staff and resources to the unit, as well as relationships to the rest of the agency. The relationship between the business unit and the agency of which it is part, needs to be clearly understood by staff (inductions, training and staff meetings are useful for this purpose). The agency may retain overall responsibility for the unit even though its relationship with the business unit has evolved into one of purchaser-supplier.

Because of the risks around commercial activities, agencies need written guidance about how to manage these risks. It is also important to “ring fence” business units so confidential commercial information does not flow back and forth from the rest of the agency. A policy and procedures for developing, approving and conducting commercial activities can help guide and implement the business case for the commercial activity.

Provisions for managing conflicts of interest on the part of employees, governing bodies and committee members involved in commercial activities are a basic measure required for commercial activities. The ICAC has published a paper that provides guidance on identifying and managing conflicts of interest.

Commercial activities should be included in an agency's internal audit process and corruption risk management processes. Following a risk assessment of these activities, an agency should consider: 

  • defining what is considered to be a commercial activity as opposed to the usual transactions carried out as part of the agency’s core functions
  • developing a statement of business ethics to advise the private sector on what to expect when doing business with government (it should provide specific advice about issues such as the offering and receiving of gifts and benefits)
  • developing and implementing a fair and accountable tender process that is open to private organisations
  • retaining documentation of information requested by, and provided to, any parties participating in tender processes
  • developing clear criteria to determine the type of commercial work that is acceptable
  • segregating employees’ roles where the agency decides to enter into a commercial agreement so the core functions are not compromised by their involvement in the commercial activities or relationship
  • establishing a gifts register
  • implementing and regularly updating registers of interests (members of the governing body, relevant employees and committee members involved in commercial activities should be required to declare their private commercial interests on such a register).

For in-house bids by an agency’s business unit, consider the following risk management strategies:

  • stipulate in request for tender (RFT) documents that an in-house bid is acceptable and the terms under which it will be considered
  • stipulate the information and resource supply responsibilities, performance requirements and obligations of both the agency and the successful tenderer
  • exclude business unit employees from being involved in the preparation of RFT documents, including tender specifications
  • restrict the flow of information between the staff preparing the in-house bid and those involved in the bid management and evaluation
  • require employees managing and evaluating bids to enter into confidentiality agreements
  • include on tender selection panels at least one person independent of the agency
  • provide all potential tenderers with equal access to information
  • secure records and other information that could benefit the in-house team’s bid
  • employees involved in the in-house bid should be physically separated from employees involved in specification development, bid evaluation processes and service regulation
  • protect the intellectual property of competing external bidders from the in-house business unit (once tenders have been evaluated and announced)
  • fully document the above procedures and provide them to all relevant employees (they should also be made available on request to external organisations involved in the tender).

For profit-share arrangements involving business unit employees, consider risk management strategies that:

  • clearly document any profit-share arrangements in publicly available documents
  • provide for profit-share arrangements under a legal instrument such as an employment contract
  • implement quality control measures, such as peer review systems, to help ensure that profit arrangements do not ignore performance standards or ethical issues.

A number of ICAC investigations have dealt with public authorities involved in commercial dealings, for example, the investigation into the conduct of the Wagonga Local Aboriginal Land Council and others (report published September 2012) and the investigation into the conduct of a former chief executive officer and members of the board of the Gandangara Local Aboriginal Land Council (report published February 2017).

The ICAC’s publication, Learning the hard way: Managing corruption risks associated with international students at universities in NSW (April 2015), contains specific advice on controlling corruption in commercial activities involving international students in NSW. Additionally, Minimising corruption risks in land dealings: Guide for Local Aboriginal Land Councils (February 2010), contains specific information for local Aboriginal land councils getting involved in commercial activities and joint ventures.

The Office of Local Government’s Report on an investigation in terms of section 430 of the Local Government Act 1993 into Wagga Wagga City Council (May 2007) is a detailed investigation into the performance of a local council, including its commercial activities. In addition, various documents relating to the NSW Government’s Commercial Policy Framework are available on the NSW Treasury website.

Reviewed November 2018