Legal form and governance of Victorian non-departmental entities

Before you begin

Before you begin to design a new non-departmental entity, you should ensure you understand what the Victorian public sector does and the key features of departments, administrative offices and public entities.

Read more:

• The Victorian Public Sector
• Victoria's system of government 

This guidance is general in nature. You should ensure that you understand the relevant pieces of legislation that govern the establishment of public sector bodies, starting with the Public Administration Act 2004. As you progress through the process of deciding on the best form for the public sector body there will be other legislation that you should read and understand.

The figure below provides an overview of the Victorian public sector and how it is organised.

Initial considerations

Non-departmental entities exist in a variety of legal and other forms. Before deciding on the right form you should consider:

• why a new entity is needed
• how new entities are created
• how their functions relate to existing entities.

Premier's Circular

The Premier’s Circular No. 2013/2: Creation and Review of Non-Departmental Entities (the Circular) outlines the policy for the creation and review of entities.

The Circular outlines four criteria which much be addressed when proposing the establishment of a new non-departmental entity:

1. Is there a role for government?
2. What degree of autonomy from departments or ministers is required?
3. What is the appropriate form of entity?
4. Can the functions be performed by an existing entity?

This guidance provides a framework to explore the criteria. It also sets out a requirement that entities must be reviewed regularly to ensure that they are operating effectively and are still necessary.

The following questions should be worked through to assist in determining whether it is appropriate to create a new non-departmental entity.

The Premier’s Circular also outlines review requirements for entities. This Guidance may assist in evaluating whether the governance structures of the entity have been set up in way that is appropriate for the way the entity is required to operate in practice.

A copy of the Circular is available upon request from the Department of Premier and Cabinet’s (DPC’s) Governance Branch at publicsectorgovernance@dpc.vic.gov.au

What are the functions and policy objectives?

The functions and policy objectives of an entity should inform its legal form.

Most non-departmental entities have more than one function. Often, the primary function of an entity will determine its form. However, all functions should be assessed when determining the appropriate form of the entity, including when merging existing entities. For example, an entity might have a secondary function that involves reporting on a department’s performance, which means that the entity should not be established in a form that is subject to the direction of the Department Head.

Consider the following:

• What are the desired functions and/or policy objectives?
• What is the primary function?
• Are there any functions that could not be fulfilled by a certain type of entity?
• What are the day-to-day activities required to achieve the functions and policy objectives?

Read through the table below which outlines functions of the public sector.

What is the role for government?

For a new public sector body to be established, there must be a clear reason for the functions to be performed by government.

Assess whether government performing this role maximises net benefits for the community. This can include a mix of policy and governance considerations.

Consider issues such as:

• Is there a legal requirement for the function?
• Has a specific policy decision been taken for government to achieve a policy outcome that requires this function?
• What are the benefits and risks of government performing this role?
• Will government performing this function maximise the net benefits for the community?
• What would be the cost and impact of not delivering this service or function?
• Is there a market failure?
• Does the activity involve providing goods and services in a market?
• Can it be contracted?
• Do alternative non-government providers exist (or could exist)?

While this can be a complex question, consideration of this criterion should, at least, ensure that there is a clear reason to establish a new non-departmental entity.

Can some of all of the proposed functions be performed by an existing entity?

For a new public sector body to be established, consider whether the functions can be delivered by an existing entity. Where a similar or appropriate entity already exists, that entity should perform the additional proposed function to avoid additional cost and complexity.

Consider the following questions:

• Do any existing entities perform similar functions?
• Do any existing entities deal with similar industries, clients or stakeholders?
• Are the powers and governance arrangements of entities performing similar functions appropriate to achieve the proposed function?
• Can the remit of existing entities be expanded to accommodate the proposed functions?

The VPSC maintains a list of current Victorian government employer bodies, which can be searched for employing public sector bodies by industry and sub-sector group. The list can be accessed on the VPSC's list of public sector employers.

In addition, the VPSC maintains the Government Appointments and Public Entities Database (GAPED) which provides information of Victorian State Government boards and committees. It can be filtered by department and portfolio fields to identify any existing non-departmental entities performing similar functions. You can find it online at Public Board Appointments Victoria.

Read more about the Government Appointments and Public Entities Databse Administrative Guideline.

Is a new public sector body required?

In general, the default position is that functions should be performed by a department.

The creation of a new non-departmental entity may be appropriate if:

• No existing public entity or public service body performs similar functions, and the functions of an existing body cannot be expanded to undertake additional functions.
• Effective delivery of the function requires operational autonomy from a department, often including the employment of dedicated staff.
• A more structured, limited or specific level of ministerial oversight and powers are required to deliver the functions (in comparison to a department).
• Independence from the Crown is required, for example when the government may be bound by the decisions of the non-departmental entity or the entity is established to scrutinise the government’s decisions.
• A clearly defined range of specialist functions may improve efficiency and effectiveness, by allowing those governing and managing the entity to focus solely on the defined role.
• The function is discrete and expected to be time limited.

When is establishing a public entity appropriate?

New public entities should only be established where it can be demonstrated that this is the most effective and appropriate means of carrying out the desired function.

This guide refers to public entity functions being performed at ‘arm’s length’ from routine ministerial control. This means that public entities perform their functions with a degree of autonomy from a minister’s decisions. While public service agencies are generally directly accountable to ministers, most public entities are generally accountable to a governing board or independent appointee, who are accountable to the responsible minister.

In general, the creation of a public entity should only be considered if:

• There are strong reasons for a function to be performed at arm’s length from routine ministerial control. For example, if greater independence promotes greater public confidence in decisions made.
• There is no existing public sector body that performs similar functions, and an existing body cannot be expanded to perform the identified function.
• Independence from the Crown is required due to the nature of the functions. For example, if the government may be bound by the public entity’s decisions, or the public entity is established to scrutinise government actions.
• The entity has a clearly defined range of specialist functions which require those governing and managing the entity to focus solely on their defined role.
• In the case of an advisory function, there is a need for ongoing independent, expert advice to ministers or the government on technical or other specialised issues.

Benefits and risks

Creating a public entity provides both benefits and risks to government.

A public entity’s increased autonomy relative to a department and arm’s length from ministerial direction may result in:

• A benefit of improved performance due to greater operational flexibility. This can promote efficient decision making and innovative solutions to problems.
• A risk of fragmentation by exposing the government to wider financial and employment risks. This can happen due to less standardised direction and control mechanisms. For example, it is more difficult to ensure public entities comply with whole of government policies.

When is establishing an administrative office (AO) appropriate?

AOs are used to perform a range of discrete advisory, support, project, service delivery and regulatory functions. In most cases, government functions should be carried out by departments or public entities.

Generally, an AO should not be assigned functions in legislation. AOs are intended to be flexible, as they can be created and abolished by an Order issued by the Governor in Council. Assigning legislative functions to an AO removes this flexibility

Statutory functions can sometimes be delegated to an AO or its Head, rather than to the minister or portfolio department. This is possible if the relevant legislation, other than the Public Administration Act 2004 (PAA), allows such a delegation. In rare circumstances, this may be a useful administrative form for public functions that require close oversight or that cross portfolio boundaries.

In summary, the establishment of a new AO may be appropriate if:

• the function is discrete and the proposed activities can be clearly specified (such as advisory, support, project, service delivery and regulatory functions)
• effective delivery of the function requires operational autonomy from a department, including the employment of dedicated staff, separate internal structures and non-financial processes which allow them to operate with significant managerial flexibility is appropriate
• the function can be performed within the financial processes and oversight of the department such that the Department Head can meet their responsibility for the financial management of the AO
• the function cannot be performed by an existing entity
• close ministerial oversight is expected

Benefits and risks

AOs have multiple and overlapping reporting lines that require careful management. The AO Head is responsible to the relevant Department Head (other than for any legislated functions) and also has the same obligations as a Department Head in relation to the AO. This means that the AO Head is responsible to both the Department Head and minister for the general conduct and the effective, efficient and economical management of the functions and activities of the AO, and must advise them both on any matters related to the AO.

In comparison, departments and public entities generally have clearer lines of accountability.

AOs do not have a separate legal identity from the Crown in right of the State of Victoria. They can be thought of as business units within a department with a defined degree of operational autonomy from the Department Head. This is beneficial if there is a discrete set of functions that need minimal day-to-day control from the department, but do not need to be performed by a legally independent entity.

Another advantage is that AOs can develop and maintain strong branding and a separate identity from their department in pursuing their narrower functions. This is not individually a compelling enough reason to establish an AO—business units in departments can also establish separate branding.

Because AOs have separate internal structures and non-financial processes, including a degree of managerial autonomy, AO Heads have independent employment powers. This means that the employees of an AO are employees of the AO Head.

AOs must be incorporated within the department’s annual financial report under the FMA, so they must operate within the oversight of the department head in relation to all financial matters. If the Department Head is not given clearly oversight over the AO’s financial matters, this compromises the Department Head and department CFO’s ability to sign off on the department’s financial statements for Parliament.

Summary of differences between a public entity and an AO

This table summarises the key differences outlined above between public entities and AOs: