What the report is about
The results of the consolidated General Government Sector (GGS) and Total State Sector (TSS) financial statements audits for the year ended 30 June 2021.
What we found
The Independent Auditor’s Report on the 2020–21 GGS and TSS financial statements was unqualified but contained an emphasis of matter. The resolution of significant issues delayed signing until 24 December 2021.
The emphasis of matter draws attention to significant uncertainties associated with key assumptions related to the recognition by the GGS of a $2.4 billion investment in the Transport Asset Holding Entity (TAHE).
The Audit Office advised NSW Treasury that it intended to issue a qualified audit opinion, but actions by the NSW Government avoided this outcome. All evidence provided prior to 14 December indicated that the GGS’s return on the $2.4 billion cash contributed to TAHE was insufficient to support accounting for it as an investment. Projected returns were below the long term inflation rate and were insufficient to recover:
- TAHE's revaluation loss of $20.3 billion in 2020–21
- an average rate of return of at least 2.5 per cent of equity invested in TAHE.
In these circumstances, the $2.4 billion contributed to TAHE should have been expensed. This could have impacted the GGS’s budget result.
The NSW Government’s actions to avoid a qualified audit opinion included:
- a government decision made on 14 December approving TAHE’s shareholding ministers communicating that their expectation of a return had increased to 2.5 per cent
- reflecting the revised shareholding ministers’ expectations in the 2021–22 ‘NSW Half-Yearly Review’ on 16 December. The NSW Government provided an additional $1.1 billion to fund increased access and license fees to TAHE from the public sector operators (Sydney Trains and NSW Trains)
- signing a Heads of Agreement (HoA) on 18 December between Transport for NSW (TfNSW),TAHE and the public sector operators. The HoA reflected the parties’ intent to renegotiate contracts to increase TAHE’s licence and access fees by $5.2 billion.
The uncertainty raised in our emphasis of matter relates to:
- TAHE’s future estimated access and licence fees, which remain subject to re-negotiation and must meet or exceed the indicative future access and licence fees set out in the HoA
- continued funding for TAHE's key customers (Sydney Trains and NSW Trains) to meet the price increases outlined in the HoA
- the 2021–22 'NSW Budget Half Yearly Review', which provides for $1.1 billion of the additional funding over the forward estimates period to 2024–25. A further $4.1 billion is required over the following six years (2026–31), which are outside the forward estimates period
- further significant cash flows required to support the funding model are outside the 10-year contract period. That is, beyond 30 June 2031.
There remains a risk that:
- TAHE will not be able to re-contract with the rail operators for access and licence fees at a level that is consistent with current projections
- future government's funding to TAHE’s key customers, the rail operators, may not be consistent with the current shareholding ministers’ expectations
- TAHE will be unable to grow its non-government revenues.
The audit found a risk of undue reliance on consultants, a need to improve quality controls on materials submitted to audit and an extreme risk finding raised with respect to providing key information on a timely basis.
The GGS Budget Result for the 2020–21 financial year was a deficit of $7.1 billion compared to an original forecast budget deficit of $16 billion.
The State did not achieve its fiscal target of maintaining annual expenditure growth below the long-term revenue growth target of 5.6 per cent. In 2020–21, the GGS expenditure grew by 6.9 per cent mainly due to grants and subsidies paid from the COVID-19 stimulus packages received from the Commonwealth.
What we recommended
Significant matters concerning TAHE
We recommend NSW Treasury:
- implement effective quality review processes over key accounting information
- establish a policy to determine the minimum expected rate of return on its equity injections into public sector entities
- report on the performance of investments in TAHE and all other public sector entities
- ensure the revised commercial agreements between TAHE and NSW rail operators reflect access and licence fees set out in the Heads of Agreement
- with TAHE, prepare robust projections and business plans to support returns beyond FY2031
- liaise with the Australian Bureau of Statistics (ABS) and reconfirm the sector classifications of TAHE, NSW Trains and Sydney Trains
- with TAHE, monitor the risk that control of TAHE assets could change in future reporting periods
- significantly improve its processes to ensure all key information is identified and shared on a timely basis
- consider whether there is sufficient competent oversight of its use of consultants and assess the risk of an overdependence on consultants at the cost of internal capability.
A number of other non-TAHE related recommendations have been raised in Section 6 ‘Key Audit Findings’.
The Total State Sector comprises the General Government Sector, the Public Non-Financial Corporation (PNFC) Sector and the Public Financial Corporation (PFC) Sector.
The 2020–21 consolidated financial statements of the General Government and Total State Sectors provide the financial performance and position of the NSW Government.
1. Auditor-General’s introduction
Pursuant to the Government Sector Audit Act 1983 I present my report on State Finances 2021. My independent auditor’s opinion on the State’s consolidated financial statements, albeit delayed, is unqualified. My independent auditor’s report however, does include an emphasis of matter drawing attention to significant uncertainties remaining in relation to the State’s equity investment in the Transport Asset Holding Entity (TAHE).
The 2020–21 year was challenging from many perspectives, not least being the continuing impact of and response to the COVID-19 pandemic. Once again, NSW Treasury provided government agencies extensions of time to submit financial statements for audit. Finance staff and management right across government must be congratulated for their responsiveness in meeting their financial reporting obligations in such challenging circumstances.
The General Government’s 2020–21 budget result, reflected within the Total State Sector Accounts, was a deficit of $7.1 billion. This compares with the original budgeted deficit of $16 billion. The factors that contributed to this outcome are presented in this Report to Parliament along with other significant matters related to the audit of the Total State Sector Accounts.
One section of my report is dedicated to issues related to the accounting for TAHE. This year’s audit was significantly delayed by protracted disagreement over the treatment of the government’s cash contribution to TAHE. This matter was further frustrated by the fact that information was withheld and not shared with my Office on a timely basis. This has warranted an extreme risk finding for NSW Treasury to significantly improve governance processes to ensure complete and timely sharing of information. This is key to preserving trust, which is one of the foundations that underpins my Office’s engagement with agencies in the conduct of their audits.
The challenges encountered in completing this year’s audit were extraordinary and tested the constructive partnership between the Audit Office and NSW Treasury. I want to acknowledge the enormous efforts of staff of both agencies to correct material errors and ultimately achieve my unmodified audit opinion. I saw first-hand the professionalism, resilience and dedication of my staff. A commitment to accurate and transparent financial reporting is a key basis upon which confidence in the financial management of New South Wales’ resources can be assured.
Auditor-General for New South Wales
9 February 2022
2. Audit result
The Independent Auditor's Report, which includes an emphasis of matter was issued on 24 December 2021
While the audit opinion on the State's 2020–21 financial statements was ultimately unmodified, NSW Treasury delayed signing the NSW Total State Sector Accounts (TSSA) in order to resolve significant accounting issues that were material to the TSSA, in particular the treatment of the General Government Sector's (GGS) investment in the Transport Asset Holding Entity (TAHE) during 2020–21.
The Treasurer and NSW Treasury signed the consolidated financial statements on 24 December 2021, eleven weeks later than the 2018–19 pre-pandemic timetable.
The Audit Office advised NSW Treasury that the 2020–21 TSSA would be qualified with respect to TAHE
Our review of all evidence received prior to 14 December indicated the GGS's expected returns were below the long-term inflation rate and that there was no expectation it should recover a significant asset revaluation loss. The levels of projected returns did not support the accounting treatment of the GGS's cash contribution of $2.4 billion to TAHE as an equity injection.
The TSSA are prepared in accordance with Australian Accounting Standards and particularly AASB 1049 ‘Whole-of-Government and General Government Sector Financial Reporting’. This standard requires contributions from owners to comply with the Australian Bureau of Statistics (ABS) Government Finance Statistics Manual 20151 (GFSM) where it would not conflict with Australian Accounting Standards.
The ABS GFSM states that an equity contribution is recognised unless there is no reasonable expectation that a sufficient rate of return can be generated by that investment, in which case the transfer is expensed. A realistic rate of return is defined in the ABS GFSM as the intention to earn a rate of return that is sufficient to generate dividends (including income tax equivalents) and holding gains or losses at a later date. Holding losses include the final asset revaluation decrement of $20.3 billion, which TAHE incurred on its property plant and equipment assets when it became a for-profit entity and was required to value its assets on the basis of the cash flows they are expected to generate. The lower the commercial returns (cashflows), the greater the potential valuation losses of a for-profit entity's assets. This $20.3 billion valuation loss is disclosed within notes 1 'Significant Accounting policies - TAHE Reform in 2020–21', Note 11 'Equity Investments in Other Public Sector Entities' and Note 14 'Property, Plant & Equipment of the Total State Sector and GGS' financial statements.
Multiple versions of models estimating the GGS's expected rate of return were submitted to the Audit Office by NSW Treasury attempting to demonstrate the commerciality of the GGS's investment in TAHE. Until 14 December 2021, our review of all calculations indicated the existing access and licence fees set up under commercial arrangements effective 1 July 2021 did not support a reasonable expectation that a sufficient rate of return would be earned on the equity injections to TAHE. The existing revenue arrangements reflected a shareholders' expected rate of return of only 1.5 per cent per annum of contributed equity and did not include recovery of the revaluation loss of $20.3 billion incurred in 2020–21.
Having reviewed all evidence provided, the Audit Office communicated to NSW Treasury that unless corrected, the State's accounts would be qualified as the $2.4 billion transfer made by the GGS to TAHE should have been reported as a grant expense instead of an investment. The GGS's estimated rate of return was not sufficient to cover:
- TAHE's final revaluation loss of $20.3 billion in 2020–21
- a dollar value equal to, or exceeding a 2.5 per cent rate of return on the equity invested in TAHE (ie: at least equal to the long term inflation rate).
Action was required by the NSW Government to avoid a qualified audit opinion
NSW Government actions avoided a qualified audit opinion related to the GGS’s cash contribution of $2.4 billion to TAHE. To support the TAHE structure as a commercial arrangement earning a sufficient rate of return, the NSW Government agreed to provide additional future funding to TAHE's key government customers (Sydney Trains and NSW Trains) to support increases in access and licence fees to be paid to TAHE.
Shareholding ministers increased their expectations as to TAHE's target average return to the expected long-term inflation rate of 2.5 per cent
On 14 December 2021, a government decision was made resulting in the TAHE shareholding ministers requesting that TAHE re-negotiate the access fees and license fees payable under the Operating Agreements between TAHE and the public operators (Sydney Trains and NSW Trains). The renegotiation was to target an average return to the GGS of 2.5 per cent on the equity contributed. TAHE's existing ten year agreements with the operators provide a mechanism by which the parties meet annually and consult in order to determine the amount of the access fees and licence fees that will be payable in the following financial year.
The revised shareholder expectations for TAHE were published in the 2021–22 'NSW Budget Half Yearly Review' on 16 December 2021. The revised expectations changed the basis of the expected returns on equity from the 10-year Commonwealth bond rate of only 1.5 per cent, to the expected long-term inflation rate of 2.5 per cent. This is consistent with the Reserve Bank's target band and the Commonwealth's Department of Finance's expected return on government investments in other sectors.
The revised shareholder expectations were confirmed in a signed Heads of Agreement
On 18 December 2021, Transport for NSW (TfNSW), TAHE and the operators, Sydney Trains and NSW Trains entered into a Heads of Agreement (HoA). This HoA forms the basis of negotiations to revise the pricing within the existing 10-year contracts and deliver upon the shareholders' expectation of a return of 2.5 per cent per annum of contributed equity. This revised return includes:
- income earned over the estimated weighted average remaining useful lives of TAHE’s assets
- recovery of the revaluation losses in 2020–21 on TAHE’s property, plant and equipment assets incurred when TAHE commenced operations as a for-profit entity, albeit the recovery of the revaluation loss is projected to take up to 2052.
The HoA reflects an intention between all parties to revise the contractual agreements to increase future access and license fees by $5.2 billion. This included $1.1 billion for the period FY2023–25, which is reflected in the 2021–22 'NSW Budget Half Yearly Review'. Further detail on the HoA is reported in Section 3 of this report ‘Investment in the Transport Asset Holding Entity’.
NSW Treasury revised its calculations to reflect the increased future returns
Following these changes, NSW Treasury revised its calculations of estimated returns to reflect a cumulative return equivalent to the expected long-term inflation rate, and recovery of the 2021 valuation loss by 2052. The rate of return period is consistent with the weighted average remaining useful life of TAHE's assets. The changes supported the financial reporting treatment of the $2.4 billion transfer from the GGS to TAHE as an investment rather than an expense, even though TAHE is currently heavily reliant on revenues from the public rail operators, Sydney Trains and NSW Trains. If the cash contribution had to be treated as a capital grant expense, it would have reduced the GGS's budget result by $2.4 billion.
The Independent Auditor’s Report includes an emphasis of matter drawing attention to uncertainty relating to the General Government Sector's investment in the Transport Asset Holding Entity (TAHE)
Despite the investment in TAHE being better supported, and the independent auditor's opinion being unqualified, the Independent Auditor’s Report includes an emphasis of matter, which draws attention to the significant uncertainties remaining in relation to the GGS’s equity investment in TAHE. The significant uncertainty is associated with key assumptions that support the recognition by the GGS of its $2.4 billion investment in TAHE during 2020–21.
As at the time of signing the Independent Auditor's Report, there was significant uncertainty with regards to judgements around the commerciality of TAHE's operations because:
- TAHE’s future estimated access and licence fees, which are critical to its ability to earn a realistic rate of return, remain subject to re-negotiation and re-signing of the current access agreements. The proposed indicative future access and licence fees, which are set out in the HoA are intended to form the basis of the re-negotiation.
- $1.1 billion in additional funding for TAHE's key customers, Sydney Trains and NSW Trains, was provided in the 2021–22 'NSW Budget Half Yearly Review' consistent with the terms in the HoA. However, this funding only extends to the end of the forward estimates period in 2024–25. There is an additional $4.1 billion required over the following six years, which falls outside of the forward estimates period (up to the end of the 10-year contract period). While this has been communicated to the government's Expenditure Review Committee, it is yet to be provided for in government's budget figures. As TAHE's projections are currently highly dependent on its government customers, it is critical that the government continue to provide sufficient funding to the GGS to support increases in the prices government customers will pay for access to TAHE's assets.
- A further significant portion of the required returns is earned outside of the 10-year contract period (terminating 30 June 2031). NSW Treasury has estimated $37.9 billion in returns from its investment in TAHE over the period from 1 July 2022 to 30 June 2052, but has not identified the source or means of these returns beyond 2031. Currently, TAHE derives the majority of its revenue from access and licence fee agreements with Sydney Trains and NSW trains, who in turn are both funded by grants to Transport for NSW from the GGS. The projected returns calculated by NSW Treasury beyond 2031 are calculated by assuming a 2.5 per cent growth rate. About 87 per cent of these estimated returns are being earned beyond the ten years, with $32.9 billion estimated over the period 2032–52. There remains risk that:
- TAHE will not be able to re-contract for access and licence fees at a level that is consistent with current projections
- future governments' funding to TAHE's key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections
- TAHE will be unable to grow its non-government revenues.
Significant accounting issues relating to TAHE are detailed in Section 3 to this report titled ‘Investment in the Transport Asset Holding Entity’. Other significant matters related to the TSSA audit are covered in section 6 to this report titled ‘Key Audit findings’.
Other financial reporting matters
The State extended the date for submission of agency financial statements for audit to provide relief to agencies impacted by the New South Wales' COVID-19 lockdowns
All agencies were given a one-week extension (two weeks in 2019–20) to prepare their financial statements and submit them for audit by 2 August 2021. Further extensions were subsequently approved for the following ten agencies and funds (11 in 2019–20) to submit completed financial statements for audit:
- Department of Communities and Justice (9 August 2021 for disclosures related to cloud computing costs)
- Investment NSW (13 August 2021)
- Jobs for NSW (13 August 2021)
- TCorp IM Funds (19 August 2021)
- Lord Howe Island Board (22 October 2021)
- Department of Customer Service (31 August 2021 for disclosures related to AASB 1059 'Service Concession Arrangements: Grantors')
- Department of Transport (20 August 2021)
- Sydney Olympic Park Authority (12 August 2021)
- Planning Ministerial Corporation (12 August 2021)
- Transport Asset Holding Entity (16 August 2021).
Additional extensions provided agencies with more time to resolve accounting issues relating to:
- asset valuations
- first time implementation of AASB 1059
- asset transfers and treatment of software as service costs.
The extensions outlined above resulted in a two-week delay submitting the State’s draft consolidated financial statements for audit.
In 2020–21, agency financial statements presented for audit contained 24 errors exceeding $20 million (19 in 2019–20). The total value of these errors was $6.6 billion, a significant increase from the previous year ($1.4 billion in 2019–20)
The graph below shows the number of reported errors exceeding $20 million over the past five years in agencies’ financial statements presented for audit.
The errors resulted from:
- incorrect application of Australian Accounting Standards and NSW Treasury Policies
- incorrect judgements and assumptions when valuing non-current physical assets and liabilities
- human error or lack of oversight.
In addition to the above agency errors of $6.6 billion, a significant misstatement of $2.4 billion would have been reported in 2020–21 relating to the GGS's investment in TAHE had the NSW Government not taken corrective action to support the assertion that the investment was earning a sufficient rate of return. Prior to 14 December 2021, the Audit Office flagged a significant concern with respect to the $2.4 billion investment and highlighted the potential for a qualification of the Independent Auditors Report on the government’s Total State Sector Accounts (further described in Section 3 of this report).
3. Investment in the Transport Asset Holding Entity
The completion of the 2020–21 Total State Sector Accounts was significantly delayed as material accounting issues were resolved. These issues related to how the General Government Sector’s (GGS)2 investment in the Transport Asset Holding Entity was accounted for. The key areas of audit concern, which required considerable effort to satisfactorily resolve, included our assessment of:
- the accounting treatment of funds transferred to TAHE from the GGS, specifically:
- whether funds transferred to TAHE from the GGS should be considered an equity investment or capital grant expense, with the latter having implication to the presentation of the NSW Government Budget positions. Funds are expensed unless, as an investment, there is a reasonable expectation to generate a sufficient rate of return
- forming a view as to what a ‘reasonable expectation of a sufficient rate of return on investment3’ should be with respect to the Australian Bureau of Statistics' Government Finance Statistics Manual 2015 (GFSM)
- the valuation of TAHE’s property, plant and equipment at 30 June 2021
- whether TAHE was correctly classified as a Public Non-Financial Corporation (PNFC) entity
- whether, under the agreements in place for the use and price of TAHE's assets, TAHE controlled its property, plant and equipment.
Our assessments were hindered by errors and omissions in information and models provided by NSW Treasury to demonstrate expected returns from TAHE, as well as a lack of timeliness and completeness in their responses to requests for documentation to support NSW Treasury's proposed accounting of government's contributions to TAHE.
Up until 13 December 2021, evidence provided by NSW Treasury to support the treatment of a $2.4 billion equity transfer from the GGS to TAHE did not demonstrate a sufficient rate of return on the State's investment. Instead, the evidence suggested the transfer was of the nature of a capital grant expense, which would impact the GGS budget result. Unless corrected, by either reversing the equity investment to a capital grant expense (impacting the GGS budget result) or providing additional resources to the rail operators to support additional TAHE access and licence fees (adding additional expenses to future GGS budget results), this matter would have caused the State's accounts to have been qualified.
After the Audit Office communicated the likely audit outcome to NSW Treasury, significant changes were made by government from 14 December 2021. Government decisions that avoided qualification of the TSSA included:
- On 14 December, a government decision approved communicating revised shareholders' expectations of rate of return of 2.5 per cent being the long-term inflation rate, and increased grants to Transport for NSW for the rail operators to pay increased access and licence fees to TAHE to support of the new rate of return (previously 1.5 per cent).
- On 16 December, the 2021–22 'NSW Budget Half Yearly Review' included an increase in expected returns to be derived through higher access and license fees charged by TAHE. To facilitate these returns, an increased allocation of funds of $1.1 billion was made to Transport for NSW (TfNSW) from 1 July 2022 as part of the forward estimates for the period 2022–25. This was to pay for the proposed increased access and licence fees the operators would be required to pay TAHE.
- On 18 December, TfNSW, TAHE and the operators Sydney Trains and NSW Trains signed a Heads of Agreement (HoA) forming the basis of negotiations to revise annual operating agreements to facilitate the shareholders’ expected returns of 2.5 per cent of contributed equity. The HoA included indicative access and licence charges to be used as a basis of renegotiation, increasing access fees and licence fees to be paid by Sydney Trains and NSW Trains over the 10-year period from 2022–2031 by a further $5.2 billion. Most of this increase occurs outside the forward estimates. The majority of the additional funding may need to be funded by future governments.
NSW Treasury has projected returns to be earned to 2052 (a period covering the weighted average remaining useful lives of TAHE's assets) as sufficient to recover the revaluation loss of $20.3 billion which arose when TAHE revalued its assets under the income approach. These assets were valued on a discounted cash flow basis as at 30 June 2021.
These key decisions and the circumstances leading up to these changes are detailed later in this section.
On 1 July 2020, the former Rail Corporation of New South Wales (RailCorp), a not-for-profit entity, was renamed the Transport Asset Holding Entity of New South Wales (TAHE) transitioning to a for-profit statutory State-Owned Corporation under the Transport Administration Act 1988. There was no change in the structure of TAHE as a new entity was not created. Ownership remains fully with the government. TAHE, and the former RailCorp, were both classified as Public Non-Financial Corporation (PNFC) entities within the Total State Sector Accounts. TAHE was not a newly created entity, nor was it the result of a change in administrative re-arrangements (such as Machinery of Government change).
Prior to 1 July 2015, the government paid appropriations to TfNSW, a GGS agency, to construct transport assets. When completed, these assets were granted to RailCorp, a not for-profit entity within the PNFC sector. The grants to RailCorp were recorded as an expense in the State’s GGS budget result and in the NSW Total State Sector Accounts (TSSA).
From 1 July 2015, the government announced the creation of TAHE (a dedicated asset manager). Funding for new capital projects was to be provided through equity injections, even though the business model was yet to be determined. NSW Treasury initially set a timetable for finalising the business model, operating model and contracts for the use of TAHE's assets of 1 July 2019.
Contributions paid to TAHE by the GGS were treated as equity investments from July 2015 forward. This treatment continued, despite delays in settling the business model. In 2020, the Audit Office raised a high risk finding due to the significance of the financial reporting impacts and business risks for NSW Treasury and TAHE.
The business model eventually adopted was one whereby:
- The GGS invests in TAHE with an expectation of a sufficient rate of return.
- TAHE charges the operators (predominantly Sydney Trains and NSW Trains) to use network and rolling stock to deliver services. The operators remain responsible for both the delivery of the services and the maintenance and safe operation of the assets. The operators are primarily funded by TfNSW through grants.
- The GGS grants funds to operators, which allows them to pay access fees to TAHE. The amount of these grants impacts the budget result.
- TAHE pays a return back to GGS by way of dividends and tax equivalents. The return may also include holding gains and losses on the fair value of the net assets of TAHE.
TAHE earns relatively small amounts of income from transactions with the private sector. While the TAHE Board envisages that, over time, they will enhance the commerciality of TAHE’s operations, it is currently highly dependent on revenues from government contracts (over 80 per cent). The circularity in flow of funds between transport agencies in the GGS and PNFC sectors is shown in the diagram below:
In total, the GGS has contributed approximately $11.1 billion to TAHE since 2015–16. This includes the equity injections from the GGS to TAHE made in the current year of $2.4 billion.
The TSSA are prepared in accordance with Australian Accounting Standards and particularly AASB 1049 ‘Whole-of-Government and General Government Sector Financial Reporting’. This standard requires contributions from owners to comply with the Australian Bureau of Statistics (ABS) Government Finance Statistics Manual (GFSM) where it would not conflict with Australian Accounting Standards.
The ABS GFSM states that transfers from the GGS to the PNFC sector are recorded as equity, unless there is no reasonable expectation that a sufficient rate of return will be earned on the investment, in which case the transfer is recorded as a capital transfer expense. Hence, the notion of the sufficient rate of return is pivotal to whether the $11.1 billion of funds the GGS had already invested in TAHE and any future investments in TAHE could be treated as an asset or should be expensed. If the funds are expensed, the result is a reduction in the budget result.
Prior to 14 December 2021, NSW Treasury's application of relevant financial reporting requirements was inaccurate, resulting in the significant write-down of TAHE's asset value being excluded from NSW Treasury's rate of return calculation
The GGS’s investment in TAHE was not just the $11.1 billion in contributed equity since 2015–16, it was also all of the assets of the former RailCorp. Prior to transition to TAHE on 1 July 2020, RailCorp's assets were measured at their fair value of $41 billion using a current replacement cost (CRC) valuation method. The assets were reported at that amount in the 2019–20 TSSA. The CRC method was appropriate in 2019–20 as RailCorp was a not-for profit entity. Once TAHE commenced as a for-profit entity it needed to value its assets using the income approach (discounted cash flows). The income approach estimates the expected cash inflows and cash outflows associated with the use of the assets and applies a discount rate to estimate a present value of these assets. TAHE is currently highly dependent on government customers. The valuation of its assets is therefore highly sensitive to prices contracted with those customers.
The track access and licence agreements with the operators were finalised on 30 June 2021 (effective 1 July 2021). This enabled TAHE, now a for-profit entity, to develop financial forecasts and value its assets under an income approach using a discounted cash flow (DCF) valuation method. The DCF is the appropriate asset valuation method for a for-profit entity. The outcome of this valuation initially resulted in a $24.8 billion write-down in TAHE’s assets during 2020–21 (discussed below under Valuation of TAHE assets in TAHE's accounts). This revaluation loss was excluded from NSW Treasury's modelling of TAHE’s rate of return calculations provided in 2020–21.
The ABS GFSM defines a realistic rate of return as the intention to earn a rate of return that is sufficient to generate dividends or holding gains at a later date and that there is a claim on the residual value of the corporation.
In regards to the holding gains (or losses) NSW Treasury proposed to the Audit Office that it need not recover the initially incurred $24.8 billion holding loss as a result of the write-down of the former RailCorp's asset values when determining the government's rate of return on its investment in TAHE.
TAHE’s asset valuation decrement in 2020–21 represents a ‘holding loss’
At the broadest level, the GFSM distinguishes between transactions and other economic flows. There are two types of other economic flows:
- holding gains/losses (also referred to as revaluations in the GFSM), and
- other changes in the volume of assets and liabilities (also referred to as other volume changes in the GFSM).
The GFSM defines holding gains and losses as changes in the current market value of an asset resulting from changes in the level and structure of prices, assuming the asset has not changed qualitatively or quantitatively.
Under the GFSM, holding gains and losses are included when determining a realistic rate of return. The write-down in the value of TAHE’s assets represents a holding loss because the fair (or market) value of TAHE’s assets fell because of a change in the level and structure of prices. The access prices and licence fees TAHE negotiated with the operators were well below the ceiling price under the pricing principles set by Independent Pricing and Regulatory Authority (IPART) under the NSW Rail Access Undertaking, and recommendations external consultants made to Transport for NSW in 2020. These lower fees were used in TAHE's discounted cash flow calculation, driving the significant write-down in its asset value.
Both the CRC and income (or DCF) methods are recognised techniques used to value assets under Australian Accounting Standards. Both techniques represent a reasonable approximation for a market price under the GFSM. A movement in the fair value of property, plant and equipment due to a change in the method used to measure the market price should be classified as a holding gain or loss under GFS.
The write-down does not represent a volume change as there is no change in the quality or quantity of TAHE’s assets. TAHE continues to provide the same services the former RailCorp delivered which included track access, and provision of rolling stock and network infrastructure. Although cash flows are now generated from TAHE’s assets in the form of track access and licence fees, they continue to be used the same way by the operators (Sydney Trains and NSW Trains). TAHE’s assets are those of the former RailCorp. There is no fundamental change in their use, there is only a change in the pricing for that use.
The potential impact of a large write-down of the value of rail assets was foreshadowed in reports to the TAHE advisory board
The implementation of TAHE was overseen by an advisory board comprising the Transport Secretary and senior executive representatives from Transport for NSW, RailCorp and NSW Treasury. During 2017–18, financial modelling and scenario analysis conducted by an external consultant for the TAHE advisory board included an expectation that, upon establishment of TAHE as a State owned for-profit corporation, there would be a write-down of its assets and an assumption was included in the modelling to this effect. The report advised the TAHE advisory board at the time that the State's ability to treat capital expenditure as equity injections into TAHE would need to be considered given the impact of the write-down in asset values. Furthermore, the report noted that assumptions about an expectation of return could potentially be rebutted if the value of TAHE’s net assets was reduced by these asset write-downs. Neither NSW Treasury or Transport for NSW shared this report with the Audit Office. The Audit Office only became aware of the potential significance of this report from the testimony provided to the Parliament’s Public Accountability Committee in late 2021.
Had NSW Treasury acted earlier on the potential implications of the 2017–18 modelling, including discussing it with the Audit Office, relevant technical discussions considering the impact of write-downs on the expected rate of returns could have been resolved earlier.
NSW Treasury presented late, unsophisticated, and inaccurate forecasts to the Audit Office, all of which sought to support the desired outcome of higher projected returns
Between 9 July and 1 December 2021, NSW Treasury submitted three versions of estimated returns with respect to the GGS’s investment in TAHE. All of these models were unsophisticated, containing errors, omissions, and/or poor logic. Most importantly, none were able to demonstrate that a realistic rate of return would be derived from the GGS’s investment in TAHE.
Errors in these versions included estimated returns being misstated due to NSW Treasury incorrectly:
- excluding TAHE's original asset write-down value of $24.8 billion (later amended to $20.3 billion when access fees were amended) being holding gains/losses arising from valuation changes
- including cumulative Government Guarantee Fees (GGF) of $2 billion. These fees should not have formed part of the returns calculation as GGF's are akin to a tax on borrowings paid by the business and are not a return of distributable earnings. NSW Treasury had previously received external advice that these fees do not form part of returns
- including $4.6 billion in cumulative forecast commercial incentive revenue that was not supported with sufficient and appropriate evidence
- including possible future cumulative revaluation increments of $15 billion, which could not be supported with any evidence to explain how it was derived, and was described as a 'plug' figure
- including the projected value of the residual net assets of TAHE in FY2061 of $59.5 billion as part of the overall 'return' on investment.
The $59.5 billion in net assets represents the government’s residual claim on TAHE’s assets and should not have been included when assessing a realistic rate of return
The residual claim on assets is a return of the investment (i.e., withdrawal), rather than a return on (i.e., generated from) the investment.
Under the GFSM, only the component that represents regular withdrawals of income earned by the corporation is considered to be a return on investments. Distributions in excess of income are considered a withdrawal of equity from the corporation.
When referring to the definition of a realistic rate of return, the GFSM, states that returns include dividends (including income tax equivalents4) and holding gains. Withdrawals, by the owner of accumulated retained earnings are treated as a reduction in equity assets by the owner. If the shareholder liquidates its investment upon wind-up, this is a withdrawal of equity. Including the $59.5 billion from residual assets in the estimated returns from TAHE was an error in NSW Treasury's analysis.
The quality of NSW Treasury’s evidence supporting the GGS’s rate of return calculations from investments in TAHE is a high risk finding.
NSW Treasury needs to implement effective quality review processes over key accounting information before submitting that information to the Audit Office.
TAHE's contracts with its key customers, (the two government rail operators Sydney Trains and NSW Trains) specified access and licence fees that were well short of the regulated maximum and not sufficient to generate a reasonable return
Our analysis of NSW Treasury’s initial versions of estimated returns identified that the access and licence fees (under the existing commercial agreements effective 1 July 2021) would not earn a sufficient rate of return until a period that is significantly beyond the assets’ current useful lives.
An external consultant engaged by Transport for NSW also indicated in their 2017–18 report that planned low access and licence fees were not going to be sufficient to maintain RailCorp's existing asset values.
Additional financial modelling performed by an external consultant on behalf of Transport for NSW during 2020 demonstrated that higher track access and licence fees were necessary to ensure that TAHE operates as a commercial PNFC corporation and earns a sufficient rate of return on its asset base. Because this model used higher track access and licence fees, the projected cash flows largely supported asset values as reported by the former RailCorp. The track access charges for regulated assets determined in the external consultant’s financial modelling remained within the bounds of the IPART NSW Rail Access Undertaking, which establishes pricing guidelines for rail owners.
The 2015–16 NSW Budget provided $700 million per year in the forward estimates to be provided to Sydney Trains and NSW Trains (the operators) to meet the cost of expected access charges that would become payable to TAHE, once it was established. In 2020–21, TAHE and the operators agreed actual access and license charges at $680 million per annum, and increasing thereafter.
The fees contracted between TAHE and the operators were significantly lower than the maximum allowable revenue established by the IPART NSW Rail Access Undertaking5 and significantly lower than the 2020 external consultant analysis. Even though there was no regulatory impediment for TAHE to charge higher track access and licence fees, it did not do so. Higher fees would have likely impacted the GGS budget, as these fees are funded by the GGS through grants to the operators (ie: Sydney Trains and NSW Trains).
TAHE has few sources of revenue other than those from the government operators, and little opportunity to decrease expenses. TAHE had to charge the operators higher access and license fees in order to improve the expected return on the GGS’s investment in TAHE for the State to justify an equity investment.
Decisions were made by government from 14 December to support a reasonable expectation that a return could be earned from its investment in TAHE
In light of the deficiencies in NSW Treasury’s proposed accounting for the $2.4 billion equity transfer to TAHE, presented above, the Audit Office communicated to NSW Treasury its intention to qualify the Total State Sector accounts.
In response, the following actions were taken by government:
- On 14 December, a government decision was made specifying that the shareholders’ expectation of returns from TAHE should be increased from 1.5 per cent to 2.5 per cent of contributed equity, an annual rate of return consistent with the Reserve Bank's long term inflation rate.
- On 16 December, the 2021–22 'NSW Budget Half Yearly Review' was updated to fund the increase in expected returns to be derived through higher operator access and license fees charged by TAHE. An increased allocation was made to TfNSW from 1 July 2022 to fund these increases as part of the forward estimates for the period 2022–25.
- On 18 December, TfNSW, TAHE and the operators (Sydney Trains and NSW Trains) signed an HoA, which is to form the basis of negotiations to revise annual operating agreements to meet the shareholders’ revised expectation of a returns of 2.5 per cent of contributed equity. The HoA included proposed increases to operator access and licence charges over the 10-year period from 2022–2031 of $5.2 billion, with most of this increase occurring outside the forward estimates. The 2021–22 'NSW Budget Half Yearly Review' included additional funding allocations to TfNSW of $1.1 billion over the forward estimates 2023–25. The additional funding required under this HoA, and its effect on the GGS budget, will extend beyond the term of the current government. The effects will predominantly be borne by future governments.
As a result, the government now projects returns until 2052 (the estimated weighted average remaining useful lives of TAHE's assets). The assumptions are that TAHE’s contracts with its government operators will generate a return of 2.5 per cent of contributed equity, and that TAHE will recover the final revaluation loss of $20.3 billion, albeit the recovery of the revaluation loss is projected to take up to 2052. This met the financial reporting test for an equity investment in TAHE for 30 June 2021.
The Heads of Agreement will increase access fees paid by rail operators to TAHE by $5.2 billion
On 18 December 2021, TAHE signed a HoA with Sydney Trains, NSW Trains and Transport for NSW. The HoA set out the parties’ intention to revise the original access and licence agreement and to revisit the pricing model. The HoA proposes indicative future access and license fees that will form the basis of negotiations to meet the revised shareholders’ expectation of a return of 2.5 per cent per annum of contributed equity and recover the holding (revaluation) loss of $20.3 billion. This represents an increase from the current contracts that reflect a shareholders’ expected rate of return of 1.5 per cent per annum of contributed equity without an intention to recover the holding loss. The revised HoA covers the period FY2022–FY2031 and includes projected access and license fees totalling $17.14 billion over this period. This is an increase of $5.2 billion on the existing commercial agreements between TAHE and Sydney Trains and NSW Trains for the same period, which came into effect from 1 July 2021.
As previously stated, the HoA plans to increase access and license fees by $1.1 billion over the period FY2022–25 as part of the annual renegotiation of prices under the terms of the existing contracts. Funding for the increases was included in the 2021–22 'NSW Budget Half Yearly Review' as part of the forward estimates and approved by government. The remaining $4.1 billion increase is planned over the period FY2025–31, and is outside of the forward estimates. Uncertainty exists because future governments may also need to commit the necessary funding in successive forward estimates to enable the operators to pay the access and licence fees outlined in the HoA.
A summary of the fees under the current agreement existing fees and those outlined in the HoA is included below:
Original contracted fees effective 1 July 2021
Projected access and license fees (under HoA)
Additional fees to be funded by the GGS
The revised access fees will significantly increase costs to the GGS budget in future years
The $5.2 billion increase in access and license charges by TAHE would appear to need to be funded through additional grants and subsides paid by the GGS to the rail operators. The additional funding may be significant, particularly in the years beyond the current budget estimates period.
The graph below demonstrates that the funding burden of higher access and license fees is expected to increase even more beyond the forward estimates period of 2023–2025. Conversely, equity contributions from the GGS to TAHE will significantly decrease over the same period. This means the budget benefits of equity contributions are realised in previous years and the current budget forward estimates period, while higher expenses to the budget may be required in years beyond the forward estimates. The additional fees charged by TAHE are required so the government can support its $2.4 billion contributions to TAHE in 2020–21 as an equity investment. Had the shareholding ministers not signalled their expectation that TAHE earn a commercial return by charging operators additional fees, this $2.4 billion should have been reversed and recorded as a capital grant expense, or the Total State Sector Accounts risked being qualified.
Valuation of TAHE assets in TAHE’s accounts
There were significant adjustments to TAHE’s valuation between the financial statements originally submitted for the audit and the final, signed financial statements
TAHE valued its property, plant and equipment as at 30 June 2021 using a valuation approach based on its discounted cash flows (DCF). Finalisation of access and licence agreements with Sydney Trains and NSW Trains prior to 30 June 2021 enabled TAHE to develop financial forecasts to value its assets under the DCF approach. Prior to the 18 December 2021 HoA, the cashflows from the existing commercial contracts were used to determine the fair value of TAHE's non-financial assets. TAHE determined the fair value of its property, plant and equipment (PPE) and related intangibles was $12.8 billion. This resulted in an initial write-down of $24.8 billion, including a write-down of the Country Regional Network to nil value.
The judgements and assumptions used by TAHE in determining the initial fair value of $12.8 billion were not reasonable to audit, resulting in a material understatement of asset values by $1.2 billion. The differences related to the discount rates that were applied to the expected cash flows. TAHE had adopted higher risk assumptions in its valuation than were supported by evidence.
Risk assumptions are reflected in discount rates – the higher the risk, the higher the discount rate. In a DCF valuation, higher discount rates drive lower values for assets. TAHE is a monopoly rail infrastructure asset owner, with limited operational and maintenance risks, and has revenue contracts in place with government operators for the next ten years. These circumstances support a lower discount rate.
As a result of signing the HoA on 18 December 2021, $5.2 billion in access and license fees were added to the discounted cash flow valuation, resulting in an upward revaluation of TAHE’s PPE and intangibles. This ensured TAHE’s asset values fell within a supportable range and were not materially misstated at 30 June 2021. The updated value resulted in a final overall write-down of the assets by $20.3 billion.
TAHE only sought to recover a return on equity injections made to the former RailCorp from 2015–16 onwards when setting its access prices. Its approach excluded consideration of all of the assets previously granted to, or acquired by the former RailCorp prior to 2015. In effect, while the operators access the full network of assets, they only pay for a portion of it. The cashflows are not reflective of the full asset base, but were used to value the full asset base. The contracted cashflows from the licence and access fees with Sydney Trains and NSW Trains are based on the expected rate of return determined by the shareholding ministers on the equity contributions received from 2015–16 onwards. The remaining asset base is considered to be ‘gifted assets’ from the government to TAHE. TAHE advised there is no expectation from government for TAHE to generate revenue from access and licence fees from the gifted asset base.
TAHE receives grants from Transport for NSW to cover the shortfall between access fee revenue and the maintenance expense for the Country Regional Network. However, TAHE is required to continue providing access to this network as it is required for the passenger services and freight movements to regional and interstate areas. This results in the Country Regional Network generating income that is far less than what it costs to operate and maintain the network. The income approach results in a fair value of nil for the Country Regional Network. Although this outcome is consistent with the accounting standards and NSW Treasury Policy Paper, it is an unusual outcome for a significant network of assets, which includes land, stations and rail tracks.
NSW Treasury policy on expected rate of return
NSW Treasury has not developed a formal policy or benchmark to guide its expectations for returns on GGS investments in State owned corporations (including TAHE)
The absence of a policy setting NSW Treasury's expectations as to what it expects as a reasonable rate of return makes it problematic to assess whether returns on GGS investments are within or outside expectations. Additionally, there is no guidance regarding the components of the investment a return is expected on, nor whether the rate of return should include or exclude the original investment. There is no guidance on the timeframe over which the investment might be realised, nor is there any guidance as to what is a reasonable timeframe. The absence of a policy on expectations of returns will be reported as a high risk finding in NSW Treasury's management letter.
In our view, the concept of a 'sufficient rate of return' could be considered to be at least the long-term inflation rate. The 'investment' should include all of the assets and funds that the owner has contributed, and the investment should be realised in its entirety before the assets in the entity have reached the end of their useful lives.
In the absence of a NSW Treasury formal policy or benchmark as to what is a sufficient rate of return for GGS investments in other sectors, we had regard to guidance provided by the Australian Government’s Department of Finance (Finance). Finance published in its July 2018 Finance Advice Paper that for an investment to be fully regarded as equity, it should expect to earn a rate of return at least equal to the long-term inflation rate (i.e. currently 2.5 per cent) and there should be a reasonable expectation that the investment will be recovered. If these conditions are not met, the payment should be partially or fully recorded as a grant expense.
To avoid qualification of the State's accounts, NSW Treasury's final TAHE modelling used a 2.5 per cent benchmark as the expected rate of return and projected returns to 2052 to recover the holding (revaluation) loss of 20.3 billion. This was the basis for the access charges and licence fees that were reflected in the 18 December 2021 HoA between TAHE and its key customers and will form the basis for re-negotiation of the contracts between those parties.
NSW Treasury should:
An unqualified opinion, with an emphasis of matter, was issued on 24 December 2021
The Independent Auditor's Opinion, while unqualified, contained an emphasis of matter drawing attention to significant uncertainty noted in the Total State Sector Accounts at Note 11 'Equity Investments in Other Public Sector Entities'. The uncertainty relates to assumptions supporting the value of the State’s investment in TAHE. While there is evidence to support those assumptions, there remains a process to be completed to reflect those assumptions in legally binding contracts. Further, the funding to enable TAHE’s customers to pay the increases, has been at least partially reflected in the forward budget estimates to 2024–25, but is yet to be included in appropriations. Furthermore, increases in prices over the period 2025–31, while reflected in the HoA are outside the forward estimates period.
The significant uncertainty relating to the access fees to be paid by rail operators was disclosed in the TSSA financial statements
The TSSA financial statement disclosures note the significant uncertainties at ‘Note 11 – Equity Investments in Other Public Sector Entities’. Significant uncertainties are acknowledged around the key judgements and estimates supporting the expected rate of return. The disclosure of these uncertainties resulted in the Independent Auditors Report including an Emphasis of Matter, which draws attention to the TSSA disclosures of the following:
- TAHE’s future estimated access and licence fees, which are critical to the ability to earn a realistic rate of return are subject to re-negotiation and re-signed access agreements, based on proposed indicative future access and licence fees set out in the HoA, which will form the basis of the re-negotiation.
- $1.1 billion in additional funding for TAHE’s key customers was provided in the 2021–22 ‘NSW Budget Half Yearly Review’ consistent with the terms in the HoA, but this funding only extends out to the end of the forward estimates period in 2024–25. There is an additional $4.1 billion over the following six years outside of the forward estimates period (up to the end of the 10-year contract period), which has been broadly communicated to the Expenditure Review Committee, but is yet to be provided for in government budget figures.
- A significant portion ($32.9 billion) of the required returns are earned outside of the 10-year contract period (terminating 30 June 2031) to 2052, and there is a risk that TAHE will not be able to re-contract for access and licence fees at a level that is consistent with current projections. There is also a risk that funding for TAHE’s key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections.
We will also include a high risk finding in NSW Treasury's management letter which recommends management addresses the uncertainties raised in the Independent Auditor's Report including the preparation of detailed projections to support returns beyond 30 June 2031.
NSW Treasury should:
Sector classification of TAHE
TAHE is a for-profit entity that has continued from the former RailCorp under the Transport Administration Amendment (Transport Entities) Act 2017. RailCorp was a not-for-profit agency. Both were classified as Public Non-Financial Corporation (PNFC) entities within the Total State Sector Accounts. During the 2012 structural reform in the transport sector, the NSW Government obtained an interim ruling from the Australian Bureau of Statistics (ABS) to maintain the current PNFC classification of RailCorp until 31 December 2014. The ABS is responsible for classifying institutional units for the purpose of official statistics. It also publishes the Government Finance Statistics manual (GFSM) framework, which is used as basis when preparing the TSSA.
NSW Treasury had identified the risk that RailCorp’s classification as a PNFC was unlikely to continue beyond 1 July 2015 as it may not meet the criteria for a PNFC under the GFSM. A PNFC entity must satisfy the requirements of being a market producer. Due to RailCorp’s dependency on government subsidies and its inability to recover its production costs, this classification was assessed as a risk because costs associated with RailCorp would then be reflected in the GGS Budget Result.
The NSW Government announced in its 2014–15 Budget Papers, the proposed development of a commercial asset holding entity, TAHE. The government expected RailCorp to transition to TAHE within a four-year period and be operational by 1 July 2019. This long-term plan recognised time was necessary to complete the legislative process required to transition RailCorp to TAHE, establish a new governing board and develop commercial models. RailCorp transitioned to TAHE 12 months after its original planned date. In 2020, the Audit Office raised a high risk finding due to the significance of the financial reporting impacts and business risks for NSW Treasury and TAHE.
Impact of revised access fees on the sector classification of TAHE and the NSW rail operators
The recently signed HoA means the GGS requires additional grant funding to pay the NSW rail operators so they can fund the $5.2 billion in additional access and license fees over the next ten years. This means Sydney Trains and NSW Trains need more government subsidies to fund their operations. A total of $17.14 billion in access and licence fees is projected to be paid by Sydney Trains and NSW Trains to TAHE through to 2031. In the absence of other additional revenue sources, this is most likely funded by the GGS sector (the Budget).
A key test considered by the ABS when determining whether public sector units are classified into either General Government (ie: government controlled non-market producers) or Public Corporations (ie: government controlled market producers) is the market producer test.
The ABS considers three indicators when considering whether a unit is a market or non-market producer:
- Sales to cost ratio: the higher the proportion of total production costs that are covered by total sales (including subsides), the more likely the unit is to be a market producer.
- Government intervention: the extent to which government can directly influence the prices, nature and level of services provided by the producer.
- Competition: the ability of consumers to buy similar goods and services from other producers on the basis of the process charged. This also considers the lack of competition when a unit is primarily supplying goods and services to other government units.
Given the 18 December 2021 HoA, reliance on government funding by the NSW rail operators is most likely. It is therefore recommended that NSW Treasury liaise with the ABS to re-confirm the classification of NSW Trains and Sydney Trains as entities within the PNFC sector.
This will affirm whether these entities continue to meet the market producer test requirement and are appropriately classified as PNFC entities.
TAHE’s sector classification was confirmed by the ABS in 2015 prior to the legislation that transitioned RailCorp to TAHE. This was based on a submission made by NSW Treasury supported by an agreed transition plan.
Now that TAHE is operating, it is recommended that NSW Treasury liaise with the ABS to re-confirm the sector classification of TAHE.
As TAHE transitioned from RailCorp, the main customers continued to be the NSW Government rail operators (ie: Sydney Trains and NSW Trains). TAHE is effectively a monopoly rail network access and license provider in NSW. There are few, if any other providers of rail infrastructure other than TAHE. These factors should be discussed with the ABS to determine if there is any impact to its existing sector classification as a PNFC entity. We will include a high risk management letter for NSW Treasury to discuss and confirm with the ABS, the sector classification of NSW Trains, Sydney Trains and TAHE.
Control of assets
The NSW Government’s rail reform initiatives in 2012 resulted in a new operating model, which created NSW Trains and Sydney Trains as the NSW rail operators, effective as of 1 July 2013. RailCorp, stripped of its rail operations, continued as a residual entity and was responsible for asset ownership.
On transition of RailCorp to TAHE on 1 July 2020, NSW Treasury determined TAHE maintains accounting control of the assets held by TAHE. The Framework for the Preparation and Presentation of Financial Statements, AASB 116 ‘Property, Plant and Equipment’ and AASB 15 ‘Revenue from Contracts with Customers’ states that to fulfil the criteria to recognise assets, an entity must demonstrate control over them. This refers to TAHE’s ability to direct the use of, and obtain substantially all of the remaining benefits from the asset as well as the ability to prevent other entities from directing the use of, and obtaining the benefits from an asset.
For the current year, the legal form of the arrangements established in its first year of operation imply TAHE has control over the assets. Relevant legal arrangements include:
- establishment of the Implementation Deed for TAHE on 30 June 2020, which removed Transport for NSW's ability to direct TAHE in relation to the Rail Service Agreement, clarified TfNSW’s role as an agent and also articulated key matters (TAHE reserved matters) which were considered as under the discretion of TAHE. The authority to approve commercial arrangements including track access agreements remained with TAHE
- under the Implementation Deed significant capital expenditure, maintenance, operating expenditure and asset disposals remain TAHE reserved matters. Disposals of land and real property must not impact on existing rail corridors and infrastructure disposal can occur when infrastructure asset is destroyed, obsolete or being replaced
- establishment of TAHE on 1 July 2020 in the Transport Administration Act 1988 and repeal of the ability by TfNSW to direct TAHE under section 3G and 3H of this Act which relates to TfNSW's ability to direct public transport agencies6
- establishment of TAHE’s Operating Licence for the year ended 30 June 2021 on 1 July 2020
- establishment of an Operating Licence and Statement of Expectations on 1 July 2021 until 30 June 2023
- the terms and conditions under the Operating Licence enable TAHE to directly contract with rail operators to facilitate access to the metropolitan network and grant licences to access and use the rail infrastructure and rolling stock assets
- execution of Track Access Agreements effective from 1 July 2021
- execution of a 10-year Licence, Agency and Maintenance Deed (LAM Deed) effective from 1 July 2021
- obtaining the benefits from providing access to these assets over the next ten years through access and licence fees. Under the Track Access Agreements and LAM Deed, effective from 1 July 2021, TAHE receives access fees and licence fees (right to receive cash) from NSW Trains and Sydney Trains for granting access and use of the rail infrastructure and rolling stock assets
- obtaining benefits from providing access to private freight operators to the track assets (right to receive cash).
Collectively, in form, these supported NSW Treasury and TAHE's assertion over its control over the assets as at 30 June 2021 on the bases:
- TAHE was able to demonstrate it had the ability to grant access to its assets by way of Track Access Agreements and govern their maintenance through the LAM Deed
- TAHE could exercise decision making ability over TAHE reserved matters
- TAHE receives access fees and licence fees (right to receive cash) from operators such as NSW Trains and Sydney Trains for granting access and use of the rail infrastructure and rolling stock assets.
However, risks remain as TAHE is in its early stages, and the actual substance of operations will need to be observed and considered. This will be included as a high risk management letter finding.
The State Owned Corporations Act 1989 maintains that all decisions relating to the operation of a statutory SOC are to be made by or under the authority of the board. However, under the Transport Administration Act (TAA) 1988, the functions of TAHE may only be exercised under one or more operating licences issued by the Minister for Transport and Roads. The current Operating Licence confers terms and conditions for TAHE to carry out its functions, and imposes constraints, including (but not limited to) TAHE:
- must not carry out railway operations (as defined in the Rail Safety National Law)
- must not operate a transport service
- must not carry out maintenance of its assets, other than by having in place arrangements with third parties (including Sydney Trains), under which another person is required to maintain transport assets
- must comply with the asset safety requirements established by TfNSW
- must continue work towards the delivery of the on-going projects in accordance with the relevant Cabinet Approval and NSW Government Capital Investment Plan.
Such operating licences are short term in nature, and the TAA allows the Portfolio Minister to grant one or more operating licences to TAHE and may amend, substitute, or impose or revoke conditions of the operating licence.
Furthermore, the Statement of Expectations issued by the Minister for Transport and Roads outlines the minister’s expectations of TAHE in ensuring the government’s priorities for the transport sector are met. This includes funding, investing and delivering transport assets, as prioritised by NSW Government to achieve customer and community outcomes aligning to the Future Transport 2056 objectives.
We note, under s20O and s20P of the SOC Act, the Portfolio Minister, with the approval of the Treasurer, may provide the Board notification of public sector policy that is to apply to a SOC or a written direction if required in the public interest. However, prior to giving such notification or direction, the Portfolio Minister must consult with the Board and request the Board to advise the Portfolio Minister whether carrying out the policy or direction would not be in the best interest of the SOC.
Given the restrictions that can be placed on the entity through the Operating Licence, and the ability to make further changes to the Operating Licence and Statement of Expectations set by the Portfolio Minister, there is a risk there could be limitations placed on the Board of Directors to operate with sufficient independence in its decision-making with respect to the operations of TAHE. Over time, this may further impact the degree of control required by TAHE to satisfy the recognition criteria over its assets. It may also fundamentally change the presentation of TAHE’s financial statements.
Furthermore, the Office of Transport Safety Investigations (OTSI) recently prepared a report based on a review of mitigation measures and TAHE’s safety governance arrangements in place to manage potential conflicts between TAHE’s commercial objectives and the safe management of rail assets. The report notes the mitigation strategies and governance arrangements through the Operating Licence and Statement of Expectations from the Portfolio Minister are intended to narrow TAHE’s safety accountabilities and clarify roles and responsibilities for maintenance and investment decisions for operating rail assets between TAHE and transport cluster entities. OTSI also states the framework has not been fully developed and implemented so whether it achieves these objectives in practice is not yet clear. The report also notes that TAHE’s role is not reflected within the TfNSW’s Asset Management Framework (AMF) and Safety Management System (SMS) documents and is expected to be updated in December 2022.
We accepted NSW Treasury’s position on control for the current year. It will remain an area of audit focus in future years as the substance of the arrangements put into place need to be confirmed by observation
Future limitations to the degree of control TAHE, and its Board, can exercise over its functions may impact the degree of control TAHE has over its assets going forward. As part of the 2021–22 audit, we will monitor and assess whether, in substance, these assets continue to be controlled by TAHE and whether, in substance, TAHE can operate as an independent SOC. We require management continue to demonstrate that TAHE continues to maintain control over its assets and has the ability to operate as an independent SOC.
NSW Treasury and TAHE should monitor the risk that control of TAHE assets could change in future reporting periods. TAHE must continue to demonstrate control of its assets or the current accounting presentation would need to be reconsidered.
NSW Treasury needs to significantly improve its provision of supporting documentation
NSW Treasury governance arrangements to support the independent external audit are inadequate and key documents were either not provided to the Audit Office, or were not provided on a timely basis, or their existence was not made known to the Audit Office
A key reason for the delay in signing the audit opinion for the TSSA related to the fact that information relating to TAHE was not shared with the Audit Office, or that information was not shared on a timely basis. This unnecessarily prolonged the audit process.
Requests for relevant information about TAHE to support the 2020–21 financial year audit date back to at least July 2020. A letter from the Audit Office to the Secretary of NSW Treasury, Secretary of Transport and the Acting CEO of TAHE in June 2021 outlined requested documents not received and flagged that not receiving those documents by 30 June 2021 would put the reporting timetables at risk. This letter was followed up with a further letter from the Auditor-General to the Secretary of NSW Treasury in September 2021, stating that all key information had still not been received. The requested information was received progressively up to 5 October 2021.
Not sharing key information with the independent external audit on a timely basis delays discussions and resolution of issues. For example, testimony given to the TAHE Public Accountability Committee Inquiry hearing on 15 November 2021 brought to our attention modelling performed by an external consultant in 2017–18 performed on behalf of the TAHE Advisory Board, which included senior executive representatives from NSW Treasury, Transport for NSW and RailCorp. The Audit Office was not made aware of this report's existence in 2018 or subsequent years, and was only provided a copy in late 2021 after repeated information requests.
The financial modelling considered, amongst other things, the track access and licence fees required to support TAHE as a commercial PNFC entity and the impact on the Budget Result and forward estimates under a commercial scenario. A further scenario reclassified TAHE and the operators within the GGS.
The financial modelling was predicated on a key assumption, that the significant write-down in asset values did not need to be factored into the required rate of return on the investment. Other assumptions included, but were not limited to, the required rate of return on equity and the use of Community Service Obligation (CSO) subsidies to support the commerciality of TAHE.
Had this information been shared with our Office earlier, discussions on the GGS’s intent to earn a sufficient rate of return would have been held and resolved earlier. Instead, the issues identified in this 2017–18 report were identified and confirmed as issues by audit in the second half of 2021.
In addition, even following repeated requests for key information, our process for seeking representations from management during audit completion identified further reports, just prior to signing the audit opinion, relevant to the audit that had not yet been shared, and should have been shared. Further, this process of seeking ordinary representations from NSW Treasury's management, that all key documents were made available to audit, was unnecessarily obstructive and difficult. Before management signed the representation to declare they had shared all relevant information, they shared at least a further 34 megabytes of data, or 23 reports (1,023 pages), with the Audit Office, around midnight, the morning of audit signing.
NSW Treasury needs to significantly improve its governance arrangements to ensure all key information is identified and shared with the Audit Office on a timely basis. This will ensure the audit process has access to complete and accurate information when considering material transactions and balances of the State.
We will include an extreme risk management letter finding for NSW Treasury to significantly improve its processes to ensure all relevant information is identified and shared with the Audit Office to support material transactions and balances of the State.
NSW Treasury needs to significantly improve its processes to ensure all key information is identified and shared with the Audit Office on a timely basis. This will ensure the audit has access to complete and accurate information when considering material transactions and balances of the State.
Undue reliance on external consultants
External consultants were used extensively to advise government agencies on matters related to TAHE. The NSW Treasury’s 2020–21 Annual Report reported spending of $975,239 alone on one consultant in that year in relation to TAHE. The same Annual Report disclosed 15 consulting engagements over $50,000 amounting to $14.9 million just in relation to finance, accounting and tax matters.
The extensive use of consultants can give rise to the risk that:
- agencies shop for opinions from multiple experts in order to receive advice that matches the outcome being sought
- so much reliance is placed on the expert that the agency cannot appropriately challenge the expert, or converse on the topic analysed by the expert without that expert being present
- issues raised by the expert, assumptions used, or limitations expressly included in the experts reports are not appropriately challenged or closed out by the engaging agency.
This will be included as a high risk management letter finding.
NSW Treasury should consider whether there is sufficient competent oversight of its use of consultants and assess the risk of an over dependence on consultants at the cost of internal capability.
Comparison of TAHE to transport asset entities Queensland Rail and VicTrack
There has been public commentary that the NSW arrangements for TAHE are similar to other jurisdictions for their relevant rail entities. Queensland and Victoria have also established rail entities in the PNFC sector, Queensland Rail and VicTrack, respectively. These rail entities are established by relevant State legislation, but there are substantive differences between them. These differences need to be taken into account when assessing the accounting implications that arise from transactions and balances that occur within these entities and between these entities and the relevant GGS.
Some of these differences include, but are not limited to for-profit/not for-profit status, nature of the services provided and the funding received and the measurement basis of assets under Australian Accounting Standards which are detailed in the table below.
|Nature of the services provided||Owns rail assets comprised of heavy rail rolling stock, property, land, plant, machinery, trackwork and infrastructure.
Passenger services are delivered by Sydney Trains and NSW Trains.
|Holds rail infrastructure and delivers passenger services.||
Legal owner of rail land, building assets and infrastructure.
Assets leased to the Department of Transport (the Department) under a peppercorn arrangement to enable the Department to provide transport services.*
|Nature of funding received||Primary revenue source is from commercial rail agreements with public rail operators (Sydney Trains and NSW Trains) from 1July 2021 and third-party operators.||Primary revenue source is from a Rail Transport Service Contract (RTSC) covering the delivery of train services for the city network, maintenance of network infrastructure and maintenance of the regional network. The RTSC is funded by the Department of Transport and is recorded as an expense to the budget.||Primary revenue source is a capital asset charge imposed by the Victorian Department of Treasury which is an estimate of the cost of capital investment in government assets. The capital asset charge is a notional charge shown as both revenue and an equivalent expense in the Comprehensive Operating Statement.*|
|Measurement basis of assets under Australian Accounting Standards||Income approach||Historical cost adjusted for impairment.||Land is valued using the market approach and specialised buildings and infrastructure assets using the cost method (current replacement cost).|
* VAGO’s opinion states that the balances and transactions that should not be recognised in the financial statements include, but are not limited to: property, plant and equipment and capital asset charge (income and expense).
Upcoming performance audit on TAHE
A performance audit on the establishment of TAHE is currently in progress. We plan to table this report in 2022.
3 The Australian System of Government Finance Statistics Manual 2015 (GFSM).
5 Note: This is after adjusting for operating and maintenance costs incurred directly by the operators.
4. Response to COVID-19
The government continues to respond to the impacts of the COVID-19 pandemic on New South Wales through its economic stimulus measures
The COVID-19 pandemic continues to significantly impact the State’s finances, reducing revenue and increasing expenses especially in sectors directly responsible for responding to the COVID-19 pandemic, such as Health. Over 2020–21, the government allocated an additional $5.6 billion to agencies as part of its economic stimulus and pandemic response. Measures included:
- $1.8 billion in health measures including essential medical equipment purchases, vaccine distribution, quarantine, contract tracing and maintaining clinical health capacity (such as intensive care units)
- $508 million in additional cleaning services primarily to the Department of Education and Transport for NSW
- $500 million as part of the ‘Dine & Discovery NSW’ voucher program to the Department of Customer Service
- $350 million in combined land tax relief and small business recovery grants to Department of Customer Service and NSW Treasury respectively.
Around $4.5 billion of this package was spent in 2020–21, leaving $1.1 billion unspent and carried forward into 2021–22. The graph below shows the total allocation and spend by cluster for 2021 compared to their target spend.
The $171 million overspend in Health was due to additional costs incurred in relation to public health activities, including:
- $367 million overspend for response measures covering Hotel Quarantine, cleaning, telehealth services, testing, and contact tracing
- $22 million overspend for health worker accommodation and medical research
- $17.1 million overspend for establishment and distribution of vaccines.
The amounts above were offset by underspends including:
- $179.1 million underspend of funding for purchases of Personal Protection Equipment
- $35 million underspend of funding to private hospitals to reserve ICU capacity and mange elective surgeries
- $18 million underspend of funding for community based services, expanded virtual services and partnering with third party service providers.
A National Cabinet made up of the Prime Minister, Premiers and Chief Ministers was established in early 2020 as the COVID-19 pandemic was evolving. On 13 March 2020, the National Partnership on COVID-19 Response (the Agreement) was entered into by the Commonwealth and the States and Territories in recognition of the anticipated additional costs that the State's health services were likely to incur in response to the COVID-19 outbreak. The agreement provided three sets of payments to states:
- An upfront advance payment payable when states committed to the agreement.
- Hospital Services Payments, which provided a 50 per cent contribution for costs incurred by states for the diagnosis and treatment of COVID-19 cases and suspected cases.
- State Public Health Payments, which provided a 50 per cent contribution for costs incurred by states for other COVID-19 activity to manage the outbreak.
During the year, over $8 billion was received in Commonwealth grants and contributions through the National Health Reform Agreement (NHRA) and the National Partnership Agreement (NPA) in 2020–21. Since its inception, the Agreements have evolved to include additional funding streams for specific needs as they have been identified. More information on this funding and our recommendations regarding the accounting for revenues received under these agreements is on page 14 of the Health 2021 NSW Auditor-General’s Report to Parliament.
Vaccines were provided to states free of charge. However, the states and territories distribute and provide the vaccines free of charge to the Australian public in a manner that they determine. On the basis that the State controls the inventory once it is distributed to it from the Commonwealth, the value of the inventory received, distributed and wasted requires recognition where a reliable measurement can be ascertained.
The value attributable to the goods received and the corresponding vaccine inventory on hand is measured at its fair value based on replacement cost. The Ministry of Health was unsuccessful in obtaining cost information from the Commonwealth because of non-disclosure agreements signed by the Commonwealth and the pharmaceutical companies supplying the vaccines. The supply of vaccines will increase in 2021–22 and future years, both in terms of brands and quantum. Obtaining the original cost data will increase the accuracy and reliability of reported financial information. More information on this issue and our recommendations in relation to accounting for vaccine inventories are on page 17 of the Health 2021 NSW Auditor-General’s Report to Parliament.
Health was allocated $433 million for personal protective equipment
Around $433 million or just under 25 per cent of the total Health stimulus package was for purchases of safety equipment, such as personal protective equipment (PPE). By 30 June 2021 $254 million of the State's funding was spent on purchases of PPE. The State's funding for PPE was matched by the Commonwealth under the terms of the Agreement.
Data errors and anomalies in the impairment model and difficulties forecasting key factors impacting the management of PPE, which comprised the majority of the State's COVID-19 inventories, impacted the valuation and impairment of the State's COVID-19 inventories. This resulted in corrected misstatements in the State's consolidated financial statement, including:
- $83.8 million overstatement in the impairment provision for COVID-19 related inventories (PPE) resulting from anomalies in the accuracy of product best before dates
- $30.4 million understatement in the impairment provision for COVID-19 related inventories (PPE) that resulted from increases in projected demand in response to the Delta variant.
More details including our recommendations to improve impairment assessments are included on pages 9 and 16 in the Health 2021 NSW Auditor-General’s Report to Parliament.
Just under half of the $500 million allocated to the ‘Dine & Discover NSW’ program was spent by 30 June 2021
The ‘Dine & Discover NSW’ program offered NSW residents $100 in vouchers to use at registered businesses throughout the state. Of the $500 million allocated to the program; $240 million (48 per cent) was spent by 30 June 2021. The lower than forecast expenditure is attributed to delays in the roll-out of the program, a lower than anticipated take-up by NSW residents due to the reintroduction of pandemic restrictions in NSW in June 2021. Service NSW launched the ‘Dine & Discover NSW’ program in March 2021.
The government has extended redemption of unused vouchers through to 30 June 2022.
The response to COVID-19 was funded by $1.2 billion in grants from the Australian Government, and $4.8 billion in State borrowings
At 30 June 2021, COVID-19 stimulus funding provided by the State to cluster agencies included $1.2 billion (2020: $1.6 billion) from the Australian Government and $4.8 billion (2020: $2.7 billion) in new borrowings by the State from bonds issued through New South Wales Treasury Corporation (TCorp). The proceeds from these bond issues were provided as loans, largely to NSW Treasury as it manages borrowings on behalf of the State and was responsible for allocating stimulus funding to cluster agencies.
In the prior year, the nature of the pandemic meant most funding was provided via ‘Exigencies of Government’ measures under Section 4.13 of the Government Sector Finance Act 2018 (GSF Act). This section allows for funding for urgent and unforeseen expenditures such as natural disasters. The ongoing nature of the COVID-19 pandemic meant that this year, most stimulus funding was provided through appropriations included as part of the 2020–21 State Budget.
We will release thematic reports that have regard to COVID-19 by considering the financial implications and trends at the State sector level, and the delivery of new or expanded projects, programs or services in 2022.
5. General Government Sector budget result
Deficit of $7.1 billion compared with a budgeted deficit of $16 billion
The outcomes of the government’s overall activity and policies are reflected its net operating balance (Budget Result). This is the difference between the cost of general government service delivery and the revenue earned to fund these sectors.
The General Government Sector, which comprises 204 entities, generally provides goods and services funded centrally by the State.
In addition to the 204 entities within the General Government Sector, a further 98 government controlled businesses are included within the consolidated Total State Sector financial statements. These businesses generally provide goods and services, such as water, electricity and financial services for which consumers pay for directly.
The Budget Result for the 2020–21 financial year was a deficit of $7.1 billion compared to an original forecast of a budget deficit of $16 billion.
The main driver of the change in result was:
- $2.7 billion of higher taxation revenue, mainly due to:
- $1.8 billion more in stamp duties collected from property sales, from higher transaction volumes and strong property price growth driven by historically low mortgage interest rates. Higher than expected new vehicle sales during the pandemic resulted in an increase in motor vehicle registrations
- $400 million more in payroll taxes was collected due to stronger than expected growth in the 2020–21 employment market. This contrasted with significant decline in employment levels experienced in 2019–20 due to the first wave of the COVID-19 pandemic
- $236 million more in land tax revenue, driven by an overall increase of 3.2 per cent in average Valuer General land values
- $2.3 billion more in grants revenue was reported, mainly due to increases in:
- Commonwealth general purpose payments of $2.6 billion from higher than expected GST revenue. The GST pool increased as both dwelling investment and household consumption in 2020–21 increased more than anticipated
- Commonwealth specific purpose and other payments of $259 million, primarily driven by National Partnership Agreement grant payments to support the COVID-19 response. This was offset by a reduction of $528 million in Commonwealth national partnership payments and other grants and subsidies, as milestone payments to Transport for NSW were delayed based on completion of certain project milestones
- $0.8 billion in increased ‘other dividends and distributions’ mostly on investments within the New South Wales Treasury Corporation Investment Management funds and NSW Self Insurance Corporation's investments.
The change was also driven by expenses being less than budgeted, including:
- reductions of $2.6 billion in Recurrent and Capital Grants and Subsidies, due to delays spending grants as COVID-19 and the March 2021 floods deferred expenditure to future years. A lower than forecasted spend was reported by NSW Treasury $652 million, Resilience NSW $513 million, Department of Education $395 million and Department of Planning, Industry & Environment $379 million
- decreases of $0.4 billion in interest expense due to GGS borrowing being less than anticipated, and Transport for NSW's financing costs on service concession financial liabilities and lease liabilities being less than budget.
6. Key audit findings
6.1 Accounting matters
COVID-19 related inventory impairment and write-offs
The Health Administration Corporation (HAC), through HealthShare NSW, procured a significant volume of inventories to support the health response to the COVID-19 pandemic. HAC held $1.4 billion in COVID-19 inventories during the year which comprised an opening balance of $731 million and purchases of $656 million during 2020–21. COVID-19 inventory includes personal protective equipment such as face shields, masks and other equipment.
HAC impaired or wrote off $776 million of its COVID-19 inventory stockpile during the year.
Inventories of $558 million are not likely to be used by their expiry dates, and were provided for as impaired. Amounts provided for impairment are not recognised within the budget result until such time the assets are written off. Impairment provisions represent an ‘other economic flow’ which is recognised outside the budget result in the Statement of Comprehensive Income.
The Health Administration Corporation has, for financial reporting purposes, written off certain COVID-19 inventory comprised of:
- $158.8 million for protective masks assessed by HAC as not meeting the Therapeutic Goods Administration's (TGA) regulatory requirements
- $37.6 million for expired PPE inventories including masks, gloves, hand sanitisers, face shields, isolation gowns and swabs
- $20.7 million for non-PPE inventories, such as ventilators, assessed by HAC as being faulty.
Data errors and anomalies in the impairment model and difficulties forecasting key factors impacting the management of Personal Protective Equipment (PPE) increased uncertainty associated with the valuation and impairment of COVID-19 inventories, which led to the following recommendation in the Health 2021 NSW Auditor-General’s Report to Parliament.
There is a high degree of estimation uncertainty regarding the impairment assessment for COVID-19 inventories (including personal protective equipment). The accuracy of the underlying data with respect to best before dates (BBDs) requires validation through a comprehensive stocktaking approach. Key assumptions supporting the model also need to be revisited to reflect events and experience, rather than just historical data.
We recommend Health:
A high risk management letter issue was also sent to the Ministry of Health with regards to improving the accounting for inventories particularly when assessing for impairment.
More details are included on pages 15 and 16 in the Health 2021 NSW Auditor-General’s Report to Parliament.
The State sold its 49 per cent interest in WestConnex
On 20 September 2021, the government announced the sale of its 49 per cent retained interest in WestConnex (WCX) Group to Sydney Transport Partners (STP) consortium for $10.3 billion (plus $823 million in stamp duty). STP is a consortium made up of Transurban, AustralianSuper, Canada Pension Plan Investment Board, Tawreed Investments and Caisse de depot et placement du Quebec.
The carrying value of the State’s 49 per cent residual interest at 30 June 2021 was $5.7 billion, held in a wholly owned company, Roads Retained Interest Pty Ltd. The NSW Generations Funds Act 2018 requires that the proceeds from the sale be paid into the NSW Generations (Debt Retirement) Fund.
Whilst the sale transaction was completed in October 2021, and the gain on sale will be recognised during the 2021–22 financial year, the State has disclosed the transaction as a subsequent event in the 2020–21 TSSA.
The State had previously sold 51 per cent of its interest in the WCX Group to Sydney Transport Partners (STP) in August 2018, yielding proceeds of $8.7 billion (plus $555 million in stamp duty).
Victim Support Scheme claims liability recorded for the first time
In previous years, the Department of Communities and Justice did not record a liability for Incurred But Not Reported (IBNR) Victims Support Scheme (VSS) claims. This was on the basis that the IBNR claims were not reliably measurable, due to limited empirical evidence available to determine a central estimate. Accordingly, the Department reported the IBNR as a contingent liability, expected to lie within a reasonably plausible range of $333 million to $564 million in 2019–20. Victim Support IBNR claims relate to acts of violence that have already occurred, but the victim has not yet come forward to lodge a claim and seek assistance from the VSS.
In 2020–21, the Department recorded, for the first time, IBNR liabilities totalling $200 million related to domestic violence, sexual assault (adult), assault, robbery, homicide and other offences. However, IBNR liabilities for Child Sexual Assault (CSA) were not recorded on the basis these claims were not reliably measurable.
Issues with reliable measurement of IBNR liabilities for CSA continue, because:
- there are no time limitations for victims to access counselling, recognition payments, justice-related and other out-of-pocket expenses
- uncertainty in year-on-year claims growth rate
- uncertainty of the number of years growth will persist.
The actuary indicated the CSA IBNR liability could reasonably lie within a range of $493 million to $997 million at 30 June 2021.
Consistent with the Department’s approach in prior years, where a central estimate has not been provided by the valuer, a contingent liability has been reported in the financial statements on the basis the CSA IBNR claims provision cannot be reliably measured.
More details are included on pages 17 to 19 of the Stronger Communities 2021 NSW Auditor-General’s Report to Parliament.
Commonwealth assistance to State emergencies not recorded or tracked
Over the last two years the State requested assistance from the Commonwealth Government to help deal with its response to Natural Disasters and the COVID-19 pandemic. The Commonwealth provided services to the State free of charge under Defence Assistance to the Civilian Community (DACC) agreements, including:
- bushfire response and recovery assistance to the NSW Rural Fire Service
- planning and contact tracing support to the Ministry of Health
- supporting NSW Police Force quarantine, reception and repatriation efforts at Sydney airport, hotels and borders.
Recognising the value of such services volunteered free of charge is a requirement of Australian Accounting Standards. Agencies receiving these services did not have adequate processes in place to identify and assess the fair value of all assistance received free of charge. As a result, the accounting implications were not considered by agencies. It is important the State recognise the value of all assistance received so it complies with Accounting Standards and can consider the overall financial impact of COVID-19 and natural disasters.
We recommend NSW Treasury:
NSW Self Insurance Corporation reports a combined underwriting loss across its ten schemes
NSW Self Insurance Corporation (SiCorp), is the State’s self-insurer. It operates ten managed fund schemes and is managed by icare. The largest scheme is the Treasury Managed Fund (TMF), which provides self-insurance coverage for public sector workers compensation and public liability claims.
In 2020–21, SiCorp reported a:
- $1.2 billion underwriting loss ($2.8 billion loss in 2019–20)
- $994 million net result ($744 million net loss in 2019–20)
- $867 million overall net asset surplus as at 30 June 2021 ($126 million net asset deficiency as at 30 June 2020).
SiCorp’s financial statements disclose an underwriting loss and net result, representing the combined performance of all ten schemes. The underwriting loss represents SiCorp’s performance from insurance (and insurance like) activities, while the net result represents the underwriting loss plus non-insurance related income and expenses including investment returns.
The 2020–21 underwriting loss was impacted by a $941 million increase in outstanding claims liabilities. This increased claim liabilities to $13.2 billion at 30 June 2021 ($12.2 billion liability at 30 June 2020). Most of the underwriting loss and the increase in outstanding claims was within the TMF scheme. The impact of the underwriting loss was offset by $2.1 billion in investment revenues, which resulted in a net result of $994 million.
The overall claims liability increased $941 million mainly due to:
- increasing numbers of psychological injury and their severity impacting the workers' compensation scheme
- increases in numbers of child abuse claim and the value of those claims as a result of proposed amendments to the Civil Liability Act 2002
- adverse experience from increasing numbers of physical injury claims
- March 2021 flood claims
- COVID-19 costs, such as business interruption claims.
SiCorp’s Home Building Compensation Fund (HBCF), continues to report an overall net asset deficiency due to unfunded liabilities of $534 million ($746 million in 2019–20). While the net asset deficiency means that the HBCF scheme is not fully funded for all expected future payments, NSW Treasury has guaranteed to fund cash shortfalls for policies written before 1 July 2018. HBCF is not caught by the Net Asset Holding Level Policy (NAHLP) referred to below. Funding claimed from NSW Treasury for policies written before 1 July 2018 was $13.5 million in 2020–21(nil in 2019–20).
SiCorp did not require grant income from the consolidated fund this year ($2 billion in 2019–20) to adjust its net assets within the NAHLP target range. This was mainly due to increases in investments, which returned $2.1 billion for the year ended 30 June 2021 ($69 million in 2019–20). The NAHLP, agreed between SiCorp and NSW Treasury, requires SiCorp to maintain financial assets for certain schemes, including TMF, at between 105 and 115 per cent of its liabilities.
More commentary on the NSW Self Insurance Corporation will be included in the Treasury 2021 NSW Auditor-General’s Report to Parliament.
The General Government Sectors Investments in other sectors (entities) has declined
The General Government Sector (GGS) recognises all investments in Public Non-Financial Corporations (PNFCs) and Public Financial Corporations (PFCs) on its balance sheet. As at 30 June 2021, the GGS has recognised $85.8 billion in investments in other public sector entities.
The GGS accounts for these interests as an equity investment, based on the net assets of those sectors, in accordance with AASB 1049 'Whole-of-Government and General Government Sector Financial Reporting'.
Movements in the carrying amount of these investments are taken through other economic flows – other comprehensive income. Because the State has designated these equity investments under AASB 9 ‘Financial Instruments’ as Fair Value through Other Comprehensive Income (FVOCI), the gains and losses on these investments are not included in the budget result. The basis of this designation is that the State intends to hold these investments over a medium to long-term period.
A list of all entities within the GGS, PNFC and PFC sectors as well as an outline of these sectors is included in Appendix three of this report.
The annual movements of these investments over the past three years are summarised in the graph below:
The graph indicates a significant decline in the value of the GGS investment over the past three years. This is mainly due to a decrease in the net asset value of Transport Asset Holding Entity (TAHE) in 2020–21. At 30 June 2021, the property, plant and equipment and intangibles values of TAHE were written down by $20.3 billion after it changed its valuation basis to reflect its transition from a not-for-profit entity to a for-profit entity. The investment in other sectors also reduced $8 billion over the period 1 July 2018 to 30 June 2021 due to other revaluations. Other revaluations of $8 billion are due to reductions in the net assets of agencies in the PFC and PNFC sectors, mainly due to; $1.8 billion revaluation decrement in residential properties held by New South Wales Land and Housing Corporation in FY20, TAHE’s (formerly RailCorp) $1.3 billion operating deficit in FY2019, Lifetime Care and Support Authority’s $1.5 billion combined operating deficits from FY2019 to FY2020 and other net reductions in the net assets of agencies in these sectors.
We will include a high risk finding in NSW Treasury's management letter to include more disclosure in the State's consolidated financial statements to improve reporting on the amount of equity injections invested into PNFC and PFC agencies, including life to date returns received for each of these investments. Further detail on this write-down is discussed as part of the significant matters highlighted in the TAHE section of this report.
Further discussion on TAHE is presented in Section 3 of this report.
NSW Treasury should include more disclosure in the State's consolidated financial statements to improve reporting on the amount of equity injections invested into PNFC and PFC agencies, including life to date returns received for each of these investments.
Financial reporting by Crown Land Managers is inadequate and incomplete
Sixty State controlled Crown Land Managers did not prepare 30 June 2021 financial statements as required under the PF&A Act (now the GSF Act)
Crown Land Managers (CLMs) are persons or entities appointed by the minister to be responsible for the care, control and management of crown reserves on behalf of the people of New South Wales.
The PF&A Act, replaced by the GSF Act, requires State controlled CLMs to prepare annual financial statements. Historically, CLMs (other than the Crown Cemeteries Operators and NSW Crown Holiday Parks Land Manager) did not prepare and submit financial statements for audit.
During 2019–20, NSW Treasury established reporting exemption criteria for the CLMs. The criteria are outlined in Division 2, Part 3A of the GSF Regulation. The Department of Planning, Industry and Environment completed a desktop review of the annual reports submitted by the CLMs. It was determined 32 State controlled CLMs (excluding the Crown Cemeteries Operators and NSW Crown Holiday Parks) did not meet the reporting exemption criteria and needed to submit 2019–20 financial statements.
NSW Treasury approved three requests to extend the 32 CLMs’ submission date for their 2019–20 financial statements. The last approval was granted in late June 2021 with a revised deadline of 30 June 2021. Eight of the 32 non-exempted CLMs submitted their 2019–20 general purpose financial statements for audit by the revised due date on 30 June 2021. The remaining 24 CLMs have not submitted 2019–20 financial statements. The audits of the eight CLMs that submitted financial statements are currently underway. The results of these audits will be included in the 2022 Report to Parliament focusing on the Planning, Industry and Environment cluster.
The Department of Planning, Industry and Environment is currently finalising the 2020–21 financial reporting exemption assessment for CLMs. The preliminary assessment indicates that 60 State controlled CLMs do not meet the reporting exemption criteria and therefore, are required to prepare 30 June 2021 financial statements. To date, no CLM has prepared and submitted financial statements for audit in 2020–21. The Department of Planning, Industry and Environment is also seeking NSW Treasury's approval to extend the submission date for CLMs' 2020–21 financial statements. Whilst the Department of Planning, Industry and Environment has made some progress in the financial reporting of CLMs, more can be done to support the CLMs meet their statutory reporting obligations.
One hundred and twenty State controlled Common Trusts did not prepare 30 June financial statements as required under the PF&A Act (now the GSF Act)
Common trusts are responsible for the care, control and management of commons for which the trust is established. A Common Trust is a parcel of land that has been set aside by the Governor or the minister for specific use in a certain locality, such as grazing, camping or bushwalking. The common trusts are considered to be controlled entities of the minister who administers the Commons Management Act 1989. Common Trusts are not CLMs.
Whilst NSW Treasury established specific reporting exemption criteria for CLMs, no such criteria was established for the common trusts. Currently there are 120 common trusts in New South Wales. None of these trusts have prepared and submitted financial statements as required under the PF&A Act (now the GSF Act).
Recommendation (repeat issue)
NSW Treasury and the Department of Planning and Environment should ensure Crown Land Managers and Common Trusts meet their statutory reporting obligations.
Catholic Metropolitan Cemeteries Trust has not been audited as required by the GSF Act
NSW Treasury considers that Catholic Metropolitan Cemeteries Trust (CMCT) is controlled by the State and is included in the Total State Sector Accounts as a consolidated entity. The CMCT has not submitted their financial statements to the Audit Office for audit as required by the GSF Act.
The CMCT assert they are not controlled by the State. While not material to the Total State Sector Accounts, the value of their combined assets and liabilities included in the State’s financial statements was $298 million.
Recommendation (repeat issue)
The NSW Government should clarify its position that the Catholic Metropolitan Cemeteries Trust is a controlled entity of the State.
On 10 December 2021, the then Minister for Water, Property and Housing wrote to the Audit office requesting a financial and performance audit be performed under section 27B(3)(c) of the Government Sector Audit Act 1983. The audit would specifically cover whether the funds of the CMCTs have been used for their proper purpose.
Financial reporting of Crown Administered Items
This year, NSW Treasury completed its review of the financial reporting requirements relating to transactions and balances of the Crown. As a result, the convention of preparing separate Crown Entity financial statements ceased in 2020–21.
Previously, the Crown Entity was considered a government department for financial reporting purposes with key financial assets and liabilities, including the consolidated fund, Crown debt portfolio and superannuation and long service liabilities for certain GGS agencies. The Crown Entity essentially acted as the residual entity for NSW whole-of-government transactions that weren’t the responsibility of any other State public sector agency.
To ensure compliance with Australian Accounting Standards in particular, AASB 1050 ‘Administered Items’, transactions and balances previously included in the Crown Entity’s financial statements are now disclosed, but not recognised within the financial statements of the relevant agency that controls or administers the transactions and balances on behalf of the State. Government departments continue to recognise assets, liabilities that they control and the related income and expenses within their financial statements.
The review resulted in most of these transactions and balances being reported by NSW Treasury as ‘administered items’ given it is responsible for managing the majority of activities undertaken on behalf of the State. There was no impact to the State’s financial statements from these Crown reforms.
More commentary on the financial reporting of Crown Administered items will be included in the Treasury 2021 NSW Auditor-General’s Report to Parliament.
$1 billion understatement of debt liabilities corrected
NSW Treasury, a GGS agency, made agreements to borrow $1 billion from New South Wales Treasury Corporation (TCorp), a PFC sector agency. Some of these agreements were entered into as early as 17 May 2021. Settlement was deferred until 1 July 2021.
As TCorp raised the funds before 30 June 2021, it recognised a financial asset and liability to NSW Treasury on 30 June 2021. Despite TCorp having raised the funds by 30 June 2021 under the mutually agreed trade deal, NSW Treasury did not recognise any borrowings at year end on the basis that it requested the settlement date and receipt of cash to be deferred to past the balance sheet date. This led to an understatement of debt liabilities of $1 billion by NSW Treasury, and an inconsistent accounting treatment between the two agencies. NSW Treasury subsequently corrected the misstatement, which resulted in the GGS recognising $1 billion in financial assets and borrowings at 30 June 2021.
NSW Treasury should use the key principles in the standard AASB 9 ‘Financial Instruments’ to determine a state-wide policy about when borrowings are recognised. This policy should ensure there is a consistent understanding of performance obligations arising under trades agreed between TCorp and government agencies. Implications of delayed settlement dates and how this could impact the timing and recognition of borrowings should also be considered.
NSW Treasury should develop a state-wide accounting policy for borrowings which ensures correct and consistent accounting treatment between agencies and sectors.
6.2 Correction of prior year errors
Prior year error of $271 million in liabilities for unspent appropriations
For the financial year ended 30 June 2020, some agencies recognised a liability for unspent appropriation money. NSW Treasury has since concluded that such a liability should not be recognised as this money represents consolidated fund money, regardless of it being held as unspent by an agency.
This error resulted in a restatement of the 2019–20 comparative figures, of:
- NSW Treasury - $159 million
- Department of Customer Service - $72 million
- Department of Education - $36 million
- Office of the Director of Public Prosecutions - $4 million.
Prior year errors are disclosed in the financial statements of the above agencies to correct these errors. There was no impact to the State’s financial statements because the liabilities are eliminated on consolidation.
7. The State's revenues
Revenues increased $5.6 billion to $91.8 billion
In 2020–21, the State’s total revenues increased by $5.6 billion to $91.8 billion, 6.5 per cent higher than previous year. A decrease of 0.3 per cent was recorded in 2019–20. The main contributors to the increase in the State's revenues were an increase in taxation revenue of $4.6 billion and an increase in grants and subsidies of $1.4 billion when compared to the prior financial year.
Taxation revenue increased by 15.3 per cent
Taxation revenue increased by $4.6 billion, mainly due to:
- $2.9 billion higher stamp duties collected from property sales driven by:
- $2.7 billion increase in contracts and conveyance duties (transfer duties) from both higher transaction volumes and strong property price growth during 2020–21
- $200 million increase in motor vehicle registration duty driven by increases in new vehicle sales
- $520 million higher Gambling and Betting Taxes was earned as 2019–20. The previous year's revenues were impacted by club and hotel closures due to COVID-19. The operation of these venues in 2020–21 returned to normal for most of the year resulting in higher club gaming tax revenue of $216 million and hotel gaming taxes of $265 million
- $439 million higher collections of payroll taxes. The previous year's revenues were impacted by tax relief measures implemented by the government in response to COVID-19. Lower payroll tax was collected in 2019–20 as employment levels dropped during the State’s first lock down
- $416 million higher land tax revenues, driven by an average 3.2 per cent increase in valuer general land values, which are the basis for determining land tax values.
Stamp duties of $11.7 billion remains the largest source of taxation revenue, $2.9 billion higher than payroll tax of $8.8 billion, the second-largest source of taxation revenue.
Australian Government grants and subsidies
The State received $35.6 billion in grants and subsides, which are mainly received from the Australian Government, $1.4 billion more than in 2019–20.
Grants and subsidies were higher mainly due to an $824 million increase in Commonwealth General Purpose Payments, primarily driven by more GST revenue being received by the State. Higher GST grant funding was allocated as the State’s allocation from the GST pool was much higher than anticipated following an improvement in both dwelling investment and household consumption in 2020–21.
Commonwealth Specific Purpose Payments increased by $721 million mainly due to the support received for the COVID-19 response. The main recipient of this was NSW Health, receiving an additional $601 million in nation healthcare funding.
Other dividends and distributions
Other dividends and distributions rose by $213 million mainly due to higher distributions received from the State’s investments in management funds by NSW Self Insurance Corporation. The value of this entity's investments was lower in 2019–20 due to the impact of COVID-19 on the market value of investments.
8. The State's expenses
Expenses increased $4.1 billion to $101 billion
The State’s expenses increased 4.3 per cent compared with 2019–20. Most of the increase was due to higher employee expenses, depreciation and amortisation, other operating costs and grants and subsidies expense.
Employee expenses, including superannuation, increased 3.6 per cent to $44.1 billion
Salaries and wages increased to $36.3 billion ($34.8 billion in 2019–20). This was mainly due to increases in staff numbers and an average increase of approximately three per cent in the cost of NSW's employees across the sector. Salaries and wages for the Education and Health sectors increased by $511 million and $619 million respectively.
The Health sector employed an additional 4,893 full time staff in 2020–21 (2,763 in 2019–20) and incurred an extra $28 million in overtime mainly in response to COVID-19. Education increased staff numbers by 2,418 full time equivalents in 2020–21 (4,866 in 2019–20). This year, the health and education sectors received a 0.3 per cent award increase in pay rates.
The Public Service Commission (PSC) noted in the ‘State of the NSW Public Sector Report, 2021’ that the government sector senior executive headcount increased by 347 to 3,680 (3,333 in 2019–20). The Transport cluster represented the majority of the increase in the government sector's senior executive headcount, with an increase of 182. The PSC report noted the increase was due to the growing portfolio of major transport infrastructure projects.
Historically, the government wages policy aims to limit growth in employee remuneration and other employee related costs to no more than 2.5 per cent per annum.
Depreciation and amortisation expense increased 7.6 per cent to $10.3 billion
Depreciation and amortisation increased to $10.3 billion in 2020–21 ($9.6 billion in 2019–20). This increase was mainly driven by the depreciation of completed infrastructure projects including the State’s WestConnex M8 and M5 East Motorways, and other road projects such as Woolgoolga to Ballina project. This year also includes twelve months of depreciation relating to the CBD and South-East Light Rail versus six months in the previous financial year.
Furthermore, the first time adoption of AASB 1059 ‘Service Concession Arrangements’ resulted in the State recognising $45.4 billion of service concession assets in its capacity as grantor under arrangements with operators. More than 87 per cent of this balance was recognised by the Transport cluster. These assets are valued at current replacement cost and are depreciated on an annual basis. A service concession arrangement is an arrangement whereby the government as grantor, contracts with an operator to develop (or upgrade), operate and maintain the grantor's public service assets such as roads, bridges or hospitals. The grantor controls or regulates what services the operator must provide using the assets, to whom, and at what price. The grantor also retains any significant residual interest in the assets at the end of the arrangement. Further details about AASB 1059 are included in the ‘Implementation of new accounting standards’ section of this report.
Grants and subsidies increased $1.5 billion to $15.6 billion
The increase in grants and subsidies is due to payments made by the State in supporting businesses and local communities in response to COVID-19. These mainly included $240 million in Dine & Discover voucher payments, $156 million in land tax relief assistance, $160 million increase in grants to non-government schools (including $31 million to support Covid intensive learning support programs), and $109 million relating to small business grant payments.
The State also transferred $592 million in newly constructed assets to local councils. These mainly related to $378 million in assets transferred following completion of WestConnex stage 2 and $180 million from Northern Roads.
Other operating expenses increased two per cent to $27.5 billion
Operating expenses increased to $27.5 billion in 2020–21 ($26.9 billion in 2019–20) due to higher operating activities as agencies responded to the pandemic.
Supplies and Other Services increased by $1.7 billion. This was mainly due to funding of $533 million in hotel quarantine and associated services, and $495 million in medical equipment for the health sector.
Inventories consumed increased by $266 million. This included $217 million in COVID-19 medical equipment that was written off because it had expired or did not meet the TGA regulatory standards. Contractor expenses increased by $306 million because of increased capital works activity, primarily in the Transport sector.
The increase was offset by $1.6 billion in lower insurance claims expense. In 2019–20 financial year, higher claims were made in respect to natural disaster events, including bush fires.
Health costs remain the State’s highest expense
Total expenses of the State were $101 billion ($96.4 billion in 2019–20). In 2020–21, Health remains the highest contributor of expenses for the State with $25.7 billion ($24.2 billion in 2019–20). Education remains the second highest contributor of expenses reporting $18.4 billion in 2020–21 ($17.5 billion in 2019–20).
The following sectors have the highest expenses as a percentage of total State expenses:
- Health – 25.6 per cent (25.1 per cent in 2019–20)
- Education – 18.3 per cent (18.2 per cent in 2019–20)
- Transport – 14.5 per cent (13.3 per cent in 2019–20).
General public service expenses as a percentage of total State expenses is lower than in the previous year, which included a $2 billion increase in SiCorp’s accrued claim expenses, due to increased claims relating to the 2019–20 natural disasters.
Health expenses increased by $1.5 billion compared with 2019–20 due to the State’s response to COVID-19. This included additional health supplies of $444 million and write-downs in the value of health COVID-19 inventory by $217 million.
Education expenses increased by $0.8 billion from $17.5 billion to $18.4 billion in 2020–21 due to annual growth in salaries and wages $511 million and additional COVID-19 related cleaning costs $185 million.
Transport expenses increased by $1.8 billion compared with 2019–20 due to higher salaries, wages and contractor expenses of $540 million, grants to local government $463 million and other capital asset transfers of $355 million.
Key expenses include:
9. The State's assets
Assets grew by $12.3 billion to $526 billion
The State’s assets include physical assets such as land, buildings and infrastructure, and financial assets such as cash, and other financial instruments and equity investments. The value of total assets increased by $12.3 billion to $526 billion. This was a 2.4 per cent increase compared with 2019–20, mostly due to changes in asset carrying values.
Valuing the State’s physical assets
State’s physical assets valued at $391 billion
The value of the State’s physical assets increased by $1.7 billion to $391 billion in 2020–21 ($37.9 billion increase in 2019–20). The State’s physical assets include land and buildings ($172 billion), infrastructure systems ($202 billion) and plant and equipment ($16.7 billion).
The movement in physical asset values between years includes additions, disposals, depreciation and valuation adjustments. Other movements include assets reclassified to held for sale and other opening balance adjustments.
The movement in carrying value of the state's physical assets was mainly due to current year additions, offset by an overall revaluation decrement of $14.4 billion in 2020–21 ($4.7 billion increment in 2019–20). This decrement included a $20.3 billion write-down in the carrying value of Transport Asset Holding Entity’s (TAHE) infrastructure asset values. Further discussion on TAHE's write-down is presented in Section 3 of this report.
The State’s depreciation expense increased in 2020–21 to $8.5 billion ($7.8 billion in 2019–20) mainly due to completed capital works as well as additional depreciation associated with the first time recognition of service concession assets under AASB 1059.
In 2020–21, asset additions totalled $26.5 billion ($22.7 billion in 2019–20), due to the following major capital projects:
- Sydney Metro City and Southwest: $2.2 billion
- Sydney Metro West: $1.7 billion
- WestConnex (State and Commonwealth funded): $1.3 billion
- More Trains, More Services: $0.7 billion
- Parramatta Light Rail Stage 1: $0.7 billion.
Several major capital projects were completed in 2020–21, including 2020–21 capital expenditure on:
- Westconnex M8 ($1.3 billion)
- Pacific Highway – Woolgoolga and Ballina ($303 million)
- Wagga Wagga Base Hospital Redevelopment ($46.2 million)
- New and upgraded schools, including:
- Barramurra Public - Catherine Field ($43 million)
- Galungra Public Stage 1 ($20 million)
- Penshurst Public ($22 million)
- Hospital developments including:
- Wagga Wagga Base Hospital redevelopment ($46.2 million)
- Mona Vale Hospital redevelopment – ($14.7 million)
- Bowral and District Hospital Stage 1 Redevelopment ($11 million)
- Inverell Hospital Redevelopment ($12 million).
Valuing the State's financial assets
State’s financial assets were valued at $115 billion
The value of financial assets increased by $11.5 billion to $115 billion at 30 June 2021. Over the year:
- financial assets held at market value and other equity investments increased by $6.5 billion and $3.9 billion respectively; reflecting improved returns in financial markets over 2020–21 and offsetting some of the prior year declines due to the COVID-19 pandemic
- investments in associates (the State’s interest in non-government entities) increased by $1.5 billion largely due to an increase in the value of retained interest in the Ausgrid and Endeavour Energy electricity distribution networks. This increase was driven by an $1.1 billion fair value adjustment relating to the State’s share of the distribution networks property, plant and equipment. These are valued at cost by the associates however a fair value adjustment is performed to ensure the accounting policies of the investment in associates are consistent with State policies.
These increases were partially offset by a $1.2 billion reduction in cash reflecting the State's acquisition of financial and non-financial assets over 2020–21.
10. The State's liabilities
Liabilities increased $16.4 billion to $291 billion
The State borrowed additional funds in response to COVID-19
The State’s borrowings rose by $15.8 billion to $134 billion at 30 June 2021. This accounted for most of the increase in the State’s total liabilities.
The value of TCorp bonds on issue increased by $16.8 billion to $114 billion, which largely funded the State's capital expenditure and response to the COVID-19 pandemic.
TCorp bonds are traded in financial markets and are guaranteed by the NSW Government.
Over 2020–21, TCorp continued to take advantage of lower interest rates, buying back short-term bonds and replacing them with longer dated debt. This lengthens the portfolio matching liabilities with the funding requirements for infrastructure assets.
The State’s fiscal objective published in the 2021–22 Budget Papers is to repair the operating position by returning the budget to surplus by 2024–25 and rebuilding balance sheet capacity by bringing net debt down towards seven per cent of Gross State Product (GSP) over the medium-term. The State measures net debt as the sum of deposits held, government securities, loans payable and other borrowings, less the sum of cash and deposits, advances paid and investments, loans receivable and placements.
The chart below shows the actual net debt to GSP for NSW compared to the Commonwealth net debt to Gross Domestic Product (GDP) over the past six years. The trend shows an increase in net debt, particularly in the past two years, which is mainly driven by additional borrowings needed to fund stimulus measures when responding to COVID-19 and natural disaster relief.
Other liabilities increased by $7.2 billion in 2020–21 to $36.7 billion. This was mainly due to recognition of service concession liabilities arising from the first time adoption of Australian Accounting Standard AASB 1059 'Service Concession Arrangements: Grantors'. There was also a $4.6 billion increase in the value of TCorp investment managed funds attributable to investors that are not controlled by the State. These include universities, local government authorities and the Workers Compensation Nominal Insurer. These interests are redeemable at the option of the investors and are recognised as financial liabilities. A corresponding receivable is recognised for the same amount of the investment held.
More than 29 per cent of the State’s liabilities relate to its employees. These include unfunded superannuation and employee benefits, such as long service and recreation leave.
Valuing these obligations involves complex estimation techniques and significant judgements. Small changes in assumptions and other variables, such as changes to discount rates, can materially impact the valuation of liability balances in the financial statements.
The State’s unfunded superannuation liability fell $11.1 billion from $71 billion to $59.9 billion at 30 June 2021. This was mainly due applying a higher discount rate of 1.5 per cent (0.87 per cent in 2019–20) based on the Commonwealth 10-year bond yield, which reflects market expectations of future cash rates. A higher discount rate reduces the superannuation liability valuation. The State’s unfunded superannuation liability represents the value of its obligations to past and present employees less the value of assets set aside to fund those obligations.
11. Fiscal responsibility
11.1 The State maintained its AAA credit rating with Moody’s but was downgraded to AA+ by S&P
The object of the Fiscal Responsibility Act 2012 is to maintain the State's AAA credit rating
The government manages New South Wales’ finances in accordance with the Fiscal Responsibility Act 2012 (the Act).
The Act establishes the framework for fiscal responsibility and the strategy to achieve a AAA credit rating and maintain service delivery to the people of New South Wales.
The legislation sets out targets and principles for financial management to achieve this. These targets are:
- general government annual expenditure growth should be lower than long term average revenue growth
- eliminate unfunded superannuation liabilities by 2030.
Moody’s Investors Service credit rating of AAA/Stable did not change from the previous year. On 7 December 2020, the State’s credit rating from S&P Global Ratings changed from AAA/Negative to AA+/Stable. The Budget Statement 2021–22 noted the recent operating deficits and sharp rise in debt was one of the main factors impacting S&P Global Ratings downgrade of the State’s credit rating.
The table below shows the General Government Sector’s net debt and financial worth over the past six years.
|Net debt1 ($m)||37,076||22,732||(1,603)||(11,195)||(9,343)||(58)|
|Net debt as a per cent of GSP||5.8||3.6||(0.3)||(1.9)||(1.6)||--|
|Annual change in net debt ($m)||14,344||24,333||9,593||(1,852)||(9,285)||(5,519)|
|Net financial worth2||(51,298)||(30,102)||(4,710)||43,843||39,724||12,403|
2 Net financial worth is calculated as financial assets less liabilities. It includes unfunded superannuation liabilities and investments in other sectors, and excludes non-financial assets such as land, buildings, equipment and infrastructure.
Net debt increased $38.7 billion over the past two years as the State borrowed an additional $43.5 billion to fund its activities including the economic stimulus and recovery policies.
Net financial worth reduced by $46.6 billion since 2019 due to higher borrowings and a reduction in the GGS investment in other public sector that was impacted by the revaluation decrement (loss) recognised by the Transport Asset Holding Entity’s (TAHE).
In 2020–21, TAHE recognised a $20.3 billion decrement in the value of its property, plant and equipment and intangibles. Further details are included in Section 3 of this report.
The State did not achieve its fiscal target of maintaining annual expenditure growth below the long-term revenue growth rate target of 5.6 per cent
In 2020–21, general government expenditure grew by 6.9 per cent (9.7 per cent in 2019–20).
Expenditure items that contributed most to the actual growth rate include:
- grants and subsidies (16.2 per cent)
- other operating expenses (5.3 per cent)
- employee costs (including superannuation) (3.6 per cent).
Grants and subsidy expenses increased by $2.8 billion in 2020–21 mainly due to the COVID-19 stimulus payments, grants to non-government schools and asset transfers to councils from TfNSW such as roads and bridges.
Other operating expenses increased by $1.2 billion due to the State funding hotel quarantine costs and medical equipment to help the health sector respond to the pandemic.
The government plans to delay the elimination of unfunded superannuation liabilities by ten years
The Act sets a target to eliminate unfunded superannuation liabilities by 2030. In last year’s Budget Statement, the government announced it plans to amend the Act to change the target to 2040. This will give the State an additional ten years to eliminate unfunded superannuation and ease pressure on the level of borrowings needed to fund other policies. To date, the Act has not been amended to reflect this revised target.
The State’s new funding plan is to contribute amounts escalated by five per cent each year with the aim to fully fund the schemes by 2040. In 2020–21, the State implemented a two year employer contribution holiday while it prioritised its funds to respond to the economic shock caused by the COVID-19 pandemic. The State plans to resume contributions after two years and increase these by five per cent each year. This year, the State made employer contributions of $176 million, which is below an expected $1.9 billion contribution. This is a five per cent increase of the $1.8 billion contribution in 2019–20. The deferral of contributions increases the risk that the government will fail to achieve the existing target to eliminate unfunded superannuation liabilities by 2030 if the Act is not amended to reflect a revised target of 2040.
For fiscal responsibility purposes, the State uses Australian Accounting Standard AASB 1056 'Superannuation Entities'. Under this accounting standard, the State’s unfunded superannuation liability was $14 billion at 30 June 2021 ($14.9 billion).
Employer contributions have not met the five per cent escalation target since 2015–16
In 2020–21, the State commenced its two year employer contribution holiday, which meant no contributions were made to fund the State’s superannuation liabilities.
The State’s financial statements record an unfunded superannuation liability of $59.9 billion at 30 June 2021
For financial statement purposes, the State must apply Australian Accounting Standard AASB 119 'Employee Benefits' to calculate its $59.9 billion ($71 billion in 2019–20) superannuation liability. The funds themselves apply AASB 1056 'Superannuation Entities' to calculate their liabilities to fund members. The two standards use different bases to measure the liability.
AASB 119 'Employee Benefits' requires entities to discount employee liabilities (including unfunded superannuation) using the more volatile long term Australian Government bond rate, while AASB 1056 'Superannuation Entities' discounts the liability using the less volatile long-term expected rate of return from the assets backing the liability, currently 5 to 6.5 per cent.
The liability to fund members calculated under AASB 1056 'Superannuation Entities' is $14 billion. The liability of the State is calculated under AASB 119 'Employee Benefits' is $59.9 billion.
AASB 119 'Employee Benefits' produces a higher liability because of the current low interest rate environment and the impact this has on discount rates.
|As recorded in the State's financial statements||Fiscal reporting and as reported in the superannuation entities' financial statements|
|AASB 119 Employee Benefits||AASB 1056 Superannuation Entities|
|Purpose||Financial statements for employer||Financial statements of the superannuation funds|
|State's superannuation unfunded liability ($billion)||59.9||14|
|Discount rate (%)||1.5||5–6.5|
|Discount rate used||Government bond rate||Expected return on assets backing the liability|
12. In focus
GSF Act and GSF Regulation
Financial reporting provisions in the Government Sector Finance Act 2018 (GSF Act) have now commenced
From 1 July 2021, the Public Finance and Audit Act 1983 (PF&A Act) financial reporting provisions were repealed. Agencies prepared their 2020–21 financial statements under Part 7 of the GSF Act. They were audited under the Government Sector Audit Act (GSA Act). The GSF Act requires the timeframe for annual financial statement submission be specified in the Treasurer’s Directions.
Under the GSF Act, all reporting GSF agencies are required to prepare annual financial statements, unless exempt from the definition of a reporting agency under the Government Sector Finance Regulation 2018 (GSF Regulation). Those agencies exempt from preparing financial statements include certain small agencies, Crown Land Managers, special purpose staff agencies and retained State interests. These agencies must meet prescribed requirements or thresholds and self-assess each year to determine whether they remain exempt against the criteria in the GSF Regulation.
Most of the financial reporting provisions of the GSF Act have now commenced except for requirements concerning special deposit accounts (SDA) and special purpose financial reports, which are scheduled to commence on 1 July 2023, subject to approval from the Governor.
The GSF Act now includes most of the provisions applicable to GSF agencies, as requirements for appropriations, expenditure, financial services, and other matters were enacted on 1 December 2018 and 1 July 2019.
Once fully commenced, the GSF Act will consolidate and replace reporting provisions of four Acts:
- PF&A Act
- Public Authorities (Financial Arrangements) Act 1987
- Annual Reports (Departments) Act 1985
- Annual Reports (Statutory Bodies) Act 1984.
GSA Act and GSA Regulation
The PF&A Act was renamed the GSA Act on 1 July 2021 and now only contains provisions relating to the Auditor-General and the Audit Office, the audit of government sector finances and governance of the Public Accounts Committee.
Of note in the renamed GSA Act is that:
- a new principal object was added that specifically provides the Auditor-General is an independent and accountable statutory officer
- the previous financial reporting provisions in the PF&A Act were repealed as the financial reporting provisions are contained in Part 7 of the GSF Act. As a result, there are no longer financial reporting provisions in the GSA Act
- a new section 34 was added, which contains the requirements for the audit of State sector agencies’ financial statements. These were previously contained in two separate sections.
The GSA Regulation commenced on 1 July 2021, replacing the Public Finance and Audit Regulation 2015 (PF & A Regulation). The GSA Regulation contains the list of entities, funds and accounts prescribed for the purpose of audits under the GSA Act.
Inconsistencies exist in the GSF Act and GSA Act related to key statutory timeframes
There are inconsistencies between key statutory timeframes imposed on the Treasurer and Auditor-General in the GSF Act and GSA Act which has been brought to the attention of NSW Treasury. The inconsistencies identified include:
- Section 34(3)(a) of the GSA Act defines the audit period for the Statements be as soon as practicable after the Auditor-General is given the Statements. This appears to be inconsistent with section 49(3) of the GSA Act, which requires that the Auditor-General, on or before 22 October transmit the Statements and audit report to the Treasurer. Neither provision is a paramount provision.
- Section 49(3) of the GSA Act also appears to be inconsistent with section 52(1) of the GSA Act which provides that the Statements are to be given to the Auditor-General in accordance with section 7.17 of the GSF Act. Section 7.17 of the GSF Act requires that the Statements are to be prepared and given to the Auditor-General by an agreed date to enable the audit of the Statements. Part 7 of the GSF Act is a paramount provision under section 1.8 of the GSF Act, which means the requirements in section 7.17 of the GSF Act prevail.
There are also inconsistencies in key statutory reporting timeframes imposed on the Treasurer under the GSF Act.
The audited Statements are a key accountability mechanism that provides information on the State’s financial performance and position. Ambiguity in the statutory reporting timeframes could impact on the future timely provision of this information to Parliament. As noted at the beginning of this report, the delay in issuing the audit report for the 30 June 2021 Statements was due to NSW Treasury’s resolution of accounting issues that were material to the Statements, in particular the treatment of the General Government Sectors investment in TAHE during 2020–21. NSW Treasury's management letter will include a high risk finding with regards to the inconsistencies between the GSF Act and GSA Act.
NSW Treasury should seek legislative amendments in Parliament to resolve the inconsistencies in the GSF Act and GSA Act relating to key statutory reporting time frames.
NSW Treasury lacks a framework to monitor and provide assurance to ministers that they are in compliance with their appropriation authority
The GSF Act requires that money not be paid out of the Consolidated Fund except under the authority of an Act, such as the annual Appropriation Act or GSF Act. This means a minister is only authorised to spend out of the Consolidated Fund the amount they have been appropriated by the relevant Act(s).
Generally, money is authorised to be paid out of the Consolidated Fund either through:
- The Annual Appropriation Act - this is an act to appropriate out of the Consolidated Fund sums for the services of the government for the relevant financial year. These appropriations are made to the responsible ministers of principal departments, Special Offices and certain SDAs.
- The GSF Act - this act allows the responsible minister of a GSF agency to be given an appropriation out of the Consolidated Fund, at the time the agency receives or recovers any deemed appropriation money. Deemed appropriation money is defined in section 4.7(3) of the GSF Act.
Ministers can delegate and sub-delegate appropriation expenditure functions to accountable authorities and officers of GSF agencies. Any spending by accountable authorities and officers of GSF agencies in excess of the amount appropriated to their relevant minister would be made contrary to section 4.6(1) of the GSF Act.
The Budget Papers are an additional mechanism by which the government controls the level of expenditure by agencies both at the individual and departmental administrative cluster level. The Budget Papers set an administrative limit imposed by the government. Separately, the Treasurer can issue a Budget control authority under section 5.1 of the GSF Act. A Budget control authority can regulate expenditure of money by GSF agencies in a variety of ways, as set out in section 5.1(2) of the GSF Act.
In July 2021, NSW Treasury advised the Audit Office that it had received advice from the Crown Solicitor's Office, in January 2021, that payments between agencies in different administrative clusters would not meet the definition of a 'deemed appropriation' under the GSF Act by the receiving agency. This applies to money paid and received by two agencies across different administrative clusters that continue to hold the money in the Consolidated Fund. These intra-government receipts increase the amount an agency has available to spend, without there being a corresponding increase in the responsible minister’s appropriated expenditure limits, thus increasing the risk an agency’s expenditure could cause a minister to exceed their appropriated expenditure authority.
After being made aware of the issue, the Audit Office worked with NSW Treasury officers to clarify potential implications. The Audit Office also obtained further advice from the Crown Solicitor’s Office to clarify certain aspects of the appropriations framework more broadly. In the advice to the Audit Office, the Crown Solicitor advised that an agency is not subject to its own legally appropriated expenditure limit (assuming it is not subject to any annual spending limit imposed through an instrument of delegation or a budget control authority issued by the Treasurer under section 5.1 of the GSF Act). In effect, because responsible ministers are given appropriations, these legal expenditure limits, rest in aggregate, with the principal department and agencies the minister is responsible for. The advice also confirmed:
- a deemed appropriation for the services of an agency would ordinarily be available for the services of other agencies, if the officers of the other agencies had a delegation from the minister(s) to expend the deemed appropriation and funds remained available under those deemed appropriations
- that the ‘exhaustion’ of a minister’s appropriation may be precipitated by one agency’s level of expenditure in the financial year, but the effect is that the relevant appropriation is exhausted for all agencies (and their officers) that may otherwise rely on it
- whether expenditure by an agency occurred beyond the scope of its authority would require a progressive examination of the total amounts expended from the minister’s appropriation
- amounts expended from the Consolidated Fund without the authority of an appropriation are spent contrary to section 4.6(1) of the GSF Act
- a minister is responsible to Parliament for (i) the manner in which appropriations are expended, and (ii) any ‘overspends’ (that is, expenditure without authority) by agencies for which they are responsible.
Determining whether expenditure has occurred without the authority of an appropriation is complex and it is not possible for an individual agency to monitor or determine at what ‘point in time’ expenditure has been incurred in excess of the minister’s appropriation authority. As noted earlier, there are mechanisms in place to manage agencies' administrative expenditure limits set by the Budget Papers, but there is no mechanism in place to ensure expenditure by agencies does not exceed a minister’s appropriation authority received under the annual Appropriations Act and GSF Act.
NSW Treasury should ensure a framework exists to monitor and provide assurance to ministers that expenditure incurred across a financial year by agencies under the relevant minister’s coordination does not exceed the appropriation authority conferred by the annual Appropriation Act and the GSF Act.
In addition, principal departments and agencies that hold money in the Consolidated Fund are required by Australian Accounting Standard AASB 1058 'Income of Not-for-Profit Entities' and NSW Treasury Circular TC20/08 'Mandates of options and major policy decisions under Australian Accounting Standards' to prepare a Summary of Compliance in their financial statements. The Summary of Compliance applies to agencies that obtain part or all of their spending authority from a Parliamentary appropriation. It is intended to provide information on the amounts appropriated or authorised for an agency’s use and whether those expenditures were authorised. There remains uncertainty around how the Crown Solicitor’s Office advice received by the Audit Office impacts these disclosures, as the total spending authority given by Parliamentary appropriations and expenditure against these appropriations cannot generally be attributed to an individual agency. Such a scenario is not contemplated by the relevant Australian Accounting Standard. NSW Treasury's management letter will include high risk findings about improving mechanisms in place to manage agencies administrative expenditure limits, uncertainties related to appropriation spending authority on agencies summary of compliance disclosures.
NSW Treasury should assess how the requirement to prepare a Summary of Compliance under Australian Accounting Standards impacts relevant principal departments and agencies' financial statement disclosures.
Delegations to incur expenditure
Further to last year's reporting, some agencies have again spent monies without an authorised delegation
The delegation to incur expenditure is an important accountability mechanism of responsible government.
Last year’s Report on State Finances reported instances where government agencies did not understand or correctly apply the requirements of the GSF Act for deemed appropriations, resulting in some agencies spending deemed appropriations money without an authorised delegation from the relevant minister(s) as required by sections 4.6(1) and 5.5(3) of the GSF Act.
This year’s financial audits identified that further agencies: TAFE Commission, Multicultural NSW and the Office of the Ageing and Disability Commissioner spent money received from an annual Appropriation and/or deemed appropriation money without an authorised delegation from the relevant minister(s), as required by sections 4.6(1) and 5.5(3) of the GSF Act. NSW Treasury's management letter will include high risk issues about improving mechanisms in place to ensure agencies have appropriate delegations in place to spend Appropriation and/or deemed appropriation money.
In addition, the audit of the Jobs for NSW Fund (the Fund) special purpose statements identified that five payments from the Fund were authorised by an officer without the necessary delegation from the minister as required by section 14 of the Jobs for NSW Act 2015 and sections 5.5(2) and 5.5(3) of the GSF Act.
Given the continued instances of non-compliance, NSW Treasury needs to promptly improve the guidance it provides agencies to ensure that expenditure of public monies is properly supported by authorised delegations.
Implementation of new accounting standards
This year, the State implemented the requirements of AASB 1059
AASB 1059 ‘Service Concession Arrangements: Grantors’
AASB 1059 is an Australian Accounting Standard that requires public sector entities (grantors) that enter service concession arrangements with private sector operators for the delivery of public services recognise service concession assets and liabilities in their financial statements. The standard was effective from 1 July 2020.
AASB 1059 requires a grantor to:
- recognise an asset provided by the operator as a service concession asset if the grantor controls the asset
- initially measure the service concession asset at current replacement cost (CRC) in accordance with AASB 13 ‘Fair Value Measurement’
- recognise a corresponding liability measured initially at the fair value (CRC) of the service concession asset, adjusted for any consideration between the grantor and the operator
- make sufficient disclosure in the financial statements so that users can understand the nature, amount and timing of assets, liabilities, revenue and cash flows arising from these.
The adoption of AASB 1059 increased the State’s total assets and liabilities by $19.5 billion and $19.6 billion respectively, with net worth reducing by $131 million at 1 July 2019
The State adopted a modified retrospective approach when adopting AASB 1059 and recognised and measured service concession assets and liabilities at the date of initial application of 1 July 2019, with any net adjustments recognised in accumulated funds at that date. This means comparatives were restated to reflect the impact of AASB 1059.
Most of the service concession assets recognised by the State related to Property, Plant & Equipment, in particular infrastructure assets.
Agencies had to devote significant effort to implement AASB 1059 and ensure their 2020–21 financial statements materially complied with the standard's requirements. Last year, the Audit Office highlighted advance preparation was key to ensuring agencies effectively transitioning to this new standard. Despite the new standard being issued well in advance of its commencement date, Sydney Water Corporation, Department of Customer Service, Transport for NSW (TfNSW) and TAHE did not prepare sufficiently for their respective implementations.
Whilst most agencies in 2019–20 had commenced assessing their existing commercial arrangements to determine whether they were within the scope of AASB 1059, calculating and posting the accounting entries to support the implementation of this standard was delayed for TfNSW. TfNSW had not finalised its opening balance adjustments in time for the Audit Office’s early close review. Critical assessments of AASB 1059 to identify the accounting implications for the Transport sector, in particular TfNSW and TAHE were still being considered as late as 30 September 2021.
Restart NSW was established in 2011 to fund the State’s major infrastructure projects
Restart NSW funds Rebuilding NSW, the government’s 10-year plan to invest $23 billion in new infrastructure. Its infrastructure projects, including Sydney Metro West and Parramatta Light Rail, are primarily funded by proceeds from the government’s asset recycling program. The Restart Fund had a balance of $12.4 billion at 30 June 2021 ($15 billion in 2019–20).
The Fund paid $3.8 billion for infrastructure projects in 2020–21 ($4.3 billion in 2020–21). The largest payments were for transport projects, including Sydney Metro West, Parramatta Light Rail, and contributed $319 million of the $2.4 billion equity contribution to the Transport Asset Holding Entity (TAHE).
The funds are invested in the NSW Infrastructure Future Fund (NIFF), which is allowed under the Restart NSW Fund Act 2011 (Restart Act). The NIFF is an investment vehicle for the fund to help the NSW Government meet its infrastructure objectives and this fund is managed by TCorp. In 2020–21, the fund earned a net return of 7.9 per cent, higher than its annual benchmark return of 4.2 per cent, benefiting from improved returns in financial markets over 2020–21.
The fund directed 30.1 per cent of its payments towards rural and regional infrastructure projects in 2020–21
The Restart Act requires the fund to report on the percentage of payments directed to rural and regional infrastructure projects and whether this represents at least 30 per cent of the total payments from the fund. The Restart NSW Fund Amendment (Rural and Regional Infrastructure Funding) Bill 2020 introduced in Parliament in 2020 would amend the Restart Act by requiring at least 30 per cent of the total payments each financial year and for the life of the Restart NSW Fund be made on infrastructure projects in rural and regional areas.
This year the fund exceeded its target of directing at least 30 per cent of funding towards rural and regional infrastructure projects. However, since the funds’ commencement, only 23 per cent of total payments went towards rural and regional infrastructure projects. Current projections for the life of the fund indicate only 27.5 per cent of funding will be spent on rural and regional projects, which is below the funds target of 30 per cent target for the life of the fund.
Key audit matters
Key Audit Matters (KAMs) are matters considered of most significance to the conduct of an audit. Australian Auditing Standard 701 ‘Communicating Key Audit Matters’ defines KAM’s as those matters considered of most significance to the audit. Whilst inclusion of KAM’s is not a mandatory requirement for public sector entities, inclusion of these matters add value for users by explaining areas of audit focus, increasing transparency and giving users a better understanding of significant management judgements in the State’s financial statements.
The KAM included in the Total State Sector Independent Auditor’s Report focused on the following risks:
- accounting for equity contributions into the Transport Asset Holding Entity (TAHE)
- control of rail transport assets vested in TAHE
- fair value measurement of property, plant and equipment
- recognition and measurement of service concession assets
- valuation of defined benefits superannuation and long service leave liabilities
- valuation of financial instruments
- valuation of outstanding claim liabilities
- taxation and statutory revenue.
13. Looking forward
Audit Office’s work plan for 2021–22
The Audit Office’s 2021–22 work plan focuses on the State’s response, recovery and impact from the COVID-19 pandemic and natural disaster emergencies
The COVID-19 pandemic continues to have a significant impact on the people and the public sector of New South Wales. Government continues to assist communities in their recovery from the 2019–20 bushfires and subsequent flooding. The scale of government responses to these events has been significant and has required a wide-ranging response involving emergency response coordination, service delivery, governance and policy.
Significant resources have been directed toward these responses, and in assisting rebuilding and economic recovery. Some systems and processes have changed to reflect the need for quick responses to immediate needs. The increasing and changing risk environment presented by these events has meant that we have recalibrated and focused our efforts on providing assurance on how effectively aspects of these emergency responses have been delivered. This includes financial and governance risks arising from the scale and complexity of government responses to these events.
While these emergencies are having a significant impact today, they are also likely to continue to have an impact into the future. We will take a phased approach to ensuring that our work addresses the following elements of the emergencies and government responses:
Recognising the pressures that arise from these challenges, the role of audit is to provide assurance that responses are timely, evidence based, well targeted, and effective. While speed of delivery is important, this must be appropriately balanced with a keen focus on:
- value for money and the appropriate use of public money
- risk identification and mitigation
- good governance and controls
- comprehensive record keeping
These considerations have framed our Annual Work Program for this year and the three-year outlook.
Appendix one – Prescribed entities
Appendix three – TSS sectors and entities
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