Machinery of Government (MoG) refers to how the government organises the structures and functions of the public service. MoG changes are where the government reorganises these structures and functions that are given effect by administrative arrangements orders.

The 'Administrative Arrangements (Administrative Changes—Miscellaneous) Order (No 2) 2023' (Miscellaneous Order 2) which commenced on 5 April 2023, amended Schedule 1, Part 2 of the Government Sector Employment Act 2013 to change the related department for the public service agencies listed in the table below.

Under the 'Administrative Arrangements (Administrative Changes—Miscellaneous) Order (No 5) 2023', effective from 1 July 2023, the parts of the Department of Transport that enable the following agencies to exercise functions were transferred to the Department of Planning and Environment:

• Centennial Park and Moore Park Trust
• Greater Sydney Parklands Trust
• Luna Park Reserve Trust
• Parramatta Park Trust
• Place Management NSW
• Royal Botanic Gardens and Domain Trust
• Western Sydney Parklands Trust.

This report focuses on agencies in the Transport portfolio as at 30 June 2023. The comparative information included in this report has been updated to reflect changes occurred during 2022–23.

The NSW Government commissioned several reviews across the Transport portfolio in 2023.

On 21 August 2023, in line with the Rail review recommendation, the government announced that a process has begun to transition the operation of the Mariyung trains and most intercity passenger services, crew and stations from NSW Trains to Sydney Trains.

We will continue to monitor the progress and outcomes of these reviews and assess their impact on the Transport agencies' financial statements and their operations.

Audit opinions

Unqualified audit opinions were issued on agencies' financial statements

Unqualified audit opinions were issued on all the portfolio agencies' 30 June 2023 financial statements. Sufficient and appropriate audit evidence was obtained to conclude the financial statements were free of material misstatement.

TAHE’s Independent Auditor’s Report includes an 'Emphasis of Matter' paragraph to draw attention to the future of TAHE

An 'Emphasis of Matter' paragraph was included in TAHE's Independent Auditor's Report for its 30 June 2023 financial statements, which draws attention to management's disclosure regarding the proposed changes to TAHE's future operating model.

In August 2023, the government made several key decisions regarding the future of TAHE. The decisions have a significant impact on TAHE’s financial position and future operating model, including converting TAHE from a for-profit State Owned Corporation (SOC) to a non-commercial Public Non-Financial Corporation (PNFC) by 1 July 2024.

These decisions may impact the future commercial agreements with the public rail operators and the future valuation of TAHE's assets.

'Emphasis of Matter' paragraphs are included in an agency's Independent Auditor's Report for matters that have been presented or disclosed by the agency in its certified financial statements. Whilst they do not constitute an audit qualification, they do highlight matters that are, in our judgment, relevant to the users' understanding of the audit.

Four acquittal audits are in progress

The following 2022–23 acquittal audits remain in progress:

• Transport for NSW – an audit was conducted to determine if the special purpose financial statements prepared for the Local Roads and Community Infrastructure Program (LRCI Program) were prepared in accordance with the requirements of the COVID-19 Local Roads and Community Infrastructure Program guidelines.
• Transport for NSW – an audit was conducted to determine if the special purpose financial statement presented in Part 1 - Chief Executive Officer's Financial Statement for the Roads to Recovery Program (RTR Program), was prepared in accordance with the requirements of Section 90 of the National Land Transport Act 2014.
• Transport for NSW – an audit was conducted to determine if the financial statement of Black Spot Projects was prepared in accordance with the requirements of Section 82(a) of the National Land Transport Act 2014.
• Transport for NSW – an audit is being conducted to determine if the Investment Projects Annual Financial Statement was prepared in accordance with the requirements of Section 21(b) of the National Land Transport Act 2014.

The acquittal audits for LRCI Program, RTR Program and Black Spot Projects are expected to be completed by the end of December 2023. The audit for Investment Projects will be completed in early 2024.

The number of identified monetary misstatements increased in 2022–23

The number of monetary misstatements identified during the audits of portfolio agencies' financial statements increased from 17 in 2021–22 to 27 in 2022–23. A monetary misstatement is an error in amount recognised in the financial statements initially submitted for audit. In our view, misstatements should be corrected. They are reported to management for this purpose. Management has determined not to correct some errors because they are not material, either individually or in aggregate. These are reported in this report as ‘uncorrected misstatements’.

Reported corrected misstatements increased from 13 in 2021–22 to 20 with a gross value of $354 million in 2022–23. Reported uncorrected misstatements increased from four in 2021–22 to seven with a gross value of $171 million in 2022–23.

The table below shows the number and quantum of monetary misstatements for the past two years.

Refer to Appendix one for details of corrected and uncorrected monetary misstatements by agency.

Of the 20 corrected monetary misstatements, ten had a gross value of greater than $5 million and related to the following:

Of the seven uncorrected monetary misstatements, six had a gross value of greater than $5 million, which comprise the following:

Three agencies were exempted from financial reporting in 2022–23

Part 3A, Division 2 of the Government Sector Finance Regulation 2018 (GSF Regulation) prescribes certain kinds of GSF agencies not to be a reporting GSF agency. For 2022–23, the following portfolio agencies have assessed and determined they met the reporting exemption criteria under the GSF Regulation, and therefore were not required to prepare annual financial statements:

Matters around the effectiveness of the exemptions framework will be included in our Report on State Finances.

Ten Special Deposits Accounts were exempt from financial reporting in 2022–23

The new financial reporting provisions in section 7.8 of the Government Sector Finance Act 2018 (GSF Act) commenced on 1 July 2023 effective for the 2022–23 financial year. These provisions require responsible managers of Special Deposit Accounts (SDAs) to prepare financial reports for each SDA account in accordance with the Treasurer’s Directions and give those reports to the Auditor-General to audit unless they are exempted from reporting under a Treasurer’s Direction.

On 29 November 2023, NSW Treasury issued Treasurer’s Direction TD 23-24 ‘SDA Account financial reports’ (TD 23-24) which specifies the mandatory requirements for preparation of financial reports for SDAs in accordance with section 7.8(2) of the GSF Act.

Under TD 23-24, SDAs are exempt from the requirement to prepare financial reports if they are:

• consolidated into the financial report of another GSF agency
• disclosed as an administered item by a GSF agency (per AASB 1050 ‘Administered Items’)
• not controlled by the NSW Total State Sector
• within the threshold limits set within TD 23-24, which include assets, liabilities, income, expenses and contingent liabilities of the SDA are each less than $5 million and total cash or cash equivalents are less than $2.5 million.

Exempt SDA Accounts are not required to comply with the requirements of TD 23-24, however they must continue to comply with any reporting requirements specified in their establishing legislation.

The following SDAs were exempt from financial reporting under TD 23-24 as they were consolidated into the financial statements of other GSF agencies:

• Transport for NSW Fund
• State Transit Authority Fund
• Sydney Trains Fund
• NSW Trains Fund
• Sydney Ferries Fund
• Sydney Metro Fund
• Residual Transport Corporation Fund
• Community Road Safety Fund
• Waterways Fund
• Public Transport Fund (Parking Space Levy).

Early close procedures

Early close mandatory procedures were submitted on time for all portfolio agencies

NSW Treasury introduced early close procedures to improve the quality and timeliness of year-end financial statements. In February 2023, NSW Treasury reissued Treasurer’s Direction TD19-02 ‘Mandatory Early Close as at 31 March each year’ (TD19-02) and reissued Treasury Policy and Guidelines TPG22-11 ‘Agency Direction for the 2022–23 Mandatory Early Close’. These pronouncements require the GSF agencies listed in Appendix A of TD19-02 to perform the mandatory early close procedures and provide the outcomes to the audit team by 27 April 2023. The 17 mandatory procedures are listed in Appendix two.

Portfolio agencies met the statutory deadline for submitting their 2022–23 early close financial statements and other mandatory procedures.

Agencies need to improve their completion of early close procedures

The following portfolio agencies did not complete all mandatory early close procedures:

Year-end financial reporting

NSW Treasury required all agencies to submit their financial statements by 1 August 2023

In June 2023, NSW Treasury issued a suite of Treasurer's Directions and Treasury Policy and Guidelines for 2022–23 financial reporting requirements and timetables:

• Treasurer's Direction TD21-02 ' Mandatory Annual Returns to Treasury' (TD21-02) and Treasury Policy and Guidelines TPG23-13 'Agency Direction for the 2022–23 Mandatory Annual Returns to Treasury' require agencies listed in the Appendix A of TD21-02 to submit their 2022–23 financial statements to both NSW Treasury and the Audit Office by 1 August 2023
• Treasury Policy and Guidelines TPG23-14 'Agency guidelines for the 2022–23 Mandatory Annual Returns to Treasury for New South Wales public sector agencies that are not included in TD21-02' requires New South Wales public sector agencies not listed in Appendix A of TD21-02 to submit their draft 2022–23 financial statements to NSW Treasury by 1 August 2023.

NSW Treasury extended the year-end submission deadline for agencies to provide the note to the financial statements that provides disclosures on appropriations to 11 August 2023. The submission date for the rest of the financial statements (that is, excluding the appropriations disclosures) remained as 1 August 2023. The extension was granted under clause 7A of TD21-02.

Treasurer's Direction TD21-03 'Submission of Annual GSF Financial Statements to the Auditor-General' requires reporting GSF agencies that are not listed in Appendix A of TD21-02 to submit their annual financial statements for audit within six weeks after the year end.

The following agencies obtained NSW Treasury's approval to extend submission of their 30 June 2023 financial statements:

Financial statements were submitted on time for all portfolio agencies

Portfolio agencies met the reporting deadlines for submitting their 2022–23 year-end financial statements. The Government Sector Audit Act 1983 does not specify the statutory deadline for issuing the audit reports.

The table in Appendix three shows the timeliness of the year-end financial reporting for portfolio agencies.

TAHE's valuation of assets

Changes in management assumptions led to a $2.9 billion decrease in the value of TAHE assets

At 30 June 2023, TAHE reported $16.5 billion in property, plant and equipment and related intangibles within the cash generating units (CGUs) – a $2.9 billion or 15% decrease from the prior year. The fair value of these assets at balance date is determined using the income approach – appropriate for TAHE given its current for-profit status. Such an approach is reliant on, and is sensitive to management judgements, estimates and assumptions.

The reduction in the carrying value of reported assets were largely driven by changes in management judgements, estimates and assumptions over:

• the uncertainty of TAHE’s future operating model under the new government, including:
  • TAHE’s ability and mandate to generate commercial returns in the future
  • future access and licence fees in both contracted and uncontracted periods
  • the need for TAHE to recover holding losses if treatment of contributions changed
  • ability to pass on inflationary increases to operators
• revised expected price increases for access and licence fees and inflation forecasts.

The government’s intention to change TAHE’s future operating model did not affect the method used to value assets at 30 June 2023

In September 2023, the NSW Government announced its intention to convert TAHE into a non-commercial PNFC.

TAHE’s new operating model is expected to be implemented in three phases by June 2024.

• Phase 1: August to December 2023 – The government is expected to commence transitioning TAHE to not-for-profit status by taking administrative actions under the State Owned Corporations Act 1989.
• Phase 2: by December 2023 – The government is expected to introduce an initial wave of legislative changes to allow for the introduction of the new operating model.
• Phase 3: by June 2024 – The government is expected to introduce further legislative changes to remove TAHE’s status as a SOC. The corporation is expected to be renamed.

The decision did not impact the current for-profit SOC status of TAHE at 30 June 2023 as existing arrangements such as access and licence fee agreements, its operating licence and statement of corporate intent remained in place. Therefore, the approach used by TAHE in valuing its CGU assets at 30 June 2023 remained appropriate.

Given the uncertainty over the future of TAHE, management will need to assess whether the income approach remains an appropriate basis of valuation going forward.

Control of TAHE assets

Changes to TAHE’s operating model may impact control of TAHE’s assets

On transition of the former RailCorp to TAHE on 1 July 2020, management determined TAHE maintained accounting control of the assets held by TAHE, as it can direct the use of and obtain substantially all of the remaining benefits from the relevant assets.

For the current year, the legal form of the existing arrangements supports that TAHE has control over the assets. However, the government’s decision to change the operating model for TAHE may impact the control TAHE has over its assets in the future.

Under the Transport Administration Act 1988, the functions of TAHE may only be exercised under one or more Operating Licences issued by the portfolio minister. The current Operating Licence confers terms and conditions for TAHE to carry out its functions, and imposes certain constraints on TAHE, including (but not limited to):

• railway operations not permitted
• transport services not permitted
• TAHE must not carry out maintenance of its assets.

Such operating licences are short term in nature, and the Transport Administration Act 1988 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 portfolio minister outlines the minister’s expectations of TAHE in ensuring the government’s priorities for the Transport portfolio are met.

Given the restrictions that can be placed on TAHE 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.

We will continue to monitor and assess whether, in substance, relevant assets continue to be controlled by TAHE.

Transport for NSW's valuation of roads and bridges

Transport for NSW needs to improve its quality assurance processes over comprehensive valuations

In 2022–23, Transport for NSW engaged an independent valuer to comprehensively revalue its roads, bridges and tunnels assets. The revaluation resulted in a net increase to the value of roads by $10.7 billion (or 13%) and bridges and tunnels by $5 billion (or 20%).

Up-to-date and accurate valuations of these assets enable an entity to correctly account for the future economic benefits the assets embody. The valuations also give entities relevant and reliable information when deciding how to allocate resources and accounting for assets.

The audit of the comprehensive valuation highlighted deficiencies in Transport for NSW’s processes and quality assurance regime – elevating the risk of incomplete or inaccurate valuations. These include:

• challenges in providing documentary evidence to support the basis of unit rate costs applied – a key input used in valuing roads assets
• inaccurate asset data and dimensions used in valuing bridges – leading to an understatement of this asset class by $38.6 million which was subsequently corrected by management
• formulaic errors in underlying spreadsheets used in the valuation process.

Bid cost contributions

Over $300 million of unsuccessful bid costs have been capitalised by Transport for NSW and Sydney Metro

At 30 June 2023, Transport for NSW and Sydney Metro have capitalised unsuccessful bid cost contributions totalling $158 million and $175 million respectively in their assets under construction. These costs represent payments made to unsuccessful bidders, reimbursing them for expenses incurred during the tender phase of a project – up to the appointment of the preferred bidder. These reimbursed costs include, but are not limited to:

• design
• technical modelling
• legal advice
• specialist reports required to develop a conforming bid.

The partial reimbursement of costs incurred by unsuccessful bidders is consistent with the NSW Treasury's Bid Cost Contributions Policy, which sets out the arrangements for when and how it will make a financial contribution to unsuccessful bidders to partially reduce the cost of bidding for construction and infrastructure projects in New South Wales. While the policy provides clarity on the reimbursement of unsuccessful bidders' costs, it does not contemplate how these costs should be recognised in agency’s financial statements. 

Contingent liabilities

Estimated possible liabilities relating to compulsory property acquisition matters exceeded $2.1 billion

Under the Land Acquisition (Just Terms Compensation) Act 1991 (the Just Terms Act), the NSW Government has the power to compulsorily acquire land that is owned or leased by individuals or businesses, if it is needed for a public purpose. These powers have been used for major transport projects such as Sydney Metro’s Western Sydney Airport, Sydney Metro West, and WestConnex projects.

At 30 June 2023, Sydney Metro and Transport for NSW estimated contingent liabilities of $1.3 billion and $825 million respectively due to a number of compulsory property acquisition matters currently under litigation where claims differ from the Valuer-General’s determined compensation amounts.

The potential liability for the Sydney Light Rail Project class action is unknown

A statement of claim filed on 28 August 2018 in the Supreme Court of NSW had alleged public and private nuisance as a result of the Sydney Light Rail Project. These proceedings were brought as a class action. On 19 July 2023, the Supreme Court found in favour of two of the three representative plaintiffs’ claims with the Court yet to award damages for these two claims. The uniqueness of these claims and the challenges estimating any potential financial effect in excess of any available insurance coverage resulted in Transport for NSW reporting an unquantifiable contingent liability in its financial statement at 30 June 2023.

Major capital projects

Several major capital projects have experienced delays and are likely to incur additional costs

Regional Rail Project

The Regional Rail project commenced in 2017 and replaces the NSW reginal rail fleet of XPT, XPLORER and Endeavour trains with 29 new trains, including 117 carriages. As part of the Regional Rail project, a purpose-built maintenance facility is being constructed in Dubbo.

The expenditure to 30 June 2023 was $874 million. The project was originally budgeted at $1.5 billion but was revised to $2.3 billion as at 30 June 2023. The original completion date of December 2022 was revised to April 2026.

New Intercity Fleet

The New Intercity Fleet (Mariyung Fleet) project commenced in 2014 and will deliver a fleet of intercity trains for passengers travelling between Sydney and the Central Coast and Newcastle, the Blue Mountains, and the South Coast. The fleet will consist of 610 carriages. A purpose-built train maintenance facility has been built at Kangy Angy on the NSW Central Coast.

The actual expenditure to 30 June 2023 was $2.2 billion. The project was initially expected to be completed in June 2024. It was originally budgeted at $2.5 billion but was revised to $3.2 billion.

Both projects may be considered in the upcoming Rail rollingstock procurement performance audit as part of our Annual Work Program.

The table below details our specific audit coverage and response over key areas of financial statements risks that had the potential to impact the financial statements of significant portfolio agencies.

Transport for NSW

Transport for NSW is the lead agency of the cluster. Its role is to lead the development of a safe, efficient, integrated transport system that keeps people and goods moving, connects communities and shapes the future of New South Wales' cities, centres and regions.
Transport for NSW is responsible for strategy, planning, policy, regulation, funding allocation and other non-service delivery functions for all modes of transport in New South Wales including road, rail, ferry, light rail, point to point, regional air, cycling and walking.

Transport Asset Holding Entity of New South Wales

TAHE is a statutory State Owned Corporation (SOC) and owner of rail property assets including property, rolling stock and rail infrastructure in the Sydney metropolitan area and country locations in New South Wales.

These assets are made available to Sydney Trains and NSW Trains for their operations. TAHE also provides rail infrastructure to third-party operators under the terms of track access agreements.

Department of Transport

The Department of Transport is a NSW Government entity controlled by the NSW Total State Sector. The Transport Administration Act 1988 states that the affairs of Transport for NSW are to be managed and controlled by the Secretary. The Secretary is defined as the Secretary of the Department of Transport.

The Department of Transport consolidates Transport for NSW, NSW Trains, State Transit Authority of New South Wales, Sydney Ferries, Sydney Metro, Sydney Trains, Transport Service of New South Wales and the Residual Transport Corporation which are under its control.

Sydney Metro

Sydney Metro is a NSW Government agency constituted to deliver safe and reliable metro passenger services in an efficient, effective and financially responsible manner, and to facilitate and carry out the orderly and efficient development of land in the locality of metro infrastructure.

Sydney Trains

Sydney Trains is a statutory authority and operates rail services across the metropolitan Sydney area. Its objective is to deliver safe, customer focused, reliable and clean rail services in an efficient, effective and financially responsible manner.

NSW Trains

NSW Trains is a statutory authority and manages the operation of NSW TrainLink, providing services between Sydney and the Hunter, Central Coast, Blue Mountains, Southern Highlands and Illawarra and South Coast regions. Its principal objective is to deliver safe and reliable railway and coach passenger services in New South Wales in an efficient, effective and financially responsible manner.

 Sydney Ferries

The number of findings reported to management has decreased, but 39% were repeat issues

Breakdowns and weaknesses in internal controls increase the risk of fraud and error. Deficiencies in internal controls, matters of governance interest and unresolved issues were reported to management and those charged with governance of agencies. The Audit Office does this through management letters, which include observations, related implications, recommendations and risk ratings.

In 2022–23, there were 49 findings raised across the portfolio (53 in 2021–22). Thirty-nine per cent of all issues were repeat findings (55% in 2021–22).

The most common repeat issues related to weaknesses in controls over the valuation of assets, payroll, management of conflicts of interests and weaknesses in controls over information technology user access administration.

A delay in implementing audit recommendations increases the risk of intentional and accidental errors in processing information, producing management reports and generating financial statements. This can impair decision-making, affect service delivery and expose agencies to fraud, financial loss and reputational damage. Poor controls may also mean agency staff are less likely to follow internal policies, inadvertently causing the agency not to comply with legislation, regulation and central agency policies.

2022–23 audits identified four high risk findings

High risk findings, including repeat findings, were reported at the following portfolio agencies.
 

The table below describes the common issues identified across the portfolio by category and risk rating.

The number of moderate risk findings decreased from prior year

Twenty-eight moderate risk findings were reported in 2022–23, representing a 15% decrease from 2021–22. Of these, eleven were repeat findings, and 17 were new issues.

Moderate risk findings mainly related to:

• valuation of assets
• monitoring of privileged user or user access
• capitalisation of bid cost contributions
• recognition of paid parental leave
• missing information in contract registers.

Deficiencies in Sydney Metro’s conflict of interest controls and oversight were identified

Sydney Metro’s workforce comprises a combination of government employees, labour hire and professional services contractors. These costs are included in employee expenditure ($46.7 million in 2022–23), contractors and consultants expense ($98.3 million in 2022–23), or capitalised into assets. The use of contractors and consultants to deliver a significant proportion of an agency’s core activities can expose agencies to greater risk of financial loss and reputational damage if controls to manage these risks are not effective.

Our review of Sydney Metro’s controls and safeguards found deficiencies in the oversight of the conflicts of interest declarations process. With the use of data-matching techniques, we identified inadequate processes which resulted in conflicts of interest declaration not being provided, and inaccurate declarations being made whereby contractors failed to declare their interests in entities that transact with Sydney Metro. These processes need to be improved.