What the report is about

Results of the 2021–22 consolidated General Government Sector (GGS) and Total State Sector (TSS) financial statements audits.

What we found

The Independent Auditor’s Report on the 2021–22 GGS and TSS financial statements was modified with a limitation of scope and also contained an emphasis of matter.

The opinion in the TSS Independent Auditor’s Report was modified with a limitation of scope on certain balances consolidated in the TSS financial statements because the Catholic Metropolitan Cemeteries Trust (CMCT) denied access to its management, books and records for the purpose of conducting a financial audit.

The Independent Auditor’s Report also includes an emphasis of matter drawing attention to the significant uncertainties associated with the GGS’s equity investment in Transport Asset Holding Entity (TAHE). The significant uncertainty relates to key assumptions and estimates used to forecast a 2.5% return from GGS investments into TAHE that supports the accounting treatment as an equity injection, including:

• funding to support the Rail Operators to pay TAHE’s contracted and forecast access and licence fees up until 2045–46. The Rail Operators are dependent on funding from the GGS to pay access and licence fees. Forecast modelling notes a requirement of a further $10.2 billion in budget funding to pay TAHE to the end of the ten-year contract period in 2030–31, in addition to the $5.5 billion allocated in the forward estimates and up to $50.8 billion for the period 2032 to 2046
• a significant portion of the projected returns are earnt outside of the ten-year contract period and there is a risk that TAHE may not be able to recontract fees at levels consistent with current projections.

What we recommended

The report includes a number of recommendations including:

• continued monitoring that TAHE controls the reported assets ensuring the CMCT, Category 2 Statutory Land Managers (SLM) and Commons Trusts meet their statutory reporting obligations
• ensuring accounting and audit position papers are sufficiently consulted with key stakeholders and are concluded on a timely basis
• ensuring agencies support the timely conclusion of audits by bringing to the auditors' attention key Cabinet records and identifying references relating to accounting issues impacting the financial statements
• for Special Deposit Accounts (SDA) responsible managers should ensure amounts appropriated under any Act or law for payment into the account are appropriately recorded, ensuring payments from SDAs are allowable and made in accordance with Treasurer's delegations and standing authorisation.

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Pursuant to section 52A of the Government Sector Audit Act 1983 I am pleased to present my Auditor-General’s Report on State Finances 2022.

Once again this year has presented considerable challenges for the state sector and my Office as we collectively grapple with uncertainties related to COVID-19 and the disruption of emergency events impacting New South Wales. In addition, there were many recommendations arising from last year’s audit to be addressed.

While there is more to do to ensure good financial stewardship of the State, resolution of matters was helped by constructive engagement with the NSW Treasury at the most senior levels. Personally I wish to thank the Treasurer and Secretary for their commitment to instilling integrity in financial management systems and processes. The support Treasury provided for recent amendments to the Government Sector Audit Act 1983 to provide ‘follow the dollar’ powers and other changes recommended by the Public Accounts Committee quadrennial review of my Office is also acknowledged.

Finally I want to thank the teams that contributed to this year’s audit of the Total State Accounts for their diligence, professionalism and commitment. I am very proud of your work.

Margaret Crawford

Auditor-General for New South Wales

The Independent Auditor's Report was qualified and also included an emphasis of matter

The audit opinion on the State's 2021–22 financial statements was modified. The delayed signing of the NSW Total State Sector Accounts (TSSA) by NSW Treasury was in order to resolve significant accounting issues that were material to the TSSA. The key areas requiring significant audit effort included reviewing the State's accounting for TCorp Investment Management (IM) Funds and responding to the risks related to the Catholic Metropolitan Cemeteries Trust (CMCT) denying access to its management and books and records, which is detailed in this Report.

NSW Treasury aimed to sign the TSSA by 19 October 2022. This was delayed by nearly six weeks and the TSSA audit opinion was subsequently signed on the statutory deadline imposed on the Treasurer for tabling of the TSSA in the Legislative Assembly of 30 November 2022.

The Independent Auditor’s Report was modified due to a limitation of scope on the balances consolidated in the TSSA relating to the CMCT

The opinion in the Independent Auditor’s Report was modified with a limitation of scope due to the inability to access management, books and records of a controlled entity, the CMCT.

This year, NSW Treasury, after reconsidering all facts and the perspectives of the CMCT, reconfirmed that the CMCT is a controlled entity of the State for financial reporting purposes. This means CMCT is a GSF agency under the provisions of the Government Sector Finance Act 2018 (GSF Act). As such NSW Treasury is required by Australian Accounting Standards to consolidate the CMCT into the Total State Sector Accounts (TSSA). The value of assets and liabilities of CMCT consolidated into the TSSA is $310.3 million and $15.1 million, respectively, and the loss of CMCT consolidated into the TSSA for the year is $2.4 million.

To date, CMCT has not met its statutory obligations to prepare financial statements under the GSF Act and give them to the Auditor-General. CMCT has not submitted its financial statements to the Auditor-General for audit as required despite repeated requests and has not provided access to its books and records for the purposes of a financial audit. The Secretary of the Department of Planning and Environment wrote to CMCT to request it work with, and offer full assistance to, the Auditor-General in the exercise of her duties.

NSW Treasury has met with and considered CMCT's perspectives. NSW Treasury’s position remains that CMCT is a controlled entity of the State for financial reporting purposes. Consequently, CMCT has not met its statutory obligations as a controlled entity to submit its financial statements for audit and provide access to its books and records. Therefore, the Audit Office was unable to obtain sufficient appropriate audit evidence about the carrying amount of assets and liabilities consolidated into the Total State Sector Accounts as at 30 June 2022 and of the amount of income and expenses for the year then ended. Accordingly a modified audit opinion was issued on the NSW Government's 2021–22 consolidated financial statements.

Section 3 of this report titled 'Limitation of Scope relating to CMCT' discusses this matter in further detail.

An emphasis of matter drawing attention to uncertainty relating to the General Government Sector's investment in the Transport Asset Holding Entity (TAHE) remains

The Independent Auditor’s Report also includes an emphasis of matter, drawing attention to the significant uncertainties associated with the General Government Sector's (GGS) equity investment in TAHE. The significant uncertainty relates to key assumptions used to forecast returns from investments into TAHE in order to support the recognition of the government's funding of TAHE as an equity injection.

At the time of signing the Independent Auditor's Report, there was significant uncertainty with regards to assumptions and estimates used to forecast a return from the GGS investment into TAHE, which supports the recognition of an equity injection. There is significant uncertainty relating to:

• the 2022–23 Budget committed $5.5 billion to fund TAHE's key customers, Sydney Trains and NSW Trains (the operators), to support their payment of access and licence fees agreed on 23 June 2022. However, this funding only extends out to the end of the forward estimates period in 2025–26, which falls short of the ten-year contractual periods to 2030–31 and the projected period to 2045–46 to achieve a 2.5% return from the government's equity investment. The government will need to fund the operators an additional $10.2 billion in Budget funding so that they can meet their contractual obligations to TAHE from 2026–27 to 2030–31, and a further projected funding of $50.8 billion from 2031 to 2046. This additional funding is not within the government's published Budget figures, leading to uncertainty on whether the government-funded operators can pay access and licence fees beyond the forward estimates period of 2025–26
• a significant portion of the projected returns are earnt outside the ten-year contract period (terminating 30 June 2031) and there is a risk that TAHE will not be able to recontract 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.

The 'State Finances 2021' report made recommendations regarding the significant accounting issues relating to TAHE. The State's response to these recommendations are detailed in Section 4 of this report titled ‘Investment in the Transport Asset Holding Entity’. Other significant matters related to the TSSA audit are covered in Section 8 titled ‘Key audit findings’.

Other financial reporting matters

All government agencies were granted an extra week to submit financial statements for audit

A one-week extension provided agencies across the sector with additional time to resolve key accounting issues and submit financial statements for audit by 1 August 2022.

Further extensions were approved for the following seven agencies (ten in 2020–21):

• State Insurance Regulatory Authority (3 August 2022)
• Dams Safety NSW (8 August 2022)
• Jenolan Caves Reserve Trust (8 August 2022)
• Transport for NSW (8 August 2022)
• Department of Enterprise, Investment and Trade (22 August 2022)
• Transport Asset Holding Entity (22 August 2022)
• Department of Transport (26 August 2022).

Additional extensions provided agencies with more time to complete:

• asset valuations
• valuations of actuarially assessed liabilities.

An initial draft of the TSSA was provided to audit on 15 September 2022. This version was incomplete and excluded the impact of consolidating the State's TCorp IM funds under the correct Australian Accounting Standards. An additional three versions of the draft TSSA were provided to audit progressively to update the TCorp IM fund consolidated balances. The final complete version of the TSSA was submitted on 27 October 2022 which included all adjustments relating to the TCorp IM fund consolidation. Refer to section 8.1 for more details on the material restatements relating to the consolidation of the TCorp IM funds.

In 2021–22, agency financial statements presented for audit contained 20 errors exceeding $20 million (24 in 2020–21). The total value of these errors was $973 million, a decrease from the previous year ($6.6 billion in 2020–21).

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.

NSW Treasury concluded CMCT is a controlled entity of the State

In response to our recommendation in the ‘State Finances 2021’ report, NSW Treasury reconfirmed that the Catholic Metropolitan Cemeteries Trust (CMCT) is a controlled entity of the State. The Audit Office accepted the position of NSW Treasury.

The reaffirmation of this position means CMCT is a GSF agency under the provisions of the Government Sector Finance Act 2018 (GSF Act). Section 7.6 of the GSF Act places an obligation on CMCT to prepare financial statements and give them to the Auditor-General. Further, section 34 of the Government Sector Audit Act 1983 (the GSA Act) requires the Auditor-General to furnish an audit report on these financial statements.

To date, CMCT has not met its statutory obligations to prepare financial statements under the GSF Act and give them to the Auditor-General. CMCT has not submitted their financial statements to the Auditor-General for audit despite repeated requests and has not provided access to its books and records for the purposes of a financial audit. There was extensive correspondence between the Audit Office of NSW, CMCT, NSW Treasury and the Department of Planning and Environment in 2022 regarding this matter.

In addition, on 10 December 2021, the then Minister for Water, Property and Housing wrote to the Auditor-General requesting a financial and performance audit be performed pursuant to section 27B(3)(c) of the GSA Act. The audit would cover the financial affairs of CMCT, including whether funds have been used for the proper purpose. The Audit Office of New South Wales has written to CMCT on a number of occasions to request the provision of documentation and access to management in order to conduct the performance audit. CMCT has not provided the Audit Office of New South Wales access to its management, books and records for the purpose of the required performance audit.

NSW Treasury has met with and considered CMCT's perspectives. NSW Treasury’s position remains that CMCT is a controlled entity of the State for financial reporting purposes. Consequently, CMCT did not meet its statutory obligations as a controlled entity to submit its financial statements for audit and provide access to its books and records.

The TSSA audit opinion included a limitation of scope

The opinion in the TSSA Independent Auditor’s Report was modified with a limitation of scope due to an inability to access management and the books and records of CMCT. This limitation was appropriately disclosed in Note 1 'Statement of Significant Accounting Policies' of the TSSA. The Statement of Compliance signed by the Secretary of Treasury and the Treasurer on 29 November 2022 was also updated to acknowledge the disclosure in Note 1 regarding CMCT.

The Audit Office was unable to obtain sufficient appropriate audit evidence about the carrying amount of assets and liabilities consolidated into the Total State Sector Accounts as at 30 June 2022 and of the amount of income and expenses for the year then ended. Accordingly a modified audit opinion was issued on the NSW Government's 2021–22 consolidated financial statements.

The process of information sharing by NSW Treasury continues to require improvement

In last year’s ‘State Finances 2021’ report an extreme risk management letter finding was reported for NSW Treasury to ensure it significantly improve its processes so that all relevant information is identified and shared with the Audit Office to support material transactions and balances of the State.

A number of events reconfirmed that NSW Treasury needs to continue improving its process with respect to information sharing with the Audit Office. Notably, NSW Treasury’s finance team had not demonstrated that all available information (on their systems) was considered by them when assessing the State’s control over CMCT.

Critical information relating to CMCT was in the possession of NSW Treasury since late October 2021 but not considered when reconfirming their accounting position on the State's control of CMCT this year. A further reconfirmation of the State's control over CMCT was needed by NSW Treasury to ensure this information was considered in their accounting assessment.

The above demonstrates that more effective consultation is required by NSW Treasury with key stakeholders to ensure all information relevant to forming an accounting position relating to the TSSA is captured. This will ensure new information is not identified late in the audit process and NSW Treasury considers all information when concluding on the accounting position of the State.

Last year's report highlighted that NSW Government actions avoided a qualified opinion in 2020–21 relating to the General Government Sector's $2.4 billion cash contribution to Transport Asset Holding Entity (TAHE). These actions included the NSW Government agreeing to provide additional future funding to TAHE's key government customers Sydney Trains and NSW Trains (the operators) to support increases in access and licence fees to be paid to TAHE.

The additional funding by the government was necessary to demonstrate that a reasonable expectation of a sufficient rate of return would be earned on its equity invested in TAHE. Last year, there was no government policy on what the minimum return should be on investments in other public sector entities, so the long-term inflation rate was used as a benchmark. A recommendation was made in last year's State Finances report that NSW Treasury establish a policy on the minimum expected return from its investments.

On 6 September 2022, NSW Treasury finalised its policy relating to the government’s returns on equity investments. The application of this policy is limited to State Owned Corporations and similar to the Commonwealth framework for commercial businesses, which requires the expected return be at least equal to the long-term inflation rate.

The government's commitment to additional funding was conveyed last year through revised shareholder expectations being published in the 2021–22 'NSW Budget-Half yearly Review' on 16 December 2021, increasing the expected returns on equity from 1.5% to the expected long-term inflation rate of 2.5%. On 18 December 2021, Transport for NSW (TfNSW) and the operators entered into a Heads of Agreement (HoA). This formed the basis of negotiations to revise the pricing within the existing ten-year contracts and deliver upon the shareholders’ expected return of 2.5% on contributed equity to be earned over the estimated weighted average remaining useful lives of TAHE's assets.

Further information on last year's audit of the government’s investment in TAHE can be found in our 'State Finances 2021' report.

Ten-year commercial agreements were signed between TAHE, operators and TfNSW

Last year's State Finances report recommended that NSW Treasury facilitate revised commercial agreements to reflect the access and licence fees detailed in the HoA. As these agreements were not executed by 30 June 2021, last year's audit opinion of the Total State Sector Accounts (TSSA) included an Emphasis of Matter drawing attention to the uncertainty that existed at balance date as these agreements were not finalised.

On 23 June 2022, commercial agreements were signed between TAHE, the operators and Transport for NSW through a deed of variation. The revised access and licence fees for the ten-year period 2021–22 to 2030–31 was $16.6 billion, which is $520 million less than the HoA fees of $17.1 billion.

TAHE's main customers principally rely on government funding to pay access and licence fees

Whilst TAHE has agreed ten-year access and licence fees of $16.6 billion with its two main customers Sydney Trains and NSW Trains, these two operators significantly rely on government funding when making these payments to TAHE. At 30 June 2022, TAHE's expected return of 2.5% is contingent upon the GGS funding the operators to support their payment of access and licence fees that have been agreed with TAHE for the ten-year contracted period and for non-contracted periods from 2031–32 to 2045–46.

The 2022–23 NSW Budget has allocated $5.5 billion to fund the operators, to support their payment of access and licence fees. However, this funding extends to the end of the forward estimates period in 2025–26, which falls short of the ten-year contractual period to 2030–2031 and the projected period to 2045–46 to achieve the 2.5% return.

The government will need to fund the operators an additional $10.2 billion in budget funding to meet their contractual obligations to TAHE from 2026–27 to 2030–2031, and a further projected funding of $50.8 billion from 2032 to 2046. This is needed to ensure the government continues to demonstrate its expected return on investment of 2.5%. This additional funding is not within the government's published 2022–23 NSW Budget figures, leading to uncertainty on whether the government funded operators can pay access and licence fees beyond the forward estimate period of 2025–26.

Significant funding uncertainties remain

While the ten-year access and licence fee agreements were communicated to the NSW Government's Expenditure Review Committee, it is yet to be fully provided for in the government's budget figures. As TAHE's projections are highly dependent on the operators as its key customers, it remains critical that the government continue to provide sufficient funding to the operators so they can pay for access and use of TAHE assets. This means the significant funding uncertainties reported in last year's TSSA audit opinion remain for 2021–22.

The government has estimated $37.9 billion in returns (equivalent to 2.5% on contributed equity) is to be earned from its investment in TAHE over the period from 1 July 2022 to 30 June 2046. As previously reported, TAHE derives most of its revenue from access and licence fee agreements from the operators, who in turn are both funded by grants through TfNSW from the GGS. More than 95% of these returns are estimated to be earned outside of the ten-year contract period (terminating 30 June 2031).

There remains risk that:

• TAHE will not be able to recontract 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.

This significant funding uncertainty was also reported in last year's TSSA audit opinion and will remain for 2021–22.

In 2021–22, TAHE and NSW Treasury prepared further modelling to support the Government's intent to earn a 2.5% return inclusive of recovering the holding (revaluation) loss of $20.3 billion on its investment in TAHE

Last year's State Finances report highlighted that NSW Treasury, with TAHE, should prepare robust projections and business plans to support the expected returns forecast beyond FY2031.

This year TAHE engaged an expert to help develop a model demonstrating the government's expected returns from its investment in TAHE. The model mathematically forecasts that returns of 2.5% will be achieved by 2046 and this will include recovery of the revaluation losses of $20.3 billion relating to 2020–21.

The current model includes some key assumptions:

• The main source of revenue is the access and licence fees expected from the two public rail operators (Sydney Trains and NSW Trains) contributing to more than 80% of TAHE's projected revenue. The rail operators are largely funded by the government when paying access and licence fees to TAHE.
• For the first ten years, the access and licence fees are based on the signed agreements between TAHE and the public rail operators.
• Beyond the ten-year contracted period, the model assumes existing contractual terms for access and licence fees will continue unchanged allowing for an annual rise for inflation (2.5% per annum), and increased fees to enable a 7.62% return for renewed assets.
• The capital expenditure included in the model is only the amounts approved by the Expenditure Review Committee (ERC) as part of the ten-year forecast. The model beyond ten years includes expected investment in renewed and replacement assets but excludes any forecasts relating to growth capex that is not approved by the ERC, and any related depreciation expenses for growth capex.

While management has developed a 35-year long term financial model to support the returns, we note this will need to be refined over the next few years. Furthermore, these are forecasted figures and we have not seen sufficient evidence of whether this reflects reality (that is, the achievement of dividends representing a return on equity) as it is still very early. Therefore, this will remain a high-risk matter until we have seen sufficient evidence of reality to the forecasted figures.

There is negative net impact on the budget after 2024–25 and this will grow in the future

There are some key points to highlight with this modelling and these are best conveyed with the graph below. This graph shows total cash injections made by the GGS since the government first announced the creation of TAHE as a for-profit entity in the 2015–16 NSW Budget. It also conveys the forecast returns from TAHE to the GGS and the level of funding operators will need from the GGS to pay TAHE's access and licence fees over the 30-year period. These cash flows are key inputs used in the modelling which calculates a 2.5% return from TAHE inclusive of recovering the holding (revaluation) loss of $20.3 billion.

The government continues to respond to the impact of the COVID-19 pandemic on New South Wales through its economic stimulus measures

The COVID-19 pandemic continued 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. In October 2021, the government announced through the 'COVID-19 Economic Recovery Strategy' an additional $2.8 billion in economic stimulus and response measures following the conclusion of the three-month lockdown due to the Delta COVID-19 outbreak. Measures included:

• $739 million in household and social support, including housing support for Aboriginal communities and survivors of domestic violence, and vouchers to thank parents for their efforts to support learning from home
• $500 million to consumers and businesses including expansion of the 'Dine & Discover' and 'Stay & Rediscover' voucher programs
• $495 million in education support addressing learning gaps for children and helping schools prepare for future learning disruptions
• $487 million in combined funding for tourism, events, sports, and recreation throughout New South Wales
• $130 million to fund mental health services for individuals whose mental health was impacted by the pandemic.

The 2021–22 financial year included $21.9 billion for pandemic response and economic stimulus measures. Of this, $17.9 billion was spent in 2021–22 while a further $1 billion of the budgeted amount from 2021–22 was carried forward into 2022–23. The graph below shows the total allocation and spend by cluster for 2022 compared to target spend.

There were 14 natural disaster declarations including four severe weather events in 2021–22

Natural disasters such as bushfires, storms, floods, and other adverse weather events can have a significant impact on the State's finances. Costs associated with natural disasters include direct response costs such as clean-up and recovery, temporary accommodation, and as well as financial assistance provided to impacted communities such as recovery and business support grants.

The NSW Government can make a natural disaster declaration allowing eligible individuals and communities from impacted Local Government Areas access to a range of special financial assistance measures.

In 2021–22, there were 14 natural disaster declarations announced comparable to 14 in the previous year. These natural disaster declarations largely related to storms and floods throughout the State. In 2021–22, there was a larger number of 'severe weather' events declared, with four in 2021–22 (nil in 2020–21).

Natural disaster expenses increased 143% to $1.4 billion in 2021–22, up from $569 million last year

Over 2021–22, the budgeted cost for declared natural disasters was $1.9 billion ($725 million in 2020–21). Actual expenditure by the State on disaster response increased by $815 million to $1.4 billion. The graph below shows the total allocation and spend by cluster for 2022 compared to their budget spend.

Deficit of $15.3 billion compared with a budgeted deficit of $8.6 billion

The outcomes of the government’s overall activity and policies are reflected in 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 196 entities, generally provides goods and services funded centrally by the State.

In addition to the 196 entities within the General Government Sector, a further 85 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, and form part of the PNFC (31) and PFC (54) sectors.

The budget result for the 2021–22 financial year was a deficit of $15.3 billion compared to an original forecast of a budget deficit of $8.6 billion.

Revenues increased $16.1 billion to $106.7 billion

The State’s total revenues increased $16.1 billion to $106.7 billion, an increase of 17.8% compared to the previous year. Total revenue growth in 2020–21 was 5.1%. The State's increase in revenue was mostly from $9.2 billion in grants and subsidies and $4.6 billion in taxation.

Taxation revenue increased by 13.3%

Taxation revenue increased by $4.6 billion, mainly due to the net of:

• $4.9 billion higher stamp duties collected from property sales driven by growth in property transaction volumes and prices during 2021–22. This was growth was experienced across residential and commercial property markets
• $296 million lower gambling and betting taxes compared to 2020–21. Decrease was primarily attributed to the ongoing effects of COVID-19 restrictions and venue closures within the first half of 2021–22.

Stamp duties of $16.6 billion remains the largest source of taxation revenue, $7.7 billion higher than payroll tax of $8.9 billion, the second-largest source of taxation revenue.

Assets grew by $53 billion to $571 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 $53.2 billion or 10.3% to $571 billion. The increase was largely due to increases in the carrying value of land, buildings and infrastructure systems.

Valuing the State’s physical assets

State’s physical assets valued at $437 billion

The value of the State’s physical assets increased by $46.8 billion to $437 billion in 2021–22 ($724 million increase in 2020–21). The State’s physical assets include land and buildings ($198 billion), infrastructure systems ($221 billion), and plant and equipment ($18 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.

Appendix one – Prescribed entities

Appendix two – Legal opinions

Appendix three – TSS sectors and entities

Copyright notice

© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

What the report is about

This audit assessed the effectiveness of NSW Government agencies’ coordination of the response to COVID-19, with a focus on the Delta variant outbreak in the Dubbo and Fairfield Local Government Areas (LGA) between June and November 2021. We audited five agencies - the Department of Premier and Cabinet, NSW Health, the NSW Police Force, Resilience NSW and the Department of Customer Service.

The audit also considered relevant planning and preparation activities that occurred prior to June 2021 to examine how emergency management and public health responses learned from previous events.

What we found

Prior to Delta, agencies developed capability to respond to COVID-19 related challenges.

However, lessons learned from prior reviews of emergency management arrangements, and from other jurisdictions, had not been implemented when Delta emerged in June 2021. As a result, agencies were not as fully prepared as they could have been to respond to the additional challenges presented by Delta.

Gaps in emergency management plans affected agencies' ability to support individuals, families and businesses impacted by restrictions to movement and gathering such as stay-at-home orders. In LGAs of concern, modest delays of a few days had a significant impact on people, especially those most vulnerable.

On 23 July 2021, the NSW Government established a cross-government coordinating approach, the Delta Microstrategy, which complemented existing emergency management arrangements, improved coordination between NSW Government agencies and led to more effective local responses.

Where possible, advice provided to government was supported by cross-government consultation, up-to-date evidence and insights. Public Health Orders were updated as the response to Delta intensified or to address unintended consequences of previous orders. The frequency of changes hampered agencies' ability to effectively communicate changes to frontline staff and the community in a rapidly evolving situation.

The NSW Government could provide greater transparency and accountability over decisions to apply Public Health Orders during a pandemic.

What we recommended

The audit made seven recommendations intended to improve transparency, accountability and preparedness for future emergency events.

This audit assessed the effectiveness of NSW Government agencies’ coordination (focused on the Department of Premier and Cabinet, NSW Health, the NSW Police Force, Resilience NSW and the Department of Customer Service) of the COVID-19 response in selected Local Government Areas (Fairfield City Council and Dubbo Regional Council) between June and November 2021.

As noted in this report, Resilience NSW was responsible for the coordination of welfare services as part of the emergency management arrangements. On 16 December 2022, the NSW Government abolished Resilience NSW.

During the audited period, Resilience NSW was tasked with supporting the needs of communities subject to stay-at-home orders or stricter restrictions and it provided secretariat support to the State Emergency Management Committee (SEMC). The SEMC was, and remains, responsible for the coordination and oversight of emergency management policy and preparedness.

Our work for this performance audit was completed on 15 November 2022, when we issued the final report to the five audited agencies. While the audit report does not make specific recommendations to Resilience NSW, it does include five recommendations to the State Emergency Management Committee. On 8 December 2022, the then Commissioner of Resilience NSW provided a response to the final report, which we include as it is the formal response from the audited entity at the time the audit was conducted.

The community of New South Wales has experienced significant emergency events during the past three years. COVID-19 first emerged in New South Wales after bushfire and flooding emergencies in 2019–20. The pandemic is now into its third year, and there have been further extreme weather and flooding events during 2021 and 2022.

Lessons taken from the experience of these events are important to informing future responses and reducing future risks to the community from emergencies.

This audit focuses on the NSW Government's response to the COVID-19 pandemic, and in particular, the Delta variant (Delta) that occurred between June and November 2021. The response to the Delta represents six months of heightened challenges for the NSW Government.

Government responses to emergencies are guided by legislation. The State Emergency and Rescue Management Act 1989 (SERM Act) establishes emergency management arrangements in New South Wales and covers:

• coordination at state, regional and local levels through emergency management committees
• emergency management plans, supporting plans and functional areas including the State Emergency Management Plan (EMPLAN)
• operations centres and controllers at state, regional and local levels.

This audit focuses on the activities of five agencies during the audit period:

• The NSW Police Force led the emergency management response and was responsible for coordinating agencies across government in providing the tactical and operational elements that supported and enhanced the health response to the pandemic. The NSW Police Force also led the compliance response which enforced Public Health Orders and included household checks on those required to isolate at home after testing positive to COVID-19. In some parts of NSW, they were supported by the Australian Defence Force in this role.
• NSW Health was responsible for leading the health response which coordinated all parts of the health system, initially to prevent, and then to manage, the pandemic.
• Resilience NSW coordinated welfare services as part of the emergency management arrangements and provided secretariat support to the State Emergency Management Committee (SEMC). The SEMC is responsible for the coordination and oversight of emergency management policy and preparedness. Resilience NSW was also tasked with supporting the needs of communities subject to stay-at-home orders or stricter restrictions.
• The Department of Customer Service (DCS) was responsible for the statewide strategic communications response.
• The Department of Premier and Cabinet (DPC) held a key role in providing policy and legal services, as well as supporting the coordination of activity across a range of functional areas and decision-making by our State’s leaders.

This audit assessed the effectiveness of NSW Government agencies’ coordination (focused on the Department of Premier and Cabinet, NSW Health, the NSW Police Force, Resilience NSW and the Department of Customer Service) of the COVID-19 response in selected Local Government Areas (LGA) (Fairfield City Council and Dubbo Regional Council) after June 2021.

The audit investigated whether:

• government decisions to apply LGA-specific Public Health Orders were supported by effective crisis management governance and planning frameworks
• agencies effectively coordinated in the communication (and enforcement) of Public Health Orders.

While focusing on the coordination of NSW Government agencies’ response to the Delta variant in June through to November 2021, the audit also considered relevant planning and preparation activities that occurred prior to June 2021 to examine how emergency management and public health responses learned from previous events.

This audit does not assess the effectiveness of other specific COVID-19 responses such as business support. It refers to the preparedness, planning and delivery of these activities in the context of supporting communities in selected LGAs. NSW Health's contribution to the Australian COVID-19 vaccine rollout was also subject to a separate audit titled 'New South Wales COVID-19 vaccine rollout' tabled in NSW Parliament on 7 December 2022. 

This audit is part of a series of audits which have been completed, or are in progress, regarding the New South Wales COVID-19 emergency response. The Audit Office of New South Wales '2022–2025 Annual Work Program' details the ongoing focus our audits will have on providing assurance on the effectiveness of emergency responses.

In this document Aboriginal refers to the First Nations peoples of the land and waters now called Australia, and includes Aboriginal and Torres Strait Islander peoples.

The COVID-19 pandemic arrived in Australia in late January 2020 as the bushfire and localised flooding emergencies were in their final stages. Between 2020 and mid-2021, agencies responded to the initial variants of COVID-19, managed a border closure with Victoria that lasted nearly four months and dealt with localised ‘flare-ups’ that required postcode-based restrictions on mobility in northern parts of Sydney and regional New South Wales. During this period, New South Wales had the opportunity to learn from events in Victoria which imposed strict restrictions on mobility across the State and the growing emergence of the Delta variant (Delta) across the Asia Pacific.

This section of the report assesses how emergency management and public health responses adapted to these lessons and determined preparedness for, and responses to, widespread community transmission of Delta in New South Wales.

The previous chapter discusses how agencies had refined the existing emergency management arrangements to suit the needs of a pandemic and describes some gaps that were not addressed. This chapter explores the first month of Delta (mid-June to mid-July 2021). It explores the areas where agencies were prepared and responses in place for the outbreak. It also discusses the impact of the gaps that were not addressed in the period prior to Delta and other issues that emerged.

NSW Health provided advice on the removal of restrictions based on up-to-date advice

The NSW Government discussed the gradual process for removing restrictions using the Doherty Institute modelling provided to National Cabinet on 10 August 2021. NSW Health highlighted the importance of maintaining a level of public health and safety measure bundles to further suppress case numbers. This was based on additional modelling from the Doherty Institute.

The Department of Regional NSW led discussion and planning around reopening with a range of proposal through August and September 2021. The Department of Premier and Cabinet and NSW Health jointly developed a paper to provide options on the restrictions when the State reached a level of 70% double dose vaccinations.

The roadmap to reopening was originally published on 9 September 2021. However, by 11 October 2021, the restrictions were relaxed when the 70% double dose threshold was reached to allow:

• up to ten fully vaccinated visitors to a home (increased from five)
• up to 30 fully vaccinated people attending outdoor gatherings (increased from 20)
• weddings and funerals limits increased to 100 people (from 50)
• the reopening of indoor pools for training, exercise and learning purposes only.

On the same day, the NSW Government announced further relaxation of restrictions once the 80% double dose threshold was reached. These restrictions were further relaxed on 8 November 2021. This included the removal of capacity restrictions to the number of visitors to a private residence, indoor pools to reopen for all purposes and density limits of one person for every two square metres, dancing allowed in nightclubs and 100% capacity in major stadia.

The NSW Government allowed workers in regional areas who received one vaccination dose to return to their workplace from 11 October 2021.

The Premier extended the date of easing of restrictions for unvaccinated people aged over 16 from 1 December to 15 December 2021.

Many agencies have undertaken reviews of their response to the Delta outbreak but a whole-of-government review has yet to be conducted

Various agencies and entities associated with the response to the Delta outbreak conducted after-action review processes. These processes assessed the achievements delivered, lessons learned and opportunities for improvement. However, a whole-of-government level review has not been conducted. This limits the New South Wales public service's ability to improve how it coordinates responses in future emergencies.

The agencies/entities that conducted reviews included:

• South West Metropolitan region, Western NSW region, Fairfield Local Emergency Management Committee (LEMC), Dubbo Local Emergency Operations Controller (LEOCON), which were collated centrally by the State Emergency Operations Centre (SEOC)
• Aboriginal Affairs NSW assessed representation and relevance of the emergency management arrangements for Aboriginal communities following the 2019 bushfires
• Resilience NSW developed case studies to capture improved practice with regard to food security and supply chains
• a community support and empowerment-focused after-action review undertaken by the Pillar 5 workstream of the Microstrategy.

Key lessons collated from the after-action reviews include:

• the impact of variation in capability across agencies on the management of key aspects of the response including welfare support and logistics
• issues with boundary differences between NSW Police Force regions, local government areas (LGA and local health districts (LHD) caused issues in delivering and coordinating services in an emergency situation 
• the need to improve relationships between state and local Government outside of acute emergency responses to improve service delivery 
• issues arising from impediments to information sharing between agencies and jurisdictions, such as:
  • timeliness and accuracy of data used to direct compliance activities
  • the impact of insufficient advance notice on changes to Public Health Orders
  • timely access to data across public sector agencies and other jurisdictions to inform decision-making, analysis and communications
  • gaps in data around ethnicity, geolocation of recent positive cases and infection/vaccination rates in Aboriginal communities.
• the lack of Aboriginal community representation on many LEMCs
• compared with the response to COVID-19 in 2020, improved coordination of communications with Culturally and Linguistically Diverse (CALD) populations with a reduction in overlapping messages and over-communication
• improved attendance from agency representatives in LEMCs, and regional emergency operations centres (REOC) to improve interagency communications, planning, capability development and community engagement issues
• deficiencies in succession planning and fatigue management practices
• the potential for REOC Welfare/Well-being subgroups to be included as part of the wider efforts to community needs during emergencies.

NSW Health commenced a whole of system review of its COVID-19 response in May 2022. At the time of writing, the completion due date for the debrief is 7 November 2022. This debrief is expected to explore:

• governance
• engagement 
• innovation and technology 
• community impact 
• workforce impact
• system impact and performance.

NSW Health is also undertaking a parallel Intra-Action Review that is focused on the public health aspects of the response with finalisation estimated for the end of November 2022. At the time of completing this performance audit report, NSW Health had not finalised these reviews and, as a result, we cannot validate their findings against our own observations.

Recent inquiries are likely to impact the governance of emergency management in New South Wales

In March 2022, the NSW Government established an independent inquiry to examine and report on the causes of, preparedness for, response to and recovery from the 2022 floods. The Flood Inquiry report made 28 recommendations, which the NSW Government supported in full or in principle. Some of the recommendations relate directly to the governance and leadership of emergency management arrangements in New South Wales. 

The State Emergency Management Committee (SEMC) will likely be involved in, and impacted by, the recommendations arising from the Flood Inquiry with potential changes to its membership and reshaping of functional areas and agencies. At the same time, the SEMC may have a role in overseeing the changes that emerge from the SEOC consolidated after-action reviews. This can also extend to ensuring local and regional bodies have incorporated the required actions. There is a risk that the recommendations from the pandemic-based after-action reviews may not be considered due to the priority of action resulting from the Flood Inquiry.

Furthermore, there is potential for the SEMC to work with NSW Health during its system-wide review. Such an approach is likely to improve preparedness for future events.

Appendix one – Response from agencies

Appendix two – Chronology 2020–2021

Appendix three – About the audit

Appendix four – Performance auditing

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© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

Parliamentary reference - Report number #371 - released 20 December 2022

What the report is about

This report analyses the internal controls and governance of the 25 largest agencies in the NSW public sector, excluding state-owned corporations and public financial corporations, for the year ended 30 June 2022.

What we found

Internal control trends

The proportion of control deficiencies identified as high-risk this year increased to 8.2% (5.9% in 2020–21). Sixteen of the 23 high-risk findings related to financial controls while seven related to IT controls.

Repeat findings of control deficiencies now represent 48% of all findings (47% in 2020–21).

Information technology

There continues to be a high number of deficiencies relating to IT general controls, particularly around user access reviews, which affected 56% of agencies.

Cyber security

Agencies' self-assessed maturity levels against the NSW Cyber Security Policy mandatory requirements are lower than target levels. Overall, maturity levels against the Australian Cyber Security Centre's Essential Eight controls have not improved since last year.

Management of cyber risks relating to third party IT service providers should be improved. IT service providers may pose risks to the agency if the provider's cyber security controls have weaknesses.

Consultants and contractors

Agencies risk over-reliance on the same consultants and contractors. A quarter of agencies have re-engaged the same contractor over the past five years.

Employment screening Twenty-four per cent of agencies have not complied with the employment screening requirements of the Government Sector Employment Act 2013 with regard to citizenship or residency. Screening and induction practices for non-permanent workers are often less stringent than for permanent employees. This can pose increased risks to an entity of not detecting applicants with false credentials or a history of corrupt conduct.

Contract management

Half of all agencies' procurement contract registers are incomplete, which is non-compliant with the Government Information (Public Access) Act 2009.

What we recommended

Agencies should:

• prioritise actions to address repeat control deficiencies
• prioritise improvements to their cyber security and resilience
• reinforce mandatory cyber training to all staff and improve completion rates
• ensure that contractor engagements that have been renewed over multiple years are periodically reassessed against the market.

Internal controls are processes, policies and procedures that help agencies to:

• operate effectively and efficiently
• produce reliable financial reports
• comply with laws and regulations
• support ethical government.

This chapter outlines the overall trends for agency controls and governance issues, including the number of audit findings, the degree of risk those deficiencies pose to the agency, and a summary of the most common deficiencies we found across agencies. The rest of this report presents this year's controls and governance findings in more detail.

For consistency and comparability, we have adjusted the 2021 results to incorporate additional audit findings that were reported after the date of the 'Internal controls and governance 2021' report. Therefore, the 2021 figures will not necessarily align with those reported in our 2021 report.

This section also covers how agencies have complied with TD 21-04 during 2021–22.

This chapter outlines our audit observations, conclusions and recommendations arising from our review of agency controls to manage key financial systems.

This chapter outlines our audit observations, conclusions and recommendations arising from our review of agencies' cyber security planning and governance arrangements.

This chapter outlines our audit observations, conclusions and recommendations arising from our review of agencies' practices in engaging external experts, such as consultants and contractors.

This chapter outlines our audit observations, conclusions and recommendations arising from our review of agencies' employment screening practices.

This chapter outlines our audit observations, conclusions and recommendations arising from our review of agencies' contract management processes.

What the report is about

Result of Health cluster (the cluster) agencies' financial statement audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for the financial statements for all Health cluster agencies.

The COVID-19 pandemic continued to increase the complexity and number of accounting matters faced by the cluster. The total gross value of corrected misstatements in 2021–22 was $353.3 million, of which $186.7 million related to an increase in the impairment provision for Rapid Antigen Tests (RATs).

A qualified audit opinion was issued on the Annual Prudential Compliance Statement related to five residential aged care facilities. There were 20 instances (19 in 2020–21) of non-compliance with the prudential responsibilities within the Aged Care Act 1997.

What the key issues were

The total number of matters we reported to management across the cluster decreased from 116 in 2020–21 to 67 in 2021–22. Of the 67 issues raised, four were high risk (three in 2020-21) and 37 were moderate risk (57 in 2020–21). Nearly half of all control deficiencies reported in 2021–22 were repeat issues.

Three unresolved high-risk issues were:

• COVID-19 inventories impairment – we continued to identify issues relating to management’s impairment model which relies on anticipated future consumption patterns. RATs had not been assessed for impairment.

• Asset capitalisation threshold – management has not reviewed the appropriateness of the asset capitalisation threshold since 2006.

• Forced-finalisation of HealthRoster time records – we continued to observe unapproved rosters being finalised by system administrators so payroll can be processed on time. 2.6 million time records were processed in this way in 2021–22.

What we recommended

• COVID-19 inventories impairment – ensure consumption patterns are supported by relevant data and plans.

• Assets capitalisation threshold – undertake further review of the appropriateness of applying a $10,000 threshold before capitalising expenditure on property, plant and equipment.

• Forced-finalisation of HealthRoster time records – develop a methodology to quantify the potential monetary value of unapproved rosters being finalised.

This report provides Parliament and other users of Health cluster (the cluster) agencies' financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

• financial reporting

• audit observations.

Financial reporting is an important element of good governance. Confidence and transparency in public sector decision-making are enhanced when financial reporting is accurate and timely.

This chapter outlines our audit observations related to the financial reporting of agencies in the Health cluster (the cluster) for 2022.

Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision-making.

This chapter outlines our observations and insights from our financial statement audits of agencies in the cluster.

Appendix one – Misstatements in financial statements submitted for audit

Appendix two – Early close procedures

Appendix three – Timeliness of financial reporting

Appendix four – Financial data

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What the report is about

Result of the Education cluster financial statement audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for Education cluster agencies.

An 'other matter' paragraph was included in the TAFE Commission's independent auditor's report as it did not have a delegation or sub-delegation from the Minister for Education and Early Learning to incur expenditure from cluster grants.

What the key issues were

Annual fair value assessments of land and buildings showed material differences in their carrying values. As a result, the Department of Education and the TAFE Commission completed desktop revaluations of land and buildings, collectively increasing the value of these assets by $1.2 billion and $4.7 billion respectively.

The Department of Education and the NSW Education Standards Authority accepted changes to their office leasing arrangements managed by Property NSW. These changes resulted in the collective derecognition of $270.6 million of right-of-use assets and $382.9 million in lease liabilities.

What we recommended

A high-risk matter was reported in the management letter for the TAFE Commission highlighting non-compliance with policies and procedures guiding appropriate use of purchasing cards.

We recommended cluster agencies prioritise and address internal control deficiencies.

This report provides Parliament and other users of the Education cluster’s financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

Financial reporting is an important element of good governance. Confidence and transparency in public sector decision-making are enhanced when financial reporting is accurate and timely.

This chapter outlines our audit observations related to the financial reporting of agencies in the Education cluster (the cluster) for 2022.

Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision-making.

This chapter outlines our observations and insights from our financial statement audits of agencies in the Education cluster.

The number of findings reported to management has increased, and 31% 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 2021–22, there were 29 findings raised across the cluster (28 in 2020–21). Thirty-one per cent of all issues were repeat issues (50% in 2020–21).

The most common new and repeat issues related to internal control deficiencies in agencies’ information technology general controls, application controls, and procurement and payroll practices.

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. 

A high-risk matter was reported at the TAFE Commission highlighting instances of non-compliance with policies and procedures guiding appropriate purchasing card use

As part of our audit of the TAFE Commission, we integrated the use of data analytics into the audit approach. We performed data analytics over aspects of payroll, procurement and accounts payable activities. This helped us to highlight anomalies or risks in those data sets that are relevant to the audit of the TAFE Commission and plan testing procedures to address those risks. Data analytics also assisted us in providing an insight into the internal control environment of the TAFE Commission, highlighting areas where key controls are not in place or are not operating as management intended.

Our analysis over purchasing card data supplied by the TAFE Commission for the period July 2021 to March 2022 found deficiencies in the provisioning, use and cancellation of purchasing cards. This included identified instances of:

• controls effectively bypassed when a purchasing card surrendered by a former employee had been used by another employee
• split payments, circumventing delegation / cardholder limits
• delays in the submission and approval of purchasing card transactions.

The table below describes the common issues identified across the cluster by category and risk rating:

Appendix one – Early close procedures

What the report is about

Result of the Premier and Cabinet cluster financial statement audits for the year ended 30 June 2022. 

What we found

Unmodified audit opinions were issued for all Premier and Cabinet cluster agencies.

The machinery of government changes within the Premier and Cabinet cluster resulted in the transfer of net assets of $1 billion from the Department of Premier and Cabinet.

The Department of Premier and Cabinet, Public Service Commission and Parliamentary Counsel's Office accepted changes to their office leasing arrangements managed by Property NSW. These changes resulted in the collective de-recognition of $167.3 million of right-of-use assets, $225.1 million in lease liabilities and recognition of $47.8 million of other gains/losses. 

What the key issues were

The number of issues we reported to management decreased. 

Forty per cent of issues were repeated from the prior year.

Four moderate risk issues were reported in the management letters for Department of Premier and Cabinet and New South Wales Electoral Commission. Three out of the four moderate risk issues were repeat issues. 

The repeat issues related to internal control deficiencies in agencies' including lack of updated procurement policies and procedures and information technology general controls.

This report provides Parliament and other users of the Premier and Cabinet’s financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

Financial reporting is an important element of good governance. Confidence and transparency in public sector decision-making are enhanced when financial reporting is accurate and timely.

This chapter outlines our audit observations related to the financial reporting of agencies in the Premier and Cabinet cluster for 2022.

Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.

This chapter outlines our observations and insights from our financial statement audits of agencies in the Premier and Cabinet cluster.

Appendix one – Early close procedures

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© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

What the report is about

In this report, we have analysed the key findings and recommendations from our audit reports over the past four years.

This analysis includes financial audits, performance audits, and compliance audits of state and local government entities that were tabled in NSW Parliament between July 2018 and February 2022.

The report is framed by recognition that the past four years have seen significant challenges and emergency events.

The scale of government responses to these events has been wide-ranging, involving emergency response coordination, service delivery, governance and policy.

The report is a resource to support public sector agencies and local government to improve future programs and activities.

What we found

Our analysis of findings and recommendations is structured around six key themes:

• Integrity and transparency
• Performance and monitoring
• Governance and oversight
• Cyber security and data
• System planning for disruption
• Resource management.

The report draws from this analysis to present recommendations for elements of good practice that government agencies should consider in relation to these themes. It also includes relevant examples from recent audit reports.

In this report we particularly call out threats to the integrity of government systems, processes and governance arrangements.

The report highlights the need for balanced advice to government on options and risks, for transparent documentation and reporting of directions and decisions, and for early and open sharing of information with integrity bodies and audit.

A number of the matters highlighted in this report are similar to those described in our previous Insights Report, (Performance Audit Insights: key findings from 2014–2018) specifically in relation to cyber and information security, to performance measurement, reporting and evaluation, and system and workforce planning and capability.

I am pleased to present the Audit Insights 2018–2022 report. This report describes key findings, trends and lessons learned from the last four years of audit. It seeks to inform the New South Wales Parliament of key risks identified and to provide insights and suggestions to the agencies we audit to improve performance across the public sector.

The report is framed by a very clear recognition that governments have been responding to significant events, in number, character and scale, over recent years. Further, it acknowledges that public servants at both state and council levels generally bring their best selves to work and diligently strive to deliver great outcomes for citizens and communities. The role of audit in this context is to provide necessary assurance over government spending, programs and services, and make suggestions for continuous improvement.

A number of the matters highlighted in this report are similar to those described in our previous Insights Report, (Performance Audit Insights: key findings from 2014–2018) specifically in relation to cyber and information security, to performance measurement, reporting and evaluation, and system and workforce planning and capability.

However, in this report we particularly call out threats to the integrity of government systems, processes and governance arrangements. We highlight the need for balanced advice to government on options and risks, for transparent documentation and reporting of directions and decisions, and for early and open sharing of information with integrity bodies and audit. Arguably, these considerations are never more important than in an increasingly complex environment and in the face of significant emergency events and they will be key areas of focus in our future audit program.

While we have acknowledged the challenges of the last few years have required rapid responses to address the short-term impacts of emergency events, there is much to be learned to improve future programs. I trust that the insights developed in this report provide a helpful resource to public sector agencies and local government across New South Wales. I would be pleased to receive any feedback you may wish to offer.

Margaret Crawford
Auditor-General for New South Wales

This report brings together a summary of key findings arising from NSW Audit Office reports tabled in the New South Wales Parliament between July 2018 and February 2022. This includes analysis of financial audits, performance audits, and compliance audits tabled over this period.

• Financial audits provide an independent opinion on the financial statements of NSW Government entities, universities and councils and identify whether they comply with accounting standards, relevant laws, regulations, and government directions.
• Performance audits determine whether government entities carry out their activities effectively, are doing so economically and efficiently, and in accordance with relevant laws. The activities examined by a performance audit may include a selected program or service, all or part of an entity, or more than one government entity. Performance audits can consider issues which affect the whole state and/or the local government sectors.
• Compliance audits and other assurance reviews are audits that assess whether specific legislation, directions, and regulations have been adhered to.

This report follows our earlier edition titled 'Performance Audit Insights: key findings from 2014–2018'. That report sought to highlight issues and themes emerging from performance audit findings, and to share lessons common across government. In this report, we have analysed the key findings and recommendations from our reports over the past four years. The full list of reports is included in Appendix 1. The analysis included findings and recommendations from 58 performance audits, as well as selected financial and compliance reports tabled between July 2018 and February 2022. The number of recommendations and key findings made across different areas of activity and the top issues are summarised at Exhibit 1.

The past four years have seen unprecedented challenges and several emergency events, and the scale of government responses to these events has been wide-ranging involving emergency response coordination, service delivery, governance and policy. While these emergencies are having a significant impact today, they are also likely to continue to have an impact into the future. There is much to learn from the response to those events that will help the government sector to prepare for and respond to future disruption. The following chapters bring together our recommendations for core elements of good practice across a number of areas of government activity, along with relevant examples from recent audit reports.

This 'Audit Insights 2018–2022' report does not make comparative analysis of trends in public sector performance since our 2018 Insights report, but instead highlights areas where government continues to face challenges, as well as new issues that our audits have identified since our 2018 report. We will continue to use the findings of our Insights analysis to shape our future audit priorities, in line with our purpose to help Parliament hold government accountable for its use of public resources in New South Wales.

Appendix one – Included reports, 2018–2022

Appendix two – About this report

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© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

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’.

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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.

Margaret Crawford

Auditor-General for New South Wales

9 February 2022

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.

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.

Background

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:

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.

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.

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.

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).

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.

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.

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.

Appropriations framework

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.

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.

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.

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

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.

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:

Appendix one – Prescribed entities

Appendix two – Legal opinions

Appendix three – TSS sectors and entities
 

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© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

What the report is about

The term ‘machinery of government’ refers to the way government functions and responsibilities are organised.

The decision to make machinery of government changes is made by the Premier. Changes may be made for a range of reasons, including to support the policy and/or political objectives of the government of the day.

Larger machinery of government changes typically occur after an election or a change of Premier.

This report assessed how effectively the Department of Planning, Industry and Environment (DPIE) and the Department of Regional NSW (DRNSW) managed their 2019 and 2020 machinery of government changes, respectively. It also considered the role of the Department of Premier and Cabinet (DPC) and NSW Treasury in overseeing machinery of government changes.

What we found

The anticipated benefits of the changes were not articulated in sufficient detail and the achievement of benefits has not been monitored. The costs of the changes were not tracked or reported.

DPC and NSW Treasury provided principles to guide implementation but did not require departments to collect or report information about the benefits or costs of the changes.

The implementation of the machinery of government changes was completed within the set timeframes, and operations for the new departments commenced as scheduled.

Major implementation challenges included negotiation about the allocation of corporate support staff and the integration of complex corporate and ICT systems.

What we recommended

DPC and NSW Treasury should:

• consolidate existing guidance on machinery of government changes into a single document that is available to all departments and agencies
• provide guidance for departments and agencies to use when negotiating corporate services staff transfers as a part of machinery of government changes, including a standard rate for calculating corporate services requirements
• progress work to develop and implement common processes and systems for corporate services in order to support more efficient movement of staff between departments and agencies.

The term ‘machinery of government’ refers to the way government functions and responsibilities are allocated and structured across government departments and agencies. A machinery of government change is the reorganisation of these structures. This can involve establishing, merging or abolishing departments and agencies and transferring functions and responsibilities from one department or agency to another.

The decision to make machinery of government changes is made by the Premier. These changes may be made for a range of reasons, including to support the policy and/or political objectives of the government of the day. Machinery of government changes are formally set out in Administrative Arrangements Orders, which are prepared by the Department of Premier and Cabinet, as instructed by the Premier, and issued as legislative instruments under the Constitution Act 1902.

The heads of agencies subject to machinery of government changes are responsible for implementing them. For more complex changes, central agencies are also involved in providing guidance and monitoring progress.

The NSW Government announced major machinery of government changes after the 2019 state government election. These changes took place between April and June 2019 and involved abolishing five departments (Industry; Planning and Environment; Family and Community Services; Justice; and Finance, Services and Innovation) and creating three new departments (Planning, Industry and Environment; Communities and Justice; and Customer Service). This also resulted in changes to the 'clusters' associated with departments. The NSW Government uses clusters to group certain agencies and entities with related departments for administrative and financial management. Clusters do not have legal status. Most other departments that were not abolished had some functions added or removed as a part of these machinery of government changes. For example, the functions relating to regional policy and service delivery in the Department of Premier and Cabinet were moved to the new Department of Planning, Industry and Environment.

Our Report on State Finances 2019, tabled in October 2019, outlined these changes and identified several issues that can arise from machinery of government changes if risks are not identified early and properly managed. These include: challenges measuring the costs and benefits of machinery of government changes; disruption to services due to unclear roles and responsibilities; and disruption to control environments due to staff, system and process changes.

In April 2020, the Department of Regional NSW was created in a separate machinery of government change. This involved moving functions and agencies related to regional policy and service delivery from the Department of Planning, Industry and Environment into a standalone department.

This audit assessed how effectively the Department of Planning, Industry and Environment (DPIE) and the Department of Regional NSW (DRNSW) managed their 2019 and 2020 machinery of government changes, respectively. It also considered the role of the Department of Premier and Cabinet and NSW Treasury in overseeing machinery of government changes. The audit investigated whether:

• DPIE and DRNSW have integrated new responsibilities and functions in an effective and timely manner
• DPIE and DRNSW can demonstrate the costs of the machinery of government changes
• The machinery of government changes have achieved or are achieving intended outcomes and benefits.

Appendix one – Response from agencies

Appendix two – About the audit

Appendix three – Performance auditing

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Parliamentary reference - Report number #359 - released (17 December 2021).

What the report is about

The Auditor-General's review analyses claims made by members of the NSW Parliament during the 2020–21 financial year by testing a sample of transactions. Our sample consisted of 67 claims submitted by 52 of the 137 members.

What we found

While we did not identify any instances of material non-compliance with the Parliamentary Remuneration Tribunal's Determination, we did identify 31 departures from the Determination, which were of an administrative nature.

What we recommended

The Department of Parliamentary Services (the department) should continue to work with the Presiding Officers, members, the Clerk of the Parliaments and the Clerk of the Legislative Assembly to enhance reporting of members' expenditure.

In 2020, we recommended the department work with the Tribunal to provide additional guidance to members to clarify:

• the definition of 'parliamentary duties'
• the activities that meet the definition
• requirements for retaining documents.

The department will work with the Tribunal to clarify these items as part of its submission to the 2022 annual Determination.

The Auditor-General has reviewed the compliance of the members of the NSW Parliament (members) with certain requirements outlined in the Parliamentary Remuneration Tribunal's Determination (the Determination) for the year ended 30 June 2021.

The Auditor-General's review analyses claims made by members during the 2020–21 financial year by testing a sample of transactions. Our sample consisted of 67 claims submitted by 52 of the 137 members.

Results

Although our review did not identify any instances of material non-compliance with the Determination for the year ended 30 June 2021, we did identify 31 departures from the Determination, which were of an administrative nature. Such departures may help identify areas in the current processes where greater clarity is needed or where training or education for members is needed. These departures were as follows:

• 12 claims were not submitted for payment within 60 days of receipt or occurrence of the expense
• 10 annual loyalty scheme declarations were submitted by members after the due date specified in the guideline
• 7 reconciliations for the Sydney Allowance were submitted after the due date
• 2 publications claimed under the Communications Allowance had not made the required authorisations and attributions on the publication.

Background

The Parliamentary Remuneration Tribunal (the Tribunal) determines the salary and additional entitlements of members of the NSW Parliament (members), details of which are set out in the Tribunal's annual Determination. The NSW Parliament, through the Department of Parliamentary Services (the department), administers payments of additional entitlements to members in accordance with the Tribunal's annual Determination. An overview is presented below:

Twelve claims were not submitted for payment within 60 days of receipt or occurrence of the expense

The Determination requires members' expense claims to be submitted to the department within 60 days of when the expense is incurred or receipted. Our audit procedures identified 12 instances where members submitted their claims between six and 248 days late.

Ten annual loyalty/incentive scheme declarations were submitted by members after the due date specified in the guidelines

At the end of each financial year, members must declare they have not used loyalty/incentive scheme benefits accrued from their parliamentary duties for private purposes. The Determination requires current members to complete the declarations at the end of each year (by 27 August 2021 per the department's administrative process). Former members must complete the declarations within 30 days of leaving Parliament. We found ten current members submitted their declarations between three and 18 days late. The declaration is important as it affirms that loyalty benefits accrued using the members' parliamentary allowances and entitlements were not used for private purposes.

Seven reconciliations for the Sydney Allowance reconciliations were submitted after the due date

Open prior period recommendations

Enhanced public reporting

In 2016, the Auditor-General's Report to Parliament recommended the Tribunal consider requiring the department to regularly publish full details of members' expenditure claims on its website in an accessible and searchable format. The Tribunal had developed a plan requiring greater public reporting of members' additional expenditure from 1 July 2019 but does not have the power to require the department to facilitate this.

The Annual Reports of the Legislative Assembly and the Legislative Council, published on the Parliament's website, currently list the total amount claimed during the year by each member for each allowance. However, transparency around members’ claims would be enhanced if information was more extensively and regularly published on the Parliament’s website. The department should continue to work with the Presiding Officers, members, the Clerk of the Parliaments and the Clerk of the Legislative Assembly to enhance reporting of members' expenditure.

Clarifying key parameters of the annual Determination

In 2020, the Auditor-General's Reports to Parliament recommended the department work with the Tribunal to provide additional guidance to members to clarify:

• the definition of 'parliamentary duties'
• the activities that meet the definition
• requirements for retaining documents.

To address this recommendation, the department has performed a review of the definitions and activities used by other jurisdictions, in their administration of members' entitlements. The department is also continuing to monitor for changes in the administration of members' entitlements occurring at the Federal level. The department will work with the Tribunal to clarify these items as part of its submission to the 2022 annual Determination.

Resolved prior period recommendations

Recommendations resolved since the 2020 Auditor-General's report

The 2019 Auditor-General's Report recommended the department work with the Tribunal to clarify whether members can claim the cost of travel from their General Travel Allowance when the travel was used to produce communications during the blackout period. Members are not permitted to use their Communications Allowance for the production and distribution of publications that they intended to distribute in a State Election year in the period from 26 January to the election date (the ‘blackout period’).

The 2021 Determination has clarified this matter by stating that during the 'blackout period' travel necessary for parliamentary duties rather than electioneering is acceptable. The 2021 Determination has also included the condition that a member may not use their General Travel Allowance to fund communications that would normally be funded from the Communications Allowance during a 'blackout period'.

Appendix one - Response from Department of Parliamentary Services

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© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.