What the report is about

This audit assessed nine agencies’ compliance with the NSW Cyber Security Policy (CSP) including whether, during the year to 30 June 2020, the participating agencies:

• met their reporting obligations under the CSP
• reported accurate self-assessments of their level of maturity implementing the CSP’s requirements including the Australian Cyber Security Centre’s (ACSC) Essential 8.

What we found

Key elements to strengthen cyber security governance, controls and culture are not sufficiently robust and not consistently applied. The CSP is not achieving the objectives of improved cyber governance, controls and culture because:

• the CSP does not specify a minimum level for agencies to achieve in implementing the 'mandatory requirements' or the Essential 8
• the CSP does not require agencies to report their target levels, nor does it require risk acceptance decisions to be documented or formally endorsed
• each participating agency had implemented one or more of the mandatory requirements in an ad hoc or inconsistent basis
• none of the participating agencies had implemented all of the Essential 8 controls
• agencies tended to over-assess their cyber security maturity - all nine participating agencies were unable to support all of their self-assessments with evidence
• there is no monitoring of the adequacy or accuracy of agencies' self-assessments.

What we recommended

In this report, we repeat recommendations made in the 2019 and 2020 Central Agencies reports, that Cyber Security NSW and NSW Government agencies need to prioritise improvements to cyber security resilience as a matter of urgency.

Cyber Security NSW should:

• monitor and report compliance with the CSP
• require agencies to report the target and achieved levels of maturity
• require agencies to justify why it is appropriate to target a low level of maturity
• require the agency head to formally accept the residual risk
• challenge agencies' target maturity levels.

Agencies should resolve discrepancies between their reported level of maturity and the level they are able to support with evidence.

Separately, the agencies we audited requested that we not disclose our audit findings. We reluctantly agreed to anonymise our findings, even though they are more than 12 months old. We are of the view that transparency and accountability to the Parliament of New South Wales are part of the solution, not the problem.

The poor levels of agency cyber security maturity are a significant concern. Improvement requires leadership and resourcing.

This report assesses whether state government agencies are complying with the NSW Cyber Security Policy. The audit was based on the level of compliance reported at 30 June 2020.

Our audit identified non-compliance and significant weaknesses against the government’s policy.

Audited agencies have requested that we not report the findings of this audit to the Parliament of New South Wales, even though the findings are more than 12 months old, believing that the audit report would expose their weaknesses to threat actors.

I have reluctantly agreed to modify my report to anonymise agencies and their specific failings because the vulnerabilities identified have not yet been remedied. Time, leadership and prioritised action should have been sufficient for agencies to improve their cyber safeguards. I am of the view that transparency and accountability to the Parliament is part of the solution, not the problem.

The poor levels of cyber security maturity are a significant concern. Improvement requires dedicated leadership and resourcing. To comply with some elements of the government’s policy agencies will have to invest in technical uplift and some measures may take time to implement. However, other elements of the policy do not require any investment in technology. They simply require leadership and management commitment to improve cyber literacy and culture. And they require accountability and transparency. Transparent reporting of performance is a key means to improve performance.

Cyber security is increasingly a focus of governments around Australia. The Australian Cyber Security Centre (ACSC) is the Australian Government’s lead agency for cyber security and is part of the Australian Signals Directorate, a statutory authority within the Australian Government’s Defence portfolio. The ACSC has advised that government agencies at all levels, as well as individuals and other organisations were increasingly targeted over the 2021 financial year¹. The ACSC received over 67,500 cybercrime reports, a 13 per cent increase on the previous year. This equates to one reported cyber attack every eight minutes. They also noted that attacks by cyber criminals and state actors are becoming increasingly sophisticated and complex and that the attacks are increasingly likely to be categorised as ‘substantial’ in impact.

High profile attacks in Australia and overseas have included a sustained malware campaign targeted at the health sector², a phishing campaign deploying emotet malware, spear phishing campaigns targeting people with administrator or other high-level access, and denial of service attacks. The continuing trend towards digital delivery of government services has increased the vulnerability of organisations to cyber threats.

The COVID-19 pandemic has increased these risks. It has increased Australian dependence on the internet – to work remotely, to access services and information, and to communicate and continue our daily lives. Traditional security policies within an organisation’s perimeter are harder to enforce in networks made up of home and other private networks, and assets the organisation does not manage. This has increased the cyber risks for NSW Government agencies.

In March 2020, Service NSW suffered two cyber security incidents in short succession. Technical analysis undertaken by the Department of Customer Service (DCS) concluded that these cyber breaches resulted from a phishing exercise through which external threat actors gained access to the email accounts of 47 staff members. These attacks resulted in the breach of a large amount of personal customer information contained in these email accounts. These attacks were the subject of the Auditor-General's report on Service NSW's handling of personal information tabled on 18 December 2020.

This audit also follows two significant performance audits. Managing cyber risks, tabled on 13 July 2021 found Transport for NSW and Sydney Trains were not effectively managing their cyber security risks. Integrity of data in the Births, Deaths and Marriages Register, tabled 7 April 2020 found that although there are controls in place to prevent and detect unauthorised access to, and activity in the register, there were significant gaps in these controls.

The NSW Cyber Security Policy (CSP) was issued by Cyber Security NSW, a business unit within the Department of Customer Service, and took effect from 1 February 2019. It applies to all NSW Government departments and public service agencies, including statutory authorities. Of the 104 agencies in the NSW public sector that self-assessed their maturity implementing the mandatory requirements, only five assessed their maturity at level three or above (on the five point maturity scale). This means that, according to their own self-assessments, 99 agencies practiced requirements within the framework in what the CSP’s maturity model describes as an ad hoc manner, or they did not practice the requirement at all. Cyber Security NSW and NSW Government agencies need to prioritise improvements to their cybersecurity and resilience as a matter of priority.

This audit looks specifically at the compliance of nine key agencies with the CSP. It looks at their achievement implementing the requirements of the policy, the accuracy of their self-assessments and the attestations they made as to their compliance with the CSP.

The CSP outlines the mandatory requirements to which all NSW Government departments and public service agencies must adhere. It seeks to ensure cyber security risks to agencies’ information and systems are appropriately managed. The key areas of responsibility for agencies are:

• Lead - Agencies must implement cyber security planning and governance and report against the requirements outlined in the CSP and other cyber security measures.
• Prepare - Agencies must build and support a cyber security culture across their agency and NSW Government more broadly.
• Prevent - Agencies must manage cyber security risks to safeguard and secure their information and systems.
• Detect/Respond/Recover - Agencies must improve their resilience including their ability to rapidly detect cyber incidents and respond appropriately.
• Report - Agencies must report against the requirements outlined in the CSP and other cyber security measures.

DCS has only recommended, but not mandated the CSP for state owned corporations, local councils and universities.

NSW Government agencies must include an attestation on cyber security in their annual report and provide a copy to Cyber Security NSW by 31 August each year stating whether, for the preceding financial year, the agency has:

• assessed its cyber security risks
• appropriately addressed cyber security at agency governance forums
• a cyber incident response plan that is integrated with the security components of business continuity arrangements, and the response plan has been tested during the previous 12 months (involving senior business executives)
• certified the agency’s Information Security Management System (ISMS) or confirmed the agency’s Cyber Security Framework (CSF)
• a plan to continuously improve the management of cyber security governance and resilience.

The purpose of the attestation is to focus the agency's attention on its cyber risks and the mitigation of those risks.

Agencies assess their level of compliance in accordance with a maturity model. The CSP does not mandate a minimum maturity threshold for any requirement, including implementation of the Australian Cyber Security Centre's (ACSC) Essential 8 Strategies to Mitigate Cyber Security Incidents (Essential 8).

Agencies are required to set a target maturity level based on their risk appetite for each requirement, seek continual improvement in their maturity, and annually assess their maturity on an ascending scale of one to five for all requirements (refer to Appendix two for the maturity model). Each control within the Essential 8 is assessed on an ascending scale of zero to three reflecting the agency's level of alignment with the strategy (refer to Appendix three for the maturity model).

Scope of this audit

We assessed whether agencies had provided accurate reporting on their level of maturity implementing the requirements of the CSP in a documented way and covering all their systems.

The scope of this audit covered nine agencies (the participating agencies). These agencies were selected because they are the lead agency in their cluster, or have a significant digital presence within their respective cluster. The list of participating agencies is in section 1.2. The audit aimed to determine whether, during the year to 30th June 2020, the participating agencies:

• met their reporting obligations under the CSP
• provided accurate reporting in self-assessments against the CSP’s mandatory requirements, including their implementation of the Australian Cyber Security Centre’s (ACSC) Essential 8
• achieved implementation of mandatory requirements at maturity levels which meet or exceed the ‘level three - defined’ threshold (i.e. are documented and practiced on a regular and consistent basis).

While the audit does assess the accuracy of agency self-assessed ratings, the audit did not assess the appropriateness of the maturity ratings.

1. Key findings

The CSP allows agencies to determine their own level of maturity to implement the 'mandatory requirements', which can include not practicing a policy requirement or implementing a policy requirement on an ad hoc basis. These determinations do not need to be justified

Agencies can decide not to implement requirements of the CSP, or they can decide to implement them only in an informal or ad-hoc manner. The CSP allows agencies to determine their desired level of maturity in implementing the requirements on a scale of one to five - level one being 'initial – not practiced' and level five being 'optimised'. The desired level of maturity is determined by the agency based on their own assessment of the risk of the services they provide and the information they hold.

The reporting template for the 2019 version of the CSP stated that level three maturity - where a policy requirement is practiced on a regular and consistent basis and its processes are documented - was required for compliance with the CSP. This requirement was removed in the 2020 revision of the reporting template.

This CSP does not require the decisions on risk tolerance, or the timeframes agencies have set to implement requirements to be documented or formally endorsed by the agency head. There is no requirement to report these decisions to Cyber Security NSW.

Some comparable jurisdictions require formal risk acceptance decisions where requirements are not implemented. The NSW CSP does not have a similar formal requirement

Some jurisdictions, with a similar policy framework to NSW, require agencies to demonstrate reasons for not implementing requirements, and require agency heads to formally acknowledge the residual risk. The NSW CSP does not require these considerations to be documented, nor does it require an explicit acknowledgement and acceptance of the residual risk by the agency head or Cyber Security NSW. The NSW CSP does not require that the records of how agencies considered and decided which measures to adopt to be documented and auditable, limiting transparency and accountability of decisions made.

All of the participating agencies had implemented one or more of the mandatory requirements in an ad hoc or inconsistent basis

All of the participating agencies had implemented one or more of the mandatory requirements at level one or two. Maturity below level three typically means not all elements of the requirement have been implemented, or the requirements have been implemented on an ad-hoc or inconsistent basis.

None of the participating agencies has implemented all of the Essential 8 controls at level one – that is, only partly aligned with the intent of the mitigation strategy

Eight of the nine agencies we audited had not implemented any of the Essential 8 strategies to level three – that is, fully aligned with the intent of the mitigation strategy. At the time of this audit the ACSC advised that:

as a baseline organisations should aim to reach to reach Maturity Level Three for each mitigation strategy³.

The Australian Signals Directorate⁴ currently advises that, with respect to the Essential 8:

[even] level three maturity will not stop adversaries willing and able to invest enough time, money and effort to compromise a target. As such, organisations still need to consider the remainder of the mitigation strategies from the Strategies to Mitigate Cyber Security Incidents and the Australian Government Information Security Manual

All agencies failed to reach even level one maturity for at least three of the Essential 8.

Cyber Security NSW modified the ACSC model for implementation of the Essential 8

The NSW maturity model used for the Essential 8 does not fully align with the ACSC’s model. At the time of this audit the major difference was the inclusion of level zero in the NSW CSP maturity scale. Level zero broadly means that the relevant cyber mitigation strategy is not implemented or is not applied consistently. Level zero had been removed by the ACSC in February 2019 and was not part of the framework at the time of this audit. It was re-introduced in July 2021 when the ACSC revised the detailed criteria for each element of the essential 8 maturity model. The indicators to reach level one on the new ACSC model are more detailed, specific and rigorous than those currently prescribed for NSW Government agencies. Cyber Security NSW asserted the level zero on the CSP maturity scale:

is not identical to the level zero of the ACSC’s previous Essential 8 maturity model, but is a NSW-specific inclusion designed to prevent agencies incorrectly assessing as level one when they have not achieved that level.

Attestations did not accurately reflect whether agencies implemented the requirements

Of the nine participating agencies, seven did not modify the proforma wording in their attestation to reflect their actual situation. Despite known gaps in their implementation of mandatory requirements, these agencies stated that they had 'managed cyber security risks in a manner consistent with the Mandatory Requirements set out in the NSW Government Cyber Security Policy'. Only two agencies modified the wording of the attestation to reflect their actual situation.

Attestations should be accurate so that agencies’ and the government’s response to the risk of cyber attack is properly informed by an understanding of the gaps in agency implementation of the policy requirements and the Essential 8. Without accurate information about these gaps, subsequent decisions as to prioritisation of effort and deployment of resources are unlikely to effectively mitigate the risks faced by NSW Government agencies.

Participating agencies were not able to support all of their self-assessments with evidence and had overstated their maturity assessments, limiting the effectiveness of agency risk management approaches

Seven of the nine participating agencies reported levels of maturity against both the mandatory requirements and the Essential 8 that were not supported by evidence.

Each of the nine participating agencies for this audit had overstated their level of maturity against at least one of the 20 mandatory requirements. Seven agencies were not able to provide evidence to support their self-assessed ratings for the Essential 8 controls.

Where agency staff over-assess the current state of their cyber resilience, it can undermine the effectiveness of subsequent decision making by Agency Heads and those charged with governance. It means that actions taken in mitigating cyber risks are less likely to be appropriate and that gaps in implementing cyber security measures will remain, exposing them to cyber attack.

Agencies' self-assessments across government exposed poor levels of maturity in implementing the mandatory requirements and the Essential 8 controls

We reviewed the data 104 NSW agencies provided to Cyber Security NSW. The 104 agencies includes nine audited agencies referred to in more detail in this report. Our review of the 104 agency self-assessment returns submitted to Cyber Security NSW highlighted that, consistent with previous years, there remains reported poor levels of cyber security maturity. We reported the previous years’ self-assessments in the Central Agencies 2019 Report to Parliament and the Central Agencies 2020 Report to Parliament.

Only five out of the 104 agencies self-assessed that they had implemented all of the mandatory requirements at level three or above (against the five point scale). Fourteen agencies self-assessed that they had implemented each of the Essential 8 controls at level one maturity or higher (using Cyber NSW’s four point scale). The remainder reported at level zero for implementation of one or more of the Essential 8 controls, meaning that for the majority of agencies the cyber mitigation strategy has not been implemented, or is applied inconsistently.

Where agencies had reported in both 2019 and 2020, agencies’ self-assessments showed little improvement over the previous year’s self-assessments:

• 14 agencies reported improvement across both the Essential 8 and the mandatory requirements
• 8 agencies reported a net decline in both the Essential 8 and the mandatory requirements.

The poor levels of maturity in implementing the Essential 8 over the last couple of years is an area of significant concern that requires better leadership and resourcing to prioritise the required significant improvement in agency cyber security measures.

2. Recommendations

Cyber Security NSW should:

1. monitor and report compliance with the CSP by:

• obtaining objective assurance over the accuracy of self-assessments
• requiring agencies to resolve inaccurate or anomalous self-assessments where these are apparent

2. require agencies to report:

• the target level of maturity for each mandatory requirement they have determined appropriate for their agency
• the agency head's acceptance of the residual risk where the target levels are low

3. identify and challenge discrepancies between agencies' target maturity levels and the risks of the information they hold and services they provide

4. more closely align their policy with the most current version of the ACSC model.

Participating agencies should:

5. resolve the discrepancies between their reported level of maturity and the level they are able to demonstrate with evidence, and:

• compile and retain in accessible form the artefacts that demonstrate the basis of their self-assessments
• refer to the CSP guidance when determining their current level of maturity
• ensure the attestations they make refer to departures from the CSP
• have processes whereby the agency head and those charged with governance formally accept the residual cyber risks.

Repeat recommendation from the 2019 Central Agencies report and the 2020 Central Agencies report

6. Cyber Security NSW and NSW Government agencies need to prioritise improvements to their cyber security and resilience as a matter of urgency.

The objective of the CSP is to ensure cyber security risks are appropriately managed. However, meeting this objective depends on the requirements being implemented at all agencies to a level of maturity that addresses their specific cyber security risks. Agency systems and data are increasingly interconnected. If an agency does not implement the requirements, or implements them only in an ad-hoc or informal way, an agency is more susceptible to their systems and data being compromised, which may affect the confidentiality of citizens' data and the reliability of services, including critical infrastructure services.

Agencies determine their own target level of maturity, which may mean the requirement is not addressed, or is addressed in an ad hoc or inconsistent way

While the CSP is mandatory for all agencies, it does not set a minimum maturity threshold for agencies to meet.

The reporting template issued in 2019 stated that agencies were required to reach level three maturity in order to comply with the CSP. The 2020 revision⁶ of the CSP and guidance indicates that level three maturity may not be sufficient to mitigate risks. It advises the agency may determine the level to which it believes it is suitable to implement the requirements, and allows for an agency to aim for a target level of maturity less than level three. The agency can set its optimal maturity level with reference to its risk tolerance with the objective that that aim ‘to be as high as possible’. However, ‘as high as possible’ does not necessarily mean ‘fully implemented’. The CSP contemplates that a lower level of maturity is sufficient if it aligns with the agency's risk tolerance.

The Department of Customer Service asserts that while the quotes above were part of their annual templates and policy documents, their documents were incorrect. They assert that the policy has never required a minimum level of maturity to be reached. They have responded to our enquiries that:

…a level three maturity was not a requirement of the Policy or Maturity Model’ and ‘it is misleading to suggest it was a requirement of the Policy.

This audit found that, based on the 2020 reporting template there is no established minimum baseline. Consequently, because the Department of Customer Service had not established a minimum baseline agencies are able to target lower levels (providing they were within the agency’s own risk appetite), which includes targeting to not practice a CSP policy requirement, or to practice a CSP policy requirement on an ad hoc basis.

Where requirements are not implemented, documentation of formal acceptance of the residual risks by the agency head is not required

The New Zealand Government has an approach that is not dissimilar to NSW, in that it also identifies 20 mandatory requirements and allows for a risk based approach to implementation. However, the New Zealand approach puts more rigor around risk acceptance decisions.

The New Zealand Government requires that agencies that do not implement the requirements must demonstrate that a measure is not relevant for them. It requires agencies to document the rationale for not implementing the measure, including explicit acknowledgement of the residual risk by the agency head. They require these records to be auditable.

A security measure with a ‘must’ or ‘must not’ compliance requirement is mandatory. You must implement or follow mandatory security measures unless you can demonstrate that a measure is not relevant in your context.

Not using a security measure without due consideration may increase residual risk for your organisation. This residual risk needs to be agreed and acknowledged by your organisation head.

A formal auditable record of how you considered and decided which measures to adopt is required as part of the governance and assurance processes within your organisation.

The NSW CSP does not require these considerations to be documented or auditable and does not require an explicit acknowledgement or acceptance of the residual risk by the agency head.

None of the participating agencies achieved level three implementation for all mandatory risk prevention and mitigation requirements

Maturity level three is the minimum level whereby an agency has implemented documented processes that are practiced on a regular basis across their environment. An agency has not reached level three if the requirement is implemented on an ad-hoc or inconsistent basis, or if not all elements of the requirement have been implemented.

None of the participating agencies achieved level three implementation for all mandatory requirements.

The requirements of the CSP are organised into five sections. Agency implementation of these requirements is discussed in the next five sections of this report.

• Lead: Planning and governance requirements. Section 2.1
• Prepare: Cyber security culture requirements. Section 2.2
• Prevent: Managing cyber incident prevention requirements. Section 2.3
• Detect/Respond/Recover: Resilience requirements. Section 2.4
• Report: Reporting requirements. Section 2.5.

Appendix one – Response from agencies

Appendix two – The maturity model for the mandatory requirements

Appendix three – Essential 8 maturity model

Appendix four – About the audit

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 report assessed how effectively the Department of Planning, Industry and Environment (DPIE) and NSW Treasury have supported state agencies to manage climate risks to their assets and services.

Climate risks that can impact on state agencies' assets and services include flooding, bushfires, and extreme temperatures. Impacts can include damage to transport, communications and energy infrastructure, increases in hospital admissions, and making social housing or school buildings unsuitable.

NSW Treasury estimates these risks could have significant costs.

What we found

DPIE and NSW Treasury’s support to agencies to manage climate risks to their assets and services has been insufficient.

In 2021, key agencies with critical assets and services have not conducted climate risk assessments, and most lack adaptation plans.

DPIE has not delivered on the NSW Government commitment to develop a state-wide climate change adaptation action plan. This was to be complete in 2017.

There is also no adaptation strategy for the state. These have been released in all other Australian jurisdictions. The NSW Government’s draft strategic plan for its Climate Change Fund was also never finalised.

DPIE’s approach to developing climate projections is robust, but it hasn’t effectively educated agencies in how to use this information to assess climate risk.

NSW Treasury did not consistently apply dedicated resourcing to support agencies' climate risk management until late 2019.

In March 2021, DPIE and NSW Treasury released the Climate Risk Ready NSW Guide and Course. These are designed to improve support to agencies.

What we recommended

DPIE and NSW Treasury should, in partnership:

• enhance the coordination of climate risk management across agencies
• implement climate risk management across their clusters.

DPIE should:

• update information and strengthen education to agencies, and monitor progress
• review relevant land-use planning, development and building guidance
• deliver a climate change adaptation action plan for the state.

NSW Treasury should:

• strengthen climate risk-related guidance to agencies
• coordinate guidance on resilience in infrastructure planning
• review how climate risks have been assured in agencies’ asset management plans.

According to the Intergovernmental Panel on Climate Change in 2021, each of the last four decades has been successively warmer and surface temperatures will continue to increase until at least the mid-century. The Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Bureau of Meteorology (BoM) have reported that extreme weather across Australia is more frequent and intense, and there have been longer-term changes to weather patterns. They also report sea levels are rising around Australia increasing the risk of inundation and damage to coastal infrastructure and communities.

According to the Department of Planning, Industry and Environment (the department), in New South Wales the impacts of a changing climate, and the risks associated with it, will be felt differently across regions, populations and economic sectors. The department's climate projections indicate the number of hot days will increase, rainfall will vary across the state, and the number of severe fire days will increase.

The NSW Government is a provider of essential services, such as health care, education and public transport. It also owns and manages around $365 billion in physical assets (as at June 2020). More than $180 billion of its assets are in major infrastructure such as roads and railway lines.

In NSW, climate risks that could directly impact on state agencies' assets and services include flooding, bushfires, and extreme temperatures. In recent years, natural hazards exacerbated by climate change have damaged and disrupted government transport, communications and energy infrastructure. As climate risks eventuate, they can also increase hospital admissions when people are affected by poorer air quality, and make social housing dwellings or schools unsafe and unusable during heatwaves. The physical impacts of a changing climate also have significant financial costs. Taking into account projected economic growth, NSW Treasury has estimated that the fiscal and economic costs associated with natural disasters due to climate change will more than triple per year by 2061.

The department and NSW Treasury advise that leading practice in climate risk management includes a process that explicitly identifies climate risks and integrates these into existing risk management, monitoring and reporting systems. This is in line with international risk management and climate adaptation standards. For agencies to manage the physical risks of climate change to their assets and services, leading practice identified by the department means that they need to:

• use robust climate projection information to understand the potential climate impacts
• undertake sound climate risk assessments, within an enterprise risk management framework
• implement adaptation plans that reduce these risks, and harness opportunities.

Adaptation responses that could be planned for include: controlling development in flood-prone locations; ensuring demand for health services can be met during heatwaves; improving thermal comfort in schools to support student engagement; proactive asset maintenance to reduce disruption of essential services, and safeguarding infrastructure from more frequent and intense natural disasters.

According to NSW Treasury policy, agencies are individually responsible for risk management systems appropriate to their context. The department and NSW Treasury have key roles in ensuring that agencies are supported with robust information and timely, relevant guidance to help manage risks to assets and services effectively, especially for emerging risks that require coordinated responses, such as those posed by climate change.

This audit assessed whether the department and NSW Treasury are effectively supporting NSW Government agencies to manage climate risks to their assets and services. It focused on the management of physical risks to assets and services associated with climate change.

Appendix one – Response from agencies

Appendix two – Timeline of key activities 

Appendix three – About the audit 

Appendix four – Performance auditing

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.

Parliamentary reference - Report number #355 - released (7 September 2021).

What the report is about

This report examines the effectiveness of the Fast-tracked Assessment Program, administered by the Department of Planning, Industry and Environment (DPIE) between April 2020 and October 2020. 

The program aimed to support the construction industry during the COVID-19 crisis by accelerating the final assessment stages for planning proposals and development applications. 

DPIE selected projects and planning proposals for fast tracked assessment that demonstrated the potential to:

• deliver jobs
• progress to the next stage of development within six months of determination
• deliver public benefit.

The audit assessed whether the Fast-tracked Assessment Program achieved its objectives while complying with planning controls.

What we found

Through tranches three to six of the program, DPIE successfully accelerated the final stages of 53 assessments. DPIE reported that 89 per cent of these proceeded to the next stage of development within six months.

Assessment of projects and planning proposals was compliant with legislation and other requirements. However, the audit found gaps in DPIE's management of conflicts of interest.

DPIE has not evaluated or costed the program and is not able to demonstrate the extent to which it provided support to the construction industry during COVID-19. 

Aspects of the program have been incorporated into longer term reforms to create a new level of transparency over the progress and status of planning assessments. 

What we recommended

DPIE should:

• strengthen controls over conflicts of interest 
• evaluate the Fast-tracked Assessment Program.

In April 2020, the Department of Planning, Industry and Environment (DPIE) introduced programs aimed at providing immediate support to the construction industry during the COVID-19 crisis. One of these was the Fast-tracked Assessment Program. This program identified planning proposals and development applications (DAs), across six tranches, that were partially-assessed and could be accelerated to determination.

In accordance with the program objectives, the planning proposals and DAs selected for fast-tracked assessment had to:

• deliver jobs – particularly in the construction industry
• be capable of progressing to the next stage of development within six months of determination
• deliver public benefit.

At the same time, the Fast-tracked Assessment Program was to lay a foundation for future reform of the planning system by piloting changes in the assessment process that could be adopted in the medium to long term.

This audit assessed whether the Fast-tracked Assessment Program achieved its objectives while complying with planning controls. The audit focused on tranches three to six of the program, which were determined between July 2020 and October 2020. The rationale for focusing on these four tranches was that the program design had been slightly modified after the first two tranches to address identified risks.

Appendix one – Response from agency

Appendix two – Planning determination pathways

Appendix three – About the audit

Appendix four – Performance auditing

© 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 #354 - released (27 July 2021).

What the report is about

This audit assessed how effectively Transport for NSW (TfNSW) and Sydney Trains identify and manage their cyber security risks.

The NSW Cyber Security Policy (CSP) sets out 25 mandatory requirements for agencies, including implementing the Australian Cyber Security Centre’s Essential 8 strategies to mitigate cyber security incidents, and identifying the agency’s most vital systems, their ‘crown jewels’. 

The audited agencies have requested that we do not disclose detail of the significant vulnerabilities detected during the audit, as these vulnerabilities are not yet remediated. We provided a detailed report to the agencies in December 2020 outlining significant issues identified in the audit. We have conceded to the agencies' request but it is disappointing that transparency to the Parliament and the public on issues that potentially directly affect them needs to be limited in this way.

What we found

TfNSW and Sydney Trains are not effectively managing their cyber security risks.

Both agencies have assessed their cyber security risks as unacceptably high and both agencies had not identified all of the risks we detected during this audit – some of which are significant.

Both agencies have cyber security plans in place that aim to address cyber security risks. TfNSW and Sydney Trains have combined this into the Transport Cyber Defence Rolling Program, part of the Cyber Defence Portfolio (CDP). 

However, neither agency has reached its target ratings for the CSP and the Essential 8 and maturity is low in relation to significant risks and vulnerabilities exposed.

Further, neither agency is fostering a culture where cyber security risk management is an important and valued aspect of decision-making.

TfNSW is not implementing cyber security training effectively across the cluster with only 7.2% of staff having completed basic cyber security training.

What we recommended

TfNSW and Sydney Trains should:

• develop and implement a plan to uplift the Essential 8 controls to the agency's target state
• as a matter of priority, address the vulnerabilities identified as part of this audit and previously described in a detailed Audit Office report provided to both agencies
• ensure cyber security risk reporting to executives and the Audit and Risk Committee
• collect supporting information for the CSP self assessments 
• classify all information and systems according to importance and integrate this with the crown jewels identification process
• require more rigorous analysis to re-prioritise CDP funding 
• increase uptake of cyber security training.

TfNSW should assess the appropriateness of its target rating for each of the CSP mandatory requirements.

Department of Customer Service should:

• clarify the requirement for the CSP reporting to apply to all systems
• require agencies to report the target level of maturity for each mandatory requirement.

Response to requests by audited agencies to remove information from this report

In preparing this audit report, I have considered how best to balance the need to support public accountability and transparency with the need to avoid revealing information that could pose additional risk to agencies’ systems. This has involved an assessment of the appropriate level of detail to include in the report about the cyber security vulnerabilities identified in this audit.

In making this assessment, the audit team consulted with Transport for NSW (TfNSW), Sydney Trains, and Cyber Security NSW to identify content which could potentially pose a threat to the agencies’ cyber security.

In December 2020, my office also provided TfNSW and Sydney Trains with a detailed report of many of the significant vulnerabilities identified in this audit, to enable the agencies to address the cyber security risks identified. The detailed report was produced as a result of a 'red team' exercise, which was conducted with both agencies' knowledge and consent. The scope of this exercise reflected the significant input provided by both agencies. More information on this exercise is at page 12 of this report.

TfNSW and Sydney Trains have advised that in the six months from December 2020 and at the time of tabling this audit report, they have not yet remediated all the vulnerabilities identified. As a result, they, along with Cyber Security NSW, have requested that we not disclose all information contained in this audit report to reduce the likelihood of an attack on their systems and resulting harm to the community. I have conceded to this request because the vulnerabilities identified have not yet been remediated and leave the agencies exposed to significant risk.

It should be stressed that the risks identified in the detailed report exist due to the continued presence of these previously identified vulnerabilities, rather than due to their potential publication. The audited agencies, alone, are accountable for remediating these vulnerabilities and addressing the risks they pose.

It is disappointing that transparency to the Parliament and the public on issues that potentially directly affect them needs to be limited in this way.

That said, the conclusions drawn in this report are significant in terms of risk and remain valid, and the recommendations should be acted upon with urgency.

Cyber security risk is an increasing area of concern for governments in Australia and around the world. In recent years, there have been a number of high-profile cyber security attacks on government entities in Australia, including in New South Wales. Malicious cyber activity in Australia is increasing in frequency, scale, and sophistication. The Audit Office of New South Wales is responding to these risks with a program of audits in this area, which aim to identify the effectiveness of particular agencies in managing cyber risks, as well as their compliance with relevant policy.

Cyber Security NSW, part of the Department of Customer Service (DCS) releases and manages the NSW Cyber Security Policy (CSP). The CSP sets out 25 mandatory requirements for agencies, including making it mandatory for agencies to implement the Australian Cyber Security Centre Essential 8 Strategies to Mitigate Cyber Security Incidents (the Essential 8). The Essential 8 are key controls which serve as a baseline set of protections which agencies can put in place to make it more difficult for adversaries to compromise a system. Agencies are required to self-assess their maturity against the CSP and the Essential 8, and report that assessment to Cyber Security NSW annually.

The CSP makes agencies responsible for identifying and managing their cyber security risks. The CSP sets out responsibilities and governance regarding risk identification, including making agencies responsible for identifying their 'crown jewels', the agency's most valuable and operationally vital systems. Once these risks are identified, agencies are responsible for developing a cyber security plan to mitigate those risks.

This audit focussed on two agencies: Transport for NSW (TfNSW) and Sydney Trains. TfNSW is the lead agency for the Transport cluster and provides a number of IT services to the entire cluster, including Sydney Trains. This audit focussed on the activities of TfNSW's Transport IT function, which is responsible for providing cyber security across the cluster, as well as directly overseeing four of TfNSW's crown jewels. Sydney Trains is one of the agencies in the Transport cluster. While it receives some services from TfNSW, it is also responsible for implementing its own IT controls, as well as controls to protect its Operational Technology (OT) environment. This OT environment includes systems which are necessary for the operation and safety of the train network.

To test the mitigations in place and the effectiveness of controls, this audit involved a 'red team' simulated exercise. A red team involves authorised attackers seeking to achieve certain objectives within the target's environment. The red team simulated a determined external cyber threat actor seeking to gain access to TfNSW's systems. The red team also sought to test the physical security of some Sydney Trains' sites relevant to the agency's cyber security. The red team exercise was conducted with the knowledge of TfNSW and Sydney Trains.

This audit included the Department of Customer Service as an auditee, as they have ownership of the CSP through Cyber Security NSW. This audit did not examine the management of cyber risk in the Department of Customer Service.

This audit assessed how effectively selected agencies identify and manage their cyber security risks. The audit assessed this with the following criteria:

• Are agencies effectively identifying and planning for their cyber security risks?
• Are agencies effectively managing their cyber security risks?

Following this in-depth portfolio assessment, the Auditor-General for NSW will also table a report on NSW agencies' compliance with the CSP in the first quarter of 2021–22.

Agencies have assessed their cyber risks as being above acceptable levels

An agency's risk tolerance is the amount of risk which the agency will accept or tolerate without developing further strategies to modify the level of risk. Risks that are within an agency's risk tolerance may not require further mitigation and may be deemed acceptable, while risks which are above the agency's risk tolerance likely require further mitigation before they become acceptable to the agency.

Both agencies have defined their risk tolerance and have identified risks which are above this level, indicating that they are unacceptable to the agency. TfNSW has defined 'very high' risks as generally intolerable and 'high' risks as undesirable. Its risk tolerance is 'medium'. Sydney Trains has four classifications of risk: A, B, C and D. A and B risks are deemed 'unacceptable' and 'undesirable' respectively, while C risks are considered 'tolerable'. This aligns with the TfNSW definition of a medium risk tolerance.

Transport IT reported five enterprise-level cyber security risks through its enterprise risk reporting tool in September 2020, all of which relate to cyber security or have causes relating to cyber security. These risks are in aggregate form, rather than relating to specific vulnerabilities. At the time of the audit, one of these risks was rated as very high and the other four rated as high. At this time, Transport IT had identified a further seven divisional-level risks which were above the agency’s risk tolerance.

Similarly, Sydney Trains has identified one main cyber security risk in its IT enterprise-level risk register and another with a potential cyber cause. Both of these IT risks are deemed to have a residual risk of ‘unacceptable’.

Similarly, two cyber-related OT risks have been determined to be above the agency's risk tolerance. One risk is rated as 'unacceptable'. Another risk, while not entirely cyber rated, is rated 'undesirable' and is deemed to have some causes which may stem from a cyber-attack.

Agencies have assessed their current cyber risk mitigations as requiring improvement

In addition to the risk ratings stated above, at the time of the audit neither agency believed that its controls were operating effectively. Transport IT had rated the control environments for its cyber security enterprise risks as 'requires improvement'. Mitigations were listed in the risk register for these risks but, in some cases, they were unlikely to reduce the risk to the target state or by the target date. For example, one risk had actions listed as 'under review' and no further treatment actions listed, but a due date of July 2021, while another risk was being treated by the CDP with a due date of July 2021. The CDP identified in May 2020 that while the average risk identified as part of that program will be reduced to a medium level by this date, ten high risks will still remain. Given the delays in the program, this number may be higher. As such, it seems unlikely that the enterprise risk will be reduced to below a 'high' level by July 2021.

Sydney Trains’ IT and OT risk registers cross-reference controls and mitigations against the causes and consequences. The IT cyber security risk identified in the register had causes with no mitigations designed for them. Further, some of these causes did not have future mitigations designed for them. This risk also had controls in place which are identified as partially effective. For the unacceptable OT risk noted above, while there was a control designed for each of the potential causes, Sydney Trains had identified all of the controls in place as either partially effective or ineffective. This indicates that Sydney Trains was not effectively mitigating the causes of its cyber risks and, even where it had designed controls or mitigations, these were not always implemented to fully mitigate the cause of the risk.

Additional information on gaps in cyber mitigations which were exposed in the course of this audit has been detailed to both agencies. The Foreword of this report provides information about why this detail is not included here.

Essential 8 maturity is low across TfNSW and Sydney Trains and little progress was made in 2020

CSP mandatory requirement 3.2 states that agencies must implement the ACSC Essential 8. Agencies must also rate themselves against each of the Essential 8 on a maturity scale from zero to three and report this to Cyber Security NSW. A full list of the Essential 8 can be found in Exhibit 1. Both agencies have a low level of maturity against the Essential 8 not just in comparison to the targets they have set, but also in relation to the risks and vulnerabilities exposed. Both agencies have set target maturity ratings for the Essential 8 but none of the Essential 8 ratings across either agency are currently implemented to this level. Having a low level of Essential 8 maturity exposes both agencies to significant risks and vulnerabilities. Little progress was made between the 2019 and 2020 attestation periods.

Transport IT has set a target rating of three across all of the Essential 8. Sydney Trains has set a target rating of three for its IT systems. Sydney Trains had an interim target of two for its OT systems in 2020 and advised that this has since increased to three. It should be noted that not all the Essential 8 are applicable to OT systems.

None of the Essential 8 ratings across either agency are currently implemented to the target levels. Given that the Essential 8 provide the controls which are most commonly able to deter cyber-attacks, having maturity at a low level potentially exposes agencies to a cyber security attack.

Some work is underway across both TfNSW and Sydney Trains to improve the Essential 8 control ratings. The CDP provided some resources to the Essential 8 over 2019–20, with uplift focusing on specific systems. The CDP work in 2019 and 2020 relevant to the Essential 8 largely focussed on determining the current state of the Essential 8 and creating a target state roadmap. As a result, there was little improvement between the 2019 and 2020 attestation periods. The CDP has a workstream for the Essential 8 in its FY 2020–21 funding allocation, however as noted above in Exhibit 6 this was delayed as resources were redeployed to Project La Brea. Regardless, work on some specific aspects of the Essential 8 remain part of the 2020–21 CDP allocation, with workstreams allocated to improving three of the Essential 8. In addition, some work from Project La Brea should lead to an improvement in the Essential 8.

Sydney Trains' Cyber Uplift Program included a workstream which had in scope the uplift in the Essential 8 in IT. There were also other workstreams which aimed to improve some of the Essential 8 for OT systems. Work is also ongoing as part of the CDP to uplift these scores in Sydney Trains.

TfNSW and Sydney Trains have not reached their target maturity across the CSP mandatory requirements and TfNSW has not evaluated its cluster-wide target to ensure it is appropriate

Cyber Security NSW allows each agency to determine its target level of maturity for the first 20 CSP mandatory requirements. Agencies can tailor their target levels to their risk profile. Not reaching the target rating of the CSP mandatory requirements risks information and systems being managed inconsistently or not in alignment with good governance principles.

Sydney Trains has set its target level of maturity for IT and OT. All of Sydney Trains' target maturity levels are at least a three (defined), with a target of four (quantitatively managed) for many of the mandatory requirements. While Cyber Security NSW does not currently mandate a minimum level of maturity, in 2019 there was a requirement for each agency to target a minimum level of three.

Sydney Trains has not met its target ratings across the mandatory requirements.

The Transport Cyber Defence Rolling Program has a program KPI to ensure that the entire cluster reaches a minimum maturity level of three against all the CSP requirements by 2023. TfNSW has not reviewed its CSP mandatory requirement targets to determine if a three is desirable for all requirements or if a higher target level may be more appropriate. It is important for senior management to set cyber security objectives as a demonstration of leadership and a commitment to cyber security.

TfNSW has not met its target ratings across the mandatory requirements for its Group IT ISMS, which was the focus of this audit.

Both agencies claimed progress in their implementation of the mandatory requirements between 2019 and 2020. The audit did not seek to verify the self-assessed results from either agency.

Both agencies operate ISMS in line with the CSP

CSP mandatory requirement 3.1 requires agencies to implement an Information Security Management System (ISMS) or Cyber Security Framework (CSF), with scope at least covering systems identified as the agency's ‘crown jewels’. The ISMS or CSF should be compliant with, or modelled on, one or more recognised IT or OT standard. As noted in the introduction, an ISMS ‘consists of the policies, procedures, guidelines, and associated resources and activities, collectively managed by an organisation, in the pursuit of protecting its information assets.’ Both agencies operate an ISMS compliant with the CSP requirement.

As noted in the introduction, TfNSW operates four ISMS. The Transport IT ISMS is certified against ISO27001, the most common standard for ISMS certification. Three of TfNSW’s six crown jewels are managed within this ISMS. The other ISMS are not certified to relevant standards, though TfNSW claims that they align with relevant controls. This is sufficient for the purposes of the CSP.

Sydney Trains operates two ISMS, one for IT and another for OT. Neither of these are certified to relevant ISMS Standards, however there have been conformance reviews of both IT and OT with relevant standards. These ISMS cover all crown jewels in the agency.

There are currently 11 ISMS in operation across the Transport cluster. TfNSW has proposed moving towards a holistic approach to these ISMS, with the CDP Board responsible for governing the available security controls and directing agency IT and OT teams to implement these.

Agencies are not routinely conducting audits of third-party suppliers to ensure compliance with contractual obligations

CSP mandatory requirement 1.5 makes agencies accountable for the cyber risks of their ICT service providers and ensuring that providers comply with the CSP and any other relevant agency security policies. The ACSC has provided advice on what organisations should do when managing third party suppliers of ICT. The ACSC advises that organisations should use contracts to define cyber security expectations and seek assurance to ensure that these contract expectations are being met. While both agencies usually include specific cyber security expectations in contracts, neither is routinely seeking assurance that these expectations are being met.

The NSW Government has mandated the use of the 'Core& One' contract template for low-value IT procurements and the Procure IT contract template for high-value IT procurements. Both of these contracts contain space for the procuring agency to include cyber security controls for the contractor to implement. The Procure IT contract template also includes a right-to-audit clause which allows agencies to receive assurance around the implementation of these controls. TfNSW and Sydney Trains used the mandated contracts for relevant contracts examined as part of this audit.

TfNSW included security controls in all the contracts examined as part of this audit. Compliance with ISO27001 was the most commonly stated security expectation. Of the contracts examined as part of this audit, only one contract did not have a right-to-audit clause. This contract was signed in October 2016. While these clauses are in place, TfNSW rarely conducted these audits on its third-party providers. Of the eight TfNSW contracts examined in detail, only two of these had been audited to confirm compliance with the stated security controls.

Sydney Trains included security controls in all but one of the contracts examined as part of this audit. Sydney Trains did not require contractors to be compliant with ISO27001, but only required compliance with whole-of-government policies. Sydney Trains does not routinely conduct audits of its third-party suppliers, however it did conduct deep-dive risk analyses of its top ten highest risk IT suppliers. This involved a detailed review of both the suppliers' security posture and also the contract underpinning the relationship with the supplier.

The CDP funding for 2020–21 includes a workstream for strategic third-party contract remediation. This funding is to conduct some foundational work which will allow the CDP to make further improvements in future years. While this funding will not address gaps in contract requirements or management across all contracts, this workstream aims to reduce the risks posed by strategic suppliers covering critical assets. Similarly, work is currently underway as part of the CDP to conduct OT risk assessments for key suppliers to Sydney Trains in a similar way to the work undertaken for IT suppliers.

Sydney Trains has risk assessed its third-party suppliers but TfNSW has not done so

It is important to conduct a risk assessment of suppliers to identify high-risk contractors. This allows agencies to identify those contractors who may require additional controls stated in the contract, those who require additional oversight, and also where auditing resources are best targeted.

Sydney Trains has risk assessed all its IT suppliers and, as noted above, has conducted a deep-dive risk analysis of its top ten highest risk suppliers. TfNSW has not undertaken similar analysis of its key suppliers, however it has identified risks attached to each of its strategic suppliers and has documented these. As a result of not risk assessing its suppliers, TfNSW cannot take a targeted approach to its contract management.

TfNSW demonstrated poor records handling relating to the contracts examined as part of this audit

TfNSW was not able to locate one of the contracts requested as part of the audit's sample. Other documentation, such as contract management plans, could not be located for many of the other contracts requested as part of this audit. These poor document handling practices limits TfNSW's ability to effectively oversee service providers and ensure that they are implementing agreed controls. It also limits public transparency on the effectiveness of these controls.

The Transport cluster is not effectively implementing cyber security awareness training

Agencies are responsible for implementing regular cyber security education for all employees and contractors under mandatory requirement 2.1 in the CSP. TfNSW is responsible for delivering this training to the whole Transport cluster, including Sydney Trains. The Transport cluster has basic cyber awareness training available for all staff. TfNSW also offers additional training provided by Cyber Security NSW targeted at executives and executive assistants. While TfNSW has training available to staff, it is not delivering this effectively. TfNSW does not make training mandatory for most staff nor does it require staff to repeat training regularly. Even among those staff who have been assigned the training, completion rates are low, meaning that delivery is not effectively monitored. Cyber security training is important for building and supporting a cyber security culture.

TfNSW is responsible for creating and rolling out all forms of training to agencies within the Transport cluster. Both TfNSW and Sydney Trains have the same mandatory cyber awareness training that is automatically assigned to new starters. At the time of the audit, this training was not mandatory for ongoing staff. TfNSW does make additional cyber security training available to staff who can choose to undertake the training themselves, or can be assigned the training by their manager. All TfNSW cyber security training is delivered via online modules and it is the responsibility of managers to ensure that it is completed.

Cyber security training completion rates for both TfNSW and Sydney Trains are low. Only 13.5 per cent of staff across the Transport cluster had been assigned the Cyber Safety for New Starters training as of January 2021. Although this course is mandatory for new starters, only 53 per cent of staff assigned the Cyber Safety for New Starters training module had completed the course by January 2021. As a result, only 7.2 per cent of staff across the entire Transport cluster had completed this training at that time. In Sydney Trains, less than one per cent of staff had completed this training as at January 2021 and a further 7.6 per cent of staff have completed the 'Cyber Security: Beyond the Basics' training. These low completion rates indicate that TfNSW is not effectively rolling out cyber security training across the cluster.

In October 2020, the Department of Customer Service released 'DCS-2020-05 Cyber Security NSW Directive - Practice Requirement for NSW Government', which made annual cyber security training mandatory for all staff from 2021. In line with this requirement, TfNSW has advised that it will be gradually implementing mandatory annual training from July 2021 for all staff.

The Transport cluster undertakes activities to build a cyber-aware culture in accordance with the CSP, but awareness remains low

Increasing staff awareness of cyber security risks and maintaining a cyber secure culture are both mandatory requirements of the CSP. While TfNSW does undertake some activities to build a cyber aware culture, awareness of cyber security risks remains low. This can be demonstrated by the low training rates outlined above, and the 'Spot the Scammer' exercise, described in Exhibit 7. TfNSW is responsible for delivering these awareness raising activities across the cluster.

TfNSW frequently communicates with staff across the Transport cluster about various cyber security risks through multiple avenues. Both agencies use the intranet, emails and other awareness raising activities to highlight the importance for staff to be aware of the seriousness of cyber risks. Advice given on the intranet includes tips for spotting scammers on mobile phones, promoting the cluster-wide training courses, as well as various advice that staff could use when dealing with cyber risks in the workplace.

In addition to these awareness raising activities, TfNSW has also undertaken a cluster-wide phishing email exercise called 'Spot the Scammer'. This is outlined in Exhibit 7. This exercise was carried out in 2019 and 2020 and allowed the Transport cluster to measure the degree to which staff were able to identify phishing emails. As can be seen in Exhibit 7, the results of this exercise indicate that staff awareness of phishing emails remains low.

Appendix one – Response from agencies

Appendix two – Cyber Security Policy mandatory requirements

Appendix three – About the audit

Appendix four – Performance auditing

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Parliamentary reference - Report number #353 - released (13 July 2021).

What the report is about

The report examined whether Transport for NSW (TfNSW) and Infrastructure NSW (INSW) effectively assessed and justified major scope changes to the WestConnex project since 2014.

What we found

NSW Government decisions to fund WestConnex-related projects outside WestConnex's $16.812 billion budget have reduced transparency and understate the full cost of WestConnex.

The NSW Government's decision to separate Sydney Gateway from WestConnex has reduced transparency over the cost of the road component of Sydney Gateway. $1.76 billion of the cost to complete Sydney Gateway is funded outside the WestConnex budget.

Network integration costs, currently estimated at $2.3 billion, are also funded outside the WestConnex budget. Many of these costs are directly attributable to WestConnex and ought to be included in the reported budget.

The Parramatta Road Urban Amenity Improvement Program, costing $198 million, should also be included as part of the WestConnex reported budget.

Decisions to exclude or remove these elements from WestConnex without justification have seen $4.26 billion of projects funded outside the $16.8 billion budget.

Positively, robust analysis was used to develop and incorporate design improvements into the 2015 WestConnex Updated Strategic Business Case.

The separate components of WestConnex underwent all required assurance reviews. However, the NSW Government's assurance framework does not require ongoing ‘whole-of-program’ assurance for large and complex projects like WestConnex. The absence of a holistic review of WestConnex allows for some costs and benefits to avoid scrutiny.

What we recommended

TfNSW should:

• review the impact of scope changes on project objectives, costs and benefits for complex infrastructure projects
• ensure that estimated costs and benefits of works which are reasonably required to meet consent conditions are included in business cases for complex large infrastructure projects
• establish centralised and project specific record keeping for major infrastructure projects.

Infrastructure NSW should provide transparent whole of program assurance on total costs and benefits when complex projects are split into sub-projects.

Government should consider enhancing public transparency of existing infrastructure assurance processes by requiring that large complex infrastructure programs undergo periodic review at a whole-of-program level.

WestConnex

WestConnex is a 33 km motorway network that will link the western and south‑western suburbs with the Sydney CBD and the Airport and Port Botany precinct. It will also connect with proposed future motorway links to the north shore, northern beaches, and southern Sydney. The project is being delivered in three stages, with completion scheduled for 2023.

When first conceived by Infrastructure NSW (INSW) in 2012, WestConnex was described as a single integrated concept. In August 2013, government approved a business case for an integrated concept of WestConnex, with an estimated cost of $14.881 billion (in nominal outturn costs). Transport for NSW (TfNSW) is the government agency (sponsor agency) accountable for the delivery of WestConnex in accordance with the business case. In August 2014, the NSW Government established the Sydney Motorway Corporation to fund, deliver and operate WestConnex.

In November 2015, the NSW Government publicly released an updated WestConnex business case with greater detail and design enhancements, which increased the estimated cost to $16.812 billion.

Subsequent to this update, further changes were made to the design, including realignment of the M4 to M5 Link connection to the Western Harbour Tunnel project, an expanded interchange at Rozelle, the deletion of the Camperdown Intersection, and the addition of the Iron Cove Link. The reported budget for WestConnex was not changed as a result of these design updates.

To fund WestConnex, Sydney Motorway Corporation consolidated a concessional loan of $2 billion from the Australian Government, private sector debt and equity funding from the State. The Australian Government also provided a $1.5 billion contribution to the State to partially fund construction of WestConnex.

In August 2018, the NSW Government sold 51 per cent of its stake in Sydney Motorway Corporation for $9.26 billion. At the time of writing, the NSW Government is in the process of selling its remaining 49 per cent stake of Sydney Motorway Corporation.

About this audit

In the course of delivering a complex major infrastructure project, it is reasonable to expect changes to the original design and scope. Changes may occur as the design moves from a high‑level concept to a detailed design for project delivery, as new risks or issues are identified, as demands change, or as other interdependent projects are approved. Changes can also occur in response to potential cost or delivery overruns which arise as a result of planning deficiencies. Where design and scope changes significantly change the project costs and/or expected benefits, the justification for these changes should be robust and transparent.

Following our 2014 performance audit, 'WestConnex: Assurance to the government', the NSW Government established the Infrastructure Investor Assurance Framework (IIAF) to improve accountability and transparency over major projects that are developed, procured, or delivered by government agencies. Under the framework, TfNSW, as project sponsor, is responsible for ensuring the WestConnex project meets all IIAF requirements. These include ensuring the project remains strategically aligned and viable, and benefits are on track. INSW is responsible for coordinating the assurance review process and reporting directly to NSW Cabinet on project delivery against time, budget and risks to project delivery.

The objective of this performance audit is to assess whether TfNSW and INSW effectively assessed and justified major scope changes to the WestConnex project since 2014.

1. Key findings

Government decisions to fund WestConnex related projects outside of WestConnex's $16.812 billion reported budget have reduced transparency over costs and understate the full cost of WestConnex

In 2015, the work required to integrate WestConnex with existing roads ('network integration') was funded as a separate project with an estimated cost of $1.534 billion outside the 2015 WestConnex budget of $16.812 billion. TfNSW then created the Network Integration Program to respond to the conditions of planning approval for WestConnex. The current estimated cost to deliver all network integration works is $2.3 billion.

Since the 2015 WestConnex Business Case, the NSW Government has removed several elements from the scope of WestConnex and funded them as separate projects, while keeping the published WestConnex budget at an estimated $16.812 billion. Projects removed include:

• Sydney Gateway, currently costed at $2.56 billion (with an $800 million contribution from WestConnex)
• Parramatta Road Urban Amenity Improvement Program, costed at $198 million in late 2018 and funded though new funding to the Greater Sydney Commission.

Together, these projects represent costs of $4.26 billion that are not included in the WestConnex budget, but are required for WestConnex to achieve the objectives of the 2013 and 2015 WestConnex Business Cases. The costs of these elements in supporting the objectives of WestConnex is not tracked centrally, and there is no single point of oversight over them. Exhibit 1 compares total WestConnex forecast costs (including related projects) between November 2015 and April 2021.

Many network integration costs are directly attributable to WestConnex and ought to be included in the reported budget for WestConnex

Prior to 2015, the scope of WestConnex included enabling works needed before or during construction, as well as funding for future works to address any adverse traffic outcomes created by WestConnex which become apparent after its opening. These works are also known as network integration works.

When government approved the 2015 WestConnex Business Case, it noted that the project would require $1.534 billion for network integration works to address the impacts of WestConnex on the road network. However, the WestConnex project budget of $16.812 billion did not include funding for network integration works. Instead, Roads and Maritime Services (RMS, now TfNSW) was to fund network integration through its normal budget allocation.

It is important to recognise these costs as part of the total WestConnex project cost because:

• TfNSW created the Network Integration Program to respond to network traffic and transport elements of the planning conditions of approval for WestConnex granted by the then NSW Department of Planning and Environment under the Environment, Planning and Assessment Act 1979.
• NSW Treasury guidelines for business cases note that accurate cost estimates include assessment of the financial impact of meeting the conditions of planning approval.
• Travel time and vehicle operating cost benefits attributed to the WestConnex project in the 2015 WestConnex Business Case assume that some network integration works, then costed at $373 million, were in place.

Refer to Appendix two for more detail on network integration works.

Some of the projects in the WestConnex Network Integration Program provide community and place benefits, such as parklands and cycleways. These benefits have not been attributed to WestConnex. Additionally, some network integration works are likely to deliver additional traffic related benefits to WestConnex. As the Network Integration Program’s primary purpose is to meet the conditions of planning approval for WestConnex, TfNSW should attribute all the costs and benefits of the program to WestConnex.

To September 2021, the total funded cost of the Network Integration Program is approximately $2.077 billion. TfNSW estimates that it will need a further $222 million to complete all expected network integration works.

The NSW Government's decision to separate Sydney Gateway from WestConnex has reduced transparency and accountability for TfNSW's underestimation of the cost of the road component of Sydney Gateway

Sydney Gateway is a high‑capacity connection between the new St Peters Interchange and the Sydney Airport and Port Botany precinct. It includes a road and rail components. The road component was included in the scope of WestConnex in the 2015 WestConnex Business Case. The November 2015 design, which TfNSW costed at $800 million, involved separate roadways from the St Peters Interchange to the International terminal, and to the domestic terminals and Mascot airport precinct.

By October 2016, TfNSW was aware that the $800 million budget for Sydney Gateway was insufficient and revised the forecast cost for the road component to $1.8 billion. The original cost estimate did not sufficiently consider the cost of:

• constructing a complex design adjacent to the airport precinct
• obtaining access to land required for the project
• managing environmental contamination.

On 9 August 2017, the then Minister for WestConnex announced that the Sydney Gateway project was not part of WestConnex.

The 2015 WestConnex Business Case notes that material changes to the WestConnex budget, funding, scope, or timeframe are subject to Cabinet approval processes. It states that, when seeking approval for material changes, the portfolio Minister will make a submission to the relevant Cabinet Committee. Changes in project scope required the approval of the then Cabinet Committee on Infrastructure and should have been endorsed by the WestConnex Interdepartmental Steering Committee.

TfNSW and the NSW Department of Premier and Cabinet (DPC) assert that there is no documentation to support the government’s decision to separate Sydney Gateway from the WestConnex Program, or the WestConnex Interdepartmental Steering Committee's endorsement of a submission to Cabinet seeking approval for the separation.

The established governance processes for major scope changes were not followed in this instance. The lack of transparency regarding government's decision to separate Sydney Gateway from WestConnex also reduces visibility of TfNSW's underestimation of the cost of delivering the road component of Sydney Gateway.

The November 2018 Final Business Case for Sydney Gateway, which was approved by the government, included an estimate of $2.45 billion (nominal outturn cost) for the road component. This estimate included an $800 million contribution from WestConnex. A more recent estimate (late 2020) for this project is $2.56 billion (nominal outturn cost).

The Parramatta Road Urban Amenity Improvement Program should be included as part of the WestConnex budget

A specific objective of the 2015 WestConnex Business Case was the creation of opportunities for urban renewal along and around Parramatta Road. The business case included an allocation of $198 million in the $16.812 billion WestConnex budget for the Parramatta Road Urban Amenity Improvement program, designed to implement aspects of the objective. In November 2018, the NSW Government removed the Parramatta Road Urban Amenity Improvement Program from the WestConnex program of works and reallocated the $198 million (inside the $16.812 billion WestConnex budget) for urban renewal works around the Rozelle Interchange. As part of this decision, government approved new funding of $198 million to the Greater Sydney Commission for the urban amenity program, outside the $16.812 billion WestConnex budget. This understates the cost of WestConnex meeting its objectives by $198 million.

There is no requirement for ongoing ‘whole‑of‑program’ assurance of the WestConnex program of works, including related projects

In August 2015, INSW conducted its first Gateway Review of WestConnex as a program consisting of composite projects. Following that review, TfNSW registered each of the components of WestConnex with INSW as individual projects, rather than keeping WestConnex registered as a program or mega‑project. This is not inconsistent with the IIAF and all WestConnex related projects, including Sydney Gateway and the Network Integration Program, have undergone independent assurance reviews as individual projects under the IIAF.

Once a program like WestConnex is broken down into its composite parts, there is no requirement for the sponsor agency (TfNSW) or INSW to provide independent assurance on the program as a whole until it is completed. This is then done as part of the Gateway review for benefits realisation, which examines whether project benefits are being measured and meet expectations. These individual projects are, in themselves, significant in scale and complexity. While addressing them as discrete components for the purposes of the assurance review process can be justified, the absence of strategic, holistic reviews of WestConnex allows for total costs and benefits to become opaque and avoid scrutiny. Programs of this scale require greater ongoing transparency on total costs and benefits in order to ensure confidence they will meet intended objectives within budget.

There is a lack of public transparency on the total costs and benefits of the WestConnex project

Prior to 2018, the Audit Office provided assurance on costs borne and levied by Sydney Motorway Corporation and its controlled entities. Since the NSW Government sold 51 per cent of its stake in WestConnex in August 2018, the Auditor‑General no longer has the mandate to provide this assurance. The Audit Office is also unable to provide any assurance regarding the performance of tolling concessions.

This means that the total costs of WestConnex, including those levied on road users through tolling, are not reported alongside the full cost of delivering the project. This information, and independent assurance over that information, would provide transparency and context to the outcome of government's sale of its interest in WestConnex.

To enhance the transparency of existing infrastructure assurance processes, government could consider requiring large and complex infrastructure programs to undergo periodic review at a whole‑of‑program level. This could take the form of annual reports to Parliament on the total costs and benefits of selected large and complex projects by the responsible agency. The reports could include an assessment of the cost to government and cost to the community of funding and financing. Independent assurance of the agency report would provide Parliament with greater confidence that infrastructure is delivered economically and providing value for money for the people of NSW.

The Australian National Audit Office provides similar assurance on selected Department of Defence acquisition projects as part of its annual Major Projects Report.

Design enhancements included in the 2015 WestConnex Updated Strategic Business Case were supported by robust analysis

The 2015 WestConnex Business Case contained more detail than the 2013 WestConnex business case. Design enhancements were made as a result of modelling analysis conducted over the two years since the 2013 business case. Enhancements included a full underground link between Kingsgrove and St Peters as part of the New M5 and re‑alignment of the M4‑M5 link tunnel (Stage 3) to include the Rozelle Interchange. The Rozelle Interchange will provide a direct connection to the Anzac Bridge and Victoria Road, and will enable a connection to the proposed Western Harbour Tunnel and Beaches Link. A map and description of these elements can be found at Exhibits 2 and 3 of this report.

In 2016, TfNSW revised the design of the M4‑M5 Link and Rozelle to address traffic and integration issues

As part of preparing the 2015 WestConnex Business Case, TfNSW prepared a Project Definition and Delivery Report (PDDR) for the M4‑M5 Link. This report describes the scope of the project, including a high‑level concept design. TfNSW identified limitations with the proposed design of the M4‑M5 in the PDDR, which it would need to address as the project moved to a detailed design stage. In particular, these limitations included:

• poor integration with the Bays Precinct masterplan
• traffic capacity constraints on Victoria Road and Anzac Bridge
• construction complexity.

Following a comprehensive review in mid‑2016, TfNSW changed the design of the M4‑M5 Link and Rozelle Interchange to address these limitations. These changes included:

• deletion of the Camperdown intersection to improve traffic conditions on Parramatta Road
• a fully underground and larger Rozelle Interchange with 10‑hectare dedicated parklands
• a toll‑free tunnel link from Iron Cove Bridge to Anzac Bridge
• increasing the lanes in the dual tunnels from three to four each way.

TfNSW documented, but did not publish, the rationale for the design changes, including how the changes addressed the limitations of the previous design while providing increased community benefit through the creation of open space. TfNSW undertook cost comparison studies which estimated that these changes would have a neutral impact on the estimated project cost while achieving the same or improved benefits.

TfNSW's record‑keeping systems for large infrastructure investments negatively impact accountability and transparency

In response to our formal requests for relevant information, made during the conduct of this audit, TfNSW advised that complete and valid records of key decision‑making processes, analysis and advice were unavailable. Additionally, TfNSW often provided information that was incomplete or unverifiable (for instance, unsigned briefing notes). This is not consistent with accepted governance practices and does not comply with the requirements of the State Records Act 1998.

We also requested that TfNSW provide a list of relevant documents held by the Sydney Motorway Corporation (SMC). While TfNSW acknowledged that SMC may hold material relevant to the audit, TfNSW did not have a list or description of these documents. As SMC is now a majority privately held entity, both the Audit Office and TfNSW have limited power to require SMC to provide documentation.

The delivery timeframe for large and complex infrastructure projects such as WestConnex frequently exceeds five years, and some projects can take over a decade to deliver. These projects represent a significant investment of public resources and government agencies should expect independent review and assurance activities such as performance audits. The establishment of dedicated record keeping facilities for major infrastructure projects, such as data rooms, would improve transparency and accountability. This would ensure that the use of public resources is fully auditable in line with public expectations and the requirements of the Government Sector Finance Act 2018, the State Records Act 1998 and the Public Finance and Audit Act 1983.

2. Recommendations

By December 2021, TfNSW should:

1. review the impact of scope changes on project objectives, costs and benefits for complex infrastructure projects

2. when preparing business cases for complex large infrastructure projects, ensure that the estimated costs and benefits of works which are reasonably expected to meet consent conditions are included in the overall project cost and its benefits (as per Treasury guidelines)

3. establish and maintain centralised and project‑specific record keeping, including through dedicated project data rooms, to ensure major infrastructure projects can readily be subject to external oversight and assurance.

By June 2022, INSW should:

4. provide transparent whole‑of‑program assurance on total costs and benefits throughout the project life‑cycle when complex projects are split into sub‑projects.

By June 2022, NSW Government should:

5. consider enhancing the public transparency of existing infrastructure assurance processes by requiring that large complex infrastructure programs undergo periodic review at a whole‑of‑program level. This could take the form of reports to Parliament on the total costs and benefits on selected large and complex projects by the responsible agency, including cost to government and cost to community of funding and financing, as well as an accompanying independent assessment of the agency report.

Following our 2014 performance audit report 'WestConnex: Assurance to the government', the NSW Government established the Infrastructure Investor Assurance Framework (IIAF). INSW is responsible for the development, implementation and administration of the IIAF. The assurance framework involves gateway reviews, health checks, deep dive reviews, and project monitoring and reporting at various stages in the lifecycle of a project. The main aims of the IIAF are to help ensure major infrastructure projects are delivered on time and on budget, and to ensure that reports are regularly monitored by the Cabinet of the NSW Government. The IIAF gateway review process is compulsory for all significant investments and expenditure under the NSW Treasury Gateway Policy.

In accordance with the IIAF, INSW is responsible for the following:

• providing a dedicated Assurance Team including Gateway Review Managers to coordinate Reviews
• determining appropriate expert reviewers, and manages scheduling, commissioning and administration of Assurance Review reports. Infrastructure NSW is independent of the Expert Review Team
• monitoring Tier 1 – High Profile/High Risk projects, Tier 2 and Tier 3 (if required) project performance through independent Assurance Reviews
• providing independent analysis and advice on key risks and any corrective actions recommended for Tier 1 – High Profile/High Risk, Tier 2 and Tier 3 projects
• escalating projects to Infrastructure Investor Assurance Committee (IIAC) and Cabinet where projects present ‘red flag issues’ and where corrective action is needed
• working with delivery agencies to register all capital projects with an estimated cost greater than $10.0 million and ensures they are risk profiled and assigned a risk‑based project tier with an endorsed IIAF Project Registration report
• preparing forward looking annual Cluster Assurance Plans
• maintaining and continuously improves the IIAF process
• reporting to the IIAC, Cabinet and Infrastructure NSW Board
• regularly report to NSW Treasury on the performance of the IIAF.

In relation to WestConnex, TfNSW is the sponsor agency responsible for meeting relevant IIAF requirements, including:

• registering and risk profiling projects
• IIAF gateway, health check, and deep dive assurance reviews
• regular reporting.

Under the IIAF, it is mandatory for all capital projects valued over $10.0 million to be registered with INSW. Capital projects can be registered either as a program (comprising of a group of related projects or activities) or as a project (which may or may not be part of a program).

According to the IIAF, programs tend to have a lifespan of several years and aim to deliver outcomes and benefits related to an organisation's strategic objectives. Projects tend to have a shorter lifespan, and deal with outputs. Projects can, however, be grouped under a single program if they are similar in nature or if they are aimed at collectively achieving a strategic objective. Complex projects can be delivered in multiple stages, under different contracts, and across different time periods.

The last assurance review of the entire WestConnex program of works as a whole was in 2015

INSW conducted the first IIAF gateway review of WestConnex in August 2015. TfNSW developed a draft WestConnex Updated Strategic Business Case to consolidate the latest analysis on WestConnex, and to confirm that the project remained fit for purpose, economically viable, and financially deliverable. The review followed a recommendation in our 2014 performance audit report that business cases be thoroughly revisited.

During September 2015, INSW conducted additional informal reviews to identify strategic risks associated with public release of the WestConnex business case. Subsequently, INSW gave the Premier of NSW its views on the draft business case, including the following points:

• The $398 million budget for Sydney Gateway was insufficient to meet the benefits claimed in the business case for a ‘functional’ connection to Sydney Airport and Port Botany. INSW studies indicate a future‑proof solution would require a minimum spend of $755 million.
• Enabling works for WestConnex estimated at $1.534 billion were excluded from the cost of WestConnex. Significant work remained for RMS to identify mitigation measures to address planning approvals and network performance issues.
• Enabling works (a Southern Connector), an access ramp and surface road improvements within St Peters were excluded from the draft 2015 business case despite their inclusion in the WestConnex scope in the 2014–15 State Budget.
• The overall cost of works not funded within the WestConnex budget ranged from $2.011 billion to $2.196 billion. This included the enabling works, access ramp and surface road improvements and the shortfall for Sydney Gateway.

All WestConnex related projects, including Sydney Gateway have undergone independent assurance reviews under the IIAF

Since INSW submitted the first WestConnex progress update report to Cabinet in June 2015, INSW has been reporting monthly on the different stages of the WestConnex Program, including Sydney Gateway, as the projects were registered with INSW as High‑Profile, High‑Risk projects. Separate reporting enabled INSW to report and review each stage with more detailed scrutiny, compared to the reporting and reviewing at a program level.

WestConnex Stage 2 (New M5) underwent both mandatory and non‑mandatory reviews at key points in the project lifecycle. Three mandatory gateway reviews – at Gate 2 (Final business case), Gate 3 (Readiness for market), and Gate 4 (Tender evaluation) – were conducted by TfNSW before the introduction of IIAF. Four non‑mandatory health check reviews and one non‑mandatory deep dive review were conducted after the introduction of the IIAF managed by INSW.

Similarly, WestConnex Stage 3 projects – M4‑M5 link, M4‑M5 Tunnels, and Rozelle Interchange – also underwent mandatory and non‑mandatory reviews at key points in their lifecycle under IIAF.

The M4‑M5 Link had two mandatory gateway reviews and one non‑mandatory health check review under IIAF. These reviews were conducted before Stage 3 was split into two stages, due to major design changes to the Rozelle Interchange and the M4‑M5 tunnels.

The M4‑M5 tunnels had two mandatory gateway reviews (at Gates 3 and 4), one non‑mandatory health check review, and one non‑mandatory deep dive review under IIAF.

Rozelle Interchange also underwent three mandatory gateway reviews at Gate 3 (part 1), Gate 3 (part 2), and Gate 4, two non‑mandatory health check reviews, and one non‑mandatory deep dive review under IIAF.

Since mid‑2017, the Sydney Gateway project has undergone required independent assurance reviews, as well as a number of optional assurance reviews

In November 2016, INSW conducted a mandatory Gate 1 gateway review on a strategic business case for the Sydney Gateway Project. TfNSW did not proceed with this business case. Following the separation of Sydney Gateway from WestConnex in mid‑2017, TfNSW developed a new business case for Sydney Gateway. It has undergone the required Gate 1, Gate 2, and Gate 3 gateway reviews, as well as two non‑mandatory health check reviews, and three non‑mandatory deep dive reviews under IIAF.

Network integration works have undergone all IIAF required assurance reviews

TfNSW completed a strategic business case for the Network Integration Program in August 2020, and INSW completed a gateway review in November 2020. This is despite network integration projects starting as early as 2015, with $645 million having been spent by June 2020. The strategic business case included a prioritisation process for completing remaining works in the program. Prior to November 2020, TfNSW registered individual network integration projects with INSW, and these projects have undergone gateway reviews where required.

The Network Integration Program strategic business case does not include Rozelle interchange network integration works ($353 million) and additional network integration works to settle a contractor claim adjacent to St Peters Interchange ($190 million). These were excluded from the business case on the basis they had already been approved by government, and as such were not subject to the prioritisation elements of the business case. TfNSW has not developed separate business cases for these works, although the scope of the St Peters Interchange works was developed through a negotiated process.

TfNSW did not prepare business cases for some network integration works which have commenced, including the $323 million Campbell Road/Euston Road works

Prior to its development of the August 2020 strategic business case, TfNSW did not prepare business cases for many network integration works that have commenced, and in some instances were completed, before 2019. Significantly, TfNSW did not prepare a business case for the Campbell Road/Euston Road works, which cost $323 million and have been completed.

In 2016, TfNSW’s Business Case Policy requires the creation of business cases for capital projects costing over $1.0 million. At the time of writing this report, TfNSW’s draft policy requires full business cases for capital projects costing $10.0 million or more.

There is no requirement for ongoing ‘whole‑of‑program’ assurance of the WestConnex program of works, including related projects

INSW conducted its first gateway review of WestConnex (as a program, which consisted of composite projects) in August 2015. Following that review, TfNSW registered each of the components of WestConnex with INSW as individual projects, rather than keeping WestConnex registered as a program or complex project. The IIAF allows this to occur.

Separate registration enabled INSW to report and review each stage with more scrutiny compared to whole‑of‑program level review.

Such an approach has merit, considering the individual stages (and components of these stages) are multi‑million dollar works in their own right. Each project has its own timing for gateway reviews at stages such as 'Readiness for Market' and 'Tender Evaluation'.

Once a program such as WestConnex is broken down into its composite parts, there is no requirement for the sponsor agency (TfNSW) or INSW to conduct independent assurance on the program of works as a whole until the whole program is completed as part of the Benefits Realisation (Gate 6) gateway review. The absence of strategic, holistic reviews of projects of the scale and complexity such as WestConnex during their delivery allows for total costs and benefits to become opaque and avoid scrutiny. Projects of this scale require greater ongoing transparency on total costs and benefits in order to ensure confidence they will meet intended objectives within budget.

INSW has advised us that it has prepared a proposal to expand its assurance function to include whole‑of‑program review of inter‑related infrastructure projects.

Appendix one – Responses from agencies

Appendix two – Network integration works

Appendix three – About the audit

Appendix four – Performance auditing

© 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 #351 - released (17 June 2021).

The Auditor-General for New South Wales, Margaret Crawford, has today released a report on Transport for NSW’s (TfNSW) acquisition of 4–6 Grand Avenue in Camellia.

This audit, which was requested on 17 November 2020 by the Hon. Andrew Constance MP, the Minister for Transport and Roads, examined:

• whether TfNSW conducted an effective process to purchase 4–6 Grand Avenue, Camellia
• whether TfNSW has effective processes and procedures to identify and acquire property required to deliver the NSW Government’s major infrastructure projects.

The audit found that TfNSW conducted an ineffective process when it purchased 4–6 Grand Avenue, Camellia. The audit also found that TfNSW’s internal policies and procedures to guide the transaction were, and continue to be, insufficient.

The Auditor-General has made seven recommendations to address the issues identified in the report.

On 17 November 2020, the Hon. Andrew Constance MP, the Minister for Transport and Roads, requested this audit under section 27B(3)(c) of the Public Finance and Audit Act 1983.

On 15 June 2016, Transport for New South Wales (TfNSW) acquired 6.3 hectares of land at 4–6 Grand Avenue, Camellia, by agreement from Grand 4 Investments Pty Ltd. Grand 4 Investments was a business entity established by the owners of Billbergia Pty Ltd, a property development and investment company.

TfNSW paid Grand 4 Investments $53.5 million and assumed liability for addressing environmental issues and contamination associated with the site. This took place seven months after the vendor acquired the land as part of a competitive Expression of Interest process, in which TfNSW also participated, for $38.15 million.

TfNSW is the NSW Government agency responsible for most major transport infrastructure projects in New South Wales. TfNSW acquired the Camellia site for use as a stabling and maintenance depot to support the Parramatta Light Rail (PLR) project.

Consistent with the minister’s request, this audit assessed:

• whether TfNSW conducted an effective process to purchase 4–6 Grand Avenue, Camellia
• whether TfNSW has effective processes and procedures to identify and acquire property required to deliver the NSW Government’s major infrastructure projects.

In considering the effectiveness of the processes for this purchase, the audit considered:

• the requirements of the Land Acquisition (Just Terms Compensation) Act 1991 (the Act)
• the application of sound processes to manage risk to the NSW Government and to achieve value for money
• the application of disciplines associated with complex procurement, such as probity, in a NSW Government context.

In 2015, TfNSW identified that it would require a stabling and maintenance depot in the Camellia area for the Parramatta Light Rail

In 2014, TfNSW commissioned an external engineering consultancy to undertake a feasibility design study for the Parramatta Light Rail - the Parramatta Transport Corridor Strategy Feasibility Design study (herein referred to as ‘the feasibility study’). In early 2015, TfNSW received the feasibility study, which was one of several key sources that informed the development of business cases for the PLR.

The feasibility study recommended that TfNSW should consolidate the maintenance and cleaning operations with overnight stabling facilities on one site. The study noted that the optimal location for any such site would be in close proximity to the proposed network, and noted that the site must have access to road connections to accommodate access for cars and trucks.

The study found that a centrally located stabling and maintenance facility would be required for all routes serving the Parramatta CBD, and that the Camellia industrial area was a preferred location for such a facility. The study noted that the Camellia area was contaminated.

The feasibility study notes that its conclusions were based on assumptions about the light rail system adopted and decisions made by the future operator of the system, who had not yet been selected or appointed.

TfNSW's decision to progress a potential acquisition in 2015 considered the risk that the site may not be required

TfNSW's FIC was responsible for making decisions on funding allocations at a whole of program level within TfNSW. FIC was also responsible for approving ‘high-risk/high-value’ variations to program budgets. Members of the FIC included:

• Secretary of Transport for NSW
• Deputy Secretary, Infrastructure and Services
• Deputy Secretary, Freight, Strategy and Planning
• Deputy Secretary, Customer Services
• Deputy Secretary Finance and Investment
• Deputy Secretary People and Corporate Services.

An April 2015 submission, from the then Deputy Director-General to the agency’s FIC, sought authorisation and funding approval to participate in an Expression of Interest sale process. It noted the risk that the project may not go ahead. The submission advised that:

By acquiring a strategic site now, it reduces the risk of having to pay an improved value or a value that may be subject to rapidly improving land values due to changes in land use and rezoning.

The property can be acquired for the project, held strategically and income generated by leasing the site as hardstand ¹ space until the project requires the land for the Parramatta Light Rail project.

If the project does not proceed in the medium to longer term, the property can be sold at a premium to what has been paid today as property fundamentals improve.

This submission acknowledged the risks associated with environmental contamination and proposed that these risks would be managed by negotiating a contract where the remediation and associated expenses would be at the landowner’s cost. 

TfNSW assessed the 4–6 Grand Avenue site as one of several sites in Camellia that was a feasible location for a stabling and maintenance facility

The Departmental feasibility study assessed six potential sites for a stabling and maintenance facility, including 4–6 Grand Avenue, noting strengths and weaknesses of each site. A different site on Grand Avenue was assessed as the ‘base case’ option (1 Grand Avenue). The study’s comments on the 4–6 Grand Avenue site included the following:

With an area of approximately 63,000m², this site has sufficient space for a depot with the required stabling yard and maintenance facilities. The location allows for good road access and LRT [light rail transit] access would be from Grand Avenue, which may require a road crossing or signalised intersection. The site has been used for general industrial uses; however the land has been cleared and is currently undergoing remediation ². The site is not affected by flooding based on one in 100-year flood data.

In early 2015, once the opportunity to acquire 4–6 Grand Avenue emerged, TfNSW commissioned a specific feasibility study of the 4–6 Grand Avenue site. The feasibility studies clearly documented the existence of environmental contamination. In April 2015, the report concluded:

Given the limitations of this report and within the parameters that have been set it is concluded that from a spatial and geographic perspective the site at 6 Grand Avenue would be suitable as a stabling and maintenance depot for the Parramatta light rail project. There are few engineering and environmental constraints that would affect the feasibility level analysis of this site and all issues identified, within this desk study, are considered to be resolvable. However this being said there is a significant amount of work necessary to reach the final layout and definition of the stabling and maintenance depot. There are numerous items which require further consideration and conformation; planning approvals could impose restrictions on building heights, noise mitigation measures, light and visual impact requirements all of which can have significant impacts on the spatial requirements of any stabling and maintenance depot. 

The acquisition of 4–6 Grand Avenue was not informed by a Property Acquisition Strategy

For major projects, TfNSW typically requires the project team to complete a Property Acquisition Strategy, which is intended to guide both process as well as specific acquisition issues expected to be faced during the project. The Property Acquisition Strategy is not a mandated document but is a recommended tool to support property acquisition as part of major projects.

TfNSW did not have a Property Acquisition Strategy in place to guide the 2015 Expression of Interest process. On 6 November 2015, the then Project Director for the PLR project emailed the property team, noting a need to develop a Property Acquisition Strategy to close off the scoping design and preliminary business case.

In January 2016, TfNSW developed a draft Property Acquisition Strategy for the Parramatta Light Rail Project, although it was silent on the potential sites for the stabling and maintenance facility.

TfNSW focussed on 4–6 Grand Avenue because it was available and aligned to TfNSW's strategic interests

In early 2015, officials commenced monitoring the market for industrial real estate in the Camellia area and surrounds for possible sites for a stabling and maintenance facility.

In March 2015, then owner of the site, Akzo Nobel Pty Limited released the 4–6 Grand Avenue site through an Expression of Interest process managed by CBRE.

TfNSW’s then Deputy Director-General, Planning, sought approval from FIC to lodge an Expression of Interest up to $30.0 million. Approval was sought on the basis that it would ‘provide certainty for the Parramatta Light Rail project by allowing for a depot site in a suitable location and potentially avoid higher costs or longer timeframes associated with compulsory acquisition following completion of the project’s business case’. FIC approved the request at its meeting on 9 April 2015.

At this time, TfNSW had not conducted any analysis of financial or operational benefits and costs of the potential sites identified in earlier feasibility studies. TfNSW staff advised us that the decision to participate in the Expression of Interest process for 4–6 Grand Avenue was because it was available. There is no documentation substantiating this statement, which TfNSW staff provided verbally as part of this audit.

In November 2015, TfNSW was advised that it was unsuccessful in the Expression of Interest process and that Grand 4 Investments (a related entity of Billbergia) had purchased 4–6 Grand Avenue. TfNSW did not conduct any further analysis of alternative potential sites in Camellia between this date and commencing discussions with Grand 4 Investments in April 2016. In that time there had been some movement on other properties that were included in the feasibility study, including 37–39a Grand Avenue being under offer in September 2015.

In March 2016, TfNSW approached CBRE to organise a meeting with Grand 4 Investments. On 1 April 2016, TfNSW met with Grand 4 Investments.

TfNSW advises that a perceived benefit of the 4–6 Grand Avenue site was that it was not subject to other uses or leaseholds that would increase the cost of compulsory acquisition. Officers involved in the acquisition advised that other nominated sites in the feasibility study were subject to other uses or leaseholds. 

Appendix one – Response from agency 

Appendix two – About the audit 

Appendix three – Performance auditing

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.

Parliamentary reference - Report number #349 - released (18 May 2021).

The Auditor‑General for New South Wales, Margaret Crawford, released a report today examining procurement management in Local Government.

The audit assessed the effectiveness of procurement management practices in six councils. All six councils had procurement management policies that were consistent with legislative requirements, but the audit found compliance gaps in some councils. The audit also identified opportunities for councils to address risks to transparency and accountability, and to ensure value for money is achieved when undertaking procurement.

The Auditor‑General recommended that the Department of Planning, Industry and Environment review the Local Government (General) Regulation 2005 and publish updated and more comprehensive guidance on procurement management for the Local Government sector. The report also generated insights for the Local Government sector on opportunities to strengthen procurement practices.

Effective procurement is important in ensuring councils achieve their objectives, demonstrate value for money and deliver benefits to the community when purchasing goods and services. Procurement also comes with risks and challenges in ensuring the purchased goods and services deliver to expectations. The risks of fraud and conflicts of interest also need to be mitigated.

The legislative requirements related to procurement in the Local Government sector are focused on sourcing and assessing tender offers. These requirements are included in the Local Government Act 1993 (the Act), the Local Government Amendment Act 2019 (the Amendment), the Local Government (General) Regulation 2005 (the Regulation), the Tendering Guidelines for NSW Local Government 2009 (the Tendering Guidelines), the Government Information (Public Access) Act 2009 (the GIPA Act) and the State Records Act 1998.

General requirements and guidance relevant to councils are also available in the Model Code of Conduct for Local Councils in NSW 2018 (the Model Code), the NSW Government Procurement Policy Framework 2019 and in publications by the Independent Commission Against Corruption (ICAC).^₁

Individual councils have developed their own procurement policies and procedures to expand on the legislative requirements. Understandably, these vary to reflect each council’s location, size and procurement needs. Nevertheless, the general principles of effective procurement management (such as transparency and accountability) and risk-mitigating practices (such as segregation of duties and the provision of training) are relevant to all councils.

The Audit Office of New South Wales Report on Local Government 2018 provided a sector-wide summary of aspects of procurement management in Local Government (see Section 2.1 of this report). This audit builds on this state-wide view by examining in detail the effectiveness of procurement management practices in six councils. This report also provides insights on opportunities to strengthen procurement management in the sector.

The selected councils for this audit were Cumberland City Council, Georges River Council, Lockhart Shire Council, Tweed Shire Council, Waverley Council and Wollongong City Council. They were selected to provide a mix of councils of different geographical classifications, sizes, priorities and levels of resourcing.

Recommendations

1. By June 2022, the Department of Planning, Industry and Environment should:
   1. publish comprehensive and updated guidance on effective procurement practices – including electronic tender submissions and procurements below the tender threshold
   2. review and update the Local Government (General) Regulation 2005 to reflect the increasing use of electronic tender submissions rather than paper copies.
2. By December 2021, the six audited councils should consider the opportunities to improve procurement management in line with the improvement areas outlined in chapter three of this report.
3. Cumberland City Council should immediately:
   1. ensure contract values are consistent between the contract register and the annual report
   2. introduce procedures to ensure supplier performance reviews are conducted as per the council’s policy
4. Georges River Council should immediately:
   1. ensure contract values are consistent between the contract register and the annual report
   2. introduce procedures to ensure all the steps up to the awarding of a contract are documented as per the council’s policy
   3. introduce procedures to ensure outcome evaluations are conducted as per the council’s policy.
5. Lockhart Shire Council should immediately:
   1. include additional information in the council’s contract register to ensure compliance with Section 29(b), (f), (g), (h) and (i) of the GIPA Act
   2. ensure contract values are consistent between the contract register and the annual report.
6. Waverley Council should immediately ensure contracts are disclosed in the annual report as per Section 217(1)(a2) of the Regulation.

While all six councils had procurement policies in place and were generally compliant with legislative requirements, this report has identified common gaps in processes and practices that expose risks to transparency, accountability and value for money.

This section discusses how councils can mitigate risks and ensure the best outcomes are achieved from their procurements.

Documented justification of procurement needs

The ICAC notes that determining what goods and services an agency requires is the first step of procurement, and the scope for corruption in how need is determined is significant. Without documenting how procurement needs have been justified, councils cannot demonstrate that they fulfill business needs, nor how the procurements may link to the councils’ strategic plans to deliver to the community.

This audit found that none of the six councils’ policies required them to document justification of procurement needs, and none did so consistently in practice. Councils can address this gap by building into their procurement planning process a requirement for staff to document the justification of procurement needs. For higher value procurements, this could be extended to include analysis of options, an assessment of risks and defining intended outcomes. Similarly, clearly establishing and documenting how relevant procurements relate to a council’s community strategic plans or operational plans helps ensure transparency.

Although a formal business case may not be required for many procurements (for example, low-value procurements or routine replacements), some form of documented justification for the expenditure should still be kept on record to demonstrate that the procurement relates to business purposes and is needed.

Segregation of duties

Segregation of duties is an effective control for reducing risks of error, fraud and corruption in procurement. It works on the principle that one person should not have end-to-end control of a procurement. Effective segregation of duties also often involves managerial or independent oversight that is built into the process. Four of the audited councils (Cumberland City Council, Georges River Council, Lockhart Shire Council and Wollongong City Council) appropriately addressed segregation of duties in their procurement frameworks. For example:

• All procurements in Cumberland City Council required a delegated officer’s approval before commencing, and the requisitioning department is responsible for ensuring the completion of the goods, works or services associated with each contract. For contracts over $50,000, a specific ‘Authority to Procure’ form had to be completed by the requesting staff, signed by an approver and then forwarded to the procurement team.

• Reflecting its small size, all procurements in Lockhart Shire Council were managed by one senior staff member. Nevertheless, this staff member had to bring contract management plans to the rest of the Executive Leadership Team for review and discussion, with large contracts such as those above the tender threshold referred to Council for approval.

The ICAC notes that segregation of duties helps to control discretion, which has particular risk implications for some types of procurement.₂ This includes those involving low-value and high-volume transactions, restricted tenders, long-standing procurements and ‘pet projects’ (projects advocated by individual staff members). In cases where corruption risks are low, ICAC notes that monitoring staff’s involvement in procurement may be a cost-effective alternative to total segregation of duties.

Assessment of supplier performance

Councils need to monitor and assess supplier performance to ensure suppliers deliver the goods and services as agreed. The audit found that all six councils consistently monitored progress in capital works and for externally funded projects. Contract monitoring in these cases included ensuring timelines, funding, and legislative requirements were met. This is positive, as capital works made up the bulk of procurements (in terms of volume) in all of the audited councils.

That said, in all six councils, the level of scrutiny was lower for other types of procurements, and there is scope for improvement. For instance, the approach to monitoring capital works or externally funded projects could be replicated across other procurements of a similar nature and value. Conducting assessments and keeping records of supplier performance on all procurements does not need to be onerous, but instead provides useful information to inform future decision-making—including by helping ensure supplier pricing remains competitive, and avoiding re-engaging underperforming suppliers.

The NSW Government Procurement Policy Framework requires that NSW Government agencies establish systems and processes jointly with the suppliers to ensure compliance with contract terms and performance requirements. It also advises that agencies should drive continuous improvement and encourage innovation in coordination with suppliers and key stakeholders.

Centralised contract register

Centrally registering a contract provides improved transparency of procurement activities and facilitates monitoring and compliance checks. While councils are already required to maintain a contract register for all contracts above the reporting threshold (as per the GIPA Act), given the threshold is set at a relatively high benchmark ($150,000), there is merit in councils extending the practice to procurements below the reporting threshold. A central and comprehensive register of contracts helps avoid duplication of procurements and re-contracting of underperforming suppliers.

Three of the audited councils (Georges River Council, Tweed Shire Council and Wollongong City Council) had contract register policies that applied to procurements below the reporting threshold during the audited period. For example, Georges River Council required contracts valued at $10,000 or above to be registered with the procurement team, and Tweed Shire Council had a threshold of $50,000.

Evaluation of community outcomes and value for money

Councils may be progressing procurements to fulfill their strategic and business plans, or using them to fulfill commitments to the community. In these instances, outcomes evaluation is an important way to demonstrate to the community that the intended benefits and value for money have been delivered.

Five of the six audited councils did not require evaluations of community outcomes and value for money. While Georges River Council required contracts valued at $50,000 or more to be monitored, evaluated and reported on at least annually throughout the contract and also at its conclusion, in the procurements we examined the only ‘outcome evaluations’ that the council had conducted were community surveys that did not refer to individual procurements. Councils can miss opportunities to understand the impact of their work on the local community if evaluations of procurement outcomes are not completed. Evaluation findings are also valuable in guiding future resource allocation decisions.

Value for money in the procurement of goods and services is more than just having the specified goods delivered or services carried out. The NSW Government Procurement Policy Framework requires that state government agencies track and report benefits to demonstrate how value for money is being delivered. The framework notes that value for money is not necessarily the lowest price, nor the highest quality good or service, but requires a balanced assessment of a range of financial and non-financial factors, such as: quality, cost, fitness for purpose, capability, capacity, risk, total cost of ownership or other relevant factors.

Procurement training

Effective procurement management relies on the capability of staff involved in various stages of the process. Guidance can be provided through training, which is an important element of any procurement management framework. It ensures that staff members are aware of the councils' policies and procedures. If structured appropriately and provided in a timely manner, training can help to standardise practices, ensure compliance, reduce chances of error, and mitigate risks of fraud or corruption.

The ICAC notes that effective procurement management depends on the competence of staff undertaking procurements and the competence of those who oversee procurement activities. As the public sector is characterised by varying levels of procurement expertise, the ICAC notes that the sector would benefit from a structured approach to training and the application of minimum standards.₃

At the time of this audit, only Wollongong City Council addressed staff training requirements in its procurement management framework. Exhibit 8 details its approach.

Two of the audited councils have now also introduced procurement training:

• Georges River Council implemented online training, which is mandatory for new staff and serves as refresher training for existing staff. The council also provides in-person training for selected staff (covering contract management, contract specification writing and contractor relationship management) and has developed quick reference cards for all staff to increase awareness of the council's procurement processes.
• Tweed Shire Council implemented mandatory online training for all staff members. The training covers the council's procurement policy and protocol as well as relevant legislation. It is linked to relevant council documents such as the Procurement Toolkit on the council's intranet, and includes a quiz for which training participants must score at least 80 per cent to have the training marked as completed.

Appendix one – Responses from councils and the Department of Planning, Industry and Environment

Appendix two – Councils’ procurement contracts

Appendix three – About the audit

Appendix four – Performance auditing

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.

Parliamentary reference - Report number #345 - released 17 December 2020

The Auditor-General for New South Wales, Margaret Crawford, released a report today examining whether the Department of Planning, Industry and Environment has effectively supported the planning for, and funding of, town water infrastructure in regional NSW.

The audit found that the department has not effectively supported or overseen town water infrastructure planning since at least 2014. It does not have a clear regulatory approach and lacks internal procedures and data to guide its support for local water utilities that service around 1.85 million people in regional NSW.

The audit also found that the department has not had a strategy in place to target investments in town water infrastructure to the areas of greatest priority. A state-wide plan is now in development.

The Auditor-General made seven recommendations to the department, aimed at improving the administration and transparency of its oversight, support and funding for town water infrastructure, and at strengthening its sector engagement and interagency coordination on town water planning issues and investments.

According to the Auditor-General, ‘A continued focus on coordinating town water planning, investments and sector engagement is needed for the department to more effectively support, plan for and fund town water infrastructure, and to work with local water utilities to help avoid future shortages of safe water in regional towns and cities.’ 

This report is part of a multi-volume series on the theme of water. Refer to ‘Water conservation in Greater Sydney’ and ‘Water management and regulation – undertaking in 2020-21’.

Read full report (PDF)

Safe and reliable water and sewer services are essential for community health and wellbeing, environmental protection, and economic productivity. In 2019, during intense drought, around ten regional New South Wales (NSW) cities or towns were close to ‘zero’ water and others had six to 12 months of supply. In some towns, water quality was declared unsafe.

Ensuring the right water and sewer infrastructure in regional NSW to deliver these services (known as 'town water infrastructure') involves a strategic, integrated approach to water management. The NSW Government committed to ‘secure long-term potable water supplies for towns and cities’ in 2011. In 2019, it reiterated a commitment to invest in water security by funding town water infrastructure projects.

The New South Wales’ Water Management Act 2000 (WM Act) aims to promote the sustainable, integrated and best practice management of the State’s water resources, and establishes the priority of town water for meeting critical human needs.

The Department of Planning, Industry and Environment (the department) is the lead agency for water resource policy, regulation and planning in NSW. It is also responsible for ensuring water management is consistent with the shared commitments of the Australian, State and Territory Governments under the National Water Initiative. This includes the provision of healthy, safe and reliable water supplies, and reporting on the performance of water utilities.

Ninety-two Local Water Utilities (LWUs) plan for, price and deliver town water services in regional NSW. Eighty-nine are operated by local councils under the New South Wales’ Local Government Act 1993, and other LWUs exercise their functions under the WM Act. The Minister for Water, Property and Housing is the responsible minister for water supply functions under both acts.

The department is the primary regulator of LWUs. NSW Health, the NSW Environment Protection Authority (EPA) and the Natural Access Resource Regulator (NRAR) also regulate aspects of LWUs' operations. The department’s legislative powers with respect to LWUs cover approving infrastructure developments and intervening where there are town water risks, or in emergencies. In this context, the department administers the Best Practice Management of Water Supply and Sewerage Guidelines (BPM Guidelines) to support its regulation and to assist LWUs to strategically plan and price their services, including their planning for town water infrastructure.

Under the BPM Guidelines, the department supports LWU’s town water infrastructure planning with the Integrated Water Cycle Management (IWCM) Checklist. The Checklist outlines steps for LWUs to prepare an IWCM strategy: a long-term planning document that sets out town water priorities, including infrastructure and non-infrastructure investments, water conservation and drought measures. The department's objective is to review and approve (i.e. give ‘concurrence to’) an IWCM strategy before the LWU implements it. In turn, these documents should provide the department with evidence of town water risks, issues and infrastructure priorities.

The department also assesses and co-funds LWU's town water infrastructure projects. In 2017, the department launched the $1 billion Safe and Secure Water Program to ensure town water infrastructure in regional NSW is secure and meets current health and environmental standards. The program was initially established under the Restart NSW Fund.

This audit examined whether the department has effectively supported the planning for and funding of town water infrastructure in regional NSW. It focused on the department’s activities since 2014. This audit follows a previous Audit Office of NSW report which found that the department had helped to promote better management practices in the LWU sector, up to 2012–13.

Regional New South Wales (NSW) is home to about a third of the state's population. Infrastructure that provides safe and reliable water and sewer services (also known simply as 'town water infrastructure') is essential for community health and wellbeing, environmental protection, and economic productivity. Planning for and meeting these infrastructure needs, as well as identifying when non-infrastructure options may be a better solution, involves a strategic and integrated approach to water resource management in regional NSW.

We examined whether the department has effectively supported planning for town water infrastructure since 2014. This assessment was made in the context of its current approach to LWU sector regulation. The findings below focus on whether the department has an effective framework including governance arrangements for town water issues to inform state-wide strategic water planning, and whether (at the local level) the department has effectively overseen and facilitated town water infrastructure planning through its Integrated Water Cycle Management (IWCM) planning guidance to LWUs.

We examined whether the department has effectively targeted town water infrastructure funding to policy objectives, with a focus on the design and implementation of the Safe and Secure Water Program (SSWP) since its commencement in 2017. The program’s aim was to fund town water infrastructure projects that would deliver health, social and environmental benefits, and support economic growth and productivity. We also assessed the department’s capacity to demonstrate the outcomes of the SSWP funding and the contributions of its town water infrastructure investments more broadly. Finally, we identified risks to the effectiveness of the department’s work underway since 2018–19, which is intended to enhance its strategic water planning and approach to prioritising investments in reducing town water risks.

Appendix one – Response from agency

Appendix two – Key terms

Appendix three – About the audit

Appendix four – Performance auditing

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.

Parliamentary reference - Report number #341 - released 24 September 2020

The Auditor-General for New South Wales, Margaret Crawford, released a report today examining credit card management in Local Government.

The audit was in response to a letter from the then Minister for Local Government in November 2018. The audit assessed the effectiveness of credit card management practices in six councils, including in the areas of policies, procedures, compliance and monitoring.

The audit found that all six councils had gaps in their credit card policies and procedures. The Auditor-General recommended that the Department of Planning, Industry and Environment publish guidelines on credit card management for the Local Government sector. The report also generated insights for the Local Government sector with respect to credit card management.

Read full report (PDF)

In 2018–19, all councils responding to an Audit Office survey (representing over 90 per cent of the sector) indicated they issued credit cards to staff members to make work-related purchases. As there are no sector-wide requirements or policies for credit card use and management in Local Government, councils have developed their credit card management frameworks to suit their own needs. The quality of credit card policies and procedures may therefore vary across the sector.

Credit cards are an efficient means of payment, especially for low-value purchases. Compared to the use of petty cash, credit card transactions provide better transparency and accountability for expenditure. By using credit cards, councils only need to make one payment each month, which can reduce the time spent on paying separate vendors, as in the case of purchase orders.

This audit assessed the effectiveness of credit card management practices in six councils: Dubbo Regional Council, Junee Shire Council, Lane Cove Council, Nambucca Valley Council, Penrith City Council and Shellharbour City Council. The councils selected represent a mix of rural, regional and metropolitan councils. They were also among the top ten users of credit cards within their geographical classification, in terms of the number of credit cards issued or the number of transactions per credit card.

This audit referenced the NSW Treasury's Policy and Guidelines Paper TPP17–09 'Use and Management of NSW Government Purchasing Cards', as its principles and recommendations for NSW Government agencies are relevant for councils.

The Audit Office of New South Wales Report on Local Government 2019 provided a high-level overview of credit card management across the sector. While over 90 per cent of councils reported that they had a credit card policy and a credit card acquittal process, the quality of these policies and procedures may vary across the sector as there is no standardised or recommended approach to credit card management for Local Government. This audit complements the Report on Local Government 2019 by providing a detailed discussion of the effectiveness of credit card management practices in councils.

Council staff provided with a credit card can purchase from a wide range of businesses, including online transactions with overseas vendors. However, councils may limit the types of purchases that staff can make through their policies and procedures or by setting controls that block certain transaction types such as cash advances. To examine credit card usage, the audit obtained credit card transaction data from 1 July 2016 to 30 June 2019 for the six councils in this review. The data included:

• transaction date
• amount
• merchant category code (MCC)
• merchant name.

The audit analysed the number and value of transactions by each council, and the types of purchases made using credit cards.

The existence of a documented approach to managing credit cards ensures transparency and consistency of use within the council. A credit card management framework that contains preventative and detective controls can also minimise risks of fraud, misuse and wastage.

There is no prescribed credit card management framework for Local Government, but typical components of a credit card management framework include:

• policies and procedures
• guidance for staff
• monitoring and reporting.

With no detailed guidance notes similar to those in TPP17–09 for NSW Government, councils have developed their own credit card management framework based on their size, structure, resources and intended credit card usage. For instance, the size of a council has implications for the number of credit cards issued, which in turn influences the arrangements for training and guidance provided to cardholders and approvers.

The intended level of credit card usage may determine whether a council adopts a manual or electronic credit card management system and councils should identify the system that best meets their needs. For instance, a council with few credit cards may not be able to justify investment in an electronic system. On the other hand, a manual system may only be viable for councils with a low number of credit cards and a low number of transactions.

Among the six councils audited, the three councils with fewer cards and a lower number of transactions had a manual credit card management system, while the three councils with more cards and a higher number of transactions used an electronic system.

Exhibit 10 summarises the six councils' policies on use of credit cards.

While it is important for councils to have an established credit card management framework, it is equally important that they ensure compliance in practice. This chapter examines councils' credit card management practices – how well staff members were complying with policies and procedures, and how effective their credit card controls were. The chapter is structured to cover:

• preventative controls (embedded in the issuance, use and cancellation of cards) that prevent fraud and misuse
• detective controls (embedded in reconciliation and record keeping) that assist in detecting fraud and misuse.

Where ineffective credit card management practices are identified, councils should reflect on whether they need to more closely monitor compliance, or whether there are fundamental deficiencies in their policies and procedures that need to be refined.

Appendix one – Responses from councils and the Department of Planning, Industry and Environment

Appendix two – About the audit

Appendix three – Performance auditing

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.

Parliamentary reference - Report number #340 - released 3 September 2020

The Auditor-General for New South Wales, Margaret Crawford, released a report today on how well four councils managed their local infrastructure contributions during the 2017-18 and 2018-19 financial years. 

Local infrastructure contributions, also known as developer contributions, are collected from developers to pay for local infrastructure such as drainage, local roads, open space and community facilities. Controls over local infrastructure contributions help to ensure that all contributions owed are collected, funds are spent as intended, and any contributions paid in the form of works-in-kind or dedicated land are correctly valued.

The audit found that Blacktown City Council and City of Sydney Council provided effective governance over their local infrastructure contributions whereas Central Coast and Liverpool City Councils’ governance arrangements require improvement.

The audit found that three councils had spent local infrastructure contributions in accordance with approved contributions plans. Central Coast Council and the former Gosford City Council had spent $13.2 million on administration costs in breach of the Environmental Planning and Assessment Act 1979. These funds were repaid into the council’s local infrastructure fund during the course of the audit.

The Auditor-General made a number of recommendations for each council relating to improving controls over contributions and increasing transparency. 

Read full report (PDF)
 

This audit examined the effectiveness of governance and internal controls over local infrastructure contributions, also known as developer contributions, held by four councils during the 2017–18 and 2018–19 financial years.

This performance audit was conducted with reference to the legislative and regulatory planning framework that was in place during that period.

Our work for this performance audit was completed at the end of March 2020 when we issued the final report to the four audited councils and the Department of Planning, Industry and Environment. We received their respective formal responses to the report’s recommendations during April and May 2020.

Concurrently to this audit, we sought Crown Solicitor’s advice (the ‘Advice’) regarding the use of local infrastructure contributions collected by local councils under the Environmental Planning and Assessment Act 1979 (‘the EPA Act’) for our financial audit work. The Advice clarified the applicable legislative requirements with reference to the application, investment and pooling of local infrastructure contributions. The Advice is included in Appendix 2 of this report. The Advice has not impacted on the findings and recommendations of this report.

Councils collect Local Infrastructure Contributions (LICs) from developers under the Environmental Planning and Assessment Act (1979), the Local Government Act (1993) and the City of Sydney Act (2000) (EP&A Act, LG Act and City of Sydney Act) to fund infrastructure required to service and support new development. At 30 June 2018, councils across NSW collectively held more than $3.0 billion in LICs collected from developers. Just over $1.37 billion in total was held by ten councils. Councils collecting LICs must prepare a contributions plan, which outlines how LICs will be calculated and apportioned across different types of infrastructure. Councils that deliver water and sewer services prepare a development servicing plan (DSP) which allows them to collect contributions for water and sewer infrastructure.

Development timeframes are such that there is often several years between when LICs are collected and the infrastructure is required. Good governance and internal controls are needed over these funds to ensure they are available when needed and spent appropriately.

This audit assessed the effectiveness of governance and internal controls over LICs collected by four councils during the 2017–18 and 2018–19 financial years: Blacktown City Council, Central Coast Council, City of Sydney Council and Liverpool City Council. As at June 2018 these councils held the four highest LIC balances, each in excess of $140 million.

A strong governance framework is important at each council to ensure that the funds are managed well, available when needed and spent as intended. The audit examined the following features of each council's governance framework as they apply to LICs:

• decision-making by councillors and council officers relating to LICs
• monitoring delivery of contributions plans and DSPs including:
  • reviewing assumptions underlying the plans
  • monitoring projected status of plans.

Internal controls over LICs are important to promote accountability, prevent fraud and deliver infrastructure to the required standard at the best possible price. If financial controls are weak or are not implemented well, there is a risk that LICs are misspent or that councils pay too much for infrastructure.

Not all councils' internal controls adequately addressed risks associated with the administration of LICs

The audit examined a number of internal controls that manage risks related to LICs. These included:

• financial controls over receipt and expenditure of LIC funds
• management of conflicts-of-interest when dealing with developers
• independent valuations of works-in-kind and dedicated land
• ensuring delivery and quality of works-in-kind, and obtaining security from developers in the event of non-delivery or poor quality work
• management of variations to VPAs and works-in-kind agreements.

We reviewed controls included in policies and procedures and then checked samples of work to ensure that controls were implemented. We found variation in the controls that councils implemented, and some weaknesses in controls. It is a matter for each council to assess their financial risk and develop internal controls that support the collection, management, and expenditure of LICs. However, councils must be able to assure their communities and developers that they are doing everything possible to collect all LICs owing and that work conducted by developers in lieu of cash payments is properly valued and carried out to the required standard.

Further information about audit findings in relation to internal controls for each council are included in chapters five to eight. The exhibit below demonstrates variation in several controls implemented in the audited councils.

In a 2018 report, the Independent Commission Against Corruption noted that 'the appetite for transparency is expanding in both the public and private sectors'.

The Practice Note and S64 Guidance refer to transparency, including the importance of transparency over:

• calculation and apportionment of LICs
• funding of infrastructure, including where and when infrastructure is delivered
• arrangements made with developers through VPAs.

The LIC system is largely transparent for community members who know where to look

Contributions plans and DSPs are public documents, exhibited to the public before being adopted by council. Councils included in the audit publish their contributions plans and DSPs on their websites and meet statutory requirements with regard to reporting and accessibility of information.

However, other public information relating to the LIC system is fragmented across different websites and reports and varies in detail across councils.

The Practice Note states that councils are accountable for providing the infrastructure for which contributions are collected. Demonstrating that infrastructure has been provided is difficult with fragmented information. As an example of transparent reporting, Blacktown City Council's 2018–19 annual report includes information about infrastructure that has been delivered for every contributions plan, providing transparency over how LICs have been spent.

Use of LICs collected under VPAs is not always transparent

Contributions collected under VPAs are not required to demonstrate the same relationship to a development as LICs collected under section 7.11 of the EP&A Act. VPAs are often negotiated because a developer requests a change to a planning instrument, and it is important that these arrangements, and their outcomes, are transparent to the community.

The EP&A Regulation includes mechanisms to ensure that VPAs are partially transparent. VPAs are exhibited to the public and approved by the elected council. Councils must maintain a VPA Register and make the VPA Deeds of Agreement available on request. However, there is no obligation on council to report on the outcomes or delivery of developers' obligations under VPAs. The four audited councils vary in transparency and accessibility of information available about VPAs.

The Practice Note suggests that councils incorporate the intended use of LICs collected under VPAs in the Deed of Agreement, but there is no guidance relating to transparency over where and when funds have actually been spent. There is merit in councils providing greater transparency over public benefits delivered through VPAs to give communities confidence in VPAs as a planning tool.

Credit arrangements with developers are not always well documented or monitored

When levying LICs, section 7.11(6) of the EP&A Act requires councils to take into account land, money, or works-in-kind that the developer has contributed on other development sites over and above their LIC obligations. This section of the EP&A Act allows a developer to offset a LIC owed on one site against land or works contributed on another. This leads to some developers carrying 'credits' for work delivered to councils, to be paid back by reduced LICs on a future development. Blacktown City Council and Central Coast Council allow developers to carry credits. Liverpool City Council and City of Sydney Council do not permit credits and instead pay the developers for any additional work undertaken.

Councils should formally document credit arrangements and have a robust process to validate and keep track of credit balances and report on them. Central Coast Council does not keep good track of credit arrangements and neither Blacktown City Council or Central Coast Council aggregate or report on outstanding credit balances.

Appendix one – Responses from councils and the Department of Planning, Industry and Environment

Appendix two – Advice from the Crown Solicitor

Appendix three – About the audit

Appendix four – Performance auditing

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.

Parliamentary reference - Report number #339 - released 17 August 2020