The Auditor-General for New South Wales, Margaret Crawford, released a report today on whether the Department of Communities and Justice (the department) effectively supports the efficient operation of the District Criminal Court system.

The audit found that in the provision of data and technology services, the department is not effectively supporting the efficient operation of the District Criminal Court system. The department has insufficient controls in place to ensure that data in the system is always accurate.

The department is also using outdated technology and could improve its delivery of technical support to courts.

The audit also assessed the implementation of the Early Appropriate Guilty Pleas reform. This reform aims to improve court efficiency by having more cases resolved earlier with a guilty plea in the Local Court. The audit found that the department effectively governed the implementation of the reform but is not measuring achievement of expected benefits, placing the objectives of the reform at risk.

The Auditor-General made seven recommendations to the department, aimed at improving the controls around courts data, reporting on key performance indicators, improving regional technical support and measuring the success of the Early Appropriate Guilty Pleas reform. 

The District Court is the intermediate court in the New South Wales court system. It hears most serious criminal matters, except murder, treason and piracy. The Department of Communities and Justice (the Department) provides support to the District Court in a variety of ways. For example, it provides security services, library services and front-desk services. This audit examined three forms of support that the Department provides to the District Court:

• data collection, reporting and analysis - the Department collects data from cases in its case management system, JusticeLink, based on the orders Judges make in court and court papers
• technology - the Department provides technology to courts across New South Wales, as well as technical support for this technology
• policy - the Department is responsible for proposing and implementing policy reforms.

Recent years have seen a worsening of District Court efficiency, as measured in the Productivity Commission's Report on Government Services (RoGS). Efficiency in the court system is typically measured through timeliness of case completion. There is evidence that timeliness has worsened. For example, the median time from arrest to finalisation of a case in the District Court increased from 420 days in 2012–13 to 541 days in 2017–18.

As a result, the government has announced a range of measures to improve court performance, particularly in the District Court. These measures included the Early Appropriate Guilty Pleas (EAGP) reform. One of the objectives of EAGP is to improve court efficiency, which would be achieved by having more cases resolve with a guilty plea in the Local Court.

This audit assessed whether the Department of Communities and Justice effectively supports the efficient operation of the District Criminal Court system. We assessed this with the following lines of inquiry:

• Does the Department effectively collect, analyse and report performance information relevant to court efficiency?
• Does the Department effectively provide technology to support the efficient working of the courts?
• Does the Department have effective plans, governance and monitoring for the Early Appropriate Guilty Pleas reform?

The audit did not consider other support functions provided by the Department. Further information on the audit, including detailed audit criteria, may be found in Appendix two.

The Department is responsible for providing technology to the courts, which can improve the efficiency of court operations by making them faster and cheaper. The Department is also responsible for providing technical support to courtrooms and registries. It is important that technical support is provided in a timely manner because some technical incidents can delay court sittings and thus impact on court efficiency. A 2013 Organisation for Economic Co‑operation and Development report emphasised the importance of technology and digitisation for reducing trial length.

While the Department may provide technology to the courts, they are not responsible for deciding when, how or if the technology is used in the courtroom.

The Department is using a significant amount of outdated technology, risking court delays

As of April 2019, the whole court system had 2,389 laptops or desktop computers out of warranty, 56.0 per cent of the court system's fleet. The court system also had 786 printing devices out of their normal warranty period, 75.1 per cent of all printers in use. The Department also advised that many of its court audio transcription machines are out of date. These machines must be running for the court to sit and thus it is critical that they are maintained to a high degree. The then Department of Justice estimated the cost of aligning its hardware across the whole Department with desired levels at $14.0 million per year for three years. Figures for the court system were not calculated but they are likely to be a significant portion of this figure.

Using outdated technology poses a risk to the court system as older equipment may be more likely to break down, potentially delaying courts or slowing down court services. In the court system throughout 2018, hardware made up 30.8 per cent of all critical incidents reported to technical support and 41.9 per cent of all high priority incidents. In addition, 16.2 per cent of all reported issues related to printing devices or printing.

From 2017 to 2018, technical support incidents from courts or court services increased. There were 4,379 technical support incidents in 2017, which increased significantly to 9,186 in 2018. The Department advised that some outside factors may have contributed to this increase. The Department was rolling out its new incident recording system throughout 2017, meaning that there would be an under‑reporting of incidents in that year. The Department also advised that throughout 2018 there was a greater focus on ensuring that every issue was logged, which had not previously been the case. Despite these factors, the use of outdated technology has likely increased the risk of technology breakages and may have contributed to the increase in requests for technical support.

Refreshing technology on a regular basis would reduce the risk of hardware failures and ensure that equipment is covered by warranty.

The Department did not meet all court technical support targets in 2017 and 2018

The Digital and Technology Services branch (DTS) was responsible for providing technical support to the courts and the Courts and Tribunal Services branch prior to July 2019. DTS provided technical support in line with a Service Level Agreement (SLA) with the Department. In 2017, DTS did not provide this support in a timely manner. Performance improved in 2018, though DTS fell short of its targets for critical and moderate priority incidents. Exhibit 7 outlines DTS' targets under the SLA.

Critical incidents are particularly important for the Department to deal with in a timely manner because these include incidents which may delay a court sitting until resolved or incidents which impact on large numbers of staff. Some of the critical incidents raised with DTS specifically stated that they were delaying a court sitting, often due to transcription machines not working. High priority incidents include those where there is some impact on the functions of the business, which may in turn affect the efficiency of the court system. High priority incidents also include those directly impacting on members of the Judiciary. 

This audit examined DTS' performance against its SLA in the 2017 and 2018 calendar years across the whole court system, not just the District Court. The total number of incidents, as well as critical and high priority incidents, can be seen in Exhibit 8.

The Department's results against its SLA in 2017 and 2018 are shown in Exhibit 9.

The Early Appropriate Guilty Pleas (EAGP) reform consists of five main elements:

• early disclosure of evidence from NSW Police Force to the prosecution and defence
• early certification of what the accused is going to be charged with to minimise changes
• mandatory criminal case conferencing between the prosecutor and accused's representation
• changes to Local Court case management
• more structured sentence discounts.

More detailed descriptions of each of these changes can be found in the Introduction. These reform elements are anticipated to have three key effects:

• accelerate the timing of guilty pleas
• increase the overall proportion of guilty pleas
• decrease the average length of contested trials.

Improving District Court efficiency is one of the stated aims of EAGP, which would be achieved by having more cases resolve in the Local Court and having fewer defendants plead guilty on the day of their trial in the District Court. The reform commenced in April 2018 and it is too early to state the impact of this reform on District Court efficiency.

The Department is responsible for delivering EAGP in conjunction with other justice sector agencies. They participated in the Steering Committee and the Working Groups, as well as providing the Project Management Office (PMO).

The Department is not measuring the economic benefits stated in the EAGP business case

The business case for EAGP listed nine quantifiable benefits which were expected to be derived from the achievement of the three key effects listed above. The Department is not measuring one of these benefits and is not measuring the economic benefits for five more, as shown in Exhibit 12.

Benefit	Economic benefit (over ten years)	Being measured?
Accelerated timing of guilty pleas	$54.6m
Increased guilty plea rate	$90.7m
Decreased average trial length	$27.5m
A reduction in the delay of indictable matters proceeding to trial	N/A
Increase the number of finalised matters per annum	N/A
Reduction of the current backlog of criminal trials in the District Court	N/A
Reduction in bed pressure on the correction system due to reduced average time in custody	$13.7m
Productivity improvements due to reduction in wasted effort	$53.3m
Bankable cost savings due to jury empanelment avoided	$2.5m

Exhibit 12: The Department's measurement of quantifiable benefits

Key

Measuring

Not measuring economic benefit

Not measuring

While it is too early to comment on the overall impact of EAGP, better practice in benefits realisation involves an ongoing effort to monitor benefits to ensure that the reform is on target and determine whether any corrective action is needed.

The Department is measuring the number of finalised matters per annum and while the Department is not measuring the reduction in the backlog as part of this program, this measure is reported as part of the Department's internal reporting framework. The Department is not monitoring the reduction in delay of indictable matters proceeding to trial directly as part of this reform, but this does form part of the monthly Operational Performance Report which the Department sends to the EAGP Steering Committee.

The Department is not monitoring any of the economic benefits stated in the business case. These economic benefits are a mixture of bankable savings and productivity improvements. This amounts to a total of $242.3 million over ten years which was listed in the business case as potential economic benefits from the implementation of this reform against the total cost of $206.9 million over ten years. The Department is collecting proxy indicators which would assist in these calculations for several indicators, but it is not actively monitoring these savings. For example, the Department is monitoring average trial length, but is not using this information to calculate economic benefits derived from changes in trial length.

The Department is also not collecting information related to the average length of custody as part of this program. This means that it is unable to determine if EAGP is putting less pressure on the correctives system and it is not possible for the Department to calculate the savings from this particular benefit.

While stakeholders are optimistic about the impact of EAGP, not measuring the expected benefits stated in the business case means that the Department does not know if the reform is achieving what it was designed to achieve. Further, the Department does not know if it must take corrective action to ensure that the program achieves the stated benefits. These two things put the overall program benefits at risk.

The Department has not assigned responsibility for the realisation of each benefit stated in the business case. The Department holds the Steering Committee responsible for the realisation of all benefits. Benefits realisation is the process which ensures that the agency reaches benefits as stated in the business case. Assigning responsibility for benefits realisation to the Steering Committee rather than individuals is not in line with good practice.

Good practice benefits realisation involves assigning responsibility for the realisation of each benefit to an individual at the business unit level. This ensures there is a single point of accountability for each part of the program with knowledge of the benefit and the ability to take corrective action if it looks like that benefit will not be realised. This responsibility should sit at the operational level where detailed action can most easily be undertaken. The role of a Steering Committee in benefits realisation is to ensure that responsible parties are monitoring their benefits and taking appropriate corrective action.

The Department advised that it believes the Steering Committee should have responsibility for the realisation of benefits due to the difficulty of attributing the achievement of each benefit to one part of the reform alone. Given the Steering Committee meets only quarterly, it is not well placed to take action in response to variances in performance.

BOCSAR are planning to undertake an overall evaluation of EAGP which is planned for release in 2021. Undertaking this evaluation will require high quality data to gain an understanding of the drivers of the reform. However, data captured throughout the first year of EAGP has proven unreliable, which may reduce the usefulness of BOCSAR's evaluation. These data issues were discussed in Exhibit 5 in Chapter 2, above. Access to accurate data is vital for conducting any program evaluation and inaccurate data raises the risk that the BOCSAR evaluation will not be able to provide an accurate evaluation of the impact of EAGP.

In addition to the BOCSAR evaluation, the Department had plans for a series of 'snapshot' evaluations for some of the key elements of the reform to ensure that they were operating effectively. These were initially delayed due to an efficiency dividend which affected EAGP. In August 2019, the Department commissioned a review of the implementation of several key success factors for EAGP.

The implementation stage of EAGP had clear governance, lines of authority and communication. The Steering Committee, each Working Group and each agency had clear roles and responsibilities, and these were organised through a Project Management Office (PMO) provided by the former Department of Justice. The governance structure throughout the implementation phase can be seen at Exhibit 13.

The Steering Committee was established in December 2016 and met regularly from March 2017. It comprised senior members of key government agencies, as well as the Chief Judge and the Chief Magistrate for most of the duration of the implementation period. The Steering Committee met at least monthly throughout the life of the program. The Steering Committee was responsible for overseeing the delivery of EAGP and making key decisions relating to implementation, including spending decisions. The Chief Judge and the Chief Magistrate abstained from financial decisions. The Steering Committee updated the governance and membership of the Steering Committee as appropriate throughout the life of the reform.

Appendix one – Response from agency
 
Appendix two – About the audit 

Appendix three – Performance auditing 

Copyright Notice

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Parliamentary Reference: Report number #329 - released 18 December 2019

A report has been released on the NSW Stronger Communities cluster.

From 1 July 2019, the functions of the former Department of Justice, the former Department of Family and Community Services and many of the cluster agencies moved to the new Stronger Communities cluster. The Department of Communities and Justice is the principal agency in the new Stronger Communities cluster.

The report focuses on key observations and findings from the most recent financial audits of agencies in the Stronger Communities cluster.

Unqualified audit opinions were issued on the financial statements for all agencies in the cluster.  

There were 157 audit findings on internal controls. Two of these were high risk and 59 were repeat findings from previous financial audits. ‘Cluster agencies should prioritise actions to address internal control weaknesses promptly with particular focus given to issues that are assessed as high risk’, the Auditor-General said.

The report notes that the NSW Government’s new workers' compensation legislation, which gave eligible firefighters presumptive rights to workers' compensation, cost emergency services agencies $180 million in 2018–19, mostly in increased premiums.

Download the PDF version of report

This report analyses the results of our audits of financial statements of the agencies comprising the Stronger Communities cluster for the year ended 30 June 2019. The table below summarises our key observations.

This report provides parliament and other users of the financial statements of agencies in the Stronger Communities cluster with the results of our audits, our observations, analyses, conclusions and recommendations in the following areas:

• financial reporting
• audit observations.

This cluster was significantly impacted by the Machinery of Government (MoG) changes on 1 July 2019. This report focuses on the agencies that from 1 July 2019, comprised the Stronger Communities cluster. The MoG changes moved some agencies from the clusters to which they belonged in 2018–19 to the Stronger Communities cluster. Conversely, the MoG also moved some agencies formerly in the Family and Community Services cluster and Justice cluster elsewhere. Please refer to the section on Machinery of Government changes for more details.

The Department of Communities and Justice is the principal agency of the cluster. The newly created department combines functions of the former Department of Justice and the Department of Family and Community Services.

Machinery of Government (MoG) refers to how the government organises the structures and functions of the public service. MoG changes occur when the government reorganises these structures and functions and those changes are given effect by Administrative Orders.

The MoG changes announced following the NSW State election on 23 March 2019 significantly impacted the Stronger Communities cluster through Administrative Changes Orders issued on 2 April 2019 and 1 May 2019. These orders took effect on 1 July 2019.

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

This chapter outlines our audit observations relating to the financial reporting of agencies in the Stronger Communities cluster for 2019.

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

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

Appendix one – Timeliness of financial reporting by agency

Appendix two – Management letter findings by agency

Appendix three – List of 2019 recommendations 

Appendix four – Status of 2018 recommendations 

Appendix five – Cluster agencies 

Appendix six – Financial data 

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.

This report covers the findings and recommendations from the 2018–19 financial audits that relate to internal controls and governance at 40 of the largest agencies in the NSW public sector. The 40 agencies selected for this report constitute around 84 per cent of total expenditure for all NSW public sector agencies.

The report provides insights into the effectiveness of controls and governance processes across the NSW public sector. It evaluates how agencies identify, mitigate and manage risks related to:

• financial controls
• information technology controls
• gifts and benefits
• internal audit
• contingent labour
• sensitive data.

The Auditor-General recommended that agencies do more to prioritise and address vulnerabilities in their internal controls and governance. The Auditor-General also recommended agencies increase the transparency of their management of gifts and benefits by publishing their registers on their websites.

This report analyses the internal controls and governance of 40 of the largest agencies in the NSW public sector for the year ended 30 June 2019.

1. Internal control trends

2. Information technology controls

3. Gifts and benefits

4. Internal audit

5. Managing contingent labour

6. Managing sensitive data

This report covers the findings and recommendations from our 2018–19 financial audits that relate to internal controls and governance at 40 of the largest agencies (refer to Appendix three) in the NSW public sector. The 40 agencies selected for this volume constitute around 84 per cent of total expenditure for all NSW public sector agencies.

Although the report includes several agencies that have changed as a result of the Machinery of Government changes that were effective from 1 July 2019, its focus on sector wide issues and insights means that its findings remain relevant to NSW public sector agencies, including newly formed agencies that have assumed the functions of abolished agencies.

This report offers insights into internal controls and governance in the NSW public sector

This is the third report dedicated to internal controls and governance at NSW State Government agencies. The report provides insights into the effectiveness of controls and governance processes in the NSW public sector by:

• highlighting the potential risks posed by weaknesses in controls and governance processes
• helping agencies benchmark the adequacy of their processes against their peers
• focusing on new and emerging risks, and the internal controls and governance processes that might address those risks.

Without strong governance systems and internal controls, agencies increase the risks associated with effectively managing their finances and delivering services to citizens. For example, if they do not have strong information technology controls, sensitive information may be at risk of unauthorised access and misuse.

Areas of specific focus of the report have changed since last year

Last year's report topics included transparency and performance reporting, management of purchasing cards and taxi use, and fraud and corruption control. We are reporting on new topics this year and re-visiting agency management of gifts and benefits, which we first covered in our 2017 report. Re-visiting topics from prior years provides a baseline to show the NSW public sectors’ progress implementing appropriate internal controls and governance processes to mitigate existing, new and emerging risks in the public sector.

Our audits do not review all aspects of internal controls and governance every year. We select a range of measures and report on those that present heightened risks for agencies to mitigate. This year the report focusses on:

• internal control trends
• information technology controls, including access to agency systems
• protecting sensitive information held within agencies
• managing large and diverse workforces (controls around employing and managing contingent workers)
• maintaining an ethical culture (management of gifts and benefits)
• effectiveness of internal audit function and its oversight by Audit and Risk Committees.

The findings in this report should not be used to draw conclusions on the effectiveness of individual agency control environments and governance arrangements. Specific financial reporting, internal controls and audit observations are included in the individual 2019 cluster financial audit reports, which will be tabled in parliament from November to December 2019.

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

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

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

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

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency controls to manage gifts and benefits. 

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency internal audit functions.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency controls to on-board, manage and off-board contingent labour.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of governance and processes in relation to the management of sensitive data.

Appendix one – List of 2019 recommendations 

Appendix two – Status of 2018 recommendations

Appendix three – In-scope agencies

© 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.

This report found the Department of Family and Community Services (FACS) needs to do more to demonstrate it is effectively and efficiently contracting NGOs to deliver community services in the Permanency Support Program (a component of out-of-home-care services) and Specialist Homelessness Services. It notes that FACS is moving to an outcomes-based commissioning model and recommends this be escalated consistent with government policy.

Government agencies, such as the Department of Family and Community Services (FACS), are increasingly contracting non-government organisations (NGOs) to deliver human services in New South Wales. In doing so, agencies are responsible for ensuring these services are achieving expected outcomes. Since the introduction of the Commissioning and Contestability Policy in 2016, all NSW Government agencies are expected to include plans for customer and community outcomes and look for ways to use contestability to raise standards.

Two of the areas receiving the greatest funding from FACS are the Permanency Support Program and Specialist Homelessness Services. In the financial year 2017–18, nearly 500 organisations received $784 million for out-of-home care programs, including the Permanency Support Program. Across New South Wales, specialist homelessness providers assist more than 54,000 people each year and in the financial year 2017–18, 145 organisations received $243 million for providing short term accommodation and homelessness support, including Specialist Homelessness Services.

In the financial year 2017–18, FACS entered into 230 contracts for out-of-home care, of which 49 were for the Permanency Support Program, representing $322 million. FACS also entered into 157 contracts for the provision of Specialist Homelessness Services which totalled $170 million. We reviewed the Permanency Support Program and Specialist Homelessness Services for this audit.

This audit assessed how effectively and efficiently FACS contracts NGOs to deliver community services. The audit could not assess how NGOs used the funds they received from FACS as the Audit Office does not have a mandate that could provide direct assurance that NGOs are using government funds effectively.

Appendix one – Response from agency

Appendix two – About the audit

Appendix three – Performance auditing

Parliamentary Reference: Report number #323 - released 26 June 2019

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.

Agencies need to do more to address risks posed by information technology (IT).

Effective internal controls and governance systems help agencies to operate efficiently and effectively and comply with relevant laws, standards and policies. We assessed how well agencies are implementing these systems, and highlighted opportunities for improvement.
 

1. Overall trends

2. Information Technology

3. Asset Management

4. Governance

5. Ethics and Conduct

6. Risk Management 

This report covers the findings and recommendations from our 2016–17 financial audits related to the internal controls and governance of the 39 largest agencies (refer to Appendix three) in the NSW public sector. These agencies represent about 95 per cent of total expenditure for all NSW agencies and were considered to be a large enough group to identify common issues and insights.

The findings in this report should not be used to draw conclusions on the effectiveness of individual agency control environments and governance arrangements. Specific financial reporting, controls and service delivery comments are included in the individual 2017 cluster financial audit reports tabled in Parliament from October to December 2017.

This new report offers strategic insight on the public sector as a whole

In previous years, we have commented on internal control and governance issues in the volumes we published on each ‘cluster’ or agency sector, generally between October and December. To add further value, we then commented more broadly about the issues identified for the public sector as a whole at the start of the following year.

This year, we have created this report dedicated to internal controls and governance. This will help Parliament to understand broad issues affecting the public sector, and help agencies to compare their own performance against that of their peers.

Without strong control measures and governance systems, agencies face increased risks in their financial management and service delivery. If they do not, for example, properly authorise payments or manage conflicts of interest, they are at greater risk of fraud. If they do not have strong information technology (IT) systems, sensitive and trusted information may be at risk of unauthorised access and misuse.

These problems can in turn reduce the efficiency of agency operations, increase their costs and reduce the quality of the services they deliver.

Our audits do not review every control or governance measure every year. We select a range of measures, and report on those that present the most significant risks that agencies should mitigate. This report divides these into the following six areas:

1. Overall trends
2. Information technology
3. Asset management
4. Governance
5. Ethics and conduct
6. Risk management.

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

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

This chapter outlines the overall trends for agency controls and governance issues, including the number of findings, level of risk and the most common deficiencies we found across agencies. The rest of this volume then illustrates this year’s controls and governance findings in more detail.

Information technology (IT) has become increasingly important for government agencies’ financial reporting and to deliver their services efficiently and effectively. Our audits reviewed whether agencies have effective controls in place over their IT systems. We found that IT security remains the source of many control weakness in agencies.

Agency service delivery relies on developing and renewing infrastructure assets such as schools, hospitals, roads, or public housing. Agencies are currently investing significantly in new assets. Agencies need to manage the scale and volume of current capital projects in order to deliver new infrastructure on time, on budget and realise the intended benefits. We found agencies can improve how they:

• manage their major capital projects
• dispose of existing assets.

Governance refers to the high-level frameworks, processes and behaviours that help an organisation to achieve its objectives, comply with legal and other requirements, and meet a high standard of probity, accountability and transparency.

This chapter sets out the governance lighthouse model the Audit Office developed to help agencies reach best practice. It then focuses on two key areas: continuous disclosure and shared services arrangements. The following two chapters look at findings related to ethics and risk management.

All government sector employees must demonstrate the highest levels of ethical conduct, in line with standards set by The Code of Ethics and Conduct for NSW government sector employees.

This chapter looks at how well agencies are managing these requirements, and where they can improve their policies and processes.

We found that agencies mostly have the appropriate codes, frameworks and policies in place. But we have highlighted opportunities to improve the way they manage those systems to reduce the risks of unethical conduct.

Risk management is an integral part of effective corporate governance. It helps agencies to identify, assess and prioritise the risks they face and in turn minimise, monitor and control the impact of unforeseen events. It also means agencies can respond to opportunities that may emerge and improve their services and activities.

This year we looked at the overall maturity of the risk management frameworks that agencies use, along with two important risk management elements: risk culture and risk registers.

Effective risk management can improve agency decision-making, protect reputations and lead to significant efficiencies and cost savings. By embedding risk management directly into their operations, agencies can also derive extra value for their activities and services.

The following report focuses on key observations and findings from the most recent audits of agencies in the Family and Community Services cluster.

The report includes a range of findings on service delivery. The Department of Family and Community Services' data indicates that family preservation programs are having a positive impact on children and young people entering statutory care. On the other hand, waiting times for social housing applicants increased in 2016-17.
 

1. Financial reporting and controls

2. Service Delivery

This report provides Parliament and others with the audit results, observations, conclusions and recommendations for Family and Community Services cluster agencies. The report has been structured into two chapters focusing on financial reporting and controls and service delivery.

The Family and Community Services cluster works with children, adults, families and communities to improve lives and help people realise their potential.

This chapter outlines audit observations, conclusions and recommendations related to the financial reporting and controls of agencies in the Family and Community Services cluster for 2016–17.

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

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

Government outcomes can be improved by delivering the right mix of services, whether from the public, private or not for profit sectors. Service delivery reform will be most successful if there is clear accountability for service delivery outcomes, decisions are aligned to strategic direction and performance is monitored and evaluated.

This chapter outlines our audit observations, conclusions and recommendations related to service delivery by agencies in the Family and Community Services cluster for 2016–17.

Appendix one - Status of 2015 and 2016 recommendations

Appendix two - Summary financial information 

Appendix three - Cluster information

Overall, agencies materially complied with NSW Government travel policies.

However, the Auditor-General found some agencies:

• did not always book official travel through the approved supplier
• had weaknesses in their travel approval processes
• had travel policies that were inconsistent with the NSW Government policy
• did not adequately manage their travel records.   

We asked the 15 participating agencies to complete a self assessment of the processes they have implemented to comply with the new policy. The key observations are summarised below.

Appendix one - Responses from agencies

Appendix two - List of selected agencies

This report highlights the results of the financial audits of NSW Government central agencies. The report focuses on key observations and findings from the most recent financial statement audits of agencies in the Treasury, Premier and Cabinet, and Finance, Services and Innovation clusters.

The report includes a range of findings in respect to service delivery. One repeat finding is that while the Government regularly reports on the 12 Premier's priorities, there is no comprehensive reporting on the 18 State priorities. 

1. Financial reporting and controls

2. Service delivery

3. Government financial services

This report sets out the results of the 30 June 2017 financial statement audits of NSW Government's central agencies and their cluster agencies.

Central agencies play a key role in ensuring policy coordination, good administrative and people management practices and prudent fiscal management. The central agencies and their key responsibilities are set out below.

Confidence in public sector decision‑making and transparency is enhanced when financial reporting is accurate and timely. Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. This chapter outlines our audit observations, conclusions or recommendations related to financial reporting and controls of agencies for 2016–17.

This chapter outlines our audit observations, conclusions and recommendations relating to service delivery for 2016–17. 

This chapter outlines our audit observations, conclusions and recommendations specific to NSW Government agencies providing financial services.

Appendix one - List of 2017 recommendations

Appendix two - Status of 2016 recommendations

Appendix three - Agencies selected for this volume

Appendix four - Timeliness of financial reporting and audit reporting

Appendix five - Financial audit reporting

Appendix six - Financial analysis

The 'Stronger Councils, Stronger Communities' and the 'Dogs deserve better' government advertising campaigns complied with the Government Advertising Act and most elements of the Government Advertising Guidelines.

However, some advertisements were designed to build support for government policy and used subjective or emotive messages. This is inconsistent with the requirement in the Government Advertising Guidelines for 'objective presentation in a fair and accessible manner'.

Advertisements in the 'Stronger Councils, Stronger Communities' campaign used subjective statements such as 'the system is broken' and 'brighter future'. While advertisements in the 'Dogs deserve better' campaign used confronting imagery such as gun targets, blood smears and gravestones.

The Government Advertising Act 2011 (the Act) requires the Auditor-General to conduct a performance audit in relation to at least one government advertising campaign in each financial year. The performance audit assesses whether advertising campaigns were carried out effectively, economically and efficiently and in compliance with the Act, the regulations, other laws and the Government Advertising Guidelines (the Guidelines). In this audit, we examined two campaigns:

• the ‘Stronger Councils, Stronger Communities’ campaign run by the Office of Local Government and the Department of Premier and Cabinet
• the ‘Dogs deserve better’ campaign run by the Department of Justice.    

Section 6 of the Act details the specific prohibitions on political advertising. Under this section, material that is part of a government advertising campaign must not contain the name, voice or image of a minister, member of parliament or a candidate nominated for election to parliament or the name, logo or any slogan of a political party. Further, a campaign must not be designed so as to influence (directly or indirectly) support for a political party.

The ‘Stronger Councils, Stronger Communities’ government advertising campaign was run by the Office of Local Government and the Department of Premier and Cabinet in four phases from August 2015 to May 2016. The total cost of the campaign was over $4.5 million. See Appendix 2 for more details on this campaign.

No breach of specific prohibitions in the Act

Section 6 of the Act prohibits the use of government advertising for political advertising. A government advertising campaign must not:

• be designed to influence (directly or indirectly) support for a political party
• contain the name, voice or image of a minister, any other member of parliament or a candidate nominated for election to parliament
• contain the name, logo or any slogan of, or any other reference relating to, a political party.

We did not identify any breach of the specific prohibitions listed above in the advertising content of this campaign.

Request for quotes to design advertisement did not reflect the full scope required

The request for quotes for the design of the Phase 1 advertisement did not reflect the full scale of work that was to be undertaken, and this created a risk to achieving value for money. The Office of Local Government sought quotes for design of a television advertisement only. It did not request an estimate for radio, online advertisements, or translation for linguistically diverse audiences, which were ultimately required for the campaign.
 

A full and fair assessment of which supplier could provide the best value for money could not be made given that the quotes obtained did not reflect the full scope of work. The final amount paid for the design of Phase 1 was 2.7 times the original quote. It is possible that another supplier that provided a quote could have provided overall better value for money.

The Office of Local Government continued to use the Phase 1 supplier for Phase 2 and Phase 2 extension (Exhibit 4). Where there are other suppliers that could feasibly compete for a contract, direct negotiation increases the risk the agency has not obtained the best value for money. The department advised that it continued with the same agency to avoid costs involved in briefing a new agency on the campaign.

The ‘Dogs deserve better’ government advertising campaign was run by the Department of Justice from August 2016, after the government announced its decision to prohibit greyhound racing, and was terminated in October 2016 after a change of government policy. The campaign had a budget of $1.6 million, with an actual spend of $1.3 million. See Appendix 2 for more details on this campaign.

No breach of specific prohibitions in the Act

Section 6 of the Act prohibits the use of government advertising for political advertising. A government advertising campaign must not:

• be designed to influence (directly or indirectly) support for a political party
• contain the name, voice or image of a minister, any other member of parliament or a candidate nominated for election to parliament
• contain the name, logo or any slogan of, or any other reference relating to, a political party.

We did not identify any breach of the specific prohibitions listed above in the advertising content of this campaign.
 

Animal welfare concerns were identified as the reason for urgent advertising

A brief prepared by the department in July 2016 raised concerns about the welfare of greyhounds following the NSW Premier’s announcement that the government would prohibit greyhound racing. The brief raised the risk that industry members may make impulse decisions to destroy their greyhounds without information on support that was being offered.

The department used the provisions in Sections 7(4) and 8(3) of the Act to expedite the release of advertising due to ‘other urgent circumstances’. This provision allows advertising to commence prior to completing the peer review process and cost benefit analysis.
 
In introducing the Government Advertising Bill to parliament in 2011, the then Premier noted that exceptional circumstances would cover situations ‘such as a civil emergency or sudden health epidemic’. There is no other guidance on when it is appropriate to use this section. It is at the discretion of a government agency head to determine whether a campaign is urgent.
 

Phase 1 advertisements did not focus on the urgent needs

This advertising campaign had three overarching objectives:

• to increase public awareness of the animal welfare reasons for the closure of the greyhound racing industry
• to change the behaviour of dog owners from potentially harming their greyhounds to treating them humanely, by accessing the support options and packages available
• to promote greyhound adoptions by the public.

Alongside advertising, the department took other steps to engage with the greyhound racing industry. This included direct mail, face to face meetings around the State, setting up a call centre and community consultation through an online survey. Other government agencies and animal welfare agencies were also engaged to reach out to affected stakeholders.

Phase 1 advertising content focused on providing information about the reasons for the closure of the industry. The department’s radio and television advertisements did not refer to support packages or encourage the public to adopt a greyhound. While print advertisements did mention these things, this was only presented in fine print. In all advertisements, audiences were referred to a website for further information.

The focus of advertisements on the reasons for industry closure was not consistent with the identified needs to urgently commence advertising to influence the behaviour of dog owners and encourage the public to adopt a greyhound.

The content in Phase 2 advertisements, which began around four weeks after the first phase, was more explicit in highlighting the services and support for industry members such as offering business and retraining advice. These advertisements also referred audiences to a call centre number as well as the website.

Peer review process limited to influencing second phase of advertisements

In urgent circumstances, the Act allows for peer review to be completed after advertising has commenced. For this campaign, the peer review process was completed on 19 August 2016, two weeks after advertising had commenced. Where advertising commences before the peer review process is completed, the usefulness of peer reviewers’ recommendations is limited to informing subsequent phases of advertising and the post-campaign evaluation.

The peer review report found the messages in Phase 1 advertisements were not clearly defined, and the role of advertising was not clearly defined amongst other campaign activities. These recommendations informed the second phase of advertising, which ran from 27 August 2016 until the campaign was terminated in October 2016.
 

The department could not demonstrate value for money was achieved for creative work

The department provided a fixed budget for creative work when requesting quotes from creative agencies to develop advertising material. This is not consistent with the quotation requirements in the government’s Guidelines for Advertising and Digital Communication Services. This approach creates risks to achieving value for money as creative agencies are not required to compete on price for their services. The department advised that it had pre-set the creative costs based on a comparative government campaign of a similar size. This was done due to a concern that requiring agencies to compete on price would affect the short timeframe given to develop creative material.

Three creative agencies accepted the opportunity to present design ideas for the campaign. The department was unable to provide evidence of how it chose the preferred supplier out of these three agencies. Records are important for accountability and allow a procurement decision to be audited after an urgent decision.     
 

Short notice did not allow for cost-efficient media booking for all phases

Placement of advertisements in various media channels was done through the State’s Media Agency Services contract. This contract achieves savings as the government can use its aggregated media spend to gain discounts from the media supplier.

The Department of Premier and Cabinet provides guidance to ensure cost efficient media booking. For example, media time for a television advertisement should be booked at least 6 to 12 weeks in advance. Radio advertisements should be booked at least 2 to 8 weeks in advance.

The peer review report noted that the department did not have adequate time to look for the most cost-efficient way to advertise. In its response to the peer reviewers, the department acknowledged this to be due to the urgency to start advertising. The media booking authority was signed by the department one day before the campaign commenced.
 

The department used a wide public campaign for a narrow target audience

The campaign identified greyhound industry participants as the primary target audience. In 201516 there were 1,342 greyhound trainers, 1,695 owner/trainers, 983 attendants and 1,247 breeders in New South Wales. The department’s advertising submission identified ‘concerns that industry members could make impulsive decisions, potentially jeopardising the welfare of a large number of dogs, prior to the shutdown of the industry’.

The submission’s evidence of advertising effectiveness focused on increasing the level of wider community support for the ban rather than stopping industry members from making impulse decisions. It used an early opinion poll to show that total support for the ban on greyhound racing rises by 17 points and opposition drops by four points following explanation of the findings of the Special Commission of Inquiry report.

The peer review report noted that the role of advertising was not clearly defined amongst the department’s range of other direct and targeted communications and consultations held with industry members.

No demonstrated basis for use of confronting imagery and provocative language

The Guidelines require ‘objective presentation in a fair and accessible manner’. Neither the Guidelines or Handbook further explain what objective presentation means. We have used an ordinary definition of this term as ‘not influenced by personal feelings or opinions in considering and representing facts’. This is synonymous with terms like ‘impartial’, ‘neutral’, and ‘dispassionate’ and opposite to ‘subjective’. We consider that to meet the current requirements in the Guidelines for objectivity, advertising content should contain accurate statements or facts, and avoid subjective language.

Phase 1 focussed on the ongoing consequences if no action was taken to close the industry. The advertisements used provocative language, for example ‘Up to 70 per cent of dogs are deemed wastage by their own industry. Wastage! Slaughtered just for being slow’. Advertisements used confronting imagery like gravestones, blood smears and gun targets.

Our literature review into this area highlighted mixed findings on the effectiveness of confrontational advertising materials. In some cases, shock campaigns may cause an audience to reject or ignore the message, and may even encourage people to do the opposite of the intended behaviour. In other cases, such as in road safety campaigns, this style of advertising can be successful. This shows the importance of conducting pre-campaign research before adopting a confrontational or emotive approach in advertising.

The Government Advertising Handbook recommends that an agency explain the rationale and the evidence for their chosen advertising approach. There was no evidence that the department researched the effectiveness of its advertising approach with its target audience. The department had planned to undertake creative concept testing as part of a strategy to ensure the creative material was understood by its audience. The department advised that due to the urgency of the campaign, it did not have time to conduct this testing.

Not all Phase 1 radio advertisements clearly identified that they were authorised by the New South Wales Government

For the first few days on air, Phase 1 radio advertisements ended by referring the audience to a government website, instead of clearly identifying that it had been authorised by the New South Wales Government. Government authorisations and logos ensure the work and the programs of the NSW Government are easily identifiable by the community.    

The department’s cost benefit analysis did not consider alternatives to advertising

For government advertising campaigns that cost over $1.0 million, the Act requires the advertising agency to carry out a cost benefit analysis and obtain approval from the Cabinet Standing Committee on Communications, prior to commencing the campaign.

The department engaged with audiences through direct mail, face to face forums, and a telephone helpline in addition to advertising. However, the department’s cost benefit analysis did not meet the requirements in the Guidelines to specify the extent to which expected benefits could be achieved without advertising, and to compare costs of options other than advertising that could be used to successfully implement the program (see Exhibit 6).

The cost benefit analysis made optimistic assumptions about the impact of the campaign on greyhound adoptions. It estimated that 2,360 greyhounds would be adopted if the campaign was run. This is significantly higher than the ‘most optimistic outcome’ of re-homing in the Special Commission Inquiry report (we calculated this to be 1,467 greyhounds). There was insufficient evidence to support the higher number of adoptions in the cost benefit analysis.

The sensitivity analysis shows that using the Special Commission’s ‘most optimistic outcome’ figure of re-homing would reduce the net present value of advertising to be negative. Further, the cost benefit analysis also assumed that increased government funding would be made available to animal welfare and rehoming organisations to support more adoptions, but did not estimate or include this cost when calculating the net present value of advertising.
 

There were two factual inaccuracies in key messages used for Phase 1 advertisements

Section 8(2) of the Act requires the head of a government agency to certify that the proposed campaign ‘contains accurate information’. The Secretary of the Department of Justice signed the compliance certificate on 29 July 2016, before advertisements commenced.

We examined the accuracy of factual claims in this advertising campaign, by comparing the key statements to the report of Special Commission of Inquiry into the Greyhound Racing Industry (the Commissioner report). The Commissioner report was quoted by the NSW Government as the basis for its policy to transition the greyhound racing industry to closure.

We identified that two of the key statements used in Phase 1 advertisements to support the animal welfare reasons for industry closure were inaccurate (Exhibit 7).    

Appendix one - Responses from agencies

Appendix two - About the campaigns

Appendix three - About the Audit

Appendix four - Performance Auditing

Parliamentary reference - Report number #294 - released 2 November 2017

Total State Sector Accounts received an unqualified audit opinion for the fifth consecutive year.

There was a $5.7 billion State budget surplus and continued investment in new infrastructure, in part funded by the long-term leases of Ausgrid and Endeavour Energy assets. This report also comments on key accounting matters, including the correction of some previously reported balances and the first time reporting of combined Cabinet members’ compensation in the Total State Sector Accounts.

Pursuant to the Public Finance and Audit Act 1983, I present my Report on State Finances 2017.

You will note that the format of this report has changed from previous years.

The intent of this change is to draw attention to the key matters that have been the focus of our audit and highlight significant factors that have contributed to the outcome.

First, it is pleasing to report once again that I issued a clear audit opinion on the State’s consolidated financial statements. This outcome demonstrates the Government’s continued focus on the quality of financial reporting across the NSW public sector.

High quality financial management and reporting are crucial to properly inform the public and build community confidence in our system of government.

The Treasury’s Financial Management Transformation program also aims to improve financial governance, budgeting and reporting arrangements across the sector. My Office is working collaboratively with The Treasury on reforms to reduce the burden of reporting, without weakening established safeguards.

The reforms should include measures to provide independent assurance of the budget process, of outcome reporting by agencies, and the power to “follow the dollar” given the increasing use of non-government organisations to deliver Government programs.

This Report also highlights another year of strong financial performance. The State’s budget result was a $5.7 billion surplus, and investment in new infrastructure has continued, in part funded by the long-term leases of Ausgrid and Endeavour Energy assets.

Finally, could I take this opportunity to thank the staff of The Treasury for the way they approached this audit. Our partnership is critical to ensuring NSW is an exemplar of quality financial management and reporting.

Margaret Crawford 
24 October 2017

A clear audit opinion on the State’s consolidated financial statements was issued.

Timely and accurate financial reporting is essential for informed decision making, effective management of public funds and enhancing public accountability.

This year’s clear audit opinion reflects the Government’s continued efforts to improve the quality of financial reporting across the NSW public sector.

Since the introduction of ‘early close procedures’ in 2011-12, the number of significant errors in financial statements of agencies has generally fallen largely due to identifying and resolving complex accounting issues early. Agencies’ 2016-17 financial statements submitted for audit contained nine errors exceeding $20 million. All errors were subsequently corrected in the individual agencies financial statements.

Agencies should continue to respond to key accounting issues as soon as they are identified. Where issues are identified, accounting position papers should be prepared for consideration by the Audit Office, their Audit and Risk Committee members, and when relevant, The Treasury.

The State addressed the following key accounting matters during 2016-17. 

The State recognised rail tunnels and earthworks valued at $8.5 billion.

Some rail tunnels and earthworks have never been valued by the State. These include the City Circle, the country rail network and other tunnels and earthworks built before the year 2000. Some of these tunnels and earthworks date back to the early 1900s.

For many years, the State did not account for these assets as they believed that their value could not be reliably measured. This year an independent valuer was engaged to perform a comprehensive valuation. The methodology used demonstrated
that the assets could have been reflected in the financial statements earlier.

The State recorded an additional $8.5 billion to correct the value of infrastructure assets at 1 July 2016.

Cabinet member’s compensation and related party transactions were reviewed.

Due to changes in Accounting Standards, the State had to consider 'related party information' in the financial statements. Previously this only applied to for-profit entities.

This year, requirements to report related party information extended to members of Cabinet, considered to be “key management personnel” of the State, as defined by Accounting Standards.

The Treasury implemented a process to assess and report Cabinet member’s compensation, and transactions between Cabinet members and/or their close family members, and government agencies.

Collectively, Cabinet members’ remuneration was $8.8 million, which was mainly salaries and allowances, and $3.5 million of non-monetary benefits such as security and drivers. The Treasury determined there were no other specific “related party” transactions or balances that required disclosure in the State’s financial statements.

Information system limitations continue at TAFE NSW.

TAFE NSW has experienced ongoing issues with its student administration system.

TAFE NSW has again implemented additional processes to verify the accuracy and completeness of revenue from sales of goods and services.

TAFE NSW expects to spend up to $89 million on a new information system to address these issues. Modules of the new student enrolment system are expected to be in place for the 2018 enrolment period.

Restatements relating to the General Government Sector's investment in the commercial sector.

The State corrected two previously reported balances relating to the General Government Sector’s investment in the commercial sector.

Accounting Standards require the General Government Sector to effectively store gains or losses related to its investment in the commercial sector in reserves until the investment is derecognised.

When these investments are disposed of, the cumulative gains and losses must be cleared and recognised in the operating result. However, the Government had previously cleared the cumulative gains and losses directly to Accumulated Funds within equity.

To comply with Accounting Standards, a total of $6 billion previously reported as a movement in equity  at 30 June 2016, has now been corrected to the operating result.

In addition, Accounting Standards only allow gains or losses on its investments to be stored in reserves. In past years, the State recognised all changes in the value of its investment in Available for Sale Reserves, including the capital contributed to establish the State’s investment. In 2016-17, a total of $23.4 billion of contributed capital was corrected to accumulated funds at 1 July 2015.

The State’s budget result was a $5.7 billion surplus, $2.0 billion higher than the budget estimate.

The Total State Sector comprises 310 entities controlled by the NSW Government.

Of the total, the General Government Sector comprises 215 entities that provide goods and services not directly paid for by consumers.

The non-General Government Sector comprises 95 Government businesses that provide goods and services such as water and electricity, or financial services.

A principal measure of a Government’s overall performance is its Net Operating Balance, or Budget Result. The Net Operating Balance reports the difference between the cost of General Government service delivery and the revenue earned to fund these sectors.

The State has recorded budget surpluses and exceeded the original budget result in nine of the last ten years.

The State maintained its AAA credit rating.

The object of the Act is to maintain the AAA credit rating.

NSW’s finances are managed in alignment with the Fiscal Responsibility Act 2012 (the Act).

The Act established the framework for fiscal responsibility and strategy needed to protect the State’s AAA credit rating and service delivery to the people of NSW.

The purpose of maintaining the AAA credit rating is to reduce the cost of, and ensure the broadest access to, borrowings.

A triple-A credit rating also helps maintain business and consumer confidence so economic activity and employment are sustained. The legislation sets out targets and principles for financial management to achieve this.

New South Wales has credit ratings of AAA/Negative from Standard & Poor’s and Aaa/Stable from Moody’s Investors Service.

The fiscal targets for achieving this objective are:

General Government expenditure growth is lower than long term revenue growth.

General Government expenditure growth was 4.2 per cent in 2016-17, below the long-term revenue growth of 5.6 per cent.

Eliminating unfunded superannuation liabilities by 2030.

The Act sets a target of eliminating unfunded defined benefit superannuation liabilities by 2030. The State’s net superannuation liability was $58.6 billion at 30 June 2017 ($71.2 billion at 30 June 2016).

The Government predicts the 2030 target will be achieved. The State’s funding plan is to contribute amounts escalated by five per cent each year so the schemes will be fully funded by 2030. In 2016-17, the State made employer contributions of $1.5 billion, which is largely consistent with contributions over the past five years.

The liability values in the graph below do not reflect the values recorded in the Total State Sector Accounts. For financial reporting purposes, Accounting Standards (AASB 119 Employee Benefits) require the State to discount its superannuation liability using the government bond rate (refer to page 10 of this report). 

The relevant government bond rate in the current economic climate is 2.62 per cent.

The State’s target for the unfunded superannuation liability is measured using AASB 1056 Superannuation Entities. This is because it adopts a measurement basis that reflects expected earnings on fund assets, which are currently between 5.9 and 7.4 per cent. Using these rates, the liability is $15.0 billion at 30 June 2017 ($16.1 billion at 30 June 2016). The unfunded liability is $2.4 billion less than when the Act was introduced.

The State’s assets grew by $31.6 billion during 2016-17 to $409 billion.

Valuing the State’s physical assets.

When we audit the financial statements, we focus on areas we consider as higher risk. These areas are often complex, and require the use of estimates and judgements.

The State has $307.2 billion of physical assets measured at fair value in accordance with Australian Accounting Standards. Fair value calculations are inherently complex and sensitive to assumptions and estimates, increasing the risk these assets are incorrectly valued.

In our audits, we assess the reasonableness and appropriateness of assumptions used in valuing physical assets. This includes obtaining an understanding of the valuation methodologies applied and judgements made. We also review the completeness of asset registers, and the mathematical accuracy of valuation models.

Net movements between years includes additions, disposals, depreciation and valuations. This year, valuations of physical assets added $16.2 billion to the State’s assets, comprising: 

• Transport for NSW and Railcorp $8.5 billion

• New South Wales Land and Housing Corporation $4.8 billion

• Roads and Maritime Services $930 million

• Crown Entity $400 million.    

The State’s financial assets increased $27.5 billion in 2016-17

The State’s financial assets have increased by 88 per cent over the past four years. In 2016-17, financial assets increased primarily due to proceeds from the sale of government assets and businesses.

The Government implemented reforms to better use the State’s financial assets. A key element was the creation of an Asset and Liability Committee (ALCO) to provide advice on ways to improve balance sheet management.

Since the creation of the ALCO, reforms include:

• Establishment of the New South Wales Infrastructure Future Fund (NIFF). The net proceeds from the State’s asset recycling program are invested into the NIFF, which is managed by TCorp, with a balance of $14.6 billion by 30 June 2017. Funds raised are invested through the NIFF until the Government requires them for critical infrastructure projects that are part of the Restart NSW and Rebuilding NSW program of works. ALCO and TCorp provide advice on the NIFF’s performance and management

• Establishment of the Social and Affordable Housing Fund ($1.1 billion at 30 June 2017). ALCO oversees the Fund to ensure an appropriate investment approach that will maintain funding certainty for new social and affordable housing stock

• Cash and liquidity management reforms to centralise cash previously held by agencies in the Treasury Banking System. This reform is designed to ensure agencies have adequate levels of liquidity but with surplus funds invested centrally for better returns.

The State’s liabilities decreased by $13.1 billion during 2016-17 to $182 billion.

Valuing the State’s liabilities relies on an actuarial assessment.

Nearly half of the State’s liabilities relate to its employees. This includes unfunded superannuation, and employee benefits, such as long service and recreation leave.

Valuation of these obligations is subject to complex estimation techniques and significant judgements. Small changes in assumptions can materially impact the financial statements.

We address the risk associated with auditing these balances:

• using actuarial specialists

• testing controls around underlying employee data used in data models, and testing the accuracy of the calculations

• evaluating assumptions applied in calculating employee entitlements such as the discount rate and the probability of long service leave vesting conditions being met.

The State’s superannuation obligations reduced by $12.6 billion in 2016-17.

The State’s $58.6 billion superannuation liability represents obligations for past and present employees, less the value of assets set aside to meet those obligations. The superannuation liability decreased from $71.2 billion to $58.6 billion, largely due to an increase in the discount rate from 1.99 per cent to 2.62 per cent. This alone reduced the liability by $9.2 billion

The State’s borrowings totalled $70.6 billion at 30 June 2017.

The State’s borrowings totalled $70.6 billion at 30 June 2017, $9.5 billion less than the previous year. This was largely due to the repayment of borrowings when the assets of Ausgrid and Endeavour Energy were leased to the private sector.

TCorp issues bonds to raise funds for NSW Government agencies. The bonds are actively traded in financial markets providing price transparency and liquidity to public sector borrowers and institutional investors. All TCorp bonds are guaranteed by the NSW Government.

The Government manages its debt liabilities through its balance sheet management strategy. The strategy extends to TCorp, which applies an active risk management strategy to the Government’s debt portfolio.

General Government Sector debt is being restructured by replacing shorter-term debt with longer-term debt. This lengthens the portfolio to better match liabilities with the funding requirements of infrastructure assets and reduces refinancing risks. It also allows the Government to take advantage of the low interest rate environment.

The State recorded revenue of $83.5 billion in  2016-17, an increase of $5.3 billion from 2015-16.

The State’s results are underpinned by revenue growth in taxation, fees and fines.

Taxation, fees, fines and other revenue comprises $30.5 billion of taxation ($28.7 billion in 2015-16) and $5.3 billion of fees, fines and other revenue ($4.6 billion).

Tax revenue for the Total State Sector increased by $1.8 billion, or 6.4 per cent compared to 2015-16, primarily due to:

• one-off business asset sales and lease transactions, including $718 million in transfer duty from the Ausgrid and Endeavour Energy lease transactions

• $385 million increase in payroll tax from growth in NSW employment and average employee compensation

• a $426 million increase in land taxes.

Growth in stamp duty is expected to slow over the next 4 years.

General Government Sector stamp duties have increased from $6.2 billion in 2012-13 to $11.5 billion in 2016-17, an annual average growth rate of 16.5 per cent. The Government’s budget forecasts the growth in stamp duties to decline, to an average annual growth rate of 2.6 per cent between 2016-17 and 2020-21.

The State received Commonwealth grants and subsidies of $30.8 billion in 2016-17.

The State received $30.8 billion from the Commonwealth Government in 2016-17, $1.6 billion more than in 2015-16. This was primarily due to transaction based asset recycling grants of $1.0 billion and a $720 million increase in national land transport grants. This increase was offset by a $435 million decrease in General Purpose Grants, which mainly comprises New South Wales’ share of the Goods and Services Tax (GST). 

The State spent $79.4 billion in 2016-17 to deliver services to the community, an increase of $3.9 billion from 2015-16.

Overall expenses increased 5.2 per cent from last year. Most of the increase was due to higher employee costs and operating costs.

Total salaries and wages increased by 4.2 per cent from 2015-16.

Total salaries and wages increased to $30 billion from $28.8 billion in 2015-16. The Government wages policy aims to limit the growth in remuneration and other employee costs to no more than 2.5 per cent per annum.

Operating expenses increased by 12.4 per cent from 2015-16.

Within operating expenses, payments for supplies, services and other expenses increased, in part, due to the State:

• reacquiring mining licenses worth $482 million and additional land remediation costs of $101 million

• spending more on health including additional drug supplies relating to Hepatitis C.

State spend on transport and communications increased by 68.1 per cent since 2012-13.

While spending on health and education remain the largest functional areas provided by Government, expenditure on transport and communication increased, on average, by 13.9 per cent annually between 2012-13 and 2016-17. This increase reflects the Government’s investment in transport infrastructure such as the Sydney Metro and Westconnex. Over the same period, spending on health increased by $3.9 billion.

Expenditure on fuel and energy has decreased by an average of 44.7 per cent since 2012-13, reflecting the State’s leases of electricity network assets.

In 2011, the Government established Restart NSW to fund high priority infrastructure projects.

Restart NSW projects are primarily funded from the proceeds from the asset recycling program enabling Government to deliver new infrastructure investment.

Restart NSW provides funding for the delivery of Rebuilding NSW, which is the Government’s 10-year plan to invest $20 billion in new infrastructure.

The State finalised long-term leases of Ausgrid and Endeavour Energy assets.

In June 2017, the Government finalised its long-term lease of 50.4 per cent of Endeavour Energy. This transaction follows on from the long-term leases of TransGrid in December 2015 and 50.4 per cent of Ausgrid in December 2016. Net proceeds of $15.0 billion were paid into Restart NSW relating to these transactions.

The Government also finalised an arrangement for the private sector to provide land titling and registry services to the public for 35 years. The State, through Restart NSW, received an upfront payment of $2.6 billion from the new operator.

Restart NSW is funding $29.8 billion of new infrastructure.

The Government has detailed its plan to invest $20 billion into the Rebuilding NSW plan from Restart NSW.

At 30 June 2017, around $2.9 billion has already been spent on Rebuilding NSW projects from Restart NSW, with a further $9 billion included in the budget aggregates. The Government has also earmarked a further $8.1 billion in Restart NSW for future projects.

The most significant project is the Sydney Metro. The Government has committed $7.0 billion from Restart NSW to build a 30-kilometre metro line, linking Sydney Metro Northwest at Chatswood, through new stations in the lower North Shore, the Sydney CBD and southwest to Bankstown. At 30 June 2017, $2.4 billion has been spent on this project from Restart NSW.

Other significant projects funded by Restart NSW include a $1.8 billion contribution to WestConnex and reserved funding of $1 billion towards the State’s Major Stadia Network program.

The Treasury initiated the Financial Management Transformation (FMT) program with the aim of changing and improving financial governance, budgeting and reporting arrangements of the New South Wales public sector.

FMT aims to deliver better outcomes for the people of New South Wales and focuses on transparency and accountability for expenditure, and better value for money.

New Financial Management System

PRIME is the Information Technology (IT) solution component of the FMT program, replacing several historical systems. PRIME will provide both financial and performance information within one IT platform for all agencies in the NSW public sector.

It is expected to give Government more timely information to plan and deliver its policy priorities and the budget.

Independent assurance over the budget process would improve confidence in the reliability of the State’s financial information.

Appendix one - Prescribed entities

Appendix two - Legal opinions