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19 December 2018

Published

Education 2018

Education

Asset valuation

Financial reporting

Information technology

Infrastructure

Service delivery

Shared services and collaboration

Workforce and capability

The Auditor-General for New South Wales, Margaret Crawford, released her report today on the results of the financial audits of agencies in the Education cluster. The report focuses on key observations and findings from the most recent financial audits of these agencies. 'I am pleased to report that unqualified audit opinions were issued on the financial statements of both agencies in the Education cluster', the Auditor-General said. Statements were submitted and audited within statutory deadlines.

This report analyses the results of our audits of financial statements of the Education cluster for the year ended 30 June 2018. The table below summarises our key observations.

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

financial reporting
audit observations
service delivery.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Education cluster for 2017–18.

Observation	Conclusions and recommendations
2.1 Quality of financial reporting
Unqualified audit opinions were issued on the financial statements of both cluster agencies.	Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement.
2.2 Timeliness of financial reporting
Both cluster agencies met the statutory deadlines for completing early close procedures and submitting financial statements.	Early close procedures continue to facilitate the timely preparation of cluster agencies’ financial statements and completion of audits, but scope exists to improve outcomes by resolving issues and supplying supporting documentation earlier.
2.3 Key issues from financial audits
Inconsistencies in the Department’s annual leave and long service leave data, identified over the past three audits, remain unresolved. This issue impacts the Department’s liability estimates for annual leave and long service leave, including associated on-costs. It also on-flows to the Crown Entity, which assumes the Department's liability for long service leave.	Recommendation: The Department should confirm leave data and review assumptions following deployment of the new HR/Payroll system to better estimate the liability for employee benefits and the amount to be assumed by the Crown Entity.
2.4 Key financial information
Cluster agencies recorded net deficits in 2017–18.	The Department recorded a net deficit of $30.7 million in 2017–18 against a budgeted surplus of $122 million. The NSW Education Standards Authority recorded a net deficit of $4.1 million against a budgeted deficit of $4.7 million.

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

This chapter outlines our observations and insights from:

our financial statement audits of agencies in the Education cluster for 2018
the areas of focus identified in the Audit Office work program.

The Audit Office Annual Work Program provides a summary of all audits to be conducted within the proposed time period as well as detailed information on the areas of focus for each of the NSW Government clusters.

Observation	Conclusions and recommendations
3.1 Internal controls
Twenty internal control deficiencies were identified during our audits of cluster agencies. We assessed one as a high risk finding.
Eight internal control weaknesses were repeat issues from previous financial audits that had not been fully addressed by management.	Recommendation: Management should prioritise and action recommendations to address internal control weaknesses.
3.2 Information technology
Delivery of the Learning Management and Business Reform (LMBR) program is complete.	The LMBR program has been a major project for the Department since it was established in 2006. A staged approach was adopted for implementing the Department’s new HR/Payroll system to manage the risks associated with this large-scale roll-out.
3.3 Valuation of the Department’s land and buildings
The Department completed a revaluation of land and building assets during 2017–18.	A market approach was used to revalue the Department’s land, resulting in a revaluation increment of $2.3 billion. A current replacement cost approach was used to revalue the Department’s school buildings, resulting in an increment of $6.2 billion.
3.4 Maintenance of school facilities
The Department regularly assesses the condition of school buildings and uses Life Cycle Costing to predict maintenance and capital renewal, and to prioritise maintenance activities.	The Life Cycle Costing assessment conducted by the Department in 2017–18 rated 70 per cent of school buildings as being in either as new or good condition. No school buildings were rated as being in end-of-life condition.
3.4 School asset delivery
The Department’s School Assets Strategic Plan is designed to ensure that there are sufficient fit-for-purpose places for students up to 2031.	The Department created a new division, School Infrastructure NSW, to oversee the planning, supply and maintenance of schools and implement major school infrastructure projects.

This chapter provides service delivery outcomes for the Education cluster for 2017–18. It provides important contextual information about the cluster's operation, but the data on achievement of these outcomes is not audited. The Audit Office does not have a specific mandate to audit performance information.

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three - Cluster agencies

Appendix four - Financial data

12 December 2018

Published

Newcastle Urban Transformation and Transport Program

Transport

Planning

Compliance

Infrastructure

Management and administration

Procurement

Project management

The urban renewal projects on former railway land in the Newcastle city centre are well targeted to support the objectives of the Newcastle Urban Transformation and Transport Program (the Program), according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. The planned uses of the former railway land achieve a balance between the economic and social objectives of the Program at a reasonable cost to the government. However, the evidence that the cost of the light rail will be justified by its contribution to the Program is not convincing.

The Newcastle Urban Transformation and Transport Program (the Program) is an urban renewal and transport program in the Newcastle city centre. The Hunter and Central Coast Development Corporation (HCCDC) has led the Program since 2017. UrbanGrowth NSW led the Program from 2014 until 2017. Transport for NSW has been responsible for delivering the transport parts of the Program since the Program commenced. All references to HCCDC in this report relate to both HCCDC and its predecessor, the Hunter Development Corporation. All references to UrbanGrowth NSW in this report relate only to its Newcastle office from 2014 to 2017.

This audit had two objectives:

To assess the economy of the approach chosen to achieve the objectives of the Program.
To assess the effectiveness of the consultation and oversight of the Program.

We addressed the audit objectives by answering the following questions:

a) Was the decision to build light rail an economical option for achieving Program objectives?
b) Has the best value been obtained for the use of the former railway land?
c) Was good practice used in consultation on key Program decisions?
d) Did governance arrangements support delivery of the program?

Conclusion
1. The urban renewal projects on the former railway land are well targeted to support the objectives of the Program. However, there is insufficient evidence that the cost of the light rail will be justified by its contribution to Program objectives.

The planned uses of the former railway land achieve a balance between the economic and social objectives of the Program at a reasonable cost to the Government. HCCDC, and previously UrbanGrowth NSW, identified and considered options for land use that would best meet Program objectives. Required probity processes were followed for developments that involved financial transactions. Our audit did not assess the achievement of these objectives because none of the projects have been completed yet.

Analysis presented in the Program business case and other planning documents showed that the light rail would have small transport benefits and was expected to make a modest contribution to broader Program objectives. Analysis in the Program business case argued that despite this, the light rail was justified because it would attract investment and promote economic development around the route. The Program business case referred to several international examples to support this argument, but did not make a convincing case that these examples were comparable to the proposed light rail in Newcastle.

The audited agencies argue that the contribution of light rail cannot be assessed separately because it is a part of a broader Program. The cost of the light rail makes up around 53 per cent of the total Program funding. Given the cost of the light rail, agencies need to be able to demonstrate that this investment provides value for money by making a measurable contribution to the Program objectives.

2. Consultation and oversight were mostly effective during the implementation stages of the Program. There were weaknesses in both areas in the planning stages.

Consultations about the urban renewal activities from around 2015 onward followed good practice standards. These consultations were based on an internationally accepted framework and met their stated objectives. Community consultations on the decision to close the train line were held in 2006 and 2009. However, the final decision in 2012 was made without a specific community consultation. There was no community consultation on the decision to build a light rail.

The governance arrangements that were in place during the planning stages of the Program did not provide effective oversight. This meant there was not a single agreed set of Program objectives until 2016 and roles and responsibilities for the Program were not clear. Leadership and oversight improved during the implementation phase of the Program. Roles and responsibilities were clarified and a multi-agency steering committee was established to resolve issues that needed multi-agency coordination.

The light rail is not justified by conventional cost-benefit analysis and there is insufficient evidence that the indirect contribution of light rail to achieving the economic development objectives of the Program will justify the cost.

Analysis presented in Program business cases and other planning documents showed that the light rail would have small transport benefits and was expected to make a modest contribution to broader Program objectives. Analysis in the Program business case argued that despite this, the light rail was justified because it would attract investment and promote economic development around the route. The Program business case referred to several international examples to support this argument, but did not make a convincing case that these examples were comparable to the proposed light rail in Newcastle.

The business case analysis of the benefits and costs of light rail was prepared after the decision to build light rail had been made and announced. Our previous reports, and recent reports by others, have emphasised the importance of completing thorough analysis before announcing infrastructure projects. Some advice provided after the initial light rail decision was announced was overly optimistic. It included benefits that cannot reasonably be attributed to light rail and underestimated the scope and cost of the project.

The audited agencies argue that the contribution of light rail cannot be assessed separately because it is part of a broader Program. The cost of the light rail makes up around 53 per cent of the total Program funding. Given the high cost of the light rail, we believe agencies need to be able to demonstrate that this investment provides value for money by making a measurable contribution to the Program objectives.

Recommendations
For future infrastructure programs, NSW Government agencies should support economical decision-making on infrastructure projects by:

providing balanced advice to decision makers on the benefits and risks of large infrastructure investments at all stages of the decision-making process
providing scope and cost estimates that are as accurate and complete as possible when initial funding decisions are being made
making business cases available to the public.

The planned uses of the former railway land achieve a balance between the economic and social objectives of the Program at a reasonable cost to the government.

The planned uses of the former railway land align with the objectives of encouraging people to visit and live in the city centre, creating attractive public spaces, and supporting growth in employment in the city. The transport benefits of the activities are less clear, because the light rail is the major transport project and this will not make significant improvements to transport in Newcastle.

The processes used for selling and leasing parts of the former railway land followed industry standards. Options for the former railway land were identified and assessed systematically. Competitive processes were used for most transactions and the required assessment and approval processes were followed. The sale of land to the University of Newcastle did not use a competitive process, but required processes for direct negotiations were followed.

Recommendation
By March 2019, the Hunter and Central Coast Development Corporation should:

work with relevant stakeholders to explore options for increasing the focus on the heritage objective of the Program in projects on the former railway land. This could include projects that recognise the cultural and industrial heritage of Newcastle.

Consultations about the urban renewal activities followed good practice standards, but consultation on transport decisions for the Program did not.

Consultations focusing on urban renewal options for the Program included a range of stakeholders and provided opportunities for input into decisions about the use of the former railway land. These consultations received mostly positive feedback from participants. Changes and additions were made to the objectives of the Program and specific projects in response to feedback received.

There had been several decades of debate about the potential closure of the train line, including community consultations in 2006 and 2009. However, the final decision to close the train line was made and announced in 2012 without a specific community consultation. HCCDC states that consultation with industry and business representatives constitutes community consultation because industry representatives are also members of the community. This does not meet good practice standards because it is not a representative sample of the community.

There was no community consultation on the decision to build a light rail. There were subsequent opportunities for members of the community to comment on the implementation options, but the decision to build it had already been made. A community and industry consultation was held on which route the light rail should use, but the results of this were not made public.

Recommendation
For future infrastructure programs, NSW Government agencies should consult with a wide range of stakeholders before major decisions are made and announced, and report publicly on the results and outcomes of consultations.

The governance arrangements that were in place during the planning stages of the Program did not provide effective oversight. Project leadership and oversight improved during the implementation phase of the Program.

Multi-agency coordination and oversight were ineffective during the planning stages of the Program. Examples include: multiple versions of Program objectives being in circulation; unclear reporting lines for project management groups; and poor role definition for the initial advisory board. Program ownership was clarified in mid-2016 with the appointment of a new Program Director with clear accountability for the delivery of the Program. This was supported by the creation of a multi-agency steering committee that was more effective than previous oversight bodies.

The limitations that existed in multi-agency coordination and oversight had some negative consequences in important aspects of project management for the Program. This included whole-of-government benefits management and the coordination of work to mitigate impacts of the Program on small businesses.

Recommendations
For future infrastructure programs, NSW Government agencies should:

develop and implement a benefits management approach from the beginning of a program to ensure responsibility for defining benefits and measuring their achievement is clear
establish whole-of-government oversight early in the program to guide major decisions. This should include:
- agreeing on objectives and ensuring all agencies understand these
- clearly defining roles and responsibilities for all agencies
- establishing whole-of-government coordination for the assessment and mitigation of the impact of major construction projects on businesses and the community.

By March 2019, the Hunter and Central Coast Development Corporation should update and implement the Program Benefits Realisation Plan. This should include:

setting measurable targets for the desired benefits
clearly allocating ownership for achieving the desired benefits
monitoring progress toward achieving the desired benefits and reporting publicly on the results.

Appendix one - Response from agencies

Appendix two - About the audit

Appendix three - Performance auditing

Parliamentary reference - Report number #310 - released 12 December 2018

28 November 2018

Published

Transport 2018

Transport

Asset valuation

Compliance

Financial reporting

Infrastructure

Management and administration

Procurement

Risk

Service delivery

Workforce and capability

The Auditor-General for New South Wales, Margaret Crawford released her report today on key observations and findings from the 30 June 2018 financial statement audits of agencies in the Transport cluster. Unqualified audit opinions were issued for all agencies' financial statements. However, assessing the fair value of the broad range of transport related assets creates challenges.

This report analyses the results of our audits of financial statements of the Transport cluster for the year ended 30 June 2018. The table below summarises our key observations.

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

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Transport cluster for 2018.

Observation	Conclusions and recommendations
2.1 Quality of financial reporting
Unqualified audit opinions were issued for all agencies' financial statements	Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement.
2.2 Key accounting issues
Valuation of assets continues to create challenges. Although agencies complied with the requirements of the accounting standards and Treasury policies on valuations, we identified some opportunities for improvements at RMS.	RMS incorporated data from its asset condition assessments for the first time in the valuation methodology which improved the valuation outcome. Overall, we were satisfied with the valuation methodology and key assumptions, but we noted some deficiencies in the asset data in relation to asset component unit rates and old condition data for some components of assets. Also, a bypass and tunnel were incorrectly excluded from RMS records and valuation process since 2013. This resulted in an increase for these assets’ value by $133 million. The valuation inputs for Wetlands and Moorings were revised this year to better reflect the assets' characteristics resulting in a $98.0 million increase.
2.3 Timeliness of financial reporting
Residual Transport Corporation did not submit its financial statements by the statutory reporting deadline.	Residual Transport Corporation remained a dormant entity with no transactions for the year ended 30 June 2018.
With the exception of Residual Transport Corporation, all agencies completed early close procedures and submitted financial statements within statutory timeframes.	Early close procedures allow financial reporting issues and risks to be addressed early in the reporting and audit process.
2.4 Financial sustainability
NSW Trains and the Chief Investigator of the Office of Transport Safety Investigations reported negative net assets of $75.7 million and $89,000 respectively at 30 June 2018.	NSW Trains and the Chief Investigator of the Office of Transport Safety Investigations continue to require letters of financial support to confirm their ability to pay liabilities as they fall due.
2.5 Passenger revenue and patronage
Transport agencies revenue growth increased at a higher rate than patronage.	Public transport passenger revenue increased by $114 million (8.3 per cent) in 2017–18, and patronage increased by 37.1 million (5.1 per cent) across all modes of transport based on data provided by TfNSW.
Negative balance Opal Cards resulted in $3.8 million in revenue not collected in 2017–18 and $7.8 million since the introduction of Opal. A total of 1.1 million Opal cards issued since its introduction have negative balances.	Transport for NSW advised it is liaising with the ticketing vendor to implement system changes and are investigating other ways to reduce the occurrences.
2.6 Cost recovery from public transport users
Overall cost recovery from users has decreased.	Overall cost recovery from public transport users (on rail and bus services by STA) decreased from 23.2 per cent to 22.4 per cent between 2016–17 and 2017–18. The main reason for the decrease is due to expenditure increasing at a faster rate than revenue in 2017–18.

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 Transport cluster for 2018
the areas of focus identified in the Audit Office annual work program.

Observation	Conclusions and recommendations
3.1 Internal controls
There was an increase in findings on internal controls across the Transport cluster.	Key themes related to information technology, employee leave entitlements and asset management. Eighteen per cent of all issues were repeat issues.
3.2 Audit Office Annual work program
The Transport cluster wrote-off over $200 million of assets which were replaced by new assets or technology.	Majority of this write-off was recognised by RMS, with $199 million relating to the write-off of existing assets which have been replaced during the year.
RailCorp is expected to convert to TAHE from 1 July 2019.	Several working groups are considering different aspects of the TAHE transition including its status as a for-profit Public Trading Enterprise and which assets to transfer to TAHE. We will continue to monitor developments on TAHE for any impact to the financial statements.
RMS' estimated maintenance backlog at 30 June 2018 of $3.4 billion is lower than last year. Sydney Trains' estimated maintenance backlog at 30 June 2018 increased by 20.6 per cent to $434 million. TfNSW does not quantify its backlog maintenance.	TfNSW advised it is liaising with Infrastructure NSW to develop a consistent definition of maintenance backlog across all transport service providers.
Not all agencies monitor unplanned maintenance across the Transport cluster.	Unplanned maintenance can be more expensive than planned maintenance. TfNSW should develop a consistent approach to define, monitor and track unplanned maintenance across the cluster.

This chapter outlines certain service delivery outcomes for 2017–18. The data on activity levels and performance is provided by Cluster agencies. The Audit Office does not have a specific mandate to audit performance information. Accordingly, the information in this chapter is unaudited.

We report this information on service delivery to provide additional context to understand the operations of the Transport cluster and to collate and present service information for different modes of transport in one report.

In our recent performance audit, Progress and measurement of Premier's Priorities, we identified 12 limitations of performance measurement and performance data. We recommended that the Department of Premier and Cabinet ensure that processes to check and verify data are in place for all agency data sources.

Appendix one - Status of 2016 and 2017 recommendations

Appendix two - Cluster agencies

Appendix three - Financial data

Appendix four - Bus contracts regions

30 October 2018

Published

Internal Controls and Governance 2018

Education

Community Services

Finance

Health

Industry

Justice

Planning

Premier and Cabinet

Transport

Treasury

Whole of Government

Environment

Compliance

Cyber security

Financial reporting

Fraud

Information technology

Internal controls and governance

Management and administration

Procurement

Project management

The Auditor-General for New South Wales Margaret Crawford found that as NSW state government agencies’ digital footprint increases they need to do more to address new and emerging information technology (IT) risks. This is one of the key findings to emerge from the second stand-alone report on internal controls and governance of the 40 largest NSW state government agencies.

This report analyses the internal controls and governance of the 40 largest agencies in the NSW public sector for the year ended 30 June 2018.

This report covers the findings and recommendations from our 2017–18 financial audits that relate to internal controls and governance at the 40 largest agencies (refer to Appendix three) in the NSW public sector.

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

This is our second 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. The way agencies deliver services increasingly relies on contracts and partnerships with the private sector. Many of these arrangements deliver front line services, but others provide less visible back office support. For example, an agency may rely on an IT service provider to manage a key system used to provide services to the community. The contract and service level agreements are only truly effective where they are actively managed to reduce risks to continuous quality service delivery, such as interruptions caused by system outages, cyber security attacks and data security breaches.

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 report divides these into the following five areas:

Internal control trends
Information technology (IT), including IT vendor management
Transparency and performance reporting
Management of purchasing cards and taxis
Fraud and corruption control.

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 2018 cluster financial audit reports, which will be tabled in Parliament from November to December 2018.

The focus of the report has changed since last year

Last year's report topics included asset management, ethics and conduct, and risk management. We are reporting on new topics this year. We plan to introduce new topics and re-visit our previous topics in subsequent reports on a cyclical basis. This will provide a baseline against which to measure the NSW public sectors’ progress in implementing appropriate internal controls and governance processes to mitigate existing, new and emerging risks in the public sector.

Agencies selected for the volume account for 95 per cent of the state's expenditure

While we have covered only 40 agencies in this report, those selected are a large enough group to identify common issues and insights. They represent about 95 per cent of total expenditure for all NSW public sector agencies.

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 findings, level of risk and the most common deficiencies we found across agencies. The rest of this volume presents this year’s controls and governance findings in more detail.

Observation	Conclusions and recommendations
2.1 High risk findings
We found six high risk findings (seven in 2016–17), one of which was repeated from both last year and 2015–16.	Recommendation: Agencies should reduce risk by addressing high risk internal control deficiencies as a priority.
2.2 Common findings
We found several internal controls and governance findings common to multiple agencies.	Conclusion: Central agencies or the lead agency in a cluster can play a lead role in helping ensure agency responses to common findings are consistent, timely, efficient and effective.
2.3 New and repeat findings
Although internal control deficiencies decreased over the last four years, this year has seen a 42 per cent increase in internal control deficiencies.	The increase in new IT control deficiencies and repeat IT control deficiencies signifies an emerging risk for agencies.
IT control deficiencies feature in this increase, having risen by 63 per cent since last year. The number of repeat IT control deficiencies has doubled and is driven by the increasing digital footprint left by agencies as government prioritises on-line interfaces with citizens, and the number of transactions conducted through digital channels increases	Recommendation: Agencies should reduce IT risks by: assigning ownership of recommendations to address IT control deficiencies, with timeframes and actions plans for implementation ensuring audit and risk committees and agency management regularly monitor the implementation status of recommendations.

Government agencies’ financial reporting is now heavily reliant on information technology (IT). IT is also increasingly important to the delivery of agency services. These systems often provide the data to help monitor the efficiency and effectiveness of agency processes and services they deliver. Our audits reviewed whether agencies have effective controls in place to manage both key financial systems and IT service contracts.

Observation	Conclusions and recommendations
3.1 Management of IT vendors
Contract management framework Although 87 per cent of agencies have a contract management policy to manage IT vendors, one fifth require review.	Conclusion: Agencies can more effectively manage IT vendor contracts by developing policies and procedures to ensure vendor management frameworks are kept up to date, plans are in place to manage vendor performance and risk, and compliance with the framework is monitored by: internal audit focusing on key contracting activities experienced officers who are independent of contract administration performing spot checks or peer reviews targeted analysis of data in contract registers.
Contract risk management Forty-one per cent of agencies are not using contract management plans and do not assess contract risks. Half of the agencies that did assess contract risks, had not updated the risk assessments since the commencement of the contract.	Conclusion: Instead of applying a 'set and forget' approach in relation to management of contract risks, agencies should assess risk regularly and develop a plan to actively manage identified risks throughout the contract lifecycle - from negotiation and commencement, to termination.
Performance management Eighty-six per cent of agencies meet with vendors to discuss performance. Only 24 per cent of agencies sought assurance about the accuracy of vendor reporting against KPIs, yet sixty-seven per cent of the IT contracts allow agencies to determine performance based payments and/or penalise underperformance.	Conclusion: Agencies are monitoring IT vendor performance, but could improve outcomes and more effectively manage under-performance by: a more active, rigorous approach to both risk and performance management checking the accuracy of vendor reporting against those KPIs and where appropriate seeking assurance over their accuracy invoking performance based payments clauses in contracts when performance falls below agreed standards.
Transitioning services Forty-three per cent of the IT vendor contracts did not contain transitioning-out provisions. Where IT vendor contracts do make provision for transitioning-out, only 28 per cent of agencies have developed a transitioning-out plan with their IT vendor.	Conclusion: Contract transition/phase out clauses and plans can mitigate risks to service disruption, ensure internal controls remain in place, avoid unnecessary costs and reduce the risk of 'vendor lock-in'.
Contract Registers Eleven out of forty agencies did not have a contract register, or have registers that are not accurate and/or complete.	Conclusion: A contract register helps to manage an agency’s compliance obligations under the Government Information (Public Access) Act 2009 (the GIPA Act). However, it also helps agencies more effectively manage IT vendors by: monitoring contract end dates and contract extensions, and commence new procurements through their central procurement teams in a timely manner managing their contractual commitments, budgeting and cash flow requirements. Recommendation: Agencies should ensure their contract registers are complete and accurate so they can more effectively govern contracts and manage compliance obligations.
3.2 IT general controls
Governance Ninety-five per cent of agencies have established policies to manage key IT processes and functions within the agency, with ten per cent of those due for review.	Conclusion: Regular review of IT policies ensures risks are considered and appropriate strategies and procedures are implemented to manage these risks on a consistent basis. An absence of policies can lead to ad-hoc responses to risks, and failure to consider emerging IT risks and changes to agency IT environments.
User access administration Seventy-two deficiencies were identified related to user access administration, including: thirty issues related to granting user access across 43 per cent of agencies sixteen issues related to removing user access across 30 per cent of agencies twenty-six issues related to periodic reviews of user access across 50 per cent of agencies.	Recommendation: Agencies should strengthen the administration of user access to prevent inappropriate access to key systems.
Privileged access Forty per cent of agencies do not periodically review logs of the activities of privileged users to identify suspicious or unauthorised activities.	Recommendation: Agencies should: review the number of, and access granted to privileged users, and assess and document the risks associated with their activities monitor user access to address risks from unauthorised activity.
Password controls Twenty-three per cent of agencies did not comply with their own policy on password parameters.	Recommendation: Agencies should ensure IT password settings comply with their password policies.
Program changes Fifteen per cent of agencies had deficient IT program change controls mainly related to segregation of duties and authorisation and testing of IT program changes prior to deployment.	Recommendation: Agencies should maintain appropriate segregation of duties in their IT functions and test system changes before they are deployed.

This chapter outlines our audit observations, conclusions and recommendations from our review of how agencies reported their performance in their 2016–17 annual reports. The Annual Reports (Statutory Bodies) Regulation 2015 and Annual Reports (Departments) Regulation 2015 (annual reports regulation) currently prescribes the minimum requirements for agency annual reports.

Observation

Conclusion or recommendation

4.1 Reporting on performance

Only 57 per cent of agencies linked reporting on performance to their strategic objectives.

The use of targets and reporting performance over time was limited and applied inconsistently.

Conclusion: There is significant disparity in the quality and consistency of how agencies report on their performance in their annual reports. This limits the reliability and transparency of reported performance information.

Agencies could improve performance reporting by clearly linking strategic objectives to reported outcomes, and reporting on performance against targets over time. NSW Treasury may need to provide more guidance to agencies to support consistent and high-quality performance reporting in annual reports.

There is no independent assurance that the performance metrics agencies report in their annual reports are accurate.

Prior performance audits have noted issues related to the collection of performance information. For example, our 2016 Report on Red Tape Reduction highlighted inaccuracies in how the dollar-value of red tape reduction had been reported.

Conclusion: The ability of Parliament and the public to rely on reported information as a relevant and accurate reflection of an agency's performance is limited.

The relevance and accuracy of performance information is enhanced when:

policies and guidance support the consistent and accurate collection of data
internal review processes and management oversight are effective
independent review processes are established to provide effective challenge to the assumptions, judgements and methodology used to collect the reported performance information.

4.2 Reporting on reports

Agency reporting on major projects does not meet the requirements of the annual reports regulation.

Forty-seven per cent of agencies did not report on costs to date and estimated completion dates for major works in progress. Of the 47 per cent of agencies that reported on major works, only one agency reported detail about significant cost overruns, delays, amendments, deferments or cancellations.

NSW Treasury produce an annual report checklist to help agencies comply with their annual report obligations.

Recommendation: Agencies should comply with the annual reports regulation and report on all mandatory fields, including significant cost overruns and delays, for their major works in progress.

The information the annual reports regulation requires agencies to report deals only with major works in progress. There is no requirement to report on completed works.

Sixteen of 30 agencies reported some information on completed major works.

Conclusion: Agencies could improve their transparency if they reported, or were required to report:

on both works in progress and projects completed during the year
actual costs and completion dates, and forecast completion dates for major works, against original and revised budgets and original expected completion dates
explanations for significant cost overruns, delays and key project performance metrics.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency preventative and detective controls over purchasing card and taxi use for 2017–18.

Observation	Conclusion or recommendation
5.1 Management of purchasing cards
Volume of credit card spend Purchasing card expenditure has increased by 76 per cent over the last four years in response to a government review into the cost savings possible from using purchasing cards for low value, high volume procurement.	Conclusion: The increasing use of purchasing cards highlights the importance of an effective framework for the use and management of purchasing cards.
Policy framework We found all agencies that held purchasing cards had a policy in place, but 26 per cent of agencies have not reviewed their purchasing card policy by the scheduled date, or do not have a scheduled revision date stated within their policy.	Recommendation: Agencies should mitigate the risks associated with increased purchasing card use by ensuring policies and purchasing card frameworks remain current and compliant with the core requirements of TPP 17–09 'Use and Management of NSW Government Purchasing Cards'.
Preventative controls We found that: all agencies maintained purchasing card registers seventy-six per cent provided training to cardholders prior to being issued with a card eighty-nine per cent appointed a program administrator, but only half of these had clearly defined roles and responsibilities thirty-two per cent of agencies place merchant blocks on purchasing cards forty-seven per cent of agencies place geographic restrictions on purchasing cards.	Agencies have designed and implemented preventative controls aimed at deterring the potential misuse of purchasing cards. Conclusion: Further opportunities exist for agencies to better control the use of purchasing cards, such as: updating purchasing card registers to contain all mandatory fields required by TPP17–09 appointing a program administrator for the agency's purchasing card framework and defining their role and responsibility for the function strengthening preventive controls to prevent misuse.
Detective controls Ninety-two per cent of agencies have designed and implemented at least one control to monitor purchasing card activity. Major reviews, such as data analytics (29 per cent of agencies) and independent spot checks (49 per cent of agencies) are not widely used.	Agencies have designed and implemented detective controls aimed at identifying potential misuse of purchasing cards. Conclusion: More effective monitoring using purchasing card data can provide better visibility over spending activity and can be used to: detect misuse and investigate exceptions analyse trends to highlight cost saving opportunities.
5.2 Management of taxis
Policy framework Thirteen per cent of agencies have not developed and implemented a policy to manage taxi use. In addition: a further 41 per cent of agencies have not reviewed their policies by the scheduled revision date, or do not have a scheduled revision date more than half of all agencies’ policies do not offer alternative travel options. For example, only 36 per cent of policies promoted the use of general Opal cards.	Conclusion: Agencies can promote savings and provide more options to staff where their taxi use policies: limit the circumstances where taxi use is appropriate offer alternate, lower cost options to using taxis, such as general Opal cards and rideshare.
Detective controls All agencies approve taxi expenditure by expense reimbursement, purchasing card and Cabcharge, and have implemented controls around this approval process. However, beyond this there is minimal monitoring and review activity, such as data monitoring, independent spot checks or internal audit reviews.	Conclusion: Taxi spend at agencies is not significant in terms of its dollar value, but it is significant from a probity perspective. Agencies can better address the probity risk by incorporating taxi use into a broader purchasing card or fraud monitoring program.

Fraud and corruption control is one of the 17 key elements of our governance lighthouse. Recent reports from ICAC into state agencies and local government councils highlight the need for effective fraud control and ethical frameworks. Effective frameworks can help protect an agency from events that risk serious reputational damage and financial loss.

Our 2016 Fraud Survey found the NSW Government agencies we surveyed reported 1,077 frauds over the three year period to 30 June 2015. For those frauds where an estimate of losses was made, the reported value exceeded $10.0 million. The report also highlighted that the full extent of fraud in the NSW public sector could be higher than reported because:

unreported frauds in organisations can be almost three times the number of reported frauds
our 2015 survey did not include all NSW public sector agencies, nor did it include any NSW universities or local councils
fraud committed by citizens such as fare evasion and fraudulent state tax self-assessments was not within the scope of our 2015 survey
agencies did not estimate a value for 599 of the 1,077 (56 per cent) reported frauds.

Commissioning and outsourcing of services to the private sector and the advancement of digital technology are changing the fraud and corruption risks agencies face. Fraud risk assessments should be updated regularly and in particular where there are changes in agency business models. NSW Treasury Circular TC18-02 NSW Fraud and Corruption Control Policy now requires agencies develop, implement and maintain a fraud and corruption control framework, effective from 1 July 2018.

Our Fraud Control Improvement Kit provides guidance and practical advice to help organisations implement an effective fraud control framework. The kit is divided into ten attributes. Three key attributes have been assessed below; prevention, detection and notification systems.

This chapter outlines our audit observations, conclusions and recommendations, arising from our review of agency fraud and corruption controls for 2017–18.

Observation	Conclusion or recommendation
6.1 Prevention systems
Prevention systems Ninety-two per cent of agencies have a fraud control plan in place, 81 per cent maintain a fraud database and 79 per cent report fraud and corruption matters as a standing item on audit and risk committee agendas. Only 54 per cent of agencies have an employment screening policy and all agencies have IT security policies, but gaps in IT security controls could undermine their policies.	Conclusion: Most agencies have implemented fraud prevention systems to reduce the risk of fraud. However poor IT security along with other gaps in agency prevention systems, such as employment screening practices heightens the risk of fraud and inappropriate use of data. Agencies can improve their fraud prevention systems by: completing regular fraud risk assessments, embedding fraud risk assessment into their enterprise risk management process and reporting the results of the assessment to the audit and risk committee maintaining a fraud database and reviewing it regularly for systemic issues and reporting a redacted version of the database on the agency's website to inform corruption prevention networks developing policies and procedures for employee screening and benchmarking their current processes against ICAC's publication ‘Strengthening Employment Screening Practices in the NSW Public Sector’ developing and maintaining up to date IT security policies and monitoring compliance with the policy.
Twenty-three per cent of agencies were not performing fraud risk assessments and some agency fraud risk assessments may not be as robust as they could be.	Conclusion: Agencies' systems of internal controls may be less effective where new and emerging fraud risks have been overlooked, or known weaknesses have not been rectified.
6.2 Detection systems
Detection systems Several agencies reported they were developing a data monitoring program, but only 38 per cent of agencies had already implemented a program.	Studies have shown data monitoring, whereby entire populations of transactional data are analysed for indicators of fraudulent activity, is one of the most effective methods of early detection. Early detection decreases the duration a fraud remains undetected thereby limiting the extent of losses. Conclusion: Data monitoring is an effective tool for early detection of fraud and is more effective when informed by a comprehensive fraud risk assessment.
6.3 Notification systems
Notification system All agencies have notification systems for reporting actual or suspected fraud and corruption. Most agencies provide multiple reporting lines, provide training and publicise options for staff to report actual or suspected fraud and corruption.	Conclusion: Training staff about their obligations and the use of fraud notification systems promotes a fraud-aware culture

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three - Cluster agencies

29 June 2018

Published

Performance audit insights: key findings from 2014-2018

Whole of Government

Compliance

Fraud

Information technology

Internal controls and governance

Procurement

Project management

A report released today by the Auditor-General for New South Wales, Margaret Crawford, presents key findings from four years of performance audits. The report findings are presented around six areas of government activity including planning for the future, meeting community expectations for key services, investment in infrastructure, managing natural resources, ensuring good governance and digital disruption.

In this report, we present common findings and lessons from the past four years of performance audits, and offer insights to the public sector on elements of effective performance. We have analysed the key findings and recommendations from 61 performance audits tabled in the NSW Parliament between July 2014 and June 2018, spanning varied areas of government activity. We will also use this report to help determine areas of unaddressed risk across all parts of government, and to shape our future audit priorities.

Governments play an important stewardship role. Their decisions need to consider intergenerational equity by ensuring that investment strategies are sustainable. Governments also need to consider the impact of their decisions on different parts of the community. We recognise that governments face challenges in delivering programs and services, targeting complex social issues with finite resources.

Governments are changing how they deliver services to respond to citizen needs and deliver greater value for money. In this section, we reflect on audits that looked at how government entities are planning their activities to meet the needs of the community into the future.

State and local government exist to provide services to citizens, and citizens are playing a greater role in defining what services they want or need. Expectations about consultation, ease of access, timeliness, and customisation of services are rising. Governments face challenges to continually improve the way they plan and deliver services to meet these expectations. Governments also need to provide quality services for a growing and ageing population whilst working within a constrained financial environment.

Over the past four years, our performance audits have assessed aspects of State and local government services, including education, health services, disability support, corrective services, and many others. In this section, we draw together common findings that government entities should reflect on when providing services to the community.

The NSW Government’s 2018–19 Budget forecasts an $87.2 billion infrastructure investment program over the next four years. Infrastructure investment of this size carries significant opportunities and risks. Competition for resources is high and maintaining the capability to manage and deliver projects effectively is challenging. Governments also need to plan effectively to ensure infrastructure built today will meet future needs.

Over the past four years, we have looked at some of the ways NSW Government agencies justify and prioritise projects for funding, work with contractors to deliver projects, and track and report on progress. In this section, we draw together common findings from our audits that government entities should consider when planning future infrastructure projects.

Governments face challenges in balancing the use of natural resources to meet diverse interests, while supporting a sustainable natural environment for the future. They need to supply communities with water, produce energy, protect natural habitats, and support farming, industry, and economic development.

Some of our recent audits have considered how government agencies are managing natural resources and protecting the environment for future generations. In this section, we have drawn together common findings across our audits that government entities should consider in managing the environment and natural resources.

A range of checks and balances is needed to support public confidence in government decision making. To maintain trust, government agencies should act transparently, and in accordance with relevant legislation and policy. This is particularly important as the public sector increasingly engages with external partners to deliver services and provide a more contestable environment.

Good governance arrangements should result in improved service delivery and more effective and efficient use of resources. Our audits have looked at many different elements of governance, including making sure the necessary processes and workplace cultures are in place to help government entities achieve their aims. In this section, we have drawn together various aspects of governance that government entities should consider.

The global increase in digital technology provides governments with opportunities to interact with citizens in more immediate and responsive ways than was previously possible. Data can be used in powerful ways such as predicting future demand for services, targeting interventions, responding to crises, and evaluating outcomes. Governments face challenges in doing this while maintaining secure digital environments that protect citizen interests, privacy, and autonomy.

Our audits have assessed some of the ways that government entities are incorporating digital change into their work. In this section, we draw together common themes that governments could consider in protecting their digital assets, or expanding their digital capabilities.

Appendix one – Performance audits 2014 to 2018

Appendix two – Performance auditing

Appendix three – About this report

14 December 2017

Published

Report on Education 2017

Education

Financial reporting

Internal controls and governance

Management and administration

Procurement

Project management

Workforce and capability

The Auditor-General, Margaret Crawford released her report on the results of the financial audits of agencies in the Education cluster. The report focuses on key observations and findings from the most recent audits of these agencies.

'I am pleased to report that unqualified audit opinions were issued on the financial statements for all agencies in the Education cluster', the Auditor-General said. 'The quality and timeliness of financial reporting remains strong'.

23 November 2017

Published

Agency compliance with NSW Government travel policies

Education

Community Services

Finance

Health

Industry

Justice

Local Government

Planning

Premier and Cabinet

Transport

Treasury

Universities

Whole of Government

Compliance

Internal controls and governance

Procurement

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.

Last year the NSW Government spent almost $250 million on travel. The government’s travel policies aim to help agencies make better travel decisions and reduce costs. The Department of Finance, Services and Innovation (DFSI) is responsible for the government’s travel policy and manages the government contract with an approved private sector provider to procure travel services.

This audit assessed how effective agency processes were to ensure compliance with:

the ‘Policy on Official Travel within Australia and Overseas’ issued by the Department of Premier and Cabinet in Circular OFS-2014–07 ‘Official Travel in Australia and Overseas’ (the former policy)
the ‘NSW Government Travel and Transport Policy’ issued by DFSI (the new policy), effective from 28 September 2016.

We examined 15 agencies from different NSW Government clusters with significant travel expenditure. For a list of participating agencies, refer to the Appendix two.

Conclusion

We found that overall, agencies materially complied with NSW Government travel policies. However, 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 government policy
did not adequately manage their travel records.

Self-assessments indicate agencies comply with most aspects of the new policy. Agencies also believe more guidance from DFSI about certain aspects of the policy would increase compliance.

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

6 July 2017

Published

Information and Communication Technologies in schools for teaching and learning

Education

Information technology

Infrastructure

Management and administration

Service delivery

Workforce and capability

Several factors are reducing effective use of information and communication technology (ICT) in the classroom.

These are primarily:

Information and communication technologies (ICT) are pervasive in modern life. Australian research has identified that the workforce demand for digital literacy and advanced digital skills is growing across most areas of work. There is broad agreement internationally and in Australian school systems that digital literacy is a core skill for the workforce and students will need to be confident with ICT. Education systems around the world are using ICT in classrooms to support learning and employment goals.

The New South Wales Department of Education’s (the Department’s) overall strategic directions for teaching and learning with ICT are set in the 'Strategic Information Technology Plan 2016–19'. The Department centrally provides a base level of resources to schools for ICT and schools supplement funding from their existing school budget and Parents and Citizens Associations. Each school decides how to allocate these funds to meet local needs. Schools also set expectations for how teachers and students will use technology to help deliver outcomes.

This audit assessed how well New South Wales public schools are using ICT to improve teaching and learning. It focussed on planning and teacher and student use of ICT. We examined whether:

the Department identifies key strategic opportunities to enhance the use of ICT platforms and technologies in schools
teachers are integrating ICT into classroom practice
the Department monitors the impact of ICT on student learning.

Conclusion

Several factors are reducing the effective use of ICT in the classroom. These are primarily:

ageing ICT equipment and inadequate wireless networks
variable student access to devices at school
variable teacher access to centrally provided devices to use outside of the classroom.

Many schools are struggling to keep up with growing ICT needs within available funding. The Department needs to review whether its current technology programs provide schools with sufficient resources and support to meet the Department’s strategic goals for 21st Century classrooms. The Department should also target additional support to schools to improve planning for ICT resources.

Most teachers are using ICT in the classroom, however, teacher access to devices outside the classroom varies between schools. In practice, teacher working days extend outside classroom hours. Teachers need access to devices for activities such as lesson preparation and student assessment. With limited access to devices outside of the classroom, teachers may not be able to effectively integrate ICT into lessons. Teachers also require further professional learning to support them to develop their skills in using ICT.

The Department is not sufficiently monitoring the digital literacy of New South Wales students, which has declined in national tests. Teachers could benefit from support to assess these skills at a school level. The Department also needs to investigate links between student use of ICT and learning outcomes, so they can better support teachers with evidence-based approaches to enhancing learning through ICT.

Old equipment and wireless networks are not keeping pace with modern demands

The Department’s vision for ICT is to enable ‘any learning opportunity, anywhere, anytime’. This vision is at risk due to an ageing stock of devices and wireless networks. The average age of devices in New South Wales schools is over four years. Older devices are less reliable, require greater maintenance and support, and cannot run demanding applications. Further, many school wireless networks are beyond the end of their useful life. This limits the number of teachers and students who can access online content on wireless networks at the same time.

The central funding model for ICT in schools is not meeting current needs

Funding for the Technology for Learning program to deliver ICT in schools has not increased since 2004, despite an increase in the number of students and emphasis placed on ICT in teaching and learning during this time. Schools supplement funding for ICT from their existing school budget and Parents and Citizens Associations.

The Department’s current funding model for ICT is not adequately addressing a growing gap in the provision of contemporary ICT in classrooms between schools able to access funding from other sources and those which cannot. The Department needs to review whether the Technology for Learning program is equitable in equipping all schools with the modern technology needed to achieve its vision.

Many teachers are not provided with devices for use outside of the classroom

School Principals we interviewed reported that technology is an essential part of a modern classroom and teacher access to devices outside of the classroom can impact how they use ICT. This is because, in practice, teacher working days extend outside classroom hours and teachers need access to devices for activities such as lesson preparation and student assessment. The Department provides teachers with access to a suite of software tools for these tasks.

The Commonwealth Government’s Digital Education Revolution program provided teachers of secondary school students with laptops from 2009 to 2013. The Department’s evaluation of the Digital Education Revolution program found that teachers reported greater confidence with, and use of, ICT throughout the program.
Providing desktop computers, laptops or tablets for teachers is now a school level decision and arrangements vary across schools. Each school must trade-off between allocating devices for students and teachers. Most other States and Territories provide all teachers with a laptop for use in and outside of the classroom or offer subsidised access to one.

There is limited teacher professional learning in the use of ICT

The Department’s research has identified that professional learning is an important factor in how effectively teachers use ICT to enhance teaching and learning. Despite this, the Department provides few courses on using ICT in the classroom directly, and most of these are offered in Sydney. This limits accessibility for teachers outside of the metropolitan area. Schools we visited reported that the costs of courses and providing relief teachers limits the number of external courses or events that teachers attend, especially for rural and regional schools. Increasing the use of online learning would improve access for teachers in these areas.

The Department is not adequately monitoring trends in professional learning in ICT or evaluating the overall effectiveness of courses. A recent upgrade to the professional learning system may provide the Department with better quality data to do this.

Greater monitoring and reporting on technology use in schools is required

The Local Schools, Local Decisions policy gives schools greater authority to make strategic decisions on the use of ICT appropriate to their local contexts. To support this, the Department needs to better monitor current trends, and identify emerging needs to determine future direction and how best to support schools.

For example, the Department does not currently know how many devices are allocated to teachers or how many schools have implemented a student Bring Your Own Device scheme. This affects how schools are using ICT, and places demand on the network and the type of support the Department must provide. An assessment of the ICT maturity of schools would help the Department target its resources to schools requiring greater assistance with planning.

The Department does not regularly monitor or report on student capabilities with ICT. A national assessment found that the ICT literacy of a sample of Year 6 and Year 10 New South Wales students fell between 2011 and 2014. The fall was greater in New South Wales than in other States and Territories. Without more regular assessment or reporting, the reasons behind this fall and the distribution of student capabilities between schools will remain unknown.

By July 2018, the Department of Education should:

Review the Technology for Learning program and school ICT support resourcing to determine whether resourcing is adequate for modern school requirements.
Develop a program to improve wireless networks in all NSW schools, for instance by expanding the Connecting Country Schools Program to all NSW schools.
Implement an assessment of school ‘ICT maturity’ and use this to target assistance to those schools requiring support with forward planning for ICT.
Improve the use of evidence to inform plans and strategies, including:
- more detailed monitoring of teacher and student access to and use of ICT
- evaluating the impact of teacher professional learning on student outcomes
- further examining the links between ICT and student outcomes.
Improve teacher access to devices for use outside of the classroom to improve how effectively they integrate ICT into teaching and learning.
Improve teacher professional learning by providing more:
- online learning opportunities for teachers in regional and remote areas
- courses focused on pedagogy to make best use of ICT.
Identify the ICT skills students need, and provide teaching resources to develop these skills and monitor their achievement.

Parliamentary reference - Report number #289 - released 6 July 2017

15 June 2017

Published

Sydney Road Maintenance Contracts

Transport

Infrastructure

Internal controls and governance

Management and administration

Procurement

Project management

In November 2013, Roads and Maritime Services (RMS) outsourced the maintenance of State roads in the Sydney region south and west zones using an innovative contracting approach called the Stewardship Maintenance Contract (SMC). The SMC links risk to reward, and uses a performance framework where outcomes should drive improved performance over time.

Roads and Maritime Services (RMS) is responsible for the Sydney region State roads network This includes over 2,800 kilometres of roads and associated road corridor infrastructure such as bridges, tunnels and drainage structures. RMS divides the network into three geographical areas: south, west and north zones.

In 1995, RMS first outsourced road corridor infrastructure maintenance for the north zone through a Performance Specified Maintenance Contract (PSMC). The current 10-year PSMC for the north zone will expire in October 2018. Prior to November 2013, RMS maintained roads in the south and west zones through its Road and Fleet Services unit.

In November 2013, RMS outsourced road maintenance services for the south and west zones using Stewardship Maintenance Contracts (SMC). The contracts run for seven years with an option for a further three years at RMS’ discretion. RMS estimated that the annual cost of these contracts was around $240 million in total. In March 2018, the contract prices are due to be reset by negotiation to reflect the contractors’ experience with, and better information about, the road networks and routine maintenance requirements.

The SMC model adopted stewardship principles to improve value for money. RMS defined stewardship principles as a broad set of values, attitudes and behaviours, required of the contractor to effectively manage the assets on behalf of RMS. The SMC also includes commercial principles, such as linking risk to reward, and a performance framework where outcomes drive performance.

This audit assessed whether RMS had effectively managed the outsourcing of road maintenance in the Sydney region south and west zones. In making this assessment, we answered the following questions:

Did RMS justify the decision to adopt the SMC model?
Do SMCs include key performance indicators (KPIs) and incentives which promote efficiency and effectiveness?
Does RMS collect high quality information on contractor performance and take action to correct performance deficiencies?
Are the expected benefits being achieved?

Conclusion

RMS developed an innovative contracting approach with the SMC. RMS has realised some benefits in the first year, including savings, from outsourcing road maintenance in the Sydney region south and west zones using the SMC. However, RMS’ management of the SMC has key elements missing which reduces its effectiveness.

The SMC includes performance measures and incentives to drive efficiency and effectiveness improvements over time.

RMS has established a contract management framework which includes most elements of good practice, including governance and dispute resolution mechanisms. However, it does not have procedures to guide its contract managers in managing specific provisions of the SMC. Consequently, RMS has not exercised several significant SMC requirements, such as having the contractor account for an efficiency dividend in its pricing at the start of each three-year works period. It also has not done enough to assure itself that the contractor provided performance and financial data are correct. This is important because the data is used to measure performance and calculate contractor payments.

RMS assessed that it had achieved around 80 per cent of the expected cost benefit in the initial year of the SMC. However, it has not tracked its achievement of benefits since then.

The Stewardship Maintenance Contract

RMS justified adopting the SMC model and included KPIs to drive efficiency and effectiveness

The SMC model includes features that RMS had not previously used for road maintenance contracts. These included adopting stewardship principles and transferring price risk to the contractor over time as the contractor becomes familiar with the assets being maintained.

The SMC model meets RMS’ requirements for flexibility in pricing models, the need for collaboration in asset maintenance planning, promoting innovation and effective performance management.

RMS used many good practices to develop the SMC model, including:

preparing a robust business case comparing the SMC model to RMS maintaining the road network itself, as well as assessing whether two other contracting models
(traditional and alliance) would meet its requirements
assessing experiences with similar arrangements in other jurisdictions and identifying elements that worked to get the best outcomes
developing a robust performance framework, which included a mix of efficiency and effectiveness KPIs that reflected NSW Government policy and RMS priorities
incorporating risk and reward incentives delivered through cost sharing arrangements which change as the contract matures
using a contract duration that supports RMS priorities and provides an incentive for better quality outcomes.

RMS uses data provided by the contractor to measure performance and calculate payments to the contractor. The SMC includes a specific sanction if RMS finds that the contractor provided incorrect performance data, but no specific sanction if the contractor provides incorrect financial data. If RMS finds that the contactor provided incorrect performance or financial data, RMS can only recover over-payments which may have been made using the incorrect data.

To provide a stronger incentive for the contractor to ensure data it provides is accurate, RMS should consider whether to incorporate stronger sanctions when negotiating the commercial reset due in mid-2018 for south and west zones. RMS should also consider this for the new contract for the north zone when the current PSMC contract expires in October 2018.

RMS' contract management approach and benefits realization

RMS can improve the effectiveness of its oversight and management of the SMC

RMS does not have SMC specific contract procedures to guide its contract managers. Consequently, RMS has not exercised several significant SMC requirements, such as having the contractors account for an efficiency dividend in their pricing at the start of each three-year works period. Effective contract management should be supported by contract specific procedures, with explanations of, and allocation of responsibility for, the various interventions that RMS may be required to exercise in the SMC.

Performance and financial reporting under the SMC is based on a mix of RMS and contractor provided data. While there are a range of audits of contractor provided performance and financial data that RMS can conduct each year under the SMC, it does not have a schedule of audits it will conduct and when.
During the first year of the SMC, RMS commissioned some limited audits of financial data. In the first three years of the SMC, RMS did not conduct any audits of performance data. Had there been SMC specific procedures in place, this would have reduced the risk of RMS not implementing a systematic audit program to give it reasonable assurance on the quality of the data that the contractor has provided. This is important because the data is used to measure performance and calculate contractor payments.

RMS has been aware of data quality issues since 2015. While RMS advised that it commenced addressing some data quality issues in response to a series of reviews conducted in 2015, a recent internal audit report indicates that RMS has not resolved the data quality issues.

RMS achieved benefits in the first year, but has not tracked benefits since

As part of the business case, RMS agreed to implement a benefits realisation strategy, including a benefits tracking tool. RMS commenced tracking benefits, but did not establish a comparative baseline pre-SMC on non-financial benefits, and has not tracked benefits past year one.

In 2015, a benchmarking study commissioned by RMS found that it had achieved 80 per cent of the expected recurrent cost savings and other benefits, such as improved workplace safety, in the first full year of the SMC. However, there was no clear baseline to measure
non-financial performance. The study was qualified due to gaps in available data. The study also did not reconcile the actual one-off transition costs to the business case estimate.

During the course of the audit, RMS advised that it intends to repeat this type of study to determine whether it has achieved all expected benefits (and their value), and that it would use the results to inform its negotiation with the SMC contractors as part of the commercial reset due in mid-2018.

Roads and Maritime Services is responsible for the State Roads network in the Sydney region

Roads and Maritime Services (RMS) is responsible for the Sydney region State roads network. This includes over 2,800 kilometres of roads and associated road corridor infrastructure such as bridges, tunnels and drainage structures. The network is divided into three geographical areas: south, west and north zones. Prior to November 2013, RMS maintained roads in the Sydney region south and west zones through its Road and Fleet Services unit.

In 1995, RMS first outsourced road corridor infrastructure maintenance for the north zone through a Performance Specified Maintenance Contract (PSMC). The current 10-year PSMC for the north zone will expire in October 2018. This contract is worth around $35 million per annum.

NSW Government priorities and road maintenance

Efficient and effective road maintenance contributes to the following NSW Government priorities:

improving road travel reliability
ensuring on-time running of public transport
reducing road fatalities
improving government services
keeping our environment clean.

The NSW Commission of Audit recommended outsourcing the maintenance of State roads

The NSW Commission of Audit in its Final Report on Government Expenditure (May 2012) recommended contestability as an appropriate strategy to consider for improving road maintenance service delivery for State roads.

The Commission benchmarked RMS’ road surface quality and cost per lane kilometre against those of Western Australia, Victoria, and Queensland. This showed that New South Wales lagged the other states on both these measures.

Exhibit 1: Interjurisdictional comparison of road maintenance outcomes 2009–10
	WA	VIC	QLD	NSW
Roads managed (lane kms)	52,659	50,510	71,353	80,348
Estimated spend ($/lane km)	5,000	4,500	6,000	7,000
Road quality measure (%)	99	99	94	91

Source: NSW Commission of Audit Final Report May 2012.

The Commission noted that RMS had conducted two independent reviews to examine the potential for extending road maintenance contestability. The Commission found that there was inadequate and inconclusive benchmarking to establish the efficiency of RMS’ Road and Fleet Services unit when compared to outsourcing. It recommended that RMS bring forward a proposal to conduct a competitive tender for the road maintenance of the Sydney region south zone road network to inform the feasibility of a progressive rollout of road maintenance contestability across other areas of the State. In August 2012, the NSW Government adopted the Commission’s recommendation.

The NSW Government introduced road maintenance contestability through Stewardship Maintenance Contracts

In April 2013, the NSW Government announced that it would introduce road maintenance contestability across the Sydney region, using a Stewardship Maintenance Contract (SMC) model to improve value for money. In doing so, it excluded RMS’ Road and Fleet Services unit from tendering.

The SMC model is based on the following key commercial and performance principles set by RMS:

performance driven by outcomes
flexible and adaptable
transparent and measurable
linking risk to reward
continuous improvement
criteria for selection of, and transition to, different payment models.

The following key stewardship principles underpin the SMC’s broad set of values, attitudes and behaviours, which are required of the contractor to effectively manage the assets on behalf of RMS:

putting RMS’ customers (road users and the general public) first and being responsive to them
being responsible and accountable for the outcomes resulting from the management of the assets
managing the assets diligently, efficiently and effectively with limited direction from RMS
working collaboratively with RMS to deliver services that are tailored to meet RMS’ evolving needs
acting with integrity and transparency in performing the services
performing the services in the best interests of RMS and asset users.

Other key features of the SMC include:

service requirements which describe the scope of the services, and the standards the contractor must meet
a commercial framework which defines how payments are structured, how performance assessment will impact on payments and outlines the key commercial principles. SMCs primarily divide payments into two main mechanisms, these being the priced component (or fixed price) and the target cost calculated as follows:
- fixed price – the contractor is paid a pre-agreed amount for specific services being provided, regardless of the actual costs incurred
- target cost – RMS and the contractor agree on a target cost for a project, and any cost overruns or underruns are shared between them
a performance framework which provides mechanisms for assessing contractor performance. This includes a comprehensive listing of the key result areas (KRAs) and key performance indicators (KPIs) against which RMS measures the contractor’s performance. The framework also outlines the scoring methodology that RMS uses to determine whether the contractor’s bid margin (profit and overheads) is reduced due to less than satisfactory performance or whether a bonus is paid if a threshold performance score is exceeded.

Road maintenance under SMCs for Sydney region south and west zones commenced in November 2013

In November 2013, RMS awarded SMCs to the Leighton Boral Amey consortium, now named Ventia Boral Amey (VBA), for the south zone and the DownerMouchel (DM) consortium for the west zone. The contracts run for seven years with an option for a further three years at RMS’ discretion. In April 2014, full services commenced following a four-month transition period. RMS estimated that the annual cost of these contracts was around $240 million in total. In March 2018, the contract prices are due to be reset by negotiation to reflect the contractors’ experience with, and better information about, the road networks and routine maintenance requirements.

Roads and Maritime Services should consider whether to incorporate stronger sanctions in the Stewardship Maintenance Contract if the contractor provides incorrect performance or financial data to RMS, when:
1. negotiating the commercial reset for the next works period with the Sydney region south and west zone contractors due in July 2018.
2. finalising a new SMC contract for the Sydney region north zone, due to commence in October 2018.

Roads and Maritime Services should, by September 2017:

2. Review its contract management framework for SMCs to ensure that all authorities and accountabilities of
contract managers are clearly defined, including:

a) accountability and procedures for exercising all operational clauses in the SMC where RMS may opt to, or be required to intervene, or make a decision

b) authority to approve or initiate the interventions RMS is required to, or may, exercise under the SMC

c) the audits that RMS will conduct to systematically validate the performance and financial data that the SMC contractors provide

d) the accountabilities of RMS contract managers to systematically review audits and quality reviews that the SMC contractors must conduct to demonstrate compliance with their service plans

e) the accountabilities of RMS contract managers to check that the monthly and annual reports provided by SMC contractors do not contain errors, omissions or inaccuracies.

3. Improve its management of benefits realisation by:

a) initiating a further benefits realisation review and record the benefits delivered against those
estimated following the tender process, including the one-off transition costs

b) identify any benefits, including savings, not yet attained and develop strategies to address any short-falls

c) establish a tool to track the ongoing realisation of benefits.

Parliamentary reference - Report number #288 - released 15 June 2017

8 June 2017

Published

NorthConnex

Premier and Cabinet

Treasury

Transport

Compliance

Infrastructure

Internal controls and governance

Management and administration

Procurement

The processes used to assess NorthConnex adequately considered value for money for taxpayers.This report also found that the impact of tolling concessions on road users and the motorway network was consistent with policy objectives described in the 2012 NSW Long Term Transport Master Plan.

By December 2017, the Department of Premier and Cabinet should:

1. publish an updated ‘Unsolicited Proposals – Guide for Submission and Assessment’ which clarifies obligations with requirements in other NSW Government policies such as the NSW PPP guideline and Infrastructure Investor Assurance Framework. The update should require:

a) a business case to be prepared, and a business case gateway review completed, as part of the assessment of the detailed proposal (currently stage 2)

b) probity reports must be completed and considered before the decision to proceed to the next stage.

The Department of Premier and Cabinet and NSW Treasury should immediately:

2. improve record keeping to ensure compliance with the State Records Act 1998 and the NSW Government Standard on Records Management.

Parliamentary reference - Report number #287 - released 8 June 2017

Audit progress

Sector

Year

Report type

Topic

Reports

Education 2018

Newcastle Urban Transformation and Transport Program

Transport 2018

Internal Controls and Governance 2018

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

The focus of the report has changed since last year

Agencies selected for the volume account for 95 per cent of the state's expenditure

Performance audit insights: key findings from 2014-2018

Report on Education 2017

Agency compliance with NSW Government travel policies

Information and Communication Technologies in schools for teaching and learning

Old equipment and wireless networks are not keeping pace with modern demands

The central funding model for ICT in schools is not meeting current needs

Many teachers are not provided with devices for use outside of the classroom

There is limited teacher professional learning in the use of ICT

Greater monitoring and reporting on technology use in schools is required

Sydney Road Maintenance Contracts

The Stewardship Maintenance Contract

RMS justified adopting the SMC model and included KPIs to drive efficiency and effectiveness

RMS' contract management approach and benefits realization

RMS can improve the effectiveness of its oversight and management of the SMC

RMS achieved benefits in the first year, but has not tracked benefits since

Roads and Maritime Services is responsible for the State Roads network in the Sydney region

NSW Government priorities and road maintenance

The NSW Commission of Audit recommended outsourcing the maintenance of State roads

The NSW Government introduced road maintenance contestability through Stewardship Maintenance Contracts

Road maintenance under SMCs for Sydney region south and west zones commenced in November 2013

NorthConnex