Reports
Actions for Design and implementation of the Transport Asset Holding Entity
Design and implementation of the Transport Asset Holding Entity
What the report is about
The Transport Asset Holding Entity (TAHE) is the State's custodian of rail assets. It is a state owned corporation and commenced operating on 1 July 2020.
This audit assessed the effectiveness of NSW Government agencies' design and implementation of TAHE. We audited TAHE, Transport for NSW (TfNSW) and NSW Treasury.
Separate and related audits on TAHE are reported in 'State Finances 2022', 'State Finances 2021' and 'Transport and Infrastructure 2022' reports.
What we found
The design and implementation of TAHE, which spanned seven years, was not effective.
The process was not cohesive or transparent. It delivered an outcome that is unnecessarily complex in order to support an accounting treatment to meet the NSW Government's short-term Budget objectives, while creating an obligation for future governments.
The benefits of TAHE were claimed in the 2015–16 NSW Budget before the enabling legislation was passed by Parliament in 2017. This committed the agencies to implement a solution that justified the 2015–16 Budget impacts, regardless of any challenges that arose.
Rail safety arrangements were a priority throughout TAHE's design and implementation, and risks were raised and addressed.
Agencies relied heavily on consultants on matters related to the creation of TAHE, but failed to effectively manage these engagements. Agencies failed to ensure that consultancies delivered independent advice as an input to decision-making. A small number of firms were used repeatedly to provide advice on the same topic. The final cost of TAHE-related consultancies was $22.6 million compared to the initial estimated cost of $12.9 million.
What we recommended
We recommended that the audited agencies should:
- improve accountability and transparency for major new fiscal transformation initiatives
- ensure entities do not reflect the financial impact of significant initiatives in the Budget when there is uncertainty, or it creates perverse incentives
- review record keeping practices, systems and policies to ensure compliance with the State Records Act 1998, and the NSW Government Information Classification, Labelling and Handling Guidelines
- review procurement policies to ensure that consultant use complies with all NSW Government policy requirements.
The NSW Government established the Transport Asset Holding Entity (TAHE), a statutory State Owned Corporation (SOC), on 1 July 2020 to replace the former rail infrastructure owner – RailCorp. It is the State's custodian of rail network assets, including rail tracks and other infrastructure, rolling stock, land, train stations and facilities, retail space, and signal and power systems, within metropolitan and regional New South Wales. It is responsible for $2.8 billion of major capital projects in 2022–23.
TAHE was established under Part 2 of the Transport Administration Act 1988 and is governed by a decision-making board. The Treasurer and the Minister for Finance and Employee Relations are the Shareholding Ministers of TAHE, and they annually agree performance expectations articulated in a Statement of Corporate Intent.
Whereas TAHE is the custodian of rail assets, Sydney Trains and NSW Trains operate public rail services. TAHE does not have responsibility for the operation of the heavy rail network or train services, nor does it have network control functions. TAHE, Sydney Trains and NSW Trains are in the Transport and Infrastructure cluster in the public sector (formerly the Transport cluster and renamed in April 2022), which also includes Sydney Metro and Transport for NSW (TfNSW).
TfNSW leads the Transport and Infrastructure cluster. Its role is to set the strategic direction for transport across the State. This involves the shaping of planning, policy, strategy, regulation, resource allocation and other service and non-service delivery functions for all modes of transport.
TAHE's Operating Licence is granted by the Portfolio Minister and authorises the entity to perform the functions required to acquire, develop, finance, divest and hold assets, pursuant to the Transport Administration Act 1988. The Portfolio Minister also issues a Statement of Expectations which outlines the government’s expectation for the business for the next three to five years.
TAHE's original Portfolio Minister was the Minister for Transport who approved, on 30 June 2020, the issuing of an interim 12-month Operating Licence to enable TAHE to commence operating on 1 July 2020. The Portfolio Minister then granted TAHE's current Operating Licence in 2021. After TAHE requested a 12-month extension to its current Operating Licence, its next Operating Licence is due on 1 July 2024. The current Portfolio Minister is the Minister for Infrastructure, Cities and Active Transport.
About this audit
This audit assessed the effectiveness of NSW Government agencies' design and implementation of TAHE. In making this assessment, we considered whether:
- the process of designing and implementing TAHE was cohesive and transparent, and delivered an effective outcome
- agencies' roles and responsibilities were clear in the planning of TAHE
- agencies effectively identified and managed certain risks.
Conclusion
The design and implementation of TAHE was not effective. The process was not cohesive or transparent. It delivered an outcome that is unnecessarily complex in order to meet the NSW Government's short-term Budget objectives, while creating an obligation for future governments to sustain TAHE through continuing investment, and funding of the state owned rail operators. The ineffective process to design TAHE delivered a model that entails significant uncertainty as to whether the anticipated longer-term financial improvements to the Budget position can be achieved or sustained.
NSW Treasury and TfNSW had different objectives for TAHE
Up to June 2013, RailCorp had been the owner and operator of rail services and maintainer of the metropolitan rail network for almost a decade. It had been operating as a not-for-profit Public Non-Financial Corporation (PNFC).
In 2012, NSW Treasury (hereafter Treasury) decided there was a risk that the Australian Bureau of Statistics (ABS) would reclassify RailCorp to the General Government Sector (GGS), meaning depreciation expenses of approximately $870 million would be reflected in the GGS Budget. Treasury wanted to avoid this impact on the GGS Budget, and considered the establishment of a transport asset holding entity as a means to do so. Capital grants to RailCorp were being treated as an expense to the GGS Budget.
TfNSW also wanted an asset holding entity – but one that would be a non-trading ‘shell’ company with no staff that would hold and manage all public transport assets. TfNSW's concept envisaged the entity would have a structure that would enable future public transport reforms and strategic directions while ensuring vertical integration of operations between asset owners and the rail operators to maintain rail safety.
However, Treasury pursued its objective to improve the GGS Budget result, and sought to expand on TfNSW's 'shell' asset holding entity concept. Treasury wanted an entity that could generate a return on investment, as this meant that government investment in transport assets could be treated as equity investments, rather than a Budget expense, and in turn improve the GGS Budget position. As an example of the potential impact of creating this new entity, capital grants of $2.3 billion were paid to RailCorp in 2013–14. If Treasury's objective was met, grants of this significance would then be treated as an equity investment, rather than an expense in the GGS Budget.
In 2017, Treasury's preferred option was progressed through legislation, but both agencies' central objectives for the proposed asset holding entity would continue to prove difficult to reconcile. To achieve Treasury's objective to improve the Budget result, the entity would need to generate a return on investment (this is further discussed below). However, TfNSW expressed concerns that the prioritisation of rail safety, and the effective management of governance, regulation and operations would be more complex in an entity with commercial imperatives.
Asset holding entities are a common approach to the management of transport assets in Australia and internationally, and there are a range of approaches to how they are structured and used. Such structures should be driven by the goal of improved asset management. Ultimately, TfNSW's objectives could have been delivered through a simpler entity structure. However, reconciling TfNSW's objectives with Treasury's imperative to deliver and justify a Budget improvement in the short-term resulted in an overly lengthy process and an unnecessarily complex outcome that places an obligation on future governments to sustain. There is still significant uncertainty as to whether the short-term improvements to the Budget can continue to be realised in the longer-term.
The Budget benefits of TAHE were claimed before the entity was legislated, committing the agencies to deliver, regardless of the complexities that subsequently arose
The 2015–16 GGS Budget treated the government's investment in TAHE (still known at this time as RailCorp) as an equity contribution. This had the immediate impact of improving the Budget result by $1.8 billion per annum. However, the legislation to enable the establishment of TAHE had not yet been passed by Parliament, key elements of the operating model were still under development, and imminent changes in accounting standards had the potential to impact TAHE's financial model. The decision to book the benefits in the Budget early committed the involved agencies to implement a solution that justified the 2015–16 Budget impacts, irrespective of the challenges that arose.
TAHE's financial structure requires circular government investment to work
For the NSW Government to continue to treat its investment in TAHE as an equity contribution, rather than an expense to the Budget, there must be a reasonable expectation that TAHE will generate a sufficient rate of return as required by the Government Finance Statistics (GFS) framework. In doing so, it needs to recover a revaluation loss created by a $20.3 billion reduction in the value of its assets which was incurred in its first full year of operation. This loss occurred as a result of a revaluation of TAHE's assets when RailCorp (a not-for profit entity) became TAHE (a for-profit commercial entity) – and is discussed further in the 'Key findings' below.
TAHE generates a small portion of its income from transactions with the private sector but, as noted in our report 'State Finances 2021', TAHE receives the majority of its revenue (more than 80%) from access and licence fee agreements with Sydney Trains and NSW Trains. Both of these entities are funded by grants (a Budget expense) to TfNSW from the GGS Budget.
Based on Treasury’s correspondence with the ABS in 2015, TAHE was initially expected to pay a return on equity of 7% in 2016–17. The assumption of a 7% return persisted through to 2018, after the legislation enabling the establishment of TAHE was passed by Parliament. However, when the initial access and licence fees were agreed on 1 July 2020, this figure had been revised to an expected rate of return of 1.5% excluding the revaluation loss. This was below the long-term inflation target and did not include the recovery of the revaluation loss – risking the government's ability to treat its investment in TAHE as an equity contribution. Importantly, as TAHE is primarily reliant on fees paid by the state owned rail operators that, in turn, are funded by the GGS Budget (as an expense), the decision to change the returns model from 7% to 1.5% would in its own right have had a positive impact on the GGS Budget. However, the decision to use a 1.5% return would ultimately be problematic as it made it difficult to treat the government's contributions to TAHE as an equity investment, as discussed below.
On 14 December 2021, to avoid a qualified audit opinion, the NSW Government made the decision to increase TAHE's expected rate of return to 2.5%, equal to the Reserve Bank’s long-term inflation target.
In 2021-22, TAHE needed to start charging rail operators higher access and licence fees in order to generate a return of 2.5%, so as to support the government's treatment of its investment in TAHE as an equity contribution in the GGS Budget. This meant the government needed to provide additional grant (expense) funding to the state owned rail operators so they could pay the increased access and licence fees to TAHE. Based on current projections, TAHE is not expected to recover the revaluation loss until 2046.
There remains a risk that TAHE will not be able to generate a sufficient return on the NSW Government's investment without relying on increased funding to state owned rail operators so that they can in turn pay the higher access and licence fees. TAHE's ability to generate returns on government investment from other sources are uncertain and may not be achievable or sustainable. Current modelling highlights that TAHE remains largely reliant, through to 2046, on increasing fees (which are assumed to increase at 2.5% per annum from 2031 onwards when the current 10 year contracts with rail operators expire) paid by the state owned rail operators that remain principally reliant on GGS Budget grants.
The process of designing and implementing TAHE was not transparent to independent scrutiny
Our report 'State Finances 2021' commented that Treasury did not always provide this Office with information relating to TAHE on a timely basis. Similarly, during this performance audit, there were also multiple instances where auditees were unable to provide documentation regarding key activities in the process to deliver TAHE. Agencies also applied higher sensitivity classifications to large tranches of documents than was justified or required by policy. Of particular concern is the incorrect classification of documents as Cabinet sensitive information. The incorrect or over-classification of documentation as Cabinet sensitive delayed this Office's ability to provide scrutiny or independent assurance.
There was a lack of clarity around the roles and responsibilities of governance structures set up to oversee the design and implementation of TAHE
From 2014, multiple workstreams and advisory committees were established to progress the design and implementation of TAHE. For some of these committees and workstreams, there is limited information on what they were tasked to do and what they achieved. Most had ceased meeting by 2018, before significant work needed to deliver TAHE was completed.
The lack of clarity around the roles and responsibilities of these governance structures reduced opportunities for TfNSW and Treasury to reconcile their differing objectives for TAHE, and resolve key questions earlier in the process.
There was a heavy reliance on consulting firms throughout the process to establish TAHE, and the management of consultant engagements failed to ensure that agencies received independent advice to support objective decision-making
In 2020, Treasury and TfNSW failed to prevent, identify, or adequately manage a conflict of interest when they engaged the same 'Big 4' consulting firm to work on separate TAHE-related projects. Both agencies used the firm's work to further their respective views with regard to the financial implications of TAHE's operating model. At this time those views were still unreconciled.
Treasury engaged the firm to provide a fiscal risk management strategy and advice on the impact of changes to accounting standards. TfNSW engaged the same firm to develop operating and financial models for TAHE, which raised concerns regarding the viability of TAHE. Disputes arose around the findings of these reports. Treasury disagreed with some of the outcomes of the work commissioned by TfNSW, relating to accounting treatment and fiscal advice.
The management of this conflict (real or perceived) was left to the 'Big 4' consulting firm when it was more appropriate for it to be managed by Treasury and TfNSW. If these agencies had communicated more effectively, used available governance structures consistently, and shared information openly about their use of the firm and the nature of their respective engagements, these disputes might have been avoided. This issue, coupled with deficiencies in procurement by both agencies, reflected and further perpetuated the lack of cohesion in the design and implementation of TAHE.
More broadly, over the period 2014 – 2021, 16 separate consulting firms were employed to work on 36 contracts, valued at over $22.56 million, relating to TAHE ranging from accounting and legal advice, project management, and the provision of administrative support and secretariat services.
Consultants are legitimately used by agencies to provide advice on how to achieve the outcomes determined by government, including advising agencies on the risks and challenges in achieving those outcomes. Similarly, consultants can provide expert knowledge in the service of achieving those outcomes and managing the risks. However, the heavy reliance on consulting firms during the design and implementation of TAHE heightened the risk that agencies were not receiving value for money, were outsourcing tasks that should be performed by the public service, and did not mitigate the risk that the advice received was not objective and impartial. The risk that the role of consultants could have been blurred between providing independent advice to government on options and facilitating a pre-determined outcome was not effectively treated or mitigated. This risk was amplified because a small number of firms were used repeatedly to provide advice on one topic. The effective procurement and management of consultants is an obligation of government agencies.
Appendix two – Classification of government entities
Appendix three – About the audit
Appendix four – Performance auditing
Copyright notice
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Parliamentary reference - Report number #372 - released 24 January 2023
Actions for Treasury 2022
Treasury 2022
What the report is about
Results of the Treasury cluster agencies' financial statement audits for the year ended 30 June 2022.
The results of the audit of the NSW Government's consolidated Total State Sector Accounts (TSSA), which is prepared by NSW Treasury, are reported separately in our report on 'State Finances 2022'.
What we found
Unmodified audit opinions were issued on all 30 June 2022 general purpose financial statement audits.
Qualified audit opinions were issued on three of the 25 other engagements prepared by cluster agencies. These related to payments made from Special Deposit Accounts (SDA) that did not comply with the relevant legislation.
What the key issues were
Commercial agreements were signed between TAHE, the operators and Transport for NSW in June 2022, which reflected an expected rate of return of 2.5% on contributed equity. However, it remains critical that the government continue to provide sufficient funding to the operators so they can pay for access and use TAHE assets. These findings are reported in our report on 'State Finances 2022'.
Eight high-risk issues were raised in 2021–22, of which five relate to NSW Treasury.
A number of previously reported audit findings and recommendations with respect to icare continue to be ongoing issues. This includes the Workers Compensation Nominal Insurer continuing to hold less assets than the estimated present value of its future payment obligations, when measured in accordance with the accounting framework.
What we recommended
Our report on 'State Finances 2022' made several recommendations to improve NSW Treasury's processes.
In this report, we recommended icare should ensure:
- it has sufficient controls in place over claim payments, including an effective quality assurance program, to minimise claim payment errors
- that documentation to support PIAWE calculations is appropriately maintained, and that the minimum documentation requirements are set out in a policy.
This report provides Parliament and other users of the Treasury cluster’s financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations.
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision-making are enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations related to the financial reporting of agencies in the Treasury cluster (the cluster) for 2022.
Section highlights
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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 Treasury cluster.
Section highlights
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Appendix one – Misstatements in financial statements submitted for audit
Appendix two – Early close procedures
Appendix three – Timeliness of financial reporting
Appendix four – Financial data
Appendix five – Acquittals and other opinions
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.
Actions for State Finances 2022
State Finances 2022
What the report is about
Results of the 2021–22 consolidated General Government Sector (GGS) and Total State Sector (TSS) financial statements audits.
What we found
The Independent Auditor’s Report on the 2021–22 GGS and TSS financial statements was modified with a limitation of scope and also contained an emphasis of matter.
The opinion in the TSS Independent Auditor’s Report was modified with a limitation of scope on certain balances consolidated in the TSS financial statements because the Catholic Metropolitan Cemeteries Trust (CMCT) denied access to its management, books and records for the purpose of conducting a financial audit.
The Independent Auditor’s Report also includes an emphasis of matter drawing attention to the significant uncertainties associated with the GGS’s equity investment in Transport Asset Holding Entity (TAHE). The significant uncertainty relates to key assumptions and estimates used to forecast a 2.5% return from GGS investments into TAHE that supports the accounting treatment as an equity injection, including:
- funding to support the Rail Operators to pay TAHE’s contracted and forecast access and licence fees up until 2045–46. The Rail Operators are dependent on funding from the GGS to pay access and licence fees. Forecast modelling notes a requirement of a further $10.2 billion in budget funding to pay TAHE to the end of the ten-year contract period in 2030–31, in addition to the $5.5 billion allocated in the forward estimates and up to $50.8 billion for the period 2032 to 2046
- a significant portion of the projected returns are earnt outside of the ten-year contract period and there is a risk that TAHE may not be able to recontract fees at levels consistent with current projections.
What we recommended
The report includes a number of recommendations including:
- continued monitoring that TAHE controls the reported assets ensuring the CMCT, Category 2 Statutory Land Managers (SLM) and Commons Trusts meet their statutory reporting obligations
- ensuring accounting and audit position papers are sufficiently consulted with key stakeholders and are concluded on a timely basis
- ensuring agencies support the timely conclusion of audits by bringing to the auditors' attention key Cabinet records and identifying references relating to accounting issues impacting the financial statements
- for Special Deposit Accounts (SDA) responsible managers should ensure amounts appropriated under any Act or law for payment into the account are appropriately recorded, ensuring payments from SDAs are allowable and made in accordance with Treasurer's delegations and standing authorisation.
Pursuant to section 52A of the Government Sector Audit Act 1983 I am pleased to present my Auditor-General’s Report on State Finances 2022.
Once again this year has presented considerable challenges for the state sector and my Office as we collectively grapple with uncertainties related to COVID-19 and the disruption of emergency events impacting New South Wales. In addition, there were many recommendations arising from last year’s audit to be addressed.
While there is more to do to ensure good financial stewardship of the State, resolution of matters was helped by constructive engagement with the NSW Treasury at the most senior levels. Personally I wish to thank the Treasurer and Secretary for their commitment to instilling integrity in financial management systems and processes. The support Treasury provided for recent amendments to the Government Sector Audit Act 1983 to provide ‘follow the dollar’ powers and other changes recommended by the Public Accounts Committee quadrennial review of my Office is also acknowledged.
Finally I want to thank the teams that contributed to this year’s audit of the Total State Accounts for their diligence, professionalism and commitment. I am very proud of your work.
Margaret Crawford
Auditor-General for New South Wales
The Independent Auditor's Report was qualified and also included an emphasis of matter
The audit opinion on the State's 2021–22 financial statements was modified. The delayed signing of the NSW Total State Sector Accounts (TSSA) by NSW Treasury was in order to resolve significant accounting issues that were material to the TSSA. The key areas requiring significant audit effort included reviewing the State's accounting for TCorp Investment Management (IM) Funds and responding to the risks related to the Catholic Metropolitan Cemeteries Trust (CMCT) denying access to its management and books and records, which is detailed in this Report.
NSW Treasury aimed to sign the TSSA by 19 October 2022. This was delayed by nearly six weeks and the TSSA audit opinion was subsequently signed on the statutory deadline imposed on the Treasurer for tabling of the TSSA in the Legislative Assembly of 30 November 2022.
The Independent Auditor’s Report was modified due to a limitation of scope on the balances consolidated in the TSSA relating to the CMCT
The opinion in the Independent Auditor’s Report was modified with a limitation of scope due to the inability to access management, books and records of a controlled entity, the CMCT.
This year, NSW Treasury, after reconsidering all facts and the perspectives of the CMCT, reconfirmed that the CMCT is a controlled entity of the State for financial reporting purposes. This means CMCT is a GSF agency under the provisions of the Government Sector Finance Act 2018 (GSF Act). As such NSW Treasury is required by Australian Accounting Standards to consolidate the CMCT into the Total State Sector Accounts (TSSA). The value of assets and liabilities of CMCT consolidated into the TSSA is $310.3 million and $15.1 million, respectively, and the loss of CMCT consolidated into the TSSA for the year is $2.4 million.
To date, CMCT has not met its statutory obligations to prepare financial statements under the GSF Act and give them to the Auditor-General. CMCT has not submitted its financial statements to the Auditor-General for audit as required despite repeated requests and has not provided access to its books and records for the purposes of a financial audit. The Secretary of the Department of Planning and Environment wrote to CMCT to request it work with, and offer full assistance to, the Auditor-General in the exercise of her duties.
NSW Treasury has met with and considered CMCT's perspectives. NSW Treasury’s position remains that CMCT is a controlled entity of the State for financial reporting purposes. Consequently, CMCT has not met its statutory obligations as a controlled entity to submit its financial statements for audit and provide access to its books and records. Therefore, the Audit Office was unable to obtain sufficient appropriate audit evidence about the carrying amount of assets and liabilities consolidated into the Total State Sector Accounts as at 30 June 2022 and of the amount of income and expenses for the year then ended. Accordingly a modified audit opinion was issued on the NSW Government's 2021–22 consolidated financial statements.
Section 3 of this report titled 'Limitation of Scope relating to CMCT' discusses this matter in further detail.
An emphasis of matter drawing attention to uncertainty relating to the General Government Sector's investment in the Transport Asset Holding Entity (TAHE) remains
The Independent Auditor’s Report also includes an emphasis of matter, drawing attention to the significant uncertainties associated with the General Government Sector's (GGS) equity investment in TAHE. The significant uncertainty relates to key assumptions used to forecast returns from investments into TAHE in order to support the recognition of the government's funding of TAHE as an equity injection.
At the time of signing the Independent Auditor's Report, there was significant uncertainty with regards to assumptions and estimates used to forecast a return from the GGS investment into TAHE, which supports the recognition of an equity injection. There is significant uncertainty relating to:
- the 2022–23 Budget committed $5.5 billion to fund TAHE's key customers, Sydney Trains and NSW Trains (the operators), to support their payment of access and licence fees agreed on 23 June 2022. However, this funding only extends out to the end of the forward estimates period in 2025–26, which falls short of the ten-year contractual periods to 2030–31 and the projected period to 2045–46 to achieve a 2.5% return from the government's equity investment. The government will need to fund the operators an additional $10.2 billion in Budget funding so that they can meet their contractual obligations to TAHE from 2026–27 to 2030–31, and a further projected funding of $50.8 billion from 2031 to 2046. This additional funding is not within the government's published Budget figures, leading to uncertainty on whether the government-funded operators can pay access and licence fees beyond the forward estimates period of 2025–26
- a significant portion of the projected returns are earnt outside the ten-year contract period (terminating 30 June 2031) and there is a risk that TAHE will not be able to recontract for access and licence fees at a level that is consistent with current projections. There is also a risk that funding for TAHE's key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections.
The 'State Finances 2021' report made recommendations regarding the significant accounting issues relating to TAHE. The State's response to these recommendations are detailed in Section 4 of this report titled ‘Investment in the Transport Asset Holding Entity’. Other significant matters related to the TSSA audit are covered in Section 8 titled ‘Key audit findings’.
Other financial reporting matters
All government agencies were granted an extra week to submit financial statements for audit
A one-week extension provided agencies across the sector with additional time to resolve key accounting issues and submit financial statements for audit by 1 August 2022.
Further extensions were approved for the following seven agencies (ten in 2020–21):
- State Insurance Regulatory Authority (3 August 2022)
- Dams Safety NSW (8 August 2022)
- Jenolan Caves Reserve Trust (8 August 2022)
- Transport for NSW (8 August 2022)
- Department of Enterprise, Investment and Trade (22 August 2022)
- Transport Asset Holding Entity (22 August 2022)
- Department of Transport (26 August 2022).
Additional extensions provided agencies with more time to complete:
- asset valuations
- valuations of actuarially assessed liabilities.
An initial draft of the TSSA was provided to audit on 15 September 2022. This version was incomplete and excluded the impact of consolidating the State's TCorp IM funds under the correct Australian Accounting Standards. An additional three versions of the draft TSSA were provided to audit progressively to update the TCorp IM fund consolidated balances. The final complete version of the TSSA was submitted on 27 October 2022 which included all adjustments relating to the TCorp IM fund consolidation. Refer to section 8.1 for more details on the material restatements relating to the consolidation of the TCorp IM funds.
In 2021–22, agency financial statements presented for audit contained 20 errors exceeding $20 million (24 in 2020–21). The total value of these errors was $973 million, a decrease from the previous year ($6.6 billion in 2020–21).
The graph below shows the number of reported errors exceeding $20 million over the past five years in agencies’ financial statements presented for audit.
The errors resulted from:
- incorrect application of Australian Accounting Standards and NSW Treasury policies
- incorrect judgements and assumptions when valuing non-current physical assets and liabilities.
NSW Treasury concluded CMCT is a controlled entity of the State
In response to our recommendation in the ‘State Finances 2021’ report, NSW Treasury reconfirmed that the Catholic Metropolitan Cemeteries Trust (CMCT) is a controlled entity of the State. The Audit Office accepted the position of NSW Treasury.
The reaffirmation of this position means CMCT is a GSF agency under the provisions of the Government Sector Finance Act 2018 (GSF Act). Section 7.6 of the GSF Act places an obligation on CMCT to prepare financial statements and give them to the Auditor-General. Further, section 34 of the Government Sector Audit Act 1983 (the GSA Act) requires the Auditor-General to furnish an audit report on these financial statements.
To date, CMCT has not met its statutory obligations to prepare financial statements under the GSF Act and give them to the Auditor-General. CMCT has not submitted their financial statements to the Auditor-General for audit despite repeated requests and has not provided access to its books and records for the purposes of a financial audit. There was extensive correspondence between the Audit Office of NSW, CMCT, NSW Treasury and the Department of Planning and Environment in 2022 regarding this matter.
RecommendationNSW Treasury and the Department of Planning and Environment should ensure the Catholic Metropolitan Cemeteries Trust meets its statutory reporting obligations. |
In addition, on 10 December 2021, the then Minister for Water, Property and Housing wrote to the Auditor-General requesting a financial and performance audit be performed pursuant to section 27B(3)(c) of the GSA Act. The audit would cover the financial affairs of CMCT, including whether funds have been used for the proper purpose. The Audit Office of New South Wales has written to CMCT on a number of occasions to request the provision of documentation and access to management in order to conduct the performance audit. CMCT has not provided the Audit Office of New South Wales access to its management, books and records for the purpose of the required performance audit.
NSW Treasury has met with and considered CMCT's perspectives. NSW Treasury’s position remains that CMCT is a controlled entity of the State for financial reporting purposes. Consequently, CMCT did not meet its statutory obligations as a controlled entity to submit its financial statements for audit and provide access to its books and records.
The TSSA audit opinion included a limitation of scope
The opinion in the TSSA Independent Auditor’s Report was modified with a limitation of scope due to an inability to access management and the books and records of CMCT. This limitation was appropriately disclosed in Note 1 'Statement of Significant Accounting Policies' of the TSSA. The Statement of Compliance signed by the Secretary of Treasury and the Treasurer on 29 November 2022 was also updated to acknowledge the disclosure in Note 1 regarding CMCT.
The Audit Office was unable to obtain sufficient appropriate audit evidence about the carrying amount of assets and liabilities consolidated into the Total State Sector Accounts as at 30 June 2022 and of the amount of income and expenses for the year then ended. Accordingly a modified audit opinion was issued on the NSW Government's 2021–22 consolidated financial statements.
The process of information sharing by NSW Treasury continues to require improvement
In last year’s ‘State Finances 2021’ report an extreme risk management letter finding was reported for NSW Treasury to ensure it significantly improve its processes so that all relevant information is identified and shared with the Audit Office to support material transactions and balances of the State.
A number of events reconfirmed that NSW Treasury needs to continue improving its process with respect to information sharing with the Audit Office. Notably, NSW Treasury’s finance team had not demonstrated that all available information (on their systems) was considered by them when assessing the State’s control over CMCT.
Critical information relating to CMCT was in the possession of NSW Treasury since late October 2021 but not considered when reconfirming their accounting position on the State's control of CMCT this year. A further reconfirmation of the State's control over CMCT was needed by NSW Treasury to ensure this information was considered in their accounting assessment.
The above demonstrates that more effective consultation is required by NSW Treasury with key stakeholders to ensure all information relevant to forming an accounting position relating to the TSSA is captured. This will ensure new information is not identified late in the audit process and NSW Treasury considers all information when concluding on the accounting position of the State.
RecommendationNSW Treasury should ensure when drafting position papers and concluding on accounting issues impacting the State, these are provided to audit on a timely basis and reflect a complete and accurate understanding of the key public sector issues being considered. |
Last year's report highlighted that NSW Government actions avoided a qualified opinion in 2020–21 relating to the General Government Sector's $2.4 billion cash contribution to Transport Asset Holding Entity (TAHE). These actions included the NSW Government agreeing to provide additional future funding to TAHE's key government customers Sydney Trains and NSW Trains (the operators) to support increases in access and licence fees to be paid to TAHE.
The additional funding by the government was necessary to demonstrate that a reasonable expectation of a sufficient rate of return would be earned on its equity invested in TAHE. Last year, there was no government policy on what the minimum return should be on investments in other public sector entities, so the long-term inflation rate was used as a benchmark. A recommendation was made in last year's State Finances report that NSW Treasury establish a policy on the minimum expected return from its investments.
On 6 September 2022, NSW Treasury finalised its policy relating to the government’s returns on equity investments. The application of this policy is limited to State Owned Corporations and similar to the Commonwealth framework for commercial businesses, which requires the expected return be at least equal to the long-term inflation rate.
The government's commitment to additional funding was conveyed last year through revised shareholder expectations being published in the 2021–22 'NSW Budget-Half yearly Review' on 16 December 2021, increasing the expected returns on equity from 1.5% to the expected long-term inflation rate of 2.5%. On 18 December 2021, Transport for NSW (TfNSW) and the operators entered into a Heads of Agreement (HoA). This formed the basis of negotiations to revise the pricing within the existing ten-year contracts and deliver upon the shareholders’ expected return of 2.5% on contributed equity to be earned over the estimated weighted average remaining useful lives of TAHE's assets.
Further information on last year's audit of the government’s investment in TAHE can be found in our 'State Finances 2021' report.
Ten-year commercial agreements were signed between TAHE, operators and TfNSW
Last year's State Finances report recommended that NSW Treasury facilitate revised commercial agreements to reflect the access and licence fees detailed in the HoA. As these agreements were not executed by 30 June 2021, last year's audit opinion of the Total State Sector Accounts (TSSA) included an Emphasis of Matter drawing attention to the uncertainty that existed at balance date as these agreements were not finalised.
On 23 June 2022, commercial agreements were signed between TAHE, the operators and Transport for NSW through a deed of variation. The revised access and licence fees for the ten-year period 2021–22 to 2030–31 was $16.6 billion, which is $520 million less than the HoA fees of $17.1 billion.
Comparison | FY22 $m |
FY23 $m |
FY24 $m |
FY25 $m |
FY26 $m |
FY27 $m |
FY28 $m |
FY29 $m |
FY30 $m |
FY31 $m |
Total $m |
Revised commercial agreements | 641.1 | 911.8 | 1,298.1 | 1,585 | 1,807.3 | 1,921.8 | 1,992 | 2,065.4 | 2,139.1 | 2,252.8 | 16,614.4 |
HoA | 679.9 | 1,081.4 | 1,236 | 1,398.9 | 1,645.8 | 1,826.1 | 2,023.3 | 2,209.4 | 2,404.5 | 2,629.2 | 17,134.6 |
Difference | (38.8) | (169.6) | 62.1 | 186.1 | 161.5 | 95.7 | (31.3) | (144) | (265.4) | (376.4) | (520.2) |
TAHE's main customers principally rely on government funding to pay access and licence fees
Whilst TAHE has agreed ten-year access and licence fees of $16.6 billion with its two main customers Sydney Trains and NSW Trains, these two operators significantly rely on government funding when making these payments to TAHE. At 30 June 2022, TAHE's expected return of 2.5% is contingent upon the GGS funding the operators to support their payment of access and licence fees that have been agreed with TAHE for the ten-year contracted period and for non-contracted periods from 2031–32 to 2045–46.
The 2022–23 NSW Budget has allocated $5.5 billion to fund the operators, to support their payment of access and licence fees. However, this funding extends to the end of the forward estimates period in 2025–26, which falls short of the ten-year contractual period to 2030–2031 and the projected period to 2045–46 to achieve the 2.5% return.
2022–261 $b |
2027–20312 $b |
2032–46 $b |
Total $b |
|
Access and licence fees3 | 5.5 | 10.2 | 50.8 | 66.5 |
The government will need to fund the operators an additional $10.2 billion in budget funding to meet their contractual obligations to TAHE from 2026–27 to 2030–2031, and a further projected funding of $50.8 billion from 2032 to 2046. This is needed to ensure the government continues to demonstrate its expected return on investment of 2.5%. This additional funding is not within the government's published 2022–23 NSW Budget figures, leading to uncertainty on whether the government funded operators can pay access and licence fees beyond the forward estimate period of 2025–26.
Significant funding uncertainties remain
While the ten-year access and licence fee agreements were communicated to the NSW Government's Expenditure Review Committee, it is yet to be fully provided for in the government's budget figures. As TAHE's projections are highly dependent on the operators as its key customers, it remains critical that the government continue to provide sufficient funding to the operators so they can pay for access and use of TAHE assets. This means the significant funding uncertainties reported in last year's TSSA audit opinion remain for 2021–22.
The government has estimated $37.9 billion in returns (equivalent to 2.5% on contributed equity) is to be earned from its investment in TAHE over the period from 1 July 2022 to 30 June 2046. As previously reported, TAHE derives most of its revenue from access and licence fee agreements from the operators, who in turn are both funded by grants through TfNSW from the GGS. More than 95% of these returns are estimated to be earned outside of the ten-year contract period (terminating 30 June 2031).
2022–261 $b |
2027–20312 $b |
2032–46 $b |
Total $b |
|
Returns to GGS | 1.8 | 4.7 | 31.5 | 37.9 |
There remains risk that:
- TAHE will not be able to recontract for access and licence fees at a level that is consistent with current projections
- future governments' funding to TAHE's key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections
- TAHE will be unable to grow its non-government revenues.
This significant funding uncertainty was also reported in last year's TSSA audit opinion and will remain for 2021–22.
In 2021–22, TAHE and NSW Treasury prepared further modelling to support the Government's intent to earn a 2.5% return inclusive of recovering the holding (revaluation) loss of $20.3 billion on its investment in TAHE
Last year's State Finances report highlighted that NSW Treasury, with TAHE, should prepare robust projections and business plans to support the expected returns forecast beyond FY2031.
This year TAHE engaged an expert to help develop a model demonstrating the government's expected returns from its investment in TAHE. The model mathematically forecasts that returns of 2.5% will be achieved by 2046 and this will include recovery of the revaluation losses of $20.3 billion relating to 2020–21.
The current model includes some key assumptions:
- The main source of revenue is the access and licence fees expected from the two public rail operators (Sydney Trains and NSW Trains) contributing to more than 80% of TAHE's projected revenue. The rail operators are largely funded by the government when paying access and licence fees to TAHE.
- For the first ten years, the access and licence fees are based on the signed agreements between TAHE and the public rail operators.
- Beyond the ten-year contracted period, the model assumes existing contractual terms for access and licence fees will continue unchanged allowing for an annual rise for inflation (2.5% per annum), and increased fees to enable a 7.62% return for renewed assets.
- The capital expenditure included in the model is only the amounts approved by the Expenditure Review Committee (ERC) as part of the ten-year forecast. The model beyond ten years includes expected investment in renewed and replacement assets but excludes any forecasts relating to growth capex that is not approved by the ERC, and any related depreciation expenses for growth capex.
While management has developed a 35-year long term financial model to support the returns, we note this will need to be refined over the next few years. Furthermore, these are forecasted figures and we have not seen sufficient evidence of whether this reflects reality (that is, the achievement of dividends representing a return on equity) as it is still very early. Therefore, this will remain a high-risk matter until we have seen sufficient evidence of reality to the forecasted figures.
There is negative net impact on the budget after 2024–25 and this will grow in the future
There are some key points to highlight with this modelling and these are best conveyed with the graph below. This graph shows total cash injections made by the GGS since the government first announced the creation of TAHE as a for-profit entity in the 2015–16 NSW Budget. It also conveys the forecast returns from TAHE to the GGS and the level of funding operators will need from the GGS to pay TAHE's access and licence fees over the 30-year period. These cash flows are key inputs used in the modelling which calculates a 2.5% return from TAHE inclusive of recovering the holding (revaluation) loss of $20.3 billion.
The government continues to respond to the impact of the COVID-19 pandemic on New South Wales through its economic stimulus measures
The COVID-19 pandemic continued to significantly impact the State’s finances, reducing revenue and increasing expenses especially in sectors directly responsible for responding to the COVID-19 pandemic, such as Health. In October 2021, the government announced through the 'COVID-19 Economic Recovery Strategy' an additional $2.8 billion in economic stimulus and response measures following the conclusion of the three-month lockdown due to the Delta COVID-19 outbreak. Measures included:
- $739 million in household and social support, including housing support for Aboriginal communities and survivors of domestic violence, and vouchers to thank parents for their efforts to support learning from home
- $500 million to consumers and businesses including expansion of the 'Dine & Discover' and 'Stay & Rediscover' voucher programs
- $495 million in education support addressing learning gaps for children and helping schools prepare for future learning disruptions
- $487 million in combined funding for tourism, events, sports, and recreation throughout New South Wales
- $130 million to fund mental health services for individuals whose mental health was impacted by the pandemic.
The 2021–22 financial year included $21.9 billion for pandemic response and economic stimulus measures. Of this, $17.9 billion was spent in 2021–22 while a further $1 billion of the budgeted amount from 2021–22 was carried forward into 2022–23. The graph below shows the total allocation and spend by cluster for 2022 compared to target spend.
There were 14 natural disaster declarations including four severe weather events in 2021–22
Natural disasters such as bushfires, storms, floods, and other adverse weather events can have a significant impact on the State's finances. Costs associated with natural disasters include direct response costs such as clean-up and recovery, temporary accommodation, and as well as financial assistance provided to impacted communities such as recovery and business support grants.
The NSW Government can make a natural disaster declaration allowing eligible individuals and communities from impacted Local Government Areas access to a range of special financial assistance measures.
In 2021–22, there were 14 natural disaster declarations announced comparable to 14 in the previous year. These natural disaster declarations largely related to storms and floods throughout the State. In 2021–22, there was a larger number of 'severe weather' events declared, with four in 2021–22 (nil in 2020–21).
Natural disaster expenses increased 143% to $1.4 billion in 2021–22, up from $569 million last year
Over 2021–22, the budgeted cost for declared natural disasters was $1.9 billion ($725 million in 2020–21). Actual expenditure by the State on disaster response increased by $815 million to $1.4 billion. The graph below shows the total allocation and spend by cluster for 2022 compared to their budget spend.
Deficit of $15.3 billion compared with a budgeted deficit of $8.6 billion
The outcomes of the government’s overall activity and policies are reflected in its net operating balance (budget result). This is the difference between the cost of general government service delivery and the revenue earned to fund these sectors.
The General Government Sector, which comprises 196 entities, generally provides goods and services funded centrally by the State.
In addition to the 196 entities within the General Government Sector, a further 85 government controlled businesses are included within the consolidated Total State Sector financial statements. These businesses generally provide goods and services, such as water, electricity and financial services for which consumers pay for directly, and form part of the PNFC (31) and PFC (54) sectors.
The budget result for the 2021–22 financial year was a deficit of $15.3 billion compared to an original forecast of a budget deficit of $8.6 billion.
Revenues increased $16.1 billion to $106.7 billion
The State’s total revenues increased $16.1 billion to $106.7 billion, an increase of 17.8% compared to the previous year. Total revenue growth in 2020–21 was 5.1%. The State's increase in revenue was mostly from $9.2 billion in grants and subsidies and $4.6 billion in taxation.
Taxation revenue increased by 13.3%
Taxation revenue increased by $4.6 billion, mainly due to the net of:
- $4.9 billion higher stamp duties collected from property sales driven by growth in property transaction volumes and prices during 2021–22. This was growth was experienced across residential and commercial property markets
- $296 million lower gambling and betting taxes compared to 2020–21. Decrease was primarily attributed to the ongoing effects of COVID-19 restrictions and venue closures within the first half of 2021–22.
Stamp duties of $16.6 billion remains the largest source of taxation revenue, $7.7 billion higher than payroll tax of $8.9 billion, the second-largest source of taxation revenue.
Assets grew by $53 billion to $571 billion
The State’s assets include physical assets such as land, buildings and infrastructure, and financial assets such as cash, and other financial instruments and equity investments. The value of total assets increased by $53.2 billion or 10.3% to $571 billion. The increase was largely due to increases in the carrying value of land, buildings and infrastructure systems.
Valuing the State’s physical assets
State’s physical assets valued at $437 billion
The value of the State’s physical assets increased by $46.8 billion to $437 billion in 2021–22 ($724 million increase in 2020–21). The State’s physical assets include land and buildings ($198 billion), infrastructure systems ($221 billion), and plant and equipment ($18 billion).
The movement in physical asset values between years includes additions, disposals, depreciation and valuation adjustments. Other movements include assets reclassified to held for sale and other opening balance adjustments.
Appendix one – Prescribed entities
Appendix three – TSS sectors and entities
Copyright notice
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Actions for Transport and Infrastructure 2022
Transport and Infrastructure 2022
What the report is about
Result of the Transport and Infrastructure cluster agencies' financial statement audits for the year ended 30 June 2022.
What we found
Unmodified audit opinions were issued for all Transport and Infrastructure cluster agencies' financial statements.
An 'other matter' paragraph was included in TAHE's Independent Auditor's Report for its 30 June 2022 financial statements which draws attention to Transport and Asset Holding Entity's (TAHE) reliance on government-funded customers.
We included an ‘emphasis of matter’ paragraph in the Independent Auditor’s Report for State Transit Authority of New South Wales’ (the authority) 30 June 2022 financial statements, which draws attention to the financial statements being prepared on a liquidation basis as the authority’s principal activities ceased operations on 3 April 2022.
What the key issues were
The 2021–22 audits identified five high-risk findings:
- detailed business modelling to support returns from TAHE
- valuation of assets at TAHE
- control of assets at TAHE
- accounting and valuation of tree assets at Centennial Park and Moore Park Trust and Parramatta Park Trust.
Access and licence fees - TAHE
Revised commercial agreements were signed between TAHE, the operators and Transport for NSW on 23 June 2022 to reflect increased access and licence fees detailed in the 18 December 2021 Heads of Agreement.
TAHE’s ability to generate the expected return of 2.5% based on the current modelling is heavily reliant on the government funding the public rail operators (TAHE's customers).
There are risks that:
- TAHE will not be able to recontract for access and licence fees at a level that is consistent with current projections
- future governments' funding to TAHE's key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections
- TAHE will be unable to grow its non-government revenues.
Valuation of assets - TAHE
Although TAHE's selected valuation of assets falls within an acceptable range, there remains a significant gap between what has been assessed as an acceptable range and TAHE's range.
What we recommended
Control of assets - TAHE
While we accepted TAHE’s position on control for the current year, NSW Treasury and TAHE should continue to monitor the risk that control of TAHE assets could change in future reporting periods. TAHE must continue to demonstrate control of its assets or the current accounting presentation would need to be reconsidered.
This report provides Parliament and other users of the Transport and Infrastructure cluster’s financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations.
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision-making are enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations related to the financial reporting of agencies in the Transport and Infrastructure cluster (the cluster) for 2022.
Section highlights
|
Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision-making.
This chapter outlines our observations and insights from our financial statement audits of agencies in the cluster.
Section highlights
|
Appendix one – Misstatements in financial statements submitted for audit
Appendix two – Early close procedures
Appendix three – Timeliness of financial reporting
Appendix four – 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.
Actions for Audit Insights 2018-2022
Audit Insights 2018-2022
What the report is about
In this report, we have analysed the key findings and recommendations from our audit reports over the past four years.
This analysis includes financial audits, performance audits, and compliance audits of state and local government entities that were tabled in NSW Parliament between July 2018 and February 2022.
The report is framed by recognition that the past four years have seen significant challenges and emergency events.
The scale of government responses to these events has been wide-ranging, involving emergency response coordination, service delivery, governance and policy.
The report is a resource to support public sector agencies and local government to improve future programs and activities.
What we found
Our analysis of findings and recommendations is structured around six key themes:
- Integrity and transparency
- Performance and monitoring
- Governance and oversight
- Cyber security and data
- System planning for disruption
- Resource management.
The report draws from this analysis to present recommendations for elements of good practice that government agencies should consider in relation to these themes. It also includes relevant examples from recent audit reports.
In this report we particularly call out threats to the integrity of government systems, processes and governance arrangements.
The report highlights the need for balanced advice to government on options and risks, for transparent documentation and reporting of directions and decisions, and for early and open sharing of information with integrity bodies and audit.
A number of the matters highlighted in this report are similar to those described in our previous Insights Report, (Performance Audit Insights: key findings from 2014–2018) specifically in relation to cyber and information security, to performance measurement, reporting and evaluation, and system and workforce planning and capability.
Fast facts
- 72 audits included in the Audit Insights 2018–2022 analysis
- 4 years of audits tabled by the Auditor-General for New South Wales
- 6 key themes for Audit Insights 2018–2022.
I am pleased to present the Audit Insights 2018–2022 report. This report describes key findings, trends and lessons learned from the last four years of audit. It seeks to inform the New South Wales Parliament of key risks identified and to provide insights and suggestions to the agencies we audit to improve performance across the public sector.
The report is framed by a very clear recognition that governments have been responding to significant events, in number, character and scale, over recent years. Further, it acknowledges that public servants at both state and council levels generally bring their best selves to work and diligently strive to deliver great outcomes for citizens and communities. The role of audit in this context is to provide necessary assurance over government spending, programs and services, and make suggestions for continuous improvement.
A number of the matters highlighted in this report are similar to those described in our previous Insights Report, (Performance Audit Insights: key findings from 2014–2018) specifically in relation to cyber and information security, to performance measurement, reporting and evaluation, and system and workforce planning and capability.
However, in this report we particularly call out threats to the integrity of government systems, processes and governance arrangements. We highlight the need for balanced advice to government on options and risks, for transparent documentation and reporting of directions and decisions, and for early and open sharing of information with integrity bodies and audit. Arguably, these considerations are never more important than in an increasingly complex environment and in the face of significant emergency events and they will be key areas of focus in our future audit program.
While we have acknowledged the challenges of the last few years have required rapid responses to address the short-term impacts of emergency events, there is much to be learned to improve future programs. I trust that the insights developed in this report provide a helpful resource to public sector agencies and local government across New South Wales. I would be pleased to receive any feedback you may wish to offer.
Margaret Crawford
Auditor-General for New South Wales
Integrity and transparency | Performance and monitoring | Governance and oversight | Cyber security and data | System planning | Resource management |
Insufficient documentation of decisions reduces the ability to identify, or rule out, misconduct or corruption. | Failure to apply lessons learned risks mistakes being repeated and undermines future decisions on the use of public funds. | The control environment should be risk-based and keep pace with changes in the quantum and diversity of agency work. | Building effective cyber resilience requires leadership and committed executive management, along with dedicated resourcing to build improvements in cyber security and culture. | Priorities to meet forecast demand should incorporate regular assessment of need and any emerging risks or trends. Absence of an overarching strategy to guide decision-making results in project-by-project decisions lacking coordination. | Governments must weigh up the cost of reliance on consultants at the expense of internal capability, and actively manage contracts and conflicts of interest. |
Government entities should report to the public at both system and project level for transparency and accountability. | Government activities benefit from a clear statement of objectives and associated performance measures to support systematic monitoring and reporting on outcomes and impact. | Management of risk should include mechanisms to escalate risks, and action plans to mitigate risks with effective controls. | In implementing strategies to mitigate cyber risk, agencies must set target cyber maturity levels, and document their acceptance of cyber risks consistent with their risk appetite. | Service planning should establish future service offerings and service levels relative to current capacity, address risks to avoid or mitigate disruption of business and service delivery, and coordinate across other relevant plans and stakeholders. | Negotiations on outsourced services and major transactions must maintain focus on integrity and seeking value for public funds. |
Entities must provide balanced advice to decision-makers on the benefits and risks of investments. | Benefits realisation should identify responsibility for benefits management, set baselines and targets for benefits, review during delivery, and evaluate costs and benefits post-delivery. | Active review of policies and procedures in line with current business activities supports more effective risk management. | Governments hold repositories of valuable data and data capabilities that should be leveraged and shared across government and non-government entities to improve strategic planning and forecasting. | Formal structures and systems to facilitate coordination between agencies is critical to more efficient allocation of resources and to facilitate a timely response to unexpected events. | Transformation programs can be improved by resourcing a program management office. |
Clear guidelines and transparency of decisions are critical in distributing grant funding. | Quality assurance should underpin key inputs that support performance monitoring and accounting judgements. | Governance arrangements can enable input into key decisions from both government and non-government partners, and those with direct experience of complex issues. | Workforce planning should consider service continuity and ensure that specialist and targeted roles can be resourced and allocated to meet community need. | ||
Governments must ensure timely and complete provision of information to support governance, integrity and audit processes. | |||||
Read more | Read more | Read more | Read more | Read more | Read more |
This report brings together a summary of key findings arising from NSW Audit Office reports tabled in the New South Wales Parliament between July 2018 and February 2022. This includes analysis of financial audits, performance audits, and compliance audits tabled over this period.
- Financial audits provide an independent opinion on the financial statements of NSW Government entities, universities and councils and identify whether they comply with accounting standards, relevant laws, regulations, and government directions.
- Performance audits determine whether government entities carry out their activities effectively, are doing so economically and efficiently, and in accordance with relevant laws. The activities examined by a performance audit may include a selected program or service, all or part of an entity, or more than one government entity. Performance audits can consider issues which affect the whole state and/or the local government sectors.
- Compliance audits and other assurance reviews are audits that assess whether specific legislation, directions, and regulations have been adhered to.
This report follows our earlier edition titled 'Performance Audit Insights: key findings from 2014–2018'. That report sought to highlight issues and themes emerging from performance audit findings, and to share lessons common across government. In this report, we have analysed the key findings and recommendations from our reports over the past four years. The full list of reports is included in Appendix 1. The analysis included findings and recommendations from 58 performance audits, as well as selected financial and compliance reports tabled between July 2018 and February 2022. The number of recommendations and key findings made across different areas of activity and the top issues are summarised at Exhibit 1.
The past four years have seen unprecedented challenges and several emergency events, and the scale of government responses to these events has been wide-ranging involving emergency response coordination, service delivery, governance and policy. While these emergencies are having a significant impact today, they are also likely to continue to have an impact into the future. There is much to learn from the response to those events that will help the government sector to prepare for and respond to future disruption. The following chapters bring together our recommendations for core elements of good practice across a number of areas of government activity, along with relevant examples from recent audit reports.
This 'Audit Insights 2018–2022' report does not make comparative analysis of trends in public sector performance since our 2018 Insights report, but instead highlights areas where government continues to face challenges, as well as new issues that our audits have identified since our 2018 report. We will continue to use the findings of our Insights analysis to shape our future audit priorities, in line with our purpose to help Parliament hold government accountable for its use of public resources in New South Wales.
Appendix one – Included reports, 2018–2022
Appendix two – About this report
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.
Actions for Universities 2021
Universities 2021
What the report is about
Results of the financial statement audits of the public universities in NSW for the year ended 31 December 2021.
What we found
Financial reporting
Unmodified audit opinions were issued for all ten universities.
The University of Wollongong reported the retrospective correction of a prior period error relating to a $169 million contract termination liability.
All universities reported positive net results in 2021 (four in 2020) and each showed improvement from 2020. This was mainly due to expenditure decreasing by a combined $644 million (5.8%) from 2020. Universities implemented redundancy programs in response to the COVID-19 pandemic, which resulted in a decrease of nearly 2,300 full-time equivalent staff in 2021.
All universities held an investment in Education Australia Limited, which paid to its shareholders a fully franked dividend comprising cash and shares in IDP Education Limited. This increased the combined investment revenues of the universities by $515 million in 2021. However, it affected each university's net result differently depending on elections made in their historical accounting treatment.
Government grants increased by $442 million from 2020, of which $297 million related to the Commonwealth's 2021 additional Research Support Program funding to the NSW universities which was a COVID-19 support measure to the sector.
Over 43% of universities' course fees revenue comes from three countries (39% in 2020). Students from China now represent over half of all overseas student enrolments. A high level of reliance on student revenue from a single country poses a concentration risk for universities.
Internal controls
We reported 105 findings to universities on internal control deficiencies (110 in 2020).
Four high-risk findings were identified (three in 2020), relating to:
- the status of one university's work in assessing its liability for underpayment of staff
- IT control deficiencies over privileged user access
- control deficiencies that resulted in non-recognition of a liability in one university's prior year's financial statements
- a detailed review of payroll compliance for casual staff, which remains outstanding at one university.
There were 45 repeat findings of control deficiencies in 2021 (45 in 2020).
All universities have drafted or implemented a cybersecurity policy and established a governance committee accountable for cybersecurity. However, improvements could be made in:
- recording and monitoring of attempted cyber incidents
- assessing cyber risks relating to IT vendors
- implementation of cybersecurity control measures for key systems.
Four out of 13 entities experienced a significant cyber incident during 2021.
What we recommended
- Universities should prioritise actions to address repeat findings on internal control deficiencies, particularly where the issue has been repeated for a number of years.
- Universities and controlled entities should prioritise improvements to their cybersecurity and resilience.
Fast facts
There are ten public universities in NSW, with 52 controlled entities in Australia and 22 overseas controlled entities.
- $12b total combined adjusted revenue in 2021, an increase of $1.1 billion (10.5%) from 2020
- $10.4b total combined expenditure in 2021, a decrease of $644 million (5.8%) from 2020
- 79,134 overseas student enrolments in 2021, a decrease of 3,138 students (3.8%) from 2020
- 209,018 domestic student enrolments in 2021, an increase of 1,622 students (0.8%) from 2020
- 4 high-risk management letter findings were identified (3 in 2020)
- 43% of reported issues were repeat issues.
This report provides Parliament with the results of our financial audits of universities in New South Wales and their controlled entities in 2021, including our analysis, observations and recommendations in the following areas:
- financial reporting
- internal controls and governance
- teaching and research.
Financial reporting is an important element of governance. Confidence and transparency in university sector decision-making are enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations on the financial reporting of universities in NSW for 2021.
Section highlights
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Appropriate and robust internal controls help produce reliable financial reports and reduce risks associated with managing finances, compliance and administration of universities.
This chapter outlines the internal controls related observations and insights across universities in NSW for 2021, including overall trends in findings, level of risk and implications.
Our audits do not review all aspects of internal controls and governance every year. The more significant issues and risks are included in this chapter. These along with the less significant matters are reported to universities for management to address.
Section highlights
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Universities' primary objectives are teaching and research. They invest most of their resources aiming to achieve quality outcomes in academia and student experience. Universities have committed to achieving certain government targets and compete to advance their reputation and their standing in international and Australian rankings.
This chapter outlines teaching and research outcomes for universities in NSW for 2021.
Section highlights
|
Appendix one – List of 2021 recommendations
Appendix two – Status of 2020 recommendations
Appendix three – Universities' controlled entities
Copyright notice
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Actions for Transport 2021
Transport 2021
What the report is about
The results of the Transport cluster agencies’ financial statement audits for the year ended 30 June 2021.
What we found
Unmodified financial statement audit opinions were issued for all Transport cluster agencies. Resolution of issues delayed signing the Transport Asset Holding Entity of NSW (TAHE) until 24 December 2021. Matters relating to TAHE are also reported in the report on State Finances 2021.
Emphasis of Matter - TAHE
An Emphasis of Matter paragraph was included in TAHE's audit opinion to draw attention to uncertainty associated with:
- future access and licence fees that are subject to re-signed agreements
- an additional $4.1 billion of funding that is outside the forward estimates period
- a significant portion of the fair value of TAHE’s non-financial assets is reflected in the terminal value, which is outside the ten-year contract period to 30 June 2031, and the risk that TAHE will not be able to negotiate contract terms to support current projections.
TAHE's transition from RailCorp also changed its valuation of assets to an income approach, resulting in a $20.3 billion decrease to the fair value. The fair value decrease was because the cash flows were not sufficient to support the previous recorded value.
TAHE corrected a misstatement of $1.2 billion relating to the valuation of its assets. This followed significant deliberation on key judgements and assumptions, with TAHE adopting risk assumptions in its valuation that were not in line with comparable benchmarks.
Emphasis of Matter - State Transit Authority of New South Wales
An Emphasis of Matter paragraph was included in the State Transit Authority of NSW's (the Authority) audit opinion to draw attention to the financial statements not prepared on a going concern basis. This was because the NSW Government put the Authority's bus contracts out to competitive tender and accordingly, management assessed the Authority's principal activities are not expected to operate for a full 12 months after 30 June 2021.
The implementation of AASB 1059 ‘Service Concession Arrangements: Grantors’ resulted in a net increase in assets of $23.5 billion across the Transport cluster.
The 2020–21 audits identified six high-risk and 45 moderate risk issues across the cluster. Fourteen of the moderate risk issues were repeat issues, including information technology controls around management of user access for key financial systems and payroll processes.
The high-risk issues, in addition to those related to TAHE and previously reported in the report on State Finances 2021, include:
- absence of conflict of declarations related to land acquisition processes at Transport for NSW
- no evidence of conflict of interest declarations obtained by TAHE from consultants and contractors regarding involvement in other engagements.
What we recommended
TAHE needs to:
- finalise revised commercial agreements to reflect fees detailed in a Heads of Agreement signed on 18 December 2021
- prepare robust projections and business plans to support the required rate of return.
NSW Treasury and TAHE should monitor the risk that control of TAHE assets could change in the future.
Transport for NSW needs to significantly improve its processes to ensure all key information is identified and shared with the Audit Office.
Transport agencies should implement a process to ensure conflicts of interest declarations are completed for land acquisitions and applied consistently across the cluster.
Transport agencies should implement a process to capture all contracts and agreements entered to ensure:
- agencies are aware of contractual obligations
- financial reporting implications are assessed, particularly with respect to leases, revenue and service concession arrangements.
Fast facts
The Transport cluster plans and delivers infrastructure and integrated services across all modes of transport. This includes road, rail, bus, ferry, light rail, cycling and walking. There are 11 agencies in the cluster.
- $128b road and maritime system infrastructure assets as at 30 June 2021
- 100% unqualified audit opinions were issued on agencies 30 June 2021 financial statements
- 26 monetary misstatements were reported in 2020–21
- $24.9b rail systems infrastructure assets as at 30 June 2021
- 6 high-risk management letter findings were identified
- 37% of reported issues were repeat issues
This report provides Parliament and other users of the transport cluster (the cluster) agencies’ 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 cluster for 2021.
Section highlights
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Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.
This chapter outlines our observations and insights from our financial statement audits of agencies in the cluster.
Section highlights
|
Findings reported to management
The number of findings reported to management has increased, and 37 per cent of all issues were repeat issues
Breakdowns and weaknesses in internal controls increase the risk of fraud and error. Deficiencies in internal controls, matters of governance interest and unresolved issues were reported to management and those charged with governance of agencies. The Audit Office does this through management letters, which include observations, related implications, recommendations and risk ratings.
In 2020–21, there were 73 findings raised across the cluster (56 in 2019–20) and 37 per cent of all issues were repeat issues (43 per cent in 2019–20).
In view of the recent performance audit ‘Managing Cyber Risks’ and compliance audit ‘Compliance with the NSW Cyber Security Policy’ involving the cluster, it is noted with concern that the most common repeat issues related to weaknesses in controls over information technology user access administration and password management. Moderate risk issues included completeness and accuracy of contract registers, accounting for assets and management of supplier and payroll masterfiles.
A delay in implementing audit recommendations increases the risk of intentional and accidental errors in processing information, producing management reports, and generating financial statements. This can impair decision-making, affect service delivery and expose agencies to fraud, financial loss and reputational damage. Control deficiencies may also mean agency staff are less likely to follow internal policies, inadvertently causing the agency not to comply with legislation, regulation, and central agency policies.
The table below describes the common issues identified across the cluster by category and risk rating.
Risk rating | Issue |
Information technology | |
Moderate: 7 new, 4 repeat** |
The financial audits identified opportunities for agencies to improve information technology processes and controls that support the integrity of financial data used to prepare agencies' financial statements. Of particular concern are issues associated with:
|
Low: 4 new, 1 repeat*** | |
Internal control deficiencies or improvements | |
High: 1 new* |
The financial audits identified internal control deficiencies across key business processes, including:
|
Moderate: 15 new, 8 repeat** | |
Low: 2 new, 5 repeat*** | |
Financial reporting | |
High: 3 new* |
The financial audits identified opportunities for agencies to strengthen financial reporting, including:
|
Moderate: 3 new, 1 repeat** | |
Low: 2 new*** | |
Governance and oversight | |
High: 1 new* |
The financial audits identified opportunities for agencies to improve governance and oversight processes, including:
|
Moderate: 2 new** | |
Non-compliance with key legislation and/or central agency policies | |
High: 1 new* |
The financial audits identified the need for agencies to improve its compliance with key legislation and central agency policies, including:
|
Moderate: 4 new, 1 repeat** | |
Low: 1 new, 7 repeat*** |
** Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
*** Low risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
Note: Management letter findings are based either on final management letters issued to agencies.
2020–21 audits identified six high-risk findings
High-risk findings were reported at the following cluster agencies.
Agency | Description |
2020–21 findings | |
Transport for NSW (new finding) |
Declaration of conflicts of interest in the land acquisition process In 2021, we conducted a performance audit over the Acquisition of 4–6 Grand Avenue, Camellia which examined:
The report made several recommendations over Transport for NSW’s internal policies and procedures to guide the land acquisition process. As part of the financial audit, we obtained an understanding of key controls and processes relating to the acquisition of land, relevant to the audit of the financial statements. We found that conflicts of interests were not always declared by all officers involved in the land acquisition process. Furthermore, processes for declaring conflicts of interests are not consistently applied across cluster agencies. Out of a sample of 19 land acquisitions tested, we identified:
Management advised that the land acquisition processes, at the time of the land acquisitions, did not require formal conflicts of interests to be declared as they believe that as per Transport for NSW code of conduct, declaration is only required where the staff member considers that a potential or perceived Conflict of Interest exists. However, Transport for NSW's Procurement Policy requires the documentation of formal declarations from all staff involved in procurement activities to formally disclose any conflicts of interest or state that they do not have a conflict of interest. This matter has been included as a high-risk finding in the management letter as absence of rigorous and consistent management of conflicts of interests, and non-compliance with established policies increases the risk that Transport for NSW may be exposed to reputational damage or financial losses in relation to land acquisitions. Furthermore, this may result in lack of probity or value-for money considerations during the land acquisition process. Further details are elaborated below under 'Land acquisitions'. |
Transport Asset Holding Entity of New South Wales (new finding) |
Control over TAHE assets and operations The State-Owned Corporations Act 1989 maintains that all decisions relating to the operation of a statutory state-owned corporation (SOC) are to be made by or under the authority of the board. However, under the Transport Administration Act 1988 (TAA), the functions of TAHE may only be exercised under one or more operating licences issued by the portfolio minister. The current Operating Licence confers terms and conditions for TAHE to carry out its functions, and imposes constraints on TAHE, including (but not limited to):
Such operating licences are short term in nature, and the TAA allows the transport minister (portfolio minister) to grant one or more operating licences to TAHE and may amend, substitute, or impose, amend or revoke conditions of the operating licence. For the current year, the legal form of the arrangements established in its first year of operation imply TAHE has control over the assets based on the Implementation Deed and the agreements signed with the public operators. However, risks remain as TAHE is in its early stages, and the actual substance of operations will need to be observed and considered. Given the restrictions that can be placed on the entity through the Operating Licence, and the ability to make further changes to the Operating Licence and Statement of Expectations set by the portfolio minister, there is a risk there could be limitations placed on the Board of Directors to operate with sufficient independence in its decision-making with respect to the operations of TAHE. Over time, this may further impact the degree of control required by TAHE to satisfy the recognition criteria over its assets. It may also fundamentally change the presentation of TAHE’s financial statements. Future limitations to the degree of control TAHE, and its Board, can exercise over its functions may impact the degree of control TAHE has over its assets going forward. As part of the 2021–22 audit, we will monitor and assess whether, in substance, these assets continue to be controlled by TAHE and whether, in substance, TAHE can operate as an independent SOC. We require management continue to demonstrate that TAHE continues to maintain control over its assets and has the ability to operate as an independent SOC. Further details are described below under 'Transport Asset Holding Entity'. |
Transport Asset Holding Entity of New South Wales (new finding) |
Asset valuation The final updated valuation was based on cash flows that were in a signed Heads of Agreement, which stated that it set out the proposed indicative future access and licence fees which will form the basis of the negotiations between TAHE, Transport for NSW, Sydney Trains and NSW Trains, who will work together to review access fees and licence fees payable under the agreements and to make all necessary changes to the Operating Agreements by 1 July 2022. This adds uncertainty in the cash flows. It is crucial that TAHE formalises these updated fees in legally binding signed access and licence agreements with the relevant parties as soon as possible. Refer below for further details on the Heads of Agreement. |
Transport Asset Holding Entity of New South Wales (new finding) |
Conflict of interest (COI) management For procurement transactions through direct negotiation with single quotes, there was no evidence of COI declarations obtained from the consultants and contractors regarding involvement in other engagements. Contractors and consultants are required to declare actual COI. However, there was no requirement to confirm nil conflict of interest. In addition, there is a risk that perceived COI may not be adequately assessed or managed. TAHE is expected to operate as an independent SOC and would need to ensure any perceived or actual conflict of interest is adequately addressed. Management should implement a process to:
The declarations should consider individuals and relationships that may create, or may be perceived to create, conflicts of interest. |
Transport Asset Holding Entity of New South Wales (new finding) |
Detailed business modelling to support returns On 18 December 2021, Transport for NSW, TAHE and the operators, Sydney Trains and NSW Trains entered into a Heads of Agreement (HoA). This HoA forms the basis of negotiations to revise the pricing within the existing 10-year contracts and deliver upon the shareholders' expectation of a return of 2.5 per cent per annum of contributed equity, including recovering the revaluation loss incurred in 2020–21. TAHE needs to revise its business plan and include detailed business modelling that supports the shareholding ministers' revised expectations of return (2.5 per cent return on the State’s equity injections and recovery of the write-down of assets over the average useful life of those assets) and align the business plan and Statement of Corporate Intent. This requires more detailed projections, estimates and plans that support how TAHE expects to recover the asset write-down and expected returns to government. The current modelling for ten years needs to be enhanced with modelling over the expected recovery period of approximately 33 years. |
Transport Asset Holding Entity of New South Wales (new finding) |
Access price build-up Management explained that in determining access and licence fees for the agreements with Sydney Trains and NSW Trains, assets prior to the commencement of equity injections in 2015–16 were excluded from the calculations. Management explained the premise being that these assets were previously funded by government through capital grants. The replacement and refurbishment of these assets is expected to be through government funded maintenance performed through the public rail operators and/or the equity injections from NSW Treasury rather than through access and licence fees. |
The number of moderate risk findings increased from prior year
Forty-five moderate risk findings were reported in 2020–21, representing a 73.1 per cent increase from 2019–20. Of these, 14 were repeat findings, and 31 were new issues.
Key moderate risk findings related to:
- weaknesses in user access management to key financial systems
- management of contracts and agreements register
- management of supplier and payroll masterfiles
- accounting for assets
- control deficiencies at service organisations
- segregation of duties relating to the hiring of employees
- conflict of interest management
- annual leave management
- review of internal audit charter
- disaster recovery planning.
Transport Asset Holding Entity of New South Wales
Background
The establishment of TAHE was originally announced by the NSW Government in the 2015–16 State Budget. On 1 July 2020, the former Rail Corporation New South Wales (RailCorp), a not-for-profit entity, transitioned to the Transport Asset Holding Entity of New South Wales (TAHE), a for-profit statutory state-owned corporation under the Transport Administration Act 1988. There was no change in the structure of TAHE as a new entity was not created. Ownership remains fully with the government. TAHE, and the former RailCorp, were both classified as Public Non-Financial Corporation (PNFC) entities within the Total State Sector Accounts.
Prior to 1 July 2015, the government paid appropriations to Transport for NSW, a General Government Sector (GGS) agency, to construct transport assets. When completed, these assets were granted to the former RailCorp, a not for-profit entity within the PNFC sector. The grants to the former RailCorp were recorded as an expense in the State’s GGS budget result.
From 1 July 2015, the government announced the creation of TAHE (a dedicated asset manager). Funding for new capital projects was to be provided through equity injections and was no longer recorded as an expense to the GGS budget, even though the business model was yet to be determined. The change, as explained in the 2015–16 State Budget, was due to the expectation that the former RailCorp will transition to TAHE, which was intended, over time to provide a commercial return. That Budget also highlighted how the change, which was largely a change in the basis of accounting, was intended to improve the GGS budget result each year. In total, the GGS has contributed approximately $11.1 billion to TAHE since 2015–16. This includes the equity injections from the GGS to TAHE made in the current year of $2.4 billion.
NSW Treasury initially set a timetable for the stand-up of TAHE of 1 July 2019, which included finalising the business model, operating model and contracts for the use of TAHE's assets. The enactment of the Transport Administration Act 1988 resulted in RailCorp transitioning to TAHE on 1 July 2020, 12 months after its originally planned operational date. Contributions paid to the former RailCorp and subsequently to TAHE by the GGS were treated as equity investments from July 2015 forward. This treatment continued, despite delays in settling the business model. In 2020, the Audit Office raised a high-risk finding due to the significance of the financial reporting impacts and business risks for NSW Treasury and TAHE.
The business model adopted and the flow of funds between transport agencies in the GGS and PNFC sectors is shown in the diagram below. For further details refer to the Report on State Finances 2021.
Appendix one – Misstatements in financial statements submitted for audit
Appendix two – Early close procedures
Appendix three – Financial data
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Actions for Treasury 2021
Treasury 2021
What the report is about
The results of Treasury cluster agencies' financial statement audits for the year ended 30 June 2021. The results of the audit of the NSW Government's consolidated Total State Sector Accounts (TSSA), which are prepared by NSW Treasury, are reported separately in our report on State Finances 2021.
What we found
Unmodified audit opinions were issued for all Treasury cluster agencies.
The number of identified monetary misstatements increased from 16 in 2019–20 to 24 in 2020–21.
Reported corrected monetary misstatements decreased from 15 in 2019–20 to seven with a gross value of $1.1 billion in 2020–21.
The largest corrected misstatement was in NSW Treasury's financial statements and was a $1 billion correction to administered borrowings.
Reported uncorrected monetary misstatements increased from one in 2019–20 to 17 with a gross value of $168 million in 2020–21.
Seven of the 2020–21 uncorrected misstatements related to one common decision relating to investment management funds terminated during the year by the NSW Treasury Corporation (TCorp).
All agencies submitted their 2020–21 financial statements within NSW Treasury's reporting deadlines.
What the key issues were
Significant audit findings were identified with respect to NSW Treasury's processes to prepare the NSW Government's consolidated TSSA (whole of government accounts). This included one extreme finding and several high-risk findings related to NSW Treasury processes. These are reported in our report on State Finances 2021.
Two high-risk issues raised in 2019–20 were also not addressed by NSW Treasury during the year and were repeat issues reported to management. These related to the appropriations framework and resolution of cross cluster payments, and instances where some agencies spent deemed appropriations money without an authorised delegation.
A number of previously reported audit findings and recommendations with respect to icare continue to be ongoing issues, namely:
- The Workers Compensation Nominal Insurer continues to hold less assets than the estimated present value of its future payment obligations.
- The Workers Compensation Nominal Insurer's four week return-to-work rate fell from 68% to 64%. This is below icare's 70% target. Contributing factors include COVID-19 lockdowns which have impacted claims handling processes, and increased barriers to claimants returning to work.
- Instances were noted where inadequate documentation was kept on file to support claims, including pre-injury average weekly earnings (PIAWE) calculations.
The Workers Compensation (Dust Diseases) Authority increased its outstanding claims liability by $93.9 million, which included $39.3 million to remediate historical underpayments, resulting from workers not being paid the rate required by existing legislation.
The icare Board approved a new approach for remediating PIAWE underpayments on 24 September 2021, the date the Workers Compensation Nominal Insurer’s financial statements were approved for issue. The impact of the decision on the financial statements was not discussed with the Audit Office and assessed as an ‘after balance date event’.
What we recommended
Our report on State Finances 2021 made several recommendations to improve NSW Treasury processes. These included:
- improve processes to ensure information is shared with audit on a timely basis
- seek legislative amendments to resolve statutory inconsistencies relating to statutory reporting time frames
- implement effective quality review processes over key accounting information
- establish a policy to determine the minimum expected rate of return on equity injections in other public sector entities
- prepare robust financial projections to support accounting decisions
- re-confirm sector classifications of TAHE, Sydney Trains and NSW Trains
- ensure sufficient oversight of its use of consultants and assess the risk of an overdependence on consultants at the cost of internal capability
- improve disclosures of equity injections invested in other public sector entities
- determine a state-wide policy on when borrowings are recognised in agency financial statements
- make legislative amendments to ensure expenditure incurred across financial years does not exceed the appropriation authority and assess the financial reporting impact
- improve the guidance provided to agencies to ensure expenditure of public money is properly supported by authorised delegations.
We also recommended icare should ensure:
- it has sufficient controls over claim payments including an effective quality assurance program, to minimise claim payment errors
- that documentation to support injured worker benefit calculations is appropriately maintained, and the documentation requirements are set out in a policy
- the impact of ‘after balance date events’ on financial statements is appropriately assessed
- its operational practices are improved to ensure the correct payment of claims in compliance with legislative requirements. icare also needs to act on a timely basis on received legal advice and amend operational practices to ensure correct payments are made.
Fast factsNSW Treasury notes that it is the Government's principal financial and economic adviser to guide the State’s growth for the benefit of the people who live, work and study in NSW.
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This report focuses on agencies within the Treasury cluster and provides parliament and other users of the Treasury cluster's financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations.
NSW Treasury also prepares the consolidated NSW whole of government financial statements (the Total State Sector Accounts), which is reported in the report on State Finances 2021.
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making is enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations related to the financial reporting of agencies in the Treasury cluster (the cluster) for 2021.
Section highlights
|
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 Treasury cluster.
Section highlights
|
Findings reported to management
The number of findings reported to management has decreased, but 30% of all issues were repeat issues and these need greater focus and prioritisation
Breakdowns and weaknesses in internal controls increase the risk of fraud and error. Deficiencies in internal controls, matters of governance interest and unresolved issues were reported to management and those charged with governance of agencies. The Audit Office does this through management letters, which include observations, related implications, recommendations and risk ratings.
In 2020–21, there were 57 findings raised across the cluster (71 in 2019–20), 30% of which were repeat issues (32% in 2019–20).
The most common repeat issues related to claims processing and information technology user access administration.
A delay in implementing audit recommendations increases the risk of intentional and accidental errors in processing information, producing management reports and generating financial statements. This can impair decision-making, affect service delivery and expose agencies to fraud, financial loss and reputational damage. Poor controls may also mean agency staff are less likely to follow internal policies, inadvertently causing the agency not to comply with legislation, regulation and central agency policies.
The table below describes the common issues identified across the cluster by category and risk rating.
Risk rating | Issue | |
Information technology | ||
Moderate2 Low1 |
The financial audits identified the need for agencies to improve information technology processes and controls that support the integrity of financial data used to prepare agencies' financial statements. Of particular concern are issues associated with:
|
|
Internal control deficiencies or improvements | ||
High3 Moderate2 Low1
|
The financial audits identified internal control weaknesses across key business processes, including:
|
|
Financial reporting | ||
High3 Moderate2 Low1 |
The financial audits identified opportunities for agencies to strengthen financial reporting, including:
|
|
Governance and oversight | ||
Extreme4 High3 Low1 |
The financial audits identified the need for agencies to improve governance and oversight processes, including:
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|
Non-compliance with key legislation and/or central agency policies | ||
High3 Low1 |
The financial audits identified the need for agencies to improve its compliance with key legislation and central agency policies, including:
|
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4 Extreme risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
3 High risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
2 Moderate risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
1 Low risk from the consequence and/or likelihood of an event that has had, or may have a negative impact on the entity.
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The number of moderate risk findings decreased from prior year
There were 21 moderate risk findings reported in 2020–21, representing a 30% decrease from 2019–20. Of these, ten were repeat findings, and 11 were new issues.
Moderate risk repeat findings include:
- claims processing weaknesses including claim payment errors, and inadequate documentation to support calculations and evidence claims were reviewed by someone with appropriate delegation
- inadequate review of user access and higher risks of unintended or unauthorised system access
- controls assurance reports from an outsourced service provider did not cover the services it provided to the government agency
- failure to review procurement contracts register to ensure it is accurate and complete
- ongoing control deficiencies with grant application and approval processes
- key policies including delegations not being reviewed in a number of years and do not incorporate new requirements from more recent legislation
- quality review processes failing to identify material classification errors associated with grant funding.
NSW Treasury related matters
Accounting for the Government's investment in Transport Asset Holding Entity
A total of seven recommendations were made with respect to NSW Treasury's processes to prepare the NSW Government's consolidated whole of government accounts (the TSSA). This included one extreme risk finding and six high risk findings. The extreme finding related to NSW Treasury needing to significantly improve its processes to ensure all key information is identified and shared with the Audit Office on a timely basis. Other high-risk findings were identified which resulted in the following recommendations for NSW Treasury:
- establishing a policy to determine the minimum expected rate of return on the GGS equity injections in other public sectors entities and report on the performance of these GGS investments in the TSSA, including how much and what type of returns the government is obtaining from its investments compared to its targeted return
- facilitate revised commercial agreements to reflect access and license fees that were agreed in the 18 December 2021 Heads of Agreement between Transport for NSW, TAHE and the operators Sydney Trains and NSW Trains
- with TAHE, prepare robust projections and business plans to support GGS investment returns beyond FY2031.
- liaising with the ABS to re-confirm the classification of TAHE, NSW Trains and Sydney Trains as entities within the PNFC sector
- monitoring the risk that control of TAHE assets could change in future reporting periods and the implications on the TSSA
- consider whether there is sufficient competent oversight of its use of consultants and assess the risk of an over dependence on consultants at the cost of internal capability.
More details on the recommendations to NSW Treasury relating to its accounting for the GGS investment in TAHE are included on pages 7 to 24 of the State Finances 2021 NSW Auditor-General’s Report to Parliament.
Borrowings of $1 billion were understated by NSW Treasury
NSW Treasury, a GGS agency, made agreements to borrow $1 billion from New South Wales Treasury Corporation (TCorp), a PFC sector agency. Some of these agreements were entered as early as 17 May 2021 and all agreements for borrowings were entered into before 30 June 2021. However, NSW Treasury requested that settlement of those additional borrowings be deferred until 1 July 2021.
As TCorp raised the funds before 30 June 2021, it recognised a financial asset and liability to NSW Treasury on 30 June 2021. Despite TCorp having raised the funds by 30 June 2021 under the mutually agreed trade deal, NSW Treasury did not recognise any borrowings at year end on the basis that it requested the settlement date and receipt of cash to be deferred to past the balance sheet date. This led to an understatement of debt liabilities of $1 billion by NSW Treasury, and an inconsistent accounting treatment between the two agencies. NSW Treasury subsequently corrected the misstatement after the matter was raised by the audit, resulting in the GGS recognising $1 billion in financial assets and borrowings at 30 June 2021.
More detail on these inconsistencies is on page 37 of the State Finances 2021 NSW Auditor-General’s Report to Parliament. We recommended NSW Treasury seek develop a state-wide accounting policy for borrowings which ensure correct and consistent accounting treatment between agencies and sectors.
Inconsistencies exist in the GSF Act and GSA Act related to key statutory timeframes
There are inconsistencies between key statutory reporting timeframes imposed on the Treasurer and Auditor-General for the Consolidated State Financial Statements (the Statements) in the Government Sector Finance Act 2018 (GSF Act) and Government Sector Audit Act 1983 (GSA Act). Ambiguity in the statutory reporting timeframes could impact on the future timely provision of this information to Parliament. More detail on these inconsistencies is on page 54 of the State Finances 2021 NSW Auditor-General’s Report to Parliament. We recommended NSW Treasury seek legislative amendments in Parliament to resolve these inconsistencies.
NSW Treasury lacks a framework to monitor and provide assurance to ministers that they are in compliance with their appropriation authority
In July 2021, NSW Treasury highlighted a potential issue associated with certain cross-cluster payments which was based on advice received from the Crown Solicitor in January 2021. After being made aware of the issue, the Audit Office obtained its own advice on matters related to the appropriations framework under relevant state legislation. In the advice to the Audit Office, the Crown Solicitor advised that an agency is not subject to its own legally appropriated expenditure limit (assuming it is not subject to any annual spending limit imposed through an instrument of delegation or a budget control authority issued by the Treasurer under section 5.1 of the GSF Act). In effect, because responsible ministers are given appropriations, these legal expenditure limits, rest in aggregate, with the principal department and agencies the minister is responsible for. It is not possible for an individual agency to monitor or determine at what ‘point in time’ expenditure has been incurred in excess of the minister’s appropriation authority and there is currently no framework to monitor this.
Further detail on this matter is on pages 54 to 56 of the State Finances 2021 NSW Auditor-General’s Report to Parliament. In this report, we recommended that NSW Treasury:
- ensure a framework exists to monitor and provide assurance to ministers that expenditure incurred across a financial year by agencies under the relevant minister's coordination does not exceed the appropriation authority conferred by the annual Appropriations Act and the GSF Act
- assess how the requirement to prepare a Summary of Compliance under Australian Accounting Standards impacts relevant principal departments and cluster agencies financial statement disclosures.
Agencies have again spent monies without an authorised delegation
In the State Finances NSW Auditor-General's Report to Parliament for 2020 and 2021 we reported instances where agencies spent money received from an annual appropriation and/or deemed appropriation money without an authorised delegation from the relevant minister(s) as required by sections 4.6(1) and 5.5(3) of the GSF Act. Further detail on this matter is on pages 56 to 57 of the State Finances 2021 NSW Auditor-General’s Report to Parliament. In this report, we recommended NSW Treasury promptly improve the guidance it provides agencies to ensure that expenditure of public monies is properly supported by authorised delegations.
Control deficiencies at NSW Treasury's service providers
NSW Treasury's business processes and information technology services were provided by Infosys, Unisys and the Department of Customer Service during 2020–21. Together this constitutes the GovConnect environment.
The GovConnect information technology general controls (ITGC) were qualified in 2020–21. The key controls over user access, system changes and batch process failed in all ITGC reports. Most of these deviations were not mitigated or sufficiently mitigated to address the risk of unauthorised user access.
In response to the internal control qualifications, the audit teams performed data analytics over payroll and accounts payable to obtain reasonable assurance that these control deficiencies did not materially impact on relevant agencies' financial statements.
Refer to the Customer Service 2021 NSW Auditor-General’s Report to Parliament for further details.
Insurance related matters
icare is in the process of implementing organisational reform in response to findings in recent external reviews. These reviews have identified 151 recommendations for icare to improve in the areas of risk and governance, performance, and culture and accountability. The reviews include the April 2021 McDougall Review, and the February 2021 ‘Independent Review of icare governance, accountability and culture’ which was recommended by SIRA in the Dore Report.
All of these recommendations were accepted by icare and are expected to be addressed through their ‘Improvement Program’. As at February 2022, icare report that 21 have been addressed, 139 are in progress, and 15 still to commence.
A number of the observations referred to in this report were also identified in the above reviews and are expected to be actioned as part of the improvement program.
Workers Compensation Nominal Insurer (the Nominal Insurer)
The Nominal Insurer’s net asset deficiency at 30 June 2021
Last year's Central Agencies Report to Parliament reported that the Workers Compensation Nominal Insurer (the Nominal Insurer), the NSW Self Insurance Corporation and the Lifetime Care and Support Authority of New South Wales all had negative net assets at 30 June 2020. After strong investment returns in 2020–21, only the Nominal Insurer continued to have negative net assets at 30 June 2021.
The Nominal Insurer's negative net assets of $252.9 million at 30 June 2021 ($316.2 million at 30 June 2020) means that it still does not hold sufficient capital to meet the estimated present value of its future payment obligations, when measured in accordance with the accounting framework. The financial statements continued to be prepared on a going concern basis because the future payment obligations are not all due for settlement within the next 12 months.
As noted in section 2.4 ‘Key accounting issues’, icare changed from an 'Accounting Ratio', to an 'Insurance Ratio', to assess the Nominal Insurer’s capital position from 2020–21. The insurance ratio uses a (higher) discount rate based on the expected earnings rate on the Nominal Insurer’s assets, rather the ‘risk free’ rate which is used for financial reporting.
Last year's Report to Parliament also noted that the deterioration in the value of the Nominal Insurer’s net assets has resulted in its funding ratio at 30 June 2020 being outside of the ‘target operating zone’ set by the Board of icare. The Insurance Ratio at 30 June 2021 is 122%, which is less than icare's target operating zone of over 130%.
icare is assessing how it can increase the Nominal Insurer’s funding ratio, and advises that actions taken to date include the execution of the Nominal Insurer Improvement Program (the Improvement Program) and an increase in premium rates.
icare were given approval by the State Insurance Regulatory Authority (SIRA) to increase workers compensation premium rates from 1.4% to 1.44% of wages (2.9%) for the 2021–22 policy year. icare advises that their pricing strategy for workers compensation premiums is for ‘modest increases over the medium term’.
Return-to-work rates have worsened
Last year's Central Agencies Report to Parliament noted that the Nominal Insurer has experienced deteriorating return-to-work rates since late 2017. According to data published by SIRA, the Nominal Insurer’s monthly four week return-to-work rate has continued to decline, falling from 68% at 30 June 2020 to 64% at 30 June 2021, and down to 63% at 30 September 2021.
A key assumption when measuring the Nominal Insurer’s outstanding claims liability, is the amount of time that injured workers will remain on benefits (i.e. continuance rates). This assumption is significantly aligned with return-to-work rate measures. At 30 June 2021, the liability was increased by $296 million due to changes in continuance rate assumptions, with workers expected to remain on benefits longer. This change is consistent with the fall in four week return-to-work rates.
The four week return-to-work rate trend since August 2017 is shown in the graph below.
Appendix one - Misstatements in financial statements submitted for audit
Appendix two – Early close procedures
Appendix three – Timeliness of financial reporting
Appendix four – Financial data
Appendix five – Acquittals and other opinions
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.
Actions for Rail freight and Greater Sydney
Rail freight and Greater Sydney
What the report is about
The movement of freight contributes $66 billion annually to the NSW economy. Two thirds of all freight in NSW moves through Greater Sydney, and the volume of freight moving through Greater Sydney is expected to increase by 48 per cent by 2036.
This audit assessed the effectiveness of transport agencies in improving the use of rail freight capacity in Greater Sydney, and to meet current and future freight demand.
What we found
Transport agencies do not have strategies or targets in place to improve the efficiency or capacity of the metropolitan shared rail network for freight.
The transport agencies acknowledge that they do not have sufficient information to achieve the most efficient freight outcomes and they do not know how to use the shared rail network to maximise freight capacity without compromising passenger rail services.
The Freight and Ports Plan 2018-2023 contains one target for rail freight - to increase the use of rail at Port Botany to 28 per cent by 2021. However, Transport for NSW (TfNSW)'s data indicates this target will not be met.
Sydney Trains records data on train movements and collects some data on delays and incidents. TfNSW collects data for the construction of the Standard Working Timetable and third-party contracts.
However, a lack of clarity around what data is gathered and who has ownership of the data makes data sharing difficult and limits its analysis and reporting.
The Freight and Ports Plan 2018-2023 includes the goal of 'Reducing avoidable rail freight delays', but the transport agencies do not have any definition for an avoidable delay and, as a result, do not measure or report them.
TfNSW and Sydney Trains are appointed to manage and deliver the Transport Asset Holding Entity of New South Wales (TAHE)'s obligations to allow rail freight operators to use the shared rail network. There are no performance measures in rail freight operator contracts or inter-agency agreements. This limits transport agencies' ability to improve performance.
TfNSW’s Freight Branch is working on four freight-specific strategies; a review of the Plan, a freight rail strategy, a port efficiency strategy and a freight data strategy.
TfNSW has not yet determined the timeframes or intended outcomes of these strategies.
What we recommended
Transport agencies should:
- commit, as part of the review of Future Transport 2056, to delivering the freight-specific strategies currently in development and develop whole-of-cluster accountability for this work including timeframes, specific targets and clear roles and responsibilities
- improve the collection and sharing of freight data
- develop a plan to reduce avoidable freight delays
- systematically collect data on the management of all delays involving and/or impacting rail-freight
- develop and implement key performance indicators for the agreements between the transport agencies.
Fast facts
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288 million tonnes of freight volume predicted to pass through Greater Sydney in 2036, up from 194 million in 2016 (an increase of 48%)
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54 trucks that can be replaced by one 600 m long port shuttle freight train
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26,671 freight trains that passed through the metropolitan shared rail network between 1 July 2020 and 30 June 2021
The movement of freight contributes $66.0 billion annually to the New South Wales economy — or 13 per cent of the Gross State Product. Two thirds of all freight in New South Wales moves through Greater Sydney, and the volume of freight moving through Greater Sydney is expected to increase by 48 per cent by 2036. This increasing demand is driven by increasing population and economic growth.
The sequence of activities required to move goods from their point of origin to the eventual consumer (the supply chain) is what matters most to shippers and consumers. Road can provide a single-mode door-to-door service, whereas conveying goods by rail typically involves moving freight onto road at some point. In Greater Sydney, 80 per cent of all freight is moved on road. Freight often passes through intermodal terminals (IMTs) as it transitions from one mode of transport to the next.
In 2016, Transport for NSW (TfNSW) released Future Transport 2056 - the NSW Government's 40-year vision for transport in New South Wales, which is intended to guide investment over the longer term. In Future Transport 2056, TfNSW noted that New South Wales will struggle to meet increasing demand for freight movements unless rail plays a larger role in the movement of freight.
Sydney Trains manages the metropolitan shared rail network, which is made up of rail lines that are used by both passenger and freight trains. The Transport Administration Act 1988 requires that, for the purposes of network control and timetabling, NSW Government transport agencies give ‘reasonable priority’ to passenger trains on shared lines. As the Greater Sydney population and rail patronage continue to grow, so too will competition for access to the shared rail network. See Appendix two for details of the area encompassed by Greater Sydney.
Freight operators can also use dedicated rail freight lines operated by the Australian Rail Track Corporation (ARTC - an Australian Government statutory-owned corporation). As the metropolitan shared rail network connects with dedicated freight lines, freight operators often use both to complete a journey.
TfNSW, Sydney Trains and the Transport Asset Holding Entity (TAHE) work in conjunction with other rail infrastructure owners and private sector entities, including port operators, privately operated IMTs and freight-shipping companies. TfNSW and Sydney Trains are responsible for managing the movement of freight across the metropolitan shared rail network. TAHE is the owner of the rail infrastructure that makes up the metropolitan shared rail network. The NSW Government established TAHE, a NSW Government state-owned corporation, on 1 July 2020 to replace the former rail infrastructure owner - RailCorp. The Auditor-General for New South Wales has commenced a performance audit on TAHE which is expected to table in 2022.
On 1 July 2021, TAHE entered into new agreements with TfNSW and Sydney Trains to operate, manage and maintain the metropolitan shared rail network. Until 30 June 2021, and in accordance with TAHE's Implementation Deed, TAHE operated under the terms of RailCorp's existing arrangements and agreements.
This audit assessed the effectiveness of TfNSW, Sydney Trains and TAHE in improving the use of rail freight capacity in Greater Sydney, and to meet current and future freight demand.
The audit focused on:
- the monitoring of access to shared rail lines
- the management of avoidable delays of rail freight movements
- steps to increase the use of rail freight capacity in Greater Sydney.
Conclusion
Transport agencies do not have clear strategies or targets in place to improve the freight efficiency or capacity of the metropolitan shared rail network. They also do not know how to make best use the rail network to achieve the efficient use of its rail freight capacity. These factors expose the risk that rail freight capacity will not meet anticipated increases in freight demand.
Future Transport 2056 notes that opportunities exist to shift more freight onto rail, and that making this change remains an important priority for the NSW Government. However, the transport agencies acknowledge that they do not have sufficient information to achieve the most efficient freight outcomes. In particular, transport agencies do not know how to use the shared rail network in a way that maximises freight capacity without compromising passenger rail services.
Neither Future Transport 2056 nor the Freight and Ports Plan 2018–2023 give any guidance on how transport agencies will improve the efficiency or capacity of the shared rail network. Other than a target for rail freight movements to and from Port Botany, which TfNSW's data indicates will not be met, there are no targets for improving rail freight capacity across the shared network. The lack of specific strategies, objectives and targets reduces accountability and makes it difficult for transport agencies to effectively improve the use of rail freight capacity in line with their commitment to do so.
Sydney Trains and Transport for NSW do not effectively use data to improve rail freight performance and capacity.
To drive performance improvement when planning for the future, transport agencies need good quality data on freight management and movements. Sydney Trains records data on train movements in real-time and collects some data on delays and incidents. TfNSW collects data for the construction of the Standard Working Timetable (SWTT) and third-party contracts. However, the different types of data gathered and the separation between the teams responsible mean that there is a lack of clarity around what data is gathered and who has ownership it. This lack of coordination prevents best use of the data to develop a single picture of how well the network is operating or how performance could be improved.
Sydney Trains' ability to evaluate the effectiveness of its incident and delay mitigation strategies is also limited by a lack of information on its management of rail-freight related delays or incidents. While Sydney Trains collects data on major incidents, it can only use this to conduct event-specific analysis on the causes of an incident, and to review the operational and management response. The use of complete and accurate incident data would assist to define, identify and reduce avoidable delays. Reducing avoidable delays is a goal of the Freight and Ports Plan 2018–2023. More complete data on all incidents would help TfNSW to have more effective performance discussions with rail freight operators to help improve performance.
TfNSW has started developing strategies to identify how it can use rail freight capacity to achieve efficient freight outcomes, but it has not committed to implementation timeframes for this work.
TfNSW’s Freight Branch has started work on four freight-specific strategies to improve freight efficiency: a review of the Plan, a freight rail strategy, a port efficiency strategy and a freight data strategy. However, none of these strategies will be fully developed before the end of 2022. TfNSW has not yet determined the implementation timeframes or intended outcomes of these strategies, although TfNSW reports that it is taking an iterative approach and some recommendations and initiatives will be developed during 2022.
Appendix one - Response from agencies
Appendix two - The Greater Sydney region
Appendix three - TfNSW strategic projects
Appendix four - Sydney Trains path priority principles
Appendix five - Sydney Trains delay management
Appendix six - About the audit
Appendix seven - Performance auditing
Copyright notice
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Parliamentary reference - Report number #357 - released (19 October 2021).
Actions for Managing climate risks to assets and services
Managing climate risks to assets and services
What the report is about
This report assessed how effectively the Department of Planning, Industry and Environment (DPIE) and NSW Treasury have supported state agencies to manage climate risks to their assets and services.
Climate risks that can impact on state agencies' assets and services include flooding, bushfires, and extreme temperatures. Impacts can include damage to transport, communications and energy infrastructure, increases in hospital admissions, and making social housing or school buildings unsuitable.
NSW Treasury estimates these risks could have significant costs.
What we found
DPIE and NSW Treasury’s support to agencies to manage climate risks to their assets and services has been insufficient.
In 2021, key agencies with critical assets and services have not conducted climate risk assessments, and most lack adaptation plans.
DPIE has not delivered on the NSW Government commitment to develop a state-wide climate change adaptation action plan. This was to be complete in 2017.
There is also no adaptation strategy for the state. These have been released in all other Australian jurisdictions. The NSW Government’s draft strategic plan for its Climate Change Fund was also never finalised.
DPIE’s approach to developing climate projections is robust, but it hasn’t effectively educated agencies in how to use this information to assess climate risk.
NSW Treasury did not consistently apply dedicated resourcing to support agencies' climate risk management until late 2019.
In March 2021, DPIE and NSW Treasury released the Climate Risk Ready NSW Guide and Course. These are designed to improve support to agencies.
What we recommended
DPIE and NSW Treasury should, in partnership:
- enhance the coordination of climate risk management across agencies
- implement climate risk management across their clusters.
DPIE should:
- update information and strengthen education to agencies, and monitor progress
- review relevant land-use planning, development and building guidance
- deliver a climate change adaptation action plan for the state.
NSW Treasury should:
- strengthen climate risk-related guidance to agencies
- coordinate guidance on resilience in infrastructure planning
- review how climate risks have been assured in agencies’ asset management plans.
Fast facts
4 years
between commitments in the NSW Climate Change Policy Framework, and DPIE and NSW Treasury producing key supports to agencies for climate risk management.
$120bn
Value of physical assets held by nine NSW Government entities we examined that have not completed climate risk assessments.
Low capability to do climate risk assessment has been found across state agencies. The total value of NSW Government physical assets is $365 billion, as at 30 June 2020.
x3
NSW Treasury’s estimates of the annual fiscal and economic costs associated with natural disasters will triple by 2060–61.
According to the Intergovernmental Panel on Climate Change in 2021, each of the last four decades has been successively warmer and surface temperatures will continue to increase until at least the mid-century. The Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Bureau of Meteorology (BoM) have reported that extreme weather across Australia is more frequent and intense, and there have been longer-term changes to weather patterns. They also report sea levels are rising around Australia increasing the risk of inundation and damage to coastal infrastructure and communities.
According to the Department of Planning, Industry and Environment (the department), in New South Wales the impacts of a changing climate, and the risks associated with it, will be felt differently across regions, populations and economic sectors. The department's climate projections indicate the number of hot days will increase, rainfall will vary across the state, and the number of severe fire days will increase.
The NSW Government is a provider of essential services, such as health care, education and public transport. It also owns and manages around $365 billion in physical assets (as at June 2020). More than $180 billion of its assets are in major infrastructure such as roads and railway lines.
In NSW, climate risks that could directly impact on state agencies' assets and services include flooding, bushfires, and extreme temperatures. In recent years, natural hazards exacerbated by climate change have damaged and disrupted government transport, communications and energy infrastructure. As climate risks eventuate, they can also increase hospital admissions when people are affected by poorer air quality, and make social housing dwellings or schools unsafe and unusable during heatwaves. The physical impacts of a changing climate also have significant financial costs. Taking into account projected economic growth, NSW Treasury has estimated that the fiscal and economic costs associated with natural disasters due to climate change will more than triple per year by 2061.
The department and NSW Treasury advise that leading practice in climate risk management includes a process that explicitly identifies climate risks and integrates these into existing risk management, monitoring and reporting systems. This is in line with international risk management and climate adaptation standards. For agencies to manage the physical risks of climate change to their assets and services, leading practice identified by the department means that they need to:
- use robust climate projection information to understand the potential climate impacts
- undertake sound climate risk assessments, within an enterprise risk management framework
- implement adaptation plans that reduce these risks, and harness opportunities.
Adaptation responses that could be planned for include: controlling development in flood-prone locations; ensuring demand for health services can be met during heatwaves; improving thermal comfort in schools to support student engagement; proactive asset maintenance to reduce disruption of essential services, and safeguarding infrastructure from more frequent and intense natural disasters.
According to NSW Treasury policy, agencies are individually responsible for risk management systems appropriate to their context. The department and NSW Treasury have key roles in ensuring that agencies are supported with robust information and timely, relevant guidance to help manage risks to assets and services effectively, especially for emerging risks that require coordinated responses, such as those posed by climate change.
This audit assessed whether the department and NSW Treasury are effectively supporting NSW Government agencies to manage climate risks to their assets and services. It focused on the management of physical risks to assets and services associated with climate change.
Conclusion
The Department of Planning, Industry and Environment (the department) has made climate projections available to agencies since 2014, but provided limited guidance to assist agencies to identify and manage climate risks. NSW Treasury first noted climate change as a contextual factor in its 2012 guidance on risk management. NSW Treasury only clarified requirements for agencies to integrate climate considerations into their risk management processes in December 2020.
The department has not delivered on a NSW Government commitment for a state-wide climate change adaptation action plan, which was meant to be completed in 2017. Currently many state agencies that own or manage assets and provide services do not have climate risk management in place.
Since 2019, the department and NSW Treasury have worked in partnership to develop a coordinated approach to supporting agencies to manage these risks. This includes guidance to agencies on climate risk assessment and adaptation planning published in 2021.
More work is needed to embed, sustain and lead effective climate risk management across the NSW public sector, especially for the state's critical infrastructure and essential services that may be exposed to climate change impacts.
The NSW Government set directions in the 2016 NSW Climate Change Policy Framework to 'manage the impact of climate change on its assets and services by embedding climate change considerations into asset and risk management’ and more broadly into 'government decision-making'.
The department released climate projections and has made information on projected climate change impacts available since 2014, but this has not been effectively communicated to agencies. The absence of a state-wide climate change adaptation action plan has limited the department's implementation of a coordinated, well-communicated program of support to agencies for their climate risk management.
NSW Treasury is responsible for managing the state's finances and providing stewardship to the public sector on financial and risk management, but it did not consistently apply dedicated resourcing to support agencies' climate risk management until late 2019. NSW Treasury estimates the financial costs of climate-related physical risks are significant and will continue to grow.
The partnership between the department and NSW Treasury has produced the 2021 Climate Risk Ready NSW Guide and Course, which aim to help agencies understand their exposure to climate risks and develop adaptation responses. The Guide maps out a process for climate risk assessment and adaptation planning and is referenced in NSW Treasury policy on internal audit and risk management. It is also referenced in NSW Treasury guidance to agencies on how to reflect the effects of climate-related matters in financial statements.
There is more work to be done by the department on maintaining robust, accessible climate information and educating agencies in its use. NSW Treasury will need to continue to update its policies, guidance and economic analyses with relevant climate considerations to support an informed, coordinated approach to managing physical climate risks to agencies' assets and services, and to the state's finances more broadly.
The effectiveness of the department and NSW Treasury's support involves the proactive and sustained take-up of climate risk management by state agencies. There is a key role for the department and NSW Treasury in monitoring this progress and its results.
The support delivered to agencies around climate risk management, including risk assessment and adaptation planning, has been slow to start and of limited impact. The department's capacity to implement a coordinated approach to supporting agencies has also been limited by the absence of a state-wide adaptation strategy and related action plan.
In 2021, products were released by the department and NSW Treasury with potential to improve support to agencies on climate risk assessment and adaption planning (that this, Climate Risk Ready NSW Guide and Course, which provides links to key NSW Treasury polices). The department and NSW Treasury are now leading work to develop a more coordinated approach to climate risk management for agencies' assets and services, and building the resilience of the state to climate risk more broadly.
While climate projections have been available to agencies and the community more broadly since 2013–14, the department has not been effective in educating the relevant data users within agencies in how to use the information for climate risk assessments and adaptation planning.
The absence of a strategy focused on this is significant and has contributed to the current low levels of climate risk assessment uptake across agencies (see section 2). Agencies are required to use the climate projections developed by the department when developing long term plans and strategies as part of the NSW Government Common Planning Assumptions.
For the department, key opportunities to embed climate risk management include leveraging land use planning policies and guidance to drive adaptation, which has potential to better protect the state's assets and services. NSW Treasury has a role in continuing to update its policies, guidance and economic analyses with relevant climate change considerations to support an informed, coordinated approach to addressing physical climate risks to agencies' assets and services, and to the state's finances more broadly.
There is currently no plan on how the department and NSW Treasury intend to routinely monitor the progress of agencies with implementing the CRR Guide or developing climate risk 'maturity' more broadly. As agencies are responsible for implementing risk management systems that meet NSW Treasury standards, which now clearly includes consideration of climate risk (TPP20-08), establishing effective monitoring, reporting and accountability around this progress should be a priority for the department and NSW Treasury.
Appendix one – Response from agencies
Appendix two – Timeline of key activities
Appendix three – About the audit
Appendix four – Performance auditing
Copyright notice
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Parliamentary reference - Report number #355 - released (7 September 2021).