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Reports

12 December 2018

Published

Newcastle Urban Transformation and Transport Program

Transport

Planning

Compliance

Infrastructure

Management and administration

Procurement

Project management

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

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

This audit had two objectives:

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

We addressed the audit objectives by answering the following questions:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Recommendations
For future infrastructure programs, NSW Government agencies should:

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

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

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

Appendix one - Response from agencies

Appendix two - About the audit

Appendix three - Performance auditing

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

28 November 2018

Published

Transport 2018

Transport

Asset valuation

Compliance

Financial reporting

Infrastructure

Management and administration

Procurement

Risk

Service delivery

Workforce and capability

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

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

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

financial reporting
audit observations.

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

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

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

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

This chapter outlines our observations and insights from:

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

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

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

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

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

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

Appendix one - Status of 2016 and 2017 recommendations

Appendix two - Cluster agencies

Appendix three - Financial data

Appendix four - Bus contracts regions

30 October 2018

Published

Internal Controls and Governance 2018

Education

Community Services

Finance

Health

Industry

Justice

Planning

Premier and Cabinet

Transport

Treasury

Whole of Government

Environment

Compliance

Cyber security

Financial reporting

Fraud

Information technology

Internal controls and governance

Management and administration

Procurement

Project management

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

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

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

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

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

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

Without strong governance systems and internal controls, agencies increase the risks associated with effectively managing their finances and delivering services to citizens. The way agencies deliver services increasingly relies on contracts and partnerships with the private sector. Many of these arrangements deliver front line services, but others provide less visible back office support. For example, an agency may rely on an IT service provider to manage a key system used to provide services to the community. The contract and service level agreements are only truly effective where they are actively managed to reduce risks to continuous quality service delivery, such as interruptions caused by system outages, cyber security attacks and data security breaches.

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

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

The findings in this report should not be used to draw conclusions on the effectiveness of individual agency control environments and governance arrangements. Specific financial reporting, controls and service delivery comments are included in the individual 2018 cluster financial audit reports, which will be tabled in Parliament from November to December 2018.

The focus of the report has changed since last year

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

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

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

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

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

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

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

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

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

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

Observation

Conclusion or recommendation

4.1 Reporting on performance

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

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

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

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

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

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

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

The relevance and accuracy of performance information is enhanced when:

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

4.2 Reporting on reports

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three - Cluster agencies

18 October 2018

Published

Mobile speed cameras

Transport

Compliance

Financial reporting

Information technology

Internal controls and governance

Management and administration

Regulation

Service delivery

The primary goal of speed cameras is to reduce speeding and make the roads safer. Our 2011 performance audit on speed cameras found that, in general, speed cameras change driver behaviour and have a positive impact on road safety.

Transport for NSW published the NSW Speed Camera Strategy in June 2012 in response to our audit. According to the Strategy, the main purpose of mobile speed cameras is to reduce speeding across the road network by providing a general deterrence through anywhere, anytime enforcement and by creating a perceived risk of detection across the road network. Fixed and red-light speed cameras aim to reduce speeding at specific locations.

Roads and Maritime Services and Transport for NSW deploy mobile speed cameras (MSCs) in consultation with NSW Police. The cameras are operated by contractors authorised by Roads and Maritime Services. MSC locations are stretches of road that can be more than 20 kilometres long. MSC sites are specific places within these locations that meet the requirements for a MSC vehicle to be able to operate there.

This audit assessed whether the mobile speed camera program is effectively managed to maximise road safety benefits across the NSW road network.

Conclusion

The mobile speed camera program requires improvements to key aspects of its management to maximise road safety benefits. While camera locations have been selected based on crash history, the limited number of locations restricts network coverage. It also makes enforcement more predictable, reducing the ability to provide a general deterrence. Implementation of the program has been consistent with government decisions to limit its hours of operation and use multiple warning signs. These factors limit the ability of the mobile speed camera program to effectively deliver a broad general network deterrence from speeding.

Many locations are needed to enable network-wide coverage and ensure MSC sessions are randomised and not predictable. However, there are insufficient locations available to operate MSCs that meet strict criteria for crash history, operator safety, signage and technical requirements. MSC performance would be improved if there were more locations.

A scheduling system is meant to randomise MSC location visits to ensure they are not predictable. However, a relatively small number of locations have been visited many times making their deployment more predictable in these places. The allocation of MSCs across the time of day, day of week and across regions is prioritised based on crash history but the frequency of location visits does not correspond with the crash risk for each location.

There is evidence of a reduction in fatal and serious crashes at the 30 best-performing MSC locations. However, there is limited evidence that the current MSC program in NSW has led to a behavioural change in drivers by creating a general network deterrence. While the overall reduction in serious injuries on roads has continued, fatalities have started to climb again. Compliance with speed limits has improved at the sites and locations that MSCs operate, but the results of overall network speed surveys vary, with recent improvements in some speed zones but not others.
There is no supporting justification for the number of hours of operation for the program. The rate of MSC enforcement (hours per capita) in NSW is less than Queensland and Victoria. The government decision to use multiple warning signs has made it harder to identify and maintain suitable MSC locations, and impeded their use for enforcement in both traffic directions and in school zones.

Appendix one - Response from agency

Appendix two - About the audit

Appendix three - Performance auditing

Parliamentary reference - Report number #308 - released 18 October 2018

4 September 2018

Published

Procurement and reporting of consultancy services

Finance

Education

Community Services

Industry

Justice

Planning

Premier and Cabinet

Health

Treasury

Transport

Environment

Information technology

NSW Government agencies engage consultants to provide professional advice to inform their decision‑making. The spend on consultants is measured and reported in different ways for different purposes and the absence of a consistently applied definition makes quantification difficult.

The NSW Government’s procurement principles aim to help agencies obtain value for money and be fair, ethical and transparent in their procurement activities. All NSW Government agencies, with the exception of State Owned Corporations, must comply with the NSW Procurement Board’s Direction when engaging suppliers of business advisory services. Business advisory services include consultancy services. NSW Government agencies must disclose certain information about their use of consultants in their annual reports. The table below illustrates the detailed procurement and reporting requirements.

	Relevant guidance	Requirements
Procurement of consultancy services	PBD 2015 04 Engagement of major suppliers of consultancy and other services (the Direction) including the Standard Commercial Framework (revised on 31 January 2018, shortly before it was superseded by 'PBD 2018 01')	Required agencies to seek the Agency Head or Chief Financial Officer's approval for engagements over $50,000 and report the engagements in the Major Suppliers' Portal (the Portal).
	PBD 2018 01 Engagement of professional services suppliers (replaced 'PBD 2015 04' in May 2018)	Requires agencies to seek the Agency Head or Chief Financial Officer's approval for engagements that depart from the Standard Commercial Framework and report the engagements in the Portal. Exhibit 3 in the report includes the key requirements of these three Directions.
Reporting of consultancy expenditure	Annual Reports (Departments) Regulation 2015 and Annual Reports (Statutory Bodies) Regulation 2015	Requires agencies to disclose, in their annual reports, details of consultants engaged in a reporting year.
	Premier's Memorandum 'M2002 07 Engagement and Use of Consultants'	Outlines additional reporting requirements for agencies to describe the nature and purpose of consultancies in their annual reports.

We examined how 12 agencies complied with their procurement and reporting obligations for consultancy services between 1 July 2016 and 31 March 2018. Participating agencies are listed in Appendix two. We also examined how NSW Procurement supports the functions of the NSW Procurement Board within the Department of Finance, Services and Innovation.

This audit assessed:

agency compliance with relevant procurement requirements for their use of consultants
agency compliance with disclosure requirements about consultancy expenditure in their annual reports
the effectiveness of the NSW Procurement Board (the Board) in fulfilling its functions to oversee and support agency procurement of consultancy services.

Conclusion

No participating agency materially complied with procurement requirements when engaging consultancy services. Eight participating agencies under reported consultant fees in their annual reports. The NSW Procurement Board is not fully effective in overseeing and supporting agencies' procurement of consultancy services.

All 12 agencies that we examined did not materially comply with the NSW Procurement Board Direction for the use of consultants between 1 July 2016 and 31 March 2018.

Eight agencies did not comply with annual reporting requirements in the 2016–17 financial reporting year. Three agencies did not report expenditure on consultants that had been capitalised as part of asset costs, and one agency did not disclose consultancy fees incurred by its subsidiaries. Agencies also defined ‘consultants’ inconsistently.

The NSW Procurement Board's Direction was revised in January 2018, and mandates the use of the Standard Commercial Framework. The Direction aims to drive value for money, reduce administrative costs and simplify the procurement process. In practice, agencies found the Framework challenging to use. To better achieve the Direction’s intent, the Board needs to simplify procurement and compliance processes.

The Board is yet to publish any statistics or analysis of agencies’ procurement of business advisory services due to issues with the quality of data and systems limitations. Also, the Board’s oversight of agency and supplier compliance with the Framework is limited as it relies on self reporting, and the information provided is insufficient to properly monitor compliance. NSW Procurement is yet to develop an effective procurement and business intelligence system for use by government agencies. Better procurement support, benefit realisation monitoring and reporting by NSW Procurement will help promote value for money in the engagement of consultants.

Appendix one - Response from agencies

Appendix two - List of selected agencies

Appendix three - Performance auditing

15 December 2017

Published

Transport 2017

Transport

Asset valuation

Information technology

Internal controls and governance

Project management

The following report focuses on key observations and findings from the most recent financial statement audits of agencies in the Transport cluster.

Unqualified audit opinions were issued for all agencies' financial statements. However, the report notes the agencies can improve their asset revaluation processes.

1. Financial reporting and controls

Audit opinions	Unqualified audit opinions were issued for all agencies' financial statements.
Early close	Early close procedures continue to facilitate timely preparation of financial statements and completion of audits, but agencies can improve their asset revaluation processes. The revaluations were not completed by the early close deadline.
Key audit matters	The cluster corrected the value of rail tunnels and earthworks by recording an additional $8.5 billion in infrastructure assets.
Passenger revenue and patronage	Revenue increased by seven per cent at a similar rate to patronage. Opal fare structure changes came into effect on 5 September 2016. Continued rises in patronage can increase pressure on public transport punctuality.
Negative balances on Opal Cards	There was $2.6 million in revenue not collected during 2016–17 financial year through negative balance Opal Cards. This represents 0.2 per cent of total annual passenger revenue. Transport advise the cumulative balance of negative balance Opal Cards is $4.2 million as at 30 June 2017. Recommendation: Transport for NSW (TfNSW) should implement measures to prevent loss of revenue from passengers tapping off with negative balance Opal Cards.
Investment in infrastructure	Agencies spent $8.5 billion on assets in 2016–17 and have contractual capital commitments of $11.3 billion over the next five years.
Internal controls	IT systems user access administration remains an area of weakness.

2. Service Delivery

Punctuality	According to Transport data, average punctuality is above target for Sydney Trains, Ferries and Light Rail, but below target for NSW Trains services. State Transit Authority of NSW (STA) is not meeting punctuality targets. STA continued working with TfNSW on delivering improved punctuality.
Public transport capacity	Passenger crowding is above benchmark for many morning peak suburban rail services, as indicated by Transport data. Eleven of the 14 bus contract regions had full buses.
Bus crowding	There are no target measures on crowding for bus operators in any contract region. Recommendation: TfNSW should develop target measures on crowding for bus operators in all contract regions and publish the results.
Customer satisfaction	Surveys conducted by Transport indicate customer satisfaction exceeded target for all modes of public transport.

Confidence in public sector decision-making and transparency is enhanced when financial reporting is accurate and timely. Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies.

This chapter outlines our audit observations, conclusions or recommendations related to financial reporting and controls of Transport cluster agencies for 2016–17.

Observation	Conclusion or recommendation
Quality of financial reporting
Unqualified opinions were issued for all agencies’ financial statements.	Unqualified audit opinions were issued on the 2016–17 financial statements of all agencies in the Transport cluster. Agencies complied with the new disclosure requirements required under accounting standard AASB 124 'Related Party Disclosures'.
Old tunnels and earthworks valued.	The cluster corrected the value of rail tunnels and earthworks by recording an additional $8.5 billion in infrastructure assets.
Timeliness of financial reporting
Most agencies complied with the statutory timeframes for completion of early close procedures and preparation and audit of financial statements.	Early close procedures continue to facilitate timely preparation of financial statements and completion of audits, but agencies can make further improvement in the revaluation process.
TfNSW and RailCorp completed asset revaluations after the early close deadline.	While all revaluation matters were resolved and corrected, completing the revaluation process earlier would enable more timely review, identification and resolution of matters.
Passenger revenue, patronage and cost recovery
Revenue increased by 7 per cent at a similar rate to patronage.	Public transport passenger revenue increased by $93 million (seven per cent) in 2016–17, and patronage increased by 49 million (seven per cent) across all modes of transport. There were some changes in the method of calculating reported patronage between 2015–16 and 2016–17. If the methods had been consistent, the patronage increase would be 6.5 per cent. Opal fare structure changes came into effect on 5 September 2016.
Value of negative balance Opal Cards doubled since last year.	There was $2.6 million in revenue not collected during 2016–17 financial year through negative balance Opal Cards. This represents 0.2 per cent of total annual passenger revenue. Transport advise the cumulative balance of negative balance Opal Cards is $4.2 million as at 30 June 2017. Recommendation: TfNSW should implement measures to prevent the loss of revenue from passengers tapping off with negative balance Opal cards.
The overall cost recovery from users of public transport increased slightly to 21.3 per cent.	Cost of service per passenger journey for buses and ferries decreased. Revenue per passenger journey for all modes remained fairly stable.
Investment in infrastructure
There was a significant investment in transport assets in 2016–17.	Agencies spent $8.5 billion on assets in 2016–17, including $3.8 billion on rail systems and $3.8 billion on road and maritime infrastructure systems.
Transport cluster have capital commitment of $11.3 billion over the next five years.	The transport cluster has significant contractual commitments over the next five years on rail and road infrastructure projects.
Internal controls
User access administration over systems remains an area of weakness.	We identified six moderate and eight low risk issues related to user systems access administration across four agencies. This included review of highly privileged/super user account transactions not performed effectively and user access reviews not performed. These weaknesses increase the risk of users having excessive or unauthorised access to critical financial systems and information.

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

This chapter outlines our audit observations, conclusions or recommendations related to service delivery in the Transport cluster agencies for 2016–17.

Observations	Conclusion or recommendation
Punctuality
Average punctuality is above target for Sydney Trains, but below target for NSW Trains services. Punctuality targets are not met by all bus operators.	Meeting punctuality targets is a continuing challenge for NSW Trains’ and STA bus services.
The 2017 performance audit 'Passenger Rail Punctuality' reported that based on forecast patronage increases, rail agencies will find it hard to maintain punctuality after 2019 unless the capacity of the network to carry trains and people is increased significantly.	The 2017 performance audit found that given the likely lead times involved with major infrastructure projects, there remains a significant risk of poor punctuality after 2019. Transport advised it is currently either delivering or planning rail network upgrades to address current growth and longer-term future demand. This includes investments such as procurement of suburban and intercity trains, Sydney Metro services and further timetable planning into the 2020s.
After reaching its punctuality target in 2015–16 for the first time in 13 years, NSW Trains regional services was below the target in 2016–17.	NSW Trains regional services achieved an average of 75 per cent punctuality in 2016–17, four per cent less than 2015–16.
The bus contracts do not have an option to impose financial penalties on STA for poor punctuality performance.	In 2015–16, we recommended TfNSW should consider including financial penalties for not meeting each punctuality KPI in future contracts with bus operators. An opportunity to implement the recommendation requires a contract renewal process to be finalised with STA, which did not occur during 2016–17.
Public transport capacity
There are no target measures on crowding for bus operators in any contract region.	Recommendation: TfNSW should develop target measures on crowding for bus operators in all contract regions and publish the results.
Customer Satisfaction
Customers on ferries continued to be most satisfied, followed by those on light rail. Sydney Trains and NSW Trains had fewer complaints in 2016–17.	Customer satisfaction exceeded target for all modes of transport.
Project management
Transport cluster manages many of the State high profile/high risk projects.	Major Transport projects include WestConnex, Sydney Metro Northwest, Sydney Metro City and Southwest, Woolgoolga to Ballina - Pacific Highway upgrade, NorthConnex, CBD and South East Light Rail and Newcastle Light Rail.
Safety performance
Road fatalities decreased by eight per cent between July 2016 and June 2017, from 390 to 359 deaths.	Road fatalities mainly involved speed, fatigue and vehicle occupants not wearing available restraints.
Maintenance
RMS’ maintenance backlog of $3.7 billion is higher than the $3.4 billion reported in 2016.	Transport cluster agencies manage $134 billion in property, plant and equipment. The total backlog maintenance of $4.1 billion at 30 June 2017 represents 3.1 per cent of those assets.

23 November 2017

Published

Agency compliance with NSW Government travel policies

Education

Community Services

Finance

Health

Industry

Justice

Local Government

Planning

Premier and Cabinet

Transport

Treasury

Universities

Whole of Government

Compliance

Internal controls and governance

Procurement

Overall, agencies materially complied with NSW Government travel policies.

However, the Auditor-General found some agencies:

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

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

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

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

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

Conclusion

We found that overall, agencies materially complied with NSW Government travel policies. However, some agencies:

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

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

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

Appendix one - Responses from agencies

Appendix two - List of selected agencies

15 June 2017

Published

Sydney Road Maintenance Contracts

Transport

Infrastructure

Internal controls and governance

Management and administration

Procurement

Project management

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

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

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

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

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

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

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

Conclusion

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

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

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

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

The Stewardship Maintenance Contract

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

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

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

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

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

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

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

RMS' contract management approach and benefits realization

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

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

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

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

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

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

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

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

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

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

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

NSW Government priorities and road maintenance

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

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

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

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

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

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

Source: NSW Commission of Audit Final Report May 2012.

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

The NSW Government introduced road maintenance contestability through Stewardship Maintenance Contracts

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

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

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

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

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

Other key features of the SMC include:

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

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

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

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

Roads and Maritime Services should, by September 2017:

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

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

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

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

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

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

3. Improve its management of benefits realisation by:

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

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

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

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

8 June 2017

Published

NorthConnex

Premier and Cabinet

Treasury

Transport

Compliance

Infrastructure

Internal controls and governance

Management and administration

Procurement

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

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

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

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

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

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

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

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

11 April 2017

Published

Passenger Rail Punctuality

Transport

Information technology

Infrastructure

Service delivery

A NSW Government priority is to ‘maintain or improve reliability of public transport services over the next four years’. Punctuality is a key element of reliability, and the level of patronage is a critical factor in the ability to maintain punctuality. Increasing patronage places pressure on the length of time trains need to wait at stations to load and offload passengers which can lead to delays. The NSW Long Term Transport Master Plan forecasts that rail patronage could increase by 26 per cent between 2012 and 2031.

Passenger rail services in NSW are provided under a purchaser-provider model. Transport for NSW enters contracts with:

Sydney Trains for Sydney suburban passenger rail services
NSW Trains for services that commence or terminate outside Sydney, including intercity services that operate between Central station and the South Coast, Southern Highlands, Blue Mountains and Central Coast and Newcastle.

Transport for NSW sets performance targets and standards for these services, develops the timetables, procures trains for the service providers, and is responsible for long term planning.

This audit assessed whether these rail agencies have plans and strategies to maintain or improve performance in getting the growing number of suburban and intercity rail passengers to their destinations on time.

Conclusion:

Rail agencies are well placed to manage the forecast increase in passengers up to 2019, including joining the Sydney Metro Northwest to the network at Chatswood. Their plans and strategies are evidence-based, and mechanisms to assure effective implementation are sound.

Based on forecast patronage increases, the rail agencies will find it hard to maintain punctuality after 2019 unless the capacity of the network to carry trains and people is increased significantly. If recent higher than forecast patronage growth continues, the network may struggle to maintain punctuality before 2019.

Transport for NSW has undertaken considerable work on developing strategies to increase capacity and maintain punctuality after 2019, but remains some way from putting a costed plan to the government. There is a significant risk that investments will not be made soon enough to handle future patronage levels. Ideally, planning and investment decisions should have been made already.

Punctuality measurement is satisfactory, but agencies could publish more information

Passenger rail punctuality indicators adopted in NSW are good practice. The key train punctuality indicator is better than indicators used by many other rail operators. It is also better than the on-time-running indicator that it replaced. Unlike the on-time-running indicator, the punctuality indicator classifies trains that have been cancelled or skipped stations as late and results are not adjusted to take account of delays caused by factors such as extreme weather or police operations.

NSW also has a customer delay measure which represents good practice. Work has started on refining and embedding customer delay as a key performance measure for the planned new Rail Operations Centre.

As train frequency approaches a ‘turn up and go’ level of service, rather than running to a timetable, more emphasis will need to be placed on excess waiting time and customer delay when assessing performance.

Measurement of punctuality is reasonably precise. There are some measurement inaccuracies which should be addressed, such as the estimated arrival time of a train being incorrect at some destination stations, but these do not affect punctuality results materially.

Train punctuality is reported publicly, but not to the detail of the indicators in the contracts between Transport for NSW and Sydney Trains and NSW Trains. There is very limited public reporting of customer delay.

Overall punctuality is good, but some services are relatively poor

System-wide train punctuality has usually exceeded target since 2005, but some services suffer from poor punctuality compared to the rest of the network.

The part of the network around North Sydney is creating problems for the punctuality of afternoon peak services heading through it and out to Western Sydney and to Hornsby via Strathfield. Transport for NSW and Sydney Trains are well advanced with strategies to address this up to 2019.

The East Hills express trains in the afternoon peak also performed well below target. The rail agencies recently analysed this issue and believe it relates to the train timetable and signalling which restricts how close trains can run behind each other into Campbelltown. It further advises that this will be corrected over the next three years.

Intercity train punctuality is below that of suburban trains and there was an extended period of declining punctuality between 2011 and 2014. Transport for NSW suggested that the old age of trains is a factor, and the recently announced intercity fleet acquisition may help address this. Apart from ensuring that train crew and station staff are available and perform their duties adequately, NSW Trains can do little to impact the punctuality of its intercity services directly. Train maintenance, track and signal maintenance, and management of trains on the rail network are performed by Sydney Trains. NSW Trains’ ability to influence improvement is hampered by key indicators in some contracts being undefined. Transport for NSW, Sydney Trains and NSW Trains are now working collaboratively to make improvements to the contracts.

Initiatives are in place or are planned to deliver good punctuality until 2019

Patronage increases, which can lead to overcrowding and trains having to wait longer at stations, are likely to present a significant challenge to maintaining punctuality into the future.

Based on patronage projections, the rail agencies have strategies to maintain punctuality up to and including joining the Sydney Metro Northwest to the network at Chatswood in 2019. These include improving infrastructure at particular parts of the network, increasing staff training, reducing the number of speed restrictions, and a new Rail Operations Centre. The projects are being managed by experienced staff, with good governance arrangements, quality assurance processes and planning systems in place. New timetables should provide more services and cater for more passengers, including off peak. They should increase network efficiency through better utilisation of capacity, but some passengers may face longer journey times and more may need to change trains mid-journey.

The planned Rail Operations Centre has the potential to make operational decision-making more customer-focussed, by placing more emphasis on minimising customer delay during disruptions. If implemented well, it will also generate information to help agencies better identify the root cause of incidents that delay trains and improve communication with passengers so they can make better real-time travel decisions.

Predicted passenger growth presents a risk to punctuality after 2019

The rail system will struggle to maintain punctuality much beyond 2019 based on current patronage forecasts and system limitations.

From 2024, the Sydney Metro City and Southwest will help by extending the metro network from Chatswood under Sydney Harbour, through the city and out to Bankstown. Announced fleet upgrades will also help. Transport for NSW advises that it is also working with the Greater Sydney Commission to ensure network capacity constraints are considered in future urban planning.

In addition to investment in new metro networks, sustained and substantial investment needs to be made into the existing heavy rail network to meet demand and ensure its ongoing reliability. Transport for NSW has been developing strategies for this purpose, including an Advanced Train Control system. Its aim is to put a costed plan to the government by the third quarter of this (2017) calendar year. Given the likely lead times involved with major infrastructure projects, there remains a significant risk of poor punctuality after 2019.

Punctuality could be at risk sooner if recent patronage growth continues

If patronage continues to increase at a faster rate than forecast, particularly during the morning peak, the network will struggle to cope before 2019. Transport for NSW forecast that between 2011 and 2026 morning peak rail patronage would increase each year by approximately 3.3 per cent. Between 2011 and 2016 the number of passengers travelling to the city during the morning peak grew by an average of 4.4 per cent each year, including annual growth of 6.6 per cent since May 2014.

A good understanding of patronage levels, trends and drivers is critical to effective planning. The audit identified some shortcomings in measurement of peak passenger loads. Transport for NSW advised that measurement approaches have been improved recently, and this will soon flow into improved data quality.

Given the increasing flexibility in work practices available to many city workers, the relatively new field of behavioural insights may offer opportunities to ‘nudge’ some passengers away from travelling at the height of the peak with benefits for them and the network.

Transport for NSW should ensure that programs to address rail patronage growth over the next five to ten years are provided to the government for Cabinet consideration as soon as possible.
Sydney Trains and Transport for NSW should:
a) maintain effective oversight and resourcing for all strategies designed to address rail patronage growth
b) adjust strategies for any patronage growth above projection.
Sydney Trains, NSW Trains and Transport for NSW should publish Customer Delay results by June 2018.
Transport for NSW, Sydney Trains and NSW Trains should agree by December 2017:
a) specific performance requirements for intercity train, track and signal availability and reliability
b) guidelines for train priorities during disruptions and indicators of control centre performance in implementing these guidelines.
Sydney Trains, NSW Trains and Transport for NSW should by June 2018:
a) improve the accuracy of patronage measurement and develop a better understanding of patronage growth trends
b) address small errors in the adjustment factors used for determining a train’s punctuality status
c) improve their understanding of the factors impacting on intercity punctuality.
Transport for NSW should, commencing June 2017, explore the potential to use behavioural insights to encourage more passengers to travel outside the height of the morning peak (8 am to 9 am).