A report released today by the Auditor-General for New South Wales, Margaret Crawford found that select advertising campaigns conducted by Service NSW and the NSW Rural Fire Service met most requirements of the Government Advertising Act, regulations, Guidelines and other laws. However, the audit found that Service NSW inappropriately used its post campaign evaluation to measure sentiment towards and confidence in the NSW Government.  

While agency analysis shows that the ‘Cost of Living’ (phases 2 and 3)  and ‘How Fireproof is Your Plan?’ campaigns achieved most of their objectives, the campaign objectives and targets set by both agencies were not sufficient to measure all aspects of campaign effectiveness. 

The report makes two recommendations to the Department of Customer Service. The first is to review its guidance to ensure agencies are not using post campaign evaluations to measure sentiment towards the government. The second, to review its guidance and the new process of peer review to ensure they support agencies to comply with the Act, the regulations and the Guidelines. 

The Government Advertising Act 2011 requires the Auditor General to conduct an annual performance audit of one or more government agencies to see whether their advertising activities were carried out in an effective, economical and efficient manner and in compliance with the Government Advertising Act 2011.
 

Read full report (PDF)

The Government Advertising Act 2011 (the Act) requires the Auditor-General to conduct a performance audit on the activities of one or more government agencies in relation to government advertising campaigns in each financial year. The performance audit assesses whether a government agency or agencies have carried out activities in relation to government advertising in an effective, economical and efficient manner and in compliance with the Act, the regulations, other laws and the Government Advertising Guidelines (the Guidelines). This audit examined two campaigns run during the 2018–19 and 2019–20 financial years respectively:

• the 'Cost of Living' campaign run by Service NSW (phases 2 and 3 delivered in 2018–19)
• the 'How Fireproof Is Your Plan?' (Fireproof) campaign run by NSW Rural Fire Service (year two of a three-year campaign delivered in 2019–20).

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

In 2018–19, Service NSW delivered phases 2 and 3 of the 'Cost of Living' campaign. The Cost of Living advertising campaign aimed to build awareness of the help available to ease the cost of living for people under financial pressure including awareness of specific rebates that can be claimed. As part of the Cost of Living program, Service NSW developed a webpage designed as a single portal to access more than 40 NSW Government savings, rebates and initiatives (which originated from over 12 different agencies). It also launched the Cost of Living service which includes face to face meetings and phone interviews to help people claim rebates from the NSW Government. Phase 2 of the campaign ran from September 2018 to August 2019. Phase 3 of the campaign ran from January 2019 to July 2019. The budgets for phases 2 and 3 were $4.127 million and $934,800 respectively. See Appendix two for more details on this campaign.

Campaign materials we reviewed did not breach section 6 of the Act

The audit team reviewed campaign materials developed as part of the paid advertising campaign including radio transcripts, digital videos and display. The audit team did not review the use of social media outside paid social media content as section four of the Act defines government advertising as the dissemination of information which is funded by or on behalf of a government agency. See Appendix two for examples of campaign materials for this campaign.

Section 6 of the Act prohibits political advertising as part of a government advertising campaign. A government advertising campaign must not:

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

The audit found no breaches of section 6 of the Act in the campaign material we reviewed. 

Post-campaign evaluations measured sentiment towards and confidence in the NSW Government

The post-campaign evaluation for phases 2 and 3 measured levels of confidence with the statement ‘the NSW Government has your best interests at heart’, despite the fact this was not a stated objective of the campaign. This is not an appropriate use of the post-campaign evaluation, which should measure the success of the campaign against its stated objectives. The post-campaign evaluation for phase 3 found that exposure to the campaign improved sentiment towards the government amongst those who did not have confidence in the NSW Government.

Service NSW advised that it was important to measure the sentiment of the advertising including the wording 'best interests' as it did not want the whole of government brand to be detrimental to customer engagement with applying for the rebates.

Following phase 2, Service NSW conducted analysis of media sentiment using the key words 'cost of living' and the names of the Premier, Treasurer and Minister for Customer Service. The analysis presented the level of positive, negative and neutral media sentiment. The Government Advertising Guidelines 2012 list the purposes that government advertising may serve which do not include improving the perception of the government. The inclusion of this analysis in Service NSW's post-campaign evaluation creates a risk that the results may be used for party political purposes.

Section 10 of the Act restricts agencies from carrying out a campaign after 26 January in the calendar year before the Legislative Assembly is due to expire and before the election for the Legislative Assembly in that year. Service NSW authorised a media agency to book media in line with the media plans for the campaign. The media plans for the campaign show that Service NSW did not authorise or plan to run any advertisements between 27 January 2019 and 23 March 2019.

Service NSW did not set targets for all rebates advertised in phase 2

Service NSW did not set targets for four of the seven rebates that were advertised as part of phase 2 of the campaign. These rebates were the Family Energy Rebate, Appliance Replacement Offer, National Parks Concession Offer and the Pensioner Travel Voucher. As a result, it was unable to evaluate whether the advertisements for these rebates were effective. Service NSW advised that at the time the campaign went to peer review, when campaign objectives are set, it did not know which rebates would be included in the advertisements.

Service NSW stated in its submission to the Department of Premier and Cabinet that it may change the creative content for phase 2 as it announced new initiatives and rebates. The peer review process should have ensured that Service NSW set targets for any additional rebates or savings it intended to advertise before that advertising commenced to ensure a strategic approach to the campaigns that clearly demonstrated anticipated benefits were in place.

The post-campaign evaluation for phase 2 shows that the advertising campaign met most of its objectives

Service NSW set overall campaign objectives and specific targets for some rebates advertised as part of phase 2 of the campaign. The objectives, targets and results for phase 2 are shown in Exhibit 5. In phase 2, Service NSW established baseline data on levels of awareness of government rebates during the peer review process. The baseline level of awareness for government rebates was 44 per cent. The level of awareness for specific rebates was 46 per cent for the Compulsory Third Party (CTP) green slip refund, and 21 per cent for both Active Kids and Toll Relief.

Post-campaign evaluation reports for phase 2 show that the campaign met its objective to raise awareness of NSW Government rebates, achieving a 16 per cent increase in awareness from 44 per cent to 51 per cent. The campaign did not meet its target to increase awareness of the CTP green slip refund by ten per cent.

Service NSW did not report the results of the uptake of the CTP green slip refund, Active Kids and Toll Relief in its post campaign effectiveness report submitted to the Department of Premier and Cabinet. However, other post-campaign evaluation documentation, which Service NSW advise was submitted to the Department of Premier and Cabinet, show that these targets were met.

Service NSW did not report to the Department of Premier and Cabinet on whether it achieved the target of a ten per cent increase of average monthly visits to the Cost of Living webpage. Service NSW reported that it had achieved an average of 11,753 visitors to the webpage per day during the campaign. These average daily results indicate that the target was met.

Exhibit 5: Phase 2 - campaign objectives, targets and results

Campaign objectives and targets	Does the post-campaign evaluation show that the target was met?
1. a) Increase awareness of rebates from the NSW Government by ten per cent.	Image
b) Increase average monthly visits to the Cost of Living webpage by ten per cent.	Image
2. Increase awareness of rebates and savings by ten per cent for:
CTP green slip refund	Image
Active Kids	Image
Toll Relief.	Image
3. Increase awareness that NSW Government initiatives relating to the cost of living are available via Service NSW by ten per cent.	Image
4. Increase the uptake of rebates and savings for the CTP green slip refund, Active Kids and Toll Relief by ten per cent.	Image

Key

Image

Yes

Image

Not Fully

The post-campaign evaluation for phase 3 shows that the advertising campaign met most of its objectives

Service NSW set overall campaign objectives and specific targets for the two rebates advertised as part of phase 3 of the campaign. The objectives, targets and results for phase 3 are shown in Exhibit 6.

In phase 3, Service NSW established baseline data on levels of awareness during the peer review process. The baseline level of awareness for government rebates was 44 per cent. This is the same baseline that was used to measure performance for phase 2 of the campaign. Service NSW did not set baselines for awareness and uptake of Energy Switch and Creative Kids as these were new services.

Post-campaign evaluation reports for phase 3 show that the campaign met its objective to raise awareness of NSW Government rebates by ten per cent, achieving a 30 per cent increase in awareness from 44 per cent to 57 per cent. The overall increase in message take-out was met with 43 per cent agreeing with the message that the NSW Government is taking steps to ease the cost of living. The campaign achieved awareness and uptake targets for the specific rebates included in phase 3, except for awareness of Creative Kids which achieved 28 per cent awareness, falling short of the 30 per cent awareness target.

Exhibit 6: Phase 3 - campaign objectives, targets and results

Campaign objectives and targets	Does the post-campaign evaluation show that the target was met?
1. Increase message takeout that ‘The NSW Government is taking steps to help ease the cost of living in NSW’ by ten per cent for those who can recall the campaign.
2. Increase awareness that the NSW Government has a range of rebates and savings by ten per cent.
3. Generate awareness with NSW residents aged 18+ of:
Energy Switch (15 per cent awareness)
Creative Kids (30 per cent awareness).
4. Create uptake of Energy Switch and Creative Kids (8,356 clicks on the Energy Switch website and 107,938 Creative Kids vouchers downloaded with 70 per cent conversion).

Key

Yes

Not Fully

The timing of campaign phases meant that it was difficult for Service NSW to evaluate each distinct campaign phase and reduced opportunities to incorporate learnings from previous phases

Service NSW commenced planning for phase 2 of the campaign while phase 1 was still underway. This limited the opportunity for Service NSW to incorporate learnings from phase 1 into phase 2. There was some overlap in the timing of phase 2 and the start of phase 3 of the campaign, making it difficult to evaluate the effectiveness of each distinct campaign phase. Both phases 2 and 3 had the same high-level outcome objective to raise awareness of rebates by ten per cent. The baseline measures that were used to evaluate performance for phase 3 were the same as those used to evaluate phase 2. As a result, Service NSW was not able to separately evaluate these two phases of the campaign. This is important given the budgets for phases 2 and 3 were $4.127million and $934,800 respectively.

Service NSW allocated 7.5 per cent of its media budget to communications with culturally and linguistically diverse (CALD) and Aboriginal audiences

The NSW Government CALD and Aboriginal Advertising Policy requires that agencies spend at least 7.5 per cent of an advertising campaign media budget on direct communications with CALD and Aboriginal audiences. Service NSW authorised a media company to book media in line with the media plans for the campaign. The media plans for phases 2 and 3 of the campaign indicate that Service NSW met this requirement, with 7.5 per cent of the budget allocated to these audiences in phase 2 and 10.4 per cent in phase 3.

The post campaign evaluation for phases 1 and 2 of the Cost of Living campaign contained a recommendation to look at other opportunities to reach CALD audiences. Effective communication with CALD audiences was particularly important in phase 3 of the campaign, where they made up 30 per cent of the target audience for the Creative Kids advertisement. The post-campaign analysis for phase 3 showed that the campaign performed well with some, but not all CALD audiences. The post-campaign analysis also showed low awareness and uptake with Aboriginal audiences. Pre-campaign focus groups in phase 3 found Aboriginal audiences had a negative reaction to the campaign tag line ‘NSW Government is helping with the cost of living’ however this tagline was still used in some advertisements in phase 3.

The cost-benefit analysis (CBA) for phase 2 did not accurately assess the benefits of the campaign and did not assess the costs and benefits of alternatives to advertising

Under the Government Advertising Act 2011, agencies are required to prepare a CBA when the cost of the campaign is likely to exceed $1 million. The CBA conducted by Service NSW for phase 2 includes $8 million in benefits attributed to the advertisements for the Energy Switch tool and $6.9 million in benefits attributed to the advertisements for Creative Kids vouchers. These benefits should not have been included in the CBA for phase 2 as they were not included in this phase of the campaign. The CBA did not estimate the benefits of some other rebates and savings advertised in phase 2 of the campaign. This means that the CBA did not accurately assess the benefits of the campaign. Service NSW advised that at the time the CBA was developed it had not selected the rebates to be included in the campaign.

The Government Advertising Guidelines require agencies to consider options other than advertising to achieve the desired objective including a comparison of costs and benefits. The CBA developed as part of phase 2 identified using existing NSW Government communication channels as an alternative to advertising but did not assess the costs and benefits of this alternative.

This is a repeat finding from two previous government advertising audits. The report ‘Government Advertising: 2015–16 and 2016–17’ found that both agencies subject to the audit did not meet the requirements in the guidelines to consider alternatives to advertising. The report made a recommendation to the Department of Premier and Cabinet to work with Treasury to ensure the requirements of the guidelines are fully reflected in the 'Cost-Benefit Analysis Framework for Government Advertising and Information Campaigns'. The report ‘Government advertising 2017–18’ found that one agency subject to the audit did not identify to what extent the benefits could be achieved without advertising, nor did it consider alternatives to advertising which could achieve the same impact as the advertising campaign.

Service NSW negotiated with a single creative agency in phase 2, making it difficult to demonstrate value for money

Agencies are required to obtain three quotes when procuring a creative agency on the prequalification scheme if the estimated cost of the creative content is greater than $150,000. In phase 2 of the campaign, Service NSW extended the contract with the creative agency used for phase 1 of the campaign and did not obtain three quotes despite the cost of the creative content for phase 2 being $731,480. The requirement to obtain three quotes was met in phase 1 when initially selecting this creative agency.

Service NSWs procurement policy details that direct negotiation may be appropriate where there is a compelling reason to renew or rollover a contract beyond temporal or convenience reasons or in the cases of a genuine emergency. In its briefing to the Chief Executive, Service NSW stated that this contract extension was sought due to the time-sensitive nature of the project and that if work was delayed by a tender process, Service NSW may not be able to meet marketing milestones and this could result in limited customer uptake. This reason is not a genuine emergency and is not compelling as it does not explain what consequences would occur if it did not meet the marketing milestones or if there was limited customer uptake.

Service NSW's procurement policy also states that under no circumstances must Service NSW employees enter into discussions with a supplier until the delegate has formally made their decision to enter into direct negotiation. Service NSW briefed the Chief Executive of Service NSW in relation to extending the contract on 5 September 2018. The briefing states that the creative agency had already begun developing creative content for phase 2 and Service NSW had already received quotes from the creative provider for the proposed work prior to 5 September 2018. Procurement sign-offs were not completed until 7 September 2018. The engagement of the creative provider prior to appropriate approvals was contrary to Service NSWs procurement policy.

The economy of the campaign may have been limited by not meeting the procurement requirements in phase 2. It is possible that the creative provider may have offered a more competitive rate if it was aware that Service NSW was seeking quotes from other creative providers. Additionally, it is possible that another creative provider could have provided better value for money.

In phase 3 of the campaign, the estimated cost of the creative exceeded $150,000 however Service NSW chose to contract two different creative agencies, and the cost for each agency fell below the threshold to obtain three quotes. Agencies are permitted to obtain one quote when using a creative provider on the prequalification scheme if the cost is between $50,000 to $150,000. Service NSW advised that it contracted two creative providers as two different project teams were responsible for the rebates, each with separate marketing budgets.

Service NSW allowed sufficient time for cost-efficient media placement

During the peer review process, the Department of Premier and Cabinet advised agencies about the time they should allow to ensure cost-efficient media placement. For example, the Department of Premier and Cabinet advised that agencies book television advertising six to 12 weeks in advance and that agencies book radio advertising two to eight weeks in advance.

Service NSW allowed sufficient time between the completion of the peer review process and the commencement of the first advertising. Service NSW signed the agreement with the approved Media Agency Services provider with sufficient time to achieve cost-efficient media placement for all types of media used in this campaign.

The campaign may have been misleading for some people who were not eligible for rebates

Advertisements we reviewed focused on the amount of savings that could be obtained from rebates, for example ‘Save up to $285’, and ended with a statement ‘To save, visit service.nsw.gov.au. This directed viewers to the Cost of Living website which contains eligibility information. However, the advertisements in phases 2 and 3 we reviewed did not contain any details on the eligibility for these rebates and not all advertisements stated that eligibility criteria apply. Service NSW advised that the eligibility criteria for each rebate is extensive and that it was not possible to include this in the creative material.

Post-campaign evaluations in phase 3 recommended that advertisements for Creative Kids should indicate eligibility (e.g. age criteria) as statements on savings have the potential to be misleading when not all viewers will be eligible for rebates. Social media analysis conducted following phase 2 showed ineligibility or inability to claim rebates or refunds caused anger for some respondents.

Some advertisements in phase 2 stated ‘we've got something for everyone’. However, as rebates were subject to eligibility criteria, it is possible that some residents in NSW would not be eligible for any rebates as part of the Cost of Living initiative. As such, this statement has the potential to be misleading.

The campaign included statements that underestimated the savings that some customers could obtain

The Guidelines require accuracy in the presentation of all facts, statistics, comparisons and other arguments. The Guidelines also require that all claims of fact included in government advertising campaigns must be able to be substantiated.

In phase 2, the possible savings customers could obtain for two rebates or savings exceeded the amounts stated in the advertising campaign. Exhibit 7 shows some advertisements in phase 2 which stated, ‘My Green Slip Saving Save up to $60’. However, the State Insurance Regulatory Authority website shows that savings for some types of motor vehicles under the 2017 CTP scheme exceed $60. The State Insurance Regulatory Authority website states that the average saving under this scheme has been $129. Service NSW advised that these advertisements were designed for regional markets and that it used different advertisements for metropolitan areas which contained different amounts of savings.

Some advertisements in phase 2 stated, ‘My Toll Relief save up to $700’. The Service NSW website states that drivers can obtain free vehicle registration if they have spent $1,352 or more in tolls in the previous financial year. The cost of registration for some vehicles exceeds $700. This means the savings detailed in the advertisement were lower than what some customers could actually save.

NSW Rural Fire Service conducted the 'How FireProof Is Your Plan?' (Fireproof) campaign. The Fireproof campaign is a three-year campaign which ran in 2018–19 (year one), 2019–20 (year two) and is planned for 2020–21 (year three). This audit examined year two of the campaign (2019–20).

The Fireproof campaign is a public safety campaign encouraging people to plan and prepare for bush fires across the summer period. The campaign aims to improve the quality of bush fire planning and preparation in the community and decrease the impact of fires on the community when they occur.

Campaign materials we reviewed did not breach section 6 of the Act

The audit team reviewed campaign materials developed as part of the paid advertising campaign for example radio advertisements, television commercials and digital displays. The audit team did not review the use of social media outside paid social media content as section four of the Act defines government advertising as the dissemination of information which is funded by or on behalf of a government agency. Examples of campaign materials are shown in Appendix two.

Section 6 of the Act prohibits political advertising as part of a government advertising campaign. A government advertising campaign must not:

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

The audit found no breaches of section 6 of the Act in the campaign material we reviewed. 

NSW Rural Fire Service did not set targets for the second year of the campaign

The second year of the Fireproof campaign (2019–20) had the same objectives as the first year of the campaign (2018–19), however no specific targets were set for the second year. The advertising submission for the first year of the campaign (2018–19) details the targets for each objective as an increase of ten per cent against the baseline data to be achieved by March 2021, at the end of the three-year campaign.

The second year of the Fireproof campaign (2019–20) was one of the first campaigns approved under the new budget and peer review processes introduced by the Department of Customer Service in 2019–20. The new process for peer review introduced a new template for campaign submissions. The former template for campaign submissions contained more prompts for agencies to ensure the submission contained sufficient detail of campaign objectives, baseline measures, targets, dates for measurement and detail on how they would measure objectives. Despite this, the peer review process should have identified that NSW Rural Fire Service did not set targets for the second year of the campaign.

The 2016 Guidelines for Implementing NSW Government Evaluation Framework for Advertising and Communications requires campaign objectives to be SMART (specific, measurable, achievable, realistic and timed). NSW Rural Fire Service did not meet this requirement for year two of the Fireproof campaign.

Post-campaign evaluations showed increases against four out of five objectives, however there were no specific targets

NSW Rural Fire Service set three campaign objectives at the time it submitted the second year of the campaign (2019–20) to the Department of Customer Service for peer review. However, the post-campaign effectiveness report submitted to the Department of Customer Service measured campaign effectiveness against five campaign objectives. The objectives in the post-campaign effectiveness report were the same objectives set for the first year of the campaign, which is appropriate as this was a repeat campaign.

NSW Rural Fire Service achieved increases against four of their five objectives. However, as noted above there were no specific targets (such as percentage increases) against which performance of the 2019–20 campaign could be measured. Despite this, at the end of the second year, the Fireproof campaign had already achieved some of the targets that NSW Rural Fire Service had set for the end of the third year of the campaign. The post-campaign research showed that both audience recall and exposure to the campaign increased significantly from the prior year. The campaign objectives and results are shown in Exhibit 8.

For those people who already have a bush fire plan, the campaign aimed to increase the number of those plans which have included two or more elements from the Guide to Making a Bush Fire Survival Plan. Elements from the Guide to Making A Bush Fire Survival Plan include actions such as deciding what to take with you if you leave, ensuring you have the right equipment for defending your home and allocating responsibilities to members of a household. The post-campaign evaluation showed that the campaign did not achieve an increase against this objective for people who planned to stay and defend their property rather than leave.

Exhibit 8: Campaign objectives and results

Campaign objectives	Does the post-campaign evaluation show increases against the objective?
1. Continue to increase the number of people that have discussed and/or written a plan with regards to what they will do in the event of a fire.
2. Of those who indicate they have a plan, increase the number of people who have included two or more elements from the Guide to Making a Bush Fire Survival Plan:
for those who plan to leave
for those who plan to stay and defend.
3. Increase the frequency in completing preparation activities around a person’s property.
4. Increase the number of people who correctly assess it is their responsibility to complete preparation activities and enact their plan without direct intervention from emergency services.
5. Visits to MyFirePlan website.

Key

Yes

No

NSW Rural Fire Service achieved cost efficiencies by reusing creative content developed in the first year of the campaign

Total creative and production costs incurred in year one of the campaign were $1.08 million. Rather than commissioning new creative materials, NSW Rural Fire Service re-used the same creative content in year two of the campaign. NSW Rural Fire Service incurred $100,000 in creative and production costs in year two of the campaign and achieved cost-efficiencies by reusing the same creative developed in the prior year.

NSW Rural Fire Service allowed sufficient time for cost-efficient media placement and received free media placements

The Department of Customer Service advises agencies to work with media contacts to book media in advance to ensure a cost-efficient placement. Prior to 2019–20, the Department of Premier and Cabinet provided suggested timeframes for agencies to book media as part of the peer review process. For example, it advised agencies to book television six to 12 weeks in advance and book radio advertising two to eight weeks in advance. NSW Rural Fire Service allowed sufficient time for a cost-efficient media placement.

NSW Rural Fire Service received $4 million of free advertising time and space donated by media companies due to the extent and impact of the 2019–20 fire season.

The cost benefit analysis (CBA) did not assess the costs and benefits of alternatives to advertising

Under the Government Advertising Act 2011, agencies are required to prepare a CBA when the cost of the campaign is likely to exceed $1 million. As part of the CBA, the Government Advertising Guidelines require agencies to consider options other than advertising to achieve the desired objective including a comparison of costs and benefits.

The CBA for the Fireproof campaign (year two) notes that the proposed campaign is one component of a broader community engagement strategy which has been developed over time and is based on research and evaluation. The CBA considers two options to achieve the objectives of the campaign. The first option is community engagement activities without an advertising campaign and the second option is community engagement activities alongside an advertising campaign. The CBA does not identify and assess the costs and benefits of both of the options in order to assess the most cost-efficient option.

This is a repeat finding from two previous government advertising audits. The report ‘Government Advertising: 2015–16 and 2016–17’ found that both agencies subject to the audit did not meet the requirements in the guidelines to consider alternatives to advertising. The report made a recommendation to the Department of Premier and Cabinet to work with Treasury to ensure the requirements of the guidelines are fully reflected in the 'Cost-Benefit Analysis Framework for Government Advertising and Information Campaigns'. The report ‘Government advertising 2017–18’ found that one agency subject to the audit did not identify to what extent the benefits could be achieved without advertising, nor did it consider alternatives to advertising which could achieve the same impact as the advertising campaign.

Appendix one – Responses from agencies

Appendix two – About the campaigns

Appendix three – About the audit

Appendix four – Performance auditing

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Parliamentary reference - Report number #342 - released 19 November 2020

The Auditor-General for New South Wales, Margaret Crawford, released her report today on State Finances for the year ended 30 June 2020.

‘I am pleased to once again report that I issued an unmodified audit opinion on the State’s consolidated financial statements,’ the Auditor-General said.

The report acknowledges this has been a challenging year, with New South Wales impacted by natural disasters and the COVID-19 pandemic.

The State’s Budget Result, reported in the financial statements, was a deficit of $6.9 billion. This is different to the 2019-20 budget forecast surplus of $1.0 billion and is an outcome of the government’s significant response to bushfires and COVID-19.

The report summarises a number of audit and accounting matters arising from the audit of the Total State Sector Accounts, a sector that comprises 291 entities controlled by the NSW Government with total assets of $495 billion and total liabilities of $256 billion.

Read full report (PDF)

Our audit opinion on the State’s 2019–20 financial statements was unmodified

An unmodified audit opinion was issued on the State’s 2019–20 consolidated financial statements.

The State extended signing its financial statements by six weeks.

Natural disasters, the COVID-19 pandemic and other factors impacted the State’s 2019–20 reporting timetable. The State extended signing its financial statements by six weeks, compared with 2018–19.

All agencies were also given a two-week extension to prepare their financial statements compared with 2018–19. Further extensions beyond two weeks were subsequently approved for the following 11 agencies (7 in 2018–19) to submit completed financial statements for audit:

• Department of Communities and Justice
• Department of Customer Service
• Department of Planning, Industry and Environment
• Department of Regional NSW
• Department of Transport
• Environment Protection Authority
• Infrastructure NSW
• Lord Howe Island Board
• NSW Crown Holiday Parks Land Manager
• Service NSW
• Water Administration Ministerial Corporation.

The extensions reflected that the COVID-19 pandemic impacted agencies’ work environments during the first six months of 2020. This was at a time when many were still implementing machinery of government changes and preparing to implement three significant new accounting standards:

• AASB 15 Revenue from Contracts with Customers (issued December 2014, effective 1 July 2019)
• AASB 16 Leases (issued February 2016, effective 1 July 2019)
• AASB 1058 Income of Not-for-profit entities (issued December 2016, effective 1 July 2019).

These new accounting standards were issued some years before they became effective, to allow reporting entities sufficient time to prepare for implementation. Notwithstanding this, some agencies had not fully implemented the new accounting standards in time for early close procedures, and the unforeseen impact of COVID-19 further complicated the year-end financial reporting processes for the State and its agencies.

The graph below shows the number of reported errors exceeding $20 million over the past five years in agencies’ financial statements presented for audit.

In 2019–20, agency financial statements presented for audit contained 19 errors exceeding $20 million (six in 2018–19). The total value of these errors increased to $1.4 billion ($927 million in 2018–19).

The errors resulted from:

• incorrectly applying Australian Accounting Standards and Treasury Policies
• incorrect judgements and assumptions when valuing noncurrent physical assets and liabilities
• incorrectly interpreting the accounting treatment for unspent stimulus funding.

Errors in agency financial statements exceeding $20m (2016–2020)

$4.1 billion in stimulus funding was allocated in 2019–20

The government implemented an economic stimulus package primarily to mitigate the impacts of the COVID-19 pandemic on New South Wales.

The COVID-19 pandemic and bushfires had a significant impact on the State’s finances, reducing its revenue and increasing its expenses especially in sectors directly responsible for responding to the COVID-19 pandemic, such as Health.

The government announced a $4.1 billion health and economic stimulus package in 2019–20. This primarily included:

• $2.2 billion in health measures including purchases of essential medical equipment and increasing clinical health capacity (like intensive care spaces)
• $1.0 billion in small business and land tax relief
• $355 million in extra cleaning services and quarantine costs.

Cluster agencies had spent $3.0 billion (just under 75 per cent) of the COVID-19 stimulus package by 30 June 2020.

The Health cluster incurred most of this expenditure.

Total spend relating to bushfires was $1.3 billion in 2019–20.

The graph below shows the total allocation and spend by cluster to 30 June 2020.

Economic stimulus allocation and spend by cluster to 30 June 2020

Deficit of $6.9 billion compared with a budgeted surplus of $1.0 billion

An outcome of the government’s overall activity and policies is its net operating balance (Budget Result). This is the difference between the cost of general government service delivery and the revenue earned to fund these sectors.

The General Government Sector, which comprises 199 entities, generally provides goods and services funded centrally by the State.

The Non-General Government Sector, which comprises 92 government businesses, generally provides goods and services, such as water, electricity and financial services that consumers pay for directly.

The Budget Result for the 2019–20 financial year was a deficit of $6.9 billion. The original budget forecast, set before the COVID-19 pandemic and bushfires, was a $1.0 billion surplus. The main driver of the change in result was:

• $1.3 billion of higher employee costs, mainly due to:
  • increased workers compensation claims
  • additional personnel required (mainly in the Health sector) to respond to the COVID-19 pandemic
• $2.3 billion of higher operating expenses, mainly due to:
  • $828 million from first time recognition of a child abuse claim liability
  • $507 million from additional insurance claims from the NSW bushfires
  • $343 million from COVID-19 claims by agencies for loss of revenue.
• $1.8 billion in higher grants and subsidy expenses, mainly due to:
  • small business grants
  • COVID-19 quarantine compliance measures
  • costs incurred in response to the 2019–20 bushfires, drought and disaster relief payments
  • third party-controlled assets that were subsequently transferred to councils and utility providers, mainly arising from construction of the CBD and South East Light Rail.

The deficit was further driven by:

• $1.9 billion less taxation revenue, mainly resulting from:
  • $1.3 billion less in payroll tax due to relief measures introduced by the government as part of its COVID-19 economic stimulus
  • $424 million less in gambling and betting taxes, due to venue closures required by COVID-19 public health orders
• $523 million less in dividends and income tax revenue from the Non-General Government Sector, due to lower dividends received from NSW Treasury Corporation and from the State’s other commercial government businesses
• lower fines, regulatory fees and other revenue, due to a $305 million decrease in mining royalties, largely driven by lower coal prices.

Main drivers of the 2019–20 actual vs. budget variance

Revenues increased $209 million to $86.3 billion

In 2019–20, the State’s total revenues increased by $209 million to $86.3 billion, 0.2 per cent higher than in 2018–19. COVID-19 impacted taxation revenue, which fell by $1.1 billion and revenue from the sale of goods and services, which fell by $1.1 billion. These falls were offset by a $2.5 billion (7.7 per cent) increase in grants and subsidies from the Australian Government, mainly in the form of additional stimulus funding.

Taxation revenue fell 3.5 per cent

Taxation revenue fell by $1.1 billion, mainly due to a:

• $861 million fall in payroll tax as a result of COVID-19 relief (reduced payroll tax payments for eligible small businesses)
• $430 million fall in stamp duty collections, driven by lower than expected growth in the property market
• $427 million decline in gambling and betting taxes, mainly due to venue closures driven by COVID-19 public health orders.

Stamp duties of $8.8 billion were the largest source of taxation revenue, $473 million higher than payroll tax, the second-largest source of taxation revenue.

Australian Government grants and subsidies

The State received $34.2 billion in grants and subsides which are mainly from the Australian Government, $2.4 billion more than in 2018–19.

The increase was driven by a $1.1 billion increase in Commonwealth Specific Purpose Payments to support the Health cluster respond to the COVID-19 pandemic. Commonwealth National Partnership Payments increased by a similar amount to provide the State with Natural Disaster relief.

Sales of goods and services

In 2019–20, sales of goods and services fell $1.1 billion. This was due to the COVID-19 pandemic reducing:

• patronage and related transport passenger revenue
• health billing activities with elective surgery being put on hold

Fines, regulatory fees and other revenues

Fines, regulatory fees and other revenues fell $505 million. This was mainly due to a $409 million decrease in mining royalties attributed to a drop in thermal coal prices during 2019–20.

Other dividends and distributions

Other dividends and distributions rose by $616 million due to higher distributions received from the State’s investments. This was due to an additional $1.3 billion held in the State’s investment portfolio compared with last year.

Expenses increased $8.2 billion to $96.0 billion

The State’s expenses increased 9.3 per cent compared with 2018–19. Most of the increase was due to higher employee expenses, other operating costs and grants and subsidies.

Employee expenses, including superannuation, increased 5.7 per cent to $42.6 billion.

Salaries and wages increased to $42.6 billion from $40.3 billion in 2018–19. This was mainly due to increases in staff numbers and a 2.5 per cent increase in pay rates across the sector. Salaries and wages for the Education and Health sectors increased by $659 million and $732 million in each sector respectively.

The Health sector employed an additional 2,763 full time staff in 2019–20. It also incurred more overtime in response to COVID-19. Education increased staff numbers by 4,866 full time equivalents and paid a one off 11 per cent pay rise to school administration staff in 2019–20. Historically, the government wages policy aims to limit growth in employee remuneration and other employee related costs to no more than 2.5 per cent per annum.

Operating expenses increased 8.7 per cent to $27.0 billion.

Operating expenses increased to $27.0 billion in 2019–20 ($24.8 billion in 2018–19) due to higher operating activities in Health. The higher level of activities and related costs is attributed to a full year of operations at the Northern Beaches Hospital (opened November 2018), and responding to COVID-19. The response to COVID-19 involved the State providing viability payments to private hospitals, higher visiting medical officer costs due to additional overtime hours and spending more on equipment to set up COVID-19 testing clinics.

Insurance claims increased by $2.0 billion. This was mainly due to NSW Self Insurance Corporation (SiCorp) recognising a liability for child abuse claims incurred but not reported for the first time, and claims for the 2019–20 bushfires, floods and COVID-19.

Health costs remain the State’s highest expense.

Total expenses of the State were $96 billion ($87.8 billion in 2018–19). Traditionally, the following clusters have the highest expenses as a percentage of total government expenses:

• Health – 24.3 per cent (25.8 per cent in 2018–19)
• Education – 17.6 per cent (19.3 per cent in 2018–19)
• Transport - 12.8 per cent (12.6 per cent in 2018–19).

General public service expenses as a percentage of total State expenses is higher due to a $2.0 billion increase in SiCorp’s accrued claim expenses.

Other expenses increased due to additional grant funding by the State for drought relief and COVID-19 stimulus spend.

Health expenses increased by $632 million compared with 2018–19 but fell as a proportion of total State expenses.

Education expenses remained stable compared with last year due to savings in student transportation costs primarily driven by COVID-19. This led to a decrease in the proportion of the State’s costs relating to education activities.

Grants and subsidies increased $2.5 billion to $14.1 billion.

The increase in grants and subsidies was due to payments the State made to support businesses and local communities in the face of COVID-19 and bushfires. In addition, the State transferred CBD and South East Light Rail assets to councils and utility providers during 2019–20 as it no longer controlled these.

Depreciation expense increased $1.0 billion to $9.2 billion.

Depreciation increased to $9.2 billion from $8.0 billion in 2018–19. At 1 July 2019, the State implemented the new leases standard recognising a right of use (ROU) asset and related lease liability in its financial statements. The value of ROU assets are amortised over the term of the lease. This contributed to $980 million of the increase in 2019–20 depreciation expense. Last year, these costs were previously reported within other operating expenses.

Assets grew by $28.0 billion to $495 billion

The State’s assets primarily include physical assets such as land, buildings and infrastructure, and financial assets such as cash, and other financial instruments and equity investments. The value of total assets increased by $28.0 billion to $495 billion. This was a six per cent increase compared with 2018–19, mostly due to changes in asset carrying values.

Of the State’s $28.0 billion increase in asset values, $9.3 billion was due to a new accounting standard requirement for operating leases to be valued and recorded on balance sheet for the first time.

AASB 16 Leases requires entities recognise values for right-ofuse assets (ROU) for the first time. An ROU asset is a lessee’s right to use an asset, the value of which is amortised over the term of the lease. This standard came into effect from 1 July 2019.

Valuing the State’s physical assets

The value of the State’s physical assets increased by $14.1 billion to $365 billion in 2019–20. The assets include land and buildings ($168 billion), infrastructure ($180 billion) and plant and equipment ($16.7 billion). A prior period error relating to the valuation of RMS infrastructure assets reduced the reported values by $1.0 billion from $352 billion to $351 billion at 30 June 2019.

The movement in physical asset values between years includes additions, disposals, depreciation and valuation adjustments. Other movements include reclassification of physical assets leased under finance leases to right of use assets upon adoption of AASB 16 Leases on 1 July 2019.

Movements in physical asset values

Liabilities increased $38.4 billion to $256 billion

The State borrowed additional funds in response to natural disasters and COVID-19.

The State’s borrowings rose by $33.9 billion to $113.8 billion at 30 June 2020. This accounted for most of the increase in the State’s total liabilities.

The value of TCorp bonds on issue increased by $25.2 billion to $97.0 billion to largely fund capital expenditure and costs associated with the bushfires, drought and COVID-19.

TCorp bonds are actively traded in financial markets and are guaranteed by the NSW Government.

Over 2019–20, TCorp continued to take advantage of lower interest rates, buying back short-term bonds and replacing them with longer dated debt. This lengthens the portfolio matching liabilities with the funding requirements for infrastructure assets.

With effect from 1 July 2019, AASB 16 Leases required the State to recognise liabilities for operating leases for the first time. This increased total lease liabilities from $5.3 billion at 30 June 2019 to $11.8 billion at 30 June 2020.

More than a third of the State’s liabilities relate to its employees. They include unfunded superannuation and employee benefits, such as long service and recreation leave.

Valuing these obligations involves complex estimation techniques and significant judgements. Small changes in assumptions and other variables, such as a lower discount rate, can materially impact the valuation of liability balances in the financial statements.

The State’s unfunded superannuation liability rose $300 million from $70.7 billion to $71.0 billion at 30 June 2020. This was mainly due to a lower discount rate of 0.87 per cent (1.32 per cent in 2018–19). The State’s unfunded superannuation liability represents the value of its obligations to past and present employees less the value of assets set aside to fund those obligations.

The State maintained its AAA credit rating

The object of the Fiscal Responsibility Act 2012 is to maintain the State’s AAA credit rating.

The government manages New South Wales’ finances in accordance with the Fiscal Responsibility Act 2012 (the Act).

The Act establishes the framework for fiscal responsibility and the strategy to maintain the State’s AAA credit rating and service delivery to the people of New South Wales.

The legislation sets out targets and principles for financial management to achieve this.

This year, the State’s credit rating from Standard & Poor’s changed from AAA/Stable to AAA/Negative. Moody’s Investors Service credit rating of Aaa/Stable did not change from the previous year.

The fiscal target for achieving this objective is that General Government annual expenditure growth should be lower than long term average revenue growth.

The State did not achieve its fiscal target of maintaining annual expenditure growth below the long-term revenue growth rate target of 5.6 per cent.

In 2019–20, General Government expenditure grew by 9.7 per cent (5.5 per cent in 2018–19).

Expenditure items that contributed most to the growth rate include:

• recurrent grants and subsidies (20.4 per cent)
• other operating expenses (9.5 per cent)
• employee costs (including superannuation) (5.6 per cent)

Recurrent grant and subsidy expenses increased by $2.8 billion in 2019–20 mainly due to the COVID-19 and natural disaster payments. Other operating expenses increased mainly due to a $2.0 billion increase in SiCorp insurance claims. This included the $828 million provision for child abuse claims incurred but not reported. The bushfires and COVID-19 pandemic also increased the number and cost of claims in 2019–20.

Superannuation funding position since inception of the Act - AASB 1056 Valuation

Appendix one - Prescribed entities

Appendix two - Legal opinions

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:

1. Internal control trends
2. Information technology (IT), including IT vendor management
3. Transparency and performance reporting
4. Management of purchasing cards and taxis
5. 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.

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.

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.

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.

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.

Appendix one - List of 2018 recommendations

Appendix two - Status of 2017 recommendations

Appendix three - Cluster agencies

Pursuant to the Public Finance and Audit Act 1983, I present my Report on State Finances 2018.

I am pleased to once again report that I issued a clear audit opinion on the State’s consolidated financial statements. This demonstrates the Government’s focus on preparing high quality information on the State’s financial position and performance for use by stakeholders.

However, there are two key areas I would like to see addressed to further support the preparation of the State’s financial statements.
Firstly, some complex accounting matters are not being resolved until late in the financial reporting cycle. This has contributed to an increase in the number of errors in the financial statements key agencies are submitting for audit, particularly around assessing the value of physical assets. Better planning and earlier resolution of these matters would lead to more efficient processes.

Secondly, the State needs to implement five new accounting standards over the next two years. Agencies will need to devote significant resources and effort to collect the necessary information and assess the impact at the whole of government level. I will work with Treasury and relevant agencies to help them improve quality assurance controls over their financial reporting.

Throughout 2017-18 my office worked with Treasury on reforms to improve financial governance, budgeting and reporting arrangements across the sector.

The Government Sector Finance Bill 2018 passed both houses of Parliament in June 2018. However, the Legislative Council returned other proposed changes to the Public Finance and Audit Act 1983 to the Legislative Assembly for further consideration. Most of these changes relate to the Public Accounts Committee. At the time of writing, the cognate Bill had not been debated.

The budget result was a $4.2 billion surplus. The consolidated financial statements at 30 June 2018 do not reflect the sale of 51 per cent of the State’s investment in Sydney Motorway Corporation for which it received $9.3 billion. The sale was announced on 31 August 2018.

Finally, I would like to thank the staff of Treasury for the way they approached the audit. Our partnership is critical to ensuring the quality of financial management and reporting.

Margaret Crawford
Auditor-General
19 October 2018

The State's financial statements given a clear audit opinion

Timely and accurate financial reporting enables informed decision making, effective management of public funds and enhances public accountability.

Since the introduction of mandatory ‘early close procedures’ in 2011-12, the number of significant errors in financial statements of agencies had fallen largely due to identifying and resolving complex accounting issues early.

In 2016-17, Treasury narrowed the scope of mandatory procedures to focus on physical asset valuations and pro-forma financial statements. Despite being broadened for 2017-18, we have observed an increase in the number of errors in agency financial statements.

In 2017-18, twenty-three errors exceeding $20 million were found in agencies’ financial statements that make up the State’s consolidated financial statements. This compares to only five in 2015-16.

The errors identified this year were the result of:

• incorrectly applying Australian Accounting Standards
• deficiencies in assessing the value of physical assets
• using inappropriate and inaccurate assumptions when measuring liabilities
• inaccurately reflecting inter-agency payables and receivables.

Quality financial reporting would be enhanced by responding to key accounting issues as soon as they are identified, and preparing accounting position papers for consideration by Treasury, agency Audit and Risk Committees and the Audit Office.

Key accounting matters addressed by the State in 2017-18.

Restatement of some of the State’s previously reported asset and liability values.

The state corrected the previously reported values of some long-term liabilities ($2 billion).

Accounting standards require the State to measure its long-term liabilities at the best estimate of the expenditures required to settle the obligations. The affected liabilities include claims liabilities of the Lifetime Care and Support Authority of NSW and the NSW Self Insurance Corporation, and scheme liabilities of the Long Service Corporation. The liabilities are adjusted by what is referred to as the ‘discount rate’ to reflect the decreasing value of money over time.

In the past, agencies used a variety of rates to discount these liabilities. Some liabilities were discounted using the estimated long-term fair value of 10-year TCorp bond yields while others were discounted using the expected
return on investments. These discount rates did not comply with the requirements of Australian Accounting Standards and underestimated liabilities by $2.0 billion.

In 2017-18, the State assessed the discount rates previously used in the Sector. It determined the market yield on Commonwealth Bonds best met the Accounting Standard requirements and used this rate to discount similar liabilities in relevant agencies. This resulted in a $2.0 billion increase in the previously reported values of these liabilities and a similar decrease in retained earnings at 1 July 2016.

Risks to the quality and timeliness of financial reporting.

Challenges associated with valuing the State's physical assets.

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

The valuation of the State’s physical assets is one such area. Fair value estimates are inherently complex and sensitive to assumptions and judgements. In the public sector, this may be exacerbated by the unique nature of its assets, such as land under roads, preserved plant specimens, cultural collections and other heritage assets.

In 2017-18, valuations of physical assets added $24.5 billion to the value of the State’s balance sheet. These assets are now valued at $339.2 billion. Our audits of these valuations identified:

Some important matters agencies should consider when planning/conducting asset valuations include:

STARTING OUT

• Planning is important
• Most effective revaluations include early engagement with all stakeholders, including auditors.
• Determine who needs to be involved and advised of progress with the revaluation – e.g. finance, internal audit, audit and risk committee.
• Ensure asset registers are complete and there is evidence to demonstrate the agency controls the assets.
• The effective date of the valuation can be any date after the financial year commences, but well before year end.

MANAGEMENT'S ROLE

• For large mass valuations consider using a suitable project management methodology to ensure the process remains ‘on track’ with sufficient oversight.
• Consider engaging an expert to perform the valuation, but maintain responsibility for the outcomes. Ensure the outcomes are reasonable and quality review the results, including the appropriateness of inputs and key assumptions.
• Compare pre and post valuation results on an individual asset basis. Where changes are significant and/or unexpected, document explanations from the valuer.
• Start revaluations early so they are completed by early close (around March). The timetable must allow time for a quality review of results and for the results to be recorded in the financial records.
• Revaluation workpapers must include the revaluation source data provided to the valuer and a reconciliation of the source data to the general ledger.

USING EXPERTS

• The terms of engagement should be documented in an engagement letter, which clearly details the proposed valuation methodology. It’s important the valuer knows what is required from a policy perspective and clearly understands the accounting framework used to prepare the financial statements.
• Valuation reports should detail the key assumptions used, explain why the valuation approach was adopted and how the use of relevant observable input was maximised.
• Valuation reports should clearly differentiate between assets revalued using a cost approach and those using an income or market approach. They should explain why the approach used was the most relevant for the asset type.
• Consider using representative/statistical sampling for mass valuations and determine the extent of physical inspections that may be required.
• If a sampling technique is used, it should provide sufficient confidence that the sample is representative of the population.
• Significant judgements should be supported by relevant benchmark data or other analysis and observations. A common example in the public sector is to discount asset values to reflect restrictions on use.
• Ensure the valuer has considered the age and condition of the assets, and heritage/cultural aspects and/or other special factors.

WHAT ABOUT INTERVENING YEARS?

• Perform revaluations with sufficient regularity to ensure asset carrying values in the financial statements reflect fair value.
• Indexation alone is not normally a substitute for a full revaluation. A full revaluation may be needed to accurately establish fair values if asset values move significantly when indices are applied to them.
• Where indexation is used between full revaluations, the indices should be appropriate for the type of asset being assessed.
• Indexing can be unreliable in assessing whether the fair value of assets has moved over time. For example, some assets are valued based on re- collection cost estimates, which may fall over time due to improved re-collection methods and technology.

COMMUNICATION

• For mass or complex valuations, key stakeholders, including auditors, should be involved at the scoping stage and invited to planning meetings with valuers.
• Management should meet with the auditors regularly to discuss progress and outcomes.
• When issues are identified, management should consult with and seek advice from Treasury.

The state will need to implement five new accounting standards over the next two years.

The State has started developing processes it considers necessary to effectively implement the requirements of five new accounting standards. The changes are significant and will impact the financial position and results of agencies and the State.

The new requirements increase the risk of errors in the financial statements. To minimise this risk, agencies will need to devote resources and effort to collect the necessary information and assess the impact of the accounting changes at the whole of government level.

Treasury is liaising with and obtaining information from agencies to assess the impact of the new standards at the whole of government level. Treasury is also liaising with other Treasuries throughout Australia on common implementation issues. To help agencies implement the new standards, Treasury is developing guidance, preparing position papers on proposed accounting treatments, and mandating options within the new standards that agencies need to adopt on transition.

A $4.2 billion surplus, $1.5 billion more than was budgeted

The Total State Sector comprises 304 entities controlled by NSW Government

The General Government Sector, which comprises 212 entities, generally provides goods and services funded centrally by the State.

The non-General Government Sector, which comprises 92 Government businesses, generally provides goods and services, such as water, electricity and financial services that consumers pay for directly.

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

WHAT CHANGED FROM 2017 TO 2018?

Changes in revenues compared to 2016-17

Dividends and distributions			Due to:  Increases in dividends from Sydney Water ($255 million), Water NSW ($60 million) and the Port Authority of NSW ($195 million). An increase in the dividend from Landcom ($200 million) as profits retained in prior years to fund certain projects were not spent. Returns from investments in managed funds increased by $649 million as the State increased the value of its investment using proceeds from the lease of Ausgrid and Endeavour Energy assets
2016-2017	Change	2017-2018
2.4b	+1.3b	3.7b

Taxation			Due to:  Increases in land tax ($564 million) driven by land valuations used to calculate land tax assessments. Increases in payroll tax ($553 million) and other taxes ($419 million). Stamp duty receipts were $1.0 billion lower largely due to additional duty in the prior year of $718 million relating to the lease of Ausgrid and Endeavour Energy assets.
2016-2017	Change	2017-2018
30.8b	+537m	31.3b

Grants & Subsidies			Due to: Increase in the receipt of general purpose grants relating to GST collected by the Australian Government ($753 million). Decreases in national partnerships and specific purpose payments received from the Australian Government ($305 million), mainly due to the timing of major road projects. An increase in Commonwealth Health Reform funding ($338 million). An increase in grants associated with the National Education Reform Agreement for Education ($233 million).
2016-2017	Change	2017-2018
31.4b	+509m	31.9b

Sale of Goods and services			Includes:  Increases in education revenue ($133 million). Higher fees for services in transport to produce property plant and equipment ($89 million).
2016-2017	Change	2017-2018
8.2b	+349m	8.5b

Changes to expenses compared to 2016-17

Recurrent Grants & Subsidies			Due to:  A $613 million increase in grants for the delivery of aging, disability (including NDIS), homecare, community and public housing services. Increase in grants paid to local government sector ($342 million).
2016-2017	Change	2017-2018
12.6b	+1.3b	13.9b

Employee costs			Due to:  Wage inflation increases ($701 million). Increased workers' compensation and long service leave costs ($337 million).
2016-2017	Change	2017-2018
34.9b	+1.2b	36.1b

Other operating expenses			Includes:  Increased expenditure by Transport for NSW ($283 million) for major rail projects and the new rail timetable. Increased expenditure by the Department of Education ($165 million) to address the maintenance backlog, and higher school operating expenses.
2016-2017	Change	2017-2018
18.3b	+1.4b	19.7b
6.8b	+103m	6.9b	Other expenses

The State maintained its AAA credit rating.

The object of the Fiscal Responsibility Act 2012 is to maintain the State’s AAA credit rating.

The Government manages NSW’s finances in alignment with the Fiscal Responsibility Act 2012 (the Act).

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

The legislation sets out targets and principles for financial management to achieve this.

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

THE FISCAL TARGETS FOR ACHIEVING THIS OBJECTIVE ARE:

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

General Government expenditure grew by 5.4 per cent in 2017-18. This was lower than the long-term revenue growth rate of 5.6 per cent.

Eliminating unfunded superannuation liabilities by 2030.

The Act sets a target to eliminate unfunded superannuation liabilities by 2030.

The State’s funding plan is to contribute amounts escalated by five per cent each year so the schemes will be fully funded by 2030. In 2017-18, the State made employer contributions of $1.7 billion, which is largely consistent with contributions over the past five years. Treasury expects superannuation liabilities will be fully funded by 2030 based on the funding program at the last triennial review (December 2015).

For fiscal responsibility purposes, the State uses AASB 1056: Superannuation Entities. This standard discounts superannuation liabilities using the expected return on assets backing the liability.

Using this method, the State’s unfunded superannuation liability was $14.0 billion at 30 June 2018 ($15.0 billion at 30 June 2017). The unfunded liability is $3.4 billion less than it was when the Act was introduced.

Revenues increased by $3.2 billion to $86.7 billion in 2017-18.

Revenues were underpinned by growth in taxation and Australian Government grant revenues, but stamp duties fell.

Tax revenue for the Total State Sector increased by $746 million, or 2.5 per cent compared to 2016-17, primarily due to a:

• $582 million increase in land tax from growth in land values
• $562 million increase in payroll tax from NSW employment and wages growth
• $1 billion decrease in stamp duty due to lower than expected growth in property market transactions, volumes and prices. In 2016-17, stamp duty included $718 million from the leases of Ausgrid and Endeavour Energy assets.

The State expects total stamp duties will fall to $9.5 billion in 2018-19, a decrease of almost $2.0 billion from 2016-17.

The State received Australian Government grants and subsidies of $30.9 billion in 2017-18.
The State received $444 million more in grants and subsidies from the Australian Government than it did in 2016-17. This was due to increases in GST revenues ($753 million) and special purpose payments ($683 million).
There was a decrease in National Partnership payments ($992 million), mainly due to the timing of major road projects including the Pacific Highway (Woolgoolga to Ballina), WestConnex and Western Sydney Infrastructure Program.

In 2017-18, sales of goods and services were $1.1 billion higher than in 2016-17. This reflected increased transaction revenue at Sydney Water ($139 million), the Department of Education ($133 million), WestConnex ($145 million), Department of Finance, Services and Innovation ($111 million) and Sydney Trains ($83 million).

Other dividends and distributions were $803 million higher than in 2016-17 mainly reflecting higher investment returns on TCorp investments.

Key revenues include:

	2016-2017	Change%	2017-2018
	35.4b	+2.8	36.3b	Taxation, Fees, Fines, and other
	31.4b	+1.6	31.9b	Grants & Subsidies
	14.1b	+8.1	15.2b	Sale of Goods and Services

Expenses increased $4.9 billion to $84.2 billion in 2017-18

Overall expenses increased 6.1 per cent compared to 2016-17. Most of the increase was due to higher employee and operating costs.

Salaries and wages increased by 3.6 per cent compared to 2016-17.

Salaries and wages increased to $31.1 billion from $30 billion. This was due to inflation linked salary and wage increases and a reported increase in front line staff.

The Government wages policy aims to limit growth in employee remuneration and other employee related costs to no more than 2.5 per cent per annum.

Operating expenses increased by 7.8 per cent from 2016-17.

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

• increased costs of major rail projects, WestConnex, B-Line bus program and a new rail timetable
• addressing the maintenance backlog and higher school operating expenses of the Department of Education.

Key expenses include:

	2016-2017	Change%	2017-2018
	32.8b	+3.8	34.1b	Employee Expenses
	21.6b	+7.8	23.3b	Operating Costs
	9.7b	+12.7	10.9b	Grants & Subsidies
	7.2b	+6.6	7.6b	Depreciation
	4.6b	+2.8	4.7b	Superannuation Expense

Health costs remain the highest expense of the State.

The Australian Bureau of Statistics introduced a revised Classification of the Function of Government Australia Framework (COFOG-A) effective 1 July 2017. This resulted in some re-classification of expenditure between purposes and now shows State expenses are highest in:

• Health (25.5 per cent)
• General Public Services (25.0 per cent)
• Education (19.6 per cent).

General Public Services includes the executive and legislative branches, financial affairs, public debt transactions and general public service transactions.

The graph highlights the annual expenditure by function and the value of assets to deliver those services.

Assets grew by $35.6 billion to $443 billion in 2017-18

Valuing the State’s physical assets.

The State had physical assets with a fair value of $339 billion at 30 June 2018. This includes land and buildings ($161.6b) and Infrastructure ($160.2b).

Our audits assess the reasonableness and appropriateness of assumptions used to value physical assets. This includes obtaining an understanding of the valuation methodologies used and judgements made. We also review the completeness of asset registers and the mathematical accuracy of valuation models.

Net movements between years include additions, disposals, depreciation and valuations. This year, revaluations of physical assets added $24.5 billion to the value of the State’s assets. This was mainly attributable to the following agencies:

• Department of Education - $8.5 billion
• Roads and Maritime Services - $7.4 billion.

The State’s financial assets increased by $308 million in 2017-18 ($27.5 billion in 2016-17).

In 2016-17, the significant increase in financial assets was primarily from the sale or lease of the following government assets and businesses:

• In June 2017, the Government leased 50.4 per cent of Endeavour Energy assets, which followed the long-term lease 50.4 per cent of Ausgrid’s assets in December 2016. The Government received proceeds of $24.0 billion from these transactions.
• A 35-year concession for providing titling and registry services, effective 30 June 2017, was granted to a private sector operator. The Government received $2.6 billion cash for the concession.

The Government implemented reforms relating to the use the State’s financial assets.

In 2017-18, the Asset and Liability Committee, which advises the Government on balance sheet management, recommended the following policy actions and frameworks to help manage the State’s financial risks and opportunities:

• expanding the scope of cash management reforms to give the State a whole-of-government view on the use of surplus funds. Treasury advises these reforms have centralised funds management of approximately $3.0 billion
• endorsing a new whole-of-government Foreign Exchange (FX) Risk Policy (effective 1 July 2018) to effectively manage the State’s FX risk
• expanding management of the State’s debt portfolio to minimise interest rate risks, reduce interest costs where possible, and extend the average weighted life of the General Government’s debt portfolio towards eight years
• endorsing establishment of a ‘sustainability bond’ program to further diversify and expand the State’s bond investor base and raise awareness of the Government’s social and environmental initiatives.

The State has established the NSW Generations Fund to maintain debt at sustainable levels.

The State established the NSW Generations Funds (NGF) in June 2018 to support debt retirement and to fund community-focused initiatives. The Government has indicated it will initially capitalise the NGF with $3.0 billion from its reserves.

The NSW Generations Funds Act 2018 requires an audit of each NSW Generations Fund by the Auditor- General (including a report by the Auditor-General on whether payments from the Funds have been made in accordance with the Act). The first audit of the fund will be for the period up to 30 June 2019.
 

Key assets include: 

	2016-2017	Change%	2017-2018
Physical Assets
	147.0b	+9.0	160.2b	Infrastructure
	143.4b	+12.7	161.6b	Land and Buildings
Financial Assets
	27.7b	- 4.6	26.4b	Equity investments
	20.6b	- 5.2	19.5b	Cash and Recievables
	40.5b	+6.5	41.3b	Investments and Placements

Liabilities increased $5.1 billion to $189 billion in 2017-18

Valuing the State’s liabilities relies on actuarial assessments.

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

Valuing these obligations involves complex estimation techniques and significant judgements. Small changes in assumptions can materially impact the values and the financial statements.

The State’s superannuation obligations fell $2.2 billion in 2017-18.

The State’s $56.4 billion unfunded superannuation liability represents obligations to past and present employees less the value of assets set aside to meet those obligations. The unfunded superannuation liability fell from $58.6 billion to $56.4 billion in 2017-18.

The State’s borrowings at 30 June 2018 were $700 million higher than they were at 30 June 2017.

The State’s borrowings totalled $71.3 billion at 30 June 2018.

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

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

General Government Sector debt has been restructured by replacing shorter-term debt with longer-term debt. This lengthens the portfolio to match liabilities with the funding requirements for infrastructure assets.

Key liabilities include: 

	2016-2017	Change%	2017-2018
	58.6b	- 3.7	56.4b	Unfunded Superannuation
	18.3b	+4.7	19.1b	Other Employee Benefits
	70.6b	+1.0	71.3b	Borrowings

Appendix one - Prescribed entities

Appendix two - Legal opinions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Appendix one – Performance audits 2014 to 2018

Appendix two – Performance auditing

Appendix three – About this report

Agencies have managed the planning of outsourcing in a competent way. All agencies satisfactorily managed the contractual aspects of outsourcing. The Audit Office is of the opinion, however, that there is no objective evidence to demonstrate that agencies have achieved their goals in outsourcing IT. Most agencies had identified the current and expected costs and risks of outsourcing. Agencies were not able to demonstrate that the actual costs of outsourcing matched the expected costs.

Parliamentary reference - Report number #103 - released 23 October 2002