Reports
Actions for State Finances 2019
State Finances 2019
The Auditor-General, Margaret Crawford, has released her report on the State Finances for the year ended 30 June 2019.
‘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 NSW Treasury and agency efforts to reduce the number and value of errors compared with the previous year. ‘Strong financial management and transparent reporting are key elements of our system of government. Treasury and agency finance teams need to be consulted on major business decisions at the time of their execution. This will ensure agencies assess the accounting implications earlier and support accurate financial statements being presented for audit on a timely basis,’ said the Auditor-General.
The report summarises the financial audit result of the Total State Sector Accounts. The Total State Sector comprises 304 entities controlled by the NSW Government with total assets of $468 billion and total liabilities of $218 billion.
The General Government sector comprises 212 entities that provide goods and services that are funded centrally by the State. General Government expenditure grew by 5.5 per cent in 2018-19, which was below the long-term revenue growth of 5.6 per cent target established by the Fiscal Responsibility Act 2012.
Pursuant to the Public Finance and Audit Act 1983, I present my Report on State Finances 2019.
Strong financial management and transparent reporting are key elements of our system of government.
I am pleased to once again report that I issued an unmodified audit opinion on the State’s consolidated financial statements.
The number of errors in agencies’ 2018–19 financial statements fell to six compared to the 23 recorded in 2017–18. This reflects Treasury’s focus on early close and the resolution of complex accounting matters before submission. Agency finance teams need to be consulted on major business decisions and commercial transactions to assess their accounting impacts at the time of their execution, rather than at the end of a financial year. This would improve the quality of financial reporting and avoid the need for extensions for agencies to submit their financial statements for audit.
To further increase transparency, a Key Audit Matters section was included in my Independent Auditor Report on the Total State Sector Accounts this year. This explains those matters considered most significant to the conduct of the audit and requiring significant management judgement.
Looking forward, certain factors have the potential to impact the accuracy and completeness of the Total State Sector Accounts in coming years. First, three new accounting standards are effective from 1 July 2019 and a fourth from 1 July 2020. Transitioning to new standards requires significant planning and resources to ensure the impacts are appropriately assessed and accounted for. Second, the Government Sector Finance Act 2018 will be implemented in stages over three years to 2020–21. This Act is intended to focus on performance, transparency, accountability, and efficiency of financial management in the government sector. I encourage agencies to build their awareness of this important reform and ensure their alignment with the principles of the Act.
I want to thank Treasury staff for the way they engaged with my staff in the conduct of the audit. Our partnership is critical to ensuring the quality of financial management and reporting.
Margaret Crawford
Auditor-General, 10 October 2019
Our audit opinion on the State’s 2018–19 financial statements was unmodified. There were fewer reported errors but earlier resolution of accounting matters is still required.
Our audit opinion on the State’s 2018–19 financial statements was unmodified.
This year, six errors exceeding $20 million were found in agencies’ 2018–19 financial statements that make up the State’s consolidated financial statements. The total value of these errors was $927 million compared to $3.8 billion in 2017–18. The errors identified in 2018–19 resulted from:
- incorrectly applying Australian Accounting Standards and Treasury Policies
- using inappropriate assumptions and inaccurate data
- incorrectly assessing the fair value of non-current physical assets.
The introduction of mandatory ‘early close procedures’ in 2011–12, saw the number of errors in agencies’ financial statements fall progressively, to a low of five in 2015–16.
In 2016–17, Treasury narrowed the scope of its mandatory early close procedures to focus on non-current physical asset valuations and pro-forma financial statements. Following this, the number of significant errors increased to 23 in 2017–18, the
highest number in six years and similar to the numbers identified before mandatory early close procedures were introduced.
In 2018–19, Treasury and agencies’ refocused their efforts around early close procedures and other year-end processes resulting in this year’s lower error total of six.
Errors in agency financial statements exceeding $20m (2015–2019)
Correction of prior year’s reported values
Correction of earthwork assets ($2.1 billion)
Some of the State’s earthworks were first valued in 2016–17. These included earth excavations and embankments for the Country Rail and Metropolitan Network created before the year 2000 and dating back to the early 1900s.
For many years, the State did not account for earthworks because it believed the value could not be reliably measured. In 2016–17, the State engaged an external valuer who identified a methodology showing the earthworks could be valued. That valuer performed a valuation using topography maps for the Country Rail Network (CRN) because information in this earthworks database was of poor quality and incomplete. The valuation resulted in the State recognising $7.5 billion of earthworks for the first time in 2016–17. This was disclosed as a prior period error.
Over the following years, the State improved the quality of the CRN earthworks database by engaging an engineering firm to perform more detailed earthworks surveys. The work involved the use of technology to survey most of the CRN lines.
In 2018–19, the State once again engaged an external valuer to assess the fair value of the CRN earthworks. The valuer determined that incorrect assumptions were used in the 2016–17 valuation. These primarily related to land elevations, which were corrected in the earthworks database and this resulted in a new fair value of $5.4 billion, $2.1 billion less than the previous valuation. The error reported in the 2017–18 value has been corrected in the 2018–2019 financial statements to reflect the revised value.
Previously reported value for earthworks reduced from $7.5 billion to $5.4 billion.
Correction of museum collection assets ($27 million)
The Australian Museum’s collection assets were restated by $27 million to $800 million in 2017–18.
After the 2017–18 financial statements were published, the Australian Museum identified additional collection assets that were not included in the original valuation. This resulted in a $27 million error relating to collection asset values. As last year’s valuation was based on an incomplete listing of collection assets, the 2017-18 value has been corrected in the 2018–19 financial statements to reflect the revised value.
Correction of lease liability ($46.2 million)
On 1 July 1995, the Department of Justice entered into a 25-year lease arrangement with an option to extend for a further 15 years.
The Department accounted for the arrangement as a finance lease by recognising a building asset and a corresponding finance lease liability for the period of 25 years. The Department depreciated the leased asset based on a useful life of 40 years.
As it was reasonably certain the Department would exercise the lease option at inception, it should have recognised a liability that reflected the entire 40 year lease period. To correct the prior year error and properly reflect the extended lease period, the Department of Justice increased the lease liability and decreased retained earnings by $46.2 million as at 1 July 2017.
Abuse Claims remain a significant contingent liability of the State
The State discloses a contingent liability in its financial statements when the possibility of settling the liability in the future is considered less than probable, but more likely than remote, or the amount of the obligation cannot be measured with sufficient reliability.
If the expected settlement subsequently becomes probable and reliably estimable, a provision is recognised.
The State has numerous contingent liabilities. Some are quantifiable while others are not. As contingent liabilities are potentially material future liabilities of the State, every effort should be made to quantify these as accurately as possible. They also need to be monitored closely to ensure that they are recognised and brought on balance sheet as they crystallise.
At 30 June 2019, NSW Self Insurance Corporation (SiCorp) could not reliably measure the claims liability arising from past incidences of abuse that occurred within NSW Government institutions which have not yet been reported. These are referred to as incurred but not reported claims (IBNR).
Since 1 July 2018, victims of child sexual abuse can opt to claim compensation through the National Redress Scheme, or to lodge a civil claim. Civil claims for incidents that occurred within NSW Government institutions may be covered by SiCorp. An estimate of an IBNR for child abuse claims within SiCorp will be impacted by the extent that victims claim compensation through redress as compared to civil claims.
Recent legislative changes have added further uncertainty to estimating the extent of IBNR claims. SiCorp requires more reliable data on the number of IBNR child abuse claims and the expected average size of the related payments. As such, the liabilities presented in the SiCorp and the State financial statements do not include an allowance for IBNR abuse claims.
As more information becomes available it may be possible for SiCorp to reasonably estimate the value of abuse claim liabilities. It is possible that such an estimate may be material to SiCorp and the State’s financial statements.
TAFE update
In prior years we reported on information system limitations at TAFE NSW, specifically relating to its student administration system. TAFE NSW continues to implement additional processes to verify the accuracy and completeness of revenue from student fees for the 2018–19 financial year.
In 2017–18 TAFE NSW started implementing a new student management system. Significant delays have occurred in implementing this system, mainly due to the complexity of integrating the vendor solution with the requirements of TAFE. TAFE will now bring the final commissioning and operation of the system in house. Final project delivery timeframes and estimated completion costs are being reviewed. Costs incurred to date amount to $67 million. The original budget for this new system is $89.4 million.
Light Rail settlement
The CBD and South East Light Rail is a new twelve kilometre light rail network for Sydney, currently under construction. Passenger trips are set to begin on the light rail by December between Circular Quay and Randwick. The second stage from Randwick to Kingsford is planned to open in March 2020. The original budget for construction work of $1.6 billion was revised to $2.1 billion in 2014.
The State Government has been in dispute with the firm responsible for delivering and operating the CBD and South East light rail project. In May 2019, the parties reached a Settlement Arrangement resulting in the State agreeing to pay a settlement amount of $576 million, which is in addition to the revised budget. Transport has advised a final cost is still to be determined following project completion.
The Audit Office has commenced a follow up audit on the CBD South East Light Rail. This audit will consider whether recommendations of our previous audit have been implemented. We will also review the current status and budget of this project.
Sydney Metro Northwest project commissioning
The Sydney Metro North West officially opened in May 2019.
In constructing the metro, some assets were built to facilitate its operation. These included pavements, roadworks, and electricity
and water connections.
When the project was completed, the assets and the responsibility for maintaining them transferred to third parties, primarily Councils and utility providers. In 2018–19, the State expensed (derecognised) the assets, valued at $306 million, because it no longer controlled them.
Financial Reporting by Crown Land Reserve Trusts
Approximately 700 reserve trusts, managed by Trust Boards, did not prepare the financial statements at 30 June 2019 as required by the
Public Finance and Audit Act 1983.
These Crown reserves contain showgrounds, cemeteries, racecourses, local parks, and other community facilities and public areas. Some of the Crown reserves have independent streams of revenue from user charges.
In 2016–17, Treasury determined that NSW cemetery trusts and a holiday park reserve trust were controlled entities of the State. As such, the Public Finance and Audit Act 1983 requires them to prepare financial statements and have these audited by the Auditor-General.
In 2017–18, three reserve trusts accepted NSW Treasury’s view, prepared financial statements and had them audited by the Auditor-General.
However, three cemetery reserve trusts continue to maintain they are not controlled by the State and therefore their financial statements are not audited by the Audit Office. These cemeteries shared their unaudited financial statements with Treasury so they could be incorporated into the State’s financial statements. At 30 June 2019, the value of their combined assets and liabilities, which are not audited by the Audit Office, was $564 million.
The State included an additional $319 million in assets that relate to Crown land values of approximately 700 reserve trusts that did not prepare or submit financial statements.
We performed additional audit procedures to obtain some assurance over the value of these crown lands. The nature and extent of the limitations to the scope of these procedures was not significant enough to impact our audit opinion. Treasury should ensure these trusts comply with the requirements of the Public Finance and Audit Act.
Derecognition of investment in City West Housing
In 2017–18, the State had an equity investment of $680 million in a community housing provider, City West Housing Pty Limited (CWH).
During 2018–19, CWH amended its constitution to ensure alignment with its charitable status. The unintended impact of this change was that on windup the net assets would not be distributed to the State. The accounting implications to the State’s investment was not considered by Treasury at the time of approving the amended constitution. Consequently, the State wrote off its $680 million investment in CWH in 2018–19.
It is important that accounting impacts of such changes are discussed and agreed upon early. At the time of approving the decision to change the constitution, all accounting implications should be made available and understood. Such information is relevant when approving decisions. The theme of what is relevant
information will be explored further in our Performance Audit of ‘Advice on Major Decisions’.
Machinery of government (MoG) changes refers to how the government reorganises agency structures and functions and realigns ministerial responsibilities.
Cluster changes
On 2 April 2019, the Government reorganised public sector agencies into eight clusters (ten in 2017–18) with effect from 1 July 2019.
Prior to 30 June 2019, two subsequent administrative arrangement orders were made to amend and finalise the MoG changes.
The key MoG changes included:
- abolishing the following five departments:
- Finance, Services and Innovation
- Industry
- Planning and Environment
- Family and Communities
- Justice
- transferring their functions into three new departments:
- Department of Customer Service
- Department of Planning, Industry and Environment
- Department of Communities and Justice
The State’s consolidated financial statements at 30 June 2019 were not impacted by the changes, as they were effective from 1 July 2019.
The chart below shows the cluster arrangements before and after the MoG changes to the General Government Sector. It compares total budgeted expenses presented in the 2018–19 and 2019–20 Budget Papers (1).
Each cluster’s share of the General Government Sector’s (GGS) total expenditure remains relatively unchanged after the MoG changes. Further details on other functions transferred between clusters are detailed in the 2019–20 Budget Papers.
Of the clusters, Education is affected most by the MoG changes from the perspective of increased expenditure in the 2019–20 budget. This is because the TAFE Commission transferred into this cluster from the former Department of Industry on 1 July 2019, resulting in a corresponding decrease in the new Planning, Industry and Environment cluster’s expenditure.
Cluster expenses
2018-19 |
2019-20 |
||
Industry | 6% | Planning, Industry and Environment | 7% |
Planning and Environment | 4% | ||
Education | 18% | Education | 21% |
Premier and Cabinet | 1% | Premier and Cabinet | 2% |
Finance, Service and Innovation | 4% | Customer Service | 3% |
Family and Community Services | 8% | Stronger Communities | 18% |
Justice | 10% | ||
Transport | 9% | Transport | 9% |
Treasury | 14% | Treasury | 14% |
Health | 26% | Health | 26% |
$1.2 billion surplus, $0.2 billion below 2018–19 budget of $1.4 billion
The Total State Sector comprises 304 entities controlled by the 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 2018 to 2019?
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 accordance 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 New South Wales.
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 5.5 per cent in 2018–19 (5.1 per cent in 2017–18 based on restated balances). This was slightly below 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 2018–19, the State made employer contributions of $1.73 billion ($1.67 billion in 2017–18), an increase of $64 million or 3.8 per cent ($52 million or 3.2 per cent in 2017–18). This was under the five per cent target by $19.5 million.
For fiscal responsibility purposes, the State uses AASB 1056: Superannuation Entities. This accounting standard discounts superannuation liabilities using the expected return from the assets backing the liability.
Using this method, the State’s unfunded superannuation liability was $13.2 billion at 30 June 2019 ($14.0 billion).
Superannuation funding position since inception of the Act - AASB 1056 Valuation
State revenues fell $604 million to $86.1 billion in 2018–19
In the prior years, revenue growth was underpinned by cyclical increases in land tax, payroll tax and one-off large stamp duty receipts from the lease of the State’s electricity network assets. In 2018–19, the State’s revenue fell by $604 million to $86.1 billion ($86.7 million in 2017–18).
Taxation revenue remained relatively stable
Taxation revenue only grew slightly, mainly due to:
- a $517 million increase in payroll tax from NSW wages growth
- a $469 million increase in land tax from growth in land values
- offset by a $1.2 billion decrease in stamp duty due to lower than expected growth in the property market. This decrease would have been higher had the State not received $555 million in stamp duty from the new 51 per cent owner of WestConnex.
The gap between payroll tax and stamp duty reduced significantly in 2018–19. Stamp duty still remains the largest source of revenue for the State at $9.2 billion, only $42 million above payroll tax.
Australian Government grants and subsidies
The State received $31.8 billion in grants and subsidies from the Australian Government, $158 million less than the previous year. This was due to falls in other grants and subsidies of $98 million and GST revenues of $48 million.
GST revenues fell due to weaker growth in national consumption expenditure and a smaller GST pool. The GST pool represents funds made available by the Commonwealth for transfer to the States as untied financial assistance. The allocation of GST is determined by the Commonwealth, not the State.
A $392 million decrease in National Partnership Payments was offset by a $380 million increase in Specific Purpose Payments.
In 2018–19, sales of goods and services fell $395 million mainly due to the sale of WestConnex.
Other dividends and distributions fell by $122 million due to lower distributions from associates. This reflected weaker performance in the electricity sector (Ausgrid and Endeavour) resulting in lower distributions paid to the State following changes in the Electricity Network Service Providers regulatory environment and the sale of Snowy Hydro Pty Ltd in 2017–18.
Fines, regulatory fees and other revenues increased by $242 million largely from mineral royalties. The increase was attributed to strong demand across Asian markets for coal exports, which the State expects will continue to experience steady growth.
Expenses increased $4 billion to $87.9 billion in 2018–19
Overall, the State’s expenses increased 4.8 per cent in 2018–19 compared to 2017–18. Most of the increase was due to higher employee expenses, operating costs and grants and subsidies.
Employee expenses, including superannuation, increased by 3.9 per cent to $40.3 billion.
Salaries and wages increased to $40.3 billion in 2018–19 from $38.8 billion 2017–18. This was mainly due to salary and wage increases. 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 6.1 per cent from 2017–18.
Within operating expenses, payments for supplies, services and other expenses increased due to:
- increased operating costs associated with the commencement of the new Sydney Metro
- higher operating activity levels experienced in the Health sector resulting in higher visiting medical officer costs, surgical supplies and information management costs
- higher school operating expenses in Education, mainly relating to teaching cloud tools and purchase of computer equipment.
Health costs remain the highest expense of the State.
The following clusters have the highest expenses as a percentage of total government expenses:
- Health - 25.8 per cent (24.6 per cent in 2017–18)
- Education - 20 per cent (18.5 per cent)
- Transport - 14.7 per cent (17.6 per cent).
Other, mainly relates to Economic Affairs, Housing and Community, Recreation and Culture functions of the State.
Transport expenses have decreased in 2018–19 mainly due to the sale of WestConnex. This is partially offset by costs associated with the new Sydney Metro, which commenced operations from 1 July 2018. The graph highlights annual expenditure by function in 2018–19 compared to 2017–18.
Grants and subsidies increased by $782 million to $11.7 billion.
This was mainly due to:
- the $239 million Emergency Drought Relief Package
- a $226 million increase in funding to the Human Services sector to deliver key election commitments, including 5,000 more nurses and midwives
- $123 million in funding for sporting facilities and creating NSW Centre's of Excellence.
Assets grew by $26.7 billion to $468 billion in 2018–19
Overall, the States total assets increased by $26.7 billion to $468 billion in 2018–19. This is a six per cent increase compared to 2017–18. Most of this was due to increases in carrying value of the State’s physical assets and investments.
Valuing the State's physical assets
The State’s physical assets were valued at $352 billion at 30 June 2019.
The State’s physical assets include land and buildings ($166 billion) and infrastructure ($168 billion). The value of the State’s physical assets at 30 June 2018 was restated from $339 billion to $337 billion. The restatement was required to correct errors in the fair value of earthworks previously reported at $7.5 billion and subsequently corrected to $5.4 billion.
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. The State’s physical assets increased by $15.2 billion compared with 2017–18.
Movement in the State's physical assets
Liabilities increased $28.6 billion to $217.5 billion in 2018–19
The State relies on actuarial assessments to value its liabilities
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 balances in the financial statements, such as a lower discount rate.
Superannuation obligations rose by $14.3 billion.
The State’s $70.7 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 rose by $14.3 billion from $56.4 billion at 30 June 2018 to $70.7 billion at 30 June 2019. This was mainly due to a lower discount rate.
Borrowings totalled $79.9 billion at 30 June 2019.
The State’s borrowings of $79.9 billion at 30 June 2019 were $8.6 billion higher than they were 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.
Implementing the requirements of new accounting standards will be challenging
Risks to the quality and timeliness of financial reporting
The State and its agencies will be implementing the requirements of new accounting standards shortly. These are likely to have a major impact on the financial positions and operating results of agencies across the sector.
Accounting standards require agencies to assess and disclose where possible, the impact of the new standards in their 2018–19 financial statements.
Our review found agencies needed to do more work on their impact assessments to minimise the risk of errors in the financial statement disclosures. Some agencies disclosed that the new standards would not have a material impact on their reported financial position and performance, but had little evidence to support this.
Each agency is unique and implementing the new standards is not straight forward as many new principles apply. Management judgement is needed to interpret how the principles apply to each agency. As a result, agencies face the following risks and challenges:
- having the required technical skills in house
- having accurate data to assess the impacts
- correctly and consistently interpreting the new requirements
- adequately planning and preparing for their application
- implementing new systems to capture the information needed to meet the new reporting obligations.
To help agencies implement the new standards consistently across the sector, Treasury:
- issued guidance to agencies
- prepared position papers on proposed accounting treatments
- provided briefing sessions to agencies
- mandated which option in the new standards agencies had to adopt on transition.
Key dates
Section 45 of the Public Finance and Audit Act 1983 requires the Auditor-General to perform audits of the financial statements of entities prescribed for the purposes of that section.
The following were prescribed entities as at 30 June 2019:
Entity/Fund | Latest financial statements audited | Type of audit opinion issued |
Agricultural Scientific Collections Trust | 30 June 2019 | Unmodified |
AustLII Foundation Limited | 31 December 2018 | Unmodified |
Belgenny Farm Agricultural Heritage Centre Trust | 30 June 2019 | Unmodified |
The Brett Whiteley Foundation | 30 June 2019 | Unmodified |
Buroba Pty Ltd | 30 June 2018* | Unmodified |
C. B. Alexander Foundation | 30 June 2018 | Unmodified |
City West Housing Pty Ltd | 30 June 2019 | Unmodified |
The Commissioner for Uniform Legal Services Regulation | 30 June 2019 | N/A (a) |
Cowra Japanese Garden Maintenance Foundation Limited | 31 March 2019 | Unmodified |
Cowra Japanese Garden Trust | 31 March 2019 | Unmodified |
Crown Employees (NSW Fire Brigades Firefighting Staff Death and Disability) Superannuation Fund | 30 June 2019 | Unmodified |
Eif Pty Limited | 30 June 2019 | Unmodified |
Energy Investment Fund | 30 June 2019 | Unmodified |
Central Coast Council Water Supply Authority (formerly Gosford City and Wyong City Council Water Supply Authorities) | 30 June 2018 | Unmodified |
Home Building Compensation Fund | 30 June 2019 | Unmodified |
The funds for the time being under the management of the New South Wales Treasury Corporation, as trustee | 30 June 2019 | Unmodified |
The Illawarra Health and Medical Research Institute Limited | 30 June 2019 | Unmodified |
The Legal Services Council | 30 June 2019 | Unmodified |
Macquarie University Professorial Superannuation Scheme | 30 June 2019 | Unmodified |
Planning Ministerial Corporation | 30 June 2019 | Unmodified |
Corporation Sole 'Minister administering the Heritage Act 1977' (a corporation) | 30 June 2019 | Unmodified |
National Art School | 31 December 2018 | Unmodified |
NSW Fire Brigades Superannuation Pty Limited | 30 June 2019 | Unmodified |
Parliamentary Contributory Superannuation Fund | 30 June 2019 | Unmodified |
Sydney Education Broadcasting Limited | 31 December 2018 | Unmodified |
The superannuation fund amalgamated under the Superannuation Administration Act 1991 and continued to be amalgamated under the Superannuation Administration | 30 June 2019 | Unmodified |
Act 1996 (known as the SAS Trustee Corporation Pooled Fund) | 30 June 2019 | Unmodified |
The trustees for the time being of each superannuation scheme established by a trust deed as referred to in section 127 of the Superannuation Administration Act 1996 | 30 June 2019 | Unmodified |
The Art Gallery of New South Wales Foundation | 30 June 2019 | Unmodified |
Trustee of the Home Purchase Assistance Fund | 30 June 2019 | Unmodified |
Trustees of the Farrer Memorial Research Scholarship Fund | 31 December 2018 | Unmodified |
United States Studies Centre | 31 December 2018 | Unmodified |
Universities Admissions Centre (NSW and ACT) Pty Limited | 30 June 2018 | Unmodified |
University of Sydney Professorial Superannuation System | 31 December 2018 | Unmodified |
Valley Commerce Pty Ltd | 30 June 2018* | Unmodified |
(a) Included as part of the Legal Services Council.
aa*Entities exempt from preparing financial statements at 30 June 2019. |
Actions for Mental health service planning for Aboriginal people in New South Wales
Mental health service planning for Aboriginal people in New South Wales
A report released by the Auditor-General for New South Wales, Margaret Crawford, has found that NSW Health is not forming effective partnerships with Aboriginal communities to plan, design and deliver appropriate mental health services. There is limited evidence that NSW Health is using the knowledge and expertise of Aboriginal communities to guide how mental health care is structured and delivered.
Mental illness (including substance use disorders) is the main contributor to lower life expectancy and increased mortality in the Aboriginal population of New South Wales. It contributes to a higher burden of disease and premature death at rates that are 40 per cent higher than the next highest chronic disease group, cardiovascular disease.1
Aboriginal people have significantly higher rates of mental illness than non Aboriginal people in New South Wales. They are more likely to present at emergency departments in crisis or acute phases of mental illness than the rest of the population and are more likely to be admitted to hospital for mental health treatments.2
In acknowledgement of the significant health disparities between Aboriginal and non Aboriginal people, NSW Health implemented the NSW Aboriginal Health Plan 2013 2023 (the Aboriginal Health Plan). The overarching message of the Aboriginal Health Plan is ‘to build respectful, trusting and effective partnerships with Aboriginal communities’ and to implement ‘integrated planning and service delivery’ with sector partners. Through the Plan, NSW Health commits to providing culturally appropriate and ‘holistic approaches to the health of Aboriginal people'.
The mental health sector is complex, involving Commonwealth, state and non government service providers. In broad terms, NSW Health has responsibility to support patients requiring higher levels of clinical support for mental illnesses, while the Commonwealth and non government organisations offer non acute care such as assessments, referrals and early intervention treatments.
The NSW Health network includes 15 Local Health Districts and the Justice Health and Forensic Mental Health Network that provide care to patients during acute and severe phases of mental illness in hospitals, prisons and community service environments. This includes care to Aboriginal patients in the community at rates that are more than four times higher than the non Aboriginal population. Community services are usually provided as follow up after acute admissions or interactions with hospital services. The environments where NSW Health delivers mental health care include:
- hospital emergency departments, for short term assessment and referral
- inpatient hospital care for patients in acute and sub acute phases of mental illness
- mental health outpatient services in the community, such as support with medications
- custodial mental health services in adult prisons and juvenile justice centres.
The NSW Government is reforming its mental health funding model to incrementally shift the balance from hospital care to enhanced community care. In 2018–19, the NSW Government committed $400 million over four years into early intervention and specialist community mental health teams.
This audit assessed the effectiveness of NSW Health’s planning and coordination of mental health services and service pathways for Aboriginal people in New South Wales. We addressed the audit objective by answering three questions:
- Is NSW Health using evidence to plan and inform the availability of mental health services for Aboriginal people in New South Wales?
- Is NSW Health collaborating with partners to create accessible mental health service pathways for Aboriginal people?
- Is NSW Health collaborating with partners to ensure the appropriateness and quality of mental health services for Aboriginal people?
NSW Health is not meeting the objectives of the NSW Aboriginal Health Plan, to form effective partnerships with Aboriginal Community Controlled Health Services and Aboriginal communities to plan, design and deliver mental health services.
There is limited evidence that existing partnerships between NSW Health and Aboriginal communities meet its own commitment to use the ‘knowledge and expertise of the Aboriginal community (to) guide the health system at every level, including (for) the identification of key issues, the development of policy solutions, the structuring and delivery of services' 3 and the development of culturally appropriate models of mental health care.
NSW Health is planning and coordinating its resources to support Aboriginal people in acute phases of mental illness in hospital environments. However, it is not effectively planning for the supply and delivery of sufficient mental health services to assist Aboriginal patients to manage mental illness in community environments. Existing planning approaches, data and systems are insufficient to guide the $400 million investment into community mental health services announced in the 2018–19 Budget.
NSW Health is not consistently forming partnerships to ensure coordinated care for patients as they move between mental health services. There is no policy to guide this process and practices are not systematised or widespread.
In this report, the term ‘Aboriginal people’ is used to describe both Aboriginal and Torres Strait Islander peoples. The Audit Office of NSW acknowledges the diversity of traditional countries and Aboriginal language groups across the state of New South Wales.
2 Australian Institute of Health and Welfare data 2016–17 (unaudited).
3 NSW Health, The Aboriginal Health Plan 2013-2023.
In May 2019, the Audit Office of New South Wales invited Aboriginal mental health clinicians and policy experts from government and non-government organisations to attend a one-day workshop. Workshop attendees advised on factors that improve the quality and appropriateness of mental health care for Aboriginal people in New South Wales. They described appropriate mental health care as:
- culturally safe, allowing Aboriginal people to draw strength in their identity, culture and community
- person centred and focussed on individual needs
- delivered by culturally competent staff with no bias
- holistic, trauma-informed and focussed on early intervention where possible
- delivered in places that are appropriate including outreach to homes and communities
- welcoming of the involvement of local Aboriginal community and connected to local knowledge and expertise including totems and kinship structures.
The definition of 'appropriate' mental health care for Aboriginal people throughout this report is based on this advice.
Aboriginal people access emergency services at much higher rates than non-Aboriginal people
The choices that people make in relation to health service options provide some insight into the suitability and appropriateness of the service to their needs.
Aboriginal people have different mental health service use patterns than non-Aboriginal people. Aboriginal people are much more likely to be in a crisis situation before receiving mental health services, usually in an emergency department of a hospital.
Aboriginal people make up three per cent of the total New South Wales population, but they constitute 11 per cent of emergency department presentations for mental health treatments. In regional areas, Aboriginal people make up 20.5 per cent of presentations at emergency departments for mental health reasons.
A number of factors help to explain Aboriginal mental health service usage patterns. According to government and non-government mental health organisations:
- emergency department services are better known to Aboriginal people than other mental health services
- community-based models of care are not appropriate for Aboriginal people
- Aboriginal people are reluctant to access community-based mental health services to prevent crisis situations
- community mental health services are not available for Aboriginal people after hours and during the weekend, so emergency services are the only option.
The statewide proportions of Aboriginal people presenting at emergency departments for mental health treatments has been increasing over time (Exhibit 6).
Appendix one – Response from agency
Appendix two – The NSW Aboriginal Health Plan
Appendix three – About the audit
Appendix four – Performance auditing
Parliamentary Reference: Report number #326 - released 29 August 2019
Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.
Actions for Engagement of probity advisers and probity auditors
Engagement of probity advisers and probity auditors
Three key agencies are not fully complying with the NSW Procurement Board’s Direction for engaging probity practitioners, according to a report released today by the Acting Auditor-General for New South Wales, Ian Goodwin. They also do not have effective processes to achieve compliance or assure that probity engagements achieved value for money.
Probity is defined as the quality of having strong moral principles, honesty and decency. Probity is important for NSW Government agencies as it helps ensure decisions are made with integrity, fairness and accountability, while attaining value for money.
Probity advisers provide guidance on issues concerning integrity, fairness and accountability that may arise throughout asset procurement and disposal processes. Probity auditors verify that agencies' processes are consistent with government laws and legislation, guidelines and best practice principles.
According to the NSW State Infrastructure Strategy 2018-2038, New South Wales has more infrastructure projects underway than any state or territory in Australia. The scale of the spend on procuring and constructing new public transport networks, roads, schools and hospitals, the complexity of these projects and public scrutiny of aspects of their delivery has increased the focus on probity in the public sector.
A Procurement Board Direction, 'PBD-2013-05 Engagement of probity advisers and probity auditors' (the Direction), sets out the requirements for NSW Government agencies' use and engagement of probity practitioners. It confirms agencies should routinely take into account probity considerations in their procurement. The Direction also specifies that NSW Government agencies can use probity advisers and probity auditors (probity practitioners) when making decisions on procuring and disposing of assets, but that agencies:
- should use external probity practitioners as the exception rather than the rule
- should not use external probity practitioners as an 'insurance policy'
- must be accountable for decisions made
- cannot substitute the use of probity practitioners for good management practices
- not engage the same probity practitioner on an ongoing basis, and ensure the relationship remains robustly independent.
The scale of probity spend may be small in the context of the NSW Government's spend on projects. However, government agencies remain responsible for probity considerations whether they engage external probity practitioners or not.
The audit assessed whether Transport for NSW, the Department of Education and the Ministry of Health:
- complied with the requirements of ‘PBD-2013-05 Engagement of Probity Advisers and Probity Auditors’
- effectively ensured they achieved value for money when they used probity practitioners.
These entities are referred to as 'participating agencies' in this report.
We also surveyed 40 NSW Government agencies with the largest total expenditures (top 40 agencies) to get a cross sector view of their use of probity practitioners. These agencies are listed in Appendix two.
Conclusion
We found instances where each of the three participating agencies had not fully complied with the requirements of the NSW Procurement Board Direction ‘PBD-2013-05 Engagement of Probity Advisers and Probity Auditors’ when they engaged probity practitioners. We also found they did not have effective processes to achieve compliance or assure the engagements achieved value for money.
In the sample of engagements we selected, we found instances where the participating agencies did not always:
- document detailed terms of reference
- ensure the practitioner was sufficiently independent
- manage probity practitioners' independence and conflict of interest issues transparently
- provide practitioners with full access to records, people and meetings
- establish independent reporting lines reporting was limited to project managers
- evaluate whether value for money was achieved.
We also found:
- agencies tend to rely on only a limited number of probity service providers, sometimes using them on a continuous basis, which may threaten the actual or perceived independence of probity practitioners
- the NSW Procurement Board does not effectively monitor agencies' compliance with the Direction's requirements. Our enquiries revealed that the Board has not asked any agency to report on its use of probity practitioners since the Direction's inception in 2013.
There are no professional standards and capability requirements for probity practitioners
NSW Government agencies use probity practitioners to independently verify that their procurement and asset disposal processes are transparent, fair and accountable in the pursuit of value for money.
Probity practitioners are not subject to regulations that require them to have professional qualifications, experience and capability. Government agencies in New South Wales have difficulty finding probity standards, regulations or best practice guides to reference, which may diminish the degree of reliance stakeholders can place on practitioners’ work.
The NSW Procurement Board provides direction for the use of probity practitioners
The NSW Procurement Board Direction 'PBD-2013-15 for engagement of probity advisers and probity auditors' outlines the requirements for agencies' use of probity practitioners in the New South Wales public sector. All NSW Government agencies, except local government, state owned corporations and universities, must comply with the Direction when engaging probity practitioners. This is illustrated in Exhibit 1 below.
Actions for Property Asset Utilisation
Property Asset Utilisation
Property NSW’s effectiveness in managing NSW Government owned and leased commercial office property is limited in three areas according to a report released today by the Auditor-General for New South Wales, Margaret Crawford.
At 30 June 2018, the NSW Government owned $160 billion worth of land and buildings. The NSW Treasury predicts this figure will rise over the coming years. Property NSW manages more than 900 leased office properties across the state. Approximately 250 of these are owned by Property NSW. Other NSW Government agencies maintain ownership and control of properties considered essential for service provision, such as schools, prisons and hospitals. Between 2012–13 and 2017–18 sales of property assets across the whole of the NSW Government have raised $10 billion, of which Property NSW has sold property assets of approximately $2 billion.
In September 2012, the Property Asset Utilisation Taskforce (the Taskforce) released its report on ‘real property asset management across government’ and concluded that the government has accumulated, over time, ‘a real property asset portfolio it cannot afford to maintain or protect’. The Taskforce noted that ‘a lack of centralised information seriously inhibits any whole-of-government strategic asset planning’ and that maintaining under-utilised or unnecessary properties diverted funds from areas where they might be better used. The Taskforce’s key findings included:
- the NSW Government should own property only as a means to deliver or enhance services
- many government properties were under-utilised, poorly maintained and inappropriate to support service delivery.
The Taskforce recommended the creation of Property NSW, as a replacement for the State Property Authority, to improve property asset utilisation and to drive efficiencies in the government’s owned and leased property portfolio. Property NSW was to achieve these goals by:
- collating property information across the whole-of-government
- working with agencies on longer-term strategic real property asset planning to:
- provide services to agencies as customers
- bring a whole-of-government perspective to real property asset planning.
In response to the Taskforce report, in December 2012, the Premier's Memorandum M2012-20 (the Memorandum) established Property NSW to improve the management of the NSW Government's owned and leased real property portfolio.
Under the Memorandum, Property NSW is responsible for:
- management of all leased and owned commercial office accommodation
- acting as the central acquisition and disposal agency
- providing advice to the government on property matters and developing property policy
- conducting regular and ongoing reviews of agencies portfolios, working with agencies to identify efficiencies to improve service delivery, in relation to the review of capital planning1
- maintaining the register of all government owned property.
The Memorandum states that ownership of all commercial office property should be vested in Property NSW.
This audit assessed whether Property NSW is effective in the management of NSW Government owned and leased commercial office property. To do this we assessed whether NSW Government leased commercial office space is being effectively utilised and whether the Government Property Register, a register of all government owned property, is accurate and up-to-date.
In December 2017, Property NSW started working across the NSW Government to help agencies identify real property assets, including commercial office properties, that are under-utilised or surplus and that could be recycled, repurposed, or vested to Property NSW.
1 Capital Planning was previously referred to as Total Asset Management (TAM).
By December 2019, Property NSW should:
- combine the results of property portfolio reviews to produce a whole-of-government picture of the NSW Government property portfolio
- devise a strategy and plan to recycle or repurpose under-utilised properties using a whole-of-government picture of the NSW Government property portfolio
- develop and report on indicators for progress in reducing the number and value of under-utilised properties at the whole-of-government level, referencing progress against an accurate baseline stocktake.
By December 2019, Property NSW should:
4. improve the data held on government owned and leased properties by combining and automating data feeds to construct a single, consolidated and accurate whole-of-government property data set.
By December 2019, Property NSW should:
5. document and communicate to stakeholders how its assessment criteria inform key decisions including agency relocations, lease renewals and rectifying under-utilisation
6. include customer satisfaction measures in its annual reports and reviews, in accordance with the requirements set out in the Premier's Memorandum M2012-20
7. improve record-keeping and compliance with the State Records Act 1998 and the Department of Finance, Services and Innovation Records Management Policy.
Appendix one - Response from agency
Appendix two - Audit Office response
Appendix three - About the audit
Appendix four - Performance auditing
Parliamentary reference - Report number #312 - released 18 December 2018
Actions for Health 2018
Health 2018
The Auditor-General, Margaret Crawford, released a report today on the New South Wales Health Cluster. The report focuses on key observations and findings from the most recent financial audits of thirty health entities in New South Wales. Unqualified audit opinions were issued for all health entities’ financial statements. However, assessing the fair value of health entities’ property, plant and equipment created challenges, particularly for local health districts.
This report analyses the results of our audits of financial statements of the Health cluster for the year ended 30 June 2018. The table below summarises our key observations.
This report provides parliament and other users of the Health 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 Health cluster for 2018.
Observation | Conclusions and recommendations |
2.1 Quality of financial reporting | |
We issued unqualified audit opinions for all health entities. We identified fewer misstatements than last year, but they were more significant. | The Ministry of Health sets significant accounting policies centrally and provides a template for the preparation of health entities' financial statements. These processes promote consistent quality in the financial reports of health entities. Significant errors identified in 2017–18 predominantly related to revaluations of property, plant and equipment. |
2.2 Timeliness of financial reporting | |
Entities' continue to bring forward financial statement procedures to 31 March where possible. All entities submitted their financial statements on time. | Health entities continue to meet statutory deadlines. |
2.3 Financial and sustainability analysis | |
NSW Health recorded an operating surplus of $377.7 million in 2017–18. Fewer health entities recorded operating deficits in 2017–18. | The operating surplus was $123 million less than budgeted, and $29.0 million less than the surplus recorded for 2016–17. NSW Health budgets for surpluses to help it invest in new facilities, upgrades and redevelopments. |
Expenses across NSW Health increased by 5.5 per cent in 2017–18 (4.4 per cent in 2016–17). | The expense growth rate for NSW Health is 0.5 percentage points lower than the projected long-term annual expense growth rate of six per cent. |
The capital replacement ratio (investment in new assets divided by depreciation) for NSW Health is 2.0. | NSW Health's high capital replacement ratios for ten health entities in 2017–18 is driven by its substantial ongoing investment in hospitals and other assets. |
2.4 Performance against budget | |
This year, four out of 17 (ten out of 17 in 2016–17) local health districts and specialty networks reported a budget variance outside of performance expectations. | Health entities' budgets are revised frequently throughout the year by the Ministry of Health. In 2017–18 the budgeted expenses of health entities were incrementally increased throughout the year by a total of $807 million. The Ministry of Health expects health entities not to exceed their revised budgeted expenses by more than 0.5 per cent. Four of the local health districts did not meet this requirement. |
2.5 Financial impact of health entity employees | |
Thirty-four per cent of NSW Health’s workforce has excess annual leave balances, compared to 35 per cent in 2016–17. |
Managing excess annual leave continues to challenge health entities.
|
The Ambulance Service of NSW reported an average sick leave rate of 88.9 hours per FTE in 2017–18, an increase from 85.2 hours per FTE in 2016–17. | Managing sick leave continues to challenge the Ambulance Service of NSW. Recommendation: The Ambulance Service of NSW should further implement and monitor targeted human resource strategies to address the high rates of sick leave taken. |
The Ambulance Service of NSW reported overtime payments of $74.8 million ($74.6 million in 2016–17). This continues to be significantly higher than other health entities. | Recommendation: The Ambulance Service of NSW should further review the effectiveness of its rostering practices to identify strategies to reduce excessive overtime payments. |
Weak timesheet approval controls mean unapproved employee timesheets continue to be a problem for health entities. | Recommendation: Health entities should, as part of the benefits realisation of HealthRoster, continue to rectify time and leave recording control weaknesses, to reduce the risk of timesheet errors and fraud. |
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 Health 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 control deficiencies | |
The number of internal control deficiencies decreased. However, almost a quarter of control deficiencies are repeat issues and over a quarter relate to managing employees' leave and time recording. | Control deficiencies that relate to managing employees' leave, employees' time recording or information system limitations can be difficult for entities to resolve in a timely manner. Nonetheless, the longer the deficiency remains unaddressed the more likely the vulnerability will contribute to error or fraud. |
3.2 Audit Office annual work program | |
Revaluation of property, plant and equipment | |
Three health entities did not effectively oversee the asset revaluations performed by the experts they engaged in 2017–18. All three entities made material adjustments to their draft financial statements. | Valuation of health property, plant and equipment is complex and subjective. Health entities and the Ministry of Health rely on the experts they engage, but needed to do more to review and oversee their work. |
Capital projects | |
NSW Health manages a significant capital program ($1.7 billion in 2017–18). We noted significant revisions to completion dates and budgeted costs for some projects. | NSW Health complied with approval requirements for business cases, initial budgets and budget variations for the projects we reviewed. For some projects revisions to planned completion dates and budgeted costs impact on the ability to assess the timeliness and cost effectiveness of projects. Combining stages of projects for simplicity of reporting, as a project progresses also makes it difficult to see how the project is tracking to the original plan. |
Asset maintenance | |
The five health entities with the highest maintenance expense used different methods to estimate budgets for maintenance expense. Entities that calculated maintenance budgets by applying CPI factors to prior year expenses were less likely to deliver within budget. | Maintenance budgets are more accurately predicted when estimates are made of expected costs and prepared with the input of asset maintenance staff. |
Two of the five entities recorded significantly higher unplanned maintenance expenditure. Planned maintenance expenditure for these entities was lower than other entities. |
The entities plan to address this by performing condition audits of their assets, increasing planned maintenance and replacing assets. |
All five of the entities were using assets that have been fully depreciated. The replacement cost of each entities' fully depreciated assets represented between 3–7 per cent total replacement cost. | While entities are now regularly reassessing the useful lives of their assets, they continue to use some assets that were fully depreciated prior to the implementation of these processes. |
Actions for Unsolicited proposal process for the lease of Ausgrid
Unsolicited proposal process for the lease of Ausgrid
In October 2016, the NSW Government accepted an unsolicited proposal from IFM Investors and AustralianSuper to lease 50.4 per cent of Ausgrid for 99 years. The deal followed the Federal Government’s rejection of two bids from foreign investors, for national security reasons.
A performance audit of the lease of Ausgrid has found shortcomings in the unsolicited proposal process. Releasing the audit findings today, the Auditor-General for New South Wales, Margaret Crawford said ‘this transaction involved a $20 billion asset owned by the people of New South Wales. As such, it warranted strict adherence to established guidelines’.
Ausgrid is a distributor of electricity to eastern parts of Sydney, the Central Coast, Newcastle and the Hunter Region.
In June 2014, the then government announced its commitment to lease components of the state's electricity network as part of the Rebuilding NSW plan. Implementation of the policy began after the government was re-elected in 2015. Between November 2015 and August 2016, the NSW Government held a competitive tender process to lease 50.4 per cent of Ausgrid for 99 years. The NSW Government abandoned the process on 19 August 2016 after the Australian Treasurer rejected two bids from foreign investors, for national security reasons. That day, the Premier and Treasurer released a media statement clarifying the government's objective to complete the transaction via a competitive process in time to include the proceeds in the 2017–18 budget.
On 31 August 2016, the state received an unsolicited proposal from IFM Investors and AustralianSuper to acquire an interest in Ausgrid under the same terms proposed by the state during the tender process. In October 2016, the government accepted the unsolicited proposal.
This audit examined whether the unsolicited proposal process for the partial long-term lease of Ausgrid was effectively conducted and in compliance with the government’s 2014 Unsolicited Proposals: Guide for Submission and Assessment (Unsolicited Proposals Guide or the Guide).
The audit focused on how the government-appointed Assessment Panel and Proposal Specific Steering Committee assessed key requirements in the Guide that unsolicited proposals must be demonstrably unique and represent value for money.
The evidence available does not conclusively demonstrate the unsolicited proposal was unique, and there were some shortcomings in the negotiation process, documentation and segregation of duties. That said, before the final commitment to proceed with the lease, the state obtained assurance that the proposal delivered value for money.
It is particularly important to demonstrate unsolicited proposals are unique, in order to justify the departure from other transaction processes that offer greater competition, transparency and certainty about value for money.
The Assessment Panel and the Proposal Specific Steering Committee determined the Ausgrid unsolicited proposal was unique, primarily on the basis that the proponent did not require foreign investment approval from the Australian Treasurer, and the lease transaction could be concluded earlier than through a second tender process. However, the evidence that persuaded the Panel and Committee did not demonstrate that no other proponent could conclude the transaction in time to meet the government’s deadline.
It is not appropriate to determine an unsolicited proposal is unique because it delivers an earlier outcome than possible through a tender process. The Panel and Committee did not contend, and it is not evident, that the unsolicited proposal was the only way to meet the government’s transaction deadline.
The evidence does not demonstrate that the proponent was the only party that would not have needed foreign investment approval to participate in the transaction. It also does not demonstrate that the requirement for foreign investment approval would have reduced the pool of foreign buyers to the degree that it would be reasonable to assume none would emerge.
The Panel, Committee and financial advisers determined that the final price represented value for money, and that retendering offered a material risk of a worse financial outcome. However, an acceptable price was revealed early in the negotiation process, and doing so made it highly unlikely that the proponent would offer a higher price than that disclosed. The Department of Premier and Cabinet (DPC) and NSW Treasury were not able to provide a documented reserve price, bargaining strategy or similar which put the negotiations in context. It is not evident that the Panel or Committee authorised, justified or endorsed negotiations in advance.
Key aspects of governance recommended by the Guide were in place. Some shortcomings relating to role segregation, record keeping and probity assurance weakened the effectiveness of the unsolicited proposal process adopted for Ausgrid.
The reasons for accepting that the proposal and proponent were unique are not compelling.
The Unsolicited Proposals Guide says the 'unique benefits of the proposal and the unique ability of the proponent to deliver the proposal' must be demonstrated.
The conclusion reached by the Panel and Committee that the proposal offered a ‘unique ability to deliver (a) strategic outcome’ was primarily based on the proponent not requiring foreign investment approval from the Australian Treasurer, and allowing the government to complete the lease transaction earlier than by going through a second tender process.
It is not appropriate to determine an unsolicited proposal is unique because it delivers an earlier outcome than possible through a tender process. The Panel and Committee did not contend, and it is not evident, that the unsolicited proposal was the only way to meet the government’s transaction deadline.
The evidence does not demonstrate that the proponent was the only party that would not have needed foreign investment approval to participate in the transaction. Nor does it demonstrate that the requirement for foreign investment approval would have reduced the pool of foreign buyers to the degree that it would be reasonable to assume none would emerge.
That said, the Australian Treasurer’s decision to reject the two bids from the previous tender process created uncertainty about the conditions under which he would approve international bids. The financial advisers engaged for the Ausgrid transaction informed the Panel and Committee that:
- it was not likely another viable proponent would emerge soon enough to meet the government’s transaction deadline
- the market would be unlikely to deliver a better result than offered by the proponent
- going to tender presented a material risk of a worse financial result.
The Unsolicited Proposals Guide says that a proposal to directly purchase or acquire a government-owned entity or property will generally not be unique. The Ausgrid unsolicited proposal fell into this category.
Recommendations:
DPC should ensure future Assessment Panels and Steering Committees considering a proposal to acquire a government business or asset:
- recognise that when considering uniqueness they should:
- require very strong evidence to decide that both the proponent and proposal are the only ones of their kind that could meet the government’s objectives
- give thorough consideration to any reasonable counter-arguments against uniqueness.
- rigorously consider all elements of the Unsolicited Proposals Guide when determining whether a proposal should be dealt with as an unsolicited proposal, and document these deliberations and all relevant evidence
- do not use speed of transaction compared to a market process as justification for uniqueness.
The Panel and Committee concluded the price represented value for money, based on peer-reviewed advice from their financial advisers and knowledge acquired from previous tenders. The financial advisers also told the Panel and Committee that there was a material risk the state would receive a lower price than offered by the unsolicited proposal if it immediately proceeded with a second market transaction.
The state commenced negotiations on price earlier than the Guide says they should have. Early disclosure of a price that the state would accept reduced the likelihood of achieving a price greater than this. DPC says the intent of this meeting was to quickly establish whether the proponents could meet the state’s benchmark rather than spending more time and resources on a proposal which had no prospect of proceeding.
DPC and NSW Treasury were not able to provide a documented reserve price, negotiation strategy or similar which put the negotiations and price achieved in context. It was not evident that the Panel or Committee authorised, justified or endorsed negotiations in advance. However, the Panel and Committee endorsed the outcomes of the negotiations.
The negotiations were informed by the range of prices achieved for similar assets and the specific bids for Ausgrid from the earlier market process.
Recommendations:
DPC should ensure any future Assessment Panels and Steering Committees considering a proposal to acquire a government business or asset:
- document a minimum acceptable price, and a negotiating strategy designed to maximise price, before commencing negotiations
- do not communicate an acceptable price to the proponent, before the negotiation stage of the process, and then only as part of a documented bargaining strategy.
The state established a governance structure in accordance with the Unsolicited Proposals Guide, including an Assessment Panel and Proposal Specific Steering Committee. The members of the Panel and Steering Committee were senior and experienced officers, as befitted the size and nature of the unsolicited proposal.
The separation of negotiation, assessment and review envisaged by the Guide was not maintained fully. The Chair of the Assessment Panel and a member of the Steering Committee were involved in negotiations with the proponent.
DPC could not provide comprehensive records of some key interactions with the proponent or a documented negotiation strategy. The absence of such records means the Department cannot demonstrate engagement and negotiation processes were authorised and rigorous.
The probity adviser reported there were no material probity issues with the transaction. The probity adviser also provided audit services. This is not good practice. The same party should not provide both advisory and audit services on the same transaction.
Recommendations:
DPC should ensure any future Assessment Panels and Steering Committees considering a proposal to acquire a government entity or asset:
• maintain separation between negotiation, assessment and review in line with the Unsolicited Proposals Guide
• keep an auditable trail of documentation relating to the negotiation process
• maintain separation between any probity audit services engaged and the probity advisory and reporting services recommended in the current Guide.
Appendix one - Response from agency
Appendix two - NSW Government’s summary of assessment of the Ausgrid unsolicited proposal
Appendix three - The definition and nature of unsolicited proposals
Appendix four - Ausgrid unsolicited proposal process
Appendix five - About the audit
Appendix six - Performance auditing
Parliamentary reference - Report number #309 - released 11 December 2018
Actions for Central Agencies 2018
Central Agencies 2018
The Auditor-General for New South Wales, Margaret Crawford, released her report today on the results of the financial audits of NSW Government central agencies. The report focuses on key observations and findings from the most recent financial statement audits of agencies in the Treasury, Premier and Cabinet, and Finance, Services and Innovation clusters. While clear audit opinions were issued on all agency financial statements, the report notes that some complex accounting requirements caused significant errors in agency financial statements submitted for audit, which were corrected before the financial statements were approved.
This report analyses the results of our audits of the Treasury, Premier and Cabinet and Finance, Services and Innovation cluster agencies for the year ended 30 June 2018. The table below summarises our key observations.
This report provides parliament and other users of the NSW Government's central agencies and their cluster agencies financial statements with the results of our audits, our observations, analysis, conclusions and recommendations in the following areas:
- financial reporting
- audit observations
- liquidity risk management
- government financial services.
The central agencies and their key responsibilities are set out below.
Central agencies | Key central agency responsibilities | Cluster responsibilities |
The Treasury |
|
The cluster:
|
Department of Premier and Cabinet |
|
The cluster:
|
Department of Finance, Services and Innovation |
|
The cluster:
|
Public Service Commission |
|
|
A full list of agencies that this report covers by relevant cluster is included in Appendix three.
Financial reporting is an important element of good governance. Confidence and transparency in public sector decision making are enhanced when financial reporting is accurate and timely.
This chapter outlines our audit observations related to the financial reporting of agencies in the Treasury, Premier and Cabinet and Finance, Services and Innovation clusters for 2018.
Observation | Conclusions and recommendations |
2.1 Quality of financial reporting | |
Unqualified opinions were issued for all agencies' financial statements submitted to the Audit Office. Complex accounting requirements caused significant errors in some agency financial statements, which were corrected before the financial statements were approved. |
Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement. Recommendation: Agencies should respond to key accounting issues when they are identified by preparing accounting papers and engaging with Treasury, the Audit Office and their Audit and Risk Committee when these matters are identified. |
2.2 Timeliness of financial reporting | |
Most agencies complied with the statutory timeframe for completion of early close procedures, 48 agencies in the Treasury cluster did not comply with the statutory requirement to prepare financial statements, and the audits of nine agencies in the Treasury cluster were not completed within the statutory timeframe. All financial statement information of the 48 agencies that did not prepare financial statements has been captured in the consolidated financial statements of their parent entity, which was subject to audit. |
Early close procedures allow financial reporting issues and risks to be addressed early in the audit process. The timeliness of financial reporting can be improved by performing more robust early close procedures. |
Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. They are essential for quality and timely decision making.
This chapter outlines our observations and insights from:
- our financial statement audits of agencies in the Treasury, Premier and Cabinet and Finance, Services and Innovation cluster for 2018
- the areas of focus identified in the Audit Office work program.
The Audit Office 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 | |
The 2017–18 audits found one high risk issue and 83 moderate risk issues across the agencies. Nineteen per cent of all issues were repeat issues. | Agencies should focus on rectifying repeat issues. |
The high risk issue at Service NSW related to several deficiencies in procurement and contract management processes. | Service NSW may not be achieving value-for-money from their procurement and contract management activities. The high risk issue should be rectified as a matter of priority. This includes updating and implementing its procurement, vendor and contract management frameworks and delivering training to key staff involved in procurement and contract management activities. |
Property NSW has implemented several controls during the year to rectify the high risk issue identified last year related to its transition to a new property and facility management service provider. However, the service providers performance remains below expectations and there are further opportunities to improve oversight and lift performance. | Property NSW can better define roles and accountabilities with the service provider and formalise policies and processes associated with its monitoring and oversight of the service provider. Implementing relevant KPIs, receiving timely reports and providing timely review and feedback to the service provider may help to lift performance. |
GovConnect received unqualified opinions from their service auditor on all business process controls, except for information technology controls provided by Unisys, where a qualified opinion was received from the service auditor. A qualified opinion was received because of several deficiencies in user access controls. | These internal control deficiencies increase the risk of unauthorised access to key business systems, and increase audit effort and costs associated with addressing the risks arising from the deficiencies. |
3.2 Audit Office annual work program | |
Remediation of the Barangaroo site is now estimated to cost the Barangaroo Delivery Authority in excess of net $400 million. |
Measuring the remaining costs to remediate requires the use of estimation techniques and judgements, making the actual outcome inherently uncertain. We reviewed evidence to support the provision for remediation, including future costs estimates and this evidence supported management’s estimate. |
The State Insurance Regulatory Authority have administered the refund of $138 million in Green slip refunds to policy holders through Service NSW during 2017–18. At 30 June 2018, $112 million in refunds are yet to be claimed. We reviewed the systems and processes supporting the refund process. While we found that this supports the disbursement of refunds to policyholders there were some deficiencies in Service NSW’s project controls when the program was being developed. |
Service NSW should apply the lessons learnt from this program to other programs it is delivering or will be delivering for agencies. |
Revenue NSW recorded $30.4 billion from taxes, fines and fees in 2017–18 ($30.0 billion in 2016–17) to support the State’s finances. |
Crown revenue has steadily increased over the last five years predominately driven by rises in payroll tax and land tax and responsibility for collection of the Emergency Services Levy transferring to Revenue NSW under the Emergency Services Levy Act 2017 effective from July 2017. |
3.3 Managing maintenance | |
Place Management NSW manages significant commercial and retail leases and maintains public domain spaces and other assets around the harbour foreshore. It has consistently underspent its asset maintenance budget. In 2017–18, asset maintenance expenses were only 34 per cent of budgeted maintenance expense. Currently, Place Management NSW does not use any ratios or benchmarks to determine the adequacy of its maintenance spend or to monitor whether it is achieving its budgeted maintenance program. |
This may be contributing to a high proportion of unplanned maintenance, which Place Management NSW reports was 38 per cent of total maintenance expense in 2017–18. Place Management NSW is outsourcing its property and facilities management function from 1 December 2018 to an external service provider. |
This chapter outlines our audit observations, conclusions and recommendations specific to NSW Government agencies providing financial services.
Observation | Conclusions and recommendation |
5.1 Superannuation funds | |
The SAS Trustee Corporation (STC) Pooled Fund and the Parliamentary Contributory Superannuation (PCS) Fund are not required to comply with the prudential and reporting standards issued by the Australian Prudential Regulation Authority (APRA). However, legislation allows the responsible Minister to prescribe prudential standards, reporting and audit requirements. |
Structured and comprehensive prudential oversight of these Funds is important as they operate in a volatile financial sector, have 103,000 members and manage investments of $43.3 billion. Recommendation: Treasury should consult with the Trustees of the STC Pooled Fund and PCS Fund to prescribe appropriate prudential standards and requirements, including oversight arrangements. |
5.2 Insurance and compensation | |
Nominal Insurer and NSW Self Insurance Corporation investment performance marginally exceeded benchmark over the past five years. | Investment returns can impact on the premiums required to maintain an adequate funding ratio in addition to other factors such as claims experience and discount rates. |
The Workers Compensation Nominal Insurer (Nominal Insurer) and NSW Self Insurance Corporation's net collected premiums and contributions decreased over the past five years. | The insurance schemes' investment performance and stable claim payments have enabled less reliance on net collected premiums and contributions as a source of funding, over the past five years. |
Reforms were introduced to manage the Home Warranty Scheme's financial sustainability risks. | The Home Warranty Scheme has not collected sufficient premiums to fund expected claims costs, since commencing operations in 2011. In 2017–18, the Crown contributed $181 million for historical shortfalls. New reforms started on 1 January 2018 enabling the Scheme to price premiums based on risk. |
Actions for Transport 2018
Transport 2018
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.
Actions for Internal Controls and Governance 2018
Internal Controls and Governance 2018
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:
|
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:
|
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 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:
|
Transitioning services 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:
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
|
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:
|
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:
|
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:
|
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:
|
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:
|
Detective controls 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:
|
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:
|
Conclusion: Agencies can promote savings and provide more options to staff where their taxi use policies:
|
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 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:
|
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 |
Actions for State Finances 2018
State Finances 2018
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.
The State corrected previously reported values of certain Library assets ($1.1 billion).The value of the Pictorial Collection of the Library Council of NSW (the Library) was reassessed at 31 January 2018. During the valuation process the Library identified three errors in the 2015 valuations which overstated the previously reported asset values. The errors included:
This resulted in a $1.1 billion decrease in previously reported asset values and a corresponding decrease in the asset revaluation reserve at 1 July 2016. |
Information system limitations continue at TAFE NSW.TAFE NSW has experienced ongoing issues with its student administration system.TAFE NSW has again implemented additional processes to verify the accuracy and completeness of revenue from student fees. TAFE NSW expects to spend up to $89 million on a new information system to address these issues. Modules of the new student enrolment system are planned to be in place by May 2019 |
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:
The Library Council of NSW had three errors in the methodology previously used to value their pictorial assets ($1.1 billion error). |
The Royal Botanic Gardens and Domain Trust did not previously recognise a value for their Herbarium assets ($284 million error). |
Some revaluations within the Ministry of Health did not meet the requirements of Australian Accounting Standards or Treasury requirements ($159 million error). |
The Department of Justice used an incorrect valuation
|
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?
$4.2b |
2017-18 General Government Budget Result |
Changes in revenues compared to 2016-17
Dividends and distributions
|
Due to:
|
||
2016-2017 | Change | 2017-2018 | |
2.4b |
+1.3b |
3.7b |
Taxation
|
Due to:
|
||
2016-2017 | Change | 2017-2018 | |
30.8b |
+537m |
31.3b |
Grants & Subsidies
|
Due to:
|
||
2016-2017 | Change | 2017-2018 | |
31.4b |
+509m |
31.9b |
Sale of Goods and services
|
Includes:
|
||
2016-2017 | Change | 2017-2018 | |
8.2b |
+349m |
8.5b |
5.5b |
-185m |
5.3b |
Other revenues |
Changes to expenses compared to 2016-17
Recurrent Grants & Subsidies
|
Due to:
|
||
2016-2017 | Change | 2017-2018 | |
12.6b |
+1.3b |
13.9b |
Employee costs
|
Due to:
|
||
2016-2017 | Change | 2017-2018 | |
34.9b |
+1.2b |
36.1b |
Other operating expenses
|
Includes:
|
||
2016-2017 | Change | 2017-2018 | |
18.3b |
+1.4b |
19.7b |
|
6.8b |
+103m |
6.9b |
Other expenses |
$5.7b |
2016-17 General Government Budget Result |
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.
$ |
83.5b |
+3.9% |
86.7b |
Total Revenue |
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.
$ |
79.3b |
+6.1% |
84.2b |
Total Expenses |
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.
$ |
407b |
+8.7% |
443b |
Total Assets |
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.
$ |
184b |
+2.8% |
189b |
Total Liabilities |
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 |