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Appendix one – Misstatements in financial statements submitted for audit

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15 December 2023

Published

Transport 2023

Transport

Whole of Government

Asset valuation

Compliance

Financial reporting

Information technology

Infrastructure

Internal controls and governance

Management and administration

Procurement

Risk

What this report is about

Result of the Transport portfolio of agencies' financial statement audits for the year ended 30 June 2023.

The audit found

Unqualified audit opinions were issued for all Transport portfolio agencies.

An 'emphasis of matter' paragraph was included in the Transport Asset Holding Entity of New South Wales' (TAHE) independent auditor's report, which draws attention to management's disclosure regarding proposed changes to TAHE's operating model.

Government's decision to convert TAHE into a non-commercial Public Non-Financial Corporation may impact the future valuation and the control of TAHE's assets.

Transport for NSW's valuation of roads and bridges resulted in a net increase to its asset value by $15.7 billion.

Transport for NSW and Sydney Metro have capitalised over $300 million of tender bid costs paid to unsuccessful tender bidders relating to significant infrastructure projects. Whilst NSW Treasury policy provides clarity on the reimbursement of unsuccessful bidders' costs, clearer guidance on how to account for these costs in agency's financial statements is required.

The key audit issues were

The number of issues reported to management decreased from 53 in 2021–22 to 49 in 2022–23.

High-risk findings include:

gaps in how Sydney Metro manages its contractors and how conflicts of interest are recorded and managed
future financial reporting implications to account for government's proposed changes to TAHE's future operating model, including asset valuations and control assessments of assets and operations
Parramatta Park Trust's tree assets' valuation methodology needs to be addressed.

Recommendations were made to address the identified deficiencies.

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

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Transport portfolio of agencies (the portfolio) for 2023.

Section highlights

Unqualified audit opinions were issued on all the portfolio agencies’ 30 June 2023 financial statements.
An 'Emphasis of Matter' paragraph was included in the Transport Asset Holding Entity of New South Wales’ (TAHE) Independent Auditor's Report to draw attention to management's disclosure regarding the proposed changes to TAHE's future operating model.
The total number of errors (including corrected and uncorrected) in the financial statements increased by 59% compared to the prior year.
The recent government's decision to convert TAHE into a non-commercial Public Non-Financial Corporation may impact the future valuation and the control of TAHE’s assets.
Transport for NSW needs to further improve its quality assurance processes over comprehensive valuations, in particular, ensuring key inputs used in the valuations are properly supported and verified.
Transport for NSW and Sydney Metro capitalised over $300 million of bid costs paid to unsuccessful bidders. NSW Treasury’s Bid Cost Contributions Policy does not contemplate how these costs should be recognised in agency’s financial statements. Transport agencies should work with NSW Treasury to develop an accounting policy for the bid cost contributions to ensure consistent application across the sector.

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 portfolio.

Section highlights

The 2022–23 audits identified four high risks and 28 moderate risk issues across the portfolio. Thirty-nine per cent of issues were repeat findings.
Four high risk findings include:
- TAHE’s asset valuations (new)
- TAHE’s control of assets and operations (new)
- Sydney Metro’s management of contractors and conflicts of interest (new)
- Parramatta Park Trust’s valuation of trees (repeat).
The total number of findings decreased from 53 in 2021–22 to 49 in 2022–23. Many repeat findings related to control weaknesses over the asset valuation, payroll processes, conflicts of interest and information technology user access administration.

Appendix one – Response from Transport for NSW

30 November 2023

Published

Regional road safety

Transport

Health

Community Services

Internal controls and governance

Management and administration

Project management

Risk

What this report is about

Around one-third of the state’s population lives in regional NSW, but deaths on regional roads make up around two-thirds of the state’s road toll.

Transport for NSW (TfNSW) is responsible for managing road safety outcomes across the NSW road network. This audit assessed the effectiveness of TfNSW’s delivery of road safety strategies, plans and policies in regional areas.

The NSW Road Safety Action Plan 2022–2026 has the stated goal of ‘no death or serious injury occurring on the road transport network’ by 2050.

What we found

There is a disproportionate amount of trauma on regional roads, but there are no specific road safety plans or trauma reduction targets for regional NSW.

TfNSW advises that the setting of state-wide road safety targets is consistent with other jurisdictions and international best practice. However, the proportion of road fatalities and serious injuries in regional NSW is almost the same as ten years ago.

There is no regional implementation plan to assist TfNSW to target the Road Safety Action Plan 2026 to regional areas.

TfNSW considers that local road safety outcomes should be managed by councils, but only 52% of regional councils participated in its Local Government Road Safety Program (LGRSP) in 2022–23. This program has not been updated since 2014, despite commitments to do so in 2021 and 2022.

TfNSW has not undertaken a systematic and integrated analysis of the combined impact of its road safety strategies and plans in regional NSW since 2012.

TfNSW reports against the Community Road Safety Fund (CRSF) annually but there is no consolidated, public reporting on total road safety funding allocated to regional NSW. The Fund underspend increased from 12% in 2019–20 to 20% in 2022–23.

What we recommended

We recommended TfNSW:

develop a regional implementation plan to support the NSW Road Safety Action Plan, including a framework to annually measure, analyse and publicly report on progress
develop a plan to measure and mitigate risks causing underspend in the CRSF
expedite the review of the LGRSP including recommendations to increase involvement of regional councils.

Disclosure of confidential information

Under the Government Sector Audit Act 1983 (the Act), the Auditor-General may disclose confidential information if, in the Auditor-General’s opinion, the disclosure is in the public interest, and that disclosure is necessary for the exercise of the Auditor-General’s functions.

Confidential information in the Act means Cabinet information or information subject to legal privilege. This performance audit report contained confidential information.

The NSW Premier has certified that in his opinion the disclosure of the confidential information was not in the public interest.

The confidential information has been redacted from this report.

Under section 36A(2) of the Government Sector Audit Act 1983, the Auditor-General may authorise the disclosure of confidential information if, in the Auditor-General’s opinion, the disclosure is in the public interest and necessary for the exercise of the Auditor-General’s functions. Confidential information under the Government Sector Audit Act 1983 means Cabinet information, or information that could be subject to a claim of privilege by the State or a public official in a court of law. This performance audit report contained confidential information which, in the opinion of the Auditor-General, is in the public interest to disclose and that disclosure is necessary for the exercise of the Auditor-General’s functions.

On 26 October 2023, pursuant to section 36A(2)(b) of the Government Sector Audit Act 1983, the Auditor-General notified the NSW Premier of the intention to include this information in the published report, having formed the opinion that its disclosure is in the public interest and is necessary for the exercise of the Auditor-General’s functions.

On 23 November 2023, pursuant to section 36A(2)(c) of the Government Sector Audit Act 1983, the NSW Premier certified that, in his opinion, the proposed disclosure of the confidential information contained in this report was not in the public interest. The Premier’s certificate follows. Section 36A(4) states that a certificate of the Premier that it is not in the public interest to disclose confidential information is conclusive evidence of that fact.

The issuance of the certificate by the NSW Premier prevents the publication of this information. The relevant sections of the report containing confidential information have been redacted.

One-third of the New South Wales population resides in regional areas, but two-thirds of the state’s road crash fatalities take place on regional roads.

Between 2017 and 2021, the average number of fatalities for every 100,000 of the population living in regional New South Wales was 8.33 — approximately four times higher than the equivalent measure for Greater Sydney. Similarly, the average number of serious injuries in regional New South Wales over the same period was 75.24 per 100,000 of the population, compared with 50.53 in Greater Sydney. Further, more than 70% of people who lose their lives in accidents on regional roads are residents of regional areas.

Residents of regional areas face particular transport challenges. They often need to travel longer distances for work, health care, or recreation purposes, yet their public transport options are more limited than metropolitan residents. Vehicle safety is also an issue. According to the NSW Road Safety Progress Report 2021, of the light vehicles registered in New South Wales that were manufactured in or after 2000, 48.4% of light vehicles in regional areas had a five-star Australasian New Car Assessment Program (ANCAP) rating, compared to 54.8% in metropolitan areas. Road conditions in regional areas can also be more challenging for drivers.

Regional New South Wales covers 98.5% of the total area of the state. The road network in New South Wales is vast — spanning approximately 200,000 kilometres.

The road network includes major highways, state roads and local roads. Speed limits range from 10 km/hr in high pedestrian shared zones, up to 110 km/hr on high volume and critical road corridors. Eighty per cent of the network has a 100 km/h speed limit, which is mostly applied as a default speed limit, regardless of the presence of safety features and treatments.

Speed is the primary causal factor in more crashes in New South Wales than any other factor, and car crashes in regional areas are more likely to be fatal because of the higher average speeds involved.

The responsibility for managing road safety outcomes across the entire New South Wales road network lies with Transport for NSW (TfNSW), pursuant to Schedule 1 of the Transport Administration Act 1988.

While its safety responsibilities are state-wide, TfNSW does not own or directly manage all of the road network in regional New South Wales, which spans approximately 200,000 kilometres. Approximately 80% of the roads are classified as Local Roads and are administered and managed by local councils. Local councils also maintain Regional Roads that run through their local government areas. TfNSW is responsible for managing State Roads (approximately 20% of roads), which are major arterial roads. It also provides funding for councils to manage over 18,000 km (approximately 10%) of state-significant Regional Roads.

According to TfNSW, between 2016 and 2020, there were 9,776 people killed or seriously injured on roads in regional New South Wales. Adding to the tragic loss of life, according to TfNSW, the estimated cost to the community between 2016 and 2020 resulting from regional road trauma and fatalities was around $13.7 billion.

TfNSW also noted that the ‘risk of road trauma is pervasive, and a combination of effective road safety measures is required to systematically reduce this risk’.

TfNSW released its first long-term road-safety strategy in December 2012, which introduced the goal of ‘Vision Zero’ — a long-term goal of zero deaths or serious injuries on NSW roads. The terminology was changed to ‘Towards Zero’ in the 2021 Road Safety Plan and has been retained in the NSW Road Safety Action Plan 2022–2026. Towards Zero has the stated goal of ‘no death or serious injury occurring on the road transport network’ by 2050.

The objective of this audit is to assess the effectiveness of TfNSW’s delivery of ‘Towards Zero’ in regional areas.

In making this assessment, the audit examined whether TfNSW:

is effectively reducing the number of fatalities and serious injuries on regional roads
has an effective framework, including governance arrangements, for designing and refreshing the NSW Road Safety Strategy 2012–2021 and the NSW Road Safety Action Plan 2022–2026
effectively makes use of whole-of-government and other relevant sources of data to support decision-making, and to evaluate progress and outcomes
effectively manages accountabilities, including roles and responsibilities, with respect to road safety outcomes and the use of data.

This audit focused on the policies and strategies used by TfNSW for managing road safety outcomes in regional areas. We did not evaluate individual road safety projects, programs and initiatives as part of this audit.

Whilst Regional Roads and Local Roads (as defined by the Road Network Classifications) are owned and maintained by local councils, we included these roads in this audit as TfNSW may advise and assist councils to promote and improve road safety, as well as manage grant programs that focus on improving road safety outcomes on these roads. Hereafter, unless otherwise stated, references to ‘regional roads’ refer to all classifications of roads in the state which are in regional New South Wales, irrespective of their ownership.

Local councils in regional areas are key stakeholders for the purposes of this audit, and we interviewed eight as part of the audit process (noting that this was not intended to be a representative sample). Road asset management by local councils is also out of scope for this audit as it is the focus of a subsequent performance audit by the Audit Office of New South Wales.b

The Audit Office of New South Wales has undertaken several performance audits relating to road safety since 2009 and these have been referenced while undertaking this audit. They include:

Condition of State Roads (August 2006)
Improving Road Safety: Heavy Vehicles (May 2009)
Improving Road Safety: School Zones (March 2010)
Improving Road Safety: Speed Cameras (July 2011)
Regional Assistance Programs (May 2018)
Mobile speed cameras (October 2018)
Rail freight and Greater Sydney (October 2021).

Conclusion

TfNSW has acknowledged that there is a disproportionate amount of road trauma on regional roads in the NSW Road Safety Strategy 2012–2021, the NSW Road Safety Plan 2021, and the NSW Road Safety Action Plan 2022–2026. However, TfNSW has not articulated or evaluated a strategy for implementing road safety policy in regional New South Wales to assist in guiding targeted activities to address regional road trauma. There is also no transparency about the total amount of funding invested in improving road safety outcomes for regional New South Wales.

People living in regional New South Wales make up one-third of the state’s population, but deaths on regional roads make up around two-thirds of the state’s total road toll. This statistic is almost the same in 2023 as it was ten years ago when TfNSW released its first long-term road safety strategy.

More than 70% of people who died on roads between 2012 and 2022 in regional New South Wales were residents of regional areas. Speed is the greatest contributing factor to road fatalities and serious injuries across the entire state. However, it is responsible for more fatalities on regional roads (43%) than in Greater Sydney (34%).

TfNSW’s road safety strategies and plans acknowledge that most road fatalities occur in regional New South Wales but none of its existing strategies or plans show evidence of tailoring measures to suit particular regional settings or ‘hot spots’. There are infrastructure initiatives (such as Saving Lives on Country Roads) and behavioural programs targeting regional areas (such as Driver Reviver). However, these activities are not aligned to a regional-specific strategy or plan that addresses issues specific to regional areas.

TfNSW has state-wide responsibility for managing road safety outcomes. TfNSW advised the audit that a regional plan and regional trauma reduction targets are not needed as the state-wide plan and targets apply equally for all areas of New South Wales, and local road safety factors are best managed by local councils. TfNSW partners with local councils. However, only 52% of councils in regional New South Wales participate in TfNSW’s Local Government Road Safety Program, compared to 84% of councils in metropolitan areas. TfNSW has not undertaken any evaluations to determine whether projects completed under the Local Government Road Safety Program have reduced road trauma at the local level.

Notwithstanding the above points, TfNSW works with local councils (who are road authorities for local roads in their respective areas under the Roads Act 1993) and other key stakeholders such as the NSW Police Force to achieve the NSW Government’s road safety policy objectives.

TfNSW advised that ‘the setting of state-wide road safety targets is consistent with other jurisdictions and international best practice. Importantly, delivery of road safety countermeasures is tailored and applied with a focus on road user groups across all geographic locations to maximise trauma reductions’. There may be legitimate reasons for the existing approach, as articulated by TfNSW. However, the proportion of road fatalities in regional New South Wales roads has not reduced since 2012 – despite a long-term reduction in the overall number of deaths on the state’s roads between 2012–2021. The audit report has recommended that a regionally focused implementation plan could address this issue. TfNSW has accepted this report’s recommendation that such a plan be developed.

Specific road safety initiatives targeted to regional areas have not been implemented or expanded

Text removed pursuant to section 36A of the Government Sector Audit Act 1983 (NSW), in compliance with the issuance of a Premier’s certificate preventing the publication of this information.

TfNSW increased the use of other forms of automated enforcement (such as tripling enforcement hours in mobile speed cameras).
However, the use of automated enforcement has a strong metropolitan focus with most red light and fixed speed cameras being in metropolitan areas. Average speed cameras are the only camera type overwhelmingly located in regional areas but these apply only to heavy vehicles and are positioned on major freight routes.

There is no consolidated, public reporting of what proportion of total road safety funding is directed to regional New South Wales each year. The main source of funding for road safety in New South Wales, the Community Road Safety Fund, has been underspent since 2019.

Fines from camera-detected speeding, red-light and mobile phone use offences are required to be used solely for road safety purposes through the Community Road Safety Fund (CRSF), as set out in the Transport Administration Amendment (Community Road Safety Fund) Act 2012.

The CRSF has been underspent every year since 2019–20. The underspend has increased from 12% in 2019–20 to 20% in 2022–23 where the full year underspend was forecasted to be $104 million. Of this underspend, $13.5 million was dedicated for regional road infrastructure projects. TfNSW advised the audit that much of the underspend is the result of delays to infrastructure projects due to COVID-19, bushfires, and floods, as well as skills shortages. However, TfNSW has not provided any evidence that it had a plan to mitigate these risks – meaning the level of underspend could continue to grow. TfNSW also advised ‘there is no reason to expect budget management and controls will not return to pre-COVID circumstances’.

In total, TfNSW received $700 million in funding for road safety in 2021–22 (including federal contributions and the Community Road Safety Fund). Of this, $411 million (or ~59%) was directed to regional New South Wales. This is the most recent comprehensive financial data that was provided by TfNSW to the audit team. The 2022–23 NSW Budget allocated $880 million for road safety in 2022–23, with a forecasted total allocation for road safety of $1.6 billion in recurrent expenses and $0.8 billion in capital expenditure over the period 2022–23 to 2025–26.

Appendix two – The Safe Systems framework and NSW road safety strategies and plans

Appendix three – About the audit

Appendix four – Performance auditing

Parliamentary reference - Report number #386 - released 30 November 2023

1 June 2023

Published

Natural disasters

Community Services

Environment

Finance

Local Government

Planning

Transport

Treasury

Whole of Government

Asset valuation

Compliance

Financial reporting

Infrastructure

Regulation

Risk

Service delivery

What this report is about

This report draws together the financial impact of natural disasters on agencies integral to the response and impact of natural disasters during 2021–22.

What we found

Over the 2021–22 financial year $1.4 billion from a budget of $1.9 billion was spent by the NSW Government in response to natural disasters.

Total expenses were less than the budget due to underspend in the following areas:

clean-up assistance, including council grants
anticipated temporary accommodation support
payments relating to the Northern Rivers Business Support scheme for small businesses.

Natural disaster events damaged council assets such as roads, bridges, waste collection centres and other facilities used to provide essential services. Additional staff, contractors and experts were engaged to restore and repair damaged assets and minimise disruption to service delivery.

At 30 June 2022, the estimated damage to council infrastructure assets totalled $349 million.

Over the first half of the 2022–23 financial year, councils experienced further damage to infrastructure assets due to natural disasters. NSW Government spending on natural disasters continued with a further $1.1 billion spent over this period.

Thirty-six councils did not identify climate change or natural disaster as a strategic risk despite 22 of these having at least one natural disaster during 2021–22.

Section highlights

$1.4 billion from a budget of $1.9 billion was spent by the NSW Government in response to natural disasters during 2021–22.
Budget underspent for temporary housing and small business support as lower than expected need.

Section highlights

83 local council areas were impacted by natural disasters during 2021–22, with 58 being impacted by more than one type of natural disaster.
$349 million damage to council infrastructure assets at 30 June 2022.

31 May 2023

Published

Universities 2022

Universities

Compliance

Cyber security

Financial reporting

Information technology

Internal controls and governance

Service delivery

What this report is about

Results of the financial statement audits of the public universities in NSW for the year ended 31 December 2022.

What we found

Unmodified audit opinions were issued for all ten universities.

Nine universities reported net deficits in 2022, and all showed a decline from their 2021 results.

Results were impacted by a decline in investment income and government grants.

Wage remediation provisions across the universities increased by 116% to $110 million at 31 December 2022.

Expenditure increased as universities transitioned back to face-to-face teaching with the lifting of most COVID-19 restrictions.

Revenue from overseas students decreased by 0.5% overall in 2022, although not all universities were impacted equally.

Nearly 42% of fees and charges revenue came from overseas student revenue from three countries of origin (43% in 2021).

What the key issues were

We reported 88 findings to universities on internal control deficiencies (105 in 2021).

Six high risk findings were identified (four in 2021), relating to:

IT control deficiencies in monitoring privileged user access
password configuration
cyber security process improvements
lack of security over access to EFT payment files
the status of a university's work in assessing its liability for underpayment of staff
inadequate review of contracts leading to incorrect accounting treatments.

Two out of 13 entities reported financial losses from cyber incidents in 2022.

Retention policies on personally identifiable information (PII) vary and universities can further reduce their PII exposure risk from cyber attack.

What we recommended

Universities should:

conduct a comprehensive assessment of their employment agreements and historical pay practices to identify potential underpayments
prioritise actions to address repeat findings on internal control deficiencies in a timely manner
review their PII retention policies to ensure PII stored is limited to the entity's needs, held only for the minimum duration it is legally and operationally required, and access is strictly limited.

This report provides Parliament with the results of our financial audits of universities in New South Wales and their controlled entities in 2022, including our analysis, observations and recommendations in the following areas:

financial reporting
internal controls and governance
teaching and research.

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

This chapter outlines our audit observations related to the financial reporting of universities in NSW for 2022.

Section highlights

The 2022 financial statements of all ten universities received unmodified audit opinions.
Wage remediation provisions across the NSW universities increased by 116% to $110 million at 31 December 2022.
Nine universities reported net deficits in 2022, and all showed a decline from 2021 results.
Revenue from overseas students decreased by 0.5% in 2022, as overseas student enrolments decreased by 1.2%. Almost 42% of universities' fees and charges revenue in 2022 came from overseas students from three countries (down from 43% in 2021).
Revenue from domestic students decreased by 0.7% in 2022, as domestic student enrolments decreased by 5.3%.
Combined expenditure for universities increased by 6.6% to $11.2 billion in 2022. Most of this was attributed to employee related expenses, which increased by 4.9%.

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

This chapter outlines our observations and insights from our financial statement audits of NSW universities.

Our audits do not review all aspects of internal controls and governance every year. The more significant issues and risks are included in this chapter. These, along with the less significant matters, are reported to universities for management to address.

Section highlights

The 2022 audits identified six high risk and 36 moderate risk issues across NSW universities. Sixteen of the moderate risk issues were repeat issues. Many repeat issues related to information technology controls around user access management.
The number of repeat deficiencies has decreased with 41 reported in 2022 compared to 45 in 2021.
Two out of 13 entities reported financial losses from cyber incidents during 2022.
Retention policies on personally identifiable information (PII) vary across entities and opportunities exist for entities to further limit their PII exposure risk from cyber attack.

Universities' primary objectives are teaching and research. They invest most of their resources aiming to achieve quality outcomes in academia and student experience. Universities have committed to achieving certain government targets and compete to advance their reputation and their standing in international and Australian rankings.

This chapter outlines teaching and research outcomes for universities in NSW for 2022.

Section highlights

Seven universities were reported as having full-time employment rates of their domestic undergraduates in 2022 that were greater than the national average.
Enrolments at NSW universities decreased the most in Science related courses in 2022. The largest increase in enrolments was in Health courses.
On average, universities delivered 21% of their courses primarily through online means in 2022, a decrease from 59% in 2021.
Five universities in 2021 were reported as meeting the target enrolment rate for students from low socio-economic status (SES) backgrounds.
Seven universities reported increased enrolments of Aboriginal and Torres Strait Islander students in 2021.

Appendix one – List of 2022 recommendations

Appendix two – Status of 2021 recommendations

Appendix three – Universities' controlled entities

Copyright notice

24 January 2023

Published

Design and implementation of the Transport Asset Holding Entity

Transport

Treasury

Asset valuation

Financial reporting

Infrastructure

Procurement

Risk

Service delivery

What the report is about

The Transport Asset Holding Entity (TAHE) is the State's custodian of rail assets. It is a state owned corporation and commenced operating on 1 July 2020.

This audit assessed the effectiveness of NSW Government agencies' design and implementation of TAHE. We audited TAHE, Transport for NSW (TfNSW) and NSW Treasury.

Separate and related audits on TAHE are reported in 'State Finances 2022', 'State Finances 2021' and 'Transport and Infrastructure 2022' reports.

What we found

The design and implementation of TAHE, which spanned seven years, was not effective.

The process was not cohesive or transparent. It delivered an outcome that is unnecessarily complex in order to support an accounting treatment to meet the NSW Government's short-term Budget objectives, while creating an obligation for future governments.

The benefits of TAHE were claimed in the 2015–16 NSW Budget before the enabling legislation was passed by Parliament in 2017. This committed the agencies to implement a solution that justified the 2015–16 Budget impacts, regardless of any challenges that arose.

Rail safety arrangements were a priority throughout TAHE's design and implementation, and risks were raised and addressed.

Agencies relied heavily on consultants on matters related to the creation of TAHE, but failed to effectively manage these engagements. Agencies failed to ensure that consultancies delivered independent advice as an input to decision-making. A small number of firms were used repeatedly to provide advice on the same topic. The final cost of TAHE-related consultancies was $22.6 million compared to the initial estimated cost of $12.9 million.

What we recommended

We recommended that the audited agencies should:

improve accountability and transparency for major new fiscal transformation initiatives
ensure entities do not reflect the financial impact of significant initiatives in the Budget when there is uncertainty, or it creates perverse incentives
review record keeping practices, systems and policies to ensure compliance with the State Records Act 1998, and the NSW Government Information Classification, Labelling and Handling Guidelines
review procurement policies to ensure that consultant use complies with all NSW Government policy requirements.

The NSW Government established the Transport Asset Holding Entity (TAHE), a statutory State Owned Corporation (SOC), on 1 July 2020 to replace the former rail infrastructure owner – RailCorp. It is the State's custodian of rail network assets, including rail tracks and other infrastructure, rolling stock, land, train stations and facilities, retail space, and signal and power systems, within metropolitan and regional New South Wales. It is responsible for $2.8 billion of major capital projects in 2022–23.

TAHE was established under Part 2 of the Transport Administration Act 1988 and is governed by a decision-making board. The Treasurer and the Minister for Finance and Employee Relations are the Shareholding Ministers of TAHE, and they annually agree performance expectations articulated in a Statement of Corporate Intent.

Whereas TAHE is the custodian of rail assets, Sydney Trains and NSW Trains operate public rail services. TAHE does not have responsibility for the operation of the heavy rail network or train services, nor does it have network control functions. TAHE, Sydney Trains and NSW Trains are in the Transport and Infrastructure cluster in the public sector (formerly the Transport cluster and renamed in April 2022), which also includes Sydney Metro and Transport for NSW (TfNSW).

TfNSW leads the Transport and Infrastructure cluster. Its role is to set the strategic direction for transport across the State. This involves the shaping of planning, policy, strategy, regulation, resource allocation and other service and non-service delivery functions for all modes of transport.

TAHE's Operating Licence is granted by the Portfolio Minister and authorises the entity to perform the functions required to acquire, develop, finance, divest and hold assets, pursuant to the Transport Administration Act 1988. The Portfolio Minister also issues a Statement of Expectations which outlines the government’s expectation for the business for the next three to five years.

TAHE's original Portfolio Minister was the Minister for Transport who approved, on 30 June 2020, the issuing of an interim 12-month Operating Licence to enable TAHE to commence operating on 1 July 2020. The Portfolio Minister then granted TAHE's current Operating Licence in 2021. After TAHE requested a 12-month extension to its current Operating Licence, its next Operating Licence is due on 1 July 2024. The current Portfolio Minister is the Minister for Infrastructure, Cities and Active Transport.

About this audit

This audit assessed the effectiveness of NSW Government agencies' design and implementation of TAHE. In making this assessment, we considered whether:

the process of designing and implementing TAHE was cohesive and transparent, and delivered an effective outcome
agencies' roles and responsibilities were clear in the planning of TAHE
agencies effectively identified and managed certain risks.

Conclusion

The design and implementation of TAHE was not effective. The process was not cohesive or transparent. It delivered an outcome that is unnecessarily complex in order to meet the NSW Government's short-term Budget objectives, while creating an obligation for future governments to sustain TAHE through continuing investment, and funding of the state owned rail operators. The ineffective process to design TAHE delivered a model that entails significant uncertainty as to whether the anticipated longer-term financial improvements to the Budget position can be achieved or sustained.

NSW Treasury and TfNSW had different objectives for TAHE

Up to June 2013, RailCorp had been the owner and operator of rail services and maintainer of the metropolitan rail network for almost a decade. It had been operating as a not-for-profit Public Non-Financial Corporation (PNFC).

In 2012, NSW Treasury (hereafter Treasury) decided there was a risk that the Australian Bureau of Statistics (ABS) would reclassify RailCorp to the General Government Sector (GGS), meaning depreciation expenses of approximately $870 million would be reflected in the GGS Budget. Treasury wanted to avoid this impact on the GGS Budget, and considered the establishment of a transport asset holding entity as a means to do so. Capital grants to RailCorp were being treated as an expense to the GGS Budget.

TfNSW also wanted an asset holding entity – but one that would be a non-trading ‘shell’ company with no staff that would hold and manage all public transport assets. TfNSW's concept envisaged the entity would have a structure that would enable future public transport reforms and strategic directions while ensuring vertical integration of operations between asset owners and the rail operators to maintain rail safety.

However, Treasury pursued its objective to improve the GGS Budget result, and sought to expand on TfNSW's 'shell' asset holding entity concept. Treasury wanted an entity that could generate a return on investment, as this meant that government investment in transport assets could be treated as equity investments, rather than a Budget expense, and in turn improve the GGS Budget position. As an example of the potential impact of creating this new entity, capital grants of $2.3 billion were paid to RailCorp in 2013–14. If Treasury's objective was met, grants of this significance would then be treated as an equity investment, rather than an expense in the GGS Budget.

In 2017, Treasury's preferred option was progressed through legislation, but both agencies' central objectives for the proposed asset holding entity would continue to prove difficult to reconcile. To achieve Treasury's objective to improve the Budget result, the entity would need to generate a return on investment (this is further discussed below). However, TfNSW expressed concerns that the prioritisation of rail safety, and the effective management of governance, regulation and operations would be more complex in an entity with commercial imperatives.

Asset holding entities are a common approach to the management of transport assets in Australia and internationally, and there are a range of approaches to how they are structured and used. Such structures should be driven by the goal of improved asset management. Ultimately, TfNSW's objectives could have been delivered through a simpler entity structure. However, reconciling TfNSW's objectives with Treasury's imperative to deliver and justify a Budget improvement in the short-term resulted in an overly lengthy process and an unnecessarily complex outcome that places an obligation on future governments to sustain. There is still significant uncertainty as to whether the short-term improvements to the Budget can continue to be realised in the longer-term.

The Budget benefits of TAHE were claimed before the entity was legislated, committing the agencies to deliver, regardless of the complexities that subsequently arose

The 2015–16 GGS Budget treated the government's investment in TAHE (still known at this time as RailCorp) as an equity contribution. This had the immediate impact of improving the Budget result by $1.8 billion per annum. However, the legislation to enable the establishment of TAHE had not yet been passed by Parliament, key elements of the operating model were still under development, and imminent changes in accounting standards had the potential to impact TAHE's financial model. The decision to book the benefits in the Budget early committed the involved agencies to implement a solution that justified the 2015–16 Budget impacts, irrespective of the challenges that arose.

TAHE's financial structure requires circular government investment to work

For the NSW Government to continue to treat its investment in TAHE as an equity contribution, rather than an expense to the Budget, there must be a reasonable expectation that TAHE will generate a sufficient rate of return as required by the Government Finance Statistics (GFS) framework. In doing so, it needs to recover a revaluation loss created by a $20.3 billion reduction in the value of its assets which was incurred in its first full year of operation. This loss occurred as a result of a revaluation of TAHE's assets when RailCorp (a not-for profit entity) became TAHE (a for-profit commercial entity) – and is discussed further in the 'Key findings' below.

TAHE generates a small portion of its income from transactions with the private sector but, as noted in our report 'State Finances 2021', TAHE receives the majority of its revenue (more than 80%) from access and licence fee agreements with Sydney Trains and NSW Trains. Both of these entities are funded by grants (a Budget expense) to TfNSW from the GGS Budget.

Based on Treasury’s correspondence with the ABS in 2015, TAHE was initially expected to pay a return on equity of 7% in 2016–17. The assumption of a 7% return persisted through to 2018, after the legislation enabling the establishment of TAHE was passed by Parliament. However, when the initial access and licence fees were agreed on 1 July 2020, this figure had been revised to an expected rate of return of 1.5% excluding the revaluation loss. This was below the long-term inflation target and did not include the recovery of the revaluation loss – risking the government's ability to treat its investment in TAHE as an equity contribution. Importantly, as TAHE is primarily reliant on fees paid by the state owned rail operators that, in turn, are funded by the GGS Budget (as an expense), the decision to change the returns model from 7% to 1.5% would in its own right have had a positive impact on the GGS Budget. However, the decision to use a 1.5% return would ultimately be problematic as it made it difficult to treat the government's contributions to TAHE as an equity investment, as discussed below.

On 14 December 2021, to avoid a qualified audit opinion, the NSW Government made the decision to increase TAHE's expected rate of return to 2.5%, equal to the Reserve Bank’s long-term inflation target.

In 2021-22, TAHE needed to start charging rail operators higher access and licence fees in order to generate a return of 2.5%, so as to support the government's treatment of its investment in TAHE as an equity contribution in the GGS Budget. This meant the government needed to provide additional grant (expense) funding to the state owned rail operators so they could pay the increased access and licence fees to TAHE. Based on current projections, TAHE is not expected to recover the revaluation loss until 2046.

There remains a risk that TAHE will not be able to generate a sufficient return on the NSW Government's investment without relying on increased funding to state owned rail operators so that they can in turn pay the higher access and licence fees. TAHE's ability to generate returns on government investment from other sources are uncertain and may not be achievable or sustainable. Current modelling highlights that TAHE remains largely reliant, through to 2046, on increasing fees (which are assumed to increase at 2.5% per annum from 2031 onwards when the current 10 year contracts with rail operators expire) paid by the state owned rail operators that remain principally reliant on GGS Budget grants.

The process of designing and implementing TAHE was not transparent to independent scrutiny

Our report 'State Finances 2021' commented that Treasury did not always provide this Office with information relating to TAHE on a timely basis. Similarly, during this performance audit, there were also multiple instances where auditees were unable to provide documentation regarding key activities in the process to deliver TAHE. Agencies also applied higher sensitivity classifications to large tranches of documents than was justified or required by policy. Of particular concern is the incorrect classification of documents as Cabinet sensitive information. The incorrect or over-classification of documentation as Cabinet sensitive delayed this Office's ability to provide scrutiny or independent assurance.

There was a lack of clarity around the roles and responsibilities of governance structures set up to oversee the design and implementation of TAHE

From 2014, multiple workstreams and advisory committees were established to progress the design and implementation of TAHE. For some of these committees and workstreams, there is limited information on what they were tasked to do and what they achieved. Most had ceased meeting by 2018, before significant work needed to deliver TAHE was completed.

The lack of clarity around the roles and responsibilities of these governance structures reduced opportunities for TfNSW and Treasury to reconcile their differing objectives for TAHE, and resolve key questions earlier in the process.

There was a heavy reliance on consulting firms throughout the process to establish TAHE, and the management of consultant engagements failed to ensure that agencies received independent advice to support objective decision-making

In 2020, Treasury and TfNSW failed to prevent, identify, or adequately manage a conflict of interest when they engaged the same 'Big 4' consulting firm to work on separate TAHE-related projects. Both agencies used the firm's work to further their respective views with regard to the financial implications of TAHE's operating model. At this time those views were still unreconciled.

Treasury engaged the firm to provide a fiscal risk management strategy and advice on the impact of changes to accounting standards. TfNSW engaged the same firm to develop operating and financial models for TAHE, which raised concerns regarding the viability of TAHE. Disputes arose around the findings of these reports. Treasury disagreed with some of the outcomes of the work commissioned by TfNSW, relating to accounting treatment and fiscal advice.

The management of this conflict (real or perceived) was left to the 'Big 4' consulting firm when it was more appropriate for it to be managed by Treasury and TfNSW. If these agencies had communicated more effectively, used available governance structures consistently, and shared information openly about their use of the firm and the nature of their respective engagements, these disputes might have been avoided. This issue, coupled with deficiencies in procurement by both agencies, reflected and further perpetuated the lack of cohesion in the design and implementation of TAHE.

More broadly, over the period 2014 – 2021, 16 separate consulting firms were employed to work on 36 contracts, valued at over $22.56 million, relating to TAHE ranging from accounting and legal advice, project management, and the provision of administrative support and secretariat services.

Consultants are legitimately used by agencies to provide advice on how to achieve the outcomes determined by government, including advising agencies on the risks and challenges in achieving those outcomes. Similarly, consultants can provide expert knowledge in the service of achieving those outcomes and managing the risks. However, the heavy reliance on consulting firms during the design and implementation of TAHE heightened the risk that agencies were not receiving value for money, were outsourcing tasks that should be performed by the public service, and did not mitigate the risk that the advice received was not objective and impartial. The risk that the role of consultants could have been blurred between providing independent advice to government on options and facilitating a pre-determined outcome was not effectively treated or mitigated. This risk was amplified because a small number of firms were used repeatedly to provide advice on one topic. The effective procurement and management of consultants is an obligation of government agencies.

Appendix one – Responses from audited agencies, and Audit Office clarification of matters raised in the TAHE formal response

Appendix two – Classification of government entities

Appendix three – About the audit

Appendix four – Performance auditing

Copyright notice

Parliamentary reference - Report number #372 - released 24 January 2023

21 December 2022

Published

Transport and Infrastructure 2022

Transport

Asset valuation

Financial reporting

Information technology

Infrastructure

Management and administration

Procurement

What the report is about

Result of the Transport and Infrastructure cluster agencies' financial statement audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for all Transport and Infrastructure cluster agencies' financial statements.

An 'other matter' paragraph was included in TAHE's Independent Auditor's Report for its 30 June 2022 financial statements which draws attention to Transport and Asset Holding Entity's (TAHE) reliance on government-funded customers.

We included an ‘emphasis of matter’ paragraph in the Independent Auditor’s Report for State Transit Authority of New South Wales’ (the authority) 30 June 2022 financial statements, which draws attention to the financial statements being prepared on a liquidation basis as the authority’s principal activities ceased operations on 3 April 2022.

What the key issues were

The 2021–22 audits identified five high-risk findings:

detailed business modelling to support returns from TAHE
valuation of assets at TAHE
control of assets at TAHE
accounting and valuation of tree assets at Centennial Park and Moore Park Trust and Parramatta Park Trust.

Access and licence fees - TAHE

Revised commercial agreements were signed between TAHE, the operators and Transport for NSW on 23 June 2022 to reflect increased access and licence fees detailed in the 18 December 2021 Heads of Agreement.

TAHE’s ability to generate the expected return of 2.5% based on the current modelling is heavily reliant on the government funding the public rail operators (TAHE's customers).

There are risks that:

TAHE will not be able to recontract for access and licence fees at a level that is consistent with current projections
future governments' funding to TAHE's key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections
TAHE will be unable to grow its non-government revenues.

Valuation of assets - TAHE

Although TAHE's selected valuation of assets falls within an acceptable range, there remains a significant gap between what has been assessed as an acceptable range and TAHE's range.

What we recommended

Control of assets - TAHE

While we accepted TAHE’s position on control for the current year, NSW Treasury and TAHE should continue to monitor the risk that control of TAHE assets could change in future reporting periods. TAHE must continue to demonstrate control of its assets or the current accounting presentation would need to be reconsidered.

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

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Transport and Infrastructure cluster (the cluster) for 2022.

Section highlights

Unqualified audit opinions were issued on all Transport and Infrastructure cluster agencies' financial statements.
An 'Other Matter' paragraph was included in the Transport Asset Holding Entity of New South Wales' (TAHE) Independent Auditor's Report to draw attention to TAHE's reliance on government-funded customers.
An 'Emphasis of Matter' paragraph was included in the State Transit Authority of New South Wales' (the authority) Independent Auditor's Report to draw attention to management’s disclosures that State Transit Authority of New South Wales' financial statements for the year ended 30 June 2022 were prepared on a liquidation basis as the authority’s principal activities ceased operations on 3 April 2022.
While TAHE's valuation of assets at 30 June 2022 was within an acceptable range of valuation outcomes, there remained significant differences in assumptions used when compared with relevant market benchmarks.
Sydney Metro corrected two prior period errors of $1.5 billion and $51 million in accounting and valuation of assets, and double counting of assets capitalised in infrastructure as well as assets under construction respectively.

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

This chapter outlines our observations and insights from our financial statement audits of agencies in the cluster.

Section highlights

The number of findings reported to management decreased from 87 in 2020–21 to 59 in 2021–22.
Repeat findings accounted for 54.2% of management letter points. Many repeat findings related to controls over payroll, including management of annual leave and processing of timesheets, management of conflicts of interests, weaknesses in controls over information technology user access administration and password management.
One new high-risk issue was identified in 2020–21, and four high-risk repeat issues remained.
The five high-risk issues arose from the audit in the cluster, with respect to:
- control over TAHE assets and operations (repeat)
- TAHE detailed business modelling to support returns (repeat)
- valuation of trees (repeat for Parramatta Park Trust and Centennial Park and Moore Park Trust)
- TAHE asset valuations.

Appendix one – Misstatements in financial statements submitted for audit

Appendix one – Misstatements in financial statements submitted for audit

Copyright notice

7 December 2022

Published

Health 2022

Health

Whole of Government

Asset valuation

Compliance

Cyber security

Financial reporting

Information technology

Infrastructure

Internal controls and governance

Management and administration

Procurement

Risk

Service delivery

Shared services and collaboration

Workforce and capability

What the report is about

Result of Health cluster (the cluster) agencies' financial statement audits for the year ended 30 June 2022.

What we found

Unmodified audit opinions were issued for the financial statements for all Health cluster agencies.

The COVID-19 pandemic continued to increase the complexity and number of accounting matters faced by the cluster. The total gross value of corrected misstatements in 2021–22 was $353.3 million, of which $186.7 million related to an increase in the impairment provision for Rapid Antigen Tests (RATs).

A qualified audit opinion was issued on the Annual Prudential Compliance Statement related to five residential aged care facilities. There were 20 instances (19 in 2020–21) of non-compliance with the prudential responsibilities within the Aged Care Act 1997.

What the key issues were

The total number of matters we reported to management across the cluster decreased from 116 in 2020–21 to 67 in 2021–22. Of the 67 issues raised, four were high risk (three in 2020-21) and 37 were moderate risk (57 in 2020–21). Nearly half of all control deficiencies reported in 2021–22 were repeat issues.

Three unresolved high-risk issues were:

COVID-19 inventories impairment – we continued to identify issues relating to management’s impairment model which relies on anticipated future consumption patterns. RATs had not been assessed for impairment.
Asset capitalisation threshold – management has not reviewed the appropriateness of the asset capitalisation threshold since 2006.
Forced-finalisation of HealthRoster time records – we continued to observe unapproved rosters being finalised by system administrators so payroll can be processed on time. 2.6 million time records were processed in this way in 2021–22.

What we recommended

COVID-19 inventories impairment – ensure consumption patterns are supported by relevant data and plans.
Assets capitalisation threshold – undertake further review of the appropriateness of applying a $10,000 threshold before capitalising expenditure on property, plant and equipment.
Forced-finalisation of HealthRoster time records – develop a methodology to quantify the potential monetary value of unapproved rosters being finalised.

This report provides Parliament and other users of Health cluster (the cluster) agencies' financial statements with the results of our audits, analysis, conclusions and recommendations in the following areas:

financial reporting
audit observations.

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

This chapter outlines our audit observations related to the financial reporting of agencies in the Health cluster (the cluster) for 2022.

Section highlights

Unqualified audit opinions were issued for all cluster agencies required to prepare general purpose financial statements.
The total gross value of corrected monetary misstatements for 2021–22 was $353.3 million, of which, $186.7 million related to an increase in the impairment provision for Rapid Antigen Tests.
A qualified audit opinion was issued on the ministry's Annual Prudential Compliance Statements.

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

This chapter outlines our observations and insights from our financial statement audits of agencies in the cluster.

Section highlights

The total number of internal control deficiencies has decreased from 116 in 2020–21 to 67 in 2021–22. Of the 67 issues raised in 2021–22, four were high (2020–21: 3) and 37 were moderate (2020–21: 57); with nearly half of all control deficiencies reported in 2021–22 being repeat issues.
The following four issues were reported in 2021–22 as high risk:
- impairment of COVID-19 inventories
- inadequate review over the appropriateness of asset capitalisation threshold
- forced-finalisation of HealthRoster time records
- COVID-19 vaccination inventories – data quality issue at 31 March 2022.
Management of excessive leave balances and poor quality or lack of documentation supporting key agreements continued to be the key repeat issues observed in the 2021–22 financial reporting period.