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15 December 2017

Published

Transport 2017

Transport

Asset valuation

Information technology

Internal controls and governance

Project management

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

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

1. Financial reporting and controls

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

2. Service Delivery

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

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

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

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

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

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

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

21 November 2017

Published

Central Agencies 2017

Finance

Premier and Cabinet

Asset valuation

Compliance

Financial reporting

Fraud

Information technology

Internal controls and governance

Project management

This report highlights 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.

The report includes a range of findings in respect to service delivery. One repeat finding is that while the Government regularly reports on the 12 Premier's priorities, there is no comprehensive reporting on the 18 State priorities.

1. Financial reporting and controls

Audit Opinions	Unqualified audit opinions were issued for all agencies' 30 June 2017 financial statements.
Early close	Early close procedures continue to facilitate the timely preparation of financial statements and completion of audits, but agencies can make further improvement.
Deficient user administration access	User access administration over financial systems remains an area of weakness. Agencies need to strengthen user access administration to critical systems.
Transitioning to outsourced service providers	Transitioning of services to outsourced service providers can be improved. Outsourcing services can lead to better outcomes, which may include lower transaction costs and improved services, but it also introduces new risks.

2. Service delivery

Premier and State Priorities	A comprehensive report of performance against the 18 State Priorities is yet to be published. While some measures are publicly reported through agency annual reports or other sources, a comprehensive report of performance against the 18 State Priorities would ensure all State Priorities are publicly reported, provide a single and easily accessible source of reference and improve transparency.
ICT and digital government	The Digital Government Strategy was released in May 2017. Targets will need to be set to assess and monitor progress against the Strategy.
Digital information security	Not all agencies are complying with the NSW Government's information security policy. This increases the risk of noncompliance with legislation, information security breaches and difficulty restoring data or maintaining business continuity in the event of a disaster or disruption.
Property and asset utilisation	Property NSW's performance reporting would be enhanced by developing and reporting on customer satisfaction, reporting against set targets and benchmarking cost of service to the private sector.

3. Government financial services

Prudential oversight of NSW Government superannuation funds	Prudential oversight of SAS Trustee Corporation Pooled Fund and Parliamentary Contributory Superannuation Fund has not been prescribed. Structured and comprehensive prudential oversight of these funds remains important as they operate in a specialised, complex and continuously changing investment market sector, have over 106,000 members and manage investments in excess of $42.4 billion.
Green slip scheme affordability	Currently, Green Slips in NSW are the most expensive in Australia. However, CTP reforms are expected to reduce the cost of Green Slips.

This report sets out the results of the 30 June 2017 financial statement audits of NSW Government's central agencies and their cluster agencies.

Central agencies play a key role in ensuring policy coordination, good administrative and people management practices and prudent fiscal management. The central agencies and their key responsibilities are set out below.

Confidence in public sector decision‑making and transparency is enhanced when financial reporting is accurate and timely. Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. This chapter outlines our audit observations, conclusions or recommendations related to financial reporting and controls of agencies for 2016–17.

Observation	Conclusion or recommendation
2.1 Quality of financial reporting
Unqualified audit opinions were issued for all agency financial statements.	The quality of financial reporting continues to remain strong across the clusters.
2.2 Timeliness of financial reporting
Most agencies complied with the statutory timeframes for completion of early close procedures and preparation and audit of financial statements.	Early close procedures continue to facilitate the timely preparation of financial statements and completion of audits, but agencies can make further improvement.
2.3 Financial performance and sustainability
We assessed the performance of agencies listed in Appendix six against some key financial sustainability indicators. This highlighted two agencies with negative operating margins of more than ten per cent and one agency with a liquidity ratio of less than 0.5.	These agencies have strategies in place to remain financially sustainability and manage their liquidity. Our analysis found that, overall, the agencies are not at high risk of sustainability concerns.
2.4 Internal Controls
User access administration over financial systems remains an area of weakness. Sixteen moderate risk and ten low risk issues related to user access administration across eight agencies were identified.	Recommendation: Agencies should review user access administration to critical systems to ensure: policies for user access creation, modification and deactivation are documented approval is being obtained to establish, modify or delete user accounts regular user access reviews are performed and highly privileged user account activity is logged and monitored evidence of review is maintained.
Transitioning of services to outsourced service providers can be improved. Our 2016–17 audits identified one high risk issue relating to Property NSW's outsourcing of property and facility management services to the private sector. While a high risk issue was identified in 2015–16 from the Department of Finance, Services and Innovation's outsourcing of transactional and information technology services to GovConnect there has been an improvement in GovConnect's internal control environment throughout 2016–17.	Outsourcing services can lead to better outcomes, which may include lower transaction costs and improved services, but it also introduces new risks. The transition needs to be carefully managed and requires thorough planning and effective project governance. This should be supported by oversight and direction from senior management and independent project assurance.
2.5 Human Resources
The percentage of full‑time equivalent staff with annual leave greater than 30 days in the Finance, Services and Innovation, Premier and Cabinet and the Treasury clusters is 7.9 per cent, 17.1 per cent and 18.4 per cent respectively.	Agencies have strategies in place to reduce annual leave balances that are greater than 30 days. The effectiveness of these strategies will need to be monitored to ensure they are helping to achieve the desired outcome.

This chapter outlines our audit observations, conclusions and recommendations relating to service delivery for 2016–17.

Observation	Conclusion or recommendation
3.1 Premier and State priorities
The Department of Premier and Cabinet monitors the achievement of targets and the implementation of initiatives to deliver the 12 Premier’s Priorities. Responsible ministers and agencies manage the 18 State Priorities. A comprehensive report of performance against the 18 State Priorities is yet to be published.	While some measures are publicly reported through agency annual reports or other sources, a comprehensive report of performance against the 18 State Priorities would ensure all State Priorities are publicly reported, provide a single and easily accessible source of reference and improve transparency. Where possible, independent sources are used to measure performance, however without independent assurance there is an increased risk that the target measures are inaccurate, not relevant or do not fairly represent actual performance.
Performance against the State Priority to make NSW the easiest state to start a business is not currently published. A key aspect of making NSW the easiest state to start a business is making regulatory obligations easier to understand and implement.	Initiatives, such as easy to do business and red tape reduction are in place to help achieve this priority. The regulatory policy framework is under review following an October 2016 performance audit on ‘Red tape reduction’ that found the regulatory burden of legislation had increased.
3.2 Financial management
Revenue NSW earned record crown revenue of $30.0 billion in 2016–17 to support the state's finances.	Record crown revenue has been driven by the sustained increase in duties revenue, which has increased by 93.7 per cent over the last five years. This is a consequence of the continued strength in the property market over this time and large one off NSW Government business asset sales and leases.
3.3 ICT and digital government
The Digital Government Strategy (the Strategy) was released in May 2017 to build on reforms set out in previous ICT strategies.	The Strategy’s priorities and enablers aim to support digital innovation. Targets and measures will need to be set to assess and monitor progress against the Strategy.
The Digital Information Security Policy (DISP) is a key tool that helps ensure a minimum set of information security controls are implemented across NSW Government agencies. A review of 2016 annual reports found 15 agencies (13 in 2015) did not attest to compliance with the DISP and of the agencies that attested to compliance, 34 reported issues associated with their compliance.	The Strategy’s priorities and enablers aim to support digital innovation. Targets and measures will need to be set to assess and monitor progress against the Strategy. Failure to comply with the DISP increases the risk of noncompliance with legislation, information security breaches and difficulty restoring data or maintaining business continuity in the event of a disaster or disruption.
3.4 Property and asset utilisation
Property NSW's performance reporting could be improved. M2012-20 'Government Property NSW and Government Property Principles' required Property NSW to set key performance indicators to measure property and asset utilisation performance.	Property NSW's performance reporting would be enhanced by developing and reporting on customer satisfaction, reporting against set targets and benchmarking cost of service to the private sector.

This chapter outlines our audit observations, conclusions and recommendations specific to NSW Government agencies providing financial services.

Observation	Conclusion or recommendation
4.1 Key issues
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). Amendments to relevant legislation allows the Minister for Finance, Services and Property to prescribe applicable prudential standards and audit requirements.	Structured and comprehensive prudential oversight of these funds remains important as they operate in a specialised, complex and continuously changing investment market sector, have over 106,000 members and manage investments of more than $42.4 billion. Recommendation: The Treasury should liaise with the respective Trustees to implement appropriate prudential standards and oversight arrangements for the exempt public sector superannuation funds.
Currently, Green Slips in NSW are the most expensive in Australia. Average premiums for Sydney Metropolitan vehicles increased by 10.4 per cent between 1 January 2016 and 31 December 2016.	CTP reforms are expected to reduce the cost of Green Slips. The State Insurance Regulatory Authority will need to ensure it has appropriate processes in place to track and report against the expected benefits.
4.2 Financial performance and sustainability
Net unfunded superannuation liabilities were $15.0 billion at 30 June 2017. Under the Fiscal Responsibility Act 2012, the NSW Government’s target is to eliminate unfunded superannuation liabilities by 2030.	The superannuation funds’ strategic asset allocation and investment strategies are monitored and adjusted to help achieve a fully funded position by 2030.
The Home Warranty Scheme commenced in 2011. Over this time total premiums collected have not been sufficient to cover expected claim costs.	Funding arrangements introduced during 2016–17 allow the Home Building Compensation Fund to apply to the Crown for reimbursement of unfunded realised losses from under-pricing of premiums. Other reforms are planned to address the long term sustainability of the home building compensation scheme.
4.3 Investment performance
The NSW Government’s main superannuation funds have maintained the management expense ratio (MER) at consistent levels over the past two years. The Parliamentary Contributory Superannuation (PCS) Fund does not set an MER target.	MER is an industry recognised ratio to measure the performance of funds and investment managers. Recommendation: The Fund Secretary for the PCS Fund, in conjunction with the Trustee, should consider establishing an appropriate management expense ratio target to measure performance.

Appendix one - List of 2017 recommendations

Appendix two - Status of 2016 recommendations

Appendix three - Agencies selected for this volume

Appendix four - Timeliness of financial reporting and audit reporting

Appendix five - Financial audit reporting

Appendix six - Financial analysis

13 December 2013

Published

Volume Eight 2013 focusing on Transport and Ports

Transport

Industry

Compliance

Financial reporting

Procurement

Project management

Regulation

Workforce and capability

Unqualified audit opinions were issued on the above corporations’ 30 June 2013 financial statements. During the year, Treasury issued TC 13/01 ‘Mandatory early close procedures for 2013’. This Circular aimed to improve the quality and timeliness of agencies’ annual financial statements. In 2012-13, application of the circular was made mandatory for State owned corporations. As a result, the port corporations were required to perform the early close procedures. All the port corporations were successful in performing the procedures, which helped them submit financial statements by an earlier due date. The early close procedures also resulted in general improvements to the quality of most financial statements.

The report recommends all transport entities should do more to reduce excessive annual leave balances to ensure they will comply with new targets set by the Premier, RailCorp, Sydney Trains and NSW Trains should minimise the amount of overtime bonuses paid to train drivers and that Transport for NSW should set targets to measure the overall satisfaction of train users.