Reports
Waste levy and grants for waste infrastructure
The Auditor-General for New South Wales, Margaret Crawford, released a report today that examined the effectiveness of the waste levy and grants for waste infrastructure in minimising the amount of waste sent to landfill and increasing recycling rates.
The audit found that the waste levy has a positive impact on diverting waste from landfill. However, while the levy rates increase each year in line with the consumer price index, the EPA has not conducted a review since 2009 to confirm whether they are set at the optimal level. The audit also found that there were no objective and transparent criteria for which local government areas should pay the levy, and the list of levied local government areas has not been reviewed since 2014.
Grant funding programs for waste infrastructure administered by the EPA and the Environmental Trust have supported increases in recycling capacity. However, these grant programs are not guided by a clear strategy for investment in waste infrastructure.
The Auditor-General made six recommendations aimed at ensuring the waste levy is as effective as possible at meeting its objectives and ensuring funding for waste infrastructure is contributing effectively to recycling and waste diversion targets.
Overall, waste generation in New South Wales (NSW) is increasing. This leads to an increasing need to manage waste in ways that reduce the environmental impact of waste and promote the efficient use of resources. In 2014, the NSW Government set targets relating to recycling rates and diversion of waste from landfill, to be achieved by 2021–22. The NSW Waste and Resource Recovery (WARR) Strategy 2014–21 identifies the waste levy, a strong compliance regime, and investment in recycling infrastructure as key tools for achieving these waste targets.
This audit assessed the effectiveness of the NSW Government in minimising waste sent to landfill and increasing recycling rates. The audit focused on the waste levy, which is paid by waste facility operators when waste is sent to landfill, and grant programs that fund infrastructure for waste reuse and recycling.
The waste levy is regulated by the Environment Protection Authority (EPA) and is generally paid when waste is disposed in landfill. The waste levy rates are set by the NSW Government and prescribed in the Protection of Environment Operations (Waste) Regulation 2014. As part of its broader role in reviewing the regulatory framework for managing waste and recycling, the EPA can provide advice to the government on the operation of the waste levy.
The purpose of the waste levy is to act as an incentive for waste generators to reduce, re-use or recycle waste by increasing the cost of sending waste to landfill. In 2019–20, around $750 million was collected through the waste levy in NSW. The government spends approximately one third of the revenue raised through the waste levy on waste and environmental programs.
One of the waste programs funded through the one third allocation of the waste levy is Waste Less, Recycle More (WLRM). This initiative funds smaller grant programs that focus on specific aspects of waste management. This audit focused on five grant programs that fund projects that provide new or enhanced waste infrastructure such as recycling facilities. Four of these programs were administered by the Environmental Trust and one by the EPA.
Conclusion
The waste levy has a positive impact on diverting waste from landfill. However, aspects of the EPA's administration of the waste levy could be improved, including the frequency of its modelling of the waste levy impact and coverage, and the timeliness of reporting. Grant funding programs have supported increases in recycling capacity but are not guided by a clear strategy for investment in waste infrastructure which would help effectively target them to where waste infrastructure is most needed. Data published by the EPA indicates that the NSW Government is on track to meet the recycling target for construction and demolition waste, but recycling targets for municipal solid waste and commercial and industrial waste are unlikely to be met.
Waste levy
The waste levy rate, including a schedule of annual increases to 2016, was set by the NSW Government in 2009. Since 2016, the waste levy rate has increased in line with the consumer price index (CPI). The EPA has not conducted recent modelling to test whether the waste levy is set at the optimal level to achieve its objectives. The waste levy operation was last reviewed in 2012, although some specific aspects of the waste levy have been reviewed more recently, including reviews of waste levy rates for two types of waste. The waste levy is applied at different rates across the state. Decisions about which local government areas (LGAs) are subject to the levy, and which rate each LGA pays, were made in 2009 and potential changes were considered but not implemented in 2014. Currently, there are no objective and transparent criteria for determining which LGAs pay the levy. The EPA collects waste data from waste operators. This data has improved since 2015, but published data is at least one year out of date which limits its usefulness to stakeholders when making decisions relating to waste management.
Grants for waste infrastructure
All state funding for new and enhanced waste infrastructure in NSW is administered through grants to councils and commercial waste operators. The government's Waste and Resource Recovery (WARR) Strategy 2014–21 includes few priorities for waste infrastructure and there is no other waste infrastructure strategy in place to guide investment. The absence of a formal strategy to guide infrastructure investment in NSW limits the ability of the State Government to develop a shared understanding between planners, councils and the waste industry about waste infrastructure requirements and priorities. The Department of Planning, Industry and Environment is currently developing a 20-year waste strategy and there is an opportunity for the government to take a more direct role in planning the type, location and timing of waste infrastructure needed in NSW.
The grants administration procedures used for the grant programs reviewed in this audit were well designed. However, we identified some gaps in risk management, record-keeping and consistency of information provided to applicants and assessment teams. In four of the five programs we examined, there was no direct alignment between program objectives and the NSW Government's overall waste targets.
Achievement of the 2014–21 state targets for waste and resource recovery (WARR targets) is reliant in part on the availability of infrastructure that supports waste diversion and recycling. The state WARR targets dependent on waste infrastructure are:
- Increase recycling rates to 70 per cent for municipal solid waste and commercial and industrial waste, and 80 per cent for construction and demolition waste.
- Increase waste diverted from landfill to 75 per cent.
A further target — manage problem waste better by establishing or upgrading 86 drop-off facilities or services for managing household problem wastes state-wide — is dependent on accessible community waste drop-off facilities across NSW.
Exhibit 7 identifies the five grant programs that provide funding for new or enhanced waste infrastructure to increase capacity for reuse or recycling of waste. All five of these programs were examined in the audit.
In addition to the grant programs shown in Exhibit 7, other programs provide funding for infrastructure, but at a smaller scale. Examples of these include:
- Bin Trim which provides rebates to small businesses for small scale recycling equipment such as cardboard and soft plastic balers.
- Litter grants which provide funding for litter bins.
- Weighbridges grants for installation of a weighbridge at waste facilities.
- Landfill consolidation and environmental improvement grants for rural councils to replace old landfills with transfer stations or to improve the infrastructure at landfill sites.
Appendix one – Responses from audited agencies
Appendix two – About the audit
Appendix three – Performance auditing
Copyright notice
© 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.
Parliamentary reference - Report number #343 - released 26 November 2020
Governance and internal controls over local infrastructure contributions
The Auditor-General for New South Wales, Margaret Crawford, released a report today on how well four councils managed their local infrastructure contributions during the 2017-18 and 2018-19 financial years.
Local infrastructure contributions, also known as developer contributions, are collected from developers to pay for local infrastructure such as drainage, local roads, open space and community facilities. Controls over local infrastructure contributions help to ensure that all contributions owed are collected, funds are spent as intended, and any contributions paid in the form of works-in-kind or dedicated land are correctly valued.
The audit found that Blacktown City Council and City of Sydney Council provided effective governance over their local infrastructure contributions whereas Central Coast and Liverpool City Councils’ governance arrangements require improvement.
The audit found that three councils had spent local infrastructure contributions in accordance with approved contributions plans. Central Coast Council and the former Gosford City Council had spent $13.2 million on administration costs in breach of the Environmental Planning and Assessment Act 1979. These funds were repaid into the council’s local infrastructure fund during the course of the audit.
The Auditor-General made a number of recommendations for each council relating to improving controls over contributions and increasing transparency.
This audit examined the effectiveness of governance and internal controls over local infrastructure contributions, also known as developer contributions, held by four councils during the 2017–18 and 2018–19 financial years.
This performance audit was conducted with reference to the legislative and regulatory planning framework that was in place during that period.
Our work for this performance audit was completed at the end of March 2020 when we issued the final report to the four audited councils and the Department of Planning, Industry and Environment. We received their respective formal responses to the report’s recommendations during April and May 2020.
Concurrently to this audit, we sought Crown Solicitor’s advice (the ‘Advice’) regarding the use of local infrastructure contributions collected by local councils under the Environmental Planning and Assessment Act 1979 (‘the EPA Act’) for our financial audit work. The Advice clarified the applicable legislative requirements with reference to the application, investment and pooling of local infrastructure contributions. The Advice is included in Appendix 2 of this report. The Advice has not impacted on the findings and recommendations of this report.
Councils collect Local Infrastructure Contributions (LICs) from developers under the Environmental Planning and Assessment Act (1979), the Local Government Act (1993) and the City of Sydney Act (2000) (EP&A Act, LG Act and City of Sydney Act) to fund infrastructure required to service and support new development. At 30 June 2018, councils across NSW collectively held more than $3.0 billion in LICs collected from developers. Just over $1.37 billion in total was held by ten councils. Councils collecting LICs must prepare a contributions plan, which outlines how LICs will be calculated and apportioned across different types of infrastructure. Councils that deliver water and sewer services prepare a development servicing plan (DSP) which allows them to collect contributions for water and sewer infrastructure.
Development timeframes are such that there is often several years between when LICs are collected and the infrastructure is required. Good governance and internal controls are needed over these funds to ensure they are available when needed and spent appropriately.
This audit assessed the effectiveness of governance and internal controls over LICs collected by four councils during the 2017–18 and 2018–19 financial years: Blacktown City Council, Central Coast Council, City of Sydney Council and Liverpool City Council. As at June 2018 these councils held the four highest LIC balances, each in excess of $140 million.
Audit Conclusion
Three of the four councils audited were currently compliant with legislation, regulations and Ministerial Directions regarding LICs. All had gaps in governance and controls over LICs which limited effective oversight.
Three of the councils included in the audit complied with legislation, regulations and Ministerial Directions relating to LICs. Central Coast Council breached the EP&A Act between 2001 and 2019 when it used LICs for administration costs. These funds were repaid in late 2019.
While controls over the receipt and expenditure of contributions funds were largely in place at all councils, there were some exceptions relating to valuing work and land delivered in lieu of cash. Three councils do not provide probity guidance in policies relating to LICs delivered through works-in-kind. Three of the councils had contributions plans that were more than five years old.
Staff at all four councils are knowledgeable about LICs but not all councils keep procedures up to date. Three councils' governance frameworks operate effectively with senior officers from across the council involved in decisions about spending LICs, entering into voluntary planning agreements (VPAs) and reviewing contributions plans.
Transparency over key information relating to LICs is important for senior management so they can make informed decisions, and for the community who pay LICs and expect infrastructure to be provided. During the period of the audit, none of the councils included in the audit provided sufficient information to senior management or their councillors about the projected financial status of contributions plans. This information would be valuable when making broader strategic and financial decisions. Information about LIC levies and intended infrastructure is available to the community but not always easy to find.
A strong governance framework is important at each council to ensure that the funds are managed well, available when needed and spent as intended. The audit examined the following features of each council's governance framework as they apply to LICs:
- decision-making by councillors and council officers relating to LICs
- monitoring delivery of contributions plans and DSPs including:
- reviewing assumptions underlying the plans
- monitoring projected status of plans.
Internal controls over LICs are important to promote accountability, prevent fraud and deliver infrastructure to the required standard at the best possible price. If financial controls are weak or are not implemented well, there is a risk that LICs are misspent or that councils pay too much for infrastructure.
Not all councils' internal controls adequately addressed risks associated with the administration of LICs
The audit examined a number of internal controls that manage risks related to LICs. These included:
- financial controls over receipt and expenditure of LIC funds
- management of conflicts-of-interest when dealing with developers
- independent valuations of works-in-kind and dedicated land
- ensuring delivery and quality of works-in-kind, and obtaining security from developers in the event of non-delivery or poor quality work
- management of variations to VPAs and works-in-kind agreements.
We reviewed controls included in policies and procedures and then checked samples of work to ensure that controls were implemented. We found variation in the controls that councils implemented, and some weaknesses in controls. It is a matter for each council to assess their financial risk and develop internal controls that support the collection, management, and expenditure of LICs. However, councils must be able to assure their communities and developers that they are doing everything possible to collect all LICs owing and that work conducted by developers in lieu of cash payments is properly valued and carried out to the required standard.
Further information about audit findings in relation to internal controls for each council are included in chapters five to eight. The exhibit below demonstrates variation in several controls implemented in the audited councils.
In a 2018 report, the Independent Commission Against Corruption noted that 'the appetite for transparency is expanding in both the public and private sectors'.
The Practice Note and S64 Guidance refer to transparency, including the importance of transparency over:
- calculation and apportionment of LICs
- funding of infrastructure, including where and when infrastructure is delivered
- arrangements made with developers through VPAs.
The LIC system is largely transparent for community members who know where to look
Contributions plans and DSPs are public documents, exhibited to the public before being adopted by council. Councils included in the audit publish their contributions plans and DSPs on their websites and meet statutory requirements with regard to reporting and accessibility of information.
However, other public information relating to the LIC system is fragmented across different websites and reports and varies in detail across councils.
| Blacktown City Council | Central Coast Council | City of Sydney Council | Liverpool City Council | |
|---|---|---|---|---|
| Financial details about contributions collected and spent | Financial statements | Financial statements | Financial statements | Financial statements |
| Implementation plans for spending LICs | Contribution plans | S64 implementation plans in DSPs. S7.11 & S7.12 implementation plans developed annually within capital works plan | Contribution plans | Developed annually within capital works plan |
| Capital works underway or completed, funded by LICs | Capital works plan and annual report | Not published | Not published | Capital works plan |
The Practice Note states that councils are accountable for providing the infrastructure for which contributions are collected. Demonstrating that infrastructure has been provided is difficult with fragmented information. As an example of transparent reporting, Blacktown City Council's 2018–19 annual report includes information about infrastructure that has been delivered for every contributions plan, providing transparency over how LICs have been spent.
Use of LICs collected under VPAs is not always transparent
Contributions collected under VPAs are not required to demonstrate the same relationship to a development as LICs collected under section 7.11 of the EP&A Act. VPAs are often negotiated because a developer requests a change to a planning instrument, and it is important that these arrangements, and their outcomes, are transparent to the community.
The EP&A Regulation includes mechanisms to ensure that VPAs are partially transparent. VPAs are exhibited to the public and approved by the elected council. Councils must maintain a VPA Register and make the VPA Deeds of Agreement available on request. However, there is no obligation on council to report on the outcomes or delivery of developers' obligations under VPAs. The four audited councils vary in transparency and accessibility of information available about VPAs.
| Blacktown City Council | Central Coast Council | City of Sydney Council | Liverpool City Council | |
|---|---|---|---|---|
| VPA Register | Council website and annual report | Annual report | Annual report | Council website and annual report |
| VPA Deeds of Agreement | Council website | Available on request | Available on request | Council website |
| Intended use of LICs collected under VPAs | In Deeds of Agreement | In Deeds of Agreement | In VPA Register and most Deeds of Agreement | In VPA Register and most Deeds of Agreement |
| Completion of work funded by cash collected under VPAs | Not published | Not published | Not published | Not published |
| Delivery of works-in-kind or land negotiated under VPAs | Not published | Not published | In VPA Register | Not published |
The Practice Note suggests that councils incorporate the intended use of LICs collected under VPAs in the Deed of Agreement, but there is no guidance relating to transparency over where and when funds have actually been spent. There is merit in councils providing greater transparency over public benefits delivered through VPAs to give communities confidence in VPAs as a planning tool.
Credit arrangements with developers are not always well documented or monitored
When levying LICs, section 7.11(6) of the EP&A Act requires councils to take into account land, money, or works-in-kind that the developer has contributed on other development sites over and above their LIC obligations. This section of the EP&A Act allows a developer to offset a LIC owed on one site against land or works contributed on another. This leads to some developers carrying 'credits' for work delivered to councils, to be paid back by reduced LICs on a future development. Blacktown City Council and Central Coast Council allow developers to carry credits. Liverpool City Council and City of Sydney Council do not permit credits and instead pay the developers for any additional work undertaken.
Councils should formally document credit arrangements and have a robust process to validate and keep track of credit balances and report on them. Central Coast Council does not keep good track of credit arrangements and neither Blacktown City Council or Central Coast Council aggregate or report on outstanding credit balances.
Blacktown City Council manages the largest LIC fund in NSW and negotiates more VPAs than any other council. Overall, Blacktown City Council demonstrates effective governance over the LIC funds but there is scope for improved oversight of the projected financial status of contributions plans and credit arrangements with developers. Blacktown City Council also needs to update its operating procedures relating to LICs and improve security over key information.
Blacktown City Council is managing areas with high growth. There is a risk that Blacktown City Council will be unable to collect sufficient LICs to fund the infrastructure required to support that growth. However, Blacktown City Council does not assess and report to senior management or its Audit, Risk and Improvement Committee about the projected financial status of contributions plans.
Blacktown City Council has policies in place to guide the management of LICs although management of credit arrangements with developers requires greater oversight. Policies relating to works-in-kind agreements provide no guidance about probity in negotiations with developers and valuations of works-in-kind are not independent as they are paid for by the developer. Blacktown City Council's S7.11 committee structure could act as a model for other councils. Blacktown City Council is spending LICs according to its contributions plans. Staff managing LICs demonstrate good knowledge of the regulatory environment. However, a number of administrative processes need attention such as outdated procedures, lack of security over key spreadsheets, and inappropriate retention of sensitive personal data.
Recommendations
By December 2020, Blacktown City Council should:
- regularly report to senior management on the projected financial status of contributions plans
- update council's works-in-kind policy to address probity risks during negotiations with developers
- mitigate risks associated with lack of independence in valuations of works-in-kind
- improve public reporting about expenditure of cash collected under VPAs
- improve management oversight of credit arrangements with developers
- update procedures for managing LICs
- implement security measures over critical or personal information and spreadsheets.
Central Coast Council's governance and internal controls over LICs were not fully effective. Between 2001 and 2019, more than $13.0 million in LICs was misspent on administration costs in breach of the EP&A Act. There is scope for improved oversight of the projected financial status of contributions plans and credit arrangements with developers. Policies and procedures from the two former councils are not aligned.
In May 2016, the newly amalgamated Central Coast Council inherited 53 contributions plans from the former Gosford City and Wyong Shire Councils. Managing this number of contributions plans fragments the available funds and increases complexity. Central Coast Council is currently working on consolidating these plans. Between June 2016 and June 2019, its LIC balance doubled from $90.0 million to $196 million. Central Coast Council does not assess and report to senior management or its Audit, Risk and Improvement Committee about the projected financial status of contributions plans. Central Coast Council has a LIC committee but it has no formal charter and senior officers do not regularly attend meetings. This limits the committee's effectiveness as a decision-making body. A draft policy relating to works-in-kind agreements provide no guidance about probity in negotiations with developers. Valuations of works-in-kind and land dedications are not independent as they are paid for by the developer.
Central Coast Council has adjusted its accounts in 2018–19 by $13.2 million to repay the LIC fund for administration expenses that were not provided for in 40 contributions plans.
Recommendations
By June 2020, Central Coast Council should:
1. obtain independent validation of the adjustment made to the restricted asset accounts and general fund to repay LICs spent on administration, and adjustments made to each infrastructure category within the contributions plans
2. publish current contributions plans from the former Gosford City Council on the Central Coast Council website.
By December 2020, Central Coast Council should:
3. regularly report to senior management on the projected financial status of contributions plans
4. increase transparency of information available to the public about LIC works planned and underway, including intended use of contributions collected under VPAs
5. consolidate existing plans, ensuring the new contributions plans includes a regular review cycle
6. develop a formal charter for the developer contributions committee and increase the seniority of membership
7. complete and adopt council's works-in-kind policy currently under development, ensuring it addresses probity risks during negotiations with developers
8. mitigate risks associated with lack of independence in valuations of works-in-kind and dedicated land
9. improve public reporting about expenditure of cash collected under VPAs
10. improve management oversight of credit arrangements with developers
11. implement security measures to ensure the integrity of key spreadsheets used to manage LICs
12. align policies and procedures relating to LICs across the amalgamated council including developing policies and procedures for the management of S64 LICs
13. update council's VPA policy to address increased or indexed bank guarantees to accommodate cost increases.
City of Sydney Council manages a complex development environment across the Sydney CBD and inner suburbs. Overall, governance and internal controls over LICs are effective although there is scope for improved oversight of the projected financial status of contributions plans.
City of Sydney Council maintains a large balance of LICs, although not excessive relative to the annual level of LIC expenditure. Unspent contributions are largely associated with open space infrastructure that cannot be delivered until suitable land is available. Thirty per cent of cash contributions are collected under VPAs and there is limited transparency over how these funds are spent. City of Sydney Council does not assess and report to management or its Audit, Risk and Compliance Committee about the projected financial status of contributions plans.
In 2017–18 and 2018–19, LICs were spent in accordance with the corresponding contributions plans. City of Sydney Council staff are knowledgeable about the regulatory environment and are supported by up-to-date policies and procedures.
Recommendations
By December 2020, City of Sydney Council should:
- regularly report to senior management on the projected financial status of contributions plans
- improve public reporting about expenditure of cash collected under VPAs
- periodically review the risk of unpaid LICs associated with complying development certificates and assess whether additional controls are required
- implement security measures to ensure the integrity of key spreadsheets used to manage LICs.
During the audit period 2017–18 and 2018–19, Liverpool City Council did not have effective governance and internal controls over LICs. Liverpool City Council is addressing deficiencies and risks identified through an internal audit published in December 2018 although further work is required. There is scope for improved oversight of the projected financial status of contributions plans.
In the two years to 30 June 2019, the balance of unspent LICs increased by more than 60 per cent against a relatively low pattern of expenditure. Prior to an internal audit completed in late 2018, there was no regular reporting on the status of LICs and a lack of transparency when prioritising the expenditure of LIC funds. During 2019, and following the internal audit, Liverpool City Council engaged additional skilled resources to improve focus and accountability for LICs. A LIC committee has been established to manage contributions plans and support business units to initiate relevant infrastructure projects, although it is too early to assess whether this committee is operating effectively. From February 2019, Liverpool City Council commenced monthly reporting to its Chief Executive Officer (CEO) about the point-in-time status of LIC funds, and to its Audit, Risk and Improvement Committee about risks associated with LICs and the implementation of internal audit recommendations. There is limited reporting to senior management about the projected financial status of some contributions plans. Our audit found no evidence of misuse of funds during the audited period. Methods for valuing work and land are not aligned with policies and procedures and are implemented inconsistently. In addition, valuations of works-in-kind and land dedications are not independent as they are paid for by the developer. The policy relating to works-in-kind provides no guidance about managing probity risks when negotiating with developers.
Recommendations
By December 2020, Liverpool City Council should:
- regularly report to senior management on the projected financial status of contributions plans
- update council's policies and procedures to provide consistent guidance about how works and land offered by developers should be valued
- update council's Works-in-Kind and Land Acquisition Policy to address probity risks during negotiations with developers
- improve public reporting about expenditure of cash collected under VPAs
- mitigate risks associated with lack of independence in valuations of works-in-kind and dedicated land
- implement security measures over critical or private information.
Appendix one – Responses from councils and the Department of Planning, Industry and Environment
Appendix two – Advice from the Crown Solicitor
Appendix three – About the audit
Appendix four – Performance auditing
Copyright notice
© 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.
Parliamentary reference - Report number #339 - released 17 August 2020
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
Progress and measurement of the Premier's Priorities
The Premier’s Implementation Unit uses a systematic approach to measuring and reporting progress towards the Premier’s Priorities performance targets, but public reporting needed to improve, according to a report released today by the Auditor-General of NSW, Margaret Crawford.
The Premier of New South Wales has established 12 Premier’s Priorities. These are key performance targets for government.
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Source: Department of Premier and Cabinet, Premier’s Priorities website.
Each Premier’s Priority has a lead agency and minister responsible for achieving the performance target.
The Premier’s Implementation Unit (PIU) was established within the Department of Premier and Cabinet (DPC) in 2015. The PIU is a delivery unit that supports agencies to measure and monitor performance, make progress toward the Premier’s Priorities targets, and report progress to the Premier, key ministers and the public.
This audit assessed how effectively the NSW Government is progressing and reporting on the Premier's Priorities.
The Premier’s Implementation Unit (PIU) is effective in assisting agencies to make progress against the Premier’s Priorities targets. Progress reporting is regular but transparency to the public is weakened by the lack of information about specific measurement limitations and lack of clarity about the relationship of the targets to broader government objectives.The PIU promotes a systematic approach to measuring performance and reporting progress towards the Premier’s Priorities’ performance targets. Public reporting would be improved with additional information about the rationale for choosing specific targets to report on broader government objectives.
The PIU provides a systematic approach to measuring performance and reporting progress towards the Premier's Priorities performance targets. Public reporting would be improved with additional information about the rationale for choosing specific targets to report on broader government objectives. The data used to measure the Premier’s Priorities comes from a variety of government and external datasets, some of which have known limitations. These limitations are not revealed in public reporting, and only some are revealed in progress reported to the Premier and ministers. This limits the transparency of reporting.
The PIU assists agencies to avoid unintended outcomes that can arise from prioritising particular performance measures over other areas of activity. The PIU has adopted a collaborative approach to assisting agencies to analyse performance using data, and helping them work across organisational silos to achieve the Premier’s Priorities targets.
Data used to measure progress for some of the Premier’s Priorities has limitations which are not made clear when progress is reported. This reduces transparency about the reported progress. Public reporting would also be improved with additional information about the relationship between specific performance measures and broader government objectives.
The PIU is responsible for reporting progress to the Premier, key ministers and the public. Agencies provide performance data and some play a role in preparing progress reports for the Premier and ministers. For 11 of the Premier's Priorities, progress is reported against measurable and time-related performance targets. For the infrastructure priority, progress is reported against project milestones.
Progress of some Priorities is measured using data that has known limitations, which should be noted wherever progress is reported. For example, the data used to report on housing completions does not take housing demolitions into account, and is therefore overstating the contribution of this performance measure to housing supply. This known limitation is not explained in progress reports or on the public website.
Data used to measure progress is sourced from a mix of government and external datasets. Updated progress data for most Premier’s Priorities is published on the Premier’s Priorities website annually, although reported to the Premier and key ministers more frequently. The PIU reviews the data and validates it through fieldwork with front line agencies. The PIU also assists agencies to avoid unintended outcomes that can arise from prioritising single performance measures. Most, but not all, agencies use additional indicators to check for misuse of data or perverse outcomes.
We examined the reporting processes and controls for five of the Premier’s Priorities. We found that there is insufficient assurance over the accuracy of the data on housing approvals.
The relationships between performance measures and broader government objectives is not always clearly explained on the Premier’s Priority website, which is the key source of public information about the Premier’s Priorities. For example, the Premier’s Priority to reduce litter volumes is communicated as “Keeping our Environment Clean.” While the website explains why reducing litter is important, it does not clearly explain why that particular target has been chosen to measure progress in keeping the environment clean.
By December 2018, the Department of Premier and Cabinet should:
- improve transparency of public reporting by:
- providing information about limitations of reported data and associated performance
- clarifying the relationship between the Premier’s Priorities performance targets and broader government objectives.
- ensure that processes to check and verify data are in place for all agency data sources
- encourage agencies to develop and implement additional supporting indicators for all Premier’s Priority performance measures to prevent and detect unintended consequences or misuse of data.
The Premier's Implementation Unit is effective in supporting agencies to deliver progress towards the Premier’s Priority targets.
The PIU promotes a systematic approach to monitoring and reporting progress against a target, based on a methodology used in delivery units elsewhere in the world. The PIU undertakes internal self-evaluation, and commissions regular reviews of methodology implementation from the consultancy that owns the methodology and helped to establish the PIU. However, the unit lacks periodic independent reviews of their overall effectiveness. The PIU has adopted a collaborative approach and assists agencies to analyse performance using data, and work across organisational silos to achieve the Premier’s Priorities targets.
Agency representatives recognise the benefits of being responsible for a Premier's Priority and speak of the value of being held to account and having the attention of the Premier and senior ministers.
By June 2019, the Department of Premier and Cabinet should:
- establish routine collection of feedback about PIU performance including:
- independent assurance of PIU performance
- opportunity for agencies to provide confidential feedback.
Appendix one: Response from agency
Appendix three: About the audit
Appendix four: Performance auditing
Parliamentary reference - Report number #307 - released 13 September 2018
Implementation of the NSW Government’s program evaluation initiative
The NSW Government’s ‘program evaluation initiative’, introduced to assess whether service delivery programs achieve expected outcomes and value for money, is largely ineffective according to a report released today by NSW Auditor-General, Margaret Crawford.
Government services, in areas such as public order and safety, health and education, are delivered by agencies through a variety of programs. In 2016–17, the NSW Government estimates that it will spend over $73 billion on programs to deliver services.
Parliamentary reference - Report number #277 - released 3 November 2016
Country towns water supply and sewerage program
The Country Towns Water Supply and Sewerage Program has effectively promoted adoption of better management practices by local water utilities, but will not achieve its objective of eliminating the water supply and sewerage infrastructure backlog in urban areas of country NSW.
The $1.2 billion Program aims to help local water utilities provide appropriate, affordable, cost effective and well-managed water supply and sewerage services in the urban areas of country NSW. It has two broad elements:
- promoting adoption of better practices
- providing financial assistance towards the capital cost of infrastructure backlog works.
Parliamentary reference - Report number #251 - released 4 May 2015
