The Committee reviews the expenditure, including the annual financial statements, of the six Australian Intelligence Community (AIC) agencies pursuant to section 29 of the Intelligence Services Act 2001 (IS Act). All agencies, except ASIO, provided the Committee with a copy of their 2014–15 financial statements. ASIO’s budget and financial statements are publically available in the Portfolio Budget Statements and the ASIO Report to Parliament 2014-15.
The Committee reviewed the financial statements and took evidence from each agency during private hearings. The Australian National Audit Office (ANAO) also provided a submission to the inquiry, outlining its audit findings for each agency over the reporting period.
Much of the evidence received by the Committee is classified and has not been authorised for publication.
The Committee examined all material provided and questioned agencies on aspects of their expenditure. Following is an unclassified overview of the Committee's findings.
In examining the financial circumstances of each agency over the reporting period, the Committee sought evidence on each agency’s ability to meet its objectives within its budget parameters. In doing so, the Committee sought assurances that each agency continued to have the necessary resources to address and target Australia’s national security priorities to the degree necessary to protect Australians against threats to national security.
Budget and financial performance
Agencies updated the Committee on their financial performance over the reporting period. Agencies also gave evidence on new funding initiatives announced during the reporting period, anticipated funding levels in future years and, where relevant, the impact of the efficiency dividend on their budgets.
ASIO received an appropriation of $368.4 million in 2014–15, up from $346.2 million in 2013–14 and $329.7 million in 2012–13.
ASIO’s 2014–15 revenue included $11.2 million of additional funding relating to the ‘Enhance Security Intelligence Capabilities to Counter the Islamist Terrorism Threat’ measure that was announced by the Government in August 2014. As part of this measure, ASIO reported that it would receive a further $128.5 million in operating funding and $41.4 million in capital funding over the next four years to continue to strengthen its counter-terrorism capabilities.
ASIO noted, however, that over the next four years it would need to return around $93.7 million to government as a result of the efficiency dividend and other savings measures. It indicated that these measures would have an impact on ASIO’s ability to address the increasing costs of doing business and will likely have broader effects on operational capabilities and capacity.
In 2014–15, ASIO recorded an operating loss of $12.7 million, excluding depreciation. Including depreciation costs, the deficit was $76.5 million.
Echoing comments made in previous submissions, ASIO outlined continuing budgetary pressures placed on the organisation:
ASIO’s budget, which includes a significant, non-discretionary component associated with the need to maintain high levels of security, has been under considerable pressure in recent years. The budget continues to be a challenge due to the impact of the increased security overlay costs, efficiency dividend and expenditure ASIO absorbs which includes security assessments relating to Illegal Maritime Arrivals (IMAs), costs associated with Operation Sovereign Borders and Data Retention. Additionally, ASIO will contribute to the National Security Hotline Campaign as well as savings measures required by government due to the budget savings measures.
ASIO noted that it had continued to focus the strategic allocation of its resources on operational-related expenditure, which accounted for 81 per cent of its budget. ASIO added that the deteriorating terrorism threat environment in Australia had put pressure on its counter-terrorism and technical capabilities, despite the additional funding. Foreign espionage and interference also remained a ‘significant threat’, and the work of intelligence agencies was ‘becoming more complex, time consuming and risky as a result of the rapidly evolving technological environment and changes in the behaviour of intelligence targets’.
ASIS provided the Committee with a copy of its audited financial statements, together with an overview of its financial performance during 2014–15.
According to the 2015–16 portfolio budget statements, ASIS received a departmental appropriation of $236.133 million in 2014–15, increased from $214.417 million in 2013–14. This increase included an additional $14.4 million as part of the Government’s package of additional funding for counter-terrorism announced in August 2014. The counter-terrorism measure was expected to provide ASIS with a further $92.5 million in operating income and a total of $19.4 million in related capital funding over the forward estimates, with funding levels to be maintained in future years as part of agencies’ ongoing base funding. ASIS also received $10.6 million in 2014–15 for its work combatting the people smuggling under ‘Operation Sovereign Borders’.
The Committee discussed ASIS’s financial position with senior staff at a private hearing. ASIS noted that, in the May 2015 Budget, it had been successful in obtaining an additional $295.8 million over the next six years to strengthen its capabilities, including by upgrading its information and communications technology systems. The measure includes capital funding of $172.5 million and operational funding of $123.4 million over the six years. The Government has also indicated its intention to provide ongoing additional funding of $47.1 million per year from 2021–22.
Offsetting these funding increases, ASIS reported that, using appropriation data from the 2015–16 Portfolio Budget Statements, the impact of the efficiency dividend on its operational activities from 2015–16 through to 2018–19 would be approximately $57 million.
The efficiency dividend
Since its inquiry for the Review of Administration and Expenditure No. 7: Australian Intelligence Agencies, the Committee has monitored the impact of the efficiency dividend and other budget measures on the relevant agencies of the AIC through its annual reviews. The Committee’s ongoing concerns about the impact of the efficiency dividend on intelligence agencies have been reported to the Parliament as part of these reviews.
The efficiency dividend has been applied to the departmental budgets of Australian Public Service organisations since 1987. While the ‘usual’ annual savings rate under the efficiency dividend has been 1.00 or 1.25 per cent over this time, the rate has often been increased by governments in recent years—to as high as 4.00 per cent—in order to achieve greater savings. In 2014–15, a rate of 2.50 per cent was applied. This rate was maintained for 2015-16 and 2016–17, and as of the 2016–17 Budget it was expected to remain at 2.50 per cent for 2017–18, before dropping back to 2.00 per cent in 2018–19 and 1.50 per cent in 2019–20.
The Department of Defence is partially exempt from the efficiency dividend, with it only applying to approximately 11 per cent of its appropriations relating to ‘civilian and non-operational areas’ of the Department.
Through its review of administration for 2008–09, the Committee recommended the Government review the potential adverse effects of the efficiency dividend on the AIC, having particular regard to the Joint Committee of Public Accounts and Audit report, The efficiency dividend and smaller agencies: Size does matter. However, the Government did not support the Committee’s recommendation, stating in its response:
The efficiency dividend is an integral part of the devolved financial management framework where agencies are provided with the flexibility and autonomy to spend the funds appropriated directly to them by the Parliament … it is important to recognise the significant funding growth in the AIC over the last decade, which materially outweighs the size of the efficiency dividend for these agencies.
In its 2009–10 review, the Committee reiterated its recommendation that the Government review the potential adverse effects of the efficiency dividend on the AIC, describing as ‘extremely concerning’ advice from agencies regarding their ability to continue to meet operational needs, should their budgets be reduced further.
The ability to maintain operational capabilities continued to be raised by agencies during the Committee’s subsequent reviews. In its 2012–13 submission, for example, ASIO warned that while it had been ‘able to adapt to the constrained fiscal environment to date without substantial diminution of its core operations’ in the future it would be ‘increasingly difficult’ to do so without having ‘adverse operational effects’. The Committee again recommended that the Government review the continued application of the efficiency dividend and other savings measures to AIC agencies, and that particular consideration be given to the cumulative impact of these measures on operational capability. The Committee concluded that the risks associated with reducing an agency’s operational capability was akin to the risks associated with reducing Australia’s Defence capability.
In its review of administration and expenditure for 2013–14, the Committee welcomed a substantial increase to the funding of AIC agencies to counter the terrorism threat and noted that this funding increase, if sustained, may mean that the ongoing efficiency dividend would be manageable. The Committee stated it would question ASIO and ASIS in future years on whether the new funding had offset or alleviated the ongoing impact of the efficiency dividend, or whether partial or full exemption would be required in order to effectively respond to security challenges.
The Committee also welcomed a Government decision, announced in the 2015–16 Budget, to exempt ONA (and the Office of the IGIS) from the ongoing application of the efficiency dividend.
ONA’s exemption from the efficiency dividend followed the January 2015 Review of Australia’s Counter-Terrorism Machinery by the Department of the Prime Minister and Cabinet (PM&C). Noting the particular difficulty of ONA and the Office of the IGIS to meet efficiency dividend requirements due to their small size, the review recommended the complete removal of the efficiency dividend from these organisations.
However, the PM&C review also recommended the removal of the efficiency dividend from the operational (i.e. non-administrative) activities of certain other organisations—specifically ASIO, ASIS, the Australian Federal Police (AFP), and (in-principle) operations of the former Australian Customs and Border Protection Service. As an alternative option, the review recommended that a reduced efficiency dividend of 0.5 per cent be applied. The precise wording of the recommendation is as follows:
The Government adjust its approach to seeking efficiencies from the national security agencies by:
a. from 2015–16, removing the efficiency dividend (ED) from all of the ASIO, ASIS and AFP operations
b. from 2015–16, ending the application of the ED to the ONA and the OIGIS [Office of the IGIS]
c. in-principle, from 2015–16, removing the ED from all ACBPS [Australian Customs and Border Protection Service] operations that will transition to the new DIBP [Department of Immigration and Border Protection] including the Australian Border Force with final costs to be agreed with the Department of Finance and a detailed proposal brought to the NSC [National Security Committee] by 30 June 2015
d. noting that the AFP, ASIO, ASIS, DIBP and ONA would be subject to the ongoing whole-of-government non-ED efficiency processes, including the functional and efficiency review, including the Efficiency through Contestability Programme.
e. from 2015–16 applying a 0.5 per cent ED to ASIO, ASIS and AFP operations, to all ONA and OIGIS funding, and in-principle applying a 0.5 per cent ED to all ACBPS operations that will transition to the new DIBP with final costs to be agreed with the Department of Finance and a detailed proposal brought to the NSC by 30 June 2015.
In private hearings, the Committee questioned ASIO and ASIS on the continued impact of the efficiency dividend on their operations. Agencies noted that the specific funding initiatives and budget indexation over the forward years would be partially offset by the efficiency dividend being applied to that funding.
The Committee was told that intelligence agencies were limited in their ability to achieve efficiencies in corporate areas due to their high organisational security requirements and, as a result, the efficiency dividend was likely to affect the resources allocated to support core operations, not just administration.
ONA’s revenue from Government in 2014–15 was $29.765 million, excluding a departmental capital budget. This was up slightly from revenue of $29.521 million in 2013–14.
During 2014–15, ONA received $1.1 million in additional operating and related capital funding for counter-terrorism, with a further $5.0 million expected in the forward years through to 2017–18.
The impact of the efficiency dividend on ONA in 2014–15 was $0.750 million. As noted above, as part of the 2015-16 Budget, the Government announced that ONA (and the Office of the IGIS) would be relieved from ongoing efficiency dividends. The measure was expected to result in an additional $7.6 million being provided to ONA over four years.
At a private hearing, ONA reported that as a result of its exemption from the efficiency dividend, combined with additional resources for counter-terrorism, it had been able to ‘modestly’ reinvest resources into core functions that had previously been cut back.
In regard to procurement, ONA advised that it had published 66 contract notices to AusTender in 2014–15, with a combined value of $5.099 million. Of these, 89 per cent had a value of less than $80 000 and 84 per cent involved the provision of some form of service. ONA used panel arrangements and the Department of Finance’s online Commonwealth Contracting Suite wherever possible. ONA noted that, with the introduction of the PGPA Act, it had updated its internal procurement guidance and forms to emphasise staff obligations in spending Commonwealth money and to reflect new terminology.
In regard to travel, ONA submitted that its officials visited 37 countries in 2014–15 at a total cost of $826 000. It used ‘best fare of the day’ policy for all domestic travel and the ‘lowest practical fare’ policy for all international travel. ONA transitioned to the new whole-of-government travel provider, Qantas Business Travel, at the end of the financial year.
ONA advised that, in response to the Government’s smaller government agenda and contestability program, and the discontinuation of some shared services available within the Department of the Prime Minister and Cabinet, it had been ‘actively engaging with other Commonwealth agencies that may be able to provide us with a range of services’. ONA advised that implementation of the Government’s ‘Shared and Common Services Programme’ would be a high priority in 2015–16.
The DIAs each provided the Committee with copies of their financial statements, which were reviewed by the Committee during the inquiry.
In 2014–15, total government expenditure on the Department of Defence’s Intelligence Capabilities program—which includes the three DIAs and (up to 30 June 2015) the Defence Security Authority, including the Australian Government Security Vetting Agency—was $654.608 million. This represented an increase of approximately 19 per cent from the 2013–14 expenditure of $550.113 million.
Unlike other agencies, funding for the operations of the DIAs was not subject to the efficiency dividend in 2014–15.
Defence 2016 Integrated Investment Program
At the private hearing, the Department of Defence briefed the Committee on plans to further increase spending on Defence intelligence in coming years. The 2016 Integrated Investment Program, which was published alongside the 2016 Defence White Paper, outlines an intention for Defence to invest ‘around nine per cent’ of its Integrated Investment Program over the decade to 2025–26 to ‘enhance Australia’s intelligence, surveillance, reconnaissance, electronic warfare, space and cyber capabilities’.
A range of strengthened capabilities are identified, including:
modernised all-source intelligence systems supported by enhanced processing capabilities,
enhanced space situational awareness,
enhanced capacity to generate and analyse imagery,
new and enhanced unmanned intelligence, surveillance, and reconnaissance capabilities, and
new electronic warfare support capabilities based on long-range commercial aircraft, and new and enhanced command, control, communications and intelligence, surveillance and reconnaissance systems.
Specific intelligence-related programs identified in the Integrated Investment Program include:
Land Based Geospatial Support Systems ($400–$500 million),
Digital Topological Systems Upgrade ($87 million),
Intelligence Systems ($2–$3 billion),
Intelligence Surveillance and Reconnaissance Information Integration and Optimisation ($300–$400 million),
Enhanced Geospatial Information, Infrastructure and Services Program ($200–$300 million),
Tactical Data Links Information Exchange Capability ($750 million–$1 billion), and
Distributed Ground Station Australia ($1–$2 billion).
The Integrated Investment Program states that these enhancements will require around 900 additional ADF positions and around 800 APS positions over the decade to 2025–26.
The Committee notes that the funding pressures faced by Australian intelligence agencies were reduced somewhat during the reporting period due to the injection of funds to support counter-terrorism capabilities, and other initiatives. The Committee strongly supports this additional funding and considers it will significantly enhance the ability of agencies to respond to the ongoing threat terrorism poses to the security of the community. However, the Committee also recognises there continues to be pressure on other functions carried out by agencies subject to efficiency dividends.
The Committee has previously recommended that the continued application of the efficiency dividend to AIC agencies be reconsidered in light of the threat to operational capabilities. The Committee remains of the view that the risks associated with reducing an AIC agency’s operational capabilities are akin to the risks associated with reducing the capability of the Australian Defence Force. It is crucial that, in a time of heightened threat to security, our key security agencies are not stretched to a point where operational capabilities have to be wound back in order to reduce costs.
The high organisational security requirements of AIC agencies, reducing their ability to make savings in corporate areas, further justifies their exemption from the efficiency dividend. The high, non-discretionary costs of maintaining the security and organisational integrity of AIC agencies have only increased in recent years as a result of a deterioration in the threat environment, the increasing sophistication of cyber-attacks and the increased threat of unauthorised disclosure by ‘malicious insiders’. High and increasing expenditure on protection against these threats means that there is decreasing scope for cost-savings at a whole-of-organisation level without impacting operational capabilities.
In last year’s report, the Committee flagged that that it would be paying attention to whether the new funding received by agencies in 2014–15, particularly for counter-terrorism, had offset or alleviated the ongoing impact of the efficiency dividend, or whether partial or full exemption would be required in order to effectively respond to security challenges. The Committee’s immediate concerns were partially allayed by these funding increases. However, the Committee appreciates that in the longer term agencies will need to maintain sufficient base funding in order to meet their obligations across the organisation. Our intelligence and security agencies need to be funded to deal not just with the increased threat to the community from terrorism, but also increased internal security threats and other significant external threats, such as foreign espionage and cyber-attacks.
The Committee’s longstanding view regarding the application of the efficiency dividend to AIC agencies was supported in January 2015 by the Department of the Prime Minister and Cabinet’s Review of Australia’s Counter-Terrorism Machinery. The review recommended that the efficiency dividend be removed from, or significantly reduced for, ONA and the Office of the IGIS, and the operations of ASIO, ASIS and the AFP.
The Committee welcomes the Government’s decision to exempt ONA and the IGIS from the efficiency dividend in the May 2015 Budget. However, the Committee notes that ASIO and ASIS are now the only two AIC agencies that are not quarantined from the efficiency dividend, and questions why the efficiency dividend should continue to apply to those organisations. For the reasons outlined above, the Committee recommends that the Government more fully implement the Department of the Prime Minister and Cabinet’s recommendation by extending the exemption to ASIO and ASIS.
While the AFP does not fall under the Committee’s jurisdiction for the review of administration and expenditure, the Committee does have a function under the Intelligence Services Act 2001 to monitor and review the performance of the AFP in its counter-terrorism functions. In light of this role, the Committee strongly supports the recommendation by the Department of the Prime Minister and Cabinet that the efficiency dividend be also removed from the AFP’s operational expenses related to counter-terrorism.
The Committee recommends that, in line with the recommendations of the Department of the Prime Minister and Cabinet’s January 2015 Review of Australia’s Counter-Terrorism Machinery, the efficiency dividend be removed from all Australian Security Intelligence Organisation, Australian Secret Intelligence Service and Australian Federal Police operations.
The Public Governance, Performance and Accountability Act 2013 (PGPA Act) commenced on 1 July 2014, replacing the Financial Management and Accountability Act 1997 and the Commonwealth Authorities and Companies Act 1997 as the Commonwealth’s financial framework.
ASIS, ASIO and ONA are each required to produce annual financial statements in accordance with section 42 of the PGPA Act, as supported by the Financial Reporting Rule.
The ANAO conducts audits of these financial statements and reports on whether they comply with Australian Accounting Standards and the PGPA Financial Reporting Rule, and whether they present fairly the financial position of the entity and its financial performance and cash flows for the year. The ANAO performs audit procedures based on the auditor’s judgement, which includes assessment of the risks of material misstatement informed by the consideration of internal controls relevant to the agencies’ preparation and presentations of the financial statements.
Under the provisions of section 105D of the PGPA Act, the Finance Minister has made determinations which allow for the Chief Executives of ASIO and ASIS to omit certain financial information from their financial statements where it could reasonably be expected to be operationally sensitive.
The DIA’s are not required under the PGPA Act to produce separate financial statements. As such, the revenues, expenses, assets and liabilities for the three organisations are included in the annual financial statements of the Department of Defence, which were audited by the ANAO. However, as noted above, in support of the Committee’s functions under section 29 of the IS Act, individual financial statements for each agency were provided to the Committee as part of its review.
The ANAO assessed the risks of material misstatement in ASIO’s 2014–15 financial statements to be normal. The ANAO noted that the financial statements reporting requirements were not complex and that ASIO had an experienced and stable financial team. The ANAO also noted that ASIO’s governance arrangements (including its management committees, internal audit function and audit committee), financial reporting regime and internal control system were designed to provide reasonable assurance in the preparation of its financial statements.
ASIO provided an overview of its internal financial controls in its submission. ASIO’s Chief Financial Officer (CFO) reports monthly to the ASIO Executive Board on financial performance matters and strategic financial management planning. The CFO also briefs ASIO’s Audit and Risk Committee on a quarterly basis. ASIO uses a financial management information system with integrated internal controls aligned to its financial framework, and ASIO’s internal audit section undertakes financial audits in addition to the ANAO’s audits.
The ANAO did not identify any new audit issues for ASIO in 2014–15. It noted that the two issues identified in the 2013–14 audit had been promptly addressed and the findings closed.
In the context of the special purpose financial statements prepared by ASIS with regard to the determination applied under section 105D of the PGPA Act, the ANAO assessed the risks of material misstatement in ASIS’s 2014‑15 financial statements to be normal. The ANAO noted that ASIS had implemented governance arrangements (including management committees, an internal audit function and an audit committee) and an internal control system designed to provide reasonable assurance over its financial management processes. It also noted that no major audit issues had been identified in previous years.
ASIS provided an overview of its internal financial controls in its submission. The submission noted that monthly management reporting is provided to senior executives and a comprehensive mid-year budget review is conducted containing recommendations from the CFO, material variance reporting from branches and all funding requests. The submission also outlined ASIS’s financial management information system, its banking arrangements, its devolved financial delegations model, its purchasing and asset management practices, and the financial policy and procedures included in its Director-General’s Instructions.
There were no audit issues identified in the ANAO’s 2014–15 audit.
The ANAO assessed the risks of material misstatement in ONA’s 2014–15 financial statements to be normal. It identified one ‘Category C’ finding as part of its audit. Category C findings are those considered to be ‘minor’ and pose a low business or financial management risk to the entity.
ONA provided an overview of its internal governance structures, audit program, risk management, and fraud prevention procedures as part of its submission.
The ANAO advised that no specific issues of significance were raised with the DIAs by the ANAO during its financial statements audit of the Department of Defence.
The Committee has scrutinised each agency’s financial management, including its internal controls. On the basis of the evidence provided, the Committee was satisfied that agencies appropriately managed their expenditure in 2014–15.
Mr Andrew Hastie MP