The Parliamentary Budget Office (PBO) has an important role in conducting and publishing research to improve the public understanding of the budget and fiscal policy settings.
PBO Report 1/2020, Alternative Financing of Government Policies: Understanding the Fiscal Costs and Risks of Loans, Equity Injections and Guarantees, identified several areas where budget reporting on the use of alternative financing mechanisms in government expenditure could be improved. The Joint Committee of Public Accounts and Audit (JCPAA) supports these improvements and proposes implementation of all the proposals in PBO Report 1/2020, to increase transparency and promote accountability to the Parliament and the Australian public. The Committee also proposes implementation of additional disaggregated information in Commonwealth reporting. Recommendations are made to this effect at the end of the chapter.
Chapter 2 sets out the findings of the Committee’s inquiry into the use of alternative financing mechanisms in government expenditure. In accordance with the inquiry terms of reference, the chapter focuses on the following matters:
Overview of alternative financing
Growth in alternative financing, and reasons for/effects of governments funding programs through such approaches
Costs associated with different policies (transactions and revaluations) and issues with current reporting practices for alternative financing mechanisms
Current reporting practices for alternative financing mechanisms
Proposed improvements to reporting on alternative financing mechanisms
Additional disaggregated information
Implementation of PBO proposals
ANAO financial statement audits
Overview of alternative financing
Growth in alternative financing, and reasons for/effects of governments funding programs through such approaches
The PBO noted that Australian Government use of alternative financing mechanisms has been ‘increasing’—‘under successive governments there has been a shift toward delivering more government policies using alternative financing arrangements rather than direct payments’. The trend towards greater use of alternative financing mechanisms has been particularly evident in Australian Government spending in the areas of education, and transport, energy and telecommunications infrastructure. To assess the degree to which such mechanisms are being used to implement government policy, the PBO examined the net cash flow associated with these mechanisms. The PBO noted that the net cash flow has remained negative since 2008-09, ‘with the net outflow reaching 1.1 per cent of GDP in 2017-18, the largest negative outflow recorded since the 1970s’.
The PBO emphasised that there are ‘sound policy reasons’ for using alternative financing mechanisms to fund particular government policies—‘for infrastructure projects, for example, governments may wish to make equity investments where a project is too large or risky for private sector investors, or to inject competition into particular sectors’. The PBO also noted that the three largest Australian political parties are ‘committed to policies using alternative financing arrangements’. As the Parliamentary Budget Officer further stated, ‘all parties and all levels of government do these things … we’re not saying there’s anything inappropriate about that—we’re just saying that to the extent that they are used they deserve a particular treatment in public disclosure because of their complexity’.
Costs associated with different policies (transactions and revaluations) and issues with current reporting practices for alternative financing mechanisms
The accounting practice adopted in the budget classifies all changes to the Australian Government financial position (the balance sheet) as resulting from either transactions or revaluations. A transaction involves two entities, with the movement of assets between these entities being clearly reflected in both entities’ balance sheets—examples include government pension payments, tax collections, grants, interest payments on loans and loan repayments. A revaluation involves a single entity and adjustment of its balance sheet—examples include where government loans are not expected to be recovered or there is a change to the value of government-owned equity. The cost of a government policy equates to its impact on the government’s balance sheet, with the main measures used to evaluate this impact comprising: net worth (assets less liabilities), net financial worth (financial assets less liabilities) and net debt (selected financial liabilities less selected financial assets). Changes to net financial worth resulting from transactions are included in the fiscal balance, underlying cash balance, net operating balance and headline cash balance. However, changes to net financial worth resulting from revaluations (referred to as ‘Other economic flows’ in budget documents) are not included in the fiscal, underlying cash, net operating or headline cash balances.
Accordingly, as the focus of the Budget Papers tends to be on explaining the fiscal impact of policy on the budget aggregates of the underlying fiscal or cash balances, there is less information available about the fiscal impact of a policy when it is implemented using alternative financing mechanisms, as the majority of the costs associated with these mechanisms are not fully captured in these aggregates. The Budget Papers have traditionally focused on transactions rather than revaluations, as ‘government policy is a major driver of transactions’—‘government policy generally does not drive revaluations, which can be volatile, fluctuating with domestic and global markets’ and ‘outside of the government’s control’. However, as the PBO emphasised, ‘some government policy decisions can directly lead to revaluations of assets on the balance sheet’, and transparency around such revaluations is ‘important’, to understand the costs and benefits of programs funded through alternative financing mechanisms and to inform the design of potential future programs.
In summary, the PBO therefore pointed to issues with current reporting practices in terms of the use of alternative financing mechanisms. While such mechanisms can have significant impacts on the fiscal position, ‘very limited information’ is provided in the budget documents about revaluation-related costs, making it ‘difficult to understand the balance sheet impact of policies using alternative financing arrangements when they are announced and to assess their performance over time’. In particular, ‘detailed disaggregated information’ on the costs of revaluations/‘Other economic flows’ is ‘not available in the budget documents’. As the Parliamentary Budget Officer observed, unlike direct financing, alternative financing often has ‘little or no impact on the most commonly quoted budget aggregates, particularly the underlying cash balance’, and while ‘financing activities in this way is not off-budget financing’ as the impact of such policies ‘will be reflected in the balance sheet’, this is ‘only as part of large totals, so the amounts can be obscured’. Distinctions are made between transactions and revaluations, and ‘the issue is that all the revaluations get bundled together in one very big line’. The underlying cash balance is the ‘metric by which the government’s fiscal position is frequently assessed in public commentary’. However, the underlying cash balance ‘should not be relied upon as the sole indicator of the fiscal position’, with the use of alternative financing mechanisms reinforcing the importance of ‘reviewing a range of budget indicators in order to form an assessment of the overall fiscal position’. As the Parliamentary Budget Officer noted, ‘there is, in fact, a lot of information in the budget papers, but … without information on the full financial impact of policies, particularly the impact on the government balance sheet, the reporting in the budget is simultaneously also too narrow’.
The PBO further emphasised that, while under current reporting practice some information on alternative financing mechanisms is available across different documents, it is ‘often hard to find, sometimes has different accounting requirements, and is not comprehensive’, and ‘multiple documents’ are required to ‘get a picture of the history and budget impact of a particular arrangement’. As the Parliamentary Budget Officer stated:
At the moment, someone who is trying to get their head around that … would have to … piece together things from the relevant portfolio’s annual report, the portfolio budget statement and the budget papers themselves. Often in the case of a government business entity you also have to piece it together from the corporate plan or the other forward looking documents of that entity itself. That, to be honest, makes it pretty hard. It’s not that the information doesn’t exist; it’s that the information is not put together in a way that helps people trying to understand these things.
The PBO noted that this ‘lack of transparency’ in reporting on alternative financing mechanisms presents a risk that decision making on the most appropriate funding arrangement for a given policy could be ‘influenced by its budget treatment and presentation’, and also makes it ‘more difficult for some significant elements of government spending to be scrutinised and effectively evaluated’:
In order to make informed decisions, parliamentarians need to have accurate and accessible information on the costs of both existing and potential policies … … …
If the use of alternative financing arrangements continues to grow without a change to reporting practices, a larger share of government spending would be difficult to scrutinise, which could pose risks to the Commonwealth Government’s fiscal position over the longer term.
As the Parliamentary Budget Officer concluded, ‘while straightforward decisions may not need complicated information to explain them, complex arrangements such as those that involve equity, loans or guarantees need other information to make them readily understandable’, and that information needs to be ‘more accessible’.
Current reporting practices for alternative financing mechanisms
The PBO and the Department of Finance (Finance) provided the Committee with information on current Australian Government reporting practices for equity injections, loans and guarantees, including where to locate such information.
For government expenditure to be classified as equity, it is necessary that the investment be expected to be recovered in real terms, by generating a return at least equal to the projected long-term inflation rate. If this criterion is not met, the expenditure would be classified as a grant. Equity injections are disclosed in the Annual Report financial statements of the portfolio entity that has policy responsibility. Government equity injections are also reported in Budget Paper No. 1 and the Mid-Year Economic and Fiscal Outlook (MYEFO). However, ‘when financial information is consolidated at the whole of government level, related equity transactions are netted out (eliminated), in the same way as other types of transactions between entities within government’—as the Finance website noted, ‘since the government has many millions of transactions each year, the financial statements provide a high-level summary of those financial transactions to present a concise overall picture of government finances. As a consequence, equity investments are not separately itemised’. Finance provides Public Governance, Performance and Accountability Act 2013 (PGPA Act) Resource Management Guidance to Commonwealth entities on accounting for the impact of government expenditure through equity injections on key budget aggregates.
For government expenditure to be classified as a loan there must be a contract requiring repayment and an expectation that payment consistent with the contractual terms will be received—a loan is concessional where the government provides more favourable loan terms than the borrower could obtain in the marketplace (typically, interest at less than the market rate). If there is no reasonable expectation a loan will be repaid, it is accounted for as if it were a grant. Loan programs are disclosed in the Annual Report financial statements of the portfolio entity that has policy responsibility, and information on major loan programs is also included in Budget Paper No. 1 and MYEFO. However, the Finance website noted that, ‘as the government’s financial statements provide a high-level summary of financial transactions, to present a concise overall picture of government finances, concessional loan programs are not separately itemised’. Finance provides PGPA Resource Management Guidance to Commonwealth entities on accounting for the impact of government expenditure through loans on key budget aggregates, and also on accounting for concessional loans.
The Australian Government issues both contractual and non-contractual guarantees. Guarantees are recognised as liabilities if they are reliably measurable and it is probable a payment will be made. Contractual and non-contractual guarantees recognised as liabilities have an impact on the fiscal balance, operating result, and net and gross debt, as well as the underlying cash balance, if paid. Guarantees that are not reliably measurable or probable to result in a payment are classified as contingent liabilities and disclosed in the relevant Commonwealth entity’s Annual Report financial statements. Contingent liabilities with a value of over $20 million in any one year or $50 million over the forward estimates are reported in the Budget Paper No. 1. Finance provides PGPA Resource Management Guidance to Commonwealth entities on accounting for guarantees.
Proposed improvements to reporting on alternative financing mechanisms
PBO Report 1/2020, Alternative Financing of Government Policies: Understanding the Fiscal Costs and Risks of Loans, Equity Injections and Guarantees, provided a central reference point to the Committee in its inquiry terms of reference. In the report, the PBO emphasised that, over time, the level of transparency provided in the Budget Papers has ‘evolved and improved’. Against this background, the PBO made suggestions to further increase transparency in reporting on the use of alternative financing mechanisms in government expenditure. The PBO identified areas where ‘specific elements of budget reporting … could be enhanced in order to support a better understanding of alternative financing arrangements by parliamentarians and the general public’. The benefit of greater transparency on this matter is the ‘potential for better decision making, and an improved ability for Parliament and civil society to scrutinise decisions already made’.
The PBO proposed possible enhancements to budget reporting on alternative financing mechanisms in government expenditure across the following three areas: expected financial impacts of new policies; expected financial impacts of ongoing programs; and existing and historical policy outcomes—see Table 2.1 for a summary of these proposals. An overview of the PBO’s proposed improvements is provided in Appendix C.
Table 2.1: Summary of PBO possible enhancements to budget reporting
The expected financial impacts of new policies
Measure descriptions could include:
for loans, the total expected size of the loan program; an estimate of the amount of debt that is not expected to be repaid; and detail on the terms of the loan
for equity injections, the full value of the equity injection; the expected rate of return at inception; the key assumptions underpinning the expected return on the equity injection; and the expected impact on fiscal aggregates, such as net financial worth
for all policies using alternative financing, the public debt interest associated with the measure.
The expected financial impacts of ongoing programs
When revaluations are expected or ‘known’, budget documents could include:
a detailed breakdown of forecast revaluations
the forecast effect of revaluations on net financial worth by policy area
forecast revaluations at a program level, where the expected revaluation is greater than $200 million over the forward estimates period.
To improve the transparency of the risks associated with government guarantees, the Statement of Risks could include a table showing the total potential exposure and expected value of exposure associated with each quantifiable government guarantee.
The outcomes of existing and historical policy
The Final Budget Outcome could include:
revaluations, separated into those for newly acquired financial assets and for existing financial assets
discussion of the drivers of revaluations, such as changes in market prices, exchange rates, and actuarial revaluations
a summary of all Commonwealth Government financial assets that have had cumulative equity injections of greater than $200 million. This should show the cumulative equity injected and the most recent fair value estimate of the entity.
Source: PBO Report 1/2020, p. 23.
Finance provided details of the locations, across multiple documents, of current reporting information relevant to the PBO proposals—see Box 2.1.
Box 2.1: Finance information regarding PBO proposals
Expected financial impacts of new policies
Measures are reported in Budget Paper No. 2 … and in the MYEFO … The measure descriptions disclose the full amount of proposed loan or equity funding and refer to relevant Ministerial press releases for further details (unless commercial-in-confidence). Where loans are concessional, the value of the concession … is included in the fiscal balance and Australian Accounting Standards (AAS) operating result impact … Any initial difference between equity funding amounts initially invested and the fair value of purchased equity is reflected in the fiscal balance impact … Further information can also be obtained from the relevant entity’s budget documentation, such as the Portfolio Budget Statement (PBS). Information on expected project returns is available in the annual corporate plans of Government Business Enterprises (GBEs). Costing conventions are that public debt interest is not allocated to specific measures … Details of borrowers, amounts loaned and interest rates on loans or loan programs with an outstanding balance of over $200 million are shown in the Budget Statement of Risks (Budget Paper No. 1).
Expected financial impacts of ongoing programs
In some circumstances, individual forecasts of revaluations of loans, equity and guarantees would be impracticable as these are influenced by a variety of factors, including valuation method and external market conditions, which are difficult to estimate. The Consolidated Financial Statements (CFS) provide details of actual revaluations for both the General Government Sector (GGS) and Australian Government … Further details are provided in entity financial statements … Guarantees that arise from contractual obligations are recognised as financial liabilities and expenses under Australian Accounting Standards Board (AASB) 9 and have a fiscal balance and AAS operating result impact; non-contractual guarantees which are probable and quantifiable are recognised as provisions at their expected value under AASB 137 … and have a fiscal balance and AAS operating result impact; and … non-contractual guarantees [which] are either not probable or are unquantifiable are disclosed as contingent liabilities under AASB 137 in entity financial statements and in the CFS. Material contingencies are disclosed in Budget Paper No. 1.
Existing and historical policy outcome assessments
The CFS provides details of actual revaluations for both the GGS and Australian Government. Explanation of significant balances and movements from the prior year are included in these notes as necessary. Note 9B Financial Instruments in the 2019-20 CFS also provides an analysis of the sensitivity of financial assets to revaluations due to movements in market parameters. AAS and the Australian Government’s accounting policies generally require newly acquired assets to be recognised at fair value, so these are not revalued. Under GFS, equity and loan revaluations are treated as Other Economic Flows and identified in the GGS sector operating statement (Budget Paper No. 1) where material: downward revaluations of loans are included in the AAS operating result, but not the fiscal balance; and revaluations of equity investments, apart from administered investments, are also included in the AAS operating result. Details of individual valuations of material loans and equity are included in the relevant entity Annual Report in the financial statements. Cumulative equity injections are shown in the Statement of Changes of Equity in GBE financial statements (Finance, Submission 2, pp. 9-11).
The PBO provided further information on the National Broadband Network (NBN) and the Higher Education Loan Program (HELP) with reference to its proposals for improved budget reporting on the expected financial impacts of ongoing programs (expected revaluation amounts), and Finance provided information on details of the locations, across multiple documents, of current reporting information relevant to these programs—see Box 2.2 on the NBN and Box 2.3 on HELP.
Box 2.2: NBN
The PBO pointed to the example of the NBN in terms of improving reporting on expected revaluation amounts. The PBO noted that the fair value of NBN Co has been ‘consistently below the cumulative amount of equity injected into the company’. The total equity invested in NBN Co is $29.5b and the most recent fair value estimate of NBN Co, as at 30 June 2019, was $8.7b. The $20.8b difference between the amount paid and the current fair value is a revaluation—with the PBO noting that this deterioration in the balance sheet as at 30 June 2019 is ‘not captured in the fiscal or underlying cash balances, though it is captured in net financial worth’. The main budget documents show ‘only the aggregated effect of all revaluations across the general government sector, rather than revaluations at an individual company or project level’, with the PBO having to compile this information from successive annual reports for the Department of Communications and the Arts, and NBN Co (PBO Report 2020/21, pp. 14-15).
Current locations of reporting information on the NBN: ‘Funding for the NBN was announced as a capital measure in the 2011-12 Budget—see Budget Paper No. 2. NBN’s valuation is reported annually in the financial statements contained within the Department of Infrastructure, Transport, Regional Development and Communications (DITRDC) Annual Report. Loan funding provided for NBN to complete the rollout was announced in the 2016-17 MYFEO. The extension of the loan was announced in the 2018-19 MYEFO. The loan balance is also published in the DITRDC annual financial statements (see DITRDC Annual Report) and information on the interest rate and term is outlined in the Budget Statement of Risks (Budget Paper No. 1). The 2019-20 DITRDC annual financial statements: show that at 30 June 2019, NBN was valued at $8.7 billion (DITRDC annual report), based on its net assets, against $29.5 billion in equity invested (NBN Annual Report)—revaluations are shown in aggregate in the Budget papers; show that the most recent NBN valuation of $13.8 billion was made on the basis of expected future cash flows (discounted cash flows); and provide a detailed explanation of the valuation method used to arrive at fair value. The estimated 2020-21 investment in NBN is shown in the DITRDC PBS’ (Finance, Submission 2, p. 12).
Box 2.3: HELP
The PBO also pointed to the example of HELP in terms of improving reporting on expected revaluation amounts. Under HELP, repayments are linked to each borrower’s income and only need to be repaid when the borrower earns above certain thresholds. The future earnings of borrowers differ, and some do not earn a sufficient income for a long enough time that the debt is repaid. A result of this policy feature is that ‘a substantial proportion of the new debt (around 16 per cent of new debt in 2018-19) is not expected to be repaid’. The debt not expected to be repaid is typically classified as a revaluation rather than a transaction in the budget documents. The full expected cost associated with issuing the loans is included in the budget forecast of net financial worth, but it is ‘not included in the budget forecasts of the fiscal or underlying cash balances’. The revaluation component of the cost to the Australian Government of the HELP loans not expected to be repaid for 2018-19 was expected to be around $1.2b. While this amount is incorporated into the fair value estimate of the HELP loan portfolio that is included in the budget documents’ forecast balance sheet, it is aggregated with other expected revaluations and is ‘not readily identifiable as a cost of HELP’ in current budget reporting. The PBO emphasised that ‘understanding the likely costs from revaluations of loan programs … would assist parliamentarians in weighing the benefits of the policy against the expected costs’ (PBO Report 1/2020, p. 15).
Current locations of reporting information on HELP: ‘the HELP accounting policy changed in the 2020-21 Budget and now includes the initial recognition of expected defaults on HELP loans in the fiscal balance. This has brought the accounting treatment for HELP loans in line with other Government concessional loans and improved Budget transparency. The estimated value of HELP loans is shown under the Advances paid line item in the Budget balance sheet (Budget Paper No. 1). The net cash outlay each year on HELP and other student loans, changes in the fair value of existing loans and indexation are also shown in the Budget as well as in the Department of Education, Skills and Employment’s (DESE) PBS. The fair value of HELP loans, key valuation assumptions made, fair value adjustments and interest revenue are disclosed in detail in the DESE 2019-20 Annual Report along with an analysis of HELP default rates compared to budget’ (Finance, Submission 2, p. 13).
Additional proposed improvements
The PBO outlined three areas where ‘additional, disaggregated information’ on the use of alternative financing mechanisms in government expenditure could be published, to ‘assist Parliament in scrutinising policy’:
forecast dividend and interest income, each of which are included only at the aggregate level in the Budget financial statements;
forecasts for the balance sheet item, Investment, Loans and Placements, the largest asset reported, which currently has almost no further breakdown in the Budget, but which includes much of the value of the Future Fund and other government funds; and
forecasts for the balance sheet item, Investments in Other Public Sector Entities, for which there is no further detail in the Budget but includes the Reserve Bank of Australia, the NBN and the Australian Rail Track Corporation.
ARTC—inland rail project
In its proposal concerning enhanced budget reporting on the expected financial impacts of new policies involving alternative financing mechanisms, the PBO saw merit in the measure description in Budget Paper No. 2 including the associated public debt interest—see Table 2.1. The PBO pointed to the inland rail project, managed by Australian Rail Track Corporation (ARTC) through an Australian Government equity injection, as an example of the application of the accounting standards in this matter, where the assessment of the ‘threshold test’ is made at the level of the entity rather than the project. ARTC as an entity is expected to deliver a positive real rate of return, in aggregate, in respect of its assets. However, the PBO noted that ‘it is not clear … whether the inland rail project itself would be expected to meet the government’s stated criteria for an equity investment’. The business case for the project noted that inland rail would ‘not generate enough revenue to provide a return on its full construction cost’, with this information suggesting that, ‘as a consequence of the policy decision to provide an equity injection into ARTC to build inland rail, the value of the Corporation may be revalued downward at some point in the future’. Such a revaluation would ‘deteriorate’ the government’s fiscal position ‘but was not mentioned in the measure description for the inland rail project at the time of the decision and under current budget reporting practice would not be reported in a disaggregated form in the event that it occurred’.
The PBO was asked, with reference to the inland rail project, whether it might be appropriate for financial reporting to occur at the project level rather than solely at the entity level. The PBO noted that the ARTC is subject to the financial reporting requirements specified in the Corporations Act 2001, which ‘do not require an entity to include project-level financial reports, such as for the inland rail project’. While ‘many corporations do … elect to provide information (financial and other) beyond that required by the relevant Australian Accounting Standards’, the nature of the business ‘may mean that it is not possible to accurately separate the various projects from each other’. However, as the inland rail project has been funded through government equity injections, the PBO noted that ‘there is scope for government budget estimates reporting to provide more transparency on planned or forecast equity injections into particular projects, such as inland rail’. The government has announced an amount for total equity injections into the inland rail project, with these equity cash flows being included under ‘Cash flows from investments in financial assets for policy purposes’ in Budget Paper No. 1. However, ‘this item is published in aggregate only, so it is not possible to determine the yearly profile of the equity funding for inland rail incorporated into the Budget’. The forecast cash flows are also included in the PBS for DITRDC—however, the inland rail equity financing component of the cash flows is ‘not separately identified’. The PBO emphasised that, if its proposed improvements to budget reporting (as set out in PBO Report 1/2020) had been in place for the equity provided to inland rail, ‘the following items would have been published in the subsequent budget update’:
the full value of the equity injection, expected rate of return at inception, the key assumptions underpinning that expected return, and the expected impact on fiscal aggregates such as net financial worth.
If the injection were then revalued, the Final Budget Outcome could include this in a table of revaluations, separated into those for newly acquired financial assets and those for existing financial assets. There would also have been a discussion of the drivers of revaluations, along with a summary of all Commonwealth Government financial assets that have had cumulative equity injections of greater than $200 million, which would show the cumulative equity injected and the most recent fair value estimate of the entity.
The Parliamentary Budget Officer provided further information about the threshold test, explaining that it is based on classification standards ‘driven out of government finance statistics requirements and Australian Bureau of Statistics frameworks’, which are in turn derived from international frameworks through the Australian Accounting Standards Board—‘it is … a low threshold—it is simply that you have an expectation of a positive return; and there is a level of interpretation around that. Given that the business case for the inland rail project noted that it ‘would not generate enough revenue to provide a return on its full construction cost’, there was also interest in the budget treatment of investment in such a project—whether this might be treated as grants rather than equity injections. The Parliamentary Budget Officer explained that, as the investment is into the entity, the ARTC, ‘the test is being applied at that level rather than at the individual project level in that particular case … the reason why the payment that is associated with the construction of inland rail is treated that way is because it’s actually a payment to the entity.
Implementation of PBO proposals
The Parliamentary Budget Officer confirmed that Australian Accounting Standards (AAS) and other relevant compliance frameworks provide sufficient flexibility for the improvements to budget reporting proposed in PBO Report 1/2020:
Accounting standards say how you treat things and how you aggregate things, so they give you the framework by which you are able to present your financial information in a way that meets a set of standards that’s consistent across jurisdictions … So they absolutely do not prohibit further disclosures, which is the kind of thing we’re talking about. They do not, for example, tell you what can be in a portfolio budget statements. They do not tell you what can be in Budget Paper No. 2, the measures document … accounting standards inform the numbers that go into those documents. The choices that we’re pointing to are choices of disclosure rather than choices of, for example, avoiding accounting standards or stepping around them. Accounting standards, and GFS as well, are not the issue. The issue is choices about disclosure.
The Parliamentary Budget Officer stated that ‘one way’ to think about the PBO proposals is that they are about ‘putting in place some principles and expectations that the parliament would look to future governments and future budget papers … to meet. It is setting a standard’. As the Parliamentary Budget Officer further observed: ‘something that simply walks you through from an opening balance to a closing balance, that shows you revenue, revaluations, expenses and transfers, is perfectly appropriate and very useful, and it ought to be possible to put it together in one place’. In terms of the implementation timing of these proposed improvements to budget reporting, the PBO noted that it is ‘not in a position to assess the practicality of the timing of publication of this additional information in budget papers. In the event that this additional information needed to be provided in a supplementary document at a later date, there would still be considerable value in publishing it’.
The Parliamentary Budget Officer pointed to reporting on funds managed by the Future Fund as reflecting its proposed improvements to reporting:
While you won’t necessarily see a lot of the detail in the budget papers, there is in fact—and there has been for quite a while—in the budget related papers … in the portfolio budget statement for the Department of Finance, a very useful series of tables that do exactly what we’re suggesting … They show what’s happening to those funds [managed by the Future Fund], from an opening balance to a closing balance. They occur in the portfolio budget statements. People know where to find them if they want to find them.
The PBO emphasised that other projects and programs, such as the equity and loan funding for the NBN, or the financial flows related to HELP loans, ‘may be candidates for budget reporting in a manner analogous to that used for the Disability Care Australia Fund’—a table in the Finance PBS provides a detailed reconciliation of planned and/or forecast financial stocks and flows. The PBO confirmed that, ‘other than for security and commercial-in-confidence considerations’, it ‘does not see any barrier to presenting similar financial information for all programs funded through alternative financing mechanisms’. For items that the Parliament considers significant, ‘program and project level forecasts, estimates and outcomes would ideally be provided on an ongoing basis, as the programs and projects evolve. This would be at least annual, and not only at the time of initial consideration’.
The PBO were asked if further detail would be required on its proposals to enable them to be implemented, and whether the additional information sought through its proposals would be readily available. The Parliamentary Budget Officer confirmed, on the PBO proposals regarding the expected financial impacts of new policies (loans):
I would expect that people in government would have a clear idea about what was involved in that, and I would hope it would simply be a question of setting it out as a set of expectations to be followed on a consistent basis … while from time to time individual things might be disclosed with more detail, at other points in time they might be disclosed with less detail. It’s about making it consistent, and it’s about having an expectation that a consistent level of information is provided … … … my experience has been that it is normal for people who have worked through these things to have that sort of information available to them, because they need that sort of information to provide a sense of how the program would work and what its implications are.
The PBO further confirmed:
on the PBO proposals regarding the expected financial impacts of new policies (associated public debt interest costs):
this information is available and would be underlying the costings that cabinet would be considering, so implementing the change is straightforward. It’s the PBO’s standard practice when we provide costings to parliamentarians.
on the PBO proposals regarding the expected financial impacts of ongoing programs (government guarantees):
the statement of risks is a very important document and a very valuable thing. This is … a fairly straightforward suggestion about bundling things together. The statement of risks already includes tables about loans, for example.
There was interest at the public hearing in how reporting on the impacts of government equity injections in projects such as inland rail might be improved and presented in a more user-friendly accessible form, noting the various ‘bits and pieces’ of information located in different reporting documents. Of particular interest was whether the various segments of ARTC might be reported on separately, with financial information disaggregated rather than aggregated, in order to provide visibility on how each major segment of the entity is performing. The Parliamentary Budget Officer observed that:
In the accounting perspective, the focus is on the entity, but … from a parliamentary perspective and a public interest perspective there is a desire to get more meaningful data, and that more meaningful data involves some level of disaggregation … that can be provided in various people’s annual reports; it can be provided in a variety of different places. The key thing here, if the committee were of a mind to do so, would be to articulate the key types of entities for which that level of disaggregation might reasonably be expected by the parliament … … … Again, there is nothing that would prevent any of that occurring … it is a question of articulating the desire for it and articulating why these things are important in such a way that it can be actioned by the parliament.
In terms of publishing more disaggregated information on the use of alternative financing mechanisms in government expenditure, the PBO stated that, while the Budget Papers provide ‘much information at an aggregate level, more detail is required when considering potential programs and assessing existing programs’:
The aggregate amounts presented in the Budget papers bring together the impacts of many different components. Given that these components exist in the underlying data, and that electronic publication does not limit the extent of possible publication, the PBO sees no impediment, other than security or commercial confidentiality, to publishing as much relevant, accessible information as possible where the methods of funding government policy are complex.
The PBO also emphasised that there can be valuation method distinctions between when an investment is in a capital-consuming establishment phase versus the methods that are used when an investment begins to establish more certain income flows:
Certainly NBN only recently changed—I think it was a year or two years ago; I can't remember exactly—to a discounted cash-flow basis, because it was a start-up and you really didn't have much sense about how this thing might work in detail over a period of time—how the cash flows would work. When you are choosing the valuation method, there's a strong need to have clarity before you use discounted cash flow, as it needs to be the preferable and more robust means of valuing something.
ANAO financial statements audits
The Australian National Audit Office (ANAO) included information on alternative financing mechanisms in its most recent financial statements audit for Commonwealth entities. The ANAO noted that the Australian Government reports on a number of fiscal aggregates including net operating balance and underlying cash—‘these aggregates exclude cash or accounting movements that are of an investment or financing nature’, such as government equity injections and concessional loans. The ANAO stated that, as these investments have elements of economic and social benefit in addition to providing commercial returns, ‘there may be some benefits in segregating the commercial and non-commercial portions of the investments to better reflect the implications on key fiscal aggregates’. On this point, the Auditor-General further explained that:
the question … we were raising was: if you know up-front that a particular investment is not going to be paid for itself in a commercial sense, then is that something that’s better placed above the line rather than below the line? It’s the same argument with respect to loans: when you know something isn’t going to be paid back, as a result of your policy position, should you expense that up-front rather than revaluing it away when it occurs?
In terms of equity injections, the majority of these investments are made in entities that provide a positive real return to the Commonwealth. However, the ANAO noted that, if the valuation of these entities deteriorates (for example, as a result of accumulating losses or the valuation of future cash flows associated with assets procured through equity injections being less than their purchase costs), ‘the deterioration in the position will be reflected in net worth but not impact on the underlying cash even if the deterioration was a predictable result of a non-commercial policy decision’. In terms of concessional loans, when HELP loans are issued they are recorded as an asset for accounting purposes at the amount the government expects to be repaid. The amount not expected to be repaid is classified under ‘Other economic flows’ (mainly revaluations), which are not included in the net operating balance and underlying cash. HELP loan amounts not expected to be repaid are therefore ‘not being reflected in the two key fiscal aggregates’. However, the Auditor-General stated: ‘I understand the framework’s changed to make that happen now’:
The issue that we’ve raised related to the fact that the policy design of those loans, because repayment was concessional, was dependent on incomes. So you didn’t have to repay it until you reached a certain income level. That meant that there was always a relatively well-known component of the loan that would never be repaid … We’ve raised whether the treatment of that previously as being a transaction which didn’t affect the fiscal balance was appropriate given that it was the effect of a fiscal policy … Finance has, I think, recently changed that policy so that the amount of the loan which is estimated not to be repaid is now treated as an expense above the line, which we think is of better representation. So that has improved.
Overall, the Auditor-General explained that ‘we’ve drawn a comparison between the accounting framework which exists for concessional loans … versus the framework for equity’:
the concessional loans framework says that the concession—that is, the non-commercial or the policy component of the loan—is the gap between the interest rate charged and what the borrower would have to get in a similar market circumstance. The parallel we have drawn is: Is there an equivalent thing where the government invests equity in an entity and its investment policy means it’s seeking a return on that equity which is lower than what the market would generally achieve in order to make the equity investment occur … If that is the policy cost of the government undertaking that expenditure rather than the private sector … should we treat that similar to concessional loans and basically expense that when the cash is paid? … So the question is, if it’s an active policy decision to achieve a lower than market rate of return, should that be above the line rather than below the line … [Auditor-General Report 25 (2020-21)] indicated that it may be worthwhile thinking how that could occur.
The Auditor-General further noted, in terms of investments in projects within an existing entity (such as the inland rail project in ARTC), that:
there are concepts in some corporate reporting which go to segmented reporting: rather than just reporting at an aggregate level for the entity, it’s broken up into business units, to give users a better understanding of the profitability of different parts of business units. There are things like that which could be considered in the context of where the parliament is interested in getting a stronger oversight of large projects within an existing entity or factors like that … [with] more segmented reporting at an entity level … parliament would get a clearer view with respect to particular investments.
The Committee commends the PBO on its work in conducting and publishing research that improves public understanding of the budget and fiscal policy settings.
Given the increasing use of alternative financing mechanisms in government expenditure and the issues identified by the PBO regarding current budget reporting on these matters, the Committee believes it is timely to improve Commonwealth reporting in this regard. The Committee supports implementation of all the PBO proposals in PBO Report 1/2020, Alternative Financing of Government Policies: Understanding the Fiscal Costs and Risks of Loans, Equity Injections and Guarantees, as well as the PBO’s proposals for ‘Additional disaggregated information’, as discussed in this JCPAA report. In Report 1/2020, the PBO emphasised that, over time, the level of transparency provided in the Budget Papers has ‘evolved and improved’. The Committee makes its recommendations against this background of continuous improvement.
Implementation of the PBO proposals will provide greater transparency around alternative financing arrangements, allow for greater parliamentary and public scrutiny, and thereby increase accountability to the Parliament and the Australian public. The Committee emphasises that the additional information provided should be easily accessible, generally available in the one document and published on an ongoing, consistent basis. Through its recommendations on this matter, the Committee therefore seeks to establish a range of principles and expectations that the Parliament would look to future governments and future Budget Papers to meet—as the Parliamentary Budget Officer stated, it is establishing ‘a standard’ and ‘a set of expectations’—‘something that simply walks you through from an opening balance to a closing balance, that shows you revenue, revaluations, expenses and transfers, is perfectly appropriate and very useful, and it ought to be possible to put it together in one place’.
In terms of implementation of the proposals in PBO Report 1/2020, the Committee notes the Parliamentary Budget Officer’s confirmation that Australian Accounting Standards and other relevant compliance frameworks provide sufficient flexibility for these improvements to budget reporting. The Committee also notes the advice of the Parliamentary Budget Officer on the straightforward implementation of many of these proposals. In terms of publishing additional disaggregated information, the PBO similarly advised that the aggregate amounts presented in the Budget Papers bring together the impacts of many different components—‘given that these components exist in the underlying data, and that electronic publication does not limit the extent of possible publication’, the PBO sees ‘no impediment, other than security or commercial confidentiality, to publishing as much relevant, accessible information as possible where the methods of funding government policy are complex’. The Parliamentary Budget Officer also pointed to reporting on funds managed by the Future Fund as reflecting its proposed improvements to reporting—in particular, in a series of tables in the Finance PBS. The PBO advised that similar financial information for all programs funded through alternative financing mechanisms could be presented ‘in a manner analogous to that used for the Disability Care Australia Fund’, with a table in the Finance providing a detailed reconciliation of planned and/or forecast financial stocks and flows.
The Committee recommends that the Minister for Finance:
consider changes to improve transparency for equity investments, consistent with the proposed improvements to budget reporting as summarised in Table 4 of Parliamentary Budget Office, Report 1/2020, Alternative Financing of Government Policies: Understanding the Fiscal Costs and Risks of Loans, Equity Injections and Guarantees, and the ‘Additional proposed improvements’ to reporting set out in paragraph 2.20 of the Committee’s report
each of these proposed changes, including how transparency could be improved in relation to equity investments subject to differing valuation methods (i.e. those in an establishment phase and those that have emerging cash flows)
how the additional information provided would meet the principles of accessibility, availability in the one document and publication on an ongoing, consistent basis, as programs and projects evolve (on an annual basis and not only at the time of initial consideration)
any impediments to implementation, and how any new reporting arrangements could be matured over time.
The Committee recommends that the Minister for Finance report back on the Finance Portfolio Budget Statement (PBS) reporting of funds managed by the Future Fund. This should include:
Finance PBS reporting on the Disability Care Australia Fund
how a similar series of tables could be implemented for the Parliamentary Budget Office proposals in Report 1/2020 and the ‘Additional proposed improvements’ to reporting set out in the relevant section of the Committee’s report, including disaggregation from major projects, loans or equity investments
how these tables would provide a detailed reconciliation of planned and/or forecast financial stocks and flows for other projects and programs, such as the equity and loan funding for the NBN and the financial flows related to HELP loans.
The Committee requests that the proposed changes and advice be provided to the JCPAA to facilitate consultation with the PBO, the ANAO and other relevant stakeholders.
Lucy Wicks MP
25 March 2022