The Joint Committee of Public Accounts and Audit’s inquiry into Commonwealth infrastructure spending was based on Auditor-General’s reports: No. 14 (2015–16) Approval and Administration of Commonwealth Funding for the East West Link Project; and No. 38 (2016–17) The Approval and Administration of Commonwealth Funding for the WestConnex Project.
Advice to Ministers on funding
The Committee noted the importance of the assessment processes undertaken by Infrastructure Australia (IA) and that the Government’s decision to depart from a full IA assessment of the East West Link and WestConnex projects reduced the evidence bases for decision making. Full business cases were not considered before funding was allocated and documents relevant to administrative activities were unavailable at key points in time. The Committee concluded that this approach is best avoided given the scale of public funding and the risks involved in infrastructure projects.
The Committee was pleased to note that the Department of Infrastructure and Regional Development’s (DIRD) advice to the Government in the lead up to funding decisions did advise of incomplete documentation, assessments, matching payments to funding needs and risks of advance payments, but was concerned that subsequent advice failed to provide an assessment of compliance with land transport legislation. The Committee recommended that for future projects DIRD provide clear advice that legislative requirements have or have not been met, or cannot be assessed.
The Committee noted the importance of having detailed project assessment information available when specifying projects and conditions in approval instruments. The instruments define the purposes for which funding may be used. The Committee recommended that DIRD review its approach to drafting instruments to identify relevant risks and develop a generic form of conditions for addressing these risks in future instruments.
The Committee noted the ANAO’s finding that payment of $2 billion were made to State Governments in June 2014 in advance of project needs for ‘budget presentation benefits to the Government by bringing forward the payments which resulted in a larger budget deficit for 2013–14’. These payments resulted in extra interest costs to the taxpayer of around $70 million (as at the completion of the audits in October 2015 and November 2016).
The committee noted that such advance payments are undesirable and recommended that significant payments only be made when required by projects according to agreed milestones. The Committee also recommended that departments specify any additional interest charges arising from additional Commonwealth borrowing in advice to Ministers.
The Committee was concerned about the lack of consideration DIRD gave to a range of issues relevant to developing a concessional loan for the WestConnex project and the resulting deficiencies in advice to Ministers. In particular, the Committee noted that DIRD’s advice:
was provided before it had obtained the financing strategy document for the WestConnex project. The Committee recommended that requests by project proponents be required to identify alternative funding strategies and justify why a Commonwealth loan would be the most effective, efficient and economical option;
was overly optimistic about the loan’s capacity to accelerate the project, having insufficient regard to project delivery risks; and
did not: seek agreement to key negotiation parameters; identify, and articulate the value of, the different elements of the concession; or address some relevant risks. However, the Committee noted that DIRD effectively considered and managed the risk of the loan not being repaid.
The Committee was also concerned that DIRD agreed key terms and conditions of the loan quite soon after the funding decision and, with one exception, in advance of engaging advisors. This, in the Committee's view, therefore limited its capacity to identify risks and negotiate favourable terms, including terms concerning the elements of the concession, particularly having regard to DIRD’s lack of experience or familiarity with concessional loans.
The Committee stressed the importance of DIRD developing a stronger basis for considering and negotiating future loans and has recommended that the Auditor-General consider an audit of whether WestConnex learnings have been applied to a subsequent loan made to the Sunshine Coast Airport expansion project.
Project monitoring and recouping unspent funds
The Committee noted that DIRD did not effectively manage milestones for the WestConnex project. Most notable were the Australian National Audit Office’s (ANAO’s) findings that milestones were agreed to after the respective event had already occurred or were amended shortly before the payment was due to be made where NSW had not met the milestone.
The Committee recognised that new information could decrease the relevance of established milestones and necessitate changes, but noted that reducing what is delivered and retaining the existing payment date could: weaken future incentives for funding recipients to meet agreed milestones; and heighten the Commonwealth’s risk exposure, if payments are made too far in advance of need and what has been delivered. The Committee considered that DIRD should identify a strong rationale for any changes and clearly record any new information and relevant considerations.
DIRD’s monitoring of milestones and tracking of expenditure is managed through its Infrastructure Management System (IMS). The Committee considered there is a need for improvements to that system and recommended that DIRD review the operation of the IMS and related processes in three areas: recording additional information about the reasons for milestone payments and revisions; improving the quality of data submissions, including controls and data validation approaches; and capturing project delivery expenditure.
The inquiry also examined how well current agreements and legislation support the recovery of unspent funding and noted that the written agreements used are not legally binding if recoupment of funding becomes necessary. However, the Committee noted that section 20 of the Federal Financial Relations Act 2009 (FFR Act) provides a legal avenue for payments to be recovered where a condition of funding has not been met.
The Committee noted that funding conditions are imposed by project approval instruments made under the land transport legislation and that fully articulated conditions would be of paramount importance if a dispute was to arise and the Commonwealth sought to recover payments. In this regard, the Committed pointed to its earlier comments and recommendation relating to the drafting of instruments. The Committee also recommended that the Department of the Treasury review the operation of section 20 of the FFR Act, including the discretion applied to recover funding as well as the current inability to recover interest earned on unspent payments.