3.1
This chapter discusses the Department of Infrastructure and Regional Development’s (DIRD’s) approach to monitoring and managing payments for the WestConnex project as well as the adequacy of the framework in place to recoup unspent funding for the East West Link project. including:
Committee conclusions and recommendations
Committee conclusions and recommendations
Managing milestones and tracking expenditure
3.2
Effective management of project milestones is of significant importance when the Commonwealth commits funding to infrastructure projects, acting as a control to ‘… ensure that Government funding is provided as it is needed; for purposes which it was intended; and to encourage timely delivery.’
3.3
The Committee notes that DIRD did not effectively manage milestones for the WestConnex project. Most notable were the 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.
3.4
DIRD’s advice to the Committee centred on the extent to which it needed to change milestones as it received additional project design and progress information. The Committee recognises that new information can decrease the relevance of established milestones and necessitate changes. However, in such circumstances, the minimum expectation would be that DIRD clearly record any new information, relevant considerations and the rationale for milestone changes.
3.5
The Committee considers that DIRD should identify a strong rationale if it intends to approve a request for changing a milestone with the effect of reducing what is delivered and retaining the existing payment date. Such actions can weaken future incentives for funding recipients to meet agreed milestones. Similarly, in the event of a project encountering insurmountable problems, the Commonwealth’s exposure is heightened if payments are made too far in advance of need and what has been delivered.
3.6
The Committee also notes evidence provided by the ANAO in relation to the WestConnex project that ‘there was no point at which their [NSW] expenditure was ahead of the Commonwealth’s milestone payments’.
3.7
A related issue raised in the inquiry was the capacity of DIRD to monitor milestones and track expenditure. The Committee notes that DIRD’s monitoring of milestones and tracking of expenditure is managed through its Infrastructure Management System (IMS) and the need for improvements to that system.
3.8
The Committee notes DIRD’s advice that it is seeking to improve milestone information in the IMS through recording discussions with funding recipients and changes to milestones over time. Improvements in this area would provide greater transparency about the matters considered by the department when reviewing milestones.
3.9
The Committee considers that a broad issue for DIRD is whether its current data collection approach enables it to be confident in the quality of the data received from funding recipients in the IMS. The ANAO’s identification of logical inconsistencies in the cumulative expenditure data contained in the IMS for the WestConnex project suggests that attention needs to be focused on improving the quality of the data. As with all such systems, the integrity of the data is only as good as any controls that prevent users from submitting erroneous data and any periodic reviews of the data’s quality. The Committee agrees with the ANAO’s suggestion that greater attention needs to be given to validating project expenditure reported by funding recipients in the IMS. Maintaining accurate data on project progress, including expenditure, is a prerequisite for effective monitoring by DIRD including, for example, when assessing the need for funding in response to requests for changes to milestone payments.
3.10
The Committee was also interested to note the ANAO’s advice that the reporting of expenditure usually reflects the amount of Commonwealth funding passed on to states/territories and paid on to their related agencies. The Committee notes the evidence provided by the ANAO that ‘what is meant by ‘the money spent’ is something which also needs some clarity to understand whether it has really been spent.’
3.11
The practical result of this is that when very significant sums of public money are publicly reported to the Commonwealth Parliament as having been ‘spent’ it does not necessarily mean that any actual works have been undertaken, or that transport or economic stimulus objectives have been achieved.
3.12
There is significant room for improvements in reporting so that the Parliament is able to look at expenditure figures with confidence and know whether construction has actually occurred. It would be timely for DIRD to examine how IMS reporting can capture more useful data on the amount of funding expended on project works by the entity that ultimately delivers the project rather than intermediaries.
3.13
The Committee recommends that the Department of Infrastructure and Regional Development undertake a review of the Infrastructure Management System to identify ways in which to:
record additional information about the reasons for milestone payments and revisions;
improve the quality of data submissions, including controls and data validation approaches; and
capture information on incremental and cumulative project expenditure by the entities responsible for delivering projects.
Recoupment of unspent funding and interest
3.14
Aside from monitoring, the inquiry also examined how well current agreements and legislation support the recovery of funding when an infrastructure project underspends, does not deliver on funding conditions or is cancelled.
3.15
The Committee notes that written agreements are often established between the Commonwealth and states/territories when National Partnership payments are to be made to infrastructure projects. These agreements set out the intent of the parties and may define what should occur when funding remains unspent—as was the case with the East West Link project. They are not, however, legally binding if recoupment of funding becomes necessary.
3.16
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. A key issue is therefore to identify the mechanism that imposes funding conditions. In the case of the cancellation of the East West Link project by the Victorian Government, legal advice indicated that a funding condition—requiring the Commonwealth’s funding contribution to be spent on the project—was imposed by a project approval instrument made under land transport legislation.
3.17
The Committee points to its comments in Chapter 2, with regard to the general undesirability of advance payments, and the level of detail included in instruments, including its recommendation about assessing risks and developing generic terms and conditions. Fully articulated conditions would be of paramount importance if a dispute was to arise and the Commonwealth sought to recover payments.
3.18
The Committee has identified two areas in which it would be timely for the Department of the Treasury (the Treasury) to conduct a review of the FFR Act as it relates to the recovery of infrastructure funding:
the ability to recover interest earned on unspent funding. For example, in the case of the cancelled East West Link project, DIRD advised the Committee that the Victorian Government earned approximately $77 million in interest on advance payments for the East West Link project between June 2014 and December 2016. At present, the FFR Act limits the Commonwealth’s recoupment power to the value of the payments that were made under the Act, it does not allow for recovery of such interest.
the discretion, as opposed to obligation, the Minister has under the FFR Act to seek repayment of funding if conditions are not met, such as when a project is cancelled. The present arrangements allow scope for the parties to negotiate on redirecting funding to other projects. Expressly requiring the return of unspent funding in legislation may encourage funding recipients to complete existing projects rather than look for less developed alternatives. It would also allow decisions about whether to fund alternative projects to be made on their own merits rather than in the context of a state or territory provisionally holding on to funding that remains unspent and is accumulating interest.
3.19
The Committee considers that significant issues of this nature are much less likely to arise if projects are only funded following full consideration of business cases by Infrastructure Australia; payments are not made in advance of project needs; and agreed milestones are used as the basis for payments.
3.20
The Committee recommends that the Department of the Treasury review the operation of section 20 of the Federal Financial Relations Act 2009, including the discretion applied to recover funding allocated in the future in the case of underspends, unfulfilled project conditions or project cancellation, as well as the current inability to recover interest earned on unspent National Partnership payments.
Review of evidence
3.21
This section reviews the evidence received by the Committee regarding DIRD’s administration of infrastructure payments and the capacity to recover funding, including:
Management of milestones for WestConnex project
Tracking of delivery expenditure
Recoupment of unspent funding and interest
Implementation of ANAO recommendations
Management of milestones for WestConnex project
3.22
Of the two infrastructure projects audited by the ANAO, payments against milestones were made for the WestConnex project, but not the East West Link project, which was cancelled at an early stage of its development. DIRD’s payments to the NSW Government for the WestConnex project consisted of:
an advance payment of $500 million made in June 2014 (consistent with the Government’s decision); and
three milestone payments:
$250 million paid in June 2015;
$450 million paid in June 2016; and
$300 million paid in November 2016.
Establishing WestConnex milestones
3.23
The administrative arrangements supporting the development and management of milestones are specified in the National Partnership Agreement on Land Transport Infrastructure (NPA) and DIRD’s corresponding Notes on Administration, which:
… set out the obligations and administrative processes that funding recipients must follow to claim payments, seek variations to project approvals and comply with the terms and conditions of approved funding. A key component of these arrangements is the submission of a ‘project proposal report’ (PPR) to DIRD by project proponents.
3.24
The PPR is the means through which payments and associated milestone achievements are proposed by funding recipients. The Notes on Administration explain that DIRD’s role is to review the proposed schedule of milestones and discuss changes with the funding recipient, before milestones are confirmed in writing and entered into DIRD’s IMS. The usual process is therefore for milestones to be agreed at the outset of a project.
3.25
NSW did not submit a PPR for the WestConnex project ahead of the Commonwealth’s $500 million advance payment in June 2014, such that a milestone schedule for the project was not proposed and agreed at this time. The ANAO reports on evidence suggesting that NSW had not anticipated receiving funding so soon, including:
a letter from the NSW Treasurer to the Assistant Minister for Infrastructure in April 2014 stating that NSW did not require a funding contribution until the following financial year (2014–15); and
NSW advising DIRD in early to mid-2014 that a PPR would not be available until early 2015.
3.26
The ability to monitor advance payments in the absence of such milestones was raised in the public hearing, with the Deputy Secretary, DIRD advising the Committee that:
I do not truly think that advance payments cannot be monitored. Obviously there are financial checks and audits that are undertaken in that regard …
3.27
The focus for such checks and audits would normally be to identify if the funding has been used for the purposes for which it was intended. In the absence of any specific agreement on the uses of funding, such checks could only have a broad focus on whether the money provided by the Commonwealth was spent on project delivery. Any detailed outcomes sought would need to be contained in a PPR, including project milestones.
3.28
Importantly, in August 2014, shortly after the advance payment was made, DIRD advised NSW that additional payments would not be made until an acceptable PPR had been agreed. NSW worked with DIRD from February to May 2015 to develop the PPR, and the ANAO’s assessment was that DIRD took steps to verify cost estimation, query inconsistencies and obtain relevant details. The PPR was eventually approved on 11 June 2015.
3.29
With specific regard to the development of milestones, the ANAO’s audit explains that DIRD provided advice to its Minister on 1 June 2015, which supported the approval of the PPR and an attached agreed milestone schedule. In its submission DIRD noted that the advice:
… clearly stated that these milestones were “subject to change based on project progress and will be assessed and possibly renegotiated between the Australian and NSW governments when separate PPRs are submitted for future phases”.
Managing WestConnex milestones and payments
3.30
The effectiveness with which DIRD manages infrastructure milestones was of considerable interest to the Committee during the public hearing. In relation to its administrative approach to milestones, DIRD advised the Committee that:
its general and preferred process is that milestones are first identified and then ‘… we pay subsequently against those milestones having been achieved’;
in managing milestones, ‘… generally project reports come in and we assess against the project report and move forward in that regard’;
it has regular discussions with state colleagues and that if ‘adjustments that need to be made to the premise of the projects—either because the project will not be completed because it needs more money, or it has cost overruns, or because they have underspends—we make adjustments by agreement …’;
the ‘Department would decline to make a milestone payment when agreed activities to accomplish that milestone have not been met. A milestone payment is approved or declined based on the achievement of agreed activities’; and
if money has already been expended in relation to a milestone ‘… varying that milestone does not change our responsibility in relation to having to make that payment’.
3.31
DIRD’s evidence at the public hearing also emphasised that milestones evolve throughout a project as more information becomes available:
The amount of detail in relation to milestones evolves as the project continues, and the amount of information available in relation to a project is actually where we learn more about exactly where something is going to proceed, what its construction time frame is and, therefore, what the milestones should be in relation to payment. Also, progress in relation to weather, for example, or the availability of construction firms et cetera will vary milestones, but it is still the preference that milestone-based payments are achieved where possible.
3.32
Of interest to the Committee in the public hearing was the latitude that DIRD provides to funding recipients when agreeing to revise milestones. In this regard, a key issue was whether changes made to WestConnex milestones reflected:
the provision of additional information and DIRD’s improved understanding of a project; or conversely
DIRD’s prioritisation of the payment schedule, such that unmet milestones were revised to allow payments to proceed.
3.33
The ANAO’s audit report took the latter view, noting that:
… in order not to delay payments, milestones were agreed to after the respective event had already occurred or amended shortly before the payment was due to be made where NSW had not met the milestone.
3.34
The evidence compiled by the ANAO to support its conclusion is summarised in Table 3.1.
Table 3.1: The ANAO’s analysis of milestone payments
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1
$250m
June 2015
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This milestone payment was approved at the same time as the milestone schedule (in June 2015).
With one exception, the milestone events for the first payment were agreed by DIRD and NSW in retrospect. Five milestone events were agreed on 11 May 2015, at which time four (for such things as obtaining planning approvals and progress in procuring contractors) had occurred between October 2014 and January 2015. The remaining milestone (close of tenders for the New M5: stage two of the project) occurred on 19 May 2015, one week after the schedule was agreed.
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2
$450m
June 2016
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The NSW Government approved an updated business case in November 2015, with substantial changes to project scope and cost. DIRD did not require an updated PPR or milestones at this time.
DIRD and NSW agreed changes to the milestone schedule in May 2016, with reduced requirements for the second milestone payment. These included: removal of a milestone requiring completion of environmental studies and documentation; and a downgrading of a milestone requiring the ‘Duck River Bridge’ to be completed and opened to traffic to the lesser requirement of: completion of bridge design and the installation of eight major girders.
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3
$300m
November 2016
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In October 2016, NSW advised DIRD that the remaining milestones for 2016–17 had been met, but the milestones reported by NSW differed from those approved in June 2015. The reported milestones indicated that the original 2016–17 milestones had not been met.
$120 million was provided ahead of the milestone schedule dates and an amount equivalent to the milestone payment ($319.4 million) remained unspent by NSW at the time of the payment.
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3.35
In its submission, DIRD disagreed with the ANAO’s assessment, arguing that:
WestConnex milestones were based on agreed activities and reflected key deliverables associated with the project’s critical path. Milestone changes from the initial Project Proposal Report (PPR) reflected design refinements as the project developed that were requested by the NSW Government as necessary to deliver the project in the most effective and efficient way.
3.36
At the public hearing, the ANAO disputed DIRD’s characterisation of the changes, noting:
… the evidence is pretty clear that this is an instance where it was not that the project scope was being refined, enhanced or developed as we went along. Having looked at … [DIRD’s] submission to the committee, we went back and looked through the detailed evidence of the records …, and it clearly shows that the correspondence from the department to the state was saying: ‘You haven't achieved what you were going to achieve by this date, but what have you done?’ And the milestones were then changed to what had been done so that a payment could still proceed. That was a process initiated by the Commonwealth to allow payments to proceed, rather than the state saying that there has been a change in our project, which means we need to change what the milestone is about.
3.37
An issue to be considered in changes to milestones is whether a project actually needs funding at the point of a change request. As was seen in Chapter 2, DIRD provided sound advice to the government about the initial profiling of payments to meet project needs, before the commencement of WestConnex—and East West Link. Such considerations remain relevant when changes to milestones are sought. At the public hearing, the ANAO noted that:
… there was no point at which … [NSW’s project] expenditure was ahead of the Commonwealth’s milestone payments, bearing in mind that the Commonwealth is not solely funding this project.
3.38
In terms of areas for future improvement, DIRD informed the Committee that:
… we are certainly looking at how we can better manage the information in our systems with regard to milestones and recording the discussions around the relevant points affecting milestones so that all those considerations are clearly in the system and we can track them more effectively as they change over time as well. The current system is a very old system and it is very difficult to do that at the moment, so we want to improve those aspects of it.
Tracking of delivery expenditure
3.39
In addition to improving the recording of milestone discussions and variations, the degree to which funding recipients provide useful reporting to government, and ultimately the Parliament, on project delivery expenditure was discussed at the public hearing.
3.40
Funding recipients report expenditure on a monthly basis through DIRD’s IMS. The ANAO provided evidence at the hearing indicating that current reporting usually reflects the flow of funding to recipients rather than expenditure on delivery activities:
… the Commonwealth treasury pays the state treasuries and then there will be a state infrastructure, land transport and roads agency but the actual delivery entity will often be someone other than that, as it is with WestConnex. So the money may go from the Commonwealth treasury to the state treasury and the state treasury may pay it on. That is usually what is reported to the Commonwealth as being the money spent, but that money may still be sitting with the state delivery agency and it has not actually been spent on actual work.
3.41
In the case of the WestConnex project, expenditure is reported by the NSW Government agency Roads and Maritime Services (RMS), rather than the entity responsible for project delivery—the Sydney Motorway Corporation Pty Limited (SMC). DIRD advised the ANAO that this approach is consistent with all other NSW road projects funded under the Australian Government’s Infrastructure Investment Programme. The ANAO’s audit report notes that this reporting approach:
… decreases the visibility DIRD has over incremental expenditure of the Australian Government grant funding, as spending by RMS relates to the passing on of grant payments in full to SMC as equity injections rather than reflecting expenditure by SMC on delivering WestConnex.
3.42
DIRD provided a comment in the audit report disagreeing with the ANAO’s assessment of decreased visibility.
3.43
The ANAO’s audit report identifies a specific problem with the quality of the WestConnex data in the IMS. It found that the data showed a 26 per cent decrease in the cumulative expenditure of Australian Government funding in October 2016, which, at face value, would suggest that Commonwealth funding had been spent on the project and then was, somehow, unspent.
3.44
DIRD advised the ANAO that it raised this issue with the NSW Government who indicated that it had incorrectly attributed expenditure between the state and the Commonwealth. However, after the data was corrected, the respective changes in the cumulative expenditure of NSW and Commonwealth funding were not proportional with each other and the data showed that total cumulative expenditure of funding from all sources had decreased. The ANAO’s audit report therefore observed that:
This situation highlights the need for DIRD to review the process it employs for the collection and validation of reported expenditure by project proponents. It is important that DIRD is able to rely on the information it collects through IMS. The ANAO notes that the risk of inaccurate information is increased in situations where DIRD is relying on information from secondary sources (such as the information being reported by SMC to RMS, then from RMS to DIRD).
3.45
In this regard, a September 2016 draft DIRD Internal Audit report ‘… highlighted the unreliability of the information stored within IMS …’ and made improvement suggestions. The suggestions included that a functional review be undertaken and that the risks associated with the system using a combination of automated and manual processes be assessed. The ANAO noted the draft report and suggested that the review also consider the validation of expenditure reporting by funding recipients.
Recoupment of unspent funding and interest
3.46
One of the outcomes that may result from the tracking of project expenditure is the identification of unspent funding. This may occur due to savings made in comparison to a project’s budget or if all or part of a project is not completed. In these circumstances, the Commonwealth can seek the return of unspent funding but may need to seek enforcement using available provisions of agreements or legislation.
3.47
The mechanisms available for the recovery of unspent funding came into focus in February 2015, when the Victorian Government notified the Commonwealth that the East West Link project was to be cancelled. At this time, no part of the $1.5 billion advance payment made by the Commonwealth to Victoria had been spent.
3.48
At the time of cancellation, there were two agreements in place relating to the East West Link project: the National Partnership Agreement on Land Transport Infrastructure Projects (NPA) and a Memorandum of Understanding (MoU).
3.49
The NPA is an overarching agreement between the Commonwealth and all states and territories, which sets out general objectives and specific responsibilities applying to any National Partnership payments that the Commonwealth may make (such as those relating to the East West Link Project). The MoU is a more specific agreement tailored to the East West Link project, which was developed by DIRD and the Victorian Department of Treasury and Finance and signed by the then Prime Minister and the then Victorian Premier in June 2014.
3.50
Table 3.2 provides an overview of the ANAO’s analysis of how the two agreements made provision for recoupment of funding.
Table 3.2: Recoupment provisions in agreements relating to the East West Link project
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NPA
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Applied to other projects in Victoria, as agreed between the parties.
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To be used on the project.
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Funding to be reallocated to another project in Victoria; or another state or territory.
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MoU
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Returned to the Commonwealth or applied to other projects in Victoria, as agreed between the parties.
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To be separately identified and used on the project; or, as agreed, applied to other projects in Victoria.
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Funding to be returned to the Commonwealth (including by reducing the total amount of funding provided to Victoria for other National Partnership payments).
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Source: Based on Table 4.1 of ANAO Audit Report No. 14 (2015–16), p. 41.
3.51
The ANAO audit report notes that DIRD had sought to use the MoU to ‘… strengthen the Commonwealth’s position compared with the provisions of the [NPA] …’. In this regard, Table 3.2 shows that the MoU goes further than the NPA in stating that some types of unspent funding should be returned or redirected (by agreement), rather than just redirected.
3.52
However, the ANAO concluded that the MoU was ‘… not an effective approach to managing the particular risks involved with approving funding and making advance payments …’ prior to completion of project assessment activities. This is equally applicable to the NPA. Central to the ANAO’s analysis is that the MoU and NPA are not intended to be, and are not, ‘legally binding and enforceable’ documents, such that:
… the Commonwealth was unable to rely on those documents to require the advance payments to be returned when the project was cancelled.
3.53
At the public hearing, the Treasury was asked about the non-legally binding nature of national partnership agreements, advising the Committee that:
It is the case that most financial assistance to states is done through national partnership agreements. And it is also the case that those agreements themselves are not legally binding agreements. I think one of the advantages of that approach is it allows the language in those agreements to be of a
non-legal nature, more transparent, more plain English.
3.54
The Treasury also advised the Committee that it was unaware of any examples of where infrastructure funding had been recouped in the recent past, but noted that conditions of funding are enforceable under the Federal Financial Relations Act 2009 (FFR Act):
Within that act, there is also provision in the event that any of the terms and conditions set out in national partnership agreements are not met by a state in relation to receiving a payment it is open to the Treasurer, who owns Federal Financial Relations Act legislation in terms of responsibility, to seek repayment of payments made to the states …
3.55
The relevant provision of the FFR Act is subsection 20(1), which states that:
It is a condition of a payment of financial assistance under this Act to a State that, if the State does not fulfil a condition in respect of the payment, the State will, if the Minister so determines, repay to the Commonwealth the amount stated in the determination.
Identifying funding conditions
3.56
The capacity to recoup funding under subsection 20(1) of the FFR Act is restricted to circumstances in which a ‘condition’ of funding has not been met. The term ‘condition’ is not defined in the FFR Act, including with regard to any related agreements such as national partnership agreements or MoUs. In this context, the agreements themselves expressly state that they are not intended to be legally enforceable.
3.57
In contrast, the conditions set out in project approval instruments made under land transport legislation were identified by the ANAO in the public hearing as a defining the FFR Act’s use of the word ‘condition’:
… one of the lessons, perhaps, that can be learned through the East West Link experience is that, if … [the] federal financial relations ability to recoup funds is actually able to be enforced, you actually need, in the infrastructure space, a project approval instrument which has conditions which the state needs to adhere to. Otherwise, by not adhering to them, that is the only mechanism through which you can use the FFR to actually recover the funding.
3.58
More specifically, the ANAO’s audit report outlines the finding of legal advice obtained by the Treasury in September 2015, which identifies that the ‘condition’ for the East West Link project was imposed by the land transport legislation and that the condition was:
… ‘a positive requirement’ on Victoria to spend the $1.5 billion on the East West Link project.
3.59
As was noted in Chapter 2, the unavailability of key project documents meant that East West Link funding conditions were not adequately set out in the approval instruments made under the land transport legislation, but that DIRD was later able to impose conditions limiting funding uses through an amendment. The ANAO advised the Committee at the public hearing:
… if the original project approval instrument, which had very little detail in it, had been retained as the only project approval instrument, it would not have provided a basis to say, ‘You aren't adhering to the conditions we have approved money for,’ because there were very few conditions and a very broad description of a road project.
3.60
The Committee, in Chapter 2, has recommended DIRD review its approach to drafting project approval instruments, to develop a generic form of conditions that can be used as basis for addressing risks. The inability to recoup project funding due to inadequate specification of funding conditions is such a risk.
Capacity to recover interest
3.61
Where the Commonwealth provides funding in advance of the needs of an infrastructure project, it may cost the Commonwealth additional interest charges if additional borrowings are required, and / or forego the opportunity to earn interest on that money. As noted earlier the Commonwealth incurred additional interest costs from borrowings as a result of Government decisions to make unnecessary advance payments. In relation to interest earned by State Governments on advance payments, DIRD advised the Committee that the Victorian Government earned approximately $77 million in interest on advance payments for the East West Link project between June 2014 and December 2016. Similarly, the ANAO calculated an equivalent figure of $20 million for interest earned by the NSW Government on advance payments for the WestConnex project between June 2014 and November 2016.
3.62
The status of interest earnings are relevant to any assessment of how much money might be recovered by the Commonwealth in the event that a project underspends or is cancelled. At the public hearing, the Treasury advised the Committee that the FFR Act does not provide for direct recoupment of such interest:
In relation to the provisions of the Federal Financial Relations Act … it is true that the ability to recoup payments is limited to the amount of the payments themselves. It does not extend to interest.
3.63
The Treasury’s evidence also noted the role of agreements in identifying how interest should be dealt with:
The treatment of interest in these examples really goes to the agreements that are made with the states as to how the Commonwealth wants any interest that accrues to the states to be directed. Typically, the terms and conditions will say something like, ‘The interest needs to be directed to that same project or to other projects agreed with the Commonwealth.’
3.64
In the case of the East West Link project, conditions were included in the NPA and MoU to indicate that any interest earned on funds would need to be directed to the project or another Victorian project agreed by the Commonwealth (rather than simply being added to state government revenues). However, these agreements are not intended to be legally enforceable, so do not provide the Commonwealth with a legal basis for recovering interest.
Discretion to recover funding
3.65
The FFR Act allows, but does not compel, the Treasurer to seek repayment of funding if conditions are not met. There was interest at the public hearing as to whether an approach that provided less discretion would change the behaviour of the parties.
3.66
It is notable, in this regard, that a significant period of time elapsed between when the Victorian Government notified the Commonwealth that the East West Link project was to be cancelled (February 2015) and when the Commonwealth and the Victorian Governments agreed on the redirection of funding (November 2016). The Minister for Infrastructure and Transport has publically described what actions were taken during the intervening period:
At the start of the year as the Prime Minister indicated we had $1.5 billion sitting in a Victorian bank account which couldn't be used. What we did in April this year was announce a range of projects that we wanted to see funded across Victoria and since that time, we've been in negotiations with the Victorian Government. So myself and other ministers, along with departmental officials have had the discussions for the best part of six months—admittedly it was interrupted by the two months in the caretaker period. But I've written to the Victorian Government overnight with the final terms of the agreement and I'm very confident that the Victorian Government will agree with those terms. It's been subject to a great deal of negotiation over the past six or seven months.
3.67
DIRD advised the Committee in its May 2017 submission that, at the time of the negotiations, it was determined that the allocation of the $77 million of interest earned on the Commonwealth’s contribution would be settled separately.
3.68
In terms of incentives, an important consideration for government is whether the Commonwealth’s interests would be best served by:
a negotiation over other projects that could be funded, with a determination under the FFR Act requiring repayment being a last resort. The issues raised in Chapter 2 relating to the desirability for projects to be assessed through established processes before funding is committed are relevant in this context; or
expressly requiring the return of unspent funding in legislation in order to encourage funding recipients to complete projects based on an implicit understanding that funding for alternative projects may be more difficult to obtain. This may also assist in making sure that the funding is not stagnant and can be used for other purposes, such as priority infrastructure projects already assessed by Infrastructure Australia.
3.69
In the period since 2009, when the FFR Act came into place, no consideration has been given to reviewing the FFR Act in relation to infrastructure funding issues. The scope and activation of the recoupment provision is an area of the legislation worthy of review. Any consideration of discretion in recouping funding may also need to consider the option of contractually binding agreements. In this regard, the Treasury advised the Committee at the public hearing that:
The alternative, I suppose, would be some kind of legally binding agreement, but, at the end of the day, enforcing a legally binding agreement would require a decision of the Commonwealth to pursue that matter in the courts. So, to that extent, it is still a decision to be made by the Commonwealth.
Implementation of ANAO recommendations
3.70
In addition to the recommendation discussed in Chapter 2, the ANAO made one other recommendation in its two audit reports. The recommendation relates to the recoupment of East West Link project funding from the Victorian Government:
Recommendation No.1
The ANAO recommends that, as a matter of priority given the significant amount of Commonwealth funding that is involved, the Department of the Treasury recommend to the Treasurer that he make a determination requiring the return of the $1.5 billion paid to Victoria in relation to the East West Link project.
3.71
The Treasury agreed to the recommendation with a qualification, noting that it had provided advice to the Treasurer on options for recovery of the $1.5 billion paid to Victoria in relation to the East West Link project, including in relation to his powers under section 20 of the FFR Act. The recommendation has no ongoing relevance as the Commonwealth and Victoria have since agreed to redirect the funding to other Victorian road projects.
19 June 2017