Infrastructure Transport Cities and Regional Development Audit focus In determining the audit work program the ANAO considers prior year audit and other review findings and what these indicate about portfolio risks and areas for improvement as well as emerging risks from new investments reforms or operating environment changes In the Infrastructure Transport Cities and Regional Development portfolio delivery depends to a significant extent on infrastructure asset procurement by portfolio entities bringing both procurement and asset valuation risks and grants where payments are made though government grant hubs The portfolio also delivers regulatory functions presenting quality and compliance risks Procurement A number of portfolio entities particularly government business enterprises are engaged in major procurement activities to deliver significant infrastructure assets but are often not required to apply the Commonwealth Procurement Rules Audits have drawn attention to the benefits of using competitive procurement processes to demonstrably obtain value for money as well as the importance of managing probity and other risks Financial management Complex valuation methods and models are used to derive the value of Commonwealth investments in portfolio entities such as the Australian Rail Track Corporation and WSA Co There are also challenges with valuation where there are significant non commercial public policy elements of investment such as with concessional loans Provisions relating to the remediation of land owned by entities within the portfolio also present challenges Valuations often require a significant level of judgement to be applied in the selection of appropriate underlying assumptions Focus is also required on the completeness and accuracy of revenue streams for certain portfolio bodies such as airway and rail access charges Valuations are also an important element in determining ongoing maintenance and sustainment investments required and the cost of future asset replacement Grants administration The department administers significant grant funding including in areas such as regional development and cities and predominantly manages these through the Department of Industry Innovation and Science grants hub Outsourcing grants presents risks relating to assurance of quality compliance and accountability particularly when the arrangement being outsourced is small compared to the broader business of the delivery entity Audit activity has also highlighted risks where assessment of grant applications does not verify the claims of applicants or ensure the assessment criteria are applied in full Regulation A number of portfolio entities have regulatory responsibilities predominantly in air land and sea transport safety In circumstances where demands on available regulatory resources are increasing audit work has highlighted risks in not ensuring an appropriate focus on organisational efficiency including through the use of benchmarking with other entities to assess performance and identify opportunities for improvement Portfolio overview The Infrastructure Transport Cities and Regional Development portfolio covers a number of policy areas including safety across the civil aviation maritime and transport sectors air navigation services developing and administering the national capital and road rail and freight transport systems The Department of Infrastructure Transport Cities and Regional Development? is the lead entity in the portfolio and is responsible for improving infrastructure across Australia through funding coordination of transport and other infrastructure providing an efficient and competitive transport system strengthening the sustainability and diversity of regional economies supporting governance arrangements in the Australian territories and developing national policy on cities Further information is available from the department website at www infrastructure gov au In addition to the Department of Infrastructure Transport Cities and Regional Development there are entities within the portfolio with responsibility for matters such as maritime transport and civil aviation safety infrastructure planning financing and delivery including development of the Western Sydney Airport and Inland Rail Program and strategic planning for the national capital In the Portfolio Budget Statements PBS for the Infrastructure Transport Cities and Regional Development portfolio the aggregated budgeted expenses for total billion The PBS contain budgets for those entities in the general government sector GGS that receive appropriations directly or indirectly through the annual appropriation acts The level of budgeted departmental? and administered? expenses and the average staffing level for entities in the GGS within this portfolio are shown in Figure The Department of Infrastructure Transport Cities and Regional Development represents the largest proportion of the portfolio expenses and administered expenses are the most material component representing per cent of the entire portfolio expenses Figure Infrastructure Transport Cities and Regional Development portfolio — total expenses and average staffing level Source ANAO analysis of PBS Budget related papers pre machinery of government changes announced on May Financial statements audits and other audit engagements Overview Entities within the Infrastructure Transport Cities and Regional Development portfolio and the risk profile of each entity are shown in Table Table Infrastructure Transport Cities and Regional Development portfolio entities and risk profile Type of entity? Risk of material misstatement? Number of higher risks? Number of moderate risks? Material entities Department of Infrastructure Transport Cities and Regional Development Non corporate Moderate Airservices Australia Corporate Moderate Australian Rail Track Corporation Company High Moorebank Intermodal Company Limited? Company High National Capital Authority Non corporate Low WSA Co Limited Company Moderate Non material entities Australian Maritime Safety Authority Corporate Low Australian Transport Safety Bureau Non corporate Low Civil Aviation Safety Authority Corporate Low Infrastructure and Project Financing Agency Non corporate Low Infrastructure Australia Corporate Low National Transport Commission Corporate Low North Queensland Water Infrastructure Authority Non corporate Low Other audit engagements including Auditor General Act section engagements Australian Rail Track Corporation grant audit Norfolk Island Health and Residential Aged Care Service financial statements audit Material entities Department of Infrastructure Transport Cities and Regional Development The Department of Infrastructure Transport Cities and Regional Development is responsible for improving infrastructure across Australia through funding coordination of transport and other infrastructure providing an efficient sustainable competitive and safe transport system for all transport users strengthening the sustainability capacity and diversity of regional economies providing advice on population policy implementing the national policy on cities and supporting governance arrangements in the Australian territories The department total budgeted expenses for are just under billion with per cent of these expenses attributable to grant expenses as shown in Figure Figure Department of Infrastructure Transport Cities and Regional Development total budgeted expenses by category Source ANAO analysis of PBS Budget related papers pre machinery of government changes announced on May The three key risks for the department financial statements that the ANAO has highlighted for specific audit coverage in including those that the ANAO considers potential Key Audit Matters KAMs are the valuation of the investments in the Australian Rail Track Corporation and Airservices Australia due to the complexity of the valuation process and the significance of the investments to the financial statements KAM Valuation of the Australian Government investment in the Australian Rail Track Corporation and Airservices Australia valuation of concessional loans due to the judgements required in selecting the assumptions used in the valuation models with particular emphasis on the selection of the market interest rate KAM Valuation of advances and loans and management of and accounting for the department grant programs due to the size and diversity of these programs and models of delivery ? Airservices Australia Airservices Australia is responsible for the provision of air navigation services across Australian and oceanic airspace and the provision of aviation rescue firefighting services at major Australian airports Supported by a national network of communications surveillance and navigation facilities and infrastructure Airservices Australia is funded through charges levied on its customers and borrowings from debt markets Airservices Australia total actual expenses for were just over billion with per cent of these expenses attributable to employee benefits as shown in Figure Figure Airservices Australia total actual expenses by category Source ANAO analysis of Airservices Australia annual report Airservices Australia six key risks for its financial statements are the completeness and accuracy of airways revenue given the complexity of the flight traffic data and dependence on multiple IT systems when generating customer invoices management of and accounting for assets under construction? and existing completed property plant and equipment and intangibles Capturing of costs related to assets under construction and determining their appropriate treatment under relevant accounting standards is complex due to the technical nature of those assets and the judgements involved in assessing whether costs can be capitalised Valuation of completed asset infrastructure which is a material balance is sensitive to changes in the assumptions used in the valuation models calculation of provisions for legal obligations and related contingencies ? due to the complexity of the underlying event that gave rise to a potential legal obligation in addition to the significant judgements required in valuing the liability management of and accounting for a large number of diverse material contracts which are complex in nature valuation of the Airservices Australia defined benefit superannuation scheme liability including the sensitivity of the liability to changes in the economic and demographic assumptions supporting the calculation and management of and accounting for a range of financial instruments including interest rate swaps and forward exchange contracts which are complex in nature Australian Rail Track Corporation Limited The Australian Rail Track Corporation ARTC is responsible for the development maintenance management and delivery of some of Australia major rail networks including the national interstate rail network the Hunter Valley coal rail network and the Inland Rail network In May the Australian Government announced it would invest up to billion in equity funding into ARTC in order for the company to deliver the Inland Rail project Inland Rail is a kilometre rail line that will link Brisbane and Melbourne through regional Australia and will be completed in It is the largest rail freight infrastructure project ever undertaken in Australia ARTC total actual expenses for were just over million with per cent of these expenses attributable to infrastructure maintenance and costs as shown in Figure Figure Australian Rail Track Corporation Limited total actual expenses by category Source ANAO analysis of the Australian Rail Track Corporation annual report ARTC seven key risks for its financial statements are the valuation of rail network assets This is a material balance for ARTC is sensitive to changes in the assumptions used in the valuation models adopted and involves highly specialised components and forecasts taxation related balances as there is complexity and judgement involved in accounting for deferred tax assets revenue recognition for a number of income streams as there are significant judgements exercised by management in estimating the amount of revenue to be recognised calculation of provisions for claims for rail related incidents at year end due to the complexity and significant judgements required in the selection of the model assumptions in valuing the liability funding and debt management particularly the monitoring of ARTC debt arrangements as operations are currently supported via a number of arrangements with current liabilities exceeding current assets in management of and accounting for grants particularly recognition and calculation of deferred grant income as this relies heavily on management assessments and IT environment given the complexity of ARTC IT applications that have input into the preparation of the financial report Moorebank Intermodal Company Limited The Moorebank Intermodal Company Limited MIC was established to oversee the development and future operation of the Moorebank intermodal terminal in Sydney south west It is designed to enable more freight to be moved by rail both locally and nationally The Moorebank terminal will have an import and export facility with a direct link to Port Botany and also an interstate and regional facility to connect to the national rail freight network The terminal will be developed and operated by co investor Sydney Intermodal Terminal Alliance MIC total actual expenses for were just under million with per cent of these expenses attributable to adviser costs and employee benefits as shown in Figure Figure Moorebank Intermodal Company Limited total actual expenses by category Source ANAO analysis of Moorebank Intermodal Company Limited annual report MIC three key risks for its financial statements are the calculation of provisions related to land remediation obligations due to the complexity of the underlying event that gave rise to a potential legal obligation the significant judgements required in the selection of the model assumptions in valuing the liability and the increasing activity as the terminal development progresses management of and accounting for MIC interests in investment trusts due to increasing development activity and the technical nature of the transactions between MIC and the trusts and recognition of capital costs in relation to construction of the MIC rail line and Moorebank Avenue works National Capital Authority The National Capital Authority NCA is responsible for managing the strategic planning promotion and enhancement of Canberra as the national capital for all Australians through the development and administration of the National Capital Plan the operation of the National Capital Exhibition delivery of education and awareness programs and works to enhance the character of the national capital The NCA total budgeted expenses for are just under million with per cent of these expenses attributable to depreciation and amortisation finance costs and impairment of assets as shown in Figure Figure National Capital Authority total budgeted expenses by category Source ANAO analysis of PBS Budget related papers pre machinery of government changes announced on May The NCA two key risks for its financial statements are the valuation of land and buildings which is a material balance and sensitive to changes in the assumptions used in the valuation models and financial reporting of the NCA construction activities which requires judgement to determine the status of projects at the end of the financial year WSA Co Limited WSA Co Limited was established to construct and operate the Western Sydney Airport in Badgerys Creek in south western Sydney to the functional specifications determined by the Australian Government WSA Co is a government business enterprise wholly owned by the Australian Government represented by the Minister for Finance and the Minister for Population Cities and Urban Infrastructure as shareholder ministers The Australian Government will invest up to billion into WSA Co to build Western Sydney Airport This investment covers WSA Co work on the earthworks and construction of the airport runway and terminal infrastructure in accordance with the conditions of the project deed agreed by the Australian Government and WSA Co Early earthworks representing the commencement of construction on the airport site commenced in late WSA Co total actual expenses for were just under million with per cent of these expenses attributable to site preparation costs as shown in Figure Figure WSA Co Limited total actual expenses by category Source ANAO analysis of WSA Co annual report WSA Co three key risks for its financial statements are the recognition and measurement of significant capital expenditure to be incurred in developing the airport particularly the valuation of work in progress recognised during airport construction activities policies and processes for procurement particularly relating to management of contracts for the delivery and cost management of major construction activities given the material amounts contained within the contracts and complexity of services delivered and calculation of provisions for land remediation activities for soil contamination on the airport site that will need to be undertaken prior to and during construction on the airport site