Introduction

Australian Government spending on land transport is guided by the June 2004 AusLink White Paper ‘Building Our National Transport Future'. Under AusLink, a defined National Network of road and rail infrastructure links and their intermodal connections has been established with $10.533 billion in funding allocated to the National Network under AusLink over the period 2004–05 to 2008–09. Under the Administrative Arrangements Order of 25 January 2008, the Department of Infrastructure, Transport, Regional Development and Local Government (DITRDLG) is responsible for administering the various AusLink funding programs. The administration of its predecessor department, the Department of Transport and Regional Services (DOTARS), is the central focus of this audit.

The Australian Rail Track Corporation (ARTC) commenced operations in 1998. Its primary role is to provide access to that part of the interstate rail network managed by the company. The ARTC is a company incorporated under the Corporations Act 2001 and is a Government Business Enterprise (GBE) wholly-owned by the Australian Government. At the time of audit, the then Minister for Transport and Regional Services and the then Special Minister of State represented the Australian Government as shareholders of the company. DOTARS and the then Department of Finance and Administration (Finance)¹ were the departments responsible for administering the reporting and accountability arrangements that facilitate active oversight of the ARTC as a GBE.²

The ARTC receives funding for its operations from a variety of sources. The ARTC's primary source of revenue from continuing operations has been access revenue received by way of fees charged to rail operators for access to the tracks maintained by the ARTC. The ARTC also receives revenue from non-operating activities, which includes interest income and government grants.

As at September 2007, $975.3 million in Australian Government grant funding had been approved for the ARTC as part of the Australian Government's $10.533 billion commitment under AusLink. This has comprised:

• $155.3 million to be paid as work progresses, for eight specific projects that are subject to the provisions of the relevant land transport legislation (the AusLink (National Land Transport) Act 2005 (AusLink Act) since July 2005) and to various conditions set out in other related documentation. As at September 2007, $70.7 million (46 per cent) of the approved funding had been paid to the ARTC; and
• $820 million in three direct lump sum grants that are not subject to the provisions of the land transport legislation. These grants were paid to the ARTC on 29 June 2004 ($450 million), 30 June 2005 ($100 million) and 27 June 2006 ($270 million). As of 30 June 2007, ARTC had reported to DOTARS and Finance that $237.1 million (29 per cent) of the special grant funds had been used.

Audit objectives and scope

The objective of this performance audit was to assess the effectiveness of the administration of grants made to the ARTC. The audit involved an examination of DOTARS' administration of the grant funding approved for, and paid to, the ARTC (in respect of both the grants paid for projects approved under legislation and the three special grants). It also involved consideration of the role of Finance and the Department of the Prime Minister and Cabinet (PM&C) in advising on the special grant funding and (in respect of Finance) the payment and reporting arrangements for the grants. The audit was conducted under Section 18 of the Auditor-General Act 1997.

Audit conclusions

The $975.3 million of ARTC grant funding represents some nine per cent of the Australian Government's $10.533 billion investment in the AusLink National Network over the period 2004–05 to 2008–09. The ARTC grant funding has been provided to assist in improving the performance of the interstate rail network, including by reducing transit times so as to make rail more competitive with road freight.

To provide confidence that grants will achieve their intended outcomes, it is important that there be a clear understanding of the purposes for which the funds are to be used, together with effective and ongoing monitoring of project progress and acquittal of the use of the grant funds. In some cases legislation imposes terms and conditions on grant funding. However, in many cases the purposes and necessary conditions of grant funding is governed by a document signed by both the administering department and the recipient (often called a funding agreement). Where discretionary grant funding is being provided to a GBE, there are also issues in aligning the commercial incentives of the GBE with the particular outcomes sought through the provision of discretionary grant funding.

Project-specific governance arrangements exist for administering the eight grants to the ARTC totalling $155.3 million that were approved under the applicable land transport legislation. Collectively, the legislation, associated Notes on Administration and a Memorandum of Understanding between DOTARS and the ARTC, signed in January 2007, set out details of the payment arrangements for each project, and processes for the reporting of project progress and the acquittal of the grant monies provided. These arrangements, and their administration, have been effective.

The majority (84 per cent) of the grant funding to the ARTC is being provided through the three special grants that total $820 million. The first special grant (of $450 million) was awarded in May 2004, as a result of advice to Ministers that DOTARS, in consultation with the ARTC, considered that the highest remaining priority for rail investment was the North NSW Coast line. That advice was based on limited consultation by DOTARS with ARTC in relation to the possible quantum of funds, the projects likely to be undertaken by the ARTC and the timeframe over which the funding would be spent by the company. As a result:

• following the payment of the grant, the ARTC reviewed its infrastructure works program to take account of the significant increase in available funding. This review, completed the following year, led to the ARTC changing the use of the first ($450 million) grant from rail realignments on the North NSW Coast line (the purpose approved by Ministers) to passing lanes between Melbourne and Junee as well as loop extensions and other works (but no rail realignments) on the North NSW Coast line; and
• each of the three special grants was paid to the ARTC significantly in advance of any construction work commencing.

In settling the administrative arrangements for the provision of the special grant funding, DOTARS and Finance gave considerable weight to the ARTC's desired taxation position. Specifically, to assist in positioning the company to not pay income tax on the special grants, the projects being funded have been selected solely by the company and there are no funding agreements (or similar) in place to govern the use of the funds. This means that the grants have been paid on an untied basis rather than in a way that ensures the funds are used for the purposes approved by Ministers at the time they made their decision to award funding.

To obtain information on the projects being funded and their progress, DOTARS advised ANAO that it is relying on the broader governance framework that applies to the ARTC as a wholly-owned Commonwealth GBE. As part of the quarterly meetings with DOTARS and Finance in their role as shareholder departments, the ARTC has recently commenced providing progress reports on the projects funded by the special grants. Nevertheless, the GBE governance framework is focused on the strategic direction and oversight of entities designated as a GBE and is not a substitute for the benefits that funding agreements provide. For this reason, the normal approach adopted when grants are provided to GBEs is to tailor a funding agreement to the specific requirements of the particular grant.

This audit highlights the importance of departmental advice to Ministers being well informed, or suitably qualified where not all initial information is firm. It further highlights the importance of departments having suitable arrangements in place to ensure that grant funding is applied for the purposes approved by Ministers. In situations where circumstances or new information suggests the approved funding purposes would benefit from review, further advice should be provided to the decision-makers to provide the opportunity for the original decision to be reconsidered or confirmed.

Key findings

Grants governed by land transport legislation (Chapter 2)

The AusLink land transport policy was given effect by the AusLink (National Land Transport) Act 2005 (AusLink Act), enacted on 6 July 2005.⁴ The legislation is supported by:

• Notes on Administration issued by DOTARS as a working draft in October 2005 and in final form in March 2006. The Notes on Administration set out processes for funding recipients under the AusLink Act to implement the requirements of the Act, including approval and funding frameworks, and reporting requirements for funding recipients; and
• a January 2007 Memorandum of Understanding (MoU) between DOTARS and the ARTC in respect of the projects approved for the ARTC under the AusLink Act.⁵ The MoU addresses a number of issues relating to the ARTC's AusLink National Projects including:
  • ­ funding purposes and contributions, which includes the types of costs eligible to be funded by the Australian Government;
  • ­ variations to projects and funding, including the manner in which variations to the cost of a project may be dealt with;
  • ­ terms and conditions of Australian Government funding for approved projects; and
  • ­ potential consequences of non-adherence to the terms of the memorandum.

Collectively, this documentation provides a sound governance regime for grant funding approved under the applicable land transport legislation for payment to the ARTC. Specifically, through the legislation, Notes on Administration and MoU, there exists:

• a defined scope and approved funding amount for each project;
• documented terms and conditions applying to the provision of funding, and the process by which payments will be calculated and made;
• requirements for monthly progress reports, variations to approved projects and reporting on project completion; and
• accountability arrangements including audited financial acquittals.

ANAO found that, with no significant exceptions, the $155.3 million in funding approved for eight projects under the AusLink Act⁶ has been paid and administered in accordance with the documented governance framework.

Special grants (Chapter 3)

In each year from 2003–04 to 2005–06, special grants were approved for the ARTC to spend on rail infrastructure improvements. Each of the three grants was provided to the ARTC in the context of assisting to reduce higher than expected budget surpluses,⁷ with the payment of each grant being made before 30 June in the relevant financial year. The payments were approved as grants to the ARTC, as the alternative considered (an equity injection) would not have had the desired effect of reducing expected budget surpluses.⁸ These three special grants totalled $820 million, as follows:

• $450 million was approved in May 2004 and paid in June 2004 for rail re alignments on the North NSW Coast line. These funds are, in fact, being largely applied to other works identified in the ARTC's May 2005 North-South Corridor Strategy, with a specific focus on sections of rail line between Melbourne and Junee;
• $100 million was approved and paid in June 2005 to also be spent as part of the North-South Corridor Strategy (in this instance, mainly concrete re sleepering and passing lanes). The majority of these funds are being used in a manner that is consistent with the works approved by Ministers; and
• $270 million was approved in April 2006 and paid in June 2006 for targeted concrete re-sleepering on the Melbourne-Sydney-Junee sections and the Newcastle to Queensland border sections of the North South rail corridor. The use of these funds is consistent with the works approved by Ministers.

There had been limited consultation with the ARTC on the possibility of a substantial injection of funding for rail infrastructure spending prior to the approval of the first ($450 million) special grant. Specifically, prior to the grant being approved, the ARTC was not asked to provide any formal advice on specific areas in which a grant of that quantum could be applied, or the timeframes over which funds could be expended. This was reflected in:

• the ARTC re-evaluating the overall program of works that had been contemplated prior to the payment of the grant. In turn, this led to an extended period between funds being paid to the ARTC and the funds being spent by the company (see Figure 1). In the interim, the ARTC invested the funds (in accordance with a revised company treasury policy) with the large increase in company investment holdings resulting in a significant increase in the ARTC's interest earnings;⁹ and
• significant changes being made to the use of the first special grant between the indicative program of works that was submitted by the ARTC in May 2004 (that focused on North NSW Coast line re alignments) and the program that was finalised in May 2005 (mainly passing lanes between Melbourne and Junee and loop extensions and other works on the North NSW Coast line).¹⁰

Figure 1 Receipt and expenditure of special grants

Source: ANAO analysis of DOTARS records.

Note to Figure: Receipts includes estimated interest earnings from investment of the special grants.

Governance arrangements

The funds were paid to the ARTC as grants rather than as equity injections so as to reduce the budget surplus—the option of making the payments as equity injections would not have had the desired accounting effect. In the absence of legislation mandating the conduct and conditions applied to grant programs and individual grants, a funding agreement is often used. However, there are no contracts, funding agreements or documented governance arrangements that require the ARTC to use the $820 million in special grant funding on any particular projects or in any particular timeframe.

The absence of funding agreements is a direct consequence of steps taken by DOTARS and Finance to allow the ARTC to treat the first special grant as non assessable for income taxation purposes.¹¹ Specifically, the May 2004 letter from the then shareholder Ministers to the ARTC advising of the grant was drafted by their departments so as not to specify that the
$450 million was to be spent on rail re alignments on the North NSW Coast line (the works that the then Prime Minister had specified in his approval of the grant). Rather, the correspondence stated that the funding was being provided for use in accordance with the objectives for which the company was established and asked the ARTC to inform the shareholder Ministers of the highest priority investments that could be undertaken with the additional funding being provided.¹²

Later in May 2004, an indicative list of projects was provided by the ARTC to the shareholder Ministers and, subsequently, by the then Minister for Transport and Regional Services to the then Prime Minister. However, DOTARS did not advise its then Minister that the indicative program had yet to undergo detailed analysis and modelling, or indicate that not all of the projects identified were rail re alignments. Accordingly, this information was also not conveyed to the then Prime Minister. In September 2004, PM&C raised concerns with DOTARS that the projects to be undertaken by the ARTC with the first special grant were not wholly consistent with those that had been put to the then Prime Minister when he approved the grant.

On 27 May 2005, 12 months after the ARTC produced its indicative program of works, the company provided DOTARS and Finance with an updated program of works referred to as the North-South Corridor Strategy. The ARTC advised the shareholder departments that, having now undertaken the detailed analysis of the proposed program of works, it had concluded that the strategy that would best achieve the maximum market share change and minimise risk was in fact a significant program of passing lanes to be constructed between Melbourne and Junee, and not the initially proposed works on the NSW North Coast.

The special grants awarded in June 2005 ($100 million) and April 2006 ($270 million) were given effect by the shareholder departments in a manner similar to the first ($450 million) special grant.¹³ As a result, for each grant, instead of a funding agreement or similar being established with the ARTC, the approach taken by the shareholder departments has been to rely on the broader governance framework that applies to the ARTC as a wholly Commonwealth owned GBE. In this context, updates on the ARTC's overall capital works program have been provided to the shareholder departments through quarterly shareholder meetings and half yearly progress reports.

Although the ARTC's overall capital works program includes the works being undertaken with the special grants, up until September 2006 the ARTC's reporting did not separately identify the works on which the $820 million in special grant funding was being used. The reporting also has not identified how the works program has been extended so as to use interest earned on the special grant funds. The result is that DOTARS has not been well placed to monitor the efficiency and effectiveness with which the grant funding the department has paid in advance to the ARTC has been applied. In addition, notwithstanding that the ARTC has recently commenced providing progress reports on the use of the special grants, there is no regime in place requiring the ARTC to acquit the $820 million in special grants, and the interest earned thereon.

Improvement opportunities

ANAO has made two recommendations, each of which relates to the provision of the three special grants. The recommendations seek to:

• promote improved advice to Ministers where they are considering opportunities to accelerate land transport spending both in terms of the timeframe over which expenditure might be expected to occur and the management of risks where advance payments are made; and
• improve the monitoring and acquittal arrangements for any future special grants.

Agency responses

DITRDLG, Finance and the ARTC provided summary responses to the audit as follows. DITRDLG also provided a more detailed comment, which is included at the appendix to the report.

DITRDLG

The Department of Infrastructure, Transport, Regional Development and Local Government welcomes the ANAO's findings that the administration and arrangements covering the eight rail grants administered under the AusLink (National Land Transport) Act 2005 at a total cost of $155.3 million has been effective.

The Department notes that, for the first of the three untied grants provided by the Government to the ARTC ($450 million, paid to ARTC on 29 June 2004), the initial urgent advice requested by the Government reflected limited consultation with ARTC on the scope for possible projects for which funds could be used, should they become available, on the north-south rail corridor. The ARTC subsequently undertook a more detailed advice analysis of the corridor which led to the provision of funding to projects between Sydney and Melbourne as well as the NSW north coast.

The Department accepts the report's two recommendations.

Finance

The Department of Finance and Administration (Finance) welcomes the ANAO performance report and supports the recommendations.

The Australian Rail Track Corporation (ARTC) is currently undertaking a significant capital and maintenance works programme worth approximately $2.4 billion (including special grant funds of approximately $820 million). The current programme of works, which is expected to be largely completed by June 2009, will achieve faster train transit times and an increased market share of the freight transport task between Melbourne, Sydney and Brisbane. This programme is consistent with ARTC's Memorandum of Association which, among other things, requires ARTC to manage track maintenance and construction and to pursue a growth strategy for interstate rail through improved efficiency and competitiveness with the aim to increase rail's share of the interstate freight market. The capital and maintenance programme has been prepared with a view to achieving value for money while ensuring that rail achieves the government's objective of making rail more competitive with road freight.

Finance considers that the Minister should receive appropriate briefings covering all aspects of the subject to enable the Minister to reach a fully informed, balanced and considered decision.

Further, Finance supports appropriate reporting and acquittal arrangements being put in place for future projects funded other than through the land transport legislated funding framework.

That said, Finance notes that ARTC do provide departmental officials with detailed reports on the capital programme, including a detailed breakdown of projects relating to the $820 million in special grants, on a quarterly basis.

ARTC

ARTC notes that a substantial proportion of the paper appears based on the premise that the $820 million of special Government Grants should be subject to the same reporting requirements as if the monies were grants as defined in schedule 3 of the AusLink Act. However, the grants were not provided on this basis. The non-AusLink grants were provided on the basis that ARTC's charter and the GBE governance arrangements provide the Commonwealth with surety that the funds are invested appropriately.

To that end, ARTC has continued to review its programs and apply those funds in the best interests of the national rail network, and in accordance with ARTC's shareholder-endorsed Corporate Plan. In that context, it has been appropriate for there to be revisions to the manner and timing of application of the monies to ensure that the most appropriate projects were undertaken in a changing environment of funding availability, industry demand and resource availability.

Our investment in the Corridor Improvement Works Program significantly exceeds the amount of the ‘special grants' in any event and as such is funded by a combination of the earnings from those pooled investments, combined with funds generated from general operations and accumulated reserves.

Accordingly, all interest earned from the ‘special grants' is effectively being invested in the North-South Corridor improvement program.

ARTC also intends to continue to work closely with appropriate shareholder representatives from DOTARS and Department of Finance regarding ongoing reporting of the performance of the investments programs over coming months in accordance with the relevant legislation and agreed processes.

Footnotes

^{1 Under the Administrative Arrangements Order of 25 January 2008, the Department of Finance and Deregulation is responsible for shareholder advice on GBEs. This audit examines the administration of its predecessor department, the Department of Finance and Administration. The Department is referred to as Finance throughout this report.}

^{2 Governance Arrangements for Commonwealth Government Business Enterprises, June 1997, p. 3.}

^{3 See, for example, ANAO Audit Report No. 14 2007–08, The Regional Partnerships Programme, Canberra, 15 November 2007, Volume 2—Main Report, p. 175 which outlined that a Memorandum of Understanding was signed in June 2004 with Telstra Corporation Ltd to govern a $2.5 million grant for the supply of a replacement mobile phone service to Christmas Island. The MOU included details of the purpose for which funding was being provided, progress reporting requirements and financial acquittal requirements.}

^{4 Prior to this time, the applicable land transport legislation was the Australian Land Transport Development Act 1988 (ALTD Act).}

^{5 This includes projects that were originally approved under the ALTD Act, and which where transitioned to the AusLink Act upon its commencement in July 2005.}

^{6 One of the eight projects was approved after the AusLink Act commenced. The other seven projects were approved under the prior legislation and transitioned to AusLink.}

^{7 For example, in relation to the first ($450 million) special grant, in the context of the 2004–05 Budget, DOTARS, Finance and the Department of the Treasury (Treasury) were asked to contribute advice to the Department of the Prime Minister and Cabinet (PM&C) concerning the scope and practicality of making payments in 2003–04 across a range of areas of government activity, most of which had been the subject of earlier advice to Ministers. The grant, made in 2003–04, was announced as a Budget Measure in the 2004–05 Budget Papers.}

^{8 The provision of grant funding to GBEs is relatively uncommon. ANAO's examination of records held by Finance showed that, in the context of examining options for measures to reduce the 2003–04 budget surplus, Finance considered that the proposed option of providing a grant of $450 million to the ARTC ‘presented the Australian Government as sole ARTC shareholder with a challenge to reconsider how it will marry the use of the grants with the commercial incentive model of a commercially financed GBE, the ultimate objective being to promote efficient resource allocation'. However, Finance also considered that this did not provide a reason to forego the grant funding.}

^{9 ANAO estimated that, by 30 June 2009, when the ARTC has advised DOTARS it expects to have spent the full $820 million, the advance payments will have cost the Australian Government some $141 million in foregone interest earnings. In October 2007, DOTARS advised ANAO that interest earned on ARTC investments is being applied to extending the works program to which the company is applying the special grants.}

^{10 In its May 2005 advice to the shareholder departments regarding the finalised program of works for the first special grant, the ARTC indicated that a program of passing lanes was to be undertaken in place of the initially proposed track deviations (re alignments) as there were a number of strategic advantages with passing lanes including shorter construction times and substantially lower cost risks.}

^{11 Treasury was not consulted by DOTARS on the merits of assisting the ARTC to treat the grants as not taxable. This was notwithstanding that, in July 2004, in the context of preparing the draft AusLink legislation, Treasury had advised DOTARS that allowing grant payments to the ARTC and taxable non government entities to be tax exempt would lead to policy and taxation administration difficulties.}

^{12 As noted at paragraph 9 in the report, the first special grant was awarded by the then Prime Minister in May 2004 as a result of advice to Ministers that DOTARS, in consultation with the ARTC, considered that the highest remaining priority for rail investment was the North NSW Coast line.}

^{13 See paragraph 19 in the report.}