Introduction

1. Of the nation's 810 000 kilometres of public roads, more than 650 000 kilometres (80 per cent) are local roads within the responsibility of local government.¹ Approximately one-third of these roads are sealed, with the remainder being unsealed (unformed, formed or gravel roads).²

2. The AusLink Roads to Recovery Program is an administered program within Outcome 1 (‘Assisting the Government to provide, evaluate, plan and invest in infrastructure') of the Department of Infrastructure, Transport, Regional Development and Local Government (DITRDLG). Roads to Recovery is the largest investment in local roads ever undertaken. In total, over 13 years, $4.18 billion³ is to be paid by the Australian Government to local government for expenditure on the construction and maintenance of roads.

3. There have been four Roads to Recovery (R2R) Programs. The initial Program was established by the Roads to Recovery Act 2000 (R2R Act) and provided $1.2 billion over four years. It commenced in early 2001 as a single intervention to address the concern that local government road infrastructure was near the end of its economic life and its replacement was beyond the capacity of local government. The initial program was the subject of an Australian National Audit Office (ANAO) performance audit tabled in March 2006.⁴

4. A second four-year program commenced in July 2005, as part of the AusLink Land Transport Initiative. The AusLink R2R Standard Program was established under the AusLink (National Land Transport) Act 2005 (AusLink Act or the Act)⁵ and provided $1.23 billion. There was also a separate, but related, AusLink R2R Supplementary Program concurrently in operation from June 2006 to June 2009 that provided $307.5 million (the third program).

5. A fourth program commenced under the Nation Building banner⁶ on 1 July 2009 and will continue through to 30 June 2014. The Nation Building R2R Program will provide $1.75 billion.

6. It is the second and third R2R Programs (the AusLink R2R Programs) that are the subject of this performance audit.

AusLink R2R Programs

7. Under the AusLink R2R programs, a total of $1.537 billion was paid to more than 720 Local Government Authorities (LGAs) between July 2005 and June 2009. The distribution of R2R funds between the States and Territories was determined at the Ministerial level. In arriving at the actual distribution, consideration was given to the historical results from using the Financial Assistance Grants (FAGs) identified for local roads; and population and length of road under the control of the local government, with each of these two statistics weighted equally.⁷ In turn, the allocation of funds within each State was determined using the formula applied by State Grants Commissions for FAGs identified for local roads.

8. Under the Standard Program, each Local Government Authority (LGA) was guaranteed its full life of program allocation by 30 June 2009, subject to the submission of satisfactory documentation such as work schedules and Quarterly and Annual Reports. Almost all LGAs received their full R2R allocation. Larger LGAs generally received an annual allocation capped at one quarter of their life of program allocation. However, subject to meeting certain conditions, smaller LGAs could access their full allocation at the start of the program. LGAs were required to spend all of their Standard Program funds by 31 December 2009.

9. The May 2006 Budget announced that a further $307.5 million would be provided in 2005–06 as a supplement to the AusLink R2R Standard Program. Under the Supplementary Program, each funding recipient received a grant equal to one quarter of its life of program allocation under the Standard Program. The funds were distributed and administered under similar funding conditions to those of the Standard Program, with funding recipients being required to acquit their project expenditures by submitting Quarterly and Annual Reports. However, unlike the Standard Program, funding recipients received their Supplementary Program allocations as a one off payment in June 2006, and were required to expend these funds by 30 June 2009.

10. The focus of the R2R Program is the renewal of local roads to meet social and economic needs. Most of the funds are provided in the form of grants direct to LGAs. These grants, together with other aspects of the program, are administered by a manager and up to three staff in the South East Roads Branch within the Canberra offices of DITRDLG. The small number of staff reflects the following program delivery decisions made at the time the program was first introduced:

• funds were to be paid directly to LGAs;
• project priorities were the choice of LGAs; and
• the process by which grants were paid to the LGAs was to be simple, with appropriate audit and accountability systems and arrangements put in place to ensure that there is due recognition by LGAs of the Commonwealth's contribution to local road projects.

Audit scope and objectives

11. The audit scope covered the management of the AusLink R2R Standard Program and the AusLink R2R Supplementary Program. The scope did not include management of the Nation Building Roads to Recovery Program, which has only recently commenced. The audit objectives were to:

• assess the effectiveness of the management of the AusLink Roads to Recovery Program;
• assess the delivery of the program and management of the funding, including the extent to which the program has provided additional (rather than substitute) funding for land transport infrastructure; and
• identify opportunities for improvements to the management of the program.

12. A key part of the audit involved examination of the use of, and accountability for, R2R funds by a representative sample of 41 LGAs from four States/Territories (representing almost six per cent of all funding recipients and eleven per cent of total funding provided under the program). This work included site inspections of more than 560 R2R funded projects, analysis of financial and other reports provided by the 41 LGAs to DITRDLG, and substantiation of the amounts charged to the program for selected projects. To supplement the audit sample, ANAO analysed data in the department's Infrastructure Management System (IMS).

Overall conclusions

13. The R2R Program encompasses the largest investment in local roads undertaken by the Australian Government. By the time the Nation Building R2R Program concludes in June 2014, some $4.18 billion will have been paid over 13 years to local government for expenditure on the construction and maintenance of roads.

14. As part of the AusLink R2R Standard and Supplementary Programs audited by ANAO, more than $1.5 billion was paid to local government for expenditure on the construction and maintenance of roads in respect of more than sixteen and a half thousand projects. Almost all LGAs received their full R2R allocation under the Standard Program and all LGAs received their Supplementary Program allocations as an up front, once only payment. Accordingly, the key aspect of the programs relating to distribution of funds to local government and LGAs using these funds for road works have been effectively administered.

15. In terms of the benefits from the R2R Program, a fundamental principle underpinning the program is that the funding provided to LGAs was to be additional to existing road funding. Accordingly, LGAs are required to maintain their own spending on local roads and report their performance in this regard to the department. Over time, the expenditure maintenance obligation placed on LGAs has been made less demanding but still, there have been significant numbers of LGAs that have not maintained their own expenditure in one or more years (and some LGAs have not maintained their own expenditure in any year). In these circumstances, the administrative practice adopted has been to waive the requirement where a satisfactory explanation has been provided and ask that the shortfall be made up in later years; but this often does not occur.

16. Another key aspect of program design was to pay LGAs quarterly in advance based on LGAs reporting the expenditure to date and forecast expenditure for the next three months in respect to each project they were undertaking under the program. Paying up to three months in advance was seen as necessary so that LGAs did not have to transfer funds from roadworks funded from their own resources.⁸ However:

• there have been many instances of LGAs being paid more than three months in advance due to factors such as accelerated funding during the last quarter of each financial year (so as to fully spend the annual program allocation) notwithstanding that these payments did not reflect LGA cash flow needs, and LGAs overstating their actual expenditure and/or submitting unreliable expenditure forecasts;
• experience with the program has shown that many LGAs do not require payments to be made in advance, such that 54 per cent of all payments made under the Standard Program have been made in arrears (and 90 per cent of LGAs were paid in arrears in one or more quarters); and
• the cost to the Commonwealth of advance payments remains considerable (up to $16.3 million over the life of the AusLink R2R Standard Program).⁹

17. Reflecting the judgement that LGAs were best placed to make decisions on road investment at the local level, the grant payment and acquittal processes were designed to be simple. However, there have been a range of important funding conditions where LGA compliance has been less than satisfactory. In this respect, and without detracting from the responsibility of individual LGAs to adhere to the prescribed funding conditions, there would be benefit in the department adopting a range of cost-effective strategies aimed at improving understanding of, and adherence to, program funding conditions and administrative arrangements by LGAs and their auditors. ANAO has made one recommendation to this end.

18. In addition, in light of experience as to how the program has operated over its first ten years, there would be benefit in the department reviewing key elements of the program design so as to confirm their continuing appropriateness, or otherwise proposing variations (recognising that decisions on program design are a matter for Government). In particular, there is value in consideration being given to:

• the formula that has been used to allocate R2R funding to individual LGAs in light of evidence of capacity constraints that affect the ability of some LGAs to both spend their R2R funds as well as maintain their own source expenditure on roads; and
• paying LGAs in advance rather than in arrears given that many LGAs have not sought payments to be made in advance and a significant proportion of advance payments that have been made have remained unspent by the respective LGAs for considerable periods of time.

19. DITRDLG has substantially implemented all recommendations made during the previous audit aimed at improving the administration of the program. In light of further experience with the program, ANAO has made a further two recommendations directed towards enhancing the administration of program accountability arrangements and strengthening the program governance framework.

Key findings by Chapter

Governance Framework (Chapter 2)

 20. Key elements of the governance framework in place for the AusLink R2R Programs were:

• the AusLink Act;
• a list of funding recipients and the amounts they were to receive¹⁰;
• Conditions Applying to Payments (the Funding Conditions) determined under section 90 of the Act; and
• Notes on Administration issued by the department, for use by LGAs in conjunction with the Funding Conditions.

21. The documented governance arrangements reinforced the considerable autonomy granted to LGAs in their delivery of R2R-funded works. This included LGAs deciding which projects they would undertake using their allocation of R2R funds, subject to providing DITRDLG with a works schedule. Works schedules are used by the department to assess whether the proposed works were eligible under the AusLink Act as well as to satisfy itself that payments were not being made more than three months in advance of the planned commencement date of the works (the works schedules were to include start and completion dates). Notwithstanding that the department reinforced to LGAs on a number of occasions and in various ways the importance of works schedules being kept up to date, ANAO's examination of 41 LGAs revealed that, in many instances, the works schedules did not include the required information, or were inaccurate.

22. ANAO made a number of suggestions to DITDRLG regarding enhancements that could be made to IMS to facilitate LGA compliance with the works schedule requirements and monitoring by the department.¹¹ More broadly, there would also be benefits from DITRDLG:

• fully implementing the planned program of financial audits of LGAs (undertaken by a contractor) given that those audits that were conducted (less than two thirds of the audits that were proposed) identified that LGAs had not complied with 38 per cent of those requirements that were examined; and
• giving greater emphasis to structured program risk management and evaluation, given that the R2R Program has been in operation for more than ten years.

Financial Management (Chapter 3)

Payment arrangements

23. Almost all LGAs received their full R2R allocation under the Standard Program and all LGAs received their Supplementary Program allocations as an up front, once only payment.

24. Payments under the Standard Program were to be made quarterly in advance and LGAs were required under the funding conditions to spend payments within six months of receipt. However, a waiver was issued by DITRDLG if a satisfactory explanation was provided for not spending the funds within this timeframe. ANAO's analysis of IMS data identified 435 instances (nearly nine per cent of all payments made under the Standard Program) where payments were not spent within six months of receipt.¹² The total amount of unspent R2R funds held by LGAs for more than six months as at the end of each quarter averaged more than $3 million, but at times was as high as $6.9 million. Where an LGA did not adhere once to the six months rule, it was common for this to be repeated.¹³

25. As a corollary, notwithstanding that payment in advance was intended to be the norm under the program, 90 per cent of LGAs were paid in arrears during one or more quarters, after expending their own funds on their R2R projects. More than one-half of all R2R payments made under the Standard Program were reimbursements to LGAs, comprising one in every three quarterly reports submitted to DITRDLG.

Spending of program allocations

26. Notwithstanding there was funding certainty and LGAs had four years in which to plan their roadworks and undertake the expenditure of funds, the life of program allocations for many LGAs exceeded their capacity to spend, on eligible roadworks, the funding provided.¹⁴ In this context, as would be expected, over the life of the program, the number of LGAs that received more than their annual allocation declined year on year, as progressively more LGAs received their full program allocation. However, this trend was reversed in the final year of the program, when around one-half of all LGAs were in ‘catch-up' mode and needed to increase their R2R expenditure. In this respect, some LGAs received up to almost 90 per cent of their full allocation as their final payout under the program.

27. This situation should also be considered in the context of the relatively high incidence of LGAs that have difficulty maintaining their own source expenditure on roads at the same time as spending their R2R allocation.¹⁵

Program Outcomes and Accountability (Chapter 4)

28. Of the approximately 16 750 road projects funded over the life of the AusLink R2R Program, most involved reconstruction, rehabilitation and widening of local roads; sealing along sections of gravel roads; sheeting and re-sheeting gravel roads with a new surface; or bridge or drainage works. In this context, LGAs have reported to DITRDLG that the key outcomes they achieved with their R2R funds have been: better asset management; improved road safety; and improved heavy vehicle access.

29. The grant payment and acquittal processes were, by design and in accordance with Government intentions, simple, with a range of post-payment audit and accountability arrangements in place. However, administration of the various accountability mechanisms for the significant quantum of program funding has not achieved full compliance. In particular:

• some seven per cent of LGAs did not agree to adhere to the funding conditions for the Supplementary Program prior to being paid a total of more than $10 million in June 2006;
• LGAs are required to erect signs in the prescribed format at each end of the works when the work began, to be maintained for one year after the project was completed, but the required signs were not in place for 22 per cent of projects inspected by ANAO that were required to display signage;
• although Annual Reports from LGAs to DITRDLG provide key information on the use of funds, outcomes achieved and whether LGAs have maintained their own spending on roads, a large proportion (60 per cent) of Annual Reports have been provided late, with some 20 per cent of the Reports containing errors and omissions of varying significance¹⁶;
• until recently, Annual Program Reports to the Parliament, which are required by the land transport legislation, have not been prepared in a timely manner, with the AusLink series of reports providing little in the way of reporting on the actual operation of the program; and
• the department did not establish and report against suitable performance indicators for the program.

Maintaining LGA expenditure on local roads

30. The R2R Program was intended to address the problem that a significant amount of local government road infrastructure was reaching the end of its economic life and its replacement was beyond the capability of local government. It was for this reason that the funding provided under the program was to be additional to existing road funding. However, data sourced from the Bureau of Infrastructure Transport and Regional Economics (BITRE) within DITRDLG indicates that national net expenditure on roads by local government was higher in each of the first four years of the R2R Program (2000–01 to 2003–04) than in any of the next three years (2004–05 to 2006–07, the most recent data available at the time of the audit).

31. Consistent with the fundamental importance to the R2R Program that funds provided by the Commonwealth be additional to existing road funding, provisions were included in the legislation, the R2R funding conditions and the Notes on Administration requiring each individual LGA to maintain its own source expenditure on constructing and maintaining local roads. In relation to this obligation, changes to the expenditure maintenance requirements introduced at the start of the Standard Program placed the department in a significantly improved position to monitor compliance by LGAs with their expenditure maintenance obligations.¹⁷ However:

• over time, changes to the program administrative arrangements have made the expenditure maintenance obligation less onerous for LGAs¹⁸; and
• the reporting by LGAs of their own source expenditure has been error prone¹⁹ and has been inconsistent with other reporting on LGA roads expenditure.²⁰ In this respect, each year the department has written to numerous LGAs to clarify or correct apparent anomalies in reported expenditure figures for the current year or previous years. However, the department has not amended its administrative arrangements to require that LGAs have their own source expenditure included within that part of their R2R Annual Report that is audited.²¹

32. Most LGAs reported to DITRDLG that they had spent more than the reference amount, on roads, from their own resources, for each year of the Standard Program. However, each year, up to nine per cent of LGAs reported that they had not met the expenditure maintenance requirements. For example, in 2005–06, overspends totalled more than $560 million, compared to underspends of almost $28 million. Where LGAs reported that they have not met the expenditure maintenance obligation, DITRDLG's practice has been to issue a waiver of the expenditure maintenance requirement. No requests for a waiver have been refused, and more than 275 waivers have been issued.

33. DITRDLG advised non-compliant LGAs that they were expected to make up for a shortfall in the years following a breach of the expenditure maintenance requirements. Of the 53 LGAs with shortfalls in 2005–06, eight LGAs were abolished and 18 LGAs again had shortfalls in one or more of the next three years. Of these 18 LGAs, 15 had not made up the cumulative shortfall at the time of the audit.²² Similarly, around one-half of the LGAs that had not met the expenditure maintenance requirement in 2006–07 had not made up the shortfall at the time of the audit.

Summary of agency response

34. DITRDLG's formal comments on the proposed audit report were as follows:

The audit found that the distribution of Australian Government funding under the Roads to Recovery Program to local government and local government authorities using these funds for road works have been effectively administered.

The audit also found that the Department of Infrastructure, Transport, Regional Development and Local Government (the Department) has substantially implemented all recommendations made during the previous audit and there is no suggestion that the administration of the program by the Department is not efficient and effective.

The Government's policy objective of providing funding directly to local government for the improvement of the local road system throughout Australia is being met and there is no evidence in the report that suggests systemic problems on the part of the Department or Local Government Authorities.

The audit raises some issues where consideration of future program arrangements may be warranted and the Department will work with local government authorities to achieve a greater consistency of understanding and interpretation of the program's administrative requirements.

The Department agrees to all of the recommendations.

Footnotes

¹ AusLink Annual Report 2007–08, p. 23.

² DITRDLG, Local Government National Report: 2006––07 Report on the Operation of the Local Government (Financial Assistance) Act 1995, p. 7. At the time of the ANAO audit the 2007–08 Report had not been presented to the Parliament.

³ For the composition of the $4.18 billion see Figure 1.1 in Chapter 1 of the audit report.

⁴ ANAO Audit Report No.31 2005–06, Roads to Recovery, Canberra, 1 March 2006.

⁵ In June 2009, the Nation Building Program (National Land Transport) Act 2009 (Nation Building Act) replaced the AusLink Act as the relevant land transport legislation.

⁶ Programs previously administered under the name ‘AusLink' were renamed as Nation Building programs in 2008–09. Source: DITRDLG Annual Report 2008–09, p. 22.

⁷ Consideration was also given to the long standing concern of South Australia that it received a disproportionately low level of funding under the FAGs identified for local roads.

⁸ In practice, DITRDLG scheduled the payments to LGAs for around the middle of the relevant quarter.

⁹ ANAO's audit of the initial R2R Program estimated the interest cost of payments in advance to be between $8.4 million and $19.4 million (ANAO Audit Report No. 31, op. cit., p. 29).

¹⁰ Determined by legislative instrument under Section 87 of the Act.

¹¹ These included additional IMS fields to separately capture some types of information and generation of system reports to prompt follow-up action where required.

¹² An additional 53 potential instances were also identified. However, there was insufficient information in DITRDLG's records to assess whether funds had or had not been expended within six months in these cases, as the respective LGAs had not submitted their quarterly reports for the relevant periods.

¹³ Multiple breaches (up to seven times) were incurred by 96 per cent of all LGAs that had not complied with the six months rule. ITRDLG also made 14 payments to LGAs totalling nearly $2.4 million which should not have been made, because the LGAs were in breach of the six months rule at the time and had not been issued with waivers.

¹⁴ Audit Report No. 31 2005 06 also noted that there was a disproportionately large payout of program funds to LGAs in the final year of the initial R2R Program.

¹⁵In addition, in March 2009, ALGA wrote to the Minister for Infrastructure, Transport, Regional Development and Local Government requesting that consideration be given to widening the definition of ‘roads' to include ‘other transport infrastructure' as: ‘A number of councils in urban areas have identified other transport infrastructure being of a higher priority than roads and have raised the possibility of using their R2R Program funding for those priorities'.

¹⁶ These included important parts of the form not being completed; the required certification not being provided (including incorrect years being specified for the expenditure maintenance certificate and errors in calculating averages); reports prepared on an accruals rather than cash basis; and missing or incorrectly worded audit certificates.

¹⁷ In particular, LGAs were required to specify the amount spent using their own resources in each year (from 2000–01) together with the reference average amount. However, if DITRDLG had also required LGAs to report their expenditures for the years 1998–99 and 1999–2000, it would have been able to determine each LGA's reference amount under the initial R2R Program, thus enabling it to monitor and quantify any cost shifting from LGAs to the Commonwealth since inception of the program.

¹⁸ For example:

• LGAs were able to reduce the standard five-year reference period to three-years by excluding the years with the highest and lowest expenditure; and
• LGAs were taken to have met the expenditure maintenance requirement where the average expenditure in that year and the previous year (or previous two years) exceeded the reference average (this is referred to as the averaging provisions).

¹⁹ In this respect, a series of financial audits of LGAs commissioned by DITRDLG found that 29 per cent of the LGAs examined had misreported their own source expenditure for one or more years.

²⁰ Specifically, data compiled by the West Australian Local Government Association (WALGA) indicated that less than one quarter of the annual own source expenditure figures reported to the department by WA LGAs during 2000–01 to 2007–08 matched the figures reported to WALGA. In addition, nearly 90 per cent of LGAs did not maintain their own source expenditure in one or more years, some LGAs did not meet the requirement in any years, and 30 per cent of LGAs had not made up the cumulative shortfall (approximately $56 million) as at 30 June 2008.

²¹ Own source expenditure figures are reported by LGAs in Part 3 of the R2R Annual Report. The independent audit by the LGA's financial auditor covers Part 1 only.

²² At this time, a number of LGAs had not yet submitted their 2008–09 R2R Annual Reports.