Introduction

1. The former Government introduced three significant programs¹ to improve the supply of affordable housing to low and moderate income households. One of these programs, the $200 million Building Better Regional Cities (BBRC) program was the subject of this audit. The BBRC program was announced in July 2010 to ‘help build up to 15 000 more affordable homes in regional cities over three years and relieve pressure on our major capital cities, so that Australia can grow sustainably’.

2. The objective for the BBRC program is:

to invest in local infrastructure projects that support an increase in the number of homes for sale and rent that are affordable for working families on ordinary incomes, in communities that are experiencing positive jobs and population growth that need more homes to be built.

3. The program approach involved awarding funding through a competitive application process for local infrastructure projects (such as connecting roads, bridges, upgrades to drains and community centres) that would support new housing developments. Grant applications were required to demonstrate how low to moderate income earners would benefit as a result of upfront development costs being borne by the Australian Government. This included providing assurance to demonstrate how benefits would be passed onto purchasers. Further in this respect, the signed grant agreements specify the total quantity of rebates or subsidies that must be provided to purchasers (as a percentage of the grant amount).

4. The program funding available for grants was halved in the May 2011 Budget to $100 million as one of a number of spending cuts made to assist in meeting the expected cost to the Australian Government of contributing to the rebuilding of flood‑affected regions.² As a consequence, rather than helping to build up to 15 000 more affordable homes, Ministers decided that the program target was to be proportionally reduced to ‘help build up to 8000 additional homes’.

5. The amount available for BBRC grants was subsequently increased by $14.5 million in May 2012 to allow additional BBRC projects from the application round to be funded.

Program administration

6. The then Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA), now the Department of Social Services (DSS), was initially responsible for the design and implementation of the BBRC. The Administrative Arrangements Order of 14 September 2010 transferred responsibility for the program to the then newly created Department of Sustainability, Environment, Water, Population and Communities (DSEWPaC), now the Department of the Environment (Environment). The effective transfer of responsibility for the program between the two departments, including the associated resources, occurred on 28 October 2010. Environment was responsible for the establishment and design of the program and also commenced the assessment of grant applications.

7. In mid‑December 2011, the administration of the BBRC Program transferred back to the DSS. The department’s first task was to complete the assessment of applications, and prepare funding recommendations for Ministerial consideration. After funding decisions were made, the department was responsible for negotiating, signing and administering grant agreements with the successful applicants. The department is also responsible for monitoring and reporting of the performance of the various housing affordability programs.

Overview of the funding round

8. There were 47 councils across six states and the Northern Territory identified as eligible to apply for BBRC funding. Applications opened on 7 October 2011 and closed on 18 November 2011. A total of 43 applications were submitted by 36 councils (seven councils submitted two applications). The funding amounts sought ranged from $0.18 million to $15 million, with a total of $331 million in BBRC funding sought across the 43 applications.

9. As a competitive grants program, the published program guidelines included five assessment criteria. The guidelines had emphasised the role that the assessment criteria were to play in securing the desired outcomes and value for money. Specifically:

The assessment criteria are intended to prioritise projects which meet the objectives of the BBRC Program and which deliver strong outcomes and represent value for money to the Australian Government.

10. Funding recommendations were provided by DSS in late March 2012 to the then Minister for Housing and Homelessness. The department recommended that a total of $100 million be awarded to 15 applications from 13 councils. The then Minister for Housing and Homelessness did not accept this recommendation and sought further information before making his funding decisions.

11. After receiving a further briefing and following agreement from the then Prime Minister of additional funding for the program, the Minister awarded 17 grants totalling $113.79 million to 17 councils on 4 May 2012. Funding was approved for 12 of the 15 applications that had been recommended earlier by the department as well as a further five applications that the department had assessed as being less meritorious than those it recommended. The five applications not recommended by the department but approved by the Minister had been assessed as offering ‘marginal’ value for money for the BBRC funding sought, and had also been assessed as not adequately meeting at least two (and in one instance, each) of the five merit criteria.

12. The approval of $2.05 million in funding for one application was withdrawn in late June 2012 as the council was unwilling to provide any direct assistance for affordable housing. Accordingly, on 3 July 2012 the then Minister announced funding of $112.1 million³ to be provided to 16 of the 17 applications that were approved for funding on 4 May 2012.

13. In March 2013, two of the projects that had been approved for funding were terminated and withdrawn respectively (Wagga Wagga and Wyong).⁴ The resulting savings allowed funding of $12 million to then be approved for a further two projects, located in Ballina and Bunbury. Appendix 2 provides a full list of projects that have been awarded BBRC program funding.

Audit objective, scope and criteria

14. The objective of the audit was to assess the effectiveness of the design and conduct of the funding round for the Building Better Regional Cities Program.

15. The audit criteria reflected relevant policy and legislative requirements for the expenditure of public money and the grant administration framework, including the Commonwealth Grant Guidelines (CGGs) and ANAO’s grants administration Better Practice Guide.

Overall conclusion

16. At the completion of the BBRC program application round, 17 grants totalling $113.8 million were awarded. Three of these projects did not proceed to contract or are no longer under contract, and have been replaced by two other projects. The 16 projects currently contracted under the BBRC program are required to deliver nearly 3000 subsidised lots/dwellings in 15 regional cities, across four states.

17. Key elements of the design of the BBRC program to implement the then Government’s policy were effective. Of note was that the BBRC program guidelines outlined that funding would be awarded through a competitive selection process, an approach that is consistent with the Commonwealth Grant Guidelines. In addition, the BBRC program guidelines clearly identified the 47 eligible regional councils and effective steps had been taken to encourage them to apply for funding. Further, the program guidelines outlined the five assessment criteria that were to be used to select those projects that best met the program objective and would deliver strong outcomes and represent value for money. This was supported by the department’s documented assessment methodology providing a clear and consistent basis for differentiating between the comparative merits of individual projects.

18. However, the BBRC program has been implemented in a way that gave insufficient attention to the program’s objective, the related key performance target (of delivering up to 8000 additional more affordable homes), the program guidelines and the importance of achieving value from the expenditure of public funds. Rather, emphasis was given to spending the program’s $100 million budget, notwithstanding that the recommended applications were expected to deliver less than 3200 additional more affordable homes (a figure 60 per cent below the program target), and that most of the applications had been assessed by the department to lack sufficient merit⁵ and/or as not providing value for money.

19. This situation was compounded when it was decided to apply unpublished eligibility criteria following projects submitted by local governments that had regard to the extent of socio‑economic disadvantage, and limiting projects to one per local government. This denied funding to some of the better credentialed applications submitted in response to the program guidelines, and increased the amount of BBRC program funding to be awarded. The result was that $113.8 million⁶ in BBRC grant funding was awarded to 17 projects that were expected to provide up to 3875 subsidised lots/dwellings, a figure less than half the targeted amount from a $100 million program, with all but four of the approved applications assessed to have not adequately met at least one of the published merit criteria.

20. The award of program funding in this manner has been reflected in the BBRC program performing poorly in terms of delivering the benefits envisaged when the program was announced, both in relation to the amount of new affordable housing being delivered and the extent of benefits being passed onto purchasers.⁷ In addition, reflecting the quality of those applications approved for funding, a number of projects have not proceeded or have had significant changes to their contracted scope. Also, significant risks relating to project delays have materialised. In particular, only eight of the contracted projects are on track to deliver the BBRC‑funded infrastructure works by the original program deadline of 31 March 2014.

21. Against this background, a key message from ANAO audits of grant programs over the years, and highlighted in ANAO’s grants administration Better Practice Guides⁸, is that selecting the best grant applications promotes optimal outcomes for least administrative effort and cost. Another recurring theme in the ANAO’s audits of grants administration has been the importance of grant programs being implemented in a manner that accords with published program guidelines so that applicants are treated equitably, and those applications that are funded are the most likely to further the program’s objectives.⁹

22. Both of the ANAO’s recommendations relate to DSS increasing its focus on pursuing value for money outcomes when administering grant programs.

Key findings by chapter

Assessment of Applications (Chapter 2)

Program accessibility and eligibility checking

23. Program access was facilitated through departmental engagement with the 47 eligible councils as well as by encouraging the eligible councils to apply for BBRC program funding. Applications were accepted between 7 October 2011 and 18 November 2011, with a total of 43 applications received. Forty‑two of the 43 applications received were considered to be eligible.

24. Some flexibility was employed in the department’s eligibility checking processes as more than one‑third of applications sought funding for ineligible infrastructure items or project costs. A decision was made to assess the eligible items and disregard any parts of the application that related specifically to ineligible infrastructure or ineligible project costs, with these costs excluded from the recommended project funding. The amount of funding approved by the Minister excluded those amounts identified by the department as ineligible. However, DSS signed a funding agreement that either included ineligible works in the scope of the funding agreement or tied milestone payments to ineligible cost items for seven of the 17 projects (41 per cent) approved for funding in May 2012.¹⁰ The effect of these approaches was that the Australian Government was funding expenditure identified as ineligible.

Merit assessment

25. The scoring methodology developed and documented for the merit assessment of BBRC applications in terms of the five merit criteria was sound. In particular, the numerical rating scale adopted provided a clear and consistent basis for effectively differentiating between the relative comparative merits of individual applications. In addition, appropriate scoring thresholds were established for each criterion, tailored to reflect statements in the guidelines as to the extent that an application needed to meet a criterion.

26. The department identified early during the assessment process, a high proportion of applications had not met the scoring threshold for one or more of the criteria. In this context, DSS decided that two of the five criteria were of greater importance given that they reflected an application’s ability to meet the BBRC program objectives, deliver strong outcomes and provide value with public money for the Australian Government funding that had been sought. However, the different relative importance of the criteria had not been adequately addressed in the program design, such that there had been no weighting of criteria identified in the published program guidelines.

Advice to the Minister and Funding Decision (Chapter 3)

27. In March 2012, DSS provided funding recommendations to the then Minister for Housing and Homelessness. Consistent with the grants administration framework, the briefing package clearly identified to the then Minister those 15 applications the department recommended be awarded BBRC grant funding. Of those 15 applications, four had been assessed as adequately meeting each of the published merit criteria, but the other 11 recommended applications had been assessed to not adequately meet at least one, and as many as three, of the five merit criteria (see further in Table 2.3 on page 58).¹¹

28. An important matter not adequately addressed by the briefing was the extent to which the recommended applications would provide affordable housing that would enable the program to deliver on its target of up to 8000 additional affordable homes. Assessment records indicate that the expected outcomes from the 15 recommended projects would result in approximately 3120 subsidised lots/dwellings being delivered under the BBRC program. This was some 4880 (more than 60 per cent) less than the program target of up to 8000. However, no advice was provided to the Minister as to whether awarding $100 million to the 15 recommended projects (of which 11 had not adequately met each of the published merit criteria) to deliver less than half of the program’s targeted number of more affordable homes could be considered to provide value with public money.

29. The then Minister did not accept the department’s recommendation to award funding to 15 projects. After receiving additional information through a further briefing, the Minister awarded funding to 17 applications, 12 of which had been recommended earlier for funding by the department. In respect to the funding decision:

• unpublished eligibility criteria, that were inconsistent with key design parameters of the program (approved and confirmed by the then Government), were applied by the Minister and this resulted in funding not being approved for three recommended applications.¹² A further two (lower ranked) applications were excluded from the possibility of being awarded funding; and
• the five not recommended but approved applications¹³ had been assessed as offering ‘marginal’ value for money for the BBRC funding sought. They had also been assessed as not adequately meeting at least two (and in one instance, each) of the five merit criteria. Approving funding for these applications was seen as necessary, otherwise a significant proportion of the available funding of $114.5 million would not have been allocated.

30. The 17 approved applications were expected, on the basis of the department’s assessment, to provide up to 3875 subsidised lots/dwellings. This is less than half of the up to 8000 additional affordable homes that had been approved by the then Government as a key program parameter.

Delivery of More Affordable Housing (Chapter 4)

31. The department was instructed by the then Minister to ensure value for money and adequate affordability outcomes in negotiating grant agreements. This was a challenging task for the department in the circumstances and the efforts achieved mixed results. On a positive note, DSS was able to negotiate an increased number of subsidised lots/dwellings to be contracted for delivery for five projects. Also, for 11 projects, the grant agreement requires that the quantum of rebates/subsidies to be provided to purchasers of the lots/dwellings will total at least 60 per cent of the BBRC grant amount.

32. However, for most projects, the department was unable to negotiate an increase to the number of subsidised lots/dwellings that would be delivered.¹⁴ The outcome was that the 16 projects currently contracted for delivery under the BBRC Program are required to deliver 2969 subsidised lots/dwellings¹⁵ in 15 regional cities across four states. In addition, some funding agreements included additional numbers of houses/lots that councils stated would be supported in being brought forward under the program.

33. Further, the subsidised lots/dwellings contracted for delivery involve a significantly greater cost than had been envisaged when the then Government had decided on the key program parameters. In this respect, each subsidised lot/dwelling involves grant funding of $38 100, a figure more than three times the ‘achievable’ figure of $12 500 per home that underpinned Government decisions on the program parameters. Further, the savings to be passed onto purchasers of the subsidised lots/dwellings are often quite modest in comparison to the grant funding that has been provided. Specifically:

• the total of the subsidies currently contracted to be provided ($89.74 million) is 21 per cent less than the contracted BBRC funding ($113.25 million). This ratio is expected to further deteriorate in light of a number of councils indicating to DSS that the housing developments that are being supported by the BBRC funded projects will be unable to provide the contracted quantum of subsidised housing and/or will be seeking to reduce the quantum of the subsidy available to purchasers; and
• for three‑quarters of the projects, the contracted subsidies are less than the grant funding that has been provided (on average, a subsidy of some $30 200 is being provided in return for a BBRC grant of more than $38 100).

34. Achieving the program outcomes that have been contracted also depends on approved projects being delivered in a timely manner. However, reflecting the quality of those applications approved for funding, the BBRC program has seen the relatively high incidence of approved projects not being contracted and delivered, or having significant changes to their contracted scope and/or delivery timeframes. It has also been commonplace for the signed grant agreements to be varied, including to reflect delays in project progress. The ANAO’s assessment is that there are significant risks (not highlighted to date in departmental reporting on the program) that a number of the contracted projects will not deliver the BBRC‑funded infrastructure works by 31 March 2014.

35. As at 6 March 2014, only eight of the 16 contracted projects are on track to deliver the completed infrastructure works by the original 31 March 2014 program deadline. Two projects successfully negotiated extended timeframes as part of funding agreement negotiations in May 2013; whereas the six remaining projects are between seven to 30 months behind schedule.

36. Information on BBRC program performance indicators and results has been included in departmental budget statements and annual reports. However, the approach taken has not focused on the extent to which the program is expected to assist councils to help build up to 8000 additional more affordable homes, which is the extant target approved by Ministers. This target will not be achieved. This situation has been reflected in DSS adopting a performance target for the program of delivering 2000 additional subsidised lots/dwellings.

37. A draft evaluation strategy was developed early in the implementation of the program, but was not finalised. The extent of any evaluation activity, and the approach to be taken, has not yet been resolved, notwithstanding that funding was awarded nearly two years ago and a key program deadline was for infrastructure construction work being funded by the BBRC program to be completed by 31 March 2014.

Summary of agency responses

38. The Department of Social Services’ and the Department of the Environment’s summary responses to the proposed audit report are provided below, with each department’s full response at Appendix 1.

Department of Social Services

I was particularly pleased that the report noted the Department has learnt from the findings of the earlier audit of the Housing Affordability Fund. I also welcomed the comment that the scoring methodology and rating scale provided a clear and consistent basis for the assessment of applications.

The report provides a constructive basis to further strengthen the delivery and performance management of the remaining projects in the BBRC program. The Department accepts the recommendations as presented in the Section 19 report, noting that recommendations will assist us in the design of future programmes. The Department has recently established a centralised Programme Office, which sets the frameworks and business processes to ensure consistent, efficient and effective administration of grants and, over time, administered procurement activities. The Programme Office will be well placed to implement ANAO recommendations where they relate to systemic practices.

The Department agrees with both the recommendations put forward by the ANAO.

Department of the Environment:

The Department of the Environment is grateful for the opportunity to respond to the audit report and notes the audit recommendations. The Department welcomes the ANAO’s conclusion that key elements of the design of the Building Better Regional Cities Program to implement the then Government’s policy were effective. The Department notes that the audit has identified a few areas for improvement in delivery aspects for which the Department was responsible, and will incorporate these improvements into current and future grants programmes.

Recommendations

Set out below are the ANAO’s recommendations and DSS’ abbreviated responses. More detailed responses from DSS are shown in the body of the report immediately after each recommendation.

Footnotes

[1] Namely, the National Rental Affordability Scheme (NRAS), the Housing Affordability Fund (HAF) and the Building Better Regional Cities (BBRC) program.

[2] During the 2010–11 Australian spring and summer seasons, the eastern states were subject to widespread flooding and Queensland was also impacted by a number of tropical cyclones.

[3] The amount of funding approved had been increased by $370 000 after one successful applicant identified that an error had been made in the assessment of its application.

[4] The agreement for the Wagga Wagga project was terminated as council was unable to secure a developer to deliver the project. The approval of funding for the Wyong project was withdrawn without a grant agreement having been signed after the proponent proposed a significant reduction in the number of lots/dwellings to be delivered by the project.

[5] In particular, a number of projects had been assessed as not meeting the key policy criterion that projects assist communities that are experiencing jobs and population growth and which need more homes to be built.

[6] As noted at paragraph 5, additional funds were transferred to the BBRC program (from the Housing Affordability Fund) so as to allow further applications to be approved.

[7] In this latter respect, see further at paragraph 33.

[8] ANAO Better Practice Guide, Implementing Better Practice Grants Administration, Canberra, June 2010, p. 7 and ANAO Better Practice Guide, Implementing Better Practice Grants Administration, Canberra, December 2013, p. 3.

[9] Similarly, the grants administration framework was developed based, in part, on recognition that potential applicants and other stakeholders have a right to expect that program funding decisions will be made in a manner, and on a basis, consistent with the published program guidelines.

[10] The milestone payments tied to ineligible costs were considerable; representing $14.95 million of the $41.58 million (36 per cent) contracted to be paid in respect to these six projects. Ineligible costs included: project management fees, design costs and stakeholder consultation expenses, and contingencies or escalation factors associated with construction works.

[11] The briefing package also identified that the remaining 28 applications were not recommended for approval, as they were ineligible (one application) or had shortcomings against at least one, if not more of the published merit criteria (the remaining 27 applications).

[12] Specifically:

• it was decided that councils that submitted more than one application could only have one of these approved for funding. The program guidelines had advised councils that they could submit up to three applications, and did not include any limit on the number of applications that could be approved. A decision was later taken following representations from one of the two councils particularly affected by this decision to award funding to that council for the second of its two applications. No such action was taken in relation to the second affected council; and
• seven of the 47 (15 per cent) organisations listed in the program guidelines as eligible were excluded from being considered for funding on the basis that they were suffering less from socio‑economic disadvantage than other eligible councils. The approach taken meant that seven of the eligible councils could not have been successful in being awarded funding, irrespective of how meritorious their applications were.

[13] Under the grants administration framework, these five grants should have been reported to the Finance Minister but departmental advice to Ministers had not identified that these grants required reporting as instances of a Minister awarding a grant that the department had recommended be rejected.

[14] For five projects, the signed grant agreement involved fewer lots/dwellings than had been expected when funding was approved. The total reduction was 1582.

[15] This figure has not been reduced to reflect projects that have current requests for variations with the department, or projects that the department has identified as being ‘at risk of not meeting BBRC objectives’.