Introduction

1.1 The 2009 Intergovernmental Agreement on Federal Financial Relations (Intergovernmental Agreement)¹ established the overarching framework for Australia’s federal financial relations. It recognises that while state and territory governments (States) have constitutional responsibility for many areas of service delivery, coordinated action may be desirable to address Australia’s economic and social challenges. The framework, and its principles, was intended to provide the States with flexibility to deliver services, while increasing governments’ accountability to the public through a combined focus on the achievement of outcomes, clearer specification of roles and responsibilities, and enhanced performance reporting.

1.2 The Intergovernmental Agreement provides for three categories of funding transfer from the Commonwealth to the States:

• general revenue assistance, including the ongoing provision of goods and services tax (GST) payments, to be used by the States for any purpose;
• National Specific Purpose Payments to be spent in the key service delivery sectors including schools, health care, housing and disability services; and
• National Partnership Payments to support the delivery of specified outputs or projects, to facilitate reforms or to reward those jurisdictions that deliver on nationally significant reforms.

The Intergovernmental Agreement is to operate indefinitely from 1 January 2009 unless revoked through unanimous agreement of the signatories.

1.3 A key feature of the framework is centralised payment. Under these arrangements, all payments are processed centrally by the Commonwealth Department of the Treasury and paid directly to each state treasury. State treasuries are responsible for distributing the funding within their jurisdictions. Having state treasuries distribute Commonwealth sourced funding to state portfolio agencies helps reinforce that state agencies are primarily accountable to their respective parliaments and public for their service delivery performance, including their delivery of programs for which the Commonwealth provides a financial contribution. In the Commonwealth, the Treasurer is accountable for the appropriations, estimates and payments under the framework.

1.4 In 2017–18, the Commonwealth provided the States $119 billion in total payments, with $63.1 billion (53 per cent) provided for GST and general revenue assistance, $42.2 billion (35 per cent) for National Specific Purpose Payments and $13.7 billion (12 per cent) for National Partnership Payments.² As Figure 1.1 shows, over the first eight years of the Intergovernmental Agreement, overall spending increased at 3.9 per cent average annual growth. Within this overall spend, funding for National Partnership Payments varied significantly with the greatest payment transfer ($24.2 billion) in 2010–11 in response to the global recession and the Council of Australian Governments (COAG) reform agenda, and the smallest payment transfer ($11.4 billion) in 2012–13.

Figure 1.1: Commonwealth payments to state/territory governments, 2009–10 to 2017–18

Source: Commonwealth Budget Papers No. 3, 2009–10 to 2017–18.

1.5 The Intergovernmental Agreement is an agreement of COAG.³ Although COAG is the key decision-making body with respect to the implementation of the Intergovernmental Agreement, it has delegated responsibility for general oversight and operation of the agreement to the Council on Federal Financial Relations. The Council is comprised of the Commonwealth Treasurer as Chair and the state Treasurers. The Council generally meets biannually, however it can meet more frequently if required.

National Partnership Agreements

1.6 Payments under National Partnership Agreements differ from National Specific Purpose Payments in that they are time limited and linked with reform activities or projects. Under the Intergovernmental Agreement, the two types of National Partnership Agreements are those that:

• facilitate reforms or reward those jurisdictions that deliver on nationally significant reforms; and
• support the delivery of specific outputs or projects, including Project Agreements that are for low value and/or low risk projects.

1.7 Implementation Plans may be required where there are jurisdictional differences in context or approach to implementation under National Partnership Agreements, or where information additional to the National Partnership Agreement is required to increase accountability and transparency. Implementation Plans are usually bilateral agreements between the Commonwealth and one State, which are negotiated between the Commonwealth portfolio Minister and the State portfolio Minister.

1.8 National Partnership Agreements are signed by the Prime Minister, Premiers and Chief Ministers, and are to be drafted in consultation with the Department of the Prime Minister and Cabinet, Commonwealth Treasury and the States’ First Ministers and Treasury departments. Project Agreements are signed by relevant Commonwealth and State Portfolio Ministers although they are still to be drafted and negotiated in consultation with First Ministers and Treasury departments. Where substantial elements of an agreement are to be varied, the agreement should be amended by the signatories to the agreement.

1.9 National Partnership Agreements are to define the mutually agreed objectives, outcomes, outputs and performance milestones related to the delivery of specific projects, improvements in service delivery or reform initiatives. Project Agreements that have been developed for low value and/or low risk projects only require outputs to be specified, not objectives and outcomes.

1.10 As Figure 1.2 shows, there was a marked increase in the number of National Partnership Agreements from 1 July 2009 to 1 July 2012, in response to the global recession and the COAG reform agenda. By 2012 there was almost a doubling of the number of agreements, reaching 160 agreements compared to 82 agreements in 2009 when the Intergovernmental Agreement was first established. Since 2013 there has been a steady decline in the number of National Partnership Agreements, to 54 agreements at 1 July 2017 (refer Appendix 2 for a list of National Partnership Agreements as at 1 July 2017).

Figure 1.2: Number of National Partnership Agreements, July 2009 to July 2017

Source: Department of the Treasury.

Audit approach

Rationale

1.11 The ANAO selected National Partnership Agreements for audit because of the risk associated with the transfer of significant Commonwealth funds to the States (on average $16 billion per year) through these agreements under the Intergovernmental Agreement. The Intergovernmental Agreement established a new framework designed to improve the transparency and accountability of National Partnership Agreements with a clearer focus on the delivery of specified outcomes. The audit aims to provide assurance that National Partnership Agreements have been developed and implemented in line with the transparency, performance and funding requirements of the Intergovernmental Agreement.

Objective

1.12 The objective of the audit was to examine the effectiveness of monitoring and payment arrangements under National Partnership Agreements.

1.13 To form a conclusion against the audit objective, the ANAO adopted the following audit criteria:

• monitoring and payment arrangements for National Partnership Agreements have been developed in line with the principles and design requirements of the Intergovernmental Agreement on Federal Financial Relations;
• monitoring of the performance of the states and territories by portfolio departments has been conducted in line with National Partnership Agreements; and
• the Commonwealth Treasury has made payments in line with the financial requirements of the National Partnership Agreements and the advice of the administering portfolio departments.

Scope

1.14 The audit examined whether Commonwealth payments to state and territory governments under selected National Partnership Agreements were based on agreed performance benchmarks/milestones and payment requirements. The audit included an examination of the performance reporting and financial requirements of National Partnership Agreements, and an analysis of a selection of agreements to establish whether payments made in 2015–16 and 2016– 17 were properly approved by the administering portfolio department. The audit also examined the Department of the Treasury’s processes for ensuring accurate and timely payments.

Entities selected for inclusion in the audit

1.15 In 2017–18, National Partnership Agreements were managed by 15 Commonwealth Departments as shown in Figure 1.3. The Department of Health is responsible for managing the largest number of National Partnership Agreements (19 agreements) and one of the two agreements managed by the Department of Infrastructure, Regional Development and Cities—the National Partnership Agreement on Land Transport Infrastructure Projects—involves the largest transfer of funds ($6.3 billion) which is almost half of the $13.7 billion transferred for National Partnership Agreements in 2017–18.

Figure 1.3: National Partnership Agreements, 2017–18

Note: Commonwealth departments include Infrastructure (Department of Infrastructure, Regional Development and Cities), DSS (Department of Social Services), Treasury (Department of the Treasury), Education (Department of Education and Training), Health (Department of Health), Agriculture (Department of Agriculture and Water Resources), AGD (Attorney-General’s Department), Employment (Department of Jobs and Small Business), Finance (Department of Finance), DFAT (Department of Foreign Affairs and Trade), Communications (Department of Communications and the Arts), PM&C (Department of the Prime Minister and Cabinet), Industry (Department of Industry, Innovation and Science), Environment (Department of the Environment) and Defence (Department of Defence).

Source: ANAO analysis of Budget Papers.

1.16 The audit examined National Partnership Agreements administered by five Commonwealth Departments: Prime Minister and Cabinet; Treasury; Agriculture and Water Resources; Health; and Infrastructure, Regional Development and Cities.

Methodology

1.17 The audit methodology included:

• reviewing National Partnership Agreements listed on the Council on Federal Financial Relations website;
• assessing reporting and financial requirements of selected National Partnership Agreements;
• examining assessment processes used by portfolio departments for a selection of Project Agreements, Implementation Plans and schedules of National Partnership Agreements outlining key deliverables/benchmarks;
• assessing payment controls for National Partnership Agreement payments drawing on analysis in the ANAO’s audits of financial statements; and
• reviewing documents and interviewing staff.

1.18 The audit assessed 17 of 71 National Partnership Agreements funded as at 1 July 2016. These 17 agreements involved the transfer of 55 per cent of funding under National Partnership Agreements to the States. The ANAO targeted high risk, high value agreements in the selection process, with a quarter of the sampled agreements randomly selected. The selected National Partnership Agreements were administered by five Commonwealth Departments, and were also assessed in the ANAO’s audits of financial statements in 2015–16 and 2016–17. The findings of the financial auditors in relation to payment accuracy were used to assess criterion 3 in relation to the correctness and accuracy of payments made by the Department of the Treasury.

1.19 Of the 17 National Partnership Agreements selected for initial analysis against the requirements of the Intergovernmental Agreement (criterion 1), 10 agreements were selected for supplementary analysis in relation to performance monitoring by departments (criterion 2). Selection of the 10 agreements was based on five criteria: high financial value; mix of State schedules to Agreements, with all agreement types represented (Project Agreements, Implementation Plans, National Partnership Agreements with schedules, National Partnership Agreements without schedules); payment types represented (reward/facilitation payment and project payment); range of risk rating (using the Department of the Treasury’s risk rating scale); and mix of performance reporting (milestones, benchmarks).

1.20 The audit was conducted in accordance with the ANAO Auditing Standards at a cost to the ANAO of approximately $365 000.

1.21 Team members for this audit were Marian Allen, Luke Josey, Shane Svoboda, Ben Readshaw and Andrew Morris.

Are National Partnership Agreements consistent with the principles and design requirements of the Intergovernmental Agreement?

2.1 The objectives and principles of the Intergovernmental Agreement are supported by a series of design requirements for agreements that are intended to improve the quality, efficiency and effectiveness of government service delivery through agreements that:

• clarify the level of government responsible for achieving outcomes and outputs so that the appropriate government can be held accountable;
• provide flexibility in the delivery of services by the States, including through reduced Commonwealth prescription, a focus on achieving outcomes and incentives for implementing reforms and achieving outcomes; and
• enhance accountability to the public for the outcomes achieved or outputs delivered under National Partnership Agreements.⁴

2.2 A Guide for National Partnership Agreements prepared by the Council on Federal Financial Relations outlines the design requirements (refer Appendix 3) for the National Partnership Agreements, consistent with the design principles of the Intergovernmental Agreement.

2.3 The ANAO’s examination of 17 National Partnership Agreements found a high level of consistency with the design requirements of the Intergovernmental Agreement, as evident in Table 2.1. Where there was inconsistency, this was usually because the design requirement did not apply at the time of signing or to the type of agreement.

Table 2.1: Consistency of National Partnership Agreements with design requirements

Note a: The Review Agreement for the Home and Community Care Program existed prior to the 2009 Intergovernmental Agreement on Federal Financial Relations and has been classified as a ‘deemed’ National Partnership Agreement.

Note b: Project Agreements are a simpler form of a National Partnership Agreement for low value and/or low risk projects.

Source: ANAO analysis.

2.4 Outcomes were not specified in two agreements on Specified Projects and Health Infrastructure Projects and should have been. These two agreements were developed to consolidate and replace previous stand-alone agreements and are omnibus agreements that were to be phased out following the findings of the 2010 Heads of Treasuries’ Review. Omnibus agreements were introduced in 2009 as a means of reducing administrative costs associated with implementing small, sometimes related projects by allowing Portfolio Ministers rather than First Ministers to sign off on specific projects. However, the 2010 Heads of Treasuries’ Review noted that omnibus agreements lacked transparency as First Ministers were signing off on a ‘shell’ document with relevant project details attached in Implementation Plans. Also, they noted the difficulty with specifying objectives and outcomes for projects that were often unrelated. The 2010 Heads of Treasuries’ Review recommended that omnibus agreements were to be phased out and replaced with Project Agreements for low value/low risk projects that could be signed by Portfolio Ministers rather than First Ministers.⁵ To be consistent with the objectives for National Partnership Agreements, Project Agreements should also have links to outcomes.

2.5 Under the Intergovernmental Agreement, National Partnership Agreements are time limited agreements and it is expected that agreements would identify expiry dates. However, four of the 17 agreements examined did not have an expiry date. While the agreements on Specified Projects and Health Infrastructure Projects did not have a specific expiry date, expiry of the agreement was linked to completion of projects in the agreements’ schedules. The 2009 National Partnership Agreement on Water for the Future also did not have an expiry date, which the department advised reflects the commitments of the Water Management Partnership Agreements that were being developed with States based on the 2008 Murray-Darling Basin Intergovernmental Agreement.

2.6 Although more than half (65 per cent) of the National Partnership Agreements examined were missing a brief overview summarising the agreement, these agreements were in place prior to 2015 when it became a design requirement for National Partnership Agreements.

Processes for developing agreements

2.7 The high level of adherence to the design principles and requirements of the National Partnership Agreements has been achieved in the context of central oversight and common processes introduced by the departments of the Prime Minister and Cabinet and the Treasury following the introduction of the Intergovernmental Agreement in 2009. Standard processes require:

• Commonwealth Portfolio Ministers to obtain policy and Budget authority from the Prime Minister and Treasurer, respectively, before a National Partnership Agreement or Project Agreement is considered;
• Commonwealth entities to obtain a payment classification from the Department of Finance before a National Partnership Agreement or Project Agreement is considered, to determine whether a payment falls under the Federal Financial Relations framework⁶;
• early consultation between central entities and portfolio entities on the design of National Partnership Agreements;
• early consultation with the Department of the Treasury (Treasury) on the payment design structure for agreements, including whether agreements should recognise partial performance;
• the use of a standard agreement template for National Partnership Agreements, Implementation Plans and Project Agreements;
• the Prime Minister, Premiers and Chief Ministers to agree and sign National Partnership Agreements (except for Project Agreements that can be signed by Portfolio Ministers); and
• variations to National Partnership Agreements in relation to milestones, funding and reporting conditions to be agreed between signatories to agreements (generally First Ministers) and not be unilaterally changed during the life of the agreement.

2.8 Standard processes are outlined in Federal Finance Circulars and guidance material that is publicly available on the Council on Federal Financial Relations website.⁷ The guidance material is collectively referred to as the ‘toolkit’ and includes a guide for drafting, finalising and varying agreements under the Federal Financial Relations framework; road maps and templates for different types of agreements; and guidance material for the review of agreements, development of payment schedules, reduction of input controls and performance reporting frameworks.

2.9 The 2010 Heads of Treasuries’ Review has provided the basis for improved processes to coordinate and implement National Partnership Agreements across government.⁸ The findings of the 2010 Review were reported in two volumes with 43 key recommendations reported in volume one and 72 operational recommendations reported in volume two. The recommendations aimed to strengthen central oversight and improve consistency in the design and management of National Partnership Agreements.

Reward payments

2.10 The Intergovernmental Agreement provides for ‘National Partnership Payments to the States and Territories to support the delivery of specific outputs or projects, to facilitate reforms or to reward those jurisdictions that deliver on nationally significant reforms’.⁹ Relatively few National Partnership Agreements involve reward payments. Treasury advised that over the last eight years, only seven National Partnership Agreements have involved reward payments, five of which were funded during 2009–13. The National Partnership Agreement on Essential Vaccines was the last agreement involving reward payments and expired in July 2017.

2.11 Under the Intergovernmental Agreement, making reward payments to States is contingent on assessment by the COAG Reform Council that performance benchmarks have been achieved. Following the abolition of the COAG Reform Council on 30 June 2014, assessment for reward payments has been undertaken by the Productivity Commission. However, the role of the COAG Reform Council in relation to reward payments for National Partnership Agreements and specific purpose payments under National Agreements remains in the Intergovernmental Agreement. The Intergovernmental Agreement should be amended to reflect the new assessment arrangements.

Are National Partnership Agreements consistent with the performance and funding requirements of the Intergovernmental Agreement?

2.15 As discussed in paragraph 1.1, the Intergovernmental Agreement was designed to increase government accountability through a combined focus on the achievement of outcomes, clearer specification of roles and responsibilities, and enhanced performance reporting. The intention was that National Partnership Agreements would include performance frameworks that tie Commonwealth payment to the achievement of agreed outcomes and outputs through the use of clear and specific measures of performance.

2.16 The ANAO assessed National Partnership Agreements to determine whether there is an outcome-focused performance framework tied to progress payments. Seventeen National Partnership Agreements were examined to determine whether there was:

• an outcome-focused performance framework. Specifically, that progress is reported using clear and precise performance milestones that are linked to outputs which, in turn, are linked to outcomes. This enables the Commonwealth to determine whether outcomes have been achieved (or outputs in the case of Project Agreements); and
• sound payment design. Payments are designed to create an incentive for the achievement of outcomes and/or outputs by being linked to the achievement of performance milestones and/or benchmarks.

2.17 Although all National Partnership Agreements examined had a broad performance framework with performance indicators, benchmarks and/or milestones, Table 2.2 shows that seven of the 17 agreements examined did not have either an outcome-focused performance framework or sound payment design, and another agreement had neither. Six agreements did not have an outcome-focused performance framework with payments linked to progress against outcomes, and outputs based on clear and precise measures of performance such as performance benchmarks or milestones. Three agreements did not have sound payment design, where payments were linked to the achievement of performance milestones.

Table 2.2: Assessment of performance frameworks

Note a: The Review Agreement for the Home and Community Care Program existed prior to the 2009 Intergovernmental Agreement on Federal Financial Relations has been classified as a ‘deemed’ National Partnership Agreement.

Source: ANAO analysis of National Partnership Agreements.

2.18 Table 2.2 outlines weaknesses in either the performance framework or payment design of eight of the 17 National Partnership Agreements. The main weaknesses were:

• insufficient measurement of outcomes—either an absence of outcome measures or lack of alignment between outcome measures and output measures or other performance measures; and
• payments not being appropriately linked to the achievement of performance benchmarks or milestones.

2.19 Six National Partnership Agreements did not have a coherent, outcome-focused performance framework where objectives, outcomes and outputs were clearly defined and linked; with performance measures that reliably indicated progress towards the achievement of outputs/outcomes.

• The National Partnership Agreement on Land Transport Infrastructure Projects does not clearly articulate the links between objectives, outcomes and outputs. As this agreement involves the transfer of nearly half of Commonwealth funding for National Partnership Agreements, it is important that outputs are clearly defined and readily linked to the agreement’s outcomes. Under the agreement, the outputs are defined in terms of ‘successful delivery of land transport infrastructure and planning projects funded under the programme’.¹⁰ The state schedules to the agreement lists projects under established programs (such as Investment (Road), Investment (Rail) and Black Spot Projects) but do not link these programs in term of outcomes or outputs. Outcomes and outputs are referenced in the agreement as being in the National Land Transport Act 2014, but are not explicitly listed in the agreement. When renegotiating the next agreement, parties to the agreement should consider more clearly defining and logically linking outcomes and outputs with reference to the existing program structure. Also a revised agreement should include a performance measurement framework that clearly outlines the range of performance measures that would be included in the project plans to indicate successful achievement of outputs and outcomes. This would aid transparency and accountability under the agreement.
• The National Partnership Agreement on Water for the Future—Sustainable Rural Water Use and Infrastructure lacked specific outputs linked to agreement outcomes. The lack of clear alignment between outcomes and outputs makes it difficult to determine whether outcomes are being achieved under the National Partnership Agreement.¹¹
• The National Partnership Agreement on Implementing Water Reform in the Murray-Darling Basin lacked specific outcome measures in the milestones and criteria for assessing the performance of NSW under the agreement. As reported by the ANAO in November 2017, this represented a significant weakness in the performance framework.¹²
• Two agreements (National Partnership Agreement for Health Infrastructure Projects and National Partnership Agreement on Specified Projects) are omnibus agreements established to streamline administrative and reporting processes for low value/low risk agreements, and do not have clear links to overarching objectives and outcomes.
• The Review Agreement for the Home and Community Care (HACC) Program does not have an outcome focused performance framework that links measures with outputs and outcomes. This is a ‘deemed’ agreement which existed prior to the introduction of the Intergovernmental Agreement in 2009.¹³

2.20 Three agreements had payments that were not linked to the achievement of performance benchmarks or milestones:

• The Review Agreement for the Home and Community Care (HACC) Program does not link payment with the achievement of performance benchmarks.
• Two of the 17 National Partnership Agreements examined (Project Agreement for Renal Infrastructure in the Northern Territory and Project Agreement for the Upgrade of Ballina Hospital) both had final payments made prior to the successful completion of the projects.

2.21 Appendix 4 describes in greater detail those National Partnership Agreements with weaknesses in performance frameworks.

Innovative payment design

2.22 National Partnership Agreements that facilitate reform often require more innovative payment models than agreements that support the delivery of specific projects. Two agreements with innovative payment designs are outlined in the case studies below.

Note a: The National Partnership Agreement was revised in 2016 and referred to as the National Partnership Agreement on Remote Housing.

Does public reporting under National Partnership Agreements provide adequate accountability and transparency?

2.23 A key objective of the Intergovernmental Agreement is ‘enhanced public accountability … with a focus on the achievement of outcomes, efficient service delivery and timely public reporting’.¹⁴ Under the current arrangements, a number of mechanisms are in place for the Australian Parliament to gain a level of insight on the operation of National Partnership Agreements; however, none of these mechanisms provide consolidated reporting of the outcomes achieved under National Partnership Agreements.

2.24 The Council on Federal Financial Relations website lists National Partnership Agreements, including schedules, Implementation Plans and Project Agreements.¹⁵ Listing these agreements provides publicly available information on agreed outcomes/outputs, Commonwealth/State roles and responsibilities, and financial commitments under National Partnership Agreements. The Council on Federal Financial Relations website provides a central source of information on National Partnership Agreements.

2.25 Under the Intergovernmental Agreement, the COAG Reform Council was required to report to the Prime Minister (as Chair of COAG) on performance against the National Agreements (for Specific Purpose Payments) and National Partnership Agreements to the extent that they supported objectives of National Agreements. In addition, the COAG Reform Council was required to assess performance in relation to National Partnership Agreements with reward payments.¹⁶ The performance reports have been made publically available through the COAG website. Following the abolition of the COAG Reform Council in 2014, reporting on outcome performance under the sole remaining reward agreement, the National Partnership on Essential Vaccines, was undertaken by the Productivity Commission.¹⁷ This agreement has now been replaced by a new agreement that is not a reward agreement.

2.26 Table 2.3 shows that of the five departments examined, all departments except Treasury reported on the performance of some of their National Partnership Agreements across 2015–16 and 2016–17. Reporting was provided through the departments’ websites¹⁸ (typically on the more significant agreements) and selectively in their annual reports. Reporting varied in nature and detail—for some agreements reporting was at a high level (typically the outcomes of agreements), while for other agreements reporting was more detailed (against specific indicators and milestones). In some instances, departments also published the findings of internal audits or reviews.

Table 2.3: Number of National Partnership Agreements reported on by audited entities in their annual reports and/or website

Source: ANAO analysis of entities’ annual reports and online reporting for 2015–16 and 2016–17.

2.27 Performance information is routinely collated by portfolio departments and, importantly, a review is to be completed prior to the expiry of a National Partnership Agreement. Under guidance provided by the Council on Federal Financial Relations, National Partnership Agreements are to be formally reviewed no later than six months prior to the expiry of the agreement. The reviews are to examine:

the effectiveness of the policy or program in achieving the outcomes of the National Partnership, and the extent to which the objectives have been achieved, including through the assessment of performance against project milestones and/or performance benchmarks, and reasons for any underperformance.¹⁹

2.28 Publication of these reviews is not required, and the ANAO observed that this only happened occasionally. To meet public accountability objectives, it is important that all reviews are consolidated and published in a readily accessible location, such as the Council on Federal Financial Relations website. Publication of the final outcomes on this website would complement existing information on the planned outcomes identified in National Partnership Agreements.

Have selected portfolio agencies adequately assessed performance against prescribed performance measures/milestones?

Agency assessment processes

3.1 The 2009 Intergovernmental Agreement on Federal Financial Relations (Intergovernmental Agreement) requires Commonwealth Ministers to authorise payments based on assessment of National Partnership Agreements’ funding and performance requirements. Once the Commonwealth Minister has authorised payment under a National Partnership Agreement, the Commonwealth Treasurer will approve (Determine) payment.²⁰

3.2 To make assessments against an agreement’s funding and performance requirements, Commonwealth entities need to collect evidence relating to the achievement of the relevant measures/milestones set out in the agreement.²¹ Entities also need to assess the evidence to establish the validity of progress reported by States in achieving the measures/milestones. Further assurance can be provided when evidence is assessed and validated by an independent assessor, for example, the Productivity Commission.

3.3 The ANAO examined the evidence used by the five portfolio departments to assess progress against outputs and outcomes for ten²² of the 17 National Partnership Agreements examined in Chapter 2. The ten agreements (detailed in Appendix 5) have been classified into project and reform agreements as the type of outcome measures and evidence required under the two types of agreements differ:

• project-based National Partnership Agreements are designed to achieve specific projects (mainly infrastructure projects) and are associated with tangible milestone evidence; and
• reform-based National Partnership Agreements are designed to achieve reform outcomes and are generally associated with performance benchmarks. Reform agreements are often complex and multifaceted, with a number of outputs and outcomes, each requiring performance measures. Also the impact of reform may involve a significant time lag, which would require performance measures that can reliably measure the impact of change over time (that is, the performance benchmarks should show the trajectory of progress against an outcome and not just the expected end point).

Project-based agreements

3.4 Table 3.1 outlines the milestone evidence that was assessed for a selection²³ of nine projects under four National Partnership Agreements, and the ANAO’s assessment of the adequacy of evidence used by the Commonwealth in assessing whether to recommend payments. The agreements assessed were:

• Land Transport Infrastructure Projects (three Major Infrastructure Projects, National Network Maintenance work, and one Black Spot Project);
• South Australian River Murray Sustainability;
• Health Infrastructure Projects (two projects); and
• Augmentation of Chaffey Dam.

3.5 In Table 3.1, five of the six projects that are managed by the Department of Infrastructure, Regional Development and Cities fall under the National Partnership Agreement on Land Transport Infrastructure Projects (2014–19).²⁴ The agreement is designed to contribute to the development of a ‘safe, sustainable national transport system’ with a total commitment by the Commonwealth of $5.1 billion for 2016–17. Under the agreement, there are over 1200 projects for 2016–17 listed on the State schedules that are to be updated annually through the annual Programme of Works. The National Network Maintenance and Black Spot Projects programs are also funded under the agreement.

Table 3.1: Level of evidence used for projects under ‘project’ National Partnership Agreements

Note a: The risk rating assigned by Treasury is used to assess the risk to Treasury of making an incorrect payment. The ANAO used Treasury’s risk ratings as they are broadly based and capture material risk to the Commonwealth Government’s outlays. Treasury’s risk assessment is based on financial value, written complexity, number of projects, complexity of payment models, and the number and complexity of performance milestones of agreements.

Source: ANAO analysis of National Partnership Agreements.

3.6 As shown in Table 3.1, the ANAO considers that six of the nine projects where milestone evidence was provided had sufficient evidence to enable the portfolio department to verify if all milestone requirements had been met, and consequently recommend payments in 2015–16 and 2016–17. In all nine projects, the assessments were that milestones had been met.

3.7 The ANAO also examined the relationship between the level of evidence used to demonstrate achievement of milestones and the project risk ratings assigned by Treasury:

• five of the seven projects that Treasury had assessed as ‘high’ risk used a ‘strong’ evidence base in the assessment of milestones; and
• two ‘high’ risk projects (Black Spot and National Network Maintenance Programs) did not have the same level of supporting evidence as larger projects in the Infrastructure Investment Program. While progress reports were provided by the States for these programs, there was not the same level of validation of achievement of milestones for each project as for individual projects in the schedules to the National Partnership Agreement on Land Transport Infrastructure Projects.

3.8 The National Partnership Agreement on Land Transport Infrastructure Projects requires that States provide a monthly progress report for each relevant project in the Schedules, including details of milestones achieved. This is not a requirement for the sub-programs under the National Partnership Agreement including the Black Spot Program and National Network Maintenance expenditure.²⁵ The Department of Infrastructure, Regional Development and Cities advised the ANAO that this approach reflects the scale and risk profile of these programs, which fund smaller road projects delivered by state and local governments. The department also advised that requiring monthly reporting and photographic evidence of each project milestone would be a significant administrative burden, particularly for local governments. The ANAO suggests that the department considers a sampling approach to obtain evidence on a selection of project milestones each year as a way of improving the evidence base without greatly increasing administrative costs and imposts on the States.

3.9 The South Australian Regional Economic Development project is jointly administered by the Department of Infrastructure, Regional Development and Cities and the Department of Agriculture and Water Resources. The ANAO examined the infrastructure component administered by the Department of Infrastructure, Regional Development and Cities—National Partnership Agreement on South Australian River Murray Sustainability Program—Part A. The project aims to create opportunity for economic diversification and regional development for Murray-Darling Basin communities in the region by offering a series of grants. Milestone evidence provided to the Commonwealth for this project was not as comprehensive as that of the other infrastructure projects. Progress reports described activities undertaken, and the evidence attached to these reports consisted primarily of high-level financial statements and listings of industry engagement and grant funding recommendations. The ANAO was advised that the Commonwealth Department of Infrastructure, Regional Development and Cities held regular meetings with the South Australia government department and was provided with additional evidence of presentations used and the final project updates of completed projects.

3.10 Projects under National Partnership Agreements that provide strong supporting milestone evidence are outlined in the case studies below.

Reform agreements

3.11 Table 3.2 outlines the milestone evidence required for the six National Partnership Agreements examined that seek to facilitate reforms or reward those jurisdictions that deliver on nationally significant reform. These agreements have State schedules or Implementation Plans that contain the performance reporting framework. A set of the State schedules or Implementation Plans was selected for analysis from seven projects under the six ‘reform’ National Partnership Agreements.²⁶

Table 3.2: Level of evidence used for projects under ‘reform’ National Partnership Agreements

Note a: The risk rating assigned by Treasury is used to assess the risk to Treasury of making an incorrect payment. The ANAO used Treasury’s risk ratings as they are broadly based and capture material risk to the Commonwealth Government’s outlays. Treasury’s risk assessment is based on financial value, written complexity, number of projects, complexity of payment models, and the number and complexity of performance milestones of agreements.

Source: ANAO analysis of National Partnership Agreements.

3.12 As shown in Table 3.2, the ANAO considers that five of the seven projects where milestone evidence was provided had sufficient evidence to enable the portfolio department to verify if all milestone requirements had been met, and consequently recommend payments in 2015–16 and 2016–17. The assessments in all seven projects were that milestones had been met.

3.13 Of the seven projects examined under the six National Partnership Agreements, five projects used a ‘strong’ evidence base with evidence verified either by an independent third party such as the National Partnership on Essential Vaccines independently assessed by the Productivity Commission or the National Partnership Agreement on Implementing Water Reform in the Murray Darling-Basin (NSW) that involved independent input by the Murray-Darling Basin Authority and the Commonwealth Environmental Water Holder. Other projects verified evidence provided by States, for example, press releases, signed sales contracts, photographs, state-published documentation, and links to online documentation.

3.14 The National Partnership Agreement on Remote Housing (NT) used sufficient evidence to support achievement of eight of the ten milestones/benchmarks²⁷, but there was no evidence of validation of benchmarks in relation to improved property and tenancy management and indigenous employment resulting in a mixed result.

3.15 There was one project (National Partnership Agreement for Adult Public Dental Services) where the portfolio department did not validate the States’ performance benchmarks with supporting evidence.

3.16 The level of evidence used by Commonwealth departments to assess outcome performance largely aligns with the risk rating assigned by Treasury. One exception is the National Partnership Agreement on Remote Housing, and in view of the ‘high’ risk rating assigned to this agreement, the Department of the Prime Minister and Cabinet could consider introducing more systematic checks to validate the benchmark data provided by the States.

3.17 Treasury’s risk assessment for National Partnership payments is largely based on financial materiality with the complexity of agreements (number of projects, payment model and the number of performance milestones) also taken into account. The ANAO noted that Treasury does not account for the complexity of evidence required to assess performance in assigning risk ratings. There may be scope for Treasury to calibrate its risk framework to account for the complexity of evidence collection for reform projects or those with outcomes that are difficult to assess, as this has implications for the appropriateness of payments made by Treasury.

Do selected portfolio entities have adequate controls over the payment approval process?

Note a: Standard controls include: separation of duties between officers responsible for making assessments as to whether a milestone had been met and officers responsible for recommending payment approval; Ministerial (or approved delegate) approval of payment; and authorisation by the Chief Financial Officer (or approved delegate) of the correct payment amount prior to submitting the payment to Treasury.

3.18 The five selected portfolio departments have adopted largely similar processes for assessing and certifying payments under National Partnership Agreements. The ANAO examined these processes to determine whether the entities had sufficient process controls to ensure that payments were being correctly and properly authorised in accordance with the requirements of National Partnership Agreements. Table 3.3 outlines the departments’ process controls.

Table 3.3: Departmental process controls for authorisation of National Partnership Agreement payments

3.19 The processes adopted by Department of Health and the Department of Infrastructure, Regional Development and Cities are more centralised than the processes adopted by other audited agencies due to the significant volume of agreements administered by the two agencies. The Department of Health is responsible for managing over a quarter of the National Partnership Agreements funded by the Commonwealth in 2016–17 and the submission and approval process is coordinated through the Financial Management Division.

3.20 The Department of Infrastructure, Regional Development and Cities administers the National Partnership Agreement on Land Transport Infrastructure Projects, which involves more than 1200 individual projects. The department’s Infrastructure Investment Division uses an electronic-based system to manage projects and administer milestone payments to States—the Infrastructure Management System (IMS).²⁸ States submit monthly progress reports for each project via IMS, and these reports provide the basis for the department monitoring the progress of projects against agreed project milestones, which triggers the payment process. The IMS provides a number of system-based controls over the accuracy and timeliness of payments. Additionally, a probabilistic cost estimation process is used for projects with a total anticipated cost²⁹ exceeding $25 million and informs the milestone payment schedule for projects. A cost increase in excess of the payment limit will only be released where there has been demonstrated need and approval has been provided in IMS by a senior official with delegated authority.

3.21 As part of auditing 2016–17 financial statements, the ANAO confirmed that in the selection of tested National Partnership Payments made in 2016–17, all five audited agencies had conducted milestone assessments and all payments were correctly approved by authorised delegates. As part of this testing, the information submitted by agencies to Treasury via the Financial Payments Management System was also checked and determined to have been in accordance with the payments approved and the requirements of the respective National Partnership Agreements.

Has Treasury implemented processes to ensure accurate and timely payments?

3.22 National Partnership Agreement payments are processed centrally by Treasury and paid directly to each state treasury. While Treasury places some reliance on assessments undertaken by portfolio departments in certifying payments, Treasury performs additional quality assurance checks before authorising final payment. Figure 3.1 provides an overview of Treasury’s processes prior to authorising National Partnership Agreement payments.

Figure 3.1: National Partnership Agreements’ Payment Process

Note: CFO is Chief Financial Officer.

Source: ANAO.

Treasury’s assurance framework

3.23 Treasury officials check payment details submitted by portfolio departments through the Federal Payments Management System prior to seeking the Treasurer’s Determination for payment. Treasury uses a checklist to confirm:

• that all agreements and any Implementation Plans are on file and have been signed by First Ministers or portfolio Ministers, as required;
• that the proposed payment is consistent with the relevant milestones of the National Partnership Agreement;
• any variance between the proposed payment and the annual and monthly estimates has been adequately explained;
• no errors have been recorded in the Federal Payment Management System;
• all items have been entered correctly against each State;
• any comments in the Federal Payment Management System have been considered; and
• the accountable authority has correctly signed off on the correct payment amounts.

3.24 Treasury is to complete a risk assessment whenever a new National Partnership Agreement or a variation to an existing agreement is signed by the Commonwealth and one other jurisdiction. Treasury employs additional, more detailed assurance checks for agreements rated as ‘high’ risk. In 2016–17, 23 agreements had been assessed as ‘high’ risk. The additional checks vary between agreements, which are appropriate as agreements vary and require different control processes to gain assurance over the accuracy, completeness and appropriateness of payments. Additional control processes implemented over high risk agreements included:

• review of the department’s assessment as to whether the State has met the milestones under the agreement;
• provision of additional, more detailed documentation;
• more detailed analysis of the components of the payment; and
• verification of proposed payment against the agreement’s milestones.

3.25 For relatively higher risk portfolios (such as the Department of Infrastructure, Regional Development and Cities and the Department of Health), proposed payment details and supporting documentation are provided to Treasury prior to being submitted via the Federal Payment Management System. Treasury reviews the documents and queries items as it sees fit. If issues cannot be resolved to Treasury’s satisfaction, the relevant item is omitted from the Federal Payment Management System request.

3.26 Treasury advised that in 2016–17 it raised issues with six proposed payment items provided by the Department of Health. Of these, three were resolved in time to be paid and the other three were omitted from that month’s Federal Payment Management System request. Similarly, five items were omitted from requests made by the Department of Infrastructure, Regional Development and Cities in 2016–17.

Appendix 1 Entity responses

Formal responses received by ANAO following circulation of the draft report are reproduced below.

Responses were received from:

• Department of Agriculture and Water Resources;
• Department of Health;
• Department of Infrastructure, Regional Development and Cities;
• Department of the Prime Minister and Cabinet; and
• Department of the Treasury.

Appendix 2 National Partnership Agreements as at 1 July 2017

Appendix 3 Guide on Structure of National Partnership Agreements

Note: * denotes that these sections apply to Project Agreements as well as National Partnerships.

Source: Council on Federal Financial Relations, Federal Financial Relations Circular 2015/01, 2015.

Appendix 4 National Partnership Agreements with weaknesses in performance frameworks

Appendix 5 National Partnership Agreement projects selected to assess milestone evidence

Source: ANAO analysis.