Background

In Australia, local government is responsible for planning, developing and maintaining a significant amount of the key infrastructure for its communities. This includes local roads, bridges and footpaths. In this context, of the nation's 810,000 kilometres of public roads, almost 650,000 kilometres (80 per cent) are local roads. Approximately one-third of these roads are sealed with the remainder unsealed.

Local government is not included in the legislative powers of the Commonwealth specified by section 51 of the Constitution. As a consequence, local government remains the responsibility of State governments. In this respect, local government bodies are established under State legislation and are subject to State government oversight. Nevertheless, since 1974–75, successive Australian governments have provided general purpose funding for local government through Specific Purpose Payments to the States and Territories.

In 2004–05, the Australian Government provided $1.5 billion in Financial Assistance Grants (FAGs) to local government through the States and Territories. In 2005–06, local government is expected to receive more than $1.6 billion in FAGs. This amount comprises general purpose assistance of $1.1 billion and ‘identified' (but untied¹) local road grants of $497 million.

The Roads to Recovery Program

The Roads to Recovery (R2R) Program was announced by the Prime Minister and the then Minister for Transport and Regional Services (and Deputy Prime Minister) in November 2000. At this time, the Prime Minister stated that:

Roads to Recovery funding of $1.2 billion over 4 years represents a 75% increase in current Federal Government grants for local roads, which are $406 million in 2000–01.

… One of the greatest strengths of the Roads to Recovery Program is that the funding will go direct to Local Government and allow councils to spend the money according to their priorities.

The initial Program was established by the Roads to Recovery Act 2000 (R2R Act). The full title of the Act is ‘An Act to provide funding to supplement expenditure on roads'. Its main object ‘is to provide $1,200,000,000 for roads expenditure by local governing bodies'.

The initial Program commenced in early 2001 as a single intervention to address the problem that a significant amount of local government road infrastructure was about to reach the end of its economic life and its replacement was beyond the capacity of local government. A total of $1.2 billion was paid to more than 730 Local Government Authorities (LGAs) between March 2001 and June 2005. In this respect, the Program is unusual in that funds are provided direct to local government rather than through the States and Territories.

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 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. ²

In turn, the allocation of funds within each State was determined using the formula applied by State Grants Commissions for the 2000–01 FAGs identified for local roads. Allocations to individual LGAs were set in a list tabled in the House of Representatives at the time the R2R Act was presented to Parliament. The R2R Act provided a Special Appropriation for payments to LGAs identified in the tabled list. ³The R2R Administrative Guidelines stated that each LGA was guaranteed its full life of program allocation by 30 June 2005, subject to the submission of satisfactory documentation such as work schedules and Quarterly and Annual Reports.

Auslink Roads to Recovery

The R2R Program was of such importance to local government that the Australian Local Government Association (ALGA), in association with its member associations, conducted a campaign during 2002 and 2003 to have R2R renewed beyond June 2005. According to ALGA, the key step was a review conducted jointly by ALGA and the Department of Transport and Regional Services (DOTARS) to assess the first two years of the R2R Program. The review concluded that, not withstanding the contribution R2R funds had made, there remained deficiencies both in terms of the existing road system and the need to upgrade and in some cases extend it.

ALGA has stated that, given the Review's clear endorsement of the Program, it coordinated a national campaign to renew R2R. This included assisting and encouraging LGAs to write to their local members as well as to relevant Ministers.

In January 2004, the Australian Government announced that a further $1.2 billion in R2R funding⁴ would be provided over the four years from July 2005 to June 2009. The second R2R Program (referred to in this Audit Report as Auslink Roads to Recovery) commenced on 1 July 2005. Total funding to be appropriated under this second Program was announced as $1.35 billion between 2005–06 and 2008–09.⁵ On 10 November 2005, the Government announced an additional $100 million for the Strategic Regional Program component of the Auslink Roads to Recovery bringing the full cost of the Program to $1.45 billion.

Administrative responsibility

Both R2R Programs are administered by DOTARS. DOTARS advised ANAO in December 2005 that it was not the Government's intention that the Department closely oversight LGA operations. Instead, the obligation to meet the Program Funding Conditions was placed with LGAs, including through the annual reporting and funding acquittal processes. DOTARS further advised that the R2R Act was framed around the following Program delivery decisions made by the Government:

• 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 objective

The audit scope covered development of the R2R Program, management of the initial R2R Program and changes made to the Program funding conditions and administrative guidance for Auslink Roads to Recovery. The scope did not include management of Auslink Roads to Recovery. The audit objectives were to:

• assess the efficiency and effectiveness of the management of the initial R2R Program; and
• identify any opportunities for improvements to management of the Program.

A key part of the audit involved examination of the use of, and accountability for, R2R funds by a representative sample of 93 LGAs (representing more than one in eight funding recipients) from around Australia. This work included site inspections of more than 400 projects funded under the Program, analysis of financial and other reports provided by the 93 LGAs to DOTARS, and substantiation of the amounts charged to the R2R Program for selected projects.

Overall audit conclusions

The R2R Program is the largest investment in local roads ever undertaken by the Australian Government. As part of the initial R2R Program audited by ANAO, a total of $1.2 billion was paid to local government for expenditure on the construction, upgrade and/or maintenance of roads. Almost all LGAs received their full R2R allocation.

The Government considered LGAs best placed to make decisions on road investment at the local level. The R2R Program reflected this by giving LGAs the freedom to use the funds as they wished, as long as it was for expenditure on roads (as defined by the R2R Act). DOTARS has reported that, of the approximately 15,000 road projects funded over the life of the Program, most involved reconstruction, rehabilitation and widening of local roads; sheeting and re-sheeting gravel roads with a new surface; sealing along sections of gravel roads; and bridge or drainage works. In this context, LGAs have reported to DOTARS that the key outcomes they achieved with their R2R funds have been improved road safety, better asset management and improved heavy vehicle access.

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 R2R Act was to be additional to existing road funding. Accordingly, provisions were included in the Act, the R2R Funding Conditions and the R2R Administrative Guidelines aimed at ensuring that LGAs were not cost shifting by substituting Australian Government funding for their own in constructing, upgrading and maintaining local roads. However, more than 60 per cent of the individual LGAs examined by ANAO had not maintained their expenditure at the required level (that is, at or above the average for the period 1998–99 to 2000–01) in at least one year between 2000–01 and 2003–04. Some had not maintained their own expenditure in any year. Furthermore, having regard to the fundamental importance to the R2R Program that funds provided by the Commonwealth be additional to existing road funding, ANAO considers there was merit in DOTARS undertaking periodic assessments of whether aggregate local government spending on roads had been maintained. This was not done.

It was recognised at the time the initial R2R Program was being implemented that the payment of funds direct to local government (rather than through the States and Territories) placed an onus on DOTARS to ensure the funds are spent on roads, and that the funds were properly accounted for. This was seen to represent a new and substantial area of responsibility for DOTARS to be managed within its existing administrative resource base (that is, no additional funding was provided to administer the initial R2R Program). After an initial period of about a year when nine staff were involved, payments to LGAs, together with other aspects of the Program, were administered by a manager and three staff in the Canberra offices of DOTARS.

The grant payment and acquittal processes were, by design and in accordance with the Government's intention, simple. Nevertheless, a significant amount of useful information was required by the Funding Conditions and Administrative Guidelines to be provided to DOTARS by LGAs. However, over the duration of the Program, insufficient use was made by DOTARS of this information. Thorough and timely analysis of the information provided to it by LGAs would have provided DOTARS with practical insights into the delivery of the R2R Program by LGAs, including the extensive delays in use of funds by some LGAs.

In this context, this audit demonstrates the importance of program management and accountability mechanisms giving reasonable assurance that road projects are undertaken in accordance with the scope and timelines proposed by LGAs. Further, effective management and monitoring of program implementation is critical to the achievement of the outcomes the Government and the community expects.

Recommendations

During the course of the audit, a number of issues were addressed by DOTARS in developing the Auslink Roads to Recovery Funding Conditions and Notes on Administration (which replaced the Administrative Guidelines used in the initial R2R Program audited by ANAO). The changes made by DOTARS are recognised and acknowledged throughout the report. In addition, DOTARS advised ANAO that better processes are to be adopted for Auslink Roads to Recovery, including:

• upgrade of the Program's computer system to cross reference Quarterly and Annual Reports submitted by individual LGAs;
• checks being made of the start and finish dates of projects to ensure that payments are made at the appropriate time; and
• checks being made to ensure that funds are used by LGAs within six months of being paid by DOTARS.

Nevertheless, ANAO considers that further improvements would add value. Accordingly, ANAO has made 10 recommendations relating to:

• analysing the benefits and costs of projects so as to inform consideration of any further extension to the R2R Program beyond 30 June 2009 (when the Auslink Roads to Recovery Program is scheduled to end);
• periodic assessments as to whether aggregate local government spending on roads has been maintained;
• stronger governance arrangements including improving the accuracy and usefulness of information submitted by LGAs;
• improved financial management including better matching payments to LGA needs and ensuring that LGAs are neither penalised, nor receive a financial advantage, from legitimate delays in using funds provided for road works; and
• enhanced accountability for, and oversight of, the special project allocations for South Australia and Western Australia.
• DOTARS agreed to all recommendations, with a qualification on one part of one recommendation.

Key Findings - Program Outcomes and Accountability (Chapter 2)

Project outcomes

DOTARS has reported that, when classifying projects by type, of the approximately 15,000 road projects funded over the life of the Program:

• almost 34 per cent involved reconstruction, rehabilitation and widening of local roads;
• more than 14 per cent involved sheeting and re-sheeting gravel roads with a new surface;
• nearly 12 per cent involved sealing along sections of gravel roads; and
• over 10 per cent involved bridge or drainage works, with about 700 bridges replaced or repaired.

Further, according to R2R Annual Reports submitted to DOTARS by the LGAs in ANAO's sample, most of the R2R funds were spent with the objectives of improving road safety (30 per cent), achieving better asset management (25 per cent) and improving heavy vehicle access (12 per cent). A relatively low proportion (six per cent) of R2R funds were reported as being spent on regional economic development.

Recognition of Commonwealth funding

In terms of recognising the Commonwealth funding of road works undertaken by local government, the R2R Funding Conditions stated as follows:

An LGA must ensure that the Commonwealth receives appropriate recognition for its contribution to the road works concerned. Each LGA must erect signs acknowledging the Commonwealth's role in respect of all works funded under the Act and cooperate with the Commonwealth in informing the public of the Commonwealth's role, in accordance with the Guidelines.

The importance of the signage requirements was emphasised to LGAs in July 2004 in advice from DOTARS. This advice reminded LGAs of the R2R signage requirements. It also informed them that ‘councils not meeting the signage requirements are non-complying and will receive no more funds until evidence is provided to show that the deficiencies have been rectified.' However, the required signs were not in place for 45 per cent of projects inspected by ANAO that were required to have signs in place.

Recognising the issues that arose in the initial R2R Program, changes have been made to the signage requirements for the Auslink Roads to Recovery Program. These include reduced signage requirements for small value projects and a reduction in the time period signs are to remain in place from two years to one year.

Aggregate local government expenditure on roads

Cost shifting involving local government has been a significant issue for a number of years. In general, the concern has involved shifting of costs from the Australian and State/Territory Governments to local government. However, in developing the R2R Program, the Government was concerned to address cost shifting in the other direction; that is, LGAs substituting Commonwealth funds for their own expenditure on roads. Accordingly, provisions were included in the R2R Act, Funding Conditions and Administrative Guidelines requiring LGAs to maintain their own source expenditure at the required level (that is, at or above the average for the period 1998–99 to 2000–01), rather than substituting Commonwealth funding for their own, in constructing, upgrading and maintaining roads.

Accordingly, it was of fundamental importance to the R2R Program that funds provided by the Commonwealth be additional to existing road funding. However, in its administration of the R2R Program, DOTARS did not attempt to assess whether or not, in aggregate, local government spending on roads had been maintained since the introduction of the R2R Program.

Maintenance of the level of road works expenditure by individual LGAs

The R2R Funding Conditions stated that each LGA must maintain the level of roads expenditure which it funded otherwise than under the R2R Act, and provide a statement to DOTARS that it had done so. In order for DOTARS to rely on the LGA certifications, it was important that LGAs had analysed whether they had maintained their own source expenditure prior to certifying. However, in the course of the audit, a number of LGAs advised ANAO that they had not undertaken their own analyses of their roads expenditure in order to give proper consideration to the whether they had maintained their own expenditure prior to certifying that they had. This raised the possibility that a number of the certifications provided to DOTARS by LGAs had been made in error, as the financial analysis necessary to substantiate the certifications had not been undertaken.

In this context, ANAO undertook an examination of the R2R Annual Reports for 2000–01 to 2003–04 inclusive⁶ submitted by the 93 LGAs in the sample. The examination of these reports revealed that 89 of the 93 LGAs certified in each year that they had maintained their own roads expenditure. However, inconsistent approaches were taken by DOTARS to LGAs that did not certify they had maintained their own expenditure on roads. Specifically, DOTARS only contacted one of the four LGAs to raise concerns that expenditure was not being maintained.

Of the 93 LGAs in ANAO's sample, sufficient financial data was available from 83 LGAs to assess whether they had actually maintained their own expenditure on roads⁷. In total, 31 of the 83 LGAs (37 per cent) for which ANAO was able to undertake the analysis had maintained their expenditure above the average level in the reference period of 1998–99 to 2000–01. However, the remaining 52 LGAs (63 per cent) had not maintained their own source expenditure in at least one year between 2000–01 and 2003–04. Ten LGAs in the sample did not maintain their expenditure in any of the four years examined.

A number of changes have been made to the expenditure maintenance requirements for the Auslink Roads to Recovery Program. A key change has been that the LGA certification has been expanded to require LGAs to specify the amount spent using its own sources in each year together with the reference average amount. This should assist DOTARS to monitor compliance by LGAs with their expenditure maintenance obligation.

A further significant change involved providing greater flexibility in the expenditure maintenance requirement so as to take account of the fluctuating nature of LGA expenditure. DOTARS considers that the changes are fairer and take better account of the realities of LGA operations and expenditure on roads.

Annual statement of accountability by funding recipients

LGAs were required by the R2R Funding Conditions to submit Annual Reports to DOTARS covering their use of R2R funds by no later than 30 September each year⁸. However, over the course of the Program, more than 29 per cent of R2R Annual Reports were submitted after the due date.

DOTARS payment procedures required Departmental officers to satisfy themselves as to whether a satisfactory Annual Report had been received prior to making further payments to an LGA. Although payments were generally not made unless an Annual Report had been submitted, this did not mean that the Annual Reports were satisfactory⁹. In this respect, DOTARS did not develop and document criteria by which it would assess whether or not Annual Reports submitted by LGAs were ‘satisfactory'. Analysis of R2R Annual Reports submitted by ANAO's sample of LGAs found 43 per cent of Annual Reports contained errors of varying significance. These included important parts of the form not being completed; the required certification not being provided (this included incorrect years being specified for the expenditure maintenance certificate); and errors in the audited financial statement.

ANAO's examination of DOTARS' management of the wind-up of the R2R Program revealed that DOTARS has begun applying greater scrutiny to R2R Annual Reports and, where errors have been detected, requiring a corrected Report to be submitted.

Governance Framework (Chapter 3)

There were four key governance documents that underpinned the administration of the R2R Program, namely:

• the R2R Act;
• a list of funding recipients and the amounts they were to receive; ¹⁰
• Conditions Applying to Payments (the Funding Conditions) determined under section 7 of the R2R Act; and
• Administrative Guidelines published pursuant to section 11 of the R2R Act. The purpose of the Administrative Guidelines was to explain how the R2R Program worked. The Funding Conditions stated that an LGA must comply with the Guidelines.

The development of the R2R Act, Conditions and Administrative Guidelines occurred between 20 November 2000 and 15 February 2001 (some three months). The speed with which the key governance documents were developed enabled the first payments to be made to LGAs in March 2001.

List of funding recipients

ANAO identified five significant instances where there was a difference between the gazetted funding list and amounts paid to LGAs. Each involved an administrative error where notices signed by Ministers to reallocate funds in the wake of council restructuring in NSW were not gazetted as required. DOTARS noted that the funds went to the LGAs as intended by the notices signed by the Minister and had a zero-net effect on the overall payments made to NSW LGAs. In November 2005, DOTARS obtained legal advice that these payments were not supported by the R2R Act Special Appropriation but there was an alternative available appropriation to support the payments that had been made in 2004–05.

There were also two LGAs that were paid less than their gazetted allocation. The first involved a LGA in Queensland that had not provided an R2R Annual Report for 2003–04 and, as a result, was not paid the remainder of its allocation. The other instance involved a LGA that had insufficient expenditure and forecast expenditure to support payment of the full allocation. In this respect, ANAO found that there were 13 LGAs in ANAO's sample of 93 that also had insufficient forecast and actual expenditure to justify payment of their full allocation. However, these 13 LGAs were each paid their full allocation, demonstrating an inconsistent adoption of the principle that payments be supported by actual and forecast expenditure on eligible roads projects.

Eligible projects

The ability of LGAs to nominate their own projects was subject to the requirement that the projects involve the construction, upgrade or maintenance of roads, as defined in the R2R Act. Under the R2R Act, the term ‘road' is defined broadly. It includes traffic lights and signs, street lights, vehicular ferries, bridges and tunnels and bike paths.

In order to provide an effective control over expenditure regarding R2R funds on allowable works, there needed to be a shared understanding between DOTARS and the funding recipients of the meaning of ‘road project' under the R2R Act. While DOTARS responded to specific questions raised by certain LGAs about the eligibility of certain projects, it did not issue guidance to all LGAs regarding eligible and ineligible projects.

In this context, ANAO's analysis of reported works projects delivered using R2R funds by the sample of 93 LGAs revealed that a shared understanding was, at times, lacking. As a result, ANAO found inconsistencies in views and/or practices in a number of areas. ANAO also found a range of practices being adopted by LGAs in charging of administrative costs to projects.

A significant improvement on the issue of eligible projects was made for the Auslink Roads to Recovery Program. Specifically, on 1 July 2005, the first day of the Auslink Roads to Recovery Program, DOTARS issued advice to all LGAs on eligible projects. However, uncertainty concerning the charging of administrative costs has yet to be resolved.

Reporting arrangements

While LGAs could decide the projects that they would deliver using the R2R funds, certain information, as set out in the Administrative Guidelines, was to be submitted to DOTARS before a payment could be made. This included a works schedule. The Guidelines defined ‘works schedule' as a proposal setting out works for which funding is being sought under the Act.

The works schedules were relied upon by DOTARS in making payments to LGAs. Specifically they provided details to enable DOTARS to assess whether proposed works were eligible under the R2R Act. They also provided start and completion dates that could be used by DOTARS to ensure payments were not made more than three months prior to works being carried out. On nine occasions DOTARS reinforced to LGAs the importance of works schedules being kept up to date. However, ANAO's examination of 93 LGAs revealed that, in many instances, the works schedules did not reflect the required information, or were inaccurate, as follows.

The location of the proposed works being funded by the R2R Program, as reported in the works schedule, was inadequate for 34 per cent of the projects inspected by ANAO. The most common discrepancy involved LGAs not specifying the location (for example, by identifying relevant crossroads or chainage) where the project involved work on a section of the identified road rather than the entire road. There were also instances where the location descriptions were so broad as to make identification of the works themselves difficult. In other instances, the works schedule description was simply inaccurate.

The R2R Administrative Guidelines stated that the works schedule should contain information on the nature of the works proposed and the problems to be addressed by the works. Of those projects examined by ANAO, 54 per cent of projects did not include the nature of the works proposed and/or the solution being employed. This was important because work schedule descriptions of the problem and works proposed provided necessary information for DOTARS to assess the eligibility of LGAs' proposed use of R2R funds. In addition, accurate and complete work schedule descriptions were necessary to fairly reflect the outcomes of the R2R Program.

In addition to inadequacies in the works schedules submitted to DOTARS, ANAO project inspections highlighted that approximately 32 per cent of projects were not undertaken as reported. Some were understated (in that more work has been done than indicated in the works schedule description) while others were overstated. There were also a small number of projects that had not been undertaken at the time of the visit.

The approach to determining start and completion dates was not defined in the R2R governance documents. As a result, inconsistent practices were adopted by LGAs. This was important because start and completion dates could affect the timing of payments ¹¹to the LGA. In addition, start and completion dates were relevant to the R2R signage requirements.¹²

Changes made for Auslink Roads to Recovery Program

The Auslink Roads to Recovery Program operates under similar arrangements to the R2R Program. However, the Auslink Roads to Recovery Program has an increased emphasis on funding recipient accountability and reporting. The Funding Conditions established as part of Auslink Roads to Recovery were strengthened to take into account issues raised during the course of the ANAO performance audit. Program administration improvements identified by DOTARS are also being introduced to improve monitoring of LGA compliance with the Auslink Roads to Recovery Program Funding Conditions.

A further key change relates to the enforceability of the Funding Conditions and Administrative Guidelines (referred to as Notes on Administration for the Auslink Roads to Recovery Program). Legal advice to DOTARS in May 2005 was that there were very limited circumstances under the R2R governance arrangements in which LGAs could be asked to repay funds or be denied further payments. In December 2005, DOTARS advised ANAO that the Auslink Roads to Recovery Funding Conditions are legally enforceable, and that all the matters which need to be legally enforceable are in the Funding Conditions.

Financial Management (Chapter 4)

DOTARS recognised that it was important to time payments to LGAs so that they could undertake R2R works without transferring funds from their normal road activities. At the same time, DOTARS recognised that payments should not be made too far in advance of need as this would incur a cost to the Commonwealth, as well as adversely impacting on accountability.

After the initial payment to LGAs, the practice that was adopted involved paying LGAs in advance, based on Quarterly Reports that included data on expenditure to date as well as forecast expenditure for the next quarter. This meant that, by design, the Program included allowance for LGAs to hold funds for up to three months before being used. This approach meant that LGAs were not financially disadvantaged.

However, insufficient steps were taken to ensure that LGAs did not receive a financial advantage. In this respect, ANAO's examination of a sample of LGAs revealed many instances of LGAs being paid more than three months in advance of the expenditure of R2R funds. The reasons for this were as follows:

• ‘Hardship' payments were made in advance of need.
  In May 2002, the Government announced that, in order to meet important budgetary priorities, the funds to be provided for the Program would be reduced by $100 million in 2002–03, with this amount reinstated in 2004–05. However, as a result of an underspend in 2001–02 funds, DOTARS identified $14.6 million that could be made available to LGAs in June 2002 that would suffer hardship as a result of their 2002–03 allocation being reduced. Hardship claims were submitted by 41 LGAs between June and October 2002. The then Minister approved the hardship claims of 36 LGAs. Each of the successful LGAs had the required amount of funds reinstated up to the original level of its 2002–03 allocation. However, ANAO observed delays in some of these LGAs using the reinstated funds.
•  Accelerated funding was insufficiently matched to LGA cash flow needs.
  In 2000–01, LGAs were able to receive accelerated payments when payments to all LGAs were less than the Budget estimate for the year, providing the LGA seeking accelerated funding had sufficient actual and forecast expenditure to support further payments.¹³ However, there were a number of instances where ANAO's analysis of accelerated payments revealed that works were not undertaken as proposed by LGAs when they requested accelerated funding. As a result, funds remained unused with the LGAs for a considerable period of time. In addition, the manner in which accelerated funding was made available did not sufficiently match R2R payments to LGA cash flow needs such that some LGAs were paid well in advance of their requested timing.
• Actual expenditure was overstated in LGA Quarterly Reports submitted to DOTARS.
  LGAs were required to include in their Quarterly Reports the cumulative expenditure on each project. ANAO analysis of Quarterly Reports identified that 65 per cent of the LGAs included in the sample reported reductions in cumulative expenditure for one or more projects. As a result of these reductions in project expenditure, 35 per cent of the LGAs in the sample had their total cumulative expenditure for the program fall in one or more quarters. As cumulative expenditure is a cash figure, reductions in these figures generally should not, in the absence of reporting errors, occur.
• Unreliable expenditure forecasts were included in LGA Quarterly Reports.
  In addition to reported expenditure to date, payments under the R2R Program were made to LGAs by DOTARS based on the forecast expenditure reported by the Council in each Quarterly Report. ANAO analysis identified 88 per cent of LGAs in the sample had forecast expenditure reported on particular projects in one or more Quarterly Reports but where little, or no, further expenditure on the project was reported in the following Quarterly Report. Some LGAs advised ANAO that their forecasts had been erroneous or overly optimistic. In addition, or as well, some LGAs advised ANAO that their forecasts were subject to variables that are outside their control.

Where LGAs were paid in advance of their needs, a financial benefit accrued to the LGA at the expense of the Australian Government. ANAO calculated that the cost to the Commonwealth of payments being made more than three months in advance of need to the 93 LGAs in ANAO's sample was between $1.4 million and $3.3 million.¹⁴ Extrapolating the interest cost to the full $1.2 billion paid under the Program results in an estimated cost to the Commonwealth of between $8.4 million and $19.4 million.

Auslink Roads to Recovery changes

A number of changes have already been made in the Auslink Roads to Recovery Payment Conditions and Notes on Administration to address the timely expenditure of Auslink Roads to Recovery funds. Specifically, the Funding Conditions state that:

• funding recipients must ensure that Auslink Roads to Recovery payments are spent within six months of receipt of the payment;
• funding recipients must spend all Auslink Roads to Recovery payments by 31 December 2009; and
• if a funding recipient receives an amount as interest in respect of an Auslink Roads to Recovery payment, the recipient must spend an amount equal to that amount on the construction or maintenance of roads.

ANAO considers that there would be benefit in further changes to the funding arrangements to reflect the inherent uncertainties in road works, and the risk of errors in Quarterly Reports. In addition, ANAO considers that the Funding Conditions should reflect the principle that LGAs should not be penalised, or receive a financial advantage, from legitimate delays in using Roads to Recovery funds.

In this context, there is a risk that the approach taken in the Funding Conditions to identifying and calculating the benefit to LGAs (and cost to the Commonwealth) of funds not being used in a timely manner may be administratively complex for LGAs. There are also circumstances where it may be difficult for DOTARS to identify whether LGAs have earned interest on Commonwealth funds and, if so, the amount of interest. Accordingly, there would be value in the approach to this issue being revisited in the Auslink Funding Conditions.

Special Project Allocations (Chapter 5)

In line with the arrangements for the local roads component of FAGs:

• in Western Australia (WA), $12.6 million, or 7 per cent of the R2R Program funding for the State was held back from LGAs for bridges and Aboriginal access roads. Two-thirds of the $12.6 million was allocated to bridge projects and one-third to roads serving remote Aboriginal communities. This involved 64 projects across 35 LGAs; and
• in South Australia (SA), $15 million, or 15 per cent of the R2R Program funding for the State was held back from LGAs for distribution in connection with the State's Special Local Roads Program. In total, 63 projects were approved for 35 individual LGAs and six regional associations. The latter represented a number of LGAs working together to develop regional plans of strategic road networks.

Western Australian Special Projects

In relation to the $12.6 million Special Project Allocation for WA, in April and May 2002, DOTARS wrote to relevant WA LGAs advising them that the then Minister for Transport and Regional Services had approved a further allocation of R2R funds to them. This correspondence also informed each LGA of the total amount involved, the relevant project or projects, the scope of works to be undertaken and the amount of funds allocated for each project. In some instances, for work to be undertaken during 2001–02, funds had already been provided to the relevant LGA. Other LGAs were advised to enter each project into their R2R works schedule and include them in their normal R2R Quarterly Reports in order to obtain their funds at the appropriate time.

Although underlying the additional allocation amounts were individual projects selected through a consultative process, no steps were taken by DOTARS in the gazettal process, or through amendments to either the Funding Conditions or the Administrative Guidelines to require that the allocated amounts be spent on the selected projects. This exposed the Commonwealth to risks that selected projects may not be undertaken and of cost-shifting from selected projects to other works. ANAO found that both risks were realised.

ANAO's analysis revealed a number of instances where Special Projects had not been included in work schedules and Quarterly Reports, but the full R2R allocation had been paid to the LGA by DOTARS. In addition, it needs to be recognised that analysis of WA Special Projects was impeded by the inconsistent practices adopted across and within LGAs for identifying their Special Project allocations. Some LGAs specifically identified the relevant projects as involving Special Project allocation funds. Others did not.

Reallocation of funds

The WA Special Projects allocation was provided to particular LGAs to address specific needs in accordance with the recommendations of the WA Government. Accordingly, DOTARS' procedures should have guarded against funds allocated for specific projects being diverted, without approval, to other road works.

ANAO found that there were three occasions where an LGA had sought, and obtained, approval to reallocate funds from an approved Special Project or Projects to other road works. However, ANAO identified a further 12 LGAs where the R2R reports submitted to DOTARS indicated that funds approved for expenditure on Special Projects had been reallocated, without approval having been sought from either DOTARS or Ministers.

Further, reallocation of funds from a Special Project to other road works projects within the same LGA is, in principle, inequitable as it means that the particular LGA has received a greater share of R2R funds than it would otherwise have received had the Special Project allocation not existed. Such inconsistencies were not addressed by DOTARS in its advice to Ministers on reallocation requests.

South Australian Special Projects

The administrative arrangements for the $15 million SA Special Allocation differed significantly from the approach adopted for other payments made under the provisions of the R2R Act (including the WA Special Allocation). Specifically, administration of, and accountability for, the SA Special Allocation was undertaken through the South Australian Local Government Grants Commission (SALGGC).

Payment procedures

The SALGGC, as the funding recipient in the published list gazetted at the commencement of the R2R Program, had responsibilities similar to those of LGAs. This included responsibility for entry of project details in works schedules, and the submission of Quarterly and Annual Reports.

Unlike the broader R2R Program, projects identified in the SALGGC's works schedule related to separate LGAs. As a result, unused funds paid to one LGA/regional association for its project were unable to be used on other R2R Special Local Roads Program projects. Instead, additional funds were obtained from DOTARS for on-payment by the SALGGC. This involved a financial cost to the Australian Government.

The final, and by far the largest, R2R Program payment was made in September 2004 based on the August 2004 Quarterly Report submitted to DOTARS. The SALGGC was advised to request the funding as a lump sum at the beginning of the financial year. The $5 million in expenditure forecast in August 2004 to be undertaken between August and October 2004 remained substantially unused by 30 April 2005. At this date, the final R2R Quarterly Report submitted by the SALGGC reported that $4.21 million remained unspent. This situation also involved a financial cost to the Australian Government.

Accountability arrangements

Having an intermediary account for use of R2R funds on road projects presents difficulties for the intermediary. Although DOTARS intended that LGAs be responsible to the SALGGC for the funds they received from it, the R2R Funding Conditions did not require LGAs to provide the SALGGC (or DOTARS) with R2R Annual Reports on funds paid to them through the SALGGC. In this context, there were 13 LGAs/regional associations that did not provide the SALGGC with an R2R Annual Report in one or more years to acquit outstanding R2R funds. Three of these did not submit an R2R Annual Report to the SALGGC in any year up to 2003–04. ¹⁵

Unlike the Annual Reports submitted by individual LGAs, the SALGGC's Annual Reports did not acquit the amount of R2R monies spent on actual roads projects.

Instead, Annual Reports submitted by the SALGGC were simply a record of incoming and outgoing R2R funds from the SALGGC's bank account. ANAO's analysis revealed that, in each year the SA Special Allocation operated, LGAs were paid more funds than they reported as being spent.

Changes made for Auslink Roads to Recovery

The Auslink Roads to Recovery Funding Conditions explicitly address the risk of special project allocation funds not being used for approved projects as well as unapproved reallocation of unspent funds. The Auslink Roads to Recovery Conditions also address accountability in situations where a funding recipient receives, spends or retains any Auslink Roads to Recovery payment which the Australian Government has specified is to be spent, in whole or part, on a particular project.

The R2R Funding Conditions and Administrative Guidelines did not address the use of an intermediary for Program administration and accountability for the SA Special Allocation. This oversight has not been addressed in the Auslink Roads to Recovery Program. Specifically, the payment of funds to LGAs through an intermediary such as the SALGGC, and accountability for related projects and funds, have not been specifically addressed.

^{15 2004–05 Annual Reports were not due at the time of ANAO's fieldwork.}

DOTARS response to the audit

DOTARS provided the following comment on the report:

The audit of the Roads to Recovery Program by the Australian National Audit Office (ANAO) found no evidence that the $1.2 billion provided to councils under the Roads to Recovery Program was not spent as intended by the Australian Government on the construction, maintenance and upgrading of local roads. The Department of Transport and Regional Services (the Department) notes that almost 15,000 projects were funded by the Program.

The local delivery of the Program involved councils determining project priorities within a national programme framework. The ANAO identified several areas where the Program's administration could be strengthened. The Department accepts all recommendations with one qualification. The ANAO acknowledges these matters are (being) addressed by the funding conditions and Notes on Administration for Auslink's Roads to Recovery Program.

The adjustments to funding conditions and procedures for Auslink's Roads to Recovery Program flowed from both a continuous improvement process for the initial program and issues raised by the ANAO during the course of the audit. The development of a new information technology system in 2006 will also enhance administrative procedures.

Footnotes

1 These grants are distributed on the basis of road expenditure needs (including consideration of factors such as length, type and use of roads) but the amounts paid may be used for any purpose, including on roads.

2 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.

3 The Special Appropriation was capped at $1.2 billion. It was also constrained by time, with any amount not spent by 30 June 2005 no longer available to be spent.

4 In its Election 2004 Policy ‘Local Government – Building on Our Relationship', the Coalition announced that the full $1.2 billion would be provided to local councils on the same basis as the initial R2R Program. Also, an extra $150 million would be provided for roads in unincorporated areas ($30 million) and strategic roads ($120 million). This announcement was also made in the transport policy statement, ‘Building Our National Transport Future', issued 15 September 2004.

5 Whereas the initial R2R Program was funded through a Special Appropriation, the Auslink Roads to Recovery Program is funded through Annual Appropriations. Between 2005–06 and 2008–09 $300 million per annum has been budgeted in administered expenses within DOTARS' Outcome 1 (“A better transport system for Australia”) for the formula component payments to LGAs. Annual allocations to individual LGAs are based on the Annual Appropriations. Other components of the $1.35 billion are identified in Table 1.3 in Chapter 1 of the full Report.

6 At the time of audit fieldwork, 2004–05 Annual Reports were not yet due and so 2004–05 R2R Annual Reports were not available for analysis.

7 For the remaining 10 LGAs, the relevant financial statements did not enable ANAO to analyse whether expenditure had been maintained, and the LGAs did not provide other data that addressed the issue.

8 For Auslink Roads to Recovery, the Annual Report due date has been extended to 31 October. This is to align with the payment cycle with the October quarterly reporting period ending on 31 October after which payment processing begins.

9 The Annual Report had three sections (see Appendix 2 of the full Report). In February 2006, DOTARS advised ANAO that the checklist for annual reports took its final form in 2003–04.

10 Section 5 of the R2R Act required the funding list to be published in the Gazette.

11 On occasion, DOTARS reduced forecast expenditure figures submitted in Quarterly Reports where it was apparent that the project was not scheduled to be undertaken in the ensuing three months.

12 The R2R Guidelines specified that R2R signs be erected at each end of the works when work began, and be maintained for two years after the project was finished.

13 LGAs with a small total allocation ($160,000 or less in total grants over the life of the Program) were also able to receive accelerated funding with their full allocation paid in one or two instalments.

14 Four LGAs in ANAO's representative sample advised ANAO that they had invested R2R funds. Of these, two further advised ANAO they reinvested the interest earning in R2R road works.