Introduction

1.1 On 15 March 2017, Snowy Hydro Limited announced commencement of a feasibility study into expanding the pumped hydro-electric generation capacity¹ of the Snowy Mountains Hydro-electric Scheme.² This expansion project would become known as Snowy 2.0. Snowy Hydro Limited completed the feasibility study process in December 2017.

1.2 In December 2018, Snowy Hydro Limited made a final investment decision to proceed with Snowy 2.0. The engineer, procure and construct (EPC) contracted schedule is for first power generation in 2024–25 and project completion in 2026–27. Appendix 3 provides a timeline of key project milestones.

1.3 Snowy 2.0 includes the construction of an underground power station and around 27 kilometres of tunnels between Tantangara and Talbingo Reservoirs (Figure 1.1). The reservoirs and supporting infrastructure are within the Kosciuszko National Park in the Snowy Mountains region of New South Wales (Figure 1.2).

1.4 Snowy 2.0 is intended to provide an additional 2000 megawatts of renewable electricity generating capacity and approximately 350,000 megawatt hours of storage to the National Electricity Market (NEM).³

Figure 1.1: Snowy 2.0 pumped hydro concept

 

 

Source: Snowy Hydro Limited.

Figure 1.2: Map of the Snowy Mountains Hydro-electric Scheme including Snowy 2.0

 

 

Source: Snowy Hydro Limited.

The National Electricity Market

1.5 The NEM connects power from electricity generators to large industrial energy users and local electricity distributors across Queensland, New South Wales, the Australian Capital Territory, Victoria, South Australia, and Tasmania.

1.6 The Australian Energy Market Operator (AEMO) has identified the NEM is in a period of change, moving from a centralised system dominated by large coal fired power stations to a decentralised system of renewable generators and energy storage resources.⁴

1.7 As part of the 2020 Integrated System Plan (ISP) published in July 2020, AEMO projected the NEM will require over 26 gigawatts of new variable renewable energy generation supported by up to 19 gigawatts of new dispatchable energy resources⁵ to replace coal fired electricity generation by 2040.⁶

1.8 In 2021, AEMO indicated the need for dispatchable resources may be greater than projected in the 2020 ISP. AEMO analysis indicates over 60 gigawatts of dispatchable capacity may be required by 2050 to efficiently support variable renewable energy.⁷

1.9 Meeting the demand for increased renewable energy generation and dispatchable energy storage was the basis of the decision to proceed with Snowy 2.0.⁸

Legislative structure, ownership and governance

1.10 Snowy Hydro Limited is an unlisted company incorporated under the Corporations Act 2001. On 29 June 2018, the Commonwealth of Australia (the Commonwealth) became Snowy Hydro Limited’s sole shareholder. Snowy Hydro Limited also became a Commonwealth company on this date.⁹

1.11 The Public Governance, Performance and Accountability Act 2013 (PGPA Act) frameworks for government-owned business enterprises (GBE) apply to Snowy Hydro Limited from this date.¹⁰ Chapter three of the PGPA Act sets out requirements with which Commonwealth companies are to comply to meet appropriate standards of public sector accountability.

1.12 The Commonwealth’s ownership interest in Snowy Hydro Limited is represented by two shareholder ministers: the Minister for Energy and Emissions Reduction, and the Minister for Finance. Shareholder ministers provide Snowy Hydro Limited guidance on purpose, role and activities through a Statement of Expectations.¹¹ Snowy Hydro Limited provides a dividend to the Commonwealth as the sole shareholder. The dividends were $217.8 million in 2019–20 and $122.7 million in 2020–21.

1.13 Internal governance of Snowy Hydro Limited is provided through its Board of Directors (the Board). The Snowy Hydro Limited Company Constitution requires that there must be a minimum of five and a maximum of nine Directors appointed to the Board. The Board has ultimate responsibility for the performance of the company and is accountable to the Commonwealth as Snowy Hydro Limited’s sole shareholder and to the Parliament. The Board has delegated authority over the day-to-day management of Snowy Hydro Limited to the Chief Executive Officer.¹²

Delivery arrangements for Snowy 2.0

1.14 Snowy Hydro Limited is using an engineer, procure and construct (EPC) contract to complete most of the Snowy 2.0 project.¹³ The Snowy 2.0 EPC contract is based on the International Federation of Consulting Engineers’ (FIDIC) ‘Conditions of Contract for EPC/Turnkey Projects’.¹⁴ Under this type of contract, a lead contractor is responsible for engineering, procurement and construction activities required to build the infrastructure to the standards set out by Snowy Hydro Limited as the project owner.

1.15 In April 2019, Snowy Hydro Limited executed the Snowy 2.0 EPC contract with Future Generation Joint Venture as the lead contractor.¹⁵ The EPC contract includes one named subcontractor responsible for the electrical and mechanical work associated with hydro-electric power station elements of the project.¹⁶

1.16 The contracted sum under the EPC contract is $5.11 billion. This makes up more than 85 per cent of the total Snowy 2.0 project cost approved by Snowy Hydro Limited. The electrical and mechanical element of the contract makes up around 15 per cent of the total contract sum of $5.11 billion under the EPC contract.

1.17 Project costs not included in the EPC contract include early road works, environmental approvals and compliance, electricity grid connections, insurance, contingency and owner’s costs. Owner’s costs are Snowy Hydro Limited’s costs of developing and managing the project, including employees and third-party advisors.

Rationale for undertaking the audit

1.18 Snowy Hydro Limited has been provided an equity injection to a subscription cap of $1.38 billion to proceed with the Snowy 2.0 project.¹⁷ Snowy Hydro Limited is financing the remainder of the project from debt funding. The audit will provide assurance to Parliament that Snowy Hydro Limited has appropriate arrangements in place to effectively deliver the Snowy 2.0 project.

1.19 Under subsection 17(2) of the Auditor-General Act 1997 (the Act), performance audits of GBEs such as Snowy Hydro Limited can be conducted only at the request of the Joint Committee of Public Accounts and Audit (JCPAA). The Auditor-General received this request from the JCPAA in August 2021.

Audit approach

Audit objective, criteria and scope

1.20 The objective of the audit was to examine the effectiveness of Snowy Hydro Limited’s governance arrangements for early implementation of Snowy 2.0, the expansion to the Snowy Mountains Hydro-electric Scheme.

1.21 To form a conclusion against this objective, the following high-level audit criteria were adopted.

• Have effective governance frameworks been established to deliver Snowy 2.0?
• Are there appropriate arrangements to manage the Snowy 2.0 engineer, procure and construct (EPC) contract?
• Does Snowy Hydro Limited effectively monitor and report on the progress of Snowy 2.0?

1.22 The scope of the audit focused on Snowy Hydro Limited’s governance arrangements during the early implementation of the Snowy 2.0 project including:

• Snowy 2.0 governance, procurement and contract management frameworks;
• contract management of the Snowy 2.0 EPC contract, including sample testing of monthly EPC payments; and
• monitoring and reporting on the Snowy 2.0 project, including internal and external performance reporting and advice to shareholder ministers.

1.23 The audit scope did not include the Commonwealth’s purchase of New South Wales and Victoria’s shares of Snowy Hydro Limited; shareholder approval of Snowy 2.0 and associated equity investment in Snowy Hydro Limited; Snowy Hydro Limited’s other operations or projects; Commonwealth or state governments’ environmental assessment processes; the appropriateness of the technical or feasibility assessments; or decisions by AEMO and other entities in relation to connections and transmission.

Audit methodology

1.24 The audit methodology involved examination of Snowy Hydro Limited documentation, a virtual site tour¹⁸ and meetings with Snowy Hydro Limited staff including demonstrations of Snowy 2.0 business processes. The audit team also met with:

• two shareholder departments: the Department of Industry, Science, Energy and Resources, and the Department of Finance; and
• the Australian Industry Participation Authority.

1.25 The audit was conducted in accordance with ANAO auditing standards at a cost to the ANAO of $386,000.

1.26 The team members for this audit were Jacqueline Hedditch, Joshua Francis, Jake Farquharson and Corinne Horton.

2.1 Governance involves the systems and processes in place that shape, enable and oversee the management of an organisation.¹⁹ Company directors have an obligation to act with care and diligence under the Corporations Act 2001.²⁰ The Public Governance, Performance and Accountability Act 2013 (the PGPA Act) requires Commonwealth companies ‘meet high standards of governance, performance and accountability’.²¹

2.2 Effective governance arrangements for a project of Snowy 2.0’s scale and complexity would be expected to include:

• appropriate oversight from the Board;
• implementation of procurement policies and procedures; and
• establishing appropriate contract management arrangements.

Does the Board have appropriate oversight over Snowy 2.0?

2.3 The Statement of Expectations issued in 2018 states that ‘the Board [of Snowy Hydro Limited] has ultimate responsibility for the performance of the Company and is accountable to the Government as its sole shareholder.’ An updated Statement of Expectations published in 2021 specifies that the Board is accountable to ministers for: the performance of Snowy Hydro Limited; internal governance of Snowy Hydro Limited; setting strategic direction and culture; compliance with external governance frameworks; and timely, accurate and transparent provision of information.

Governance framework

2.4 The Snowy Hydro Limited Board Charter (the Board Charter) sets out that the role of the Board is to:

act in the best interests of Snowy Hydro; ensure that Snowy Hydro’s business objectives are aligned with shareholder expectations; and guide and monitor Snowy Hydro’s strategies, policies and performance to optimise performance and create shareholder value, while having regard to employee, community and other stakeholder interests.²²

2.5 The Department of Finance maintains a resource management guide for government-owned business enterprises (GBEs) in relation to board and corporate governance, financial governance and planning and reporting.²³ The guide provides the following guidance to GBEs in relation to the composition of the board:

GBE boards and any subsidiaries are to comprise directors with an appropriate mix of skills, who are to be appointed on the basis of their individual capacity to contribute to the board, having an appropriate balance of relevant skills (such as commerce, finance, accounting, law, marketing, workplace relations, management and other skills relevant to the GBE’s operations) to enable them to contribute to the achievement of the GBE´s objectives.²⁴

2.6 The Board’s composition has changed since the December 2018 Snowy 2.0 final investment decision.²⁵ Five of the current members were appointed between March 2019 and August 2020.

2.7 Snowy Hydro Limited advised the ANAO that the changes in composition reflect the changing requirements of the company relating to the scale of the project. A 2019 internal review of the Board, initially scheduled for November 2018, was deferred until after the final investment decision to enable consideration of the specific skills required for Snowy 2.0. The review also considered the tenure of previous Board members.

2.8 Snowy Hydro Limited assessed the skills and experience of the Board members, in particular those joining the Board following the final investment decision, against its skills matrix. Snowy Hydro Limited found they are consistent with the skills matrix and provide coverage of the necessary skill areas.

2.9 The Board Charter states it will ‘meet as required to facilitate the effective discharge of its duties and will generally meet at least ten times each year.’ The Board met at least ten times in each calendar year 2018, 2019, 2020 and 2021. Snowy Hydro Limited advised the ANAO that in addition to the Board’s regular meeting schedule, two additional meetings in 2018 and four additional meetings in 2020 covered specific Snowy 2.0 matters or milestones.

Reporting structure

2.10 Snowy Hydro Limited has established specific governance arrangements for the Snowy 2.0 project. Figure 2.1 provides an overview of the Snowy 2.0 governance framework. The roles and responsibilities of all relevant committees are articulated in their respective charters. This includes appropriate reporting arrangements.²⁶

Figure 2.1: Snowy 2.0 project governance framework

 

 

Note a: The Snowy 2.0 Funding Committee has been inactive since the execution of the funding strategy.

Note b: The Snowy 2.0 Project Team is also referred to as the Owner’s Team.

Source: ANAO presentation of Snowy Hydro Limited documentation.

Key decision points and assurance over assumptions

2.11 The Board established several key decision points for approval to progress with Snowy 2.0. The key decision points were the feasibility study, the final investment decision, and the notice to proceed. These decision points are discussed below. Appendix 3 provides an overview of all project milestones.

Feasibility study

2.12 In March 2017, Snowy Hydro Limited announced the proposed Snowy 2.0 project would commence with a feasibility study.²⁷ The purpose of the feasibility study was to determine whether Snowy 2.0 was technically feasible. The feasibility study also:

• provided a project cost estimate and timeframes;
• sought to establish a business case to support investment in Snowy 2.0²⁸;
• included an investment case, cost estimate and commercial and business analysis modelling; and
• outlined a range of further work required prior to the final investment decision.

2.13 The feasibility study was approved by the Board in December 2017.

Final investment decision

2.14 Following approval of the feasibility study, Snowy Hydro Limited commenced the final investment decision process (FID process). This included consideration of the final Snowy 2.0 business case.

2.15 The business case considered several scenarios, including a comparison of ‘build’ and ‘do not build’ scenarios, various outcomes relating to the Integrated System Plan, a downside case scenario, and other National Energy Market scenarios as modelled by an external provider.²⁹ The business case was approved by the Board on 21 November 2018.

2.16 The FID process also involved due diligence and preparatory work such as detailed assessment of project elements including health and safety, the business case and funding strategy, procurement and contracting, probity, technical design, environmental approvals, and risk management. Snowy Hydro Limited sourced opinions from external advisors to support these detailed assessments.³⁰

2.17 The FID process included re-examination of key assumptions set out in the feasibility study, including financing and cost modelling. These assumptions were set out in the funding strategy. The funding strategy provided analysis on financing Snowy 2.0 and the project’s impact on Snowy Hydro Limited’s credit rating.

Financing

2.18 The funding strategy sets out funding requirements against four capital expenditure scenarios³¹: a $5.4 billion ‘low case’; a $5.9 billion ‘base case’; a $6.4 billion ‘high case’; and a $6.9 billion ‘worst case’.

2.19 The final investment decision documentation also included correspondence from eight potential future financiers indicating their interest in providing debt facilities to Snowy Hydro Limited for the construction of Snowy 2.0. These financiers were provided with public and confidential information about Snowy 2.0 and engaged with both Snowy Hydro Limited and its financial adviser to develop a detailed understanding of the project.

2.20 Snowy Hydro Limited formed the view that collectively the correspondence indicated that the company would be able to secure more credit capacity than required.

Credit rating

2.21 The funding strategy further considered six commercial scenarios for their impact on Snowy Hydro Limited’s credit rating, including assessment by S&P Global.³² These six scenarios were:

• ‘base case’ — a ‘defensible and commercially robust base case for the consolidated Snowy hydro business including the funding of Snowy 2.0’;
• ‘National Electricity Market downside case’ — a scenario that considers the implied value of capacity in the National Electricity Market being 15 per cent lower than base case and an average decrease of 25 per cent in the buy/sell net revenue for the duration of the modelled period³³;
• ‘hydrology dry case’ — a scenario that considers both immediate and long-lasting effects of less water inflows to the Snowy Mountains Hydro-electric Scheme resulting in a material reduction in Snowy Hydro Limited’s access to water for hydro-electricity generation;
• ‘capex downside case’ — a scenario that considers a total capital expenditure that exceeds the base case by $1.0 billion with no extension of the project delivery schedule;
• ‘composite downside case’ — a scenario that considers negative events in both Snowy Hydro Limited’s existing business operations and the financing of Snowy 2.0; and
• ‘“Black swan³⁴” downside case’ — this scenario takes the composite downside case and adds the hydrology dry case.

2.22 Snowy Hydro Limited considers that a rating of BBB– or above is essential to continue operations. However, Snowy Hydro Limited prefers a BBB+ rating. The funding strategy outlined that Snowy Hydro Limited has maintained the same BBB+ credit rating since the company became an entity under the Corporations Act 2001 in July 2002.

2.23 The funding strategy stated that ‘under all of the scenarios S&P [Global] believes that Snowy Hydro will be able to maintain its satisfactory business risk profile.’ Against all six scenarios, the credit rating organisation provided an indicative rating of BBB– or above.

2.24 Further, the strategy stated that the credit rating organisation ‘concluded that Snowy Hydro is expected to maintain its investment grade credit rating under the base case as well as all of the downside scenarios.’ On 30 June 2021, Snowy Hydro Limited retained its BBB+ rating.

Final investment decision approvals

2.25 On 12 December 2018, the Board reached a final investment decision and approved Snowy Hydro Limited to proceed with Snowy 2.0. Following Board approval and consistent with the requirements of Snowy Hydro Limited’s constitution, a recommendation was presented to the shareholder ministers to approve the final investment decision. Shareholder approval was provided in February 2019.

2.26 The final investment decision approval provided for Snowy 2.0 to proceed in three stages:

• early access road works involving upgrades to access roads to main access tunnel construction location;
• early works including exploratory works³⁵, design development and procurement of long lead time items; and
• all other works on the project, known as main works.³⁶

Notice to proceed

2.27 The final phase of the decision-making process was to issue the notice to proceed under the engineer, procure and construct (EPC) contract with the selected contractors.³⁷ The notice to proceed decision included reconsideration of the business case including finalising financing arrangements, as well as key risks and proposed treatments.

2.28 The Board approved the notice to proceed on 16 July 2020.³⁸ Shareholder approval was provided in August 2020.

2.29 Snowy Hydro Limited continues to utilise the governance framework outlined in Figure 2.1 above for the ongoing management of the Snowy 2.0 project. Details of ongoing management are discussed throughout Chapters Three and Four.

Risk management

2.30 GBE boards are responsible for managing risks.³⁹ The Board Charter states that the Board is responsible for ‘oversight and review of the principal risks facing Snowy Hydro, including ensuring that appropriate standards of accountability, risk management and corporate governance are in place’.

2.31 Snowy Hydro Limited determined the addition of a large, complex infrastructure project to its operations required adjustments to its business-as-usual risk management approach. A third-party provider was engaged to develop a project specific risk management framework for Snowy 2.0.

Risk assessment at final investment decision

2.32 Over 120 individual risks relevant to Snowy 2.0 were identified as part of the FID process. Snowy Hydro Limited assessed these individual risks for materiality and grouped them into 12 risk categories. These became known as the top 12 risks.⁴⁰

2.33 As outlined in Appendix 4, the top 12 risks were assigned:

• an inherent risk rating at final investment decision. This was the risk level at final investment decision without using mitigations to reduce the impact or severity. The top 12 risks at the final investment decision were assigned an inherent risk rating of ‘Extreme’ or ‘High’;
• a current risk rating at final investment decision. This considered the mitigations in place at final investment decision; and
• a target risk rating. This is the risk rating if all identified mitigations are actioned.

Ongoing risk management

2.34 Snowy Hydro Limited maintains a consolidated Snowy 2.0 risk register which includes both the top 12 risks and all active individual risks. As at March 2022, there are 135 active individual risks. Snowy Hydro Limited monitors the consolidated risk register. The top 12 risks are reviewed and reported monthly to governance committees. The project team reviews the individual risks on a six-weekly cycle. Snowy Hydro Limited has retired three key risks where the risk is no longer considered relevant (see Appendix 4).

2.35 Snowy Hydro Limited also reports on key risks to shareholder departments (see paragraphs 4.26 to 4.32).

Shared and transferred risk

2.36 Shared risk refers to risks that arise from objectives shared between multiple entities.⁴¹ Risk transfer is a risk management strategy that involves shifting of a risk from one party to another by using contractual arrangements to reach an agreement, such as the purchase of insurance policies and indemnities.⁴²

2.37 Snowy Hydro Limited assessed the top 12 risks to determine whether they were able to be shared with or transferred to the contractor, as well as the extent to which these risks were to be shared or transferred. Appendix 4 outlines the target extent of risk transfer and the key mechanisms adopted to facilitate this transfer.

2.38 Snowy Hydro Limited utilised the EPC contract as the key mechanism for formalising risk allocation and transfer arrangements. The EPC contract’s risk allocation and transfer mechanisms are discussed further in paragraphs 3.25 to 3.30.

Have appropriate procurement and contract management frameworks been implemented?

2.39 The shareholder ministers’ Statement of Expectations requires that Snowy Hydro Limited:

• ensures the Snowy 2.0 procurement processes are open, transparent, competitive and reflect value for money⁴³; and
• take all appropriate actions to ensure the project is delivered on-time and on-budget in accordance with agreed parameters.⁴⁴

2.40 The Australian Government Contract Management Guide indicates that good contract management arrangements support the management of risk and achievement of value for money and procurement objectives.⁴⁵ Snowy Hydro Limited recognises the importance of effective contract management in both its existing contract management framework⁴⁶ and the framework established specifically for Snowy 2.0 contracts.⁴⁷

Snowy 2.0 procurement and contract management frameworks

2.41 The procurement and contract management frameworks for Snowy 2.0 built on Snowy Hydro Limited’s pre-existing frameworks. Snowy Hydro Limited’s pre-existing procurement policies and procedures were used for Snowy 2.0 procurements except for the EPC contract related procurement.⁴⁸ A specific procurement approach was developed for the EPC contract. The implementation of this EPC procurement framework is discussed in paragraphs 3.33 to 3.42.

2.42 The Snowy 2.0 contract management approach builds on Snowy Hydro Limited’s pre-existing framework. At the feasibility stage in 2017, Snowy Hydro Limited identified that its existing framework needed to be amended to appropriately manage contracts of the scope and complexity required. The final investment decision papers supporting the Board’s December 2018 decision described the development and implementation of these amendments. This included developing Snowy 2.0 specific contract management policies, processes and systems.

2.43 Figure 2.2 provides an overview of key policy and procedural documents that make up the Snowy 2.0 procurement and contract management frameworks.

Figure 2.2: Key procurement and contract management framework documents

 

 

Note: Not all procurement and contract management framework documents reviewed during the audit are shown in this figure.

Note a: These are Snowy Hydro Limited’s standard procurement and contract management framework documents. These existed prior to the Snowy 2.0 project.

Note b: These Snowy 2.0 contract management framework documents are relevant to all Snowy 2.0 contracts. These were developed in recognition of the additional risk and complexity of the Snowy 2.0 contract management compared to business-as-usual contract management at Snowy Hydro Limited.

Note c: The scale, risk and complexity of the Snowy 2.0 EPC contract compared to other Snowy 2.0 contracts requires additional EPC contract specific management plans.

Note d: These documents provided the framework for the procurement activities described in paragraphs 3.31 to 3.42.

Source: ANAO presentation of Snowy Hydro Limited documents.

2.44 Snowy Hydro Limited’s procurement framework includes guidance related to achieving value for money, encouraging competition, ethics and probity, and effective contract management. This framework was in place at the commencement of the Snowy 2.0 project feasibility work in 2017.

2.45 Snowy Hydro Limited’s ‘Procurement Procedure’ document sets out four procurement goals that are aligned with the CPRs.

• Acquire goods, equipment, services and/or works from external suppliers that meet the quality requirements of Snowy Hydro Limited.
• Achieve Snowy Hydro Limited’s commercial outcomes.
• Undertake procurement within acceptable risk limits, including commercial risk to Snowy Hydro Limited’s business, technical risk to plant and equipment, and risk of harm to employees, contractors or the environment.
• Undertake procurement with the most efficient use of time and resources.

2.46 Snowy Hydro Limited classifies its procurement activities for Snowy 2.0 into four categories (Table 2.1).⁴⁹

Table 2.1: Snowy 2.0 procurement categories

Note a: Percentages calculated on a May 2022 data set.

Source: ANAO analysis of Snowy Hydro Limited data.

2.47 Snowy Hydro Limited’s contract management framework covers the key elements of contract management as set out in the Australian Government Contract Management Guide. This includes mechanisms for contract governance, performance management, supplier relationship management, and contract administration. The implementation of EPC contract management activities under this framework is examined in paragraphs 3.33 to 3.67 and 4.4 to 4.13.

2.48 Snowy Hydro Limited’s Snowy 2.0 contract register documents 323 contracts related to Snowy 2.0 (Table 2.2). The EPC contract described in paragraphs 1.14 to 1.17 is around 90 per cent of Snowy Hydro Limited’s Snowy 2.0-related contract value and spend.

Table 2.2: Snowy 2.0 project contracts

Note a: This is the Snowy 2.0 EPC contract.

Source: ANAO analysis of Snowy Hydro Limited data set from May 2022.

Probity management

2.49 Those responsible for the governance of Commonwealth entities must promote the ethical management of public resources and establish and maintain appropriate systems relating to risk management and oversight and internal controls.⁵⁰ This includes policies and procedures regarding the management of conflicts of interest. Such policies and procedures should apply to all contractors, consultants and advisory bodies employed by, or associated with, the entity.⁵¹ Each Statement of Expectations issued by the shareholders confirms the need for these types of arrangements to be established for Snowy 2.0 procurement.⁵²

2.50 In relation to probity management for Snowy 2.0, Snowy Hydro Limited has implemented the following mechanisms.

• A Board-approved code of conduct policy. The code of conduct policy establishes that employees are accountable for declaring all actual, perceived or potential conflicts of interest and must declare any conflict of interest as soon as it arises.
• A procedure for declaring gifts and conflicts of interest. This procedure directs employees to disclose conflicts of interest in writing to their senior manager immediately upon their becoming aware of the actual or potential conflict of interest.
• Adopted the existing code of conduct policy and declaring gifts and conflicts of interest procedure for Snowy 2.0, supplemented by a Project Charter, which describes the required standards of behaviour relevant to the project.
• A conflict of interest register. This register includes declarations and evidence of oversight of potential conflicts related to the Snowy 2.0 project.

2.51 Nothing came to the ANAO’s attention that the probity management mechanisms do not provide a sufficient basis to manage conflicts of interest.

Probity management in Snowy 2.0’s engineer, procure and construct procurement

2.52 Snowy Hydro Limited identified the EPC procurement process as a high probity related risk for Snowy 2.0. To manage this risk, Snowy Hydro Limited required all personnel involved in the Snowy 2.0 tender assessment to confirm that they had read the relevant policies and did not have any conflicts with the policies or the listed contractors.⁵³ This was in addition to the established Snowy Hydro Limited procedure for declaring gifts and conflicts of interest which requires employees to declare actual or potential conflicts as they arise.

2.53 Snowy Hydro Limited engaged an external provider to undertake a review of probity management arrangements for the EPC procurement processes. This review did not identify any material probity risks which have not been identified, assessed and or mitigated by Snowy Hydro. A report documenting this probity review was included with the final investment decision material presented to the Board in December 2018.

Australian Industry Participation Plan

2.54 The Australian Jobs Act 2013 requires proponents of major projects to submit an Australian Industry Participation Plan (AIP Plan) and submit AIP Plan compliance reports to the Australian Industry Participation Authority (AIP Authority).⁵⁴ Major projects are defined as projects with capital expenditure likely to exceed $500 million.

2.55 Snowy Hydro Limited was largely compliant with the Australian Jobs Act 2013. Reporting to the AIP Authority was non-compliant with the required timeframes though the ANAO noted an improving trend in submission timeframes (Table 2.3).⁵⁵ The most recent report for the 24 June 2021 to 23 December 2021 period was submitted on time.

Table 2.3: Snowy Hydro Limited compliance with AIP Plan reporting timeframes

Source: ANAO analysis of AIP Plan reports against AIP Plan approval letter requirements.

2.56 Snowy Hydro Limited advised the ANAO that initially the principal EPC contractor required time to establish the monitoring and reporting framework necessary to meet reporting requirements. Snowy Hydro Limited withheld an amount of interim payment to the main EPC contractor in October 2020 as questions received from the AIP Authority required a response. Snowy Hydro Limited subsequently reported an improved level of engagement from the contractor, and the withheld payment was released.

2.57 Snowy Hydro Limited should continue to focus on the timeliness of compliance reporting to the AIP Authority. This will support ongoing transparency of its activities to provide opportunities for Australian industry to compete for work.

3.1 Contract management refers to the activities undertaken to manage the performance of a contract including achieving agreed outcomes and meeting key deadlines. Effective contract management requires development of a contract that supports the achievement of intended outcomes, selection of the most appropriate contractor, and ongoing monitoring of performance.

3.2 To assess whether Snowy Hydro Limited has appropriate arrangements to manage the Snowy 2.0 EPC contract⁵⁶, the ANAO examined whether:

• development of the EPC contract supported Snowy 2.0 outcomes;
• contract negotiation and execution demonstrated value for money; and
• Snowy Hydro Limited effectively monitors the contractor’s performance.

Did the development of the EPC contract support Snowy 2.0 outcomes?

3.3 Snowy 2.0 was developed as a commercial business opportunity for Snowy Hydro Limited. The shareholder expects Snowy 2.0 to support the delivery of reliable, secure and affordable energy in Australia.⁵⁷ Contract arrangements for Snowy 2.0 need to deliver against quality, cost and time requirements to realise outcomes that will generate commercial value and meet shareholder expectations.

Assessment of contracting approaches

3.4 Snowy Hydro Limited articulated the following position as part of developing its Snowy 2.0 contracting strategy in 2017.

• Snowy Hydro Limited is the owner of the project, and ultimately responsible for its success or failure. This accountability cannot be delegated.
• Snowy Hydro Limited does not have the internal resources or capability to execute Snowy 2.0 without external contractors.
• Snowy Hydro Limited does not have the necessary systems in-house to control a project of this scale and complexity. It must either develop them or buy them in.
• Snowy Hydro Limited remains directly accountable for some aspects of the project, for example, stakeholder engagement, legal and regulatory, trading and portfolio considerations, though they may be supplemented with external expertise.

Selecting the primary contracting approach

3.5 Snowy Hydro Limited reviewed four potential contracting approaches during the feasibility stage in 2017.⁵⁸ Differences between the approaches included the contracting method to be used, the number of main contracts, and whether Snowy Hydro Limited would engage a contract management consultant or develop in-house contract management capability.

3.6 The preferred contracting approach identified was to:

• use the International Federation of Consulting Engineers’ (FIDIC) ‘Conditions of Contract for EPC/Turnkey Projects’ contracting method to deliver Snowy 2.0 to Snowy Hydro Limited specified requirements as a turnkey solution for a contracted price⁵⁹;
• engage a single principal EPC contractor; and
• develop capability in Snowy Hydro Limited to manage the EPC contract.

3.7 This approach was the preferred option based on the risk management benefits and a contracted fixed price. The 2017 review concluded the EPC contract was the most advantageous in five of the eight assessment categories. These five categories were overhead costs, exposure to cost overruns, market attractiveness, exposure to execution and coordination risk, and exposure to technical integrity risk. The development of an ‘Owner’s Team⁶⁰’ would also separate the Snowy 2.0 project from Snowy Hydro Limited’s existing operations.

3.8 The use of a single EPC contract managed by a Snowy Hydro Limited project team was endorsed by the Snowy Hydro Limited Board of Directors (the Board) at both the feasibility study approval in December 2017 and final investment decision in December 2018.

Project and contract deliverables

3.9 The aim of contract management is to ensure that all parties meet their obligations to deliver the objectives of the contract.⁶¹ A contract requires clearly documented deliverables if the contracting organisation is to achieve its outcomes. Clearly documented deliverables will include information about quality, cost and schedule. The Snowy 2.0 EPC contract incorporates clear deliverables in the recitals section at the highest level of the contract (see extract in the box below).

Source: EPC/Turnkey Contract for the execution of the Snowy 2.0 Pumped Hydro Electric Scheme Capacity Upgrade Project, executed 5 April 2019, Recitals section, page (i).

3.10 The statements outlined in Box 1 are supported by Clause 4.1 of the Snowy 2.0 EPC contract, which places general obligations on the contractor. In summary, these obligations require the contractor to deliver the project in accordance with the time, budget and specific design requirements established elsewhere in the contractual documentation. Table 3.1 outlines the key elements of the Snowy 2.0 EPC contract and how they define contract deliverables.

Table 3.1: Key Snowy 2.0 EPC contract elements

Note a: Presented in the contractual order of priority under the Formal Instrument of Agreement’s Clause 1.5.

Source: ANAO review of Snowy 2.0 EPC contract documents.

Quality — EPC contract employer’s requirements

3.11 Detailed requirements for the construction of Snowy 2.0 are outlined in the Employer’s Requirements. The Employer’s Requirements details the scope of work, including quality and technical specifications and Snowy Hydro Limited’s expectations of the contractors for the project including commissioning⁶² and handover.

3.12 Snowy Hydro Limited commenced development of the Employer’s Requirements during the feasibility study where key technical and operational requirements of Snowy 2.0 were outlined.

3.13 The Employer’s Requirements were used to inform the procurement and contract negotiation process and were also refined as part of this process. This iterative approach was intended to ensure the Employer’s Requirements were appropriately balanced.

3.14 The Employer’s Requirements are included at Exhibit B of the EPC Contract.

Cost — EPC contract payment schedule

3.15 Snowy Hydro Limited controls the costs of the EPC contract through Clause 14 Contract Price and Payment and Schedule 10 Schedule of Payments. Clause 14 (b) states:

The Contractor acknowledges and agrees that, subject to the terms of the Contract, the Contract Price is:

(i) a fixed and firm price that includes the Contractor’s profit and overhead and all costs and expenses that the Contractor may incur in executing the Works and performing the Contractor’s Activities and any of its other obligations under the Contract; and

(ii) not subject to any adjustment, escalation or rise and fall, other than adjustments, additions and/or deductions in accordance with the Contract.

3.16 Schedule 10 of the EPC contract sets the payment items the EPC contractor can claim. The payment schedule has 319 payment items across 17 categories. These categories relate to:

• early works;
• main works;
• electrical and mechanical works;
• incentives and risk sharing; and
• escalation.

3.17 Each payment item includes identification of the work to be completed, a rule of credit describing the circumstances for payments to be released, and the total amount that can be claimed for that payment item.

3.18 Each payment item is linked to one of 14 rules of credit. The rules of credit reflect different circumstances that are required to be met for Snowy Hydro Limited to release payments for items.⁶³ Circumstances include when:

• design work is completed, materials have been purchased, or construction activities have been completed; or
• certain events have occurred, such as tunnel conditions that are different to the geotechnical baseline or situations triggering incentive or risk sharing payments.

3.19 The rules of credit recognise that some contracted costs may be variable within the amounts set in the payment schedule. For example, the rules of credit associated with the supply of materials⁶⁴ are that payments are made based on the amount of material used. Therefore, if less material is used than was estimated in the EPC contract, the amount paid will be less than the amount in the EPC payment schedule.

Development of EPC payment schedule

3.20 The EPC contract’s costings and payment schedule were developed and refined through the feasibility and tendering processes. Snowy Hydro Limited commenced the cost estimate with its third-party engineering and costing advisors during the feasibility study stage. The costing and payment schedules were part of the competitive tender process. Snowy Hydro Limited’s third-party engineering and costing advisors continued to provide advice on the costing elements of bids during the tender assessment and approval.

3.21 The Board was provided advice on EPC contracting costing at its approvals of the feasibility study, final investment decision, and notice to proceed with main works decision.

Timeframes — EPC contract scheduling of works

3.22 The EPC contract includes clauses related to the scheduling of works, including Clause 8 Commencement Delays and Suspension and Clause 10 Employer’s Taking Over. These clauses require the contractor to deliver the contracted works in line with timeframes set out in the contract schedules.

3.23 EPC contract Schedule 1 Contract Data sets key delivery dates for the taking over⁶⁵ of each section of work to Snowy Hydro Limited (Table 3.2). The contracted date for handover of the whole of the works is in fourth quarter of 2026–27.

Table 3.2: Period for completion of each section of work under the EPC contract

Note a: These periods reflect the dates in the executed EPC contract’s programme from April 2019.

Note b: These periods reflect the varied approved completion dates as of February 2022. See paragraphs 3.55 to 3.60. Approved variations were less than six months.

Source: Snowy Hydro Limited documents.

3.24 The EPC contractor’s detailed 217-page Basis of Programme document is included in the EPC contract as Schedule 3. This document lists milestones and expected completion dates for the detailed construction path leading to the delivery of the specified sections above. This programme is also used to support the management of the contractor’s performance and monitoring of the progress of Snowy 2.0 overall.⁶⁶

Risk allocation and transfer

3.25 The Snowy 2.0 contract includes risk allocation and transfer mechanisms. The contractual arrangements requiring the contractor to deliver the contracted work to specified quality, cost and timeframes is a risk transfer mechanism. Allocation and transfer of risk is supported by the adoption of a geotechnical baseline report (GBR) and schedule, and warranties and performance guarantees established in the EPC contract.

Geotechnical baseline report and schedule

3.26 Snowy Hydro Limited identified uncertainty of ground conditions and groundwater as one of the top 12 risks (see paragraphs 2.30 to 2.38 and Appendix 4). Snowy Hydro Limited and the contractor developed a GBR and associated payment schedule to provide a specific risk allocation mechanism between Snowy Hydro Limited and the contractor.⁶⁷

3.27 The use of the GBR is an example of risk allocation through contractual arrangements. Case study 1 provides an overview of the development of the GBR and its application in risk allocation.

Warranties and performance security

3.28 Snowy Hydro Limited’s transfer of risk though the EPC contract is supported by warranties through testing and defect provisions and the requirement for the contractor to maintain performance security.

3.29 The EPC contract’s testing and defect provisions allow Snowy Hydro Limited to confirm the works are delivered to the standards set in the Employer’s Requirements and require actions to be taken if these standards are not met.

3.30 The performance security is a set of ‘unconditional, irrevocable, fully enforceable unconditional insurance bonds payable on first demand’.⁶⁸ Ten different securities are required under the contract. This includes insurance bonds in relation to the performance of works and performance against several key functional specifications.

Did the contract negotiation and execution demonstrate value for money?

3.31 The Commonwealth Procurement Rules contain a value for money principle.⁶⁹ Value for money includes both cost and non-cost factors. Competition is a key element of the Australian Government’s procurement framework and helps deliver value for money. Each version of the Statement of Expectations issued by the shareholders required Snowy Hydro Limited to ‘ensure its procurement processes are open, transparent, competitive and reflect value for money’.

3.32 The approach Snowy Hydro Limited adopted for contract negotiation and execution was integrated with the procurement approach outlined in paragraphs 2.41 to 2.45. This approach includes four procurement goals focused on achieving value for money.

Pre-tender submission

3.33 Snowy Hydro Limited’s procurement and contract negotiations involved early and ongoing engagement with industry. This was supported by appropriate planning and timeframes. Table 3.3 provides an overview of Snowy Hydro Limited’s EPC procurement activities prior to receiving tender submissions.

Table 3.3: Snowy 2.0 EPC procurement activities prior to tender submissions

Source: ANAO presentation of information provided by Snowy Hydro Limited.

3.34 Snowy Hydro Limited’s efforts to demonstrate value for money are evident in the pre-tender activities.

• Early contractor consultation provided an opportunity early in the process for Snowy Hydro Limited to develop its understanding of the project’s requirements (quality), budget (costs) and schedule (time).
• An EOI process was used to shortlist potential tenders. This process assessed interested parties against delivery capability, capacity and contractor experience.
• During model tests of the proposed hydro power generating units, Snowy Hydro Limited assessed if electrical and mechanical tenders were of the required quality.

Tender issue and evaluation

3.35 The tender process for the EPC procurement occurred between May 2018 and January 2019. This involved issuing the civil works tender to two participants and the electrical and mechanical works tender to four participants in May 2018. Table 3.4 provides an overview of Snowy Hydro Limited’s EPC procurement activities from the issue of tenders through to evaluation.

Table 3.4: Table 3.4 : Snowy Hydro Limited’s Snowy 2.0 EPC procurement activities — tender issue and evaluation

Note a: The TESC comprised members of Snowy Hydro Limited’s executive management and technical staff.

Source: ANAO presentation of information provided by Snowy Hydro Limited.

3.36 Snowy Hydro Limited assessed value for money during both tender evaluations. Prior to making a final decision for the civil EPC procurement, Snowy Hydro Limited compared the final bids and conducted a normalisation process. Snowy Hydro Limited also conducted a normalisation process for the electrical and mechanical procurement as part of the price evaluation.

3.37 The normalisation process was included in the tender evaluation plans and involved identifying and analysing the areas in which the bids were different. Where Snowy Hydro Limited determined that adjustments were required to allow for comparison of bids, cost or time was added or subtracted. This was informed by technical assessment of the bids and Snowy Hydro Limited worked with the owner’s engineer and the main advisory firm to complete this process.⁷⁰

3.38 Factors considered by evaluators included the underlying assumptions of each bid, risk, and the practicality of designs. Where an element of a proposal was assessed as not fully delivering against the employer’s requirements, additional cost or time was added to the proposal.

3.39 Quality was also considered during the evaluation of both tenders. The technical merit of both civil tenders was evaluated by the owner’s engineer, and the first-placed tenderer achieved a higher score than the second-placed tenderer. The models developed by the electrical and mechanical tenderers were also tested and scored. The first-placed electrical and mechanical tenderer’s model achieved the highest score.

3.40 Snowy Hydro Limited maintained competitive tension throughout the entire EPC procurement process by including more than one tenderer until the final decision point in both procurement processes. The second placed tenderers were retained as standby options during contract negotiations. In both procurements, the successful tenderer submitted a best and final offer that was lower than competing offers.

Contract execution

3.41 Following the evaluation process, Snowy Hydro Limited negotiated an EPC contract with the preferred civil and electrical and mechanical tenderers. This resulted in a single EPC contract incorporating the successful civil work package tenderer as the lead contractor and the successful electrical and mechanical work package tenderer as a named subcontractor.⁷¹

3.42 The Snowy 2.0 EPC contract was executed on 5 April 2019. This was followed by the notice to proceed with exploratory works in 2019 and main works in 2020.

Does Snowy Hydro Limited effectively monitor the contractor’s performance?

3.43 The importance of effectively monitoring contractor performance is recognised in both the Australian Government and Snowy Hydro Limited procurement and contract management frameworks.

3.44 The Snowy 2.0 feasibility study, documentation supporting the final investment decision and contract management framework documents identify that Snowy Hydro Limited needs to undertake the following activities to effectively monitor the EPC contractor’s performance: schedule and cost management; contract administration; financial management⁷²; and performance and progress reporting.⁷³

Schedule and cost management

3.45 Snowy Hydro Limited’s schedule and cost management activities for the Snowy 2.0 EPC contract are described in the Snowy 2.0 Earned Value Performance Management Plan.⁷⁴ This plan sets out 11 steps for managing the Snowy 2.0 project’s schedule and costs. These steps and evidence of implementation are outlined in Table 3.5.

Table 3.5: Snowy 2.0 Earned Value Performance Management Plan implementation

Source: ANAO analysis of Snowy Hydro Limited documentation including the Snowy 2.0 Earned Value Performance Management Plan.

Contract administration

3.46 The Snowy 2.0 EPC Contract Management Plan and Snowy 2.0 General Contracts Administration Procedures describe how Snowy Hydro Limited undertakes Snowy 2.0 EPC contract administration activities.

3.47 Contract administration activities described in these documents include assessment and approval of payment claims; contract change control included variations, instructions and directions; communications with the contractor; delegations for contract management decisions; contractual risk management activities; and dispute management and resolution processes.

Monthly payment process

3.48 The monthly payment process is based on EPC contract Clause 14 — Price and Payment (Figure 3.1). The Snowy 2.0 EPC Contract Management Plan sets out the procedures and timing for this process.

Figure 3.1: Overview of monthly payment process

 

 

Source: ANAO figure based on Snowy Hydro Limited’s documentation.

3.49 Snowy Hydro Limited’s contract management framework sets a timeframe of 15 business days from the submission of the claim to the payment of the invoice. This process involves the following steps.

1. Once a month, the contractor submits a payment claim to Snowy Hydro Limited. This submission outlines the contractor’s claimed payments for progress against the different EPC contract’s payment schedule items.⁷⁵
2. Snowy Hydro Limited has 10 business days to assess the contractor’s claimed progress against each payment schedule item’s rule of credit as defined in the EPC contract.⁷⁶ This involves:
   • assessing whether appropriate evidence has been provided that each rule of credit has been met; and
   • the accountable individuals certifying the amount to be paid is due against the rule of credit.
3. The contractor receives a notice advising the amount Snowy Hydro Limited intends to pay based on assessed progress.
   • A delegate of the Board approves the amount assessed as eligible to be paid.
4. The contractor has one business day to issue Snowy Hydro Limited with invoices for the assessed payment amount.
5. Snowy Hydro Limited has four business days to make payment against the submitted invoices.

Review of monthly EPC payment process

3.50 The EPC contractor submitted 29 monthly payment submissions to Snowy Hydro Limited between April 2019 and September 2021.⁷⁷ Across these 29 monthly payment submissions, Snowy Hydro Limited’s records show it has made $1.114 billion in payments for 999 individual claims against EPC contract’s payment schedule items.

3.51 The ANAO selected a representative sample of 15 EPC individual payment claims to assess Snowy Hydro Limited’s compliance with its procedures for reviewing and approving these 999 claims. Analysis of this sample found:

• Snowy Hydro Limited appropriately documents the rationale and retained supporting evidence for approval against rules of credit⁷⁸; and
• there were some minor delays in meeting payment process timeframes. These minor delays are not considered a material issue. Based on the 15 samples reviewed and observation of the approval process for December 2022, challenges in meeting timeframes are due to the review of large and complex payment claims and supporting evidence to the standard required to appropriately hold the EPC contractor to account. Challenges in meeting set timeframes are not due to issues with the design of the procedures.

Claims by the EPC contractor exceed amount approved by Snowy Hydro Limited

3.52 Snowy Hydro Limited’s assessment of the EPC contractor’s monthly submissions led to a reduction in the amount paid compared to the amount claimed in all 11 monthly submissions reviewed (Figure 3.2).⁷⁹ Across the 11 monthly processes reviewed, Snowy Hydro Limited’s actual amount paid was on average 57 per cent lower than the amount initially claimed by the EPC contractor.⁸⁰

Figure 3.2: Amounts claimed by contractor compared to amounts paid by Snowy Hydro Limited

Source: ANAO analysis of Snowy Hydro Limited documents.

3.53 Snowy Hydro Limited monitors the EPC contractor’s performance and makes payments consistent with the EPC contract’s rules of credit. Examples of where Snowy Hydro Limited’s assessment payment claims resulted in a reduction of amounts paid include:

• Snowy Hydro Limited assessing the contractor is not entitled to receive payment for the items claimed⁸¹; and
• information the contractor presents in the claim sheets for calculating payment claims under the rules of credit does not contain the latest performance data.⁸²

3.54 Snowy Hydro Limited’s contract management arrangements provide an effective framework for managing the payment process with the contractor. The complexity of the project and the consistent reduction in payments made compared to amount claimed highlights the importance of Snowy Hydro Limited continuing to effectively implement the monthly payment claims assessment and approval process.

Variations

3.55 The EPC contract includes quality, cost and time requirements. The EPC contractor is required to deliver against these requirements. Snowy Hydro Limited’s EPC contract management framework recognises the importance of effectively managing requests for contract variations to ensure the delivery of Snowy 2.0 to the quality, cost and time standards set at final investment decision.

3.56 The EPC contract defines variations as any change to the Employer’s Requirements, the works or the contractor’s activities. Variations can be initiated by either party, including through claims raised by the contractor.

Term sheets

3.57 Snowy Hydro Limited advised the ANAO that as at February 2022 all material variations to the EPC contract have been executed.

• The first variation is effective as of 14 May 2020. The main outcome of this variation is the granting of an extension of time of 150 days to the principal EPC contractor and adjusting the schedule milestones. This extension of time is due to the impact of COVID-19 and delays caused by parties other than the principal EPC contractor.
• The second variation is effective as of 31 May 2021. This resolves matters arising from conditions placed on the project by environmental approvals completed after the EPC contract was executed. There are no extensions of time or changes to project cost.
• The third variation resolves claims related to costs incurred by the contractor due to COVID-19 up to 6 November 2020.

3.58 Other EPC contract change processes outside of these variations, such as activities under value engineering⁸³ or employer’s instructions⁸⁴ clauses, have not been examined in this audit.

Dispute Avoidance/Adjudication Board

3.59 The EPC contract establishes a Dispute Avoidance/Adjudication Board (DAAB). The purpose of the DAAB is to facilitate the avoidance of disputes and act as a decision-making body where disputes arise. The DAAB is comprised of nominated legal experts intended to provide impartial advice. The cost of the DAAB is shared between Snowy Hydro Limited and the EPC contractor.

3.60 The DAAB has been used to provide guidance in the negotiations between the parties on the matter covered by the variation that came into effect in May 2021. This included facilitating five workshops between June and September 2020.

Assurance mechanisms

3.61 Snowy Hydro Limited developed a series of procedures and a supporting audit schedule to provide assurance over the EPC contractor’s activities in relation to workplace health and safety (WHS), quality and environmental management.

3.62 Snowy Hydro Limited’s audit program for the 2021–22 financial year includes 129 planned activities of which 61 were completed and two were ongoing as of December 2021. The program presents planned and completed WHS, quality and environmental audits.

Workplace health and safety assurance

3.63 Snowy Hydro Limited established a WHS assurance and surveillance procedure to provide assurance that the EPC contractor’s systems, processes and compliance with legal requirements are fit-for-purpose. The procedure includes an inspection regime and a hazard rating scale based on risk.

3.64 The procedure allows for WHS assurance audits to be conducted internally or by an agreed third-party auditor. Snowy Hydro Limited provided evidence of two occasions where a third-party auditor has been engaged to assess the contractor’s compliance with WHS laws.

Quality assurance

3.65 Snowy Hydro Limited developed a procedure and audit schedule to provide assurance over the quality of the EPC contractor’s work. These quality assurance processes are designed to ensure that the contractor’s activities align with the employer’s requirements, relevant laws and regulations, and relevant documents.

3.66 As well as tracking the contractor’s performance through a quality management system, on-site audits led by Snowy Hydro Limited and third-party audits are conducted. Snowy Hydro Limited developed a matrix to identify the greatest risks to the project’s quality and used this to assign activities an audit frequency. Factors considered include financial consequence, design complexity and program sensitivity.

Environmental assurance

3.67 Snowy Hydro Limited developed checklists and a procedure to support the environmental inspection program. Inspections are intended to be scheduled and completed by a Snowy Hydro Limited environmental assurance advisor. The procedure allows for the advisor to note observations of non-compliance or areas for improvement including when an overall compliant assessment is made.

4.1 Successful implementation is underpinned by effective monitoring, review and evaluation processes. Effective monitoring collects timely and relevant information that allows progress to be tracked towards outcomes and adjustments made as necessary.⁸⁵

4.2 To assess whether Snowy Hydro Limited effectively monitors and reports on the progress of Snowy 2.0, the ANAO examined whether:

• arrangements to monitor the progress of Snowy 2.0 have been established; and
• Snowy Hydro Limited reports to stakeholder entities and ministers on the progress of Snowy 2.0.

Has Snowy Hydro Limited established arrangements to monitor the progress of Snowy 2.0?

4.3 The engineer, procure and construct (EPC) contracted schedule is for first power generation in 2024–25 and project completion in 2026–27.

Monitoring framework

4.4 Snowy Hydro Limited identified core requirements of its monitoring framework as part of the feasibility study. Monitoring and reporting arrangements were subsequently established within the EPC contract and associated management plans. This includes information that Snowy Hydro Limited requires from the contractor.

4.5 The contractor is required to submit a monthly progress report which includes:

• the value of work performed and remaining expenditure forecast to project completion;
• planned progress compared to actual progress;
• an earned value report;
• a cash flow forecast;
• a risk, issues and opportunity register; and
• design related matters.

4.6 The monthly progress report aligns to the contract management arrangements outlined in Chapter Three and also informs reporting to governance bodies and to shareholder departments and ministers.

Earned value management

4.7 Snowy Hydro Limited has adopted the earned value management approach for measuring Snowy 2.0 performance and progress.⁸⁶

4.8 Earned value management is a measurement of:

the value of work accomplished in a given period against the planned value of work scheduled for that period and the actual cost of work accomplished. Differences in these values are measured in both cost and schedule variances. Positive variances indicate that project activities are costing less or are ahead of schedule. Negative variances indicate that project activities are costing more or are falling behind schedule.⁸⁷

4.9 The earned value management approach utilises the baseline schedule and budget outlined in paragraphs 3.15 to 3.24. This approach allows Snowy Hydro Limited to calculate a schedule performance index (SPI) and cost performance index (CPI) to assess contractor performance and overall progress. An index equal to or greater than one indicates a favourable condition.⁸⁸ In November 2021, a SPI of 0.99 and CPI of 1 were reported to the Board.⁸⁹

Status of the project against planned schedule and budget

4.10 Internal reporting to the Board as well as external reporting to shareholders includes reporting against both the baseline schedule as well as current timeframes. Delays resulting from approved changes to the EPC contract and risks to progress are clearly identified in reporting.

4.11 As outlined in paragraph 3.57, Snowy Hydro Limited and the EPC contractor agreed to a variation in May 2020 granting an extension of time of 150 days to the contracted whole of works completion date. This extension of time was due to the impact of the COVID-19 pandemic response and delays caused by parties other than the principal EPC contractor.

4.12 This 150-day extension of time variation is reflected in the project schedule outlined in Table 3.2. In November 2021, Snowy Hydro Limited reported to the Board that Snowy 2.0 is on track to meet this schedule with first power milestone in the fourth quarter of 2024–25 and whole of works commissioning in the fourth quarter of 2026–27.⁹⁰

4.13 The total project expenditure to date as at November 2021 is $2.07 billion. This includes both EPC contract costs as well as other project costs not captured within the EPC contract. Snowy Hydro Limited’s reporting indicates the budget is tracking in line with planned expenditure.

Does Snowy Hydro Limited report to stakeholder entities and Ministers on the progress of Snowy 2.0?

4.14 Under the Statement of Expectations issued by the shareholder ministers, Snowy Hydro Limited is expected to foster and maintain working relationships with key stakeholders who may have a genuine interest in the project, including relevant Commonwealth, state and local government agencies, and Indigenous, community, business and environment groups.⁹¹

Stakeholder management and engagement

4.15 Snowy Hydro Limited developed a stakeholder strategy and engagement (the strategy) document as part of the final investment decision process. The strategy is available on the Snowy Hydro Limited website.⁹²

4.16 The strategy categorises stakeholders into four broad groups: government⁹³; the local community; industry groups; and the media.

4.17 Prior to the commencement of main construction activities, Snowy Hydro Limited was responsible for all stakeholder management. Snowy Hydro Limited transitioned to using the EPC contractor’s community and stakeholder engagement plan as the framework for stakeholder engagement during the construction phase. The EPC contractor assumed primary responsibility for engaging with the local community and industry, with ongoing engagement and reporting to Snowy Hydro Limited. Snowy Hydro Limited retained responsibility for engaging with government and the media.

4.18 The EPC contractor’s community and stakeholder engagement plan was first issued in April 2019. Snowy Hydro Limited advised the ANAO that the plan is jointly updated by Snowy Hydro Limited and the contractor yearly and the final plan is signed off by Snowy Hydro Limited. The most recent review of the plan commenced in 2021.

4.19 Snowy Hydro Limited included a specific section on community and local content in each operational report across the period examined.⁹⁴ Examples of activities reported include Snowy Hydro Limited’s ‘Snowy 2.0 – powered by locals’ campaign, which provides for local supplier involvement, and business and community forums held with local suppliers to provide project and procurement process updates.

4.20 Snowy Hydro Limited also includes local content in monthly shareholder reporting.⁹⁵ Reporting includes statistics on the amount spent in the Snowy Valley, Snowy Monaro and surrounding regional areas, details of business workshops held in the surrounding areas and engagement with the EPC contractor to track and increase local content.

Complaints management

4.21 A complaints resolution procedure (the procedure) that outlines the complaints management process is an annex to the stakeholder engagement plan. The procedure states that interactions with community members or stakeholders will be classed as enquiries, concerns or complaints.

• Enquiries — a request for general information.
• Concerns — something that makes a stakeholder upset or anxious.
• Complaints — an expression of dissatisfaction where a response or resolution is explicitly or implicitly expected.

4.22 In March 2022, Snowy Hydro Limited published a consolidated complaints register for the 2019 to 2022 calendar years. Table 4.1 provides the classifications of these complaints.⁹⁶

Table 4.1: Complaints received relating to the Snowy 2.0 project

Note a: This includes one complaint still under investigation and not published as at March 2022.

Note b: This complaint related to concerns from an adjacent landholder relating to potential noise and other impacts.

Note c: This complaint deals with unauthorised contractor access to commercial property.

Source: ANAO analysis of Snowy Hydro Limited data.

4.23 The ANAO examined the number of complaints reported publicly on the Snowy Hydro Limited website in relation to the Snowy 2.0 against internal reporting. All complaints reported internally are recorded and published externally.

4.24 Complaints are reported and monitored at regular Snowy 2.0 team meetings, monthly progress reporting meetings with the contractor, as well as the 2.0 Project Advisory Committee.⁹⁷

4.25 Snowy Hydro Limited has implemented changes to processes and procedures as a result of concerns and complaints received.

• In response to concerns raised by small businesses at community information sessions relating to prequalification processes required in order to bid for work on the project, Snowy Hydro Limited reviewed procurement processes and removed the requirement to register on a global procurement portal for contracts less than $400,000. This change to process was also outlined in Snowy Hydro Limited’s Australian Industry Participation Plan compliance report for 24 December 2019 to 23 June 2020.⁹⁸
• Snowy Hydro Limited investigated complaints related to traffic management, which led to contractors and subcontractors reinforcing existing policies and procedures with drivers.

Reporting to shareholder departments and ministers

4.26 As outlined in paragraph 1.12, Snowy Hydro Limited is represented by two shareholder ministers: the Minister for Energy and Emissions Reduction, and the Minister for Finance.

4.27 The government’s relationship with government business enterprises (GBEs) is similar to the relationship between a holding company and its subsidiaries, features of which include:

• a strong interest in the performance and financial returns of the GBE;
• reporting and accountability arrangements that facilitate active oversight by the shareholder;
• action by the shareholder in relation to the strategic direction of its GBEs where it prefers a different direction from the one proposed;
• management autonomy balanced with regular reporting of performance to shareholders; and
• boards that are accountable to shareholders for GBE performance, and shareholders that are accountable to Parliament and the public.⁹⁹

4.28 The Statement of Expectations requires that Snowy Hydro Limited keep the government regularly informed of the project’s progress.¹⁰⁰ Several specific reporting requirements are outlined in the Department of Finance guidance¹⁰¹ to GBEs as well as the Equity Subscription Agreement.¹⁰²

4.29 Snowy Hydro Limited has provided regular reporting to both shareholder departments and ministers throughout the planning and early implementation of Snowy 2.0, consistent with the conditions of the equity subscription agreement.

4.30 The ANAO examined reporting provided by Snowy Hydro Limited to shareholder departments following the publication of the 2019 Statement of Expectations. This included monthly briefings to shareholder departments from March 2019 to December 2021 and operational reporting provided every second month from August 2020, coinciding with shareholder approval of the notice to proceed with main works.

4.31 The monthly briefing consistently covers key areas including the project’s status, key risks such as transmission, and financing. Additional content was also included in the briefing at milestones such as notice to proceed.

4.32 Operational reporting provided every second month is based on a template that evolved over the period examined. All reports contain a minimum level of content, covering areas such as health and safety, project milestones, risk, environmental metrics, and financial status. Additional information, such as COVID-19 mitigations, is included when the circumstance arises.

Management and escalation of risks to shareholders departments and ministers

4.33 Reporting against key risks is included as part of the monthly briefings to shareholder departments, as well as reporting to shareholder ministers every second month. Among this risk reporting, the risk relating to electricity transmission network upgrades has presented the highest ongoing risk and has been a consistent feature in all reports.

4.34 As outlined in paragraph 3.3, the government’s expectations are that Snowy 2.0 is both a commercial business opportunity for Snowy Hydro Limited and an infrastructure project that will deliver benefits to Australian electricity users. To achieve these desired outcomes, electricity transmission network capacity upgrades are required to allow Snowy 2.0 to provide its full energy storage and generation capacity to the National Electricity Market (NEM).¹⁰³

Transmission upgrades relevant to Snowy 2.0

4.35 The National Electricity Rules establish the framework for transmission network planning and expansion including upgrades to capacity.¹⁰⁴ Transmission Network Service Providers are responsible for building, maintaining, planning and operating the transmission network.¹⁰⁵

4.36 Entities responsible for proposing new electricity transmission infrastructure require regulatory approval from the Australian Energy Regulator.¹⁰⁶ The Regulatory Investment Test for Transmission (RIT-T) is the defined regulatory mechanism under the National Electricity Rules. The RIT-T requires NEM planners or Transmission Network Service Providers to undertake a public economic cost benefit analysis to identify a preferred option for regulatory approval. The RIT-T process involves public consultation. Electricity generators are stakeholders in the RIT-T process and can provide input as part of the consultation process.

4.37 The Australian Energy Market Operator (AEMO) Integrated System Plans¹⁰⁷ have identified ‘actionable’ electricity transmission projects. These are projects AEMO considers should be commenced to support the transformation in the National Electricity Market and provide consumer benefits in relation to electricity reliability, security and affordability.¹⁰⁸

4.38 Two actionable electricity transmission upgrade projects are directly relevant to Snowy 2.0 as they provide access to the NEM. These two projects are Humelink in New South Wales and the Victorian New South Wales Interconnector (VNI) West.¹⁰⁹ Table 4.2 provides a summary of these projects.

Table 4.2: Summary of Humelink and VNI West transmission upgrades

Note a: AEMO’s Draft 2022 Integrated System Plan, Table 7.

Note b: AEMO’s Draft 2022 Integrated System Plan, p. 65 Humelink, VNI West p. 68.

Source: Australian Energy Market Operator Limited, Draft 2022 Integrated System Plan December 2021: For the National Electricity Market, version 1.0, 10 December 2021.

Consideration of transmission upgrade risks in Snowy 2.0 approvals

4.39 Consideration of the transmission upgrade risks to Snowy 2.0 was documented at each approval decision by Snowy Hydro Limited and the shareholder ministers. These were:

• Snowy Hydro Limited’s approval of Snowy 2.0 Feasibility Study in December 2017;
• correspondence to Snowy Hydro Limited from Minister for the Environment and Energy in December 2017;
• shareholder minister’s approval of final investment decision in February 2019;
• Snowy Hydro Limited’s final investment decision in December 2018;
• Snowy Hydro Limited’s notice to proceed decision in July 2020; and
• shareholder minister’s approval of the notice to proceed decision in August 2020.

4.40 The Board identified the desired level of certainty on transmission upgrades had not been met at both the final investment decision or the notice to proceed decision. This risk was communicated to the shareholder ministers at both decision points as part of the final investment decision and notice to proceed documentation.

4.41 The Commonwealth provided the Snowy Hydro Limited Directors with a deed of indemnity in relation to this matter at final investment decision in December 2018. This indemnified individual Directors against liability arising from taking the final investment decision without certainty in relation to transmission network upgrades. The deed of indemnity was extended to cover the notice to proceed decision in July 2020.

4.42 Snowy Hydro Limited advised the ANAO in October 2021 that:

The Board of Snowy Hydro was able to proceed with the Project through the key gates of Feasibility, Final Investment Decision and Notice to Proceed relying on undertakings from the Commonwealth provided in December 2017, February 2019 and August 2020 and Deeds of Indemnity in favour of directors provided at FID.

…

While there has been strong progress on both links, neither is formally committed at this stage and Snowy Hydro continues to rely on undertakings from the Commonwealth and Deeds of Indemnity in favour of directors.¹¹⁰

Actions by Snowy Hydro Limited to mitigate transmission upgrade risks

4.43 Snowy Hydro Limited provided the ANAO with evidence of more than 350 engagements with government and industry stakeholders between 2017 and 2022 relating to transmission upgrades.¹¹¹ This includes engagement with stakeholders such as AEMO, the Australian Energy Regulator, the Clean Energy Finance Corporation and Transgrid, among other energy sector related stakeholders.

4.44 Snowy Hydro Limited has considered a number of alternatives beyond relying on developments under the Integrated System Plan, such as alternate funding mechanisms for transmission upgrades and dedicated connection assets to bring forward the required connections into Victoria. These alternative options were considered and discussed with shareholder departments and ministers as part of regular reporting.

4.45 Snowy Hydro Limited advised the ANAO that these options have not been progressed for the following reasons.

• Continued assurances from shareholder ministers and supporting departments relating to progress under the Integrated System Plan provided a basis for expected timeframes and support risk management consistent with the assessment at final investment decision.
• Any potential expansion of Snowy Hydro Limited’s activities to electricity transmission projects as outlined in paragraph 4.44 would be considered a significant business initiative.¹¹² This would be beyond the scope of Snowy Hydro Limited operations as set by the shareholders through GBE governance arrangements.

Impact transmission upgrade risk Snowy 2.0

4.46 The timeframes for connection remain unclear, however, it is increasingly certain that the timeframes will exceed the planned commissioning timeframe for Snowy 2.0 (see Table 4.2 above). As such, Snowy Hydro Limited continues to assess the risk relating to transmission upgrades as ‘extreme’. The uncertainty relating to the transmission upgrade projects is now expected to impact on the business case for Snowy 2.0 with the extent of this impact being examined.

4.47 In October 2021 Snowy Hydro Limited reported to shareholder ministers that:

The current base case transmission scenario, of HumeLink by 31 December 2026 and VNI West by 31 December 2027, delays transmission commissioning well past the forecast first power milestone in 2025. On this basis, the project will be unable to materially realise the pre-commissioning revenue of $242 million, which will therefore be added to the project’s cost base.

4.48 As part of the Board approved Strategic Corporate Plan for 2022 to 2031¹¹³, Snowy Hydro Limited presented an updated scenario analysis, whereby transmission connections were delayed as outlined in paragraph 4.47. These delays are further expected to impact on net revenue including pre-commissioning revenue. Snowy Hydro Limited advised the ANAO that the extent of this impact will be reviewed as part of the annual corporate planning process in June 2022.¹¹⁴

Appendix 1 Entity response

 

 

 

 

 

 

Appendix 2 Improvements observed by the ANAO

1. The existence of independent external audit, and the accompanying potential for scrutiny improves performance. Improvements in administrative and management practices usually occur: in anticipation of ANAO audit activity; during an audit engagement; as interim findings are made; and/or after the audit has been completed and formal findings are communicated.

2. The Joint Committee of Public Accounts and Audit (JCPAA) has encouraged the ANAO to consider ways in which the ANAO could capture and describe some of these impacts. The ANAO’s 2021–22 Corporate Plan states that the ANAO’s annual performance statements will provide a narrative that will consider, amongst other matters, analysis of key improvements made by entities during a performance audit process based on information included in tabled performance audit reports.

3. Performance audits involve close engagement between the ANAO and the audited entity as well as other stakeholders involved in the program or activity being audited. Throughout the audit engagement, the ANAO outlines to the entity the preliminary audit findings, conclusions and potential audit recommendations. This ensures that final recommendations are appropriately targeted and encourages entities to take early remedial action on any identified matters during the course of an audit. Remedial actions entities may take during the audit include:

• strengthening governance arrangements;
• introducing or revising policies, strategies, guidelines or administrative processes; and
• initiating reviews or investigations.

4. In this context, the below actions were observed by the ANAO during the course of the audit. It is not clear whether these actions and/or the timing of these actions were planned in response to proposed or actual audit activity. The ANAO has not sought to obtain assurance over the source of these actions or whether they have been appropriately implemented.

5. During the course of the audit, the ANAO observed Snowy Hydro Limited:

• improved the clarity of reporting requirements in Snowy 2.0 related committee charters;
• updated its internal monthly payment approval sheet and had the principal EPC contractor update their claim for payment document. These updates improved the presentation of the Goods and Services Tax (GST) amount for payment claims paid in Euros in approval documents;
• reported to the Board in March 2022 that the project team was undertaking detailed cost and forecast reviews to monitor spending against the Corporate Plan; and
• added a risk related to project resourcing to the Top Risk register in the March 2022 reporting.

Appendix 3 Snowy 2.0 project timeline

 

 

Source: ANAO presentation of Snowy Hydro Limited documents and Australian Government media releases.

Appendix 4 Top 12 Snowy 2.0 risks — ratings and transfer