Background

On 12 September 2001, the Ansett group of companies began to be placed under external administration and its 15 000 employees faced possible retrenchment.

The Prime Minister first announced that a Special Employee Entitlements Scheme for Ansett group employees (SEESA) would be established at a press conference on 14 September 2001. SEESA was to provide a safety net arrangement for the Ansett staff who were terminated on or after 12 September 2001 owing to their employer's insolvency. The Department of Employment and Workplace Relations (DEWR) is responsible for administering SEESA.

To meet the cost of the Scheme a special Air Passenger Ticket Levy was placed on airline tickets. The Levy, which was administered by the Department of Transport and Regional Services (DOTARS), applied to air passenger tickets purchased on or after 1 October 2001 until 30 June 2003. From the outset, the Government made it clear that the existence of the Levy would not relieve the company of its responsibilities. The Government would pursue recovery from the administrator.

The Government's objectives for SEESA were to achieve both early payment of unpaid entitlements (up to the community standard) and to ‘stand in the shoes of the employees' to recover from Ansett's assets the funds advanced under the Scheme. SEESA was to use the private sector to administer payments and be designed in such a way as to minimise the impact on the Commonwealth budget, especially the underlying cash balance.

The Minister for Employment, Workplace Relations and Small Business provided details of SEESA in a press release on 18 September 2001. On 9 October 2001, he made a formal determination specifying the companies and entitlements to be covered by SEESA and terms on which payments were to be made.

The Air Passenger Ticket Levy (Collection) Act 2001 provided a special appropriation of $500 million for SEESA.

SEESA: key questions and where addressed in this report

How much was owed to the Ansett employees who were terminated due to the collapse of that group of companies?

In their third report to creditors, the Ansett Administrators estimated that unpaid entitlements amounted to $735.8 million. The ANAO's analysis shows that the mean value of all employee entitlements owed to Ansett group employees upon termination was about $53 800 and the median was $38 400. The distribution of entitlements varied widely. About 50 workers were owed less than $1000 each and over 120 workers were owed over $250 000 dollars each. The highest individual unpaid entitlement at termination was just over $625 000. An analysis of the relevant statistics is set out in Appendix 1.

How was SEESA established?

SEESA was announced by the Government on 18 September 2001. The proposed scope and level of financial assistance under SEESA was advertised widely in newspapers in mid- September 2001. SEESA was formally established under a section of the Air Passenger Ticket Levy (Collection) Act 2001. This gave the Minister for Employment and Workplace Relations the authority to decide the business rules under which the Scheme would operate. He did this by a determination under the Act, which set out the entitlements that would be covered under the Scheme. This is explained in Chapters 2 and 3.

What does SEESA cover?

SEESA is a safety-net scheme that provides payment of all unpaid wages, all unpaid annual leave, all entitlements for pay in lieu of notice (PILN), all long service leave, and up to eight weeks unpaid redundancy leave, regarded as the community standard, to former employees of the Ansett group of companies who were terminated due to Ansett's collapse. See Chapters 2 and 3.

What is NOT covered by SEESA?

SEESA does not cover redundancy pay in excess of 8 weeks. At their termination, some Ansett employees were owed up to 104 weeks' redundancy pay. See Chapters 2 and 3.

What has been paid under SEESA to the former Ansett employees?

Under SEESA, $336.1 million has been loaned to the Ansett and Hazelton administrators to pay 12 994 terminated employees (a mean payment of $25 868). This covers all unpaid wages, all unpaid annual leave, all entitlements for (PILN), all long service leave, and up to eight weeks unpaid redundancy leave for terminated employees. The first payment ($80 million for 3847  employees) was made to the Ansett Administrators on 18 December 2001. Subsequently, as each group of employees has been terminated, the administrators have made a claim in respect of that group and a SEESA payment has followed. Towards the end of the audit, DEWR provided the ANAO with a letter from the Ansett Administrators that certifies that all SEESA funds forwarded to them have been distributed to eligible claimants. More detail on amounts, dates and employee numbers are set out in Chapter 5 and Appendix 1.

What entitlements—other than SEESA—are yet to be paid?

Although 12 994 terminated employees have been paid their SEESA entitlements, around 9500 of these are awaiting payment of entitlements for redundancy pay in excess of 8 weeks. Only when Ansett assets can be disbursed can payments be made by the Administrators to meet these further entitlements. On 25 November 2003, the Ansett Administrators announced that they had sought and received Federal Court approval of an agreement which would clear the way for further payments to Ansett staff. See Appendix 1.

Where did the SEESA funds come from?

The funds to pay SEESA were borrowed from the Commonwealth Bank of Australia (CBA). They were borrowed by a private company, SEES Pty Ltd, with a Commonwealth guarantee, and advanced as a loan to the administrators. SEES has done this acting under a contract with the Department of Employment and Workplace Relations. Chapter 4 discusses the arrangements for outsourcing the SEESA arrangements.

What has become of the funds raised by the Air Passenger Ticket Levy?

Under the Constitution, all revenue—such as that raised by the Air Passenger Ticket Levy— must be paid into the Consolidated Revenue Fund (CRF). Under a special appropriation of up to $500 million in the Air Passenger Ticket Levy (Collection) Act, DEWR has been paying regular instalments of $8 million a month from the CRF to SEES, which the latter has used to repay the loan from the CBA. DEWR has also been meeting the costs of the collection of the Levy and operation of SEESA under the appropriation. In effect, the revenue from the levy is funding repayments of the CBA loan and the administrative costs of raising the Levy and operating the scheme. It would not have been possible to rely wholly on the Levy to directly offset SEESA payments as, for example, by early June 2002, when over $300 million had been advanced to pay employee entitlements, only $87 million had been raised by the Levy.

What about Ansett's assets?

The Ansett Administrators are reported as having some $400 million ‘in the bank'. This can only be distributed to creditors as various legal disputes are resolved. When repayment can be made, the priority regime contemplated by ss. 556 and 560 of the Corporations Act will apply. This means that the Commonwealth ‘stands in the shoes' of the employees to be repaid an equivalent amount to the funds advanced under SEESA to the Administrators. It also means that, following the priorities set out in s. 556, funds advanced to cover wages and leave must be repaid before redundancy payments. After that, the funds advanced under SEESA for PILN and up to 8 weeks of redundancy will be repaid at the same rate as payments to terminated employees for redundancy in excess of 8 weeks. See Chapter 2.

Key audit findings

Inception of the Scheme (Chapter 2)

The period from October to early December 2001 was characterised by two parallel streams of activity. These were:

(a) discussions between the Government, and its advisers, and the Ansett Administrators over certain key aspects of the Scheme; and

(b) putting the SEESA administrative arrangements in place (this is discussed below).

In relation to the former, the most important issues that were addressed were:

• the use to be made of a $150 million payment received by Ansett from Air New Zealand in early October, and, more particularly;
• the priority that the Government was willing to accept for repayment of SEESA advances made to the Ansett Administrators. The Administrators had made representations to the Government for it to subordinate repayment of SEESA advances to rank in a lesser priority than the Government had proposed.

The first issue was resolved with agreement that 4–5 weeks pay in lieu of notice would be funded from Ansett resources at an estimated cost of $35 million.

The second issue was resolved by a deed (the SEESA Deed) executed on 14 December 2001. This both protected the Ansett Administrators from any personal liability arising from the advance of SEESA funds and secured the Government's priority position equal to the former employees. The Deed was confirmed by the Federal Court.

Only after the resolution of the second matter could SEESA payments flow. The process of negotiation delayed SEESA payments to Ansett employees, many of whom had been stood down in September. However, for the Government to have agreed to the Ansett Administrators' proposals would have required it to com-promise its other primary objective, concerning priority in recovery. The outcome maintained the Government's original policy position.

The SEESA Deed made safe the legal priority for recovery of SEESA advances by the Commonwealth. However, the final distribution of Ansett resources remains subject to a range of other contingencies, including legal disputes. These could, for example, deplete the amount of the assets available in due course for recovery of SEESA advances. Thus the effectiveness of the overall recovery strategy cannot be finally assessed until completion of all action.

Risk management during the implementation of SEESA (Chapter 3)

The Government put a policy framework in place for SEESA promptly after the announcement of the Scheme. An interdepartmental task force of officials supported the Government during the period of establishment of the operational apparatus of the Scheme and the simultaneous negotiation with the Ansett Administrators. The Task Force also provided advice on the risks associated with the various possible courses of action.

Putting SEESA in place involved engaging a private sector entity (SEES Pty Ltd) to undertake most of the work, including borrowing funds and advancing payments to the administrators after verifying claims received from them. The Task Force advised on, and the Government accepted, certain risks associated with this approach, that is, those of additional cost and possible delay in making payments.

DEWR was responsible for implementing the Scheme and was required to deal with many risks, including the timely provision of SEESA assistance. This latter risk was well managed. However, three particular risks that arose during the implementation of the Scheme which, in the ANAO's view, could have been managed more effectively by DEWR. These related to:

• the incidence of tax;
• repayment of the loan; and
• interaction between SEESA and other Commonwealth payment programs.

The first such risk concerned the incidence of tax on the various SEESA transactions. SEES raised concerns about the tax risks with DEWR early in the life of the Scheme. The Australian Government Solicitor assessed those risks as low but advised that the matter be resolved with ATO rather than risk a contrary outcome. DEWR, although it clearly saw the tax risk as serious, did not take this action before finalising arrangements and proceeding to make the initial SEESA advances in December 2001. To facilitate progress, and avoid the risk of further delays to payment, DEWR accepted contractually, for the Commonwealth, the tax risk that would fall upon SEES. That risk crystallised in April 2002, when Commissioner of Taxation ruled that the payments by DEWR to SEES are assessable income in the hands of SEES. A range of other consequences and costs flowed from this outcome.

It should be emphasised that the net effect is only a small increase in the overall cost of the Scheme. However, addressing all of the unintended tax consequences has taken substantial time and effort, and therefore cost, if only on an opportunity cost basis. As well, the cost implications were unknown, which was a risk in itself. The ANAO concludes that a better approach would have been for DEWR to have advised its minister of the tax risk before execution of the contract in December 2001. That would have enabled the minister to balance the priority attributed to making initial SEESA payments before Christmas 2001 with the then known tax risk, or even whether he and/or the Government wished to reconsider broader options for implementation. In the event, the matter was first drawn to the attention of the minister's office only in May 2002.

The Levy raised revenue at a rate higher than was originally expected. This could have allowed DEWR to set a higher monthly rate of repayment of the SEESA loan facility or, later, to have increased it. Doing so would have reduced the amount of interest paid by the Commonwealth and, hence, the total cost of the Scheme. However, in March 2002 DEWR set a repayment rate ($8 million a month) that was substantially lower than the then established pattern of revenue ($13 million a month) without any apparent consideration of the interest costs. Later, it maintained the same rate of repayment because of its concern to meet the unanticipated tax liability. When a strategy for avoiding meeting the tax liability from Levy revenue had been devised, and agreed to, the risk of reaching the limit of the appropriation caused DEWR to adhere to the same repayment rate. SEES has advised the ANAO that the additional interest paid to mid-September 2003 was $3.6 million. This is substantially more than the cost of payments made in the establishment and operation of the Scheme, which, from 1 October 2001 to 31 March 2003, was reported as $1.98 million.

In the ANAO's view, DEWR could have undertaken the necessary financial analysis early in 2002 that would have assisted it to manage better the funds available to it under the appropriation in the Collection Act.

DEWR has recognised that payments under its other employee entitlements programs, the Employee Entitlements Support Scheme (EESS) and its successor, the General Employee Entitlements and Redundancy Scheme (GEERS), can affect individual entitlements under other programs, such as social security income support payments delivered by Centrelink. To help to target Commonwealth assistance and avoid ‘double-dipping', it has been DEWR's practice to advise Centrelink of EESS and GEERS payments promptly upon payment.

However, for SEESA, DEWR did not recognise this issue until March 2002, well after the program was under way and substantial advances had already been made. DEWR then found it difficult to make suitable arrangements with SEES. This was overcome when Centrelink approached the Ansett Administrators directly. However, the data Centrelink obtained in this way proved inadequate for Centrelink to use in its compliance work. If any overpayments are detected through post hoc compliance strategies, the recovery costs will be greater than would have been possible had DEWR made arrangements to provide prompt and full advice at the time payment was made. The costs to the Commonwealth could be determined only if, and when, such overpayments are detected.

Outsourcing (Chapter 4)

In accordance with Government policy, DEWR outsourced the administration of SEESA, including the provision of finance, to a private sector entity. With a major objective of making prompt payment to employees terminated through Ansett's insolvency, DEWR proceeded rapidly with the process of selecting and engaging a suitable company to undertake these tasks.

The ANAO found that DEWR conducted the selection effectively and properly. The selection was made more challenging by the need for a speedy result and DEWR having to conduct the process during the caretaker period before the 2001 general election. The department also minimised the possibility of delays in making payments by making arrangements for the preferred tenderer to begin preparatory work as soon as practicable after the selection.

In contrast to the sound practice in the selection of the contractor, DEWR was not able to provide the ANAO with a documented decision on the selection of the financier for the Scheme. In the ANAO's view, it is unsatisfactory from an accountability viewpoint that DEWR was unable to provide a formal record of the decision (whether made by DEWR or by SEES with DEWR guidance) to select the CBA to provide the finance. This is more so given that the CBA's successful bid stated: ‘The Bank has been involved from a very early stage in structuring a financing package for the Scheme, including a number of informal discussions with Government and the submission of an unsolicited finance offer'.

The ANAO found that DEWR had stated its expectations of SEES under the contract in terms that made the major tasks clear. However, initially, DEWR had not articulated a clear statement of the standards of service or performance that it expected of its contractor. Thus, when the contractor proposed to undertake the claim verification work using an approach known as an ‘agreed-upon-procedures engagement', DEWR did not recognise that this meant it would have to draw its own conclusions from the factual results presented by SEES nor did it realise that this effectively transferred risk back to the Commonwealth. During the course of the audit, DEWR has sought to clarify the standards of service with the contractor. In response to the draft of this report, SEES has stated to the ANAO that it was providing a high level of assurance to DEWR. Moreover, SEES has also shown that the procedures it followed comprised non-statistical sampling and the use of professional judgement.

From the ANAO's perspective, the important aspect is not now to determine, ex post, whether SEES was providing assurance nor, if it were, the degree of assurance being provided. Rather, the ANAO's observation is that, at the commencement of the engagement, DEWR had not clarified the level of assurance being provided. The fact that DEWR had to refer to SEES for such clarification reinforces the view that insufficient attention was given to this aspect of accountability.

The ANAO noted extensive evidence on file of assiduous and co-operative effort by SEES staff and DEWR's principal project officer in managing the timely processing of each tranche of payments. DEWR's records show that this was motivated by the objective of achieving prompt payment of SEESA advances to the Ansett Administrators. This was clearly better practice.

On 6 March 2002, a ministerial press release stated that ‘The Government expects to provide Special Employee Entitlements Support for Ansett Scheme (SEESA) monies to the Ansett Administrators for distribution to workers within five working days of receiving data from the Administrators about entitlements owed to individual workers.' However, there was no amendment to the contract or any record of an understanding, to reflect DEWR's expectation that SEES would maintain this standard.

Nonetheless, the ANAO found no evidence that the timeliness of SEES's verification work has been unsatisfactory. It has not impeded the process of advancing payments to the Administrators, which has usually been achieved within five days of receiving their claim for each tranche. However, neither the contract nor the letter of engagement included a standard or a mechanism for applying a standard for timeliness to SEES's activity. This is not sound contract management practice as it could have placed at risk DEWR's ability to control a main objective of the Scheme to ensure required performance.

DEWR specified in the contract, and secured, regular, useful reports from its contractor on a range of relevant aspects of SEES's operations. Although these reports set out the numbers and categories of employee for each tranche payment made to the Ansett Administrators, they did not provide any ‘details of the number of Eligible Employees to whom Eligible Employee Payments have been made', as specified in the contract. Towards the end of the audit, however, DEWR received an assurance direct from the Ansett Administrators allowing it to conclude that all terminated employees had been paid their SEESA entitlement.

A DEWR officer was present at, and closely involved in, SEES's verification of the first ten tranches of claims from the Ansett Administrators, and facilitated the work involved. However, the ANAO found no evidence of any systematic monitoring of the quality and cost of SEES's work by DEWR. Nonetheless, there was at least evidence that DEWR scrutinised invoices and addressed apparent errors, including additional errors identified by the ANAO in the course of the audit. This was again an illustration of inconsistency in DEWR's approach, which put at risk the good practices that were actually put in place.

SEESA performance (Chapter 5)

SEESA has delivered employee entitlement payments to nearly 13 000 former Ansett employees much more quickly than would have occurred if those employees had had to await the distribution of funds from the assets of the Ansett group. At the time of preparation of this audit report, many employees who are entitled to further payments, not funded by SEESA, had yet to receive them from the Ansett Administrators.

While the existence of SEESA meant that former Ansett employees did not have to wait until assets were realised to receive certain of their employee entitlements, DEWR neither specified any target for timeliness of payment of former Ansett employees nor collected any data on how promptly it had been able to effect payment. The minister made a public undertaking in March 2002 that the verification and forwarding of SEESA funds to the Ansett Administrators would be effected within five days. This undertaking was relevant to public concerns at the time but was both too late and inappropriate to use as a credible measure of the promptness of payment overall, that is, the timeliness of payments to individual former Ansett employees.

It is the ANAO's opinion that public reporting on the performance of SEESA has been less than adequate. Two reports have been provided to the Parliament containing statements about expenditure and related activities under the special appropriation in the Air Passenger Ticket Levy (Collection) Act 2001 (as required by that Act) and about the number of former Ansett employees who have benefited from SEESA. However, DEWR has not compiled any reports setting out empirical data on the timeliness or accuracy of SEESA payments to the Ansett Administrators, nor about SEESA payments through the Ansett Administrators to former Ansett employees.

Management of the Air Passenger Ticket Levy (Chapter 6)

DOTARS implemented an effective system for managing the Air Passenger Ticket Levy. Well-documented rules and guidelines assisted DOTARS in reducing the incidence of error in administering, collecting and remitting the Levy. The consultations held by DOTARS with the airlines and the travel industry assisted in ensuring the legislative and administrative frameworks were designed with the needs of the industry also in mind. The Levy program was implemented promptly by airlines with minimal disruption and a high degree of compliance.

The sound procedures implemented by DOTARS for monitoring airline compliance with the Levy legislation provided assurance that airlines collected and remitted the appropriate amount of Levy required under legislation. Regular checking of the airline industry enabled DOTARS to identify new entrants to the industry and the implementation of the airline audit program enabled DOTARS to monitor registered airlines for compliance with the ticket Levy regulations and legislation.

DOTARS and DEWR put effective liaison arrangements in place. This was of particular value to DOTARS in helping it to formulate advice on when the Levy could be terminated.

Conclusion

SEESA has been effective in delivering some $336.1 million in employee entitlements to former Ansett group employees terminated through their employer's insolvency. The arrangements for delivering these payments were put in place in a very tight timeframe.

SEESA payments have been made far more promptly and with greater certainty than if the employees had had to wait until assets were realised and creditors paid in the normal course. However, no specific data on the promptness of SEESA delivery has been compiled. As well, performance information on SEESA is limited.

Despite the assessed effectiveness of SEESA, DEWR could have been more efficient in its administration despite the tight timeframe. The tax issue is a case in point, which also added to costs. There were also opportunities, in the ANAO's view, for DEWR to have managed better the repayment of the SEESA loan and the interaction between SEESA and other Commonwealth payments.

Some aspects of DEWR's contract management (such as the engagement of SEES) were sound but others (such as the specification of performance requirements) were inadequate. The absence of key documentation on the choice of financier is not conducive to proper accountability, particularly on a matter of considerable public interest.

DOTARS put effective arrangements in place, promptly, for the implementation and operation of the Levy.

Agency comment: Department of Employment and Workplace Relations

The Department of Employment and Workplace Relations (DEWR) welcomes the ANAO's recognition of the successful implementation of SEESA in line with Government policy, within very tight timeframes.

The ANAO acknowledge that SEESA payments have been made far more promptly and with greater certainty than if the employees had to wait for payment through the normal insolvency process. The department's expeditious implementation of the Scheme ensured that the economic and social hardships that would otherwise have been experienced by these employees were avoided.

The Government's commitment to Ansett employees was made clear in September 2001 when the terms of the SEESA Scheme were publicly announced. The Government has delivered in full on that commitment for all terminated Ansett employees.

SEESA has provided all terminated Ansett employees with all of their unpaid wages, annual leave, long service leave, pay in lieu of notice and up to the community standard of 8 weeks redundancy pay. To date over $336 million has been paid under SEESA for almost 13 000 terminated Ansett employees.

In its criticisms of the administration of the Scheme, the ANAO does not adequately take into account the challenges of rapidly implementing a new scheme to address one of the most significant corporate insolvency in Australian history. The ANAO found that the Scheme has effectively delivered assistance to the former Ansett employees and that the majority of the issues raised have had only a minor impact on the Scheme's administration.