Introduction

1. The eastern states were subject to widespread flooding during the 2010–11 Australian spring and summer seasons, and Queensland was also impacted by a number of tropical cyclones. In this context, on 27 January 2011, the Prime Minister announced that preliminary estimates indicated that the Australian Government would need to contribute $5.6 billion to the rebuilding of flood-affected regions, to be funded under the existing Natural Disaster Relief and Recovery Arrangements (NDRRA). The majority of expenditure was expected to be on rebuilding essential infrastructure.

2. On 7 February 2011, the Prime Minister announced new oversight and accountability measures to ensure value for money would be obtained in the rebuilding of flood affected regions. Features of the new governance arrangements included an Australian Government Reconstruction Inspectorate to provide assurance concerning value for money, a Secretaries’ Steering Committee and the National Disaster Recovery Cabinet Sub-Committee, the appointment of the Minister Assisting on Queensland Floods Recovery and, for Victoria, the Minister for Regional Australia, Regional Development and Local Government having an oversight role in respect of recovery. In addition, Queensland established the Queensland Reconstruction Authority (with two Commonwealth appointments to its Board). In Victoria, the state established the Secretaries’ Flood Recovery Group and the Senior Officials’ Coordination Group (with one Commonwealth member on the latter). These various governance arrangements are in addition to the existing oversight, acquittal and audit requirements of NDRRA, and they do not alter States’ obligations under those arrangements.

3. Separate National Partnership Agreements¹ (NPAs) were signed with the Queensland and Victorian state governments in February and May 2011 respectively.² The NPAs outline that the Inspectorate had been established to oversee reconstruction activity to provide assurance that value for money is being achieved in the expenditure of funds during the reconstruction phase. This was principally to be achieved by the Inspectorate undertaking value for money reviews of reconstruction projects. The Inspectorate is to perform its functions by:

• working collaboratively with any reconstruction agency on the development of contractual frameworks, tendering processes and project management systems used;
• where necessary, undertaking scrutiny of requests for reimbursement by local government for completed reconstruction projects;
• undertaking scrutiny of contracts and benchmark prices, to ensure value for money;
• undertaking scrutiny prior to execution for complex or high value contracts;
• monitoring achievement against agreed milestones; and
• responding to and investigating complaints or issues raised by the public.

4. The Inspectorate is supported by the National Disaster Recovery Taskforce (the Taskforce) located within the Department of Regional Australia, Local Government, Arts and Sport (Regional Australia). The Taskforce is responsible for Commonwealth engagement with Queensland and Victorian reconstruction agencies and for the implementation of the additional oversight requirements contained in the NPAs.³ This includes undertaking, on behalf of the Inspectorate, value for money reviews of individual recovery and reconstruction projects. In relation to Victoria, it has been agreed through the operating protocol between the Inspectorate and Victoria that value for money reviews will only be undertaken on projects of $5 million or more.

5. The Taskforce is also responsible for:

• providing secretariat support to the Inspectorate;
• reporting to relevant Ministers and providing the National Disaster Recovery Cabinet Sub-Committee with monthly progress reports on state plans for recovery, including updated estimates of the Commonwealth’s liability under NDRRA;
• assessing spending on recovery and reconstruction efforts arising from the flooding and cyclone events so as to ensure consistency with NDRRA;
• assessing requests for Commonwealth funding assistance outside of those automatically triggered by a NDRRA declaration; and
• ensuring that a strategic approach is taken to reconstruction and recovery efforts.

6. The Taskforce and the relevant state body completed reviews of the Queensland and Victorian NPAs in 2012. The reviews found that the new arrangements were largely effective at coordinating and overseeing reconstruction activity and did not recommend any changes to either NPA. Nevertheless, the review of the Victorian NPA noted some areas relating to Commonwealth-state collaboration in emergency recovery that would benefit from further consideration between the Australian Government and the states for future events. Among other matters, the review suggested that the appropriate cost threshold and methodology for value for money assessments should be considered for discussion and clarification. A second review of each NPA is scheduled for 2013, once further progress has been made on the reconstruction program.

7. In January 2013, the Taskforce advised the ANAO that the Australian Government is considering the extension of both the Taskforce and the Inspectorate.

Audit objective, scope and criteria

8. The ANAO is undertaking three audits of key aspects of the NPAs signed with Queensland and Victoria in relation to natural disasters over the 2010–11 Australian spring and summer seasons.

9. The objective of this audit was to assess the effectiveness of the Inspectorate, supported by the Taskforce, in providing assurance that value for money is being achieved in recovery and reconstruction expenditure in Victoria.

10. The report of a second audit, examining the effectiveness of the Inspectorate in providing assurance that value for money is being achieved in respect to Queensland reconstruction projects is expected to be tabled in the 2013 Budget sittings.

11. Because the Australian Government will meet up to 75 per cent of eligible reconstruction expenditure, the audit focused on the activities undertaken by the Inspectorate, supported by the Taskforce, in conducting value for money reviews of Victorian reconstruction projects.⁴ The audit criteria were based on the role of the Inspectorate as announced by the Prime Minister in February 2011 and subsequently reflected in the Inspectorate’s terms of reference and the NPAs.

12. The ANAO has also undertaken a separate but related audit assessing the extent to which the disaster recovery work plans required under the NPAs for Queensland and Victoria were prepared, and appropriate monitoring reports provided, in accordance with the relevant NPA. The report on that audit is being tabled in conjunction with this report.

Overall conclusion

13. The flooding that occurred in Victoria over the 2010–11 summer was widespread. Reconstruction was expected to be expensive, with the latest (December 2012) data available from Victoria estimating the cost to the state of the resulting damage to be in the vicinity of $1 billion. A significant proportion of reconstruction expenditure is expected to be met by the Australian Government through the Natural Disaster Relief and Recovery Arrangements (NDRRA).

14. With the stated intention of ensuring recovery and rebuilding could start as soon as possible, a significant advance payment was made in 2010–11 to Victoria ($500 million).⁵ The advance payment also assisted the Australian Government to secure the agreement of Victoria to the additional oversight and accountability measures announced by the Prime Minister in early February 2012, which were then included in the NPA.

15. The conduct of value for money project reviews by the Inspectorate was expected to provide a greater level of oversight and assurance concerning reconstruction expenditure than would have occurred relying solely on NDRRA, which provides for the Australian Government to meet up to 75 per cent of the cost of reconstruction. This is because NDRRA generally operates on a reimbursement basis, with the Australian Government having little oversight of reconstruction as it occurs as there is no reporting from the states until such time as they seek reimbursement, which is commonly some years after the disasters occur. In addition, limited Australian Government oversight at the conclusion of reconstruction is afforded by audited claims submitted by states and territories, with no project level information provided in these claims. NDRRA also does not include value for money assurance arrangements.

16. Monthly reports from Victoria to the Taskforce indicate that recovery and reconstruction in flood-affected areas is well underway.⁶ However, to date, the creation of the Australian Government Reconstruction Inspectorate has not provided the Australian Government with the expected assurance that value for money is being achieved through Victorian reconstruction projects. This is because, as at December 2012, no value for money reviews have been completed in respect to any Victorian projects, and a review of one project had only recently commenced.⁷ In this context, in November 2012, the Inspectorate wrote to Victoria stating that:

The Inspectorate is also troubled that, more than 18 months after the disaster events, it has been unable to complete a value for money assessment on any Victorian project. In comparison, the National Disaster Recovery Taskforce, on behalf of the Inspectorate, has completed 61 value for money reviews of Queensland reconstruction projects.⁸

17. In addition, in January 2013 the Taskforce advised the ANAO that this issue has been the subject of discussion between the Attorney-General’s Department (AGD) and the Department of the Prime Minister and Cabinet (PM&C), in the context of Victoria’s request for an extension of the timeframe for NDRRA funding. In this respect, in December 2012 the Chair of the Inspectorate wrote to the Minister for Regional Australia, Regional Development and Local Government raising this issue and recommending that any extension to funding arrangements in Victoria be contingent upon the Inspectorate being provided with sufficient projects to be able to provide the required level of assurance. The Minister responded in February 2013, advising that he: shared the Inspectorate’s concerns about its ability to assess value for money in circumstances where only one project had been identified for review; strongly supported the Inspectorate’s recommendation that an extension to the allowable period for reconstruction be contingent upon Victoria’s agreement to increase oversight; and had written to the Attorney-General recommending this approach as responsibility for the extension request rests with Emergency Management Australia.

18. ANAO analysis is that the lack of value for money reviews of Victoria reconstruction projects at the time the ANAO’s audit work was completed reflects that:

• the Taskforce initially focused its work on developing a review methodology and project sampling processes for Queensland, given this is where the majority of expenditure will occur. There was relatively little attention given at that time, or subsequently, to developing a robust methodology for identifying projects to review in Victoria (proportionate to the level of expenditure expected in that state); and
• the parties to the NPA intended that the Inspectorate would only examine reconstruction projects with a value more than $5 million.⁹ Even allowing for this threshold, the Taskforce has not been active in seeking to ensure that projects with a value greater than $5 million are identified for value for money review. One project has been identified for review, but it is not representative of the reconstruction program and there is also some evidence that a number of other projects with a value above $5 million have proceeded, without being referred to the Taskforce for a value for money review. At the time of preparing this ANAO report, no formal requests had been made to Victoria concerning Inspectorate reviews of these other projects.¹⁰

19. The audit highlights the importance of greater attention being given to oversighting reconstruction activity in Victoria.¹¹ The Taskforce is currently funded to continue operating until the end of 2013 (and this date may be extended), thereby providing time for some value for money project reviews to be undertaken in Victoria. However, as reflected in the protocol with Victoria, in order to obtain the maximum benefit, it was intended that the Inspectorate’s review of a project for value for money would be conducted at the development phase of projects, although they can also be undertaken on completion of the project.

20. Notwithstanding advice from both the Taskforce and PM&C that it was intended that the NPA place restrictions on the Inspectorate’s ability to examine projects with a value below $5 million¹², there were opportunities for the Taskforce to have obtained greater insight into reconstruction projects being undertaken in Victoria. In particular:

• the Taskforce was the lead Australian Government agency in terms of developing the work plans with Queensland and Victoria but, as discussed in the related audit of the development of the work plans with these two states, in many instances the work plan for Victoria identifies broad categories of work rather than specific reconstruction projects; and
• the operating protocol with Victoria was negotiated by the Taskforce, but this did not require the state to provide and regularly update information on all reconstruction projects (which is the approach taken in Queensland). This would have enabled the Taskforce to identify those projects costing over $5 million that the Inspectorate wishes to review.

21. The ANAO recognises that the majority of the expected expenditure under the two NPAs relates to Queensland. Nevertheless, reconstruction activity in Victoria was significant in absolute terms and relative to the amount of natural disaster assistance expenditure typically experienced.¹³ Further, additional oversight and assurance through Inspectorate reviews of individual reconstruction projects was anticipated in the agreement reached between the Australian and Victorian Governments. In this context, there was considerable scope for the Taskforce to have more actively supported the work of the Inspectorate.

22. In addition, whereas the Inspectorate has endorsed the value for money strategy applied by the Queensland Reconstruction Authority (QRA) to projects in that state prior to a project being reviewed by the Taskforce, similar work has not been undertaken in respect to Victoria. These different circumstances place added importance on value for money project reviews being undertaken by the Taskforce of Victorian reconstruction projects in the remaining lifetime of the Inspectorate. Accordingly, the ANAO has recommended improved arrangements for conducting value for money reviews of Victorian reconstruction projects.

Key findings by Chapter

Development of Operating Protocols (Chapter 2)

23. The Inspectorate’s terms of reference stated that it would develop operating protocols with the other Commonwealth and state bodies with which it interacts ‘as soon as is practicable after its establishment’. In its role of providing support to the Inspectorate, the Taskforce was responsible for developing operating protocols.

24. The Taskforce did not initiate the process of developing an operating protocol with Victoria until early 2012. The protocol was finalised in August 2012, more than 18 months after the Inspectorate was established, and subsequently endorsed by the Victorian Deputy Premier in early December 2012. The delay in developing the protocol adversely affected the Inspectorate’s ability to scrutinise Victorian reconstruction projects. This is because it was decided that the protocol should be developed prior to any information being provided to the Taskforce on flood recovery projects for review.¹⁴

25. The Victorian protocol does not address a number of the key responsibilities of the Inspectorate set out in its terms of reference. For example, it does not outline the processes by which the Inspectorate is to review the state’s contractual frameworks, tendering processes and project management systems. It also does not address the sharing of relevant information and documentation that would be necessary for the Inspectorate to track the use of NDRRA funding from its source to the point of final expenditure.

26. In large part, those matters that are addressed by the protocol involve restrictions being placed on the way in which the Inspectorate is able to conduct its value for money project reviews. Of note is that possible projects for Inspectorate review are to be identified by the state, rather than the state being required to provide information on all reconstruction projects to enable the Taskforce to identify a sample of projects for review (which is the approach taken in Queensland, and was the approach originally envisaged for Victoria as well).¹⁵ In addition, the Queensland protocol provides for NDRRA funding to be reduced where a project review concludes that value for money is not being achieved, but the Victorian protocol instead provides for a process of dispute resolution.¹⁶ Also in this respect, in January 2013 the Taskforce advised the ANAO that:

The Inspectorate still retains the power to recommend to Senior Commonwealth Ministers that NDRRA funding be reduced if it determines that a project does not represent value for money. The decision as to whether funding will be reduced ultimately resides with the Attorney-General, who is responsible for the NDRRA (as it does for Queensland projects).

Scrutiny of Recovery and Reconstruction Projects (Chapter 3)

27. In announcing the creation of the Inspectorate, the Prime Minister emphasised that the focus of review activity would be on high value, complex contracts.¹⁷ The Prime Minister further stated that any project that was being funded under NDRRA would be under the oversight of the Inspectorate.¹⁸

28. Both states have documented public sector procurement frameworks, but the Australian Government’s decision to create the Inspectorate recognised that reliance on existing procurement frameworks would not provide sufficient assurance that value for money was being achieved. In this context, in response to the 2010–11 flooding, Queensland developed a value for money strategy that was subsequently endorsed by the Inspectorate. That strategy involves pre-approval review by QRA of each project against value for money criteria.¹⁹ It is only after QRA has completed its value for money review that the Taskforce undertakes its own value for money review of a sample of approved projects. There is no equivalent value for money strategy in place under the arrangements adopted with Victoria; a situation that should have increased the Taskforce’s focus on conducting its own value for money reviews in that state.

29. Against this background, reporting from Victoria to the Taskforce, and reports subsequently prepared by the Taskforce from the Inspectorate to the Prime Minister, have outlined that reconstruction is well advanced in Victoria. However, notwithstanding that, by November 2012 (the latest report available from Victoria), some $749 million in project expenditure had been reported, there have been no value for money reviews completed in respect to any Victorian reconstruction projects. In January 2013, the Taskforce advised the ANAO that a value for money assessment of the first Victorian reconstruction project has been underway since late-October 2012 when the documentation for Inspectorate review was received. It also advised that further information has been requested and will be taken into consideration before the report is completed. However:

• this $22.7 million project (the relocation and reconstruction of the Charlton Hospital) is not representative of the reconstruction program in Victoria, where most of the funding relates to the reconstruction of road and rail infrastructure by local government and state government authorities. In addition, the Charlton Hospital project is not expected to be completed within the (currently funded) lifetime of the Inspectorate; and
• the Inspectorate’s third report to the Prime Minister (provided in February 2012) had stated that review of reconstruction projects in Victoria for value for money would begin ‘shortly’, with three initial projects identified (including the Charlton Hospital project). However, the Taskforce did not request that the relevant documentation for two of these projects be provided for review, and the reviews were not undertaken. Subsequent Inspectorate reports did not identify that these reviews had not proceeded, or advise of the reasons for this situation.

30. Commencing in late-September 2012, the Taskforce also started requesting information from Victoria on projects with a value greater than $5 million²⁰, and a list of all reconstruction projects underway or completed in Victoria. At the time of preparing this ANAO report, Victoria had identified to the Taskforce nine tenders with a value over $5 million.²¹ However, to date a list of all reconstruction projects has not been provided and there has been no agreement reached on what constitutes a ‘project’ for the purposes of the Inspectorate’s value for money review activities. Although Regional Australia has informed the ANAO that it has been advised by Victoria that a list of reconstruction projects is not feasible, delivery agencies hold the necessary project level information and such data is being reflected, in aggregate, in the monthly progress reports being provided to the Taskforce in respect to the flood work plan. Given that two years have elapsed since the disaster events occurred, it is reasonable to expect that by now reconstruction projects arising from those events should be identifiable.

31. There has also been a general absence of the envisaged involvement by the Inspectorate and the Taskforce in developing and reviewing contractual frameworks, tendering processes and project management systems in relation to flood reconstruction in Victoria.

Summary of agency responses

32. The proposed audit report was provided to Regional Australia, the Chair of the Inspectorate, the Attorney-General’s Department, the Department of Finance and Deregulation, the Department of Infrastructure and Transport (DIT), the Department of the Prime Minister and Cabinet, the Victorian Senior Officials Coordination Group and the Queensland Reconstruction Authority. Regional Australia, the Chair of the Inspectorate, DIT and the Victorian Senior Officials Coordination Group provided formal comments on the proposed report. These are included at Appendix 1. PM&C also provided a departmental response on the recommendation.

Recommendations

Set out below is the ANAO’s recommendation and the responding agencies’ abbreviated responses. More detailed responses are shown in the body of the report immediately after the recommendation.

Footnotes

[1]     The NPA with Queensland relates to the reconstruction of communities that were affected by the 2010‑11 floods and Tropical Cyclone Yasi. The NPA with Victoria relates to the early 2011 flooding in Victoria. NDRRA continues to apply to those natural disasters covered by the NPAs, with payments to the states authorised by Emergency Management Australia (EMA) within the Attorney-General’s Department (which administers NDRRA).

[2]     The existing NDRRA arrangements continue to apply to expenditure covered by the NPAs. These arrangements include the states and territories providing audited financial statements to acquit expenditure, including expenditure of advance payments.

[3]     Initially, the Taskforce was funded to operate until the end of 2012. The May 2012 Budget included additional funding to extend the operation of the Taskforce by one year. This was in response to the increased time granted to the Queensland Government for the completion of reconstruction projects.

[4]     It also included examination of the level of scrutiny applied to the contractual frameworks, tendering processes and project management systems developed by Victoria, and to the rebuilding contracts, requests for reimbursement and benchmark prices.

[5]     Australian Government obligations under the NPA are forecast by Victoria to be less than the $500 million advance provided in May 2011.

[6]     In this context, the Inspectorate’s most recent four-monthly report to the Prime Minister noted that, by the end of August 2012, more than $464 million had been spent on recovery and reconstruction, representing 47 per cent of the estimated cost of damage.

[7]     See paragraph 29.

[8]     At the time of preparing this ANAO report, Victoria had identified to the Taskforce nine tenders with a value over $5 million, it was not clear whether any of these projects would be the subject of a value for money review. See further at paragraphs 3.54 to 3.60.

[9]     This restriction is included in the operating protocol agreed to by the Taskforce with Victoria. The Taskforce advised the Inspectorate that this restriction also exists in the NPA, but the ANAO’s analysis did not support this view. (The NPA only applies a threshold in relation to Victoria being required to seek the views of the Inspectorate on proposed project plans and strategies for projects over $5 million, which were to be included in the work plan developed in accordance with the NPA). Although it is not evident from the NPA agreed between governments, PM&C advised the ANAO in December 2012 that it was the clear intention of the Commonwealth at the time of drafting the NPA that no individual reconstruction projects in Victoria would be subject to value for money assessment by the Inspectorate unless the value of the project exceeded $5 million. By way of comparison, in Queensland, around one in three of the 91 projects selected for review by October 2012 was valued at less than $5 million.

[10]     The Victorian protocol states that the Inspectorate may also ‘propose’ to review additional projects to those identified by the state as costing more than $5 million. Up to the time of preparation of this ANAO report, no such project reviews had been proposed.

[11]     The Taskforce has advised the ANAO that it has provided meetings of the Australian Government Reconstruction Inspectorate with an overview of recovery and reconstruction progress in both Victoria and Queensland.

[12]     At the time of preparation of this ANAO report, the NPA had not been amended to reflect the intended (but omitted) restriction on the Inspectorate’s ability to examine projects valued under $5 million.

[13]     The average total annual payment to all states under NDRRA (and its predecessor the Natural Disaster Relief Arrangements) between 2001–02 and 2009–10 was less than $100 million.

[14]     While the protocol was submitted by state officials to the Victorian Deputy Premier for approval, the Taskforce did not seek the Inspectorate’s endorsement or approval of the protocol.

[15]     The protocol states that the Inspectorate may also ‘propose’ to review additional projects to those identified by the state.

[16]     In its third report to the Prime Minister, the Inspectorate recommended that ‘the Commonwealth take a strong position on withholding funds under the Natural Disaster Relief and Recovery Arrangements for projects which the Inspectorate has determined do not represent value for money.’

[17]     The Hon Julia Gillard MP, Prime Minister of Australia, Australian Government Reconstruction Inspectorate, Media Release, Monday 7 February 2011.

[18]     The Hon Julia Gillard MP, Prime Minister of Australia, Transcript of press conference, Canberra, Monday 7 February 2011.

[19]     As of January 2013, QRA was reporting that $1.7 billion in project submissions in Queensland had been assessed by the Authority as not eligible or otherwise returned to the relevant delivery agency, thereby avoiding $1.3 billion in cost to the Australian Government and $434 million in potential state costs. The ANAO understands that these figures may include some submissions that have been returned on more than one occasion (thereby overstating the extent of any costs avoided) and that, in some instances, submissions initially returned are later approved. Pre-approvals of Department of Transport and Main Roads projects usually exclude value for money reviews, as these are not conducted until after tenders have been received.

[20]     In January 2013, Regional Australia advised the ANAO that ‘the Inspectorate’s methodology for identifying projects to review in Victoria is straightforward: all projects valued over $5 million are subject to Inspectorate review.’ A decision to adopt such a methodology is not recorded in the minutes of the Inspectorate meetings. The Taskforce had earlier advised Victoria that ‘only two or three Victorian projects may be selected for review’ (see paragraph 3.11) and the Inspectorate’s June 2011 first report to the Prime Minister had foreshadowed that a sampling approach to selecting projects for review would be adopted in both Queensland and Victoria (see paragraph 3.22).

[21]     These tenders over $5 million had already been identified by the ANAO.