Introduction

1. The onset of the global financial crisis in 2008 caused a severe loss of confidence, not only in the financial sector, but also in households and businesses around the world. The result was a period of global economic downturn and a prospect of rising unemployment in many countries.

2. In response, many governments around the world have adopted fiscal measures to support employment and economic recovery. Domestically, the Australian Government announced a series of stimulus measures in late 2008 and early 2009. Included in these was the Regional and Local Community Infrastructure Program (RLCIP).

3. The RLCIP is administered by the Department of Infrastructure, Transport, Regional Development and Local Government (DITRDLG). Its establishment had been announced in the May 2008 Budget, to replace from 2009 10 the Regional Partnerships Program, which had been subject to a report by the ANAO in November 2007. ¹

4. Also in May 2008, the Minister for Infrastructure, Transport, Regional Development and Local Government asked the House of Representatives Standing Committee on Infrastructure, Transport, Regional Development and Local Government (the House Standing Committee) to investigate and report on options for the new regional funding program. On 5 November 2008, the House Standing Committee tabled an Interim Report on its inquiry into a new regional development funding program. The Committee's decision to issue an interim report stemmed from the Government accelerating its nation building agenda in response to the global financial crisis. The Committee's intention was for the recommendations of the Interim Report to help inform government decision-making as the Government considered the manner in which it would distribute funds for regional infrastructure projects.²

5. On 12 November 2008, one week after the House Standing Committee tabled its Interim Report, the Government decided to establish a $300 million RLCIP comprising:

• $250 million allocated amongst all councils (referred to as the Council Allocation component); and
• $50 million to fund high priority infrastructure projects with a value of greater than $2 million that would be selected through a competitive, application-based process (referred to as the Strategic Projects component).

6. The Strategic Projects component is the subject of this audit report. A separate performance audit of the Council Allocation component is also underway with the report expected to be tabled in early 2011.

Conduct of the 2009 application round

Initial call for applications

7. The initial call for applications to the first round³ of the Strategic Projects component was made on 21 November 2008, three days after the Program was announced. On that date, the Minister for Infrastructure, Transport, Regional Development and Local Government:

• released the Program Guidelines;
• released the official timetable, which was intended to encourage local councils and shires to identify local projects as soon as possible so as to have funding released promptly;
• announced that application forms for the $50 million Strategic Projects component would be available (on the department's website) later that day for projects seeking a minimum Commonwealth contribution of $2 million or more; and
• announced that complete applications must reach the department by 23 December 2008.⁴

8. By 23 December 2008, DITRDLG had received 344 applications that sought some $1.2 billion of Commonwealth funds for projects with an overall value of $2.9 billion.

Program funding increased from $50 million to $550 million

9. In the context of the impact in Australia of the evolving global financial crisis, at its meeting on 28 January 2009, the Strategic Priorities and Budget Committee of Cabinet considered options to provide further economic stimulus through the Infrastructure, Transport, Regional Development and Local Government portfolio. Further discussion occurred after the Committee meeting between the Office of the then Prime Minister and the Office of the Minister for Infrastructure, Transport, Regional Development and Local Government. Subsequently, on 2 February 2009, the then Prime Minister wrote to the Minister for Infrastructure, Transport, Regional Development and Local Government:

• confirming the allocation of an extra $500 million over two years to the Strategic Projects component of the RLCIP, with $250 million to be allocated in 2008–09 and $250 million in 2009–10; and
• reiterating the 28 January 2009 decision that priority was to be given to projects that could proceed quickly and for which co-investment from councils and other partners, such as State and Territory governments, was proposed.

Applications re-opened

10. On 13 February 2009, the Minister for Infrastructure, Transport, Regional Development and Local Government announced that the Government had secured the passage of the $42 billion Nation Building and Jobs Plan legislation, which included the additional $500 million for the Strategic Projects component of the RLCIP. The Minister's announcement also outlined that:

The Government will give local councils and shires the opportunity to submit new or revised applications for the Regional and Local Community Infrastructure Program—Strategic Projects.⁵

11. In the context of the Strategic Projects component having been increased from $50 million in available funding to $550 million, the Minister's announcement advised that councils had until 4pm Australian Eastern Daylight Saving Time, Friday 6 March 2009⁶ to submit new or revised applications. It was further announced that the existing Program Guidelines would continue to apply.

12. By the revised closing date, a total of 484 applications were received seeking $2.05 billion in Commonwealth funding compared with the $550 million that was available.

Successful applications

13. The decision about which applications were to receive Program funding was made by Cabinet, in a meeting on 22 April 2009. Cabinet agreed to the recommendations of the Minister for Infrastructure, Transport, Regional Development and Local Government that a total of $549.672 million be approved for 137 projects.⁷ The successful projects were publicly announced over the course of April and May 2009. Funding Agreements for 136 of the projects were signed during June 2009, with a total of nearly $230 million in program funds paid before 30 June 2009. The final Funding Agreement was signed in late July 2009.

14. Figure S 1 provides an overview of the application, assessment and funding approval processes for the Strategic Projects component of the RLCIP. In respect to the program context and way in which it was delivered, in June 2010 the department advised ANAO that:

The program was implemented during the global economic crisis and the Government's response to the emerging crisis. Between September 2008 and the 2009 Budget, the Government dealt with an unfolding global and economic crisis which required senior Ministers to re-consider and adjust policy and program settings as the impacts of the crisis became clearer. This included considering projects which would not only provide an immediate economic stimulus but also provide community infrastructure investment for the recovery post 2010–11. The program changed significantly as the Government, through successive consideration of stimulus measures, expanded the program from $50 million to $550 million and adapted the timeframes and approach to assessment and delivery of the program.

Figure S 1 Approval process map for the Strategic Projects component

Legislative framework

15. The Strategic Projects component of the RLCIP is a discretionary grants program. Commonwealth grant programs involve the expenditure of public money and are thus subject to applicable financial management legislation. Specifically, the Financial Management and Accountability Act 1997 (FMA Act) provides a framework for the proper management of public money and public property. This framework includes requirements governing the process by which decisions are made about whether public money should be spent on individual grants, including those made under the Strategic Projects component.

16. While not affecting a Minister's right to decide on the allocation of grants, since December 2007, the financial framework applying to grants decision-making has been progressively enhanced. Two of the significant changes made on 14 December 2007 were to require that guidelines for any new grants program be considered by the Expenditure Review Committee of Cabinet; and Ministers were not to make any decisions on grants without first receiving departmental advice on the merits of each grant application relative to the guidelines for the program. These requirements remain in place.

17. In December 2008, prior to the re-opening of applications to the Strategic Projects component, the Government agreed to a range of measures to reform the administration of grants, including the development of an improved framework for grants administration. These decisions were made in response to the 31 July 2008 report of the Strategic Review of the Administration of Australian Government Grant Programs (Strategic Review of Grants). The Government's December 2008 decisions have now been reflected in the new policy framework for the administration of grant programs by agencies subject to the FMA Act that took effect from 1 July 2009.

18. Whilst the enhancements to the grants administration framework made in December 2007 applied to the design and implementation of the Strategic Projects component, the changes to the FMA Regulations and introduction of the Commonwealth Grant Guidelines (CGGs) occurred after projects had been approved for funding.

Audit objectives

19. The audit was undertaken under section 18 of the Auditor-General Act 1997. The objective of the audit was to assess whether the Strategic Projects component of the RLCIP has been effectively designed and administered. Amongst other things, the audit examined the design of the Strategic Projects component; the processes by which applications were sought, assessed and successful projects approved for funding; and the extent to which timely economic stimulus has been provided through the funded projects.

Overall audit conclusion

20. The Strategic Projects component of the RLCIP was one of a number of programs introduced by the Australian Government in response to the global financial crisis. Initially announced with funding of $50 million, this was increased in January 2009 by a further $500 million so as to increase stimulus spending in local communities as part of the Government's response to the global financial crisis. In addition to the intention of providing timely economic stimulus, the Program is also expected to provide longer term community infrastructure investment by funding additional projects not already underway, or additional stages of projects that were already underway.

Application, assessment and approval of projects

21. The objectives of the RLCIP were to create local jobs and stimulate local economies in the short term and medium term. The Strategic Projects component was intended to contribute to this objective by directing funding towards a limited number of large strategic projects that were ready to proceed. Projects were to be allocated funding on a nationally competitive basis through an application process open to all local councils.

22. Guidelines for the Strategic Projects component were approved by the Government and published soon after the RLCIP was announced. The published guidelines were updated and reissued to reflect key changes in the Strategic Projects component, including the decisions made in January and February 2009 to increase the available funding to $550 million and to re-open the Strategic Projects component to new or revised applications.

23. The Program Guidelines included a comprehensive suite of criteria addressing applicant and project eligibility, and emphasising that only complete applications would be considered compliant and therefore eligible for funding. In this respect, the Strategic Review of Grants which reported in July 2008 had observed that potential applicants and other stakeholders have a right to expect that program funding decisions will be made in a manner, and on a basis, consistent with the published program guidelines and selection documentation.⁸ A similar observation had been made by ANAO in the audit report on the predecessor Regional Partnerships program.⁹ An eligibility and compliance checking process was developed by the department but was abandoned part-way through its implementation and was not replaced with an alternative, systematic consideration of eligibility and compliance. As a consequence, rather than ineligible and incomplete applications being excluded from further consideration, all applications received were considered as to whether they should be shortlisted to undergo a risk assessment by the department.

24. A further shortcoming in the administration of the Strategic Projects component was that no version of the program guidelines outlined the assessment criteria that would be used to select the successful applications. At various points, decisions were made to establish criteria to prioritise applications and shortlist those applications that would be further considered for possible funding. The various decisions taken in relation to criteria were indicative of an evolution in thinking about the implementation of the Strategic Projects component, but opportunities to publish the criteria as they were decided upon were not taken. This was notwithstanding that the House Standing Committee had recommended in its November 2008 Interim Report that key assessment criteria should be defined ‘in the clearest possible way' and that the department should ensure that ‘applicants and departmental staff are aware of these criteria'.¹⁰

25. After examining applications against shortlisting criteria approved by Ministers on 19 March 2009, the department undertook a risk assessment of shortlisted projects. In total, 202 applications were shortlisted for risk assessment, with external accounting firms playing a key role in the conduct of these assessments.¹¹ While the risk assessment results were provided to its Minister, the department did not provide recommendations to the Minister about which projects should be approved within the available funding of $550 million.¹² This was a significant failing on the part of the department given that, since December 2007, the enhanced grants administration framework has required departments to provide advice to Ministers on the merits of each grant application relative to the guidelines for the program.¹³

26. It is difficult to understand in light of the department's experience with grants administration why greater attention was not given to designing and implementing the Strategic Projects component in a way that paid greater regard to the Government's December 2008 decision to accept all recommendations made in the July 2008 report of the Strategic Review of Grants, the November 2008 Interim Report of the House Standing Committee,¹⁴ the instructions issued by the Finance Minister in December 2007 and the findings and recommendations of earlier ANAO audit reports. The department has indicated to ANAO that it now has a better appreciation of its obligations under the enhanced grants administration framework, and that procedures will be implemented to provide a clear agency recommendation to the Minister concerning whether or not funding should be approved in respect to each application to competitive, merits-based grants programs it administers.

27. On 21 April 2009, the Minister's Office advised the department of a list of 137 projects the Minister intended to recommend to Cabinet for approval; and that this list had been derived taking into account one or more of the following factors:

• geographic distribution of projects;
• likely economic stimulus and community impact, drawing on population sizes, capacity within local government authorities, percentage of partnership funding, and nature of projects; and
• whether alternative funding sources are available or have been provided.

28. Whilst not inconsistent with the Program objectives and the published Guidelines, these criteria had not been published or otherwise advised to councils and other stakeholders. Further, there was no documented assessment of each application against the three criteria outlining: the extent to which each application had been assessed as satisfying each criterion; the information relied upon in making the assessment; or an overall assessment and ranking of each competing application.

29. The Minister's actual recommendations were finalised on 22 April 2009 and provided to Cabinet. The projects recommended for funding were identical in most respects to the list provided to the department one day earlier.¹⁵ On 22 April 2009, Cabinet endorsed the Minister's recommendations.

30. Prior to Cabinet being provided with recommendations as to which projects should be approved, analysis of the proposed distribution was undertaken on a geographic and electorate basis. In addition to providing what was considered to be a reasonable geographical spread of approved funding, the proportion of total funding awarded on an electorate basis was consistent with the proportion of seats held in the House of Representatives. Further in this respect, three of the four largest grants were made to projects located in electorates held by the Liberal Party (the third largest grant was made in respect to a project located in an Independent held electorate).

31. The published Program Guidelines outlined that all councils were eligible to apply for funding towards the cost of a large strategic project and that funding would be allocated on a nationally competitive basis. In this light, whilst the total amount of funding provided a reasonable geographic spread and was largely consistent with the proportion of electorates held by the major parties and Independent members, in terms of the number of applications, projects located in electorates held by the Australian Labor Party (ALP) and Independent Members were more successful at being awarded funding than those located in electorates held by the Coalition parties.

32. The higher approval rates for projects in ALP held electorates compared to those in Coalition held electorates was the case when considered in terms of political party representation in the House of Representatives, as well as when considered in terms of the pattern of applications¹⁶ and the types of councils within electorates. The awarding of funding to projects also disproportionately favoured ALP held seats when considered in terms of the extent to which the various applications indicated that construction work would be able to be undertaken in the desired economic stimulus timeframe.¹⁷

33. In advice to ANAO in July 2010, the Minister indicated that, in respect to the selection of projects and distribution of funding:

• he received detailed assessments (based on rigorous Independent Viability Assessments) and recommendations from his department on 14 April 2009 on the 202 projects which met the shortlisting criteria of 19 March 2009. Of these, 188 were recommended to him by the department as suitable for funding;
• he had asked Cabinet to endorse projects in the context of three objectives¹⁸ namely to: provide an equitable geographic distribution of funding; fund worthwhile projects where no alternative funding was available; and maximise the stimulus and community benefits;
• the 137 approved projects stimulated local economies and provided confidence into local governments representing over 12 million people and, collectively, leveraged in excess of $1.5 billion in partnership funding thereby resulting in this amount flowing into local communities; and
• unlike the distribution of applications, which the Minister considered to be skewed as it reflected wide variations in council numbers and sizes across the country, the final allocation of funding by State and Territory was seen as being broadly representative of the populations of those jurisdictions.

34. In this context, it has become increasingly common for governments to analyse the distribution of grants on an electorate basis so as to assess, amongst other things, the relationship between intended grant outcomes following the application of selection criteria and the distribution of funding. Whilst the distribution of approved funding across electorates provides beneficial analysis to inform decision-making, an important measure of equity of access is the extent to which approved projects correlate with the pattern of applications in any applications-based grants program. In any event, Government decisions on grants administration that have subsequently been reflected in the CGGs emphasise the use of competitive, merit-based selection processes based upon clearly defined selection criteria.¹⁹

35. The Strategic Projects component was publicised as being a nationally competitive discretionary grants program to which all councils were eligible to apply. In this light, the distribution of grants in respect to those councils who had applied for funding, combined with the absence of a documented assessment of each application in terms of the three criteria (see paragraphs 25 to 28), means that the basis on which decisions were made to include, or exclude, particular applications to fit within the budget allocation was not clear. In particular, the reasons for the selection of 131²⁰ of the 188 shortlisted applications, and non-selection of 57 shortlisted applications, were not apparent from the Program documentation or subsequent advice. The reasons for the selection of the additional six projects were documented, although in each case the documented reasons either involved the waiving of Program eligibility criteria (two applications) or were based on indications of considerations that were not included in the Program Guidelines as being relevant to the selection of projects (four applications).

36. To improve the transparency of grants approval processes,²¹ the financial framework applying to funding decisions for grants was subsequently enhanced by the Government with effect from 1 July 2009 to require decision-makers to record the substantive reasons for their approval, having regard for the relevant statutory obligations that regulate the approval of spending proposals, in addition to the factual terms of the approval. This reinforces the obligation, first introduced in December 2007, for departments to provide advice on the merits of each grant application in order to allow projects to be selected for funding having regard to the best outcomes from the expenditure of public moneys, relevant legislation and government policies.²²

37. Following approval of each of the projects, the department worked expeditiously to develop and sign Funding Agreements, and make the initial upfront payments. These steps were necessary to allow projects to commence and thus generate economic stimulus. Subsequently, the department implemented procedures to monitor project commencement and progress as reported to it by councils.

Providing economic stimulus

38. In the context of an earlier audit, the Department of the Treasury (Treasury) informed ANAO that where infrastructure and public capital works projects can be implemented quickly, they are likely to boost aggregate demand in the short term and add to productive capacity over the longer term.²³ Accordingly, key parameters in the design of the Strategic Projects component related to funding ready to proceed (‘shovel ready') projects that could provide timely stimulus to local communities.

39. The department has informed the ANAO that the need to roll out the Program quickly to meet the expectations of government and the community was a key factor in the way the department delivered the Strategic Projects component of the RLCIP. The prompt approval and announcement of funding for approved projects was important to provide confidence and greater certainty about the forward outlook in the local government and construction sectors, but there were delays in the announcement of funding for some projects. Further, the Strategic Projects component has not provided the planned level of stimulus in the timeframe that had been budgeted at the time it was introduced, as indicated by the following:

• the program timetable involved Funding Agreements being signed in June 2009 with a requirement that construction commence within six months of Funding Agreement execution. On the basis of the reporting to the department by councils, 75 per cent of the 137 projects approved for funding in April 2009 had commenced construction within six months of the Funding Agreement being signed but ANAO analysis is that this reporting is not sufficiently reliable. Rather, the best available indicator of project commencement and progress relates to expenditure by councils on the approved project;
• to enable construction work to commence as soon as possible, significant upfront payments (between 25 per cent and 50 per cent of the grant amount) were paid to councils upon signing of Funding Agreements. However, there have been significant delays in these payments being used together with delays in projects progressing such that further payments have been delayed.²⁴ By 31 March 2010, total grant payments made had risen to some $277 million but these payments remained nearly $130 million (32 per cent) below the level that should have been paid had projects commenced and been progressing in accordance with the milestones specified in the respective Funding Agreements (see Figure S 2); and
• the reported use of Program funding was minimal in the first six months of 2009–10 (also see Figure S 2). There has been no marked improvement in this situation in the period to 30 June 2010 such that councils had reported to the department that they had spent some $142 million of the $438.5 million that had been paid to them (some 68 per cent of funds had yet to be reported as spent).²⁵ In April 2010 the department changed its payment practices so as to increase the amount of funds being paid to councils (as illustrated in Figure S 2), but this has not meant that there has been any acceleration in the rate at which funding is being spent by councils.

Figure S 2 Scheduled payments to councils, actual payments made to councils and expenditure of Strategic Projects payments reported by councils

Source: ANAO analysis of DITRDLG data.

40. The relatively low level of program expenditure to date reflects the situation that a large proportion of the projects approved for funding were not ready to proceed; were planned to be delivered over a longer timeframe than that necessary to provide timely stimulus; and/or involved high project delivery risks which have been realised. The consequence has been that, whereas the Strategic Projects component was budgeted to have paid out $300 million in 2008–09 and the remaining $250 million in 2009–10 and each of the 137 Funding Agreements (as originally signed) required that projects would have proceeded sufficiently so as to allow all Commonwealth funding be paid on or before 30 June 2010, a significant rephasing of funds ($112 million) from 2009–10 to 2010–11 has been necessary.²⁶

Improvement opportunities

41. The administration of grant funding is a significant and sensitive area of public administration that provides significant community benefits but requires care and effective oversight on the part of agencies and Ministers. This is particularly the case when circumstances dictate that programs need to be implemented in a short time period to meet government policy objectives whilst still treating applicants equitably and retaining public confidence in the selection process for the awarding of grants. In that context, this audit has highlighted that designing and implementing grants programs in a way that focuses on selecting those applications that clearly satisfy soundly-based selection criteria is considerably more likely to lead to a positive result in terms of achieving program objectives, promoting public confidence in grants administration and being efficient for agencies to administer.

42. The changes to the financial framework announced by the Finance Minister on 1 July 2009 will encourage enhanced decision-making and delivery of approved grants, but there remains a need for complementary steps by Ministers and agencies to ensure grants programs are designed and implemented in the best interests of outcomes and value from the significant levels of public expenditure involved. ANAO has made five recommendations to address the issues arising from the design and implementation of the Strategic Projects component of the RLCIP. A number of these recommendations are directed at encouraging stronger leadership within the department in the provision of advice to Ministers on the design and implementation of grants programs. The recommendations also identify some opportunities to further improve delivery of Australian Government funding to approved recipients in the pursuit of desired government policy outcomes. In addition, in June 2010 ANAO published a revised Better Practice Guide titled ‘Implementing better practice grants administration' so as to complement the new framework for grants administration by providing a companion reference point that will assist decision-makers and administering agencies to understand and comply with their obligations and implement the better practice principles, having regard to the particular circumstances of individual grants programs.

Key findings by chapter

Program guidelines (Chapter 2)

43. The guidelines promulgated in relation to a grant program play an essential role in funding the most meritorious applications and promoting public confidence in the equity and probity of the grant giving process. As outlined at paragraph 16, since December 2007, the development, approval and publication of program guidelines has been a key aspect of the enhanced grants administration framework.

44. The Program Guidelines for the Strategic Projects component were approved by Cabinet on 12 November 2008 and published on 21 November 2008. A small number of changes were made to the Guidelines between their original approval and public release, with the changes aimed at allowing ‘ready-to-proceed' projects to commence as soon as possible. The published Guidelines:

• provided an overview of the Program;
• included advice on those proponents that were eligible to apply, the types of projects that were eligible and those that were ineligible, and emphasised that incomplete applications would not be considered for funding;
• advised that the department would undertake a risk analysis of proposed projects, following which it would rank applications under three categories (recommended, not recommended and non-compliant);
• outlined that, following the department's risk assessment and ranking of projects, a decision on funding approval would be sought from the Minister for Infrastructure, Transport, Regional Development and Local Government; and
• provided information on the contracting and funding arrangements that would apply to successful applications.

45. In addition to the Program Guidelines, DITRDLG developed and published a document entitled ‘Frequently Asked Questions'. This document was expected to be read in conjunction with the Guidelines as it was intended to provide information on the Program's objectives and timeframes and an overview of the application and approval processes.

Program objectives and assessment criteria

46. The Program Guidelines stated that funding was being made available under the Strategic Projects component ‘to stimulate additional growth and economic activity across Australia as part of the Australian Government's contribution to addressing the global economic crisis.' The objectives of the RLCIP were to create local jobs and stimulate local economies in the short term and medium term.

47. The criteria that are to be applied in determining the funding recipients under a grant program are the key link between the program's stated objectives and the outcomes that are subsequently achieved from the funding provided. Particularly where competitive funding rounds are utilised, setting out the assessment criteria clearly in the program guidelines:

• assists to attract good applicants and discourages applicants that are unlikely to be successful; and
• contributes to the conduct of an efficient, effective, transparent and accountable process for differentiating between eligible, compliant applications that are competing for the available funding.

48. The Strategic Projects component Program Guidelines stated that the department would undertake a risk analysis of applications and rank them as recommended, not recommended or non-compliant. However, no version of the Program Guidelines outlined the criteria that would be applied by the department in ranking applications for Ministerial funding consideration. The only guidance in this respect was a statement that:

Larger projects and those that included partnership funding would be given preference.

49. However, no assessment criteria were established at the time the Strategic Projects component was announced, such that the published Program Guidelines did not advise councils of the criteria that would be used to develop a ranked list of eligible applications. Prioritisation and shortlisting criteria were established by Government at various points in time (as shown in Table S 1) but opportunities to publish the criteria as they were decided upon were not taken and not all of the criteria were actually applied to prioritise or shortlist applications for further consideration. It was not until 21 April 2009, the day before the Minister put forward to Cabinet his recommendations on which projects he recommended be approved for funding, that assessment criteria were documented.

Table S 1 Prioritisation and shortlisting criteria for Strategic Projects component

Source: ANAO analysis.

Checking application eligibility and compliance with Program Guidelines (Chapter 3)

50. Well-constructed eligibility criteria are straightforward, easily understood and effectively communicated to potential applicants, and it is better practice for the guidelines to clearly state that applications that do not satisfy all threshold criteria will not be considered. This helps to reduce frustration and unnecessary costs by assisting potential applicants to avoid developing and submitting applications that are ineligible or have little chance of success. It also promotes fairness and equity by guarding against situations where eligibility criteria are waived for some applicants, but not for others.

51. Each version of the published Program Guidelines for the first funding round of the Strategic Projects component of the RLCIP included clear and, in most respects, consistent guidance on applicant and project eligibility, as well as other threshold requirements an application needed to meet in order to be considered for funding.

52. One of the most important threshold criteria was that incomplete applications were not to be considered for funding. In this respect, in order to achieve the economic stimulus objectives of the Program, it was recognised that projects needed to be sufficiently well developed (as demonstrated through the project application) to enable them to be able to commence and be completed in a relatively short period of time (less than 18 months). A complete application was defined as one that answered all questions on the application and attached all required documentation needed to demonstrate the viability of the proposed project, such as recent business plans, feasibility studies, detailed project plans and project cost estimates.

Application of the threshold (eligibility and compliance) criteria

53. It is important that eligibility and other mandatory criteria advised to potential applicants be transparently and consistently applied in the assessment process. Accordingly, it is advisable to confirm the compliance of each application with those criteria as the first stage of the assessment process. This aids the efficiency of program administration because, in the interests of probity and fairness, non-compliant applications should be clearly identified as ineligible and excluded from further consideration.

54. Prior to the re-opening of applications²⁷, the department had developed and commenced applying procedures (through two ‘cull sheets') to scrutinise applications submitted in response to the initial call for applications. The matters being assessed by the department included whether:

• the application had been submitted by an eligible applicant, being a council, group of councils, or by a council on behalf of a local not-for-profit organisation;
• the application was for an eligible project;
• the application had been submitted on time;
• the application was complete including whether supporting documentation such as a cost estimate, a feasibility study, a business plan with cash flow projects and a detailed project plan had been provided; and
• the project was likely to provide an economic stimulus in that it was ready to commence construction within six months of the Funding Agreement being signed, and was an additional stage or stages of a project that was already underway.

55. The initial assessment of applications was still set out in the latest version of the department's Strategic Projects component procedures manual (October 2009) provided to ANAO during the course of the audit. In addition, no substantive changes had been made to the published Program Guidelines or otherwise advised to potential applicants to identify that projects would no longer be scrutinised in terms of being complete and eligible for funding in accordance with the criteria set down in the published Guidelines.

56. A new compliance checking sheet was developed after Program funding was increased by $500 million and applications were re-opened. The revised cull sheet combined the previous two forms, however, three key elements were either changed or removed. In addition, the revised, combined checklist was not completed for a significant proportion of the revised and new applications submitted to the re-opened round.

57. The threshold criteria relating to applicant eligibility, project eligibility and the requirement for funding applications to be complete were set out in published Program Guidelines that had been approved by Cabinet and, in one instance, Ministers explicitly decided to waive the project eligibility criteria for an application they wished to fund.²⁸ Accordingly, it would have been appropriate for DITRDLG to have sought explicit clarification from its Minister as to how the threshold criteria in the Guidelines were now required to interact with the prioritisation and shortlisting criteria agreed by Cabinet before the department abandoned the process of explicitly applying the threshold criteria as a first step in the process of assessing applications for funding. In June 2010, the department informed ANAO that this reflected the changing nature of the Government's consideration of the most appropriate means of dealing with the emerging pressures of the global financial crisis. Nevertheless, the equitable consideration of all applicants was not evident in the processes employed.

58. The original checking process for applications that was abandoned part way through assessment was not replaced with an alternative, systematic consideration of application eligibility and compliance. This meant that, rather than ineligible and incomplete applications being excluded from further consideration:

• all applications received were considered as to whether they should be shortlisted to undergo a risk assessment by the department, based on shortlisting criteria agreed by Cabinet on 19 March 2009, without any prior comprehensive review having been undertaken of applications in terms of their compliance with, and eligibility under, the published Program Guidelines. As a result, 143 (71 per cent) of the 202 projects shortlisted for risk assessment by the department based on the shortlisting criteria agreed by Cabinet on 19 March 2009 were ineligible and/or non-compliant in terms of the published Program Guidelines. The remaining 59 shortlisted projects seeking $271.8 million were, based on the department's analyses, eligible and compliant; and
• the only substantive opportunity for the department to identify shortlisted applications that did not meet the threshold criteria set out in the Guidelines was where such issues were identified incidental to the risk assessment process conducted in respect to shortlisted applications.²⁹

59. Risk assessment processes have a different focus than do eligibility and compliance checking processes. Accordingly, it is unsurprising that the risk assessments identified a small number (seven) of non-compliant/ineligible applications amongst those shortlisted, but overlooked a large number of other non-compliant/ineligible projects. As previously indicated, in one instance Ministers made an explicit decision to approve an application that was known to be otherwise ineligible under the Guidelines³⁰ but, in another 90 instances, approved non-compliant and/or ineligible projects without being made aware of this by the department.

Shortlisting applications received (Chapter 4)

 60. Each version of the Program Guidelines had informed potential applicants that ‘the department will undertake a risk analysis of the council to undertake the proposed project'. The Guidelines also advised that Independent Viability Assessments would be undertaken by a qualified external consultant engaged by the department in situations where it was considered that there were risks to the viability of the proponent or project that required further consideration.

61. As well as being more likely to lead to a positive result in terms of achieving program objectives and promoting public confidence in grants administration, publishing well-developed eligibility and assessment criteria can also improve the efficiency of the departmental assessment process by reducing the need to apply resources to the assessment of ineligible or poor quality applications. Accordingly, in light of the importance to the Program objectives of timely application assessment and approval processes, and the evidence from the initial application round that the existing approach of not publishing any assessment criteria was also likely to result in a significantly over-subscribed application round, there would have been benefits in the department canvassing with its Minister the merits of developing and publishing in the Program Guidelines assessment criteria. This was not done.

62. In addition, the approach taken to the risk assessment of individual applications was changed through:

• greater use of consultants to contribute to the conduct of risk assessments; and
• rather than complete a risk assessment of all 484 applications that were received (as had been suggested by the published Program Guidelines), the shortlisting criteria were used to identify a sub-set of 202 applications³¹ for which a risk assessment was conducted. This was viewed by the department as a necessary truncation of the originally envisaged process so as to meet the desired assessment timeframe.

63. Criteria for the shortlisting of applications for risk assessment were approved on 9 February 2009 (prior to the re-opening of applications on 13 February 2009) and 19 March 2009 (after the re-opened round had closed to applications on 6 March 2009). In neither case were the criteria included in published Program Guidelines or guidance.

64. The risk assessments considered and rated risks in five categories, namely: Corporate and Personnel; Management of Grant Funds; Project Delivery; Project Sustainability; and the Proponent's Financial Position. The outcome of risk assessments conducted on the 202 shortlisted projects was that seven were identified as non-compliant, with a further seven not recommended based on the assessment of risk. The department had advised its Minister that there were risks associated with reducing the time available to undertake the risk assessments, including a lack of rigour and inadequate scrutiny of applications.

Project delivery risks

65. The identification and management of project delivery risks is particularly important in the context of economic stimulus spending programs. This is because delays in the commencement and/or progression of projects approved for funding compromise the objective of providing timely stimulus to the economy.

66. The project delivery criterion was the most significant in terms of the number of risks identified and based on the risk ratings given to projects. For example, 166 projects were rated with a project delivery risk of Moderate or higher prior to receiving treatment. This compares to 126 projects with similar levels of risk under project sustainability and 45 projects under the proponent's financial position criteria. Against this background, project delivery risk was analysed from a range of perspectives, including whether the necessary project approvals and permits had been sought and obtained, project planning and management risks and cost risks.

Risk treatment

67. The department's documented procedure was that any application with one or more High or Severe risks identified required a risk treatment or treatments to be identified. Against this background, there were 23 projects not approved for funding that had been assessed as having Low or Moderate project deliverability and project sustainability risks. By way of comparison, there were 50 projects approved for funding that had been assessed as representing High or Severe project deliverability and/or project sustainability risks in the absence of any risk treatment. These circumstances give added emphasis to risk treatments being effective.

68. For those 188 shortlisted projects where the risk assessment had not identified the application as either non-compliant or too high a risk for funding, the proposed risk treatments were identified by the department in risk assessment summaries provided to the Minister. With one exception, the department concluded that the existing terms of the proforma Funding Agreement would effectively manage the identified risks.

69. However, it is not feasible for all project risks to be managed in a cost-effective manner through Funding Agreements. In particular, it is difficult, once funding has been approved for a project, to treat risks that relate to incomplete information having been available to inform decisions about which projects should be approved for funding. In this respect, for a number of approved projects, the Funding Agreement included a requirement for applicants to provide the missing key information before they would receive payments subsequent to the initial payment that had been made upon signing of the Funding Agreement. In a number of instances, the subsequent provision of this information actually raised significant issues concerning the delivery of the funded works including, for some projects, requiring the project scope to be reduced.

70. In this context, attempting to manage information gaps through the Funding Agreement undermined the strong approach to incomplete applications that had been taken in the published Program Guidelines and application form. It was also inequitable relative to those councils that had submitted a complete application. In addition, approving funding for incomplete applications increased the risk of the Strategic Projects component not delivering timely economic stimulus. In this respect, a total of 90 applications where the risk assessment had identified that one or more key items of information were missing were approved (an approval rate of 65 per cent) for a total of $361.5 million in Program funding, but the majority of these projects have been delayed in implementation.

Selection of projects to be funded (Chapter 5)

71. It has been common for grant programs to operate through competitive funding rounds which open and close to applications on nominated dates, with eligible applications received by the closing date being assessed against the selection criteria set down for the program and then for competing, eligible applications to be ranked (or prioritised) in terms of the available funding.³² A merit-based, competitive funding round approach offers advantages such as:

• certainty of timeframes for applicants (which is important for project planning and viability) and agencies (which is important for effective resource management); and
• a transparent and reliable method of selecting successful applicants through a process of ranking competing eligible applications based on their relative performance against the published assessment criteria.

72. In terms of the design of the Strategic Projects component, there was no documented consideration given to developing appropriate assessment criteria either in November 2008 prior to the initial $50 million component being announced, or in January/February 2009 when consideration was given to increasing Strategic Projects component funding (by which time it was clear that the application round would be over-subscribed).

73. Prioritisation criteria were established on 28 January 2009, with funding to be focused on those projects that included partner funding and would be delivered quickly. In this latter respect, priority was to be given in the following order to projects:

• that can commence and be completed in 2009;
• that can commence in 2009 and be completed by mid-2010; and
• that can commence in 2009 and be completed by end 2010.

74. These criteria were consistent with those established for other economic stimulus programs including in the Nation Building and Jobs Plan.³³ The timeframes set by the Government on 28 January 2009 as being a focus for projects under the Strategic Projects component of the RLCIP were also consistent with Treasury modelling of the optimal timeframe for medium term stimulus spending. However, applications to the re-opened application round were not assessed against the 28 January 2009 prioritisation criteria.

75. Instead, each of the 484 applications received were considered against shortlisting criteria established on 19 March 2009 in order to identify which applications would be the subject of a departmental risk assessment. In total, 202 applications were shortlisted for risk assessment, with external accounting firms playing a key role in the conduct of these assessments. The risk assessment results were provided to the Minister, with the department categorising 188 of the shortlisted projects as ‘recommended subject to available funding'. This comprised applications assessed as representing a range of risks ranging from low to severe.³⁴ The remaining 14 projects were not considered by the department as meriting consideration for funding either because the risks were seen as unacceptable or the risk assessment had identified the application as being either non-compliant or ineligible.

76. The purpose of the risk assessment process undertaken in respect to shortlisted applications was to inform the Minister's consideration as to which projects should be further considered for possible approval of funding. It was not intended to prioritise or rank competing, eligible applications. This was evident from the results of the risk assessment, with 188 projects seeking $808.9 million in Program funding being assessed as eligible, compliant and of a sufficiently low risk such that the department recommended that they could be considered for funding. Clearly, in the context of total Program funding of $550 million being available, a further assessment stage would be necessary in order to identify which of the 188 projects should be approved for funding.

77. However, it was not until 21 and 22 April 2009, at the same time as the Minister put forward to Cabinet those projects that were recommended for funding approval, that assessment criteria were documented. In this respect, on 21 April 2009 the Minister's Office advised the department that the following criteria had been applied:

• Geographic distribution of projects;
• Likely economic stimulus and community impact, drawing on population sizes, capacity within local government authorities, percentage of partnership funding, and nature of projects; and
• Whether alternative funding sources are available or have been provided.

78. At this time, the Minister's Office also provided the department with a list of 137 projects that the Minister intended to recommend to Cabinet for funding approval.

79. The following day, the Minister signed a letter that summarised his recommendations as to which projects should be approved by Cabinet for funding. The letter had been prepared by the department on the basis of the previous day's email from the Minister's Office and, accordingly, referred to the same three criteria. Attached to the letter was a list of 136 projects that the Minister had recommended that Cabinet approve for funding. The Minister also recommended partial funding of a 137th project.³⁵ These 137 projects were identical in most respects to the list provided to the department one day earlier except that three projects had been removed, three different projects were now recommended for approval and the amount of funding for another project was reduced.³⁶

80. On 22 April 2009, Cabinet approved a total of $549.67 million in funding for the 137 projects that had been recommended by the Minister in his letter of 22 April 2009.

Documentation of the application of the assessment criteria

81. The Minister's correspondence of 22 April 2009, outlining the three assessment criteria that had been taken into account, documented the basis of the recommendations made to Cabinet about which applications merited being approved for funding. In particular, the Minister had asked Cabinet to endorse projects in the context of three factors namely: the geographic distribution of projects; the likely economic stimulus and community impact; and whether alternative funding sources were available or had been provided.

82. However, just as specifying the assessment criteria in Program Guidelines does not obviate the need for a record as to how the criteria were applied to each competing application, the Minister's correspondence alone did not provide a sufficient record of the assessments that had been undertaken and, in particular, the basis for why it was decided that certain applications were more worthy of being approved for funding compared with other applications. The spreadsheets summarising the applications received that were provided to the Minister by the department one week earlier also do not fill this gap as they did not include any rating of the various applications against the criteria documented by the Minister, or include an overall rating or ranking of each competing application.

83. While not affecting a Minister's right to decide on the allocation of grants, since 2007, the financial framework applying to grants decision-making has been progressively enhanced. In this respect, ANAO's audit of the Regional Partnerships Program highlighted that the provisions of the then-existing framework did not require approvers of proposals to spend public money, including Ministers, to record the basis on which they were satisfied that a proposal represents efficient and effective use of public money. In some circumstances this had left uncertainty as to the basis of decisions to provide a grant.F In the interests of transparency and accountability, ANAO proposed that consideration be given to changes to the then-existing financial framework governing the expenditure of public money so as to require approvers of spending proposals to record the basis for their decision where this is not apparent from the existing documentation.37 This recommendation was endorsed by both:

• the House Standing Committee, which recommended that changes to the financial framework be expedited so that the changes would be in place for the commencement of the new regional funding program;³⁸ and
• the Strategic Review of Grants, which commented that:

In view of the clear evidence of irregularities in past decision-making on discretionary grants, and given public concerns in this respect, the Review considers that that there is a strong case to mandate a new requirement on the approvers of grant program spending under FMA Regulation 9 to document the basis, as well as the terms, of their approvals.³⁹

84. Against this background, since 14 December 2007, Ministers have been required to obtain agency advice on the merits of each proposed grant before making any decision about whether to approve the grant.⁴⁰ The approach adopted of the department not being involved in the assessment of applications against the assessment criteria also does not sit comfortably with this requirement.⁴¹ Specifically, providing Ministers with advice on the merits of individual grants necessarily involves the department being involved in the application of assessment criteria (rather than, as in this case, performing a more limited role relating only to the assessment of risk), so as to provide advice as to whether each application should, or should not, be approved for funding. Further, in practice, advice on the merits of a grant application includes a clear agency recommendation to the Minister concerning whether or not funding should be approved under the program guidelines, having regard to the specified eligibility, assessment and any other relevant criteria.

Distribution and announcement of funding (Chapter 6)

85. In April 2009, prior to Cabinet being provided with recommendations as to which projects should be approved for funding, analysis of the proposed funding distribution was undertaken on a geographic and electorate basis. In addition to providing what was considered to be a reasonable geographical spread of approved funding, the proportion of total funding awarded on an electorate basis was consistent with the proportion of seats held in the House of Representatives. After adjusting for some late changes to the list of recommended projects (see paragraph 79), ANAO analysis in respect to the projects actually approved for funding was that:

• the ALP held 55 per cent of electorates, with 57 per cent of funding being awarded to projects located in an ALP held electorate;
• the Coalition parties held 43 per cent of electorates, with 37 per cent of funding being awarded to projects located in an electorate held by the Coalition. In addition, three of the four largest grants were made to projects located in Liberal Party held electorates (the third largest grant was made in respect to a project located in an Independent held electorate); and
• Independent members held 2 per cent of electorates, with 6 per cent of funding being awarded to projects located in an electorate held by an Independent member.

86. The published Program Guidelines outlined that all councils were eligible to apply for funding towards the cost of a large strategic project and that funding would be allocated on a nationally competitive basis. In this light, and given the discretionary nature of Ministerial approvals42 under the Strategic Projects component of the RLCIP, it is also relevant to consider the distribution of approved funding across party electorates as well as the extent to which approved projects correlate with the pattern of applications. In these respects, the funding available under the Strategic Projects component of the RLCIP was:

• distributed in a way that meant projects located in electorates held by the ALP and Independent Members were more successful at being awarded funding than those located in electorates held by the Coalition parties when considered in terms of political party representation in the House of Representatives as well as the types of councils within electorates;
• directed towards ALP held electorates at a rate that was disproportionate to the pattern of applications. More specifically:
  • whilst the majority of applications received related to projects located in a Coalition held electorate (55 per cent of all applications), the significant majority (some 82 per cent) of these were not approved for funding. As a result, projects in a Coalition held electorate comprised 36 per cent of approved applications, with an approval rate of 18.4 per cent; whereas
  • whilst 40.3 per cent of all applications related to a project in an ALP held electorate, just under 60 per cent of approved projects were in an ALP held electorate. The approval rate for these applications was 42.1 per cent, which was more than twice that of projects located in a Coalition held electorate.

87. The different distribution outcomes that arise in terms of the amount of funding and the number of applications approved for funding reflect a number of factors:

• the four largest grants were awarded to projects in electorates not held by the ALP. In aggregate, these four projects (3 per cent of the total number of projects approved) were awarded 15 per cent of the available Program funding;
• there were significantly more applications received in respect to projects located in a Coalition held electorate (55 per cent of all applications) than were received for projects located in an ALP held electorate (40 per cent of all applications); and
• a significant proportion (72 per cent) of applications in respect to projects located in a Coalition held electorate were not shortlisted for the conduct of departmental risk assessments but the majority (52 per cent) of applications in respect to projects located in an ALP held electorate met the shortlisting criteria.⁴³ There was no evidence that the shortlisting criteria were intended to benefit electorates held by one party compared to another.

88. The awarding of funding to projects also disproportionately favoured ALP held seats when considered in terms of the extent to which the various applications indicated they would be able to undertake construction work in the desired economic stimulus timeframe of 18 months. Specifically, of the 346 projects that the application had indicated would be capable of being undertaken within the desired economic stimulus timeframe, 145 (42 per cent) were located in ALP held electorates. Of those, 60 were approved for funding, representing a success rate of 41 per cent. By way of comparison, of the 346 projects the application had indicated would be capable of being undertaken within the desired economic stimulus timeframe:

• 186 (54 per cent) were located in Coalition held electorates. Of those, 28 were approved for funding, representing a success rate of 15 per cent; and
• 15 (4 per cent) were located in electorates held by Independent Members. Of those, four were approved, representing a success rate of 27 per cent.

89. In July 2010, the Minister indicated to ANAO that he had a different perspective in respect to the distribution of funding. In particular, the Minister informed ANAO that he had considered that the distribution of applications was skewed as it reflected wide variations in council numbers and sizes across the country. By way of comparison, the Minister viewed the final allocation of funding by State and Territory as being broadly representative of the populations of those jurisdictions.⁴⁴

Program outcomes (Chapter 7)

90. One of the most important measures for the various economic stimulus programs are their effect on employment. At the Commonwealth level, Treasury has been assigned responsibility for monitoring the overall economic effect of the various measures, including the total number of jobs supported.⁴⁵

91. The Strategic Projects component of the RLCIP was one element of the medium term stimulatory measures announced by the Government in late 2008 and early 2009. The criteria adopted by the Government for the design of the stimulus packages was that they be timely, targeted and temporary.⁴⁶ The specific objectives announced for the Strategic Projects component of the RLCIP were to create local jobs, stimulate local economies in the short term and medium term and (in the long term) provide long lasting benefits for communities. In July 2010, the Minister commented to ANAO that the 137 approved projects under the Strategic Projects component of the RLCIP had stimulated local economies and provided confidence into local governments representing over 12 million people and, collectively, leveraged in excess of $1.5 billion in partnership funding thereby resulting in this amount flowing into local communities

92. In this context, some important steps were taken to expedite implementation of the Program so as to optimise its economic stimulus impact, including its focus on job creation. These included: a relative short timeframe being allowed for councils to develop applications; the Program Guidelines required applications to be complete (in order to minimise delays in projects commencing, for example, due to the need to complete designs, costings or obtain relevant approvals); the time available to the department to undertake risk assessments of applications was truncated; and there was timely Cabinet consideration as to which applications should be approved for funding. However, there were also aspects of the design and implementation of the Program that detracted from the objectives of timely creation of local jobs and stimulation of local economies. Specifically:

• at an early point in the assessment of applications, a shortlisting criterion was established (but not published) to give priority to projects likely to commence and complete before the end of 2010. This criterion was not applied and was later replaced by other shortlising criteria that did not relate to the timeliness of construction activity commencing and being completed; and
• no assessment criteria were published in the Program Guidelines—whilst providing for a high degree of flexibility in the assessment of applications competing for the available funding, this approach contributed to the Program being significantly over-subscribed. By way of comparison, publishing well-developed eligibility and assessment criteria has been found to be more likely to lead to a positive result in terms of achieving program objectives, promoting public confidence in grants administration and being efficient for agencies to administer.

93. The shortcomings in the application process were compounded by the Funding Agreements executed with successful applicants not incorporating any provisions outlining intended outcomes for the relevant project (including employment outcomes), or how these would be measured and reported to the department.⁴⁷ This was the case even for those projects for which the application had stated that a certain employment outcome would result from the relevant project, and that expected outcome had been announced as part of the funding announcement.

94. While there will generally be caveats with respect to the numbers of jobs created from one source of funding, information on the number of jobs created or preserved would have been beneficial to inform the progressive assessment of program outcomes, particularly in providing an early indication of the stimulus effect on employment. It would also have been beneficial for any overall evaluation of the Strategic Projects component noting that robust evaluation of overall program outcomes is to be the third phase of the overall economic stimulus programs.⁴⁸

Program expenditure

95. In the context of ANAO's audit of the Primary Schools for the 21st Century element of the Building the Education Revolution Program (BER P21), the Treasury advised ANAO that where infrastructure and public capital works projects can be implemented quickly, they are likely to boost aggregate demand in the short term and add to productive capacity over the longer term.⁴⁹ Treasury's forecasts for economic activity under the Nation Building and Jobs Plan (which included the Strategic Projects component of the RLCIP) largely followed the budgeted expenditure under each program, with Treasury's modelling assuming that the stimulus programs would be implemented as announced by the Government with minimal lags between payments being made and economic activity taking place.

96. In this context, the Strategic Projects component was budgeted to have $300 million paid out in 2008–09, with the remaining $250 million to be paid out in 2009–10. Substantial up front payments (nearly $239 million) were made in June and July 2009 upon the signing of Funding Agreements, with the remaining payments to be made as projects progressed. In this respect, rather than tailoring the payment arrangements to project cashflow needs as outlined in the respective applications, a formula approach was adopted depending on the size of the grant (see Table S 2).

Table S 2 Instalment payment arrangements for approved grants

Source: ANAO analysis of DITRDLG data.

97. Achievement of the Program timetable, which involved Funding Agreements being signed in June 2009 and a requirement that construction commence within six months of Funding Agreement execution, required funding to have been focused on projects that, based upon the assessment of the application submitted, would demonstrably commence sometime between July and December 2009. Further in this respect, the underlying objective of achieving timely, targeted and temporary economic stimulus would have been promoted by having projects start as early in this six month period as possible.

98. The department took a number of steps in its administrative arrangements to support timely spending of the Program funds. In particular:

• consistent with the guidance in the Program Guidelines that to be eligible for funding, the project must be ready to commence construction within six months of signing the Funding Agreement, each Funding Agreement required that a continuous program of on-site construction commence within six months of each Agreement being signed;
• for each approved project, the Funding Agreement specified that the last project payment was scheduled to be made on or before 30 June 2010, although for many projects the funded activity was not expected to be completed for some considerable time after 30 June 2010;⁵⁰ and
• the department has actively monitored the reporting of commencement of construction work and has also actively monitored whether projects are proceeding in accordance with their respective Funding Agreements together with the extent to which Funding Agreement variations have been approved (and the impact of these on project completion dates) and whether progress reports were being submitted and progress payments claimed.

99. However, these administrative arrangements have been unable to compensate for the shortcomings in the approach taken to assessing applications and the selection of which projects should be approved for funding. In particular:

• for 90 of the approved projects, the departmental risk assessment had identified that one or more key items of information had not been included with the application, which the department had earlier recognised as increasing the risk that projects would not commence within six months;⁵¹
• one-third (45) of the approved projects had included in their application a project delivery timeframe that indicated the project would not be completed in the desired economic stimulus timeframe;⁵² and
• 42 of the approved projects had been assessed as having a Severe or High project delivery risk rating.

100. On the basis of the reporting to the department by councils, 75 per cent of the 137 projects approved for funding in April 2009 had commenced construction within six months of the Funding Agreement being signed. However, based on ANAO site inspections at a sample of projects, it has been relatively common for councils to report that construction had commenced when it had not. A more reliable indicator of construction commencement and progress in this context has been the reported achievement of project milestones and whether the level of expenditure reported on the funded projects was sufficient for the second milestone payment to be made on time. In this respect, only 10 of the 137 approved projects had proceeded sufficiently to receive their second milestone payment within one month of it being due under the terms of the relevant Funding Agreement.

101. The results of delays in projects commencing and progressing are clearly illustrated in delays in program expenditure and in councils' reporting of their use of the funds paid to them. In this respect, had projects been proceeding in accordance with the Funding Agreement milestones, milestone payments of $83.15 million would have been made by 31 December 2009 (in addition to the upfront payments of $238.99 million). However, actual milestone payments made to that date totalled only $8.45 million, some 90 per cent lower than planned.

102. Until recently, the department had adopted the sound practice of only making further payments when project milestones had been made and payments previously made had been fully spent and/or committed. However, only making further payments when councils had spent or committed the upfront payment contributed to overall Program expenditure being slower and lower than had been budgeted. At the time ANAO audit fieldwork was concluded, the department was making arrangements to increase Program spending by making further payments before 30 June 2010 irrespective of whether councils had yet spent or committed the funds already advanced to them. Nevertheless, $112 million was rephased from 2009–10 to 2010–11.

Summary of agency response

103. Summary comments received from the department on the proposed report are reproduced below, with the full response and ANAO comments on certain aspects of the response included in Appendix 1.

The department agrees to all five recommendations, noting that each, in effect, reflects existing guidance now published in the Commonwealth Grant Guidelines.

The department is concerned that the report does not present a balanced perspective on the program. In particular the draft report does not examine or recognise the community benefits arising from the investment in community facilities, nor any acknowledgement of the success of the program in meeting its objective to build local community infrastructure.

The program was implemented in the context of the global economic crisis and was part of the Government's response to the emerging crisis. The Government dealt with an unfolding global financial and economic crisis which required senior Ministers to re-consider and adjust policy and program settings as the impacts of the crisis became clearer. This included considering projects which would not only provide an immediate economic stimulus but also provide community infrastructure investment for the recovery post 2010 11.

The department also considers that the report's analysis on the allocation of funding is not balanced. Too great an emphasis is placed on the relationship between the number of applications received and the number of projects funded on an electoral and jurisdictional basis, which does not take into account clear Government decisions to give preference to larger, more capable councils serving larger populations. The final selection of projects represents an equitable distribution across jurisdictions and electorates, and provides funding to 137 councils which cover more than 12 million Australians.

Footnotes

¹ ANAO Audit Report No. 14 2007–08, Performance Audit of the Regional Partnerships Program,
Canberra, 15 November 2007.

² House of Representatives Standing Committee on Infrastructure, Transport, Regional Development and
Local Government, Funding regional and local community infrastructure: Principles for the development
of a regional and local community infrastructure funding program, Final Report, June 2009, p. 1.

³ In June 2009, the then Prime Minister announced additional funding of $120 million for the Strategic
Projects component of the RLCIP, to be made available through a second competitive process.
Subsequently, on 9 October 2009, the Minister for Infrastructure, Transport, Regional Development and
Local Government announced that applications for round two of the Strategic Projects component were
open and were due by 15 January 2010.

⁴ The Hon Anthony Albanese MP, Minister for Infrastructure, Transport, Regional Development and Local
Government, Guidelines Released for $300 million Regional and Local Community Infrastructure
Program, Media Release, AA180/2008, 21 November 2008.

⁵ The Hon Anthony Albanese MP, Minister for Infrastructure, Transport, Regional Development and Local
Government, Rudd Government Secures Extra $500 Million for Local Community Infrastructure—No
Thanks to Liberal and National Parties, Media Release, AA28/2009, 13 February 2009.

⁶ A total of 11 councils affected by bushfires in Victoria and floods in north Queensland and northern NSW
were given an extension of time to 20 March 2009 to lodge new or revised applications. The non-disaster
affected councils had been advised that steps were being taken to assist the disaster-affected councils.

⁷ The total approved funding was subsequently reduced by $117 000 to $549.555 million, following the
replacement of one of the approved projects with a different project, based on advice from the Minister
for Infrastructure, Transport, Regional Development and Local Government to the then Prime Minister
that there had been an error in the list of recommended projects provided to Cabinet.

⁸ Mr Peter Grant PSM, Strategic Review of the Administration of Australian Government Grant Programs, 31 July 2008, p. 56.

⁹ ANAO Audit Report No. 14 2007–08, Performance Audit of the Regional Partnerships Program, Volume 1—Summary and Recommendations, Canberra, 15 November 2007, p. 21.

¹⁰ House of Representatives Standing Committee on Infrastructure, Transport, Regional Development and Local Government, Proposals for the new Regional and Local Community Infrastructure Program, Interim Report, November 2008, Recommendation 22, p. 56.

¹¹ See further at paragraphs 4.8 to 4.10 in the report.

¹² The purpose of the risk assessment process undertaken in respect to shortlisted applications was to inform the Minister's consideration as to which projects should be further considered for possible approval of funding. The risk assessment process was not intended to prioritise or rank competing, eligible applications. This was evident from the results of the risk assessment, with 188 projects seeking $808.9 million in Program funding being assessed as eligible, compliant and of a sufficiently low risk such that the department recommended that they could be considered for funding. The department did not rank or prioritise these 188 applications. Clearly, in the context of total Program funding of $550 million being available, a further assessment stage would be necessary in order to identify which of the 188 projects should be approved for funding.

¹³ In another recent audit report, the department accepted that meeting the obligation to provide advice on the merits of a proposed grant includes a clear agency recommendation to the Minister concerning whether or not funding should be approved under the relevant program's guidelines. Source: ANAO Audit Report No. 30 2009–10, Management of the Strategic Regional Program/Off-Network Program, Canberra, 22 April 2010, p. 80.

¹⁴ The Committee had released an Interim Report with the stated intention that its recommendations be used to help inform government decision-making as the Government considered the manner in which it would distribute funds for regional infrastructure projects during the global financial crisis. Source: House of Representatives Standing Committee on Infrastructure, Transport, Regional Development and Local Government, Funding regional and local community infrastructure: Principles for the development of a regional and local community infrastructure funding program, Final Report, June 2009, p. 1.

¹⁵ Three projects were removed, three different projects were included and the amount of funding for another project was reduced. See further at paragraph 6.4 in the report.

¹⁶The approval rate for projects located in an ALP held seat was 42.1 per cent compared with 18.4 per cent for projects located in a Coalition held electorate.

¹⁷ See further at paragraph 87.

¹⁸ See further at paragraphs 27 and 28.

¹⁹ Department of Finance and Deregulation, Commonwealth Grant Guidelines—Policies and Principles for Grants Administration, Financial Management Guidance No. 23, July 2009, p. 29.

²⁰ Of the 137 projects approved for funding, 131 were selected from the list of applications shortlisted by the department and categorised as ‘recommended subject to available funding', one had been shortlisted but the department considered it represented too high a risk for funding, another had also been shortlisted but the risk assessment had identified it as being ineligible and the remaining four had not been shortlisted but a risk assessment was subsequently undertaken at the request of the Minister. See further at paragraph 5.37 in the report.

²¹ The Strategic Review of Grants commissioned by the Government concluded that, given the fundamental importance of the approval process in relation to the expenditure of public funds, and for accountability purposes, it is critical that agencies have a clear understanding and record of Ministerial decisions, and their reasons. Consistent with an earlier ANAO recommendation, the review recommended that decision-makers be required to document the basis on which the approver was satisfied that the proposed expenditure represented an efficient and effective use of public money, and was in accordance with the relevant policies of the Commonwealth. Source: Strategic Review of the Administration of Australian Government Grant Programs, op. cit., pp. 9 and 67–68.

²² In this respect, the CGGs stipulate that the policy requirements that must be complied with in administering a grant program include the guidelines applying to a granting activity. Source: Department of Finance and Deregulation, Commonwealth Grant Guidelines—Policies and Principles for Grants Administration, Financial Management Guidance No. 23, July 2009, p. 9.

²³ ANAO Audit Report No. 33, 2009–10, Building the Education Revolution—Primary Schools for the 21st Century, Canberra, 5 May 2010, p. 14.

²⁴ For example, had projects been proceeding in accordance with the Funding Agreement milestones, milestone payments of $83 million would have been made by 31 December 2009. However, actual milestone payments made to that date totalled less than $9 million, some 90 per cent lower than planned.

²⁵ By way of comparison, ANAO's audit of the BER P21 Program had noted that, as at December 2009, expenditure of program funds had fallen substantially short of what would be expected if anticipated payment milestones had been met by schools but for that Program the expectation was that construction expenditure would accelerate rapidly from the first quarter of 2010 onwards. Source: ANAO Audit Report No. 33, 2009–10, Building the Education Revolution—Primary Schools for the 21st Century, Canberra, 5 May 2010, paragraph 7.12.

²⁶ Infrastructure, Transport, Regional Development and Local Government Portfolio, Portfolio Budget Statements 2010–11, Budget Related Paper No. 1.14, May 2010, p. 87.

²⁷ See paragraph 10.

²⁸ The approved project was Etheridge Shire Council's application for the full $18 million estimated cost of replacing the Einasleigh River Bridge on Gulf Development Road. The project was for a roads project although the published Guidelines had identified roads projects as not being eligible for funding under the Program. In making his recommendations about which projects should be approved for funding, the Minister had outlined reasons for waiving the project eligibility criteria in respect to this application.

²⁹ The department advised ANAO in April 2010 that those eligibility checklists that had been completed were placed on the file for the relevant application. However, whilst included in departmental records, the completed checklists were not taken into account in the risk assessment process (for example, they were not provided to the Independent Viability Assessment providers—see paragraph 60, who were responsible for assessing project deliverability and sustainability risks).

³⁰ See footnote 28.

³¹ Shortly before funding recommendations were finalised, the Minister's Office instructed the department that, on the basis of community support for the project, five other projects were to be subject to a risk assessment. Four of the projects had not met the shortlisting criteria for risk assessment established on 19 March 2009 and the fifth project had already been subject to a risk assessment, with the department concluding it was ineligible. The Minister's Office advised the department that further risk assessments were being sought so that the Minister could decide whether to include these on the list of projects he would be recommending that Cabinet approve for funding. Each of the five projects was subsequently recommended by the Minister to Cabinet for approval, and was approved for funding.

³² House of Representatives Standing Committee on Infrastructure, Transport, Regional Development and Local Government, Proposals for the new Regional and Local Community Infrastructure Program, Interim Report, November 2008, p. 48 and Funding regional and local community infrastructure: Principles for the development of a regional and local community infrastructure funding program, Final Report, June 2009, p. 17.

³³ See ANAO Audit Report No. 33, 2009–10, Building the Education Revolution—Primary Schools for the 21st Century, Canberra, 5 May 2010, paragraph 3.28.

³⁴ See Table 4.3 in the report in respect to the assessment of project delivery and project sustainability risks.

³⁵ Funding towards the renovation of Brisbane City Hall application submitted by Brisbane City Council.

³⁶ See further at paragraphs 6.4 and 6.5 in the report.

³⁷ ANAO Audit Report No.14 2007–08, Volume 2—Main Report, op. cit., pp 82–94 and Recommendation No. 2.

³⁸ House of Representatives Standing Committee on Infrastructure, Transport, Regional Development and Local Government, Proposals for the new Regional and Local Community Infrastructure Program, Interim Report, November 2008, p. 59.

³⁹ Strategic Review of the Administration of Australian Government Grant Programs, op. cit., p. 9.

⁴⁰ Initially this requirement was introduced through Finance Minister's Instructions of 14 December 2007, was incorporated into one of the recommendations of the Strategic Review of Grants which was accepted by the Government in December 2008 and so was incorporated into the revised Instructions issued on 16 January 2009, and is now incorporated into the CGGs.

⁴¹ In terms of this requirement, the Strategic Review commented that: ‘This is a prudent control, designed to ensure that where Ministers elect to assume a decision-making role in relation to the award of grants, they are well-informed of the department's assessment of the merits of grant applications and suitably briefed on any other relevant considerations.' Source: Strategic Review of the Administration of Australian Government Grant Programs, op. cit., pp. 7 and 62.

⁴² Those projects approved for funding were not restricted solely to those that had been shortlisted for risk assessment. As it eventuated, four projects not shortlisted were approved for funding. In respect to these four projects, a risk assessment was undertaken at the Minister's request prior to him recommending that they be approved. In respect to a further two approved projects, the risk assessment concluded that funding should not be approved, but it was (in one instance, the identified concern was that the project was ineligible, in the other instance the department considered the project represented too high a risk).

⁴³ Excluding those projects that were not shortlisted: 79 of 102 shortlisted projects located in an ALP held electorate were approved for funding (an approval rate of 78 per cent); 47 of 75 shortlisted projects located in a Coalition held electorate were approved for funding (an approval rate of 63 per cent); and five of 11 shortlisted projects located in an electorate held by an Independent member were approved for funding (an approval rate of 46 per cent).

⁴⁴ See paragraph 6.8 and Table 6.1, together with paragraph 4.3 and Table 4.1 in the report.

⁴⁵ ANAO Audit Report No. 33, 2009–10, op. cit., pp. 23, 25, 41, 127 and 137.

⁴⁶ House of Representatives Standing Committee on Infrastructure, Transport, Regional Development and Local Government, The Global Financial Crisis and regional Australia¸ November 2009, p. 55.

⁴⁷ By way of comparison, the standard Funding Agreement adopted by DITRDLG to administer the $40 million National Bike Path Projects component of the Jobs Fund (another economic stimulus grant program) requires that each progress report provided by funding recipients, as well as the final report for each project: estimate the number of Short Term Jobs and Long Term Jobs that are either created or maintained (or both) indirectly and describe how the estimate was calculated; and provide documentary evidence supporting the specified number of Short Term Jobs and Long Term Jobs which are either created or are maintained (or both).

⁴⁸ Commonwealth of Australia, 2010, Commonwealth Coordinator-General's Progress Report to 31 December 2009, Canberra, p. 18.

⁴⁹ ANAO Audit Report No. 33, 2009–10, Building the Education Revolution—Primary Schools for the 21st Century, Canberra, 5 May 2010, p. 14.

⁵⁰ Under the terms of the Funding Agreements signed in June and July 2009, a total of 41 projects involving aggregate funding of $170.4 million were to complete the activity being funded by the Commonwealth on or before 30 June 2010, with a further 17 projects involving funding of $48.4 million due to have the funded activity completed in the following three months (to 30 September 2009). In respect to the remaining 79 projects (58 per cent) involving aggregate funding of $330.7 million were due to have the funded activity completed between October 2010 and July 2012.

⁵¹ This was particularly the case, for example, where documentation had been excluded from the application because it did not exist (rather than due to an oversight)—for example, where projects did not have in place the necessary approvals or designs had not been completed.

⁵² These projects were approved for a total of $235.3 million in Program funding ahead of 254 other applications (seeking a total of $925.9 million in Program funding) which had each indicated that the relevant project would be delivered in the desired economic stimulus timeframe (34 of these projects—seeking $138.8 million in Program funding—had met the Government's shortlisting criteria for the conduct of a risk assessment with the department's risk assessment supporting them being considered for funding approval).