7. Administering approved grants

The approach taken to administering approved grants is instrumental to achieving the expected community benefits and value for money on which the approval was based, and in ensuring there is appropriate accountability to the Parliament and the community for the outcomes achieved through the expenditure of the public money involved.

Key Points

The expectation is that grants will have been approved on the basis that they will contribute to achieving the relevant program’s stated objectives. Accordingly, it is important that approved grants are administered in a manner that will promote cost-effective and accountable achievement of those objectives. Key considerations include that:

• agencies should seek to engage and manage risks to the achievement of program objectives, including risks relating to individual grants. Some risks can be managed through the funding agreement, but others are best managed as an element of determining which projects should be approved for funding;
• the funding agreement, which must be fully consistent with the terms of the decision-maker’s approval, provides the mechanism for identifying the outcomes expected to result from an approved grant and the governance arrangements that will apply, including for the management of relevant risks;
• effective planning of the strategy to be used in paying approved funds to grant recipients helps to ensure that relevant budgetary factors are taken into account and that there is appropriate observance of the obligation to make proper use of the public money involved, including appropriate management of the risk of fraud or non-completion of the project;
• an on-going monitoring regime to ensure funding recipients are meeting agreed milestones and other key requirements of their funding agreements is integral to the success of a grant program. Early identification of projects requiring remedial action and/or increased oversight will assist in minimising the consequences for program administration; and
• an essential component of any grant program is the establishment of an effective performance framework that enables the administering agency to reliably establish the outcomes achieved through individual grants, as well as overall program outcomes.

7.1 Introduction

In administering approved grants, agencies must comply with the overarching obligation to make efficient, effective and ethical use of Commonwealth resources that is not inconsistent with the policies of the Commonwealth.

A range of guidance on establishing and administering funding agreements and an effective performance information framework for grant programs is set out in the CGGs and associated guidance from Finance, as well as in guidance published by the Australian Government Solicitor.[102]

Key points of good practice in administering approved grants are summarised in this chapter.

7.2 Risk management

Risk management is an integral part of effective public administration, including for grant programs, and plays an important part in securing value for money for the Commonwealth. From the initial program planning and design stage through to the final evaluation of a completed program, structured risk management will promote more effective and transparent decision-making and efficient resource allocation.

The importance of appropriate risk analysis to informing sound grants administration is reflected in the seven key principles established in the CGGs, which are focused on achieving the outcomes required by government in a manner that maximises transparency, accountability and cost-effectiveness from the perspective of both the community and the administering agency. Guidance on the application of risk management in grants administration is set out in the CGGs, including in relation to managing the potential for risks to:

• the achievement of program objectives and value for money, including through the selection of inappropriate grant recipients or the failure of approved projects to achieve the expected outcomes;
• public confidence in the equity, probity and accessibility of the program, including the capacity for Ministers and agencies to demonstrate that all relevant statutory and policy obligations have been met and that appropriate fraud control and other internal procedures were implemented;
• the efficiency of program administration for both the agency and potential funding recipients; and
• the ability of agencies to clearly identify and evaluate the outcomes actually achieved through the expenditure, both in relation to individual grants and the program as a whole.

7.2.1 Appropriate strategies and controls

Risk management involves the systematic identification, analysis, treatment and allocation of risks, both in relation to the overall design of a grant program and in the assessment and, where relevant, administration of individual grants. There are five strategies that can be adopted for treating risks in the context of a grant program:

• accept the risk and leave it untreated;
• avoid the risk by choosing a different course of action;
• treat the risk, bearing in mind that there is a trade-off between the cost of the treatment and the benefit derived from the level of reduction in the risk achieved;
• transfer the risk to the grant recipient—the appropriateness of this approach needs to be considered in terms of the capability of the recipient to manage the risk. In general, risks should be allocated to the party best equipped to manage them at least cost. In the context of grant programs, relevant considerations include:
  • if transferring risk to grant recipients as an element of program design is likely to adversely affect the extent to which intended funding recipients subscribe to the program, it may be appropriate to re-examine the design and/or re-consider whether a grant program is the most appropriate vehicle for achieving the relevant government objectives[103]; and
  • care needs to be taken in using the transfer of risk to funding recipients as a basis for approving and administering individual grants. For example, a common practice has been for an assessed risk of project funding shortfall to be transferred to the funding recipient through an obligation to accept responsibility for any project cost increases. While this approach may appear to mitigate the risk to the Australian Government, it may not be effective in terms of maximising program outcomes from the grants approved. In particular, approved projects may not be delivered as envisaged where funding recipients are unable to source funding to meet increased costs; and
• retain the risk—some level of residual risk will often be retained following risk reduction measures, where the residual risk is considered acceptable, or because of other reasons that require them to be retained by the public sector organisation.

Managing risk is not the same as avoiding risk. Agencies should seek to engage risk and manage it, taking into account not only the likelihood of risks eventuating, but also their impact. Managing risk in the context of a grant program is also not a 'set-and-forget' function to be undertaken once at the outset of the program. New and/or different risks can be expected to emerge over the life of a program, having regard for changes in the administrative and political environment in which it is being delivered, together with the potential for the risk-profile associated with individual grants to change between initial submission of an application, approval of the grant and finalisation of the grant acquittal process.

Further guidance on the role of risk management and analysis in sound grants administration can be found in Part II of the CGGs, particularly in relation to the key principles of:

• robust planning and design;
• proportionality;
• governance and accountability;
• probity and transparency; and
• value for money.

More detailed guidance on risk management can be found in the Risk Management Standard AS/NZS ISO 31000:2009 Risk management—Principles and guidelines.

7.3 Establishing and managing funding agreements

In order for a payment of Australian Government funding to be subject to the grants policy framework, the recipient must be required to act in accordance with terms or conditions specified in the arrangement. The document setting out the terms and conditions on which a grant is provided is commonly described as a 'funding agreement', but can take a variety of forms.

The CGGs advise that, wherever possible, an enforceable agreement should be established, such as a deed, contract, conditional gift or an exchange of letters.[104] In that context, having regard for the principles of proportionality, collaboration and partnership, and governance and accountability, the CGGs further advise that, unless legislation or policy mandates the form of an agreement, agencies should choose the appropriate form of agreement based on:

• an analysis of the risks;
• the context in which the grant is made (for example, the nature of the recipient, relevant applicable legislation, and relevant policy directions);
• the desired remedy for non-compliance; and
• legal advice, where appropriate.[105]

7.3.1 Funding agreement must comply with the terms of the approval

An important point for agencies to remain cognisant of is that the funding agreement is the means by which the responsible agency gives effect to the decision-maker's approval of a grant under FMA Regulation 9. Accordingly, the terms of the agreement entered into with the funding recipient must be fully consistent with the terms of the approval. This obligation arises under FMA Regulation 13.[106] In the context of a grant program, the key requirements set down under Regulation 13 are that, prior to the funding agreement being entered into:

• the grant must have been approved by the program decision-maker under Regulation 9. Regulation 12 requires that a written record be made by the approver of both the terms of, and basis for, the approval; and
• if the grant relates to expenditure for which there is insufficient appropriation available, the decision-maker must have been authorised in writing to give the approval, either by the Finance Minister or a delegate, before giving the approval.

Accordingly, the project parameters, including project scope, funding contributions and deliverables, described in the funding agreement must reflect the project as described in the proposal submitted to the approver or, where the approver has decided to approve funding for a varied project, as described in the written approval. Further, any conditions imposed on the grant by the decision-maker must be either satisfied prior to a funding agreement being executed or, if appropriate given the nature of the condition specified by the approver, be reflected in the funding agreement and complied with in its administration. In particular, for grants that cannot proceed until conditions specified by the approver have been satisfied, effective program administration will be promoted by ensuring relevant proponents are advised of the timeframe in which they will be expected to satisfy the condition, with timely advice in relation to considering the withdrawal of the grant approval being provided to the decision-maker where compliance is not achieved in that timeframe.

A further matter for agencies to remain alert to in administering funding agreements is whether changes in the grant or project parameters requested by funding recipients in the course of project delivery are of sufficient scope to represent a new spending proposal that requires referral back to the program decision-maker for consideration. Guidance in this regard can be provided through the internal procedures manual developed for the grant program.

7.3.2 Monitoring compliance with terms and conditions

Once the appropriate form of funding agreement for a grant has been determined and executed, it is important for agencies to be careful to ensure that the Commonwealth's rights and obligations under the agreement are appropriately observed and maintained. This will require timely and pro-active monitoring of compliance with the terms of the agreement.

In particular, the Commonwealth's rights under the agreement may be adversely affected by actions taken, or not taken as the case may be, in response to a failure by the funding recipient to satisfy the terms of the agreement. This can arise through verbal or written interchanges with the funding recipient, as well as a failure to exercise a right available under the agreement in a timely manner. Such actions may:

• inadvertently vary the agreement (even though the variation procedures set out in the agreement have not been followed);
• be considered a waiver of the funding recipient's relevant obligation; or
• result in the Commonwealth being prevented (estopped) from taking certain actions due to having given the funding recipient cause to believe it could proceed on the basis that such action would not be taken.

Given that the purpose of entering into enforceable agreements with funding recipients is to protect the Commonwealth's interests and manage risks, the application of sound contract management principles will require that, where a breach occurs, the remedies set out in the agreement are applied unless there is a sound policy basis for not doing so. This is particularly the case where a funding agreement expresses an action to be taken in response to a breach of the agreement in absolute terms (for example, that the Commonwealth 'will' or 'will not' take a particular course in the event of a certain circumstance arising).

If it is considered that following the terms of the funding agreement would produce an undesirable outcome in terms of the program's policy objectives, it is advisable for the merits of formally varying the agreement to provide for an alternative course of action to be explicitly considered and appropriately documented. If approved, the variation process set out in the funding agreement will need to be applied in order to ensure the Commonwealth's rights under the agreement are appropriately protected.

If the funding agreement states that, should a particular circumstance arise (such as failure to meet project milestones), the Commonwealth 'may' choose to take a certain action (such as terminating the agreement or suspending payments), it is advisable to determine the course that is to be taken based on appropriate risk analysis and, if necessary, legal advice and for that process to be properly authorised and documented.

Further guidance on establishing and administering funding agreements is set out in:

• Parts I and II of the CGGs, particularly in relation to the key principles of:
  • proportionality;
  • collaboration and partnership; and
  • governance and accountability; and
• the Australian Government Solicitor's Legal Briefing. Legal Briefing 83, Grants and Funding Programs : Legal Issues, 17 November 2009.

7.4 Funding strategies

An important aspect of administering grant programs is determining the most appropriate strategy for:

• determining the amount to be awarded as individual grants; and
• paying approved grants to funding recipients.

Effective planning of the funding strategy helps to ensure that relevant budgetary factors are taken into account and there is appropriate management of the risk of fraud or non-completion of the project (and, therefore, non-achievement of the outcomes on which the grant approval was based).

7.4.1 Strategies for determining the amount of grant to be awarded

The appropriate approach for determining the amount that will be awarded to successful applicants to a grant program may vary depending upon the nature of the program and considerations of cost-effective administration. For example, grants may be determined as:

• Lump sum funding paid at a set amount for all funding recipients, irrespective of the actual cost of individual projects. For example, this approach is often used in programs under which, in order to provide an incentive to invest in technologies or other practices that have a broader community benefit, eligible applicants receive the same amount as an offset of the associated cost (irrespective of the actual costs incurred by individual applicants). The main benefit of this approach is to minimise administration costs. However, it can involve unnecessary or inefficient grant expenditure, because some applicants may have proceeded with a payment that was less than the set amount and/or the actual cost to the applicant of undertaking the relevant project may be less than the grant amount. The risk can be reduced by adjusting the level of funding to the scale of the project, but it is still possible for recipients to be in a position of retaining grant monies in excess of their project requirements. Alternatively, if the amount of grant assistance to be provided is too low compared to the actual cost to many potential applicants of undertaking the relevant activity, the program may be unsuccessful in incentivising program participation. A lump sum program may be most appropriate when individual funding is small in value;
• Standard percentage funding, under which the grant paid is calculated as a standard percentage of the project's costs. This method has similar advantages to lump sum funding, but using percentages reduces the potential for unnecessary grant expenditure in proportion to the outcomes achieved, or for program participation to be diminished due to the relationship between the grant available and total costs of undertaking the relevant activity being too great for some potential applicants. To assist manage the Commonwealth's overall financial exposure under a grants program, standard percentage funding should normally be subject to a fixed upper limit in the grant agreement;
• Flexible funding, where applicants are able to apply for varying amounts of grant funding, depending upon their project's needs, and an assessment of the application against the program guidelines determines the amount and terms of the grant. Particularly when large individual grants are anticipated, this approach is normally preferred in order to optimise program expenditure. However, it can also be appropriate for programs involving smaller individual grants, as it assists in ensuring grant recipients are only provided with the level of assistance necessary to achieve the program objectives, thereby maximising access to the available funding. This strategy can also provide a greater degree of control over the recipient's use of funds through the tying of funds to the completion of project milestones; or
• a combination of the above.

7.4.2 Strategies for paying approved grants to funding recipients

Regardless of which method is adopted for determining the grant amount to be awarded to individual recipients, care needs to be taken to ensure that the strategy adopted for the payment of approved funds appropriately safeguards the public money and promotes achievement of the agency's obligation to make proper use of Commonwealth resources. In this respect, in no circumstances should funding be paid before a grant has been formally approved by the program decision-maker and the funding agreement has been executed.

The timing and structure of grant payments needs to appropriately reflect:

• the cash flow required in order to progress the project, including consideration of whether funding contributions required from the proponent and other sources are being applied to the project at the same proportional rate as the grant contribution[107];
• the risk of non-performance of obligations, or non-compliance with the terms of the grant. In particular, the Australian Government's capacity to influence project delivery can be expected to diminish once the grant has been substantially paid; and
• the cost to the Australian Government, through interest foregone, of payment of grant funds earlier than needed to achieve program objectives.

The appropriate payment strategy will, in part, depend upon the nature of the grant program. However, options for providing grant assistance in a manner that minimises the risk of fraud and non-performance should always be carefully considered.

For example, a program where single grants are available, such as in the form of a cost offset or 'rebate', can be structured such that funds are paid upon the presentation of required evidence of the original outlay for the specified purpose.

For project-based grants, value for money and sound risk-management would be promoted by funds becoming payable only upon the demonstrated completion of work that represents a milestone defined in the relevant funding agreement.[108] That is, if project work is not completed satisfactorily, no further funds would be forthcoming.[109] This strategy provides a greater degree of control over the recipient's use of funds. It is also important for agencies to consider the impact of under performance against a milestone on the continued viability of the project in terms of the project budget, the achievement of remaining milestones and the project completion date, and provide advice to the Minister or other decision-maker as appropriate.

There should be a demonstrated net benefit from making advance payments

A practice commonly adopted by agencies has been to pay a proportion of approved funding in advance upon execution of the funding agreement. In some instances, an initial payment of grant funding may be warranted in order to enable the funding recipient to initiate the project in a timely fashion. However, in other cases observed by ANAO, agencies have adopted a standardised approach under a grant program of paying a proportion of grant funding upon execution of funding agreements regardless of the relevant project's proposed timing and overall funding structure. In some cases, this approach has been used as a means of maximising program expenditure in a given financial year. However, it may not be consistent with the obligation to make proper use of Commonwealth resources.

Where payments are made in advance, there should be a net benefit in doing so. The net benefit could be demonstrated by:

• comparing the cost of administering payments in arrears to interest foregone;
• efficiencies for the recipient in either reducing the time to complete the project or total funds required (possibly linked to reducing the amount of grant funding as these benefits are realised); or
• establishing that the funded activity would not proceed at all or in a timely fashion without payment in advance.

A comprehensive documented risk assessment and cost benefit analysis will assist in establishing whether payment in advance of need is warranted and, if so, the proportion of the grant that should reasonably be paid. In this respect, it is appropriate for consideration to also be given to whether the funding contributions being provided by the funding recipient and other parties is proportional to the investment made by the Australian Government (in terms of both timing and quantum).

The performance reporting and monitoring regime established for a grant recipient will need to take appropriate account of the increased risks that arise where payments are made in advance of progress, having regard for the nature of the funding recipient entity and the type of project involved.

Expending grant payments before further payments are made

A further consideration in the effective payment of grant funds is to ensure funding recipients have expended, or will soon spend, previous instalment payments prior to receiving any further payments.

In this respect, where grants are to be paid in instalments, it is advisable for agencies to include provisions in the funding agreement requiring the funding recipient to demonstrate that any funds previously received have been expended, or are soon to be spent, when requesting subsequent instalment payments, and enabling the administering agency to withhold further payments until it is satisfied that previous payments have been expended or will be spent in the near future. The interaction of such provisions with the milestones and associated payment schedule established for a project will also be an important consideration in framing the funding agreement.

This approach will assist in avoiding the circumstance arising in which a funding recipient builds up a significant balance of grant funding on which the recipient might earn interest, representing interest foregone by the Commonwealth. Making payments in line with project cash flow requirements also provides a financial incentive to proponents to progress their project in a timely manner.

Retaining a proportion of the grant until project completion and acquittal

It is also good practice to retain a portion of the grant funds until the recipient has completed and fully acquitted the project. This provides an incentive for funding recipients to comply with all obligations set down in the funding agreement. To be effective, the amount retained must be sufficiently large to provide an incentive, but not so significant that it endangers the timely completion of the project. As with most aspects of grants administration, agencies should endeavour to strike an informed balance, consistent with the proportionality principle outlined in the CGGs.

In circumstances where the Commonwealth is not the only financial contributor to the activity for which funds have been granted, effective administration of the grant will be supported by the funding recipient being required to fully acquit all project expenditure and revenue, not just the Australian Government grant component. It is only by fully accounting for project costs and funding contributions that agencies will be able to:

• consider the extent to which the grant has contributed to overall outcomes;
• demonstrate that the project was delivered in accordance with the arrangements specified in the funding agreement; and
• determine whether the project was completed for less than the expected total cost. In this respect, assessing the merits of including appropriate provision for a share of project cost savings to be returned to the Australian Government is an important element in determining the terms and conditions that should be included in a funding agreement.

Effective project acquittal requires agency officials to be appropriately trained in analysing the financial and other information provided by funding recipients, and for adequate and appropriate guidance to be set out in the internal procedures manual established for the program.

Further guidance on mechanisms for safeguarding grant funding through the structure and administration of funding agreements is set out in:

• Part II of the CGGs, particularly in relation to the key principle of governance and accountability; and
• the Australian Government Solicitor's Legal Briefing Legal Briefing 83 Grants and Funding Programs: Legal Issues, 17 November 2009.

7.5 Monitoring progress

Integral to the success of the grant funding process is an on-going monitoring regime to ensure funding recipients are meeting agreed milestones and other key requirements of their funding agreements. Monitoring is important throughout the project cycle, from the implementation stage through on-going management to post-implementation evaluation.

Grant monitoring encompasses a range of techniques that can be applied by agencies in order to obtain assurance that projects are proceeding as planned and grant funding is being appropriately applied. These include:

• requiring funding recipients to submit regular progress reports, including acquitting the expenditure of grant funds received to date, total costs incurred to date and the source of any additional funds contributed to project costs to date;
• monitoring the timely provision of required reports and taking corrective action as necessary;
• analysing progress reports and other available information in order to identify projects that are slipping behind schedule or that otherwise require additional oversight due to other factors that may impact on full achievement of the project scope (such as cost increases, particularly where the additional costs are unfunded, or unforeseen impediments to the project progressing), and implementing management plans for those projects; and
• instituting processes for verifying the achievement of milestones to support the payment of grant instalments, such as undertaking site inspections and/or obtaining relevant documentary evidence.

The extent and timing of monitoring can be a challenge, particularly for smaller grant programs with limited resources, and for programs funding a large number of relatively low-value grants. Consistent with the principle of proportionality, cost-effective administration of a grant program will be supported by agencies adopting a risk-based approach to defining the extent, timing and frequency of monitoring, including:

• the frequency and level of detail of the reporting requirements that are to be imposed on funding recipients; and
• the methodology to be applied in scrutinising reports received from funding recipients and otherwise verifying project progress.

There may also be opportunities to improve the efficiency of the reporting process for both funding recipients and the administering agency by leveraging off reporting that the funding recipient must undertake to satisfy its own governance requirements. For example, local government authorities often submit reports on significant projects to the elected Council. Similarly, non-profit organisations may have to report to governing boards etcetera.

The reporting requirements determined in relation to individual grants, based on a risk analysis of the project and funding recipient involved, will need to be specified in the relevant funding agreement to ensure they are enforceable.

7.5.1 Are there arrangements to ensure consistent, high-quality, and appropriate frequency of monitoring?

Effective monitoring is assisted by clear definition of responsibilities for monitoring individual grants. Monitoring staff need appropriate skills and knowledge of the activity being undertaken and adequate administrative support to process routine monitoring data.

Where possible, decentralising responsibility for grant monitoring will increase the ability to bring local knowledge to bear and support effective communication between officials and funding recipients. However, this approach can increase the risk of inconsistency in monitoring processes. This can be avoided by:

• setting standards for frequency, consistency and quality of monitoring and ensuring that these are met at all locations; and
• reviewing the scope and completeness of the monitoring actually carried out and watching for any backlog of unmonitored cases.

It is particularly important that the monitoring methodology documented for a program identifies the procedures to be adopted where:

• funding recipients fail to provide the progress reports required under the relevant funding agreement; and/or
• reports or other advice provided by funding recipients indicate that the project is not proceeding as planned and/or other risks to project implementation have arisen.

Early identification of projects requiring remedial action and/or increased oversight will assist in minimising the consequences for program administration. In this respect, ANAO has observed instances in which the response to requests from funding recipients for a significant extension to the due dates for project milestones and/or the overall project completion date has been to reduce the reporting obligation on the recipient (by delaying any further reports until there has been substantive progress toward the next required milestone). Where projects are exhibiting increased risk of failure to achieve the required outcomes, program governance would be better served by the agency responding to such requests by:

• requiring that a progress report be submitted containing the information (including financial acquittal) specified in the funding agreement; and
• using the information provided in the progress report to assist in informing its decision about whether to agree to an extension and, if so, the duration of any such extension.

Where the agency agrees to the extension, it would also be appropriate to consider whether the project's circumstances (and associated heightened risks of non-completion) warrant it being subject to closer monitoring. In this respect, in promoting the application of the principle of proportionality in the administration of grants, the CGGs advise that agencies may wish to consider adjusting the detail of their accountability and reporting requirements in line with a recipient's established record of compliance and performance.[110] This will support the provision of timely and appropriate advice to the decision-maker in relation to options for managing the grant.

7.5.2 Monitoring procedures applied to individual grants should have regard to the nature of the project and funding recipient

The purpose of monitoring grants is to reduce risk, including the risk of fraud, ineffective project implementation and/or non-completion. Although a monitoring strategy will have been established during the program planning stage, regular review of that strategy helps to ensure that adequate resources continue to be available to deal with the size, perceived risk and sensitivity of the grants awarded.

In this respect, the nature and extent of monitoring procedures applied to individual grants should appropriately reflect the risk factors associated with that project. Relevant considerations include the:

• size of the grant;
• nature of the risks and their assessed priority;
• sensitivity of the grant;
• degree of uncertainty or subjective judgement in the original appraisal;
• type of grant (for example, is it repayable?);
• type of funding recipient; and
• type of project (for example, is it innovative, open to unintended changes of use or ownership, or exposed to high risks of delay or cost increases?).

The type of entity involved may also have implications for monitoring a grant

Different types of funding recipient may exhibit particular characteristics that will need to be taken into account in establishing a cost-effective monitoring regime.

For example, as noted in Chapter 6 of this Guide, risks to project viability through the non-receipt of expected funding contributions are heightened for funding recipients that have few financial resources of their own to contribute to the project, such as non-profit organisations. Accordingly, an important aspect of monitoring such grants to is to maintain appropriate oversight of actual project costs and funding, in order to provide timely advice of any emerging threats to project viability. This is particularly the case for higher value grants relating to complex projects, such as construction projects. Where potential difficulties in completing the project are identified, it is advisable for agencies to work closely with the funding recipient to ensure the recipient does not take actions that further heighten the risks to achievement of program objectives (for example, by obtaining additional funding through means that transfer ownership of the asset being acquired or constructed using the Australian Government funding).

However, the limited resources of many non-profit or voluntary bodies can also give rise to particular challenges in establishing a monitoring regime that provides appropriate oversight of the grant funding, but does not involve undue compliance costs for both the agency and funding recipient. This risk can be reduced by the program guidelines informing applicants of the monitoring requirements they will be expected to comply with; focusing reporting requirements on the critical aspects of project oversight; and ensuring that compliance can be achieved with a minimum of effort.

Particular issues also arise in monitoring grants awarded to commercial or for-profit entities. Government grants are a valuable source of funding to such organisations. This is because obtaining grant funding increases after tax cash flows to the funding recipient, but without the recipient being required to pay a return on those funds. In some circumstances, a for-profit entity may seek to delay investing its own resources in the relevant project until after the grant and other funding sources (if any) have been exhausted. This approach can be effective in minimising the funding recipient's financing costs, particularly where the project is able to be completed at a cost that is less than the budget originally proposed. Such entities are also susceptible to changes in ownership or corporate structure, which may impact on the continuing eligibility of the funding recipient and/or achievement of program objectives. Accordingly, it is appropriate that for-profit entities be expected to provide monitoring information that demonstrates:

• whether the funding recipient is investing its resources and/or funding obtained through commercial borrowings, equity raisings etcetera into the project in a manner that is consistent with the funding agreement; and
• whether ownership of the entity that is receiving the financial benefit from the project continues to reflect the basis on which the grant was approved.

7.5.3 Verify milestone achievement before making associated payments

It is important that, where grant payments are payable upon completion of nominated milestones, the scrutiny applied to the progress claimed by funding recipients is sufficient to provide appropriate assurance that a milestone payment is properly payable under the terms of the funding agreement. Particular issues in this respect arise in relation to grants that are to be used in the acquisition or construction of physical assets. For grants of that nature, it is prudent for agencies to be careful to obtain assurance about the physical process actually achieved before making grant payments, and that the project is being implemented in accordance with the funding agreement. This assists in avoiding making inefficient use of the public money, as well guarding against fraud.

Verifying actual project progress can be achieved through a variety of means. For example, recipients' advice of progress can be supplemented through:

• photographic evidence included with project progress reports;
• requiring funding recipients to provide documentary evidence of the completion of a milestone (such as evidence of: planning approval; commercial loan approval; formal acceptance of quotes and associated terms and conditions; completion of tender processes including cost outcomes; contracts, leases or partnership agreements executed in relation to the project; engagement of relevant personnel; acquisition of relevant equipment; completion of phases of construction such as certificate of completion etc);
• requiring independent verification or evidence of actual project expenditure and revenue to date. For example, this might include the provision of bank statements; copies of invoices, receipts or cheques; and/or independent auditor certificates; and/or
• undertaking physical inspections of projects.

Other sources can also be used to substantiate claims made by funding recipients, such as local government authority Council minutes; State government agency websites; public reporting to bodies such as the Australian Securities and Investments Commission, Australian Stock Exchange or in annual reports; or through the use of internet search engines.

The verification procedures adopted in relation to each grant should be proportional to the nature of the project and assessed risks.

7.5.4 Are arrangements in place to recover grant funds when the recipient has not complied with grant conditions?

Where a funding recipient is in breach of the terms of the funding agreement, it is possible for a debt to the Commonwealth to arise. Depending upon the terms of the agreement, this may arise due to circumstances such as the funding recipient failing to complete the funded project; failing to provide required progress reports; or failing to provide payment to the relevant agency of unspent grant funds in accordance with the terms of the funding agreement.

Section 47 of the FMA Act obliges agency Chief Executive Officers to take action to recover debts owed to the Commonwealth, unless:

• the debt has been written off as authorised by an Act; or
• the Chief Executive is satisfied that the debt is not legally recoverable; or
• the Chief Executive considers that it is not economical to pursue recovery of the debt.

Section 34 (1)(a) of the FMA Act allows the Finance Minister to waive a debt to the Commonwealth, with that power having been delegated to the Finance Chief Executive and Finance officials. Guidance on applying for a debt waiver is set out in Finance Circular 2009/09, Discretionary Compensation and Waiver of Debt Mechanisms, which advises that the circumstances under which waiver of debt requests are approved can broadly be characterised as where the Minister or delegate considers that it is appropriate to provide redress because recovery of the debt would, in the particular circumstances of a case, be inequitable or cause ongoing financial hardship The waiver power is available to provide a remedy in respect of all FMA Act agencies. However, it is generally a remedy of last resort and used only where there is no other viable remedy.[111]

Accordingly, the administrative arrangements for a grant program must be designed to provide for the appropriate and timely consideration of the recovery of grant funds where a funding recipient has failed to comply with the terms under which the grant was provided, as set out in the executed funding agreement.

Any recurring need to recover grants may be an indicator that a program is not achieving its objectives, or that appraisal of applications may not be fully effective. Accordingly, it is advisable for agencies to periodically monitor the levels of recovery arising under a grant program and to analyse the causes.

Further guidance on the monitoring of funded projects is set out in Part II of the CGGs, particularly in relation to the key principles of:

• proportionality; and
• governance and accountability.

7.6 Measuring outcomes

As discussed in earlier chapters of this Guide, one of the seven key principles established for grants administration is to have an outcomes orientation in all aspects of program design and implementation. Accordingly, an essential component of any grant program is the establishment of an effective performance framework that enables the administering agency to reliably establish:

• the outcomes achieved through individual grants; and
• overall program outcomes.

The evaluation of individual grants is best achieved through robust performance management against performance measures specified in funding agreements. Effective performance measures established for individual grants will enable a reliable assessment to be made of the extent to which the expected outcomes on which the grant approval was based have been achieved. Monitoring throughout the life of a project should focus, to the extent possible and reasonable (having regard for the nature of the grant program), on the contribution to overall program objectives as well as the achievement of project specific goals. On the completion or termination of a grant, the outcomes achieved should be evaluated in terms of the project specific and program related objectives.

In general, the strategy established for evaluating a grant program within the outcomes/outputs framework will need to support assessments of:

• the continued relevance or appropriateness of the program;
• the effectiveness of the program (i.e. whether program outcomes are achieving stated objectives). In this respect, effectiveness indicators demonstrate the extent to which programs make positive contributions to specified outcomes. Targets should generally be set for effectiveness indicators[112];
• whether there are better ways of achieving those objectives;
• the need to establish new programs or extend existing programs; and
• whether resourcing should remain at current levels, be increased, reduced or discontinued.

Care should be taken to ensure program evaluations are informed by analysis of actual, demonstrated outcomes formally advised by funding recipients through the funding agreement reporting framework (rather than basing such evaluations on the expected outcomes identified in the assessments on which the funding approval was based or the funding agreements subsequently executed).

The frequency and type of evaluation will need to be informed by the risk assessment undertaken in the planning phase of the program.

7.6.1 Common traps in performance measurement design

There are a number of common traps that can diminish the effectiveness of the performance indicators established for a grant program, including:

• assuming that the awarding of a grant automatically secures the forecast outcome;
• assuming that the consumption of inputs (for example, expending the grant funds) results in desired outputs and outcomes;
• using the number of grants awarded under a program as a measure of program output and achievement against the desired government outcomes (this is simply a measure of administrative activity);
• framing performance indicators that are reliant upon data provided by the funding recipient, without validating the recipient's capacity to produce accurate, reliable and complete data;
• not relating performance measures to operational and strategic objectives or outcomes. It is more important to achieve the desired strategic outcomes from the program than to maximise, for example, the number or value of grants approved; and/or
• identifying large numbers of performance indicators because they are easy to measure rather than focussing on key indicators, which are difficult to measure or assess but are more directly related to the program's objectives.

There are also a number of 'trade-offs' to be considered in the design of a performance information framework (see Figure 11).

Figure 11

Factors that may affect the effectiveness of a performance information framework

Factor	Potential influence on effectiveness of performance measurement
Behavioural	Performance measurement influences, and can also distort, behaviour. Poorly designed performance information can encourage agencies and grant recipients to adopt inefficient or ineffective practices which allow them to achieve short-term targets, but endanger the achievement of long-term goals.
Cost	Performance measurement costs time and money. In addition, poorly designed performance systems can adversely affect the performance of the program they are measuring. Care should be taken to ensure that performance information is not over specified to the detriment of the efficient conduct of the program.
Stability versus improvement	Performance information is most effective where trends can be established over time. However, performance information may need to be altered over the course of the program to improve measurement, which inhibits trend analysis.

Source: ANAO analysis.

7.6.2 Equity of distribution of program funds

A measure of achieved grant program outcomes that is frequently the subject of public and parliamentary scrutiny is the distribution of funding awarded under the program. In this respect, the geographic and political distribution of grants may be seen as indicators of the general equity of access to a program, as well as its effectiveness in targeting funding in accordance with the stated policy objectives of the program.

In relation to applications received, relevant performance measures include the extent to which the nature and distribution of applications submitted to the program aligns with the program's intended target population(s) and/or anticipated take-up rate. This provides a measure of the effectiveness of the communication of the program and of the avenues for completing and lodging applications that were made available. Similar considerations apply in relation to approved funding.

A further measure of the equity of decision-making that is frequently applied is the distribution of approved funding across party electorates, including consideration of the status of the electorates in which funding recipients were located (for example, whether the relevant electorates were categorised by the Australian Electoral Commission as 'marginal', 'fairly safe' or 'safe' following the most recent election). However, other indicators of the equity and impartiality of the decision-making process may include:

• the extent to which the geographic distribution of approved funding correlates with the pattern of applications received;
• the extent to which the funding approved for recipients located in electorates held by each political party correlates with the distribution of applications received from applicants located in each type of electorate;
• the relative success rates of applications received from applicants located in electorates held by each political party; and
• where relevant, the extent to which applications received from applicants located in electorates held by each political party were represented in those applications either approved against agency advice or not approved despite being recommended by the agency.

These factors are broad indicators only, with the awarding of grants expected to be based upon the merits of individual applications in relation to the criteria set out in the program guidelines. However, it would also be expected that the factors that led to any significant differences in relation to the above indicators would be readily discernable from the documented assessment and decision-making process, given there is now a requirement for approvers to record the basis on which they have decided to award a grant.

Further guidance on adopting an outcomes orientation in grants administration is set out in the CGGs.

More broadly, the Better Practice Guide, Performance Information in Portfolio Budget Statements, issued by the ANAO in 2002, and the Better Practice Guide, Better Practice in Annual Performance Reporting, jointly issued by the ANAO and the then Department of Finance and Administration in 2004 may also be of assistance.

 

 

 

 

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