In determining the 2020–21 audit work program, the ANAO considers prior-year audit and other review findings and what these indicate about portfolio risks and areas for improvement, and emerging risks from new investments, reforms or changes in the operating environment. A key area of risk for the public sector, including the Industry, Science, Resources and Energy portfolio, is the impact of the COVID-19 pandemic, both on entity operations but also through the rapid development and implementation of new government policy responses. In the Industry, Science, Energy and Resources portfolio, risk considerations predominantly relate to the provision of evidence-based advice to government; effective governance of, and service delivery by, portfolio entities; and the management of scientific assets. The department’s responsibilities for the Business Grants Hub also bring delivery and accountability risks, including in relation to undertaking the procurement process for the National Medical Stockpile.

Governance

The merger of new functions into a department requires a reconsideration of governance structures to ensure all strategic business risks and performance measures have appropriate oversight and monitoring arrangements in place.

Recent audits emphasise the importance of transparency and consistency in decision-making,  conformance and performance, as well as softer elements of governance, such as culture and behaviour. 

New programs that offer a range of more complex financial mechanisms as a form of assistance, such as concessional loans and guarantees, including through the Underwriting New Generation Investments program to boost investment into energy generation, will create the need to establish related risk tolerance levels and risk mitigation actions, as well as capabilities in managing these instruments.

Grants management

The delivery of end-to-end grants management services through the department’s Business Grants Hub means the department needs to ensure that service and quality control expectations are agreed and maintained, and that priorities accord with entity expectations, to provide assurance that policy objectives are being met. This will also apply to any other departments’ grant programs delivered through this mechanism. Grants management risks are heightened in an environment of additional funding where multiple programs target a similar group of beneficiaries, such as in drought assistance.

Policy development

Audit work has highlighted that effective policy development, particularly where there are short timeframes, requires articulation of the evidence-based and frank advice on likely impacts and implementation risks of proposals. 

An area of policy risk is in developing performance frameworks to ensure that the success of policy implementation can be measured and the benefits articulated. 

Asset management and sustainment

The portfolio carries a large number of physical assets, including nuclear and related scientific assets and Snowy Hydro infrastructure used for energy generation activities. These assets require specific maintenance and sustainability planning unique to the nature and use of the asset. The asset portfolio needs to adapt to changing needs and scientific advancements over time. It is also important that targets are set in asset management strategies, and that tracking and reporting against targets is undertaken, to provide a clear focus for performance and accountability for delivering on objectives. 

Department of Industry, Science, Energy and Resources

The Department of Industry, Science, Energy and Resources is responsible for supporting science and its commercialisation; growing business investment and improving business capability; developing northern Australia; streamlining regulation; developing and implementing a national response to climate change; improving Australia’s energy supply, efficiency, quality, performance and productivity; and facilitating the growth of small and family business.

The department’s total budgeted expenses for 2019–20 are $2.8 billion, with 49 per cent of these expenses attributable to payments to corporate Commonwealth entities, as shown in Figure 2.

Figure 2: Department of Industry, Science, Energy and Resources’ total budgeted expenses by category ($’000)

Source: ANAO analysis of 2019–20 PAES.

The five key risks for the department’s 2019–20 financial statements that the ANAO has highlighted for specific audit coverage in 2019–20, including those that the ANAO considers potential key audit matters (KAMs), are the:

• completeness and accuracy of the department’s offshore petroleum and uranium royalties revenue, due to the reliance on the data included in self-assessments provided by uranium and petroleum producers (KAM – Completeness and accuracy of royalty revenue);
• valuation of the Australian Government’s investment in Snowy Hydro Limited (including risk factors identified in relation to the impact of COVID-19), due to the materiality of the investment and complexities associated with the choice of assumptions and judgements applied in the valuation model (KAM – Valuation of Snowy Hydro Limited administered investment);
• completeness and accuracy of the department’s other revenue streams,  which are diverse in nature, often rely on manual calculations to quantify the amount of revenue recognised, and/or are cash-based transactions;
• valuation of concessional loans made under the Northern Australia Infrastructure Facility, due to the complexity of the accounting treatment for these loans and the level of estimation required in the calculations supporting their valuation; and
• management of, and accounting for, the department’s grants programs, due to the size and diversity of these programs.

Australian Nuclear Science and Technology Organisation

The Australian Nuclear Science and Technology Organisation (ANSTO) is Australia’s national nuclear research and development organisation. ANSTO operates Australia’s only nuclear research reactor and the Australian Synchrotron, contributes to radiopharmaceutical production and supply, and conducts research into areas of national priority, including human health, the environment and the nuclear fuel cycle. ANSTO also provides advice to government and other stakeholders on matters relating to nuclear science, technology and engineering.

ANSTO’s total budgeted expenses for 2019–20 are just under $455 million, with 42 per cent of these expenses attributable to supplier expenses and grants, as shown in Figure 3.

Figure 3: Australian Nuclear Science and Technology Organisation’s total budgeted expenses by category ($’000)

Source: ANAO analysis of 2019–20 PAES.

The five key risks for ANSTO’s 2019–20 financial statements are the:

• complexities arising from a potential restructure of the ANSTO group, including the potential wind-up of subsidiaries;
• cash-flow and going concern considerations in relation to the financial position of the ANSTO Nuclear Medicine Pty Ltd subsidiary;
• valuation of the decommissioning provision, due to the complexity of the calculation and reliance on the exercise of significant judgement;
• valuation and subsequent depreciation of assets, due to their unique nature and materiality; and
• completeness and accuracy of material streams of commercial revenue, due to the number of revenue streams from both commercial and government sources and complex funding arrangements.

Clean Energy Finance Corporation

The Clean Energy Finance Corporation (CEFC) is a corporate Commonwealth entity established under the Clean Energy Finance Corporation Act 2012. The CEFC is responsible for the facilitation of increased flows of finance into the clean energy sector. The CEFC’s role is to invest with commercial rigour in a diverse portfolio of clean energy technologies, that are solely or mainly Australian based — either directly or indirectly through industry and the banking sector — that, in aggregate, have an acceptable but not excessive level of risk relative to the sector.

The CEFC seeks to mobilise capital investment in renewable energy, low-emissions technology and energy efficiency in Australia through commercial loans, concessional loans, equity investments and loan guarantees.

The CEFC is required to liaise with relevant bodies, including the Australian Renewable Energy Agency, the Clean Energy Regulator, other Australian Government entities and state and territory governments, for the purposes of facilitating its investment function. In the Investment Mandate Direction 2020, the responsible ministers have also strongly encouraged the CEFC Board to make available from its original $10 billion of funding up to:

• $1 billion of investment finance over 10 years for the Reef Funding Program;
• $1 billion of investment finance over 10 years for the Sustainable Cities Investment Program;
• $200 million for debt and equity investment through the Clean Energy Innovation Fund;
• $100 million for an Australian Recycling Investment Fund; and
• $300 million in concessional finance through the Advancing Hydrogen Fund.

The CEFC’s total budgeted expenses for 2019–20 are just under $112 million, with 36 per cent of these expenses attributable to employee benefits, as shown in Figure 4.

Figure 4: Clean Energy Finance Corporation’s total budgeted expenses by category ($’000)

Source: ANAO analysis of 2019–20 PAES.

The six key risks for the CEFC’s 2019–20 financial statements are the:

• measurement of interest and fee income from CEFC’s loans and deposits, which continues to be a significant portion of CEFC’s revenue, in view of CEFC’s contractual lending arrangements;
• accounting for complex financing arrangements, due to the bespoke nature of each investment transaction, and ensuring ongoing compliance with the accounting standards for financial instruments as the portfolio continues to develop;
• valuation and accounting for direct equity investments, which are now required to be at fair value under AASB 9 Financial Instruments;
• verifying the carrying value of CEFC’s investment in its associates, i.e. entities that CEFC does not control, but has significant influence over, and the resultant adjustments through the income statement for CEFC’s share of gains/losses from associates;
• adequacy of the impairment provision relating to loans, in view of the complexity of the transactions undertaken, the concentration of sectorial exposure and the degree of management judgement required to estimate the provisions; and
• agreements underpinning the remuneration of senior management personnel, including the Board of Directors who must be consistent with the requirements of the Remuneration Tribunal Act 1974, while the CEFC has implemented a variable compensation plan to reward performance of employees, ensure competitiveness, and encourage retention of key personnel.

Commonwealth Scientific and Industrial Research Organisation

The primary functions of the Commonwealth Scientific and Industrial Research Organisation (CSIRO), as set out in the Science and Industry Research Act 1949, are to carry out scientific research and facilitate the application or utilisation of the results of such research. CSIRO is responsible for delivering science and innovative solutions for industry, society and the environment.

CSIRO’s total budgeted expenses for 2019–20 are just under $1.44 billion, with 54 per cent of these expenses attributable to employee benefits, as shown in Figure 5.

Figure 5: CSIRO’s total budgeted expenses by category ($’000)

Source: ANAO analysis of 2019–20 PBS.

The six key risks for CSIRO’s 2019–20 financial statements are the:

• capturing of relevant costs of various capital projects, and ensuring the complex requirements of the relevant accounting standards are met and values do not exceed fair value;
• completeness and accuracy of research project revenue, due to the degree of judgement involved across a number of revenue streams from a variety of sources and funding models;
• valuation of unlisted companies, including within the CSIRO innovation funds, due to their diverse nature, early stage development and funding arrangements;
• implementation of new accounting standards, AASB 16 Leases, AASB 15 Revenue from Contracts with Customers, and AASB 1058 Income of Not-for-Profit Entities.
• calculation of waste remediation liabilities, due to the significant judgements required in the selection of the model’s assumptions; and
• valuation of CSIRO’s land and buildings, plant and equipment, and properties held for investment or sale. These are material balances sensitive to movements in assumptions adopted in the underlying valuation models and are subject to possible impairment.

Snowy Hydro Limited

Snowy Hydro Limited is a government business enterprise whose primary business includes energy generation activities to supply the National Electricity Market and operating as a retail energy provider to over 1 million customers through the Red Energy and Lumo Energy brands. Snowy Hydro’s energy generation capacity of 5,500 megawatts supplies New South Wales, Victoria and South Australia, primarily through the generating capacity of the Snowy Mountains hydroelectric scheme. Snowy Hydro is currently progressing Snowy 2.0, a pumped hydro project that will add 2,000 megawatts of on-demand generation and 175 hours of large-scale storage capability to the existing Snowy scheme.

Snowy Hydro’s total actual expenses for 2018–19 were $2.3 billion, with 77 per cent of these expenses attributable to the direct costs associated with revenue, as shown in Figure 6.

Figure 6: Snowy Hydro Limited’s total actual expenses by category ($’000)

Source: ANAO analysis of Snowy Hydro Limited’s 2018–19 annual report.

The seven key risks for Snowy Hydro’s 2019–20 financial statements are the:

• valuation of financial instruments, including hedging instruments, forward contracts and swaps, reflecting the complexity of the valuation process and model. These valuations require an increased level of judgement from management to determine inputs into the valuation model. There may be increased levels of uncertainty associated with inputs into valuation models due to the COVID-19 pandemic;
• valuation of renewable energy certificates, due to the complexity of management’s methodology and the level of judgement applied by management for determining the value and accounting treatment for these certificates;
• completeness and accuracy of the impairment of retail debtors, given the reach of Snowy Hydro’s retail customer base, the economic impacts of the COVID-19 pandemic, and the increased level of judgement required by management to determine the key inputs to be applied in the expected credit loss model;
• valuation and existence of unbilled retail revenue, reflecting the timing of customer electricity meter readings and the end of the financial year. The methodology for estimation of unbilled revenue requires increased judgement by management and the use of a complex model;
• valuation of capitalised customer acquisition costs, reflecting the increased judgement applied in accounting for the amortisation of this balance;
• capitalisation of Snowy 2.0 costs, which reflects the complexity of the underlying project work and the judgement that needs to be applied to meet the requirements of the accounting standards; and
• valuation and impairment of non-financial assets, particularly due to the judgement and estimation required to determine the economic and cash flow assumptions underpinning the valuation model applied in the impairment assessment.